Deckers Outdoor Corporation (NYSE:DECK) Q1 2024 Earnings Call Transcript

Deckers Outdoor Corporation (NYSE:DECK) Q1 2024 Earnings Call Transcript July 27, 2023

Deckers Outdoor Corporation misses on earnings expectations. Reported EPS is $1.66 EPS, expectations were $2.22.

Operator: Good afternoon and thank you for standing by. Welcome to the Deckers Brands First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I’d like to remind everyone that this conference call is being recorded. I will now turn the call over to Erinn Kohler, Vice President, Investor Relations and Corporate Planning. Please go ahead.

Erinn Kohler: Hello, and thank you everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company’s Safe Harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the Federal Securities Laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements, and include statements regarding our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory levels, and promotional activity, and the impact of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates.

Forward-looking statements made on this call represent management’s current expectations, and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements.

On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. In addition, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. With that, I will now turn it over to Dave.

Dave Powers: Thanks, Erinn. Good afternoon, everyone, and thank you for joining us. I’m pleased to be here today to discuss another strong quarter for Deckers, starting off fiscal 2024 on the right path as we build towards delivering another year of great results. Our results give us increased confidence to achieve our updated outlook for full fiscal year 2024, which includes a raise to our prior expectations. For the first quarter, our performance slightly outpaced our expectations, with revenue increasing 10% versus last year, to $676 million, gross margin improving more than 300 basis points including beneficial brand and channel mix dynamics, and diluted earnings per share growing 45% to $2.41. Revenue growth versus last year was driven by our key areas of focus, with global HOKA expanding 27% to deliver $420 million, global DTC increasing 35% to represent 37% of portfolio revenue, up from 30% last year, and international UGG delivering strong growth.

As anticipated, we had some offsets to the growth in the quarter due to timing dynamics in UGG U.S. wholesale, with accounts choosing to receive products for it later into the year as opposed to a frontloaded preference we saw in the last couple of years. As we look to best manage our wholesale account product flow, we also continue to monitor marketplace inventory levels to maintain a healthy omnichannel presence that services our end consumer in the best way possible, and preserves the premium nature of our brands. Our ability to propel the targeted opportunities of global HOKA, global DTC, and international UGG further demonstrates the success of our omnichannel marketplace management and strategic investments. We will continue to remain nimble in execution, as we always have, to deliver strong results on both the top and bottom line.

With the continued execution of our long-term vision, we believe Deckers is emerging as a leading creator of compelling consumer connections through highly desirable products that infuse disruptive innovation across both fashion and performance. As a reminder, our long-term strategic vision remains focused on building HOKA into a multibillion-dollar major player in the performance athletic space, growing the UGG brand by connecting with consumers through elevated experiences and a segmented product offering, expanding our DTC business through consumer acquisition and retention, and driving international growth through strategic investments. Steve will provide further details around our increased forward-looking expectations later in the call.

In the meantime, let’s dive into the brand and channel performance for the first quarter of fiscal year 2024, starting with the brand highlights. As mentioned, global HOKA revenue increased 27% versus last year, to $420 million, a quarterly record, and the first time the brand eclipsed $400 million in a single quarter. The HOKA brand’s well-managed ecosystem of access points continues to flourish. DTC was the primary growth driver in the quarter, increasing 63% versus last year, and accounting for approximately two-thirds of total brand growth. DTC growth was broad-based as each region grew the business more than 50% versus the prior year, global consumer acquisition increased 58%, global consumer retention increased 57%, and 18 to 34-year-old consumers in the U.S. increased 68%.

This exceptional DTC demand resulted in an improvement in gross margin as HOKA maintained high levels of full-price selling, and continues to benefit from shifting a greater proportion of revenue mix to DTC. While the HOKA brand’s DTC business is still predominantly ecommerce, our select retail stores are augmenting the brand’s presence by increasing awareness and brand engagement with a physical presence in key strategic markets, creating personal consumer connections through community-oriented experiences, and broadening category adoption by showcasing the depth of the HOKA product offering. For these reasons, we expect to continue testing potential permanent locations through pop-up stores. We are excited about a couple of new doors that are in the pipeline, and look forward to sharing more soon.

From a wholesale perspective, HOKA continues to drive growth and manage the marketplace to build market share in existing points of distribution, maintain high levels of full-price sell-through, increase category shelf space through differentiated products, and expand brand awareness with a broader consumer demographic. HOKA has preserved high levels of full-price sell-through, and remains one of the fastest turning brands within the majority of its wholesale accounts. We continue to tightly manage the marketplace inventory and closely monitor HOKA key performance indicators in the channel to ensure the brand maintains its premium positioning across its ecosystem of access points. As excess consumer demand materializes, we prefer that HOKA satisfies upside through the brand’s DTC business, which is what we saw happen this quarter.

We are encouraged by the momentum that HOKA has sustained across its distribution landscape, and continue to make investments to build awareness and affinity for the brand across key markets. In June, HOKA launched the second edition of its Fly Human Fly global marketing campaign, and is already seeing the benefits of this upgraded rollout. This edition of the campaign was designed to reinforce that HOKA stands for joyful and inclusive performance at its highest level. As campaign content and activations continue to roll out across the globe, HOKA has seen a powerful response from consumers in the first few weeks, including robust growth in online engagement across social channels and digital platforms, especially with the release of the campaign’s focal film, titled, Murmuration, which embodies the brand ethos of moving together.

Heightened attention brought directly to HOKA.com with the vast majority of digital campaign asset clicks yielding first-time visitors to our brand’s ecommerce platform globally, more than doubling the conversion rate of HOKA.com landing page visitors, and significant impressions from out-of-home activations. We are optimistic about the reach and broad appeal of this campaign as HOKA continues to introduce itself to new consumers around the world. And the brand is as visible as it has ever been, with connected TV advertising, billboards, special running events, and several compelling activations in the pipeline. On the heels of the Fly Human Fly campaign rollout, HOKA launched the all-new Mach X, which was designed for propulsive everyday running, and features high-rebound cushioning and a Pebax plate.

Mach X media content was seamlessly weaved into the Fly Human Fly launch. And HOKA further celebrated this innovative product creation with several regional activations to aid Mach X awareness, including a demo run, in Germany, where participants were challenged to run as far as they could for 30 minutes, a sprint relay in France across a two-kilometer loop, in [Les Deux, Chamonix] (ph), a college event in Eugene, Oregon, hosting demo community runs to celebrate the U.S. Track and Field Championships, and a two-day HOKA experience clinic at our retail store in Japan, and at a popup location in Thailand. These global events, combined with the connected TV, social media, and digital out-of-home content have created significant energy behind the HOKA brand’s latest shoe innovation.

The Mach X was treated as an exclusive launch in our own DTC channel, and with our run specialty partners as we continue to work towards greater segmentation of the HOKA brand’s compelling product line. Just a few weeks into the second quarter, the Mach X is close to cracking the top 10 sales globally on HOKA.com, and we are getting great feedback so far from our run specialty partners. HOKA continues to build a bigger business through the expansion and increased adoption of its lineup of innovative products. We see the Mach X as an incremental addition to the already stellar portfolio of our footwear, led by the brand’s most popular styles, Clifton and Bondi. The Mach is a great example of franchise development where the team has innovated upon the original Mach which continues to perform exceptionally well, by introducing the snappier and more competitive version, the Mach X.

It is with this approach to product line management that HOKA is able to broaden the aperture of HOKA consumers, while maintaining pinnacle positioning in the performance athletic space. HOKA has an amazing roster of athletes around the world who are competing at the highest level, and achieving incredible results wearing commercially available versions of our shoes. During this past quarter, HOKA athlete, Cole Watson finished first in the Canyons Endurance 100K wearing the HOKA Tecton X carbon-plated trail running shoe. Congratulations to Cole who, with this victory, punched his ticket to the UTMB Mont-Blanc, a HOKA-sponsored event to be held in Chamonix, France, at the end of August. Moving to UGG, global revenue in the first quarter decreased 6% versus last year, to $196 million.

As expected, this decline resulted from lapping earlier wholesale shipping patterns over the last couple of years in the U.S. UGG was able to offset this challenging compare in the U.S. with the strength of the brand’s international regions. International strength was broad-based across multiple regions, and in both wholesale and DTC channels. In particular, our EMEA region, as well as China, which benefited from lapping lower demand from lockdowns in the prior year, drove above average growth. These regions found success attracting consumers with more transitional styles, like the Ultra Mini, Tasman, and Classic Mini, as well as seasonal franchises, like the Goldenstar and LA Cloud. We are encouraged by the continued progress of international regions to increase the adoption of key global franchises year-round.

Part of the excitement behind these franchises is being driven by the brand’s more focused approach to product marketing, creating greater global alignment of key stories. With this more focused approach; UGG is maintaining high levels of brand heat with more consumers actively searching for the brand. During the first quarter, online search interest across Europe increased 60% versus last year, with outsized strength in the U.K. and France. The same is true in the U.S., where search interest increased 21% versus last year according to Google Trends. UGG brand momentum also benefited from this spring’s Feel House activation at Coachella. The Feel House, first launched in the fall of 2022, is a multisensory community experience dedicated to making self-expression comfortable for all.

UGG invited individuals from around the world to experience this latest iteration of the Feel House, which was designed as an oasis for creatives, in Palm Springs, California. The Feel House was decorated with signature artwork from New York City-based artist, KidSuper, who partnered with UGG to design a quick-strike collaboration of the Tasman X, whose global activation drove significant press coverage with the likes of influential publications, such as Esquire, Teen Vogue, Daily Mail, and Hypebeast. As a result of the UGG team’s continued brand activations and compelling products, UGG global DTC increased 6% versus last year. UGG experienced consumer demand both in stores and online. We have been particularly excited by the interest of consumers who are shopping in person, especially during the spring and summer seasons.

We believe this dynamic is partly attributable to the development and greater adoption of transitional franchises that embrace the brand’s heritage DNA and have greater year-round wearing occasions. By maintaining this momentum, the entire UGG product portfolio benefits, especially in our stores, where consumers can feel and directly engage with the broader product offering. For this reason, and in line with our focus on elevate the UGG brand in an influential international market, subsequent to quarter-end, we opened our newest flagship store in the high tourist traffic Harajuku shopping district of Tokyo. With the first quarter behind us, we remain confident in executing the UGG plan we outlined for fiscal year 2024, evidenced by the continued momentum of global markets as consumers actively search for UGG, growth of global direct-to-consumer with improved margins from full-price business, and strength of iconic silhouettes like the Ultra Mini and Tasman driving year-round excitement.

Entering the second quarter, the UGG team is working hard to state its global omnichannel marketplace to connect with consumers through engaging experiences in the autumn/winter season. To execute this vision, UGG will be expanding on and embracing the celebration of culture and community by creating meaningful experiences, such as the Feel House, that serve as an invitation to develop and emotional connection with the brand. This fall, UGG will celebrate its brand heritage through consumer-centric moments around the world, with new winter lifestyle-themed Feel House executions, an exciting new winter product aimed at capturing more of the winter fashion and resort-focused consumer. Shifting to our discussion of consolidated channel performance, global direct-to-consumer drove first quarter revenue growth, increasing 35% versus the prior year on a reported basis, and 33% on a comparable basis.

Strength in the channel was driven by continued increases in HOKA consumer acquisition and retention globally. HOKA consumer growth was robust across regions and various age demographics, with outsized growth among international markets and the 18-34 year-old cohort, which remain key targets for us. The UGG DTC business also experienced growth, driven by more than 20% increase internationally, that benefited from China catching up from lockdowns in the prior year. The strength in China resulted from increased adoption of both sneaker and sandal styles. From a wholesale perspective, global revenue was down 1%, as gains in HOKA were offset by UGG U.S. shipment timing realignment to pre-pandemic cadence, as well as a continued focus to manage the marketplace inventory of our brands to maintain high levels of full price selling in this more promotional consumer landscape.

Overall, we are pleased with the China results, which reflect the power of our marketplace management strategies that continue to benefit our wholesale partners, DTC business, and ultimately Deckers bottom line. With that, I will hand the call over to Steve to provide further details on our first quarter financial results as well as our increased outlook for fiscal year 2024. Steve?

Steve Fasching: Thanks, Dave, and good afternoon everyone. As Dave just covered, Deckers delivered strong results in the first quarter and demonstrated great progress toward our full fiscal year and raised outlook. HOKA was the driver of growth in the quarter, lead by strong performance in the DTC channel, and UGG continues to elevate its presence globally, as represented by international growth. As anticipated, UGG’s global revenue was lower than last year, primarily due to lapping earlier selling during the prior year. But the brand maintains high levels of consumer interest, capturing increased demand through our DTC in the quarter. As we continue to operate in a very dynamic consumer environment, we remain committed to executing against our strategic priorities, and maintaining our disciplined approach to managing our business.

We are encouraged by the demand signals we are seeing, and believe our portfolio of leading brands continues to resonate with consumers globally. With that, let’s get into the details of our first quarter fiscal year 2024 results. Revenue was $676 million, up 10% versus prior year. HOKA revenue increased 27% versus last year, due to the exceptional demand experienced across the brand’s DTC channel and global ecosystem of access points. Gross margins for the quarter were 51.3%, which is up 330 basis points from last year’s 48%. First quarter gross margin benefited from lower freight costs, a greater mix of HOKA brand revenue, and an increased mix of DTC business with slight offsets from unfavorable foreign currency exchange rates compared to the same period last year, and select closeouts of seasonal inventory.

SG&A dollar spent in the first quarter was $276 million, which is up 16% from last year’s $238 million. SG&A growth was driven by reinvestment in key areas of the business in support of our growth targets, which includes strategic marketing, including the spend intended to amplify HOKA awareness in leading international markets, supply chain footprint to match the growing scale of our organization, enhanced e-commerce capabilities, and talent across the organization, including areas we’ve delayed in the enterprise support functions. Our tax rate was 21.9%, which compares to 21.3% in the prior year. These results coupled with higher interest income and a lower share count as a result of our share repurchases program drove diluted earnings per share of $2.41 for the quarter, which was $0.75 above last year’s $1.66 per share, representing growth of 45%.

Turning to our balance sheet, at June 30, 2023, we ended June with $1.05 billion of cash and equivalents. Inventory was $741 million, down 12% versus the same point in time last year, and we had no outstanding borrowings. During the first quarter, we repurchased approximately $25 million worth of shares at an average price of $485.95. As of June 30, 2023, the company had approximately $1.3 billion remaining under its stock repurchase authorization. Now, moving on to our updated outlook for fiscal year 2024, with the HOKA brand’s DTC business exceeding our expectation in the first quarter, we are increasing our full-year top line revenue guidance to be approximately $3.98 billion from our previous range of approximately $3.95 billion. This increase represents full-year growth expectations of approximately 10% versus the prior year.

As a result of this update, we now expect HOKA growth to exceed 20% for the fiscal year 2024, compared to fiscal year 2023, with the majority of growth anticipated to come from the brand’s direct-to-consumer business. UGG revenue is still expected to increase low single-digits, driven by international expansion and a focus on driving more business to DTC. Beyond our updated revenue outlook for full fiscal year 2024, gross margin is still expected to be approximately 52%, representing a more than 150 basis point improvement relative to last year. SG&A is still expected to be approximately 34% of revenue, as we re-invest gross margin improvements in key areas of the business. Operating margin is still expected to be approximately 18%. Our effective tax rate is still projected to be 22% to 23%, and we are increasing our diluted earnings per share expectation now to be in the range of $21.75 to $22.25.

The $0.65 increase is related to the increased expectation for HOKA DTC and an increased expectation for interest income as we benefit from working capital improvements, including inventory management, driving higher cash balances that are earning at a higher interest rate. Please note, this guidance excludes any charges that maybe considered one-time in nature, and does not contemplate any impact from future share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which includes but not limited to supply chain disruptions, constraints, and related expenses, labor shortages, inflationary pressures, changes in consumer confidence, and recessionary pressures, foreign exchange rate fluctuations, and geopolitical tensions.

We remain confident in our disciplined operating model, well-positioned brands, robust financial profile, and ability to remain nimble as we adapt to evolving marketplace dynamics. Thanks, everyone, And I will now hand the call back to Dave for his final remarks.

Dave Powers: Thanks, Steve. Fiscal year 2024 is off to a nice start, with HOKA continuing its strong momentum, and the balance of our brand portfolio on track to our full-year expectations. While keeping our long-term strategies top of mind, we are operating fiscal year 2024 with a sharp focus to prioritize DTC growth across all of our brands, while managing wholesale marketplace inventory to drive online acquisition in a high level of full price selling, expand HOKA brand awareness globally, lead with UGG products that are proven to resonate with global consumers, thoughtfully manage inventory to align with consumer demand, and invest in enterprise infrastructure in key strategic growth areas. We believe Deckers’ unique ability to introduce exciting innovation into both fashion and performance products, is why our differentiated brands are able to create lasting consumer connections.

This along with our financial discipline, agile operating platform, exceptional marketplace management and purpose-led culture allow us to continue to deliver best-in-class results, and exceptional shareholder value. On behalf of our management team, I would like to thank our employees for their continued dedication to delivering results and making Deckers a great place to work. And I would also like to thank all of our stakeholders for their continued support. With that, I will turn the call over to the operator for Q&A. Operator?

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jay Sole with UBS. Please go ahead.

Jay Sole: Great, thank you so much. My question is on HOKA. You talked about, obviously, really strong DTC performance for HOKA in the quarter. Can you just talk about a little bit what you say at wholesale, and then talk about what you’re seeing for the rest of the year? And really just going back to the quarter for a second, just talk about some of the drivers of the HOKA growth just across channel in terms of product that would be great? Thank you.

Dave Powers: Yes, thanks, Jay. So, yes, obviously we are super excited about the continued momentum of HOKA, broad-based, it’s just continuing to meet or exceed expectations for us, and we’re really optimistic about the rest of the year. DTC growth, as you saw from both brands, was exceptional. Wholesale for HOKA is about where we expected it to be for this quarter; couple puts and takes here and there by channel and region. But generally speaking, right in line with our marketplace management expectations. We love how this flywheel is working for us. We’re creating awareness out in the marketplace at a top level of the funnel. The awareness is increasing dramatically for the brand, up 20% over last year. And that’s driving all channels, but particularly, as designed, into DTC.

So, there’s some noise out in the wholesale channel with markdowns and promotions from other brands, a lot of inventory in the channel, so we’re managing that tightly by purpose. But again, as I say, raising awareness at a high level and seeing the brand interest coming directly to our DTC business is super exciting for us. Obviously it’s our most profitable sale. We gain all the data from that and it creates even a stronger flywheel going forward in the marketplace as we expand globally. Some of the things that are driving HOKA for the quarter, this was a HOKA-driven quarter, as expected, right? So, this isn’t a big quarter for UGG. A lot of the top-selling styles for the company overall for the quarter were driven by HOKA. Again, the Clifton and the Bondi continue to be the frontrunners here.

The Clifton 9 has been received extremely well globally, and we’re looking to get more inventory into that franchise and continuing the upside of that franchise going forward. And then also in the hike side of things, that business is still very strong. In places like REI, we’re the number one running brand, and also in hike. And then in the international regions, particularly in China, we have a very strong hike business. So, we’re going to continue to go after that. We’ve got some new innovations launching. We just launched the Mach X, which has been received very well with the PEBA plate, and there’s a little more attainable price point, and then continuing to update franchises throughout the year with some very, very exciting launches of existing upgrades, but also some new product coming into Q4.

Jay Sole: Got it. Okay, thank you so much.

Dave Powers: You bet.

Operator: Thank you. And our next question today comes from Laurent Vasilescu with BNP Paribas. Please go ahead.

Laurent Vasilescu: Good afternoon. Thank you very much for taking my questions. Congrats on such good results. Hey, Steve, I’d love to ask about your HOKA DTC strategy. I think in the 10-K it’s noted that you have 18 HOKA stores. I believe those are permanent stores; predominantly located in Asia, correct me if I’m wrong. But can you provide a little bit of color on how these stores are performing and what lessons are you learning from the store opened up in — permanent store you opened up in New York? And how many stores do you envision for the brand over the next couple of years?

Dave Powers: I can speak to that, and then, Steve, you want to get into specifics.

Steve Fasching: Sure.

Dave Powers: Yes, this is — like we’re doing with everything else in our marketplace, we like to test and learn. And when we see positive signs we like to go fast and capture opportunities, and so far, very good on retail. Fortunately for us, we know how to run retail stores based on our legacy of UGG retail stores over the last 20 years, we have the operations globally to do it, and we’re leveraging that platform exceptionally well. The stores that we have opened, both pop-ups and permanent, are exceeding or on plan, no concerns as of this point. But we do want to take it slow. We want to make sure we’re not overextending ourselves; we’re going into markets that are accretive to the overall marketplace strategy, but are also creating awareness to important consumers in key locations around the globe.

We need retail to work in China. We can’t have a distributor business with partners if we don’t know how to do retail very well, so we’re fine-tuning that. But, so far, the partners are pleased. We’re very positive and optimistic about our own retail stores there as well. Excited to open our first permanent store in New York City, feedback from that has been exceptional. And I think for us, now, it’s really about fine-tuning the experience for the consumer in the stores. So, the operations and the behind the scenes, we have dialed, but we want to make sure this is an exceptional experience for the consumer beyond just the product. We’re looking at holding events and run clubs, and making sure that there is engagement with the community in these stores as well to drive renewed interest or renewed — sorry, I should say repeat visits from existing customers, but also creating awareness and showing the full breadth of the line for new customers to the brand.

So, off to a good start. Small in the scheme of things at this point, but we see upside here. And as far as size of stores and how many, we don’t have a number put on that yet. It all depends on how the marketplace evolves. But DTC is our primary objective here. And using our stores to grow online, and vice versa. But you’ll see a handful of key stores being opened in key cities and locations as we go, and continuing to leverage our popup and test model before we make long-term commitments.

Steve Fasching: Yes, Laurent, this is Steve. Just on the number, you’re right, 16 are the company-owned stores, so that does not include retail partners that we have in Asia or with some of our distributors. So, those are not included in the store count. So, the 16 — sorry, 18 are included are company-owned, not inclusive of some of our retail partners as well. And then just as Dave said, I think the performance of those has exceeded our expectations, both from a revenue and a profit standpoint. And we use the pop-ups to inform us on locations. So, as we see pop-ups perform very well, it gives us a good indication of store location and opportunity for a permanent location. And we’ll continue to operate in that manner. And we continue to look at area where we can continue to expand the HOKA retail store presence.

Laurent Vasilescu: Very helpful, thank you for all that color. And then just as a follow-up, I think Stefano was elevated to Chief Commercial Officer, in April.

Dave Powers: Yes.

Laurent Vasilescu: Just curious to know if you have any update with regarding a permanent find for the brand president for HOKA. And then just another — sneaking in one more question. You’ve got $1 billion of cash on the balance sheet. Can you just remind us your capital allocation [technical difficulty] audience?

Dave Powers: Yes, so just on — with Stefano, super excited to elevate him to that role, well-deserved. And we spoke on the last call, I believe, the HOKA business is in excellent shape under Stefano’s leadership. He knows this space incredibly well, and we’re excited about the fast-tracking of innovation and marketplace management that’s happening there. No news to report yet on the HOKA full-time president replacement. But I would say, trust that we’re confident in the business until we do, and we’ll be excited to announce that when the time comes.

Steve Fasching: And then just on the capital allocation question, no change in terms of how we’re thinking about it. Clearly, like to operate from a position of strength, so have an incredibly strong balance sheet, especially in current times, I think that serves us well, constant conversation with our Board in terms of how we’re looking at capital allocation. But as we’ve indicated over prior quarters, we have been and look at share repurchase as a great way to return value to our shareholder base. So, we’ll continue to look at that and evaluate that. But yes, in terms of how we’re thinking about it, no change. And we’ll continue to have conversations with our Board.

Laurent Vasilescu: Very helpful. Thank you very much, and best of luck.

Steve Fasching: Thank you.

Operator: Thank you. And our next today comes from Sam Poser with Williams Trading. Please go ahead.

Sam Poser: Good afternoon. Thanks for taking my questions. Erinn, I think two of the five have been answered. So, can you give me — well, can you give me wholesale for every brand, please?

Erinn Kohler: Sure. So, wholesale for each of the brands, including distributor at a global scale, so for UGG, that’s $121.5 million; for HOKA, $260.8 million; Teva, $35.1 million; Sanuk, $6.5 million. And then you have some other.

Sam Poser: Okay, thank you. So, either Dave or Steve, on HOKA DTC, can you give us some idea of what you’re looking at for the full-year there, given that’s going to be the big driver of this? Are we going to have — I mean, is there going to a 4 handle on it, a 5 handle on it, the growth?

Steve Fasching: Yes, I think — that’s a good question. Right, clearly we’ve seen DTC perform slightly above our expectation in Q1. We’ve reflected that in the raised guidance for the year. And we’re continuing to watch that. As part of — and Dave articulated this a little bit, part of our strategy is to manage the wholesale marketplace tightly. And we’ll let some of that excess demand come over into our DTC channel, and we’ll fulfill there. But a little bit harder to gauge how that consumer shows up, but we’re confident in our ability to grow DTC, and with HOKA specifically. And we’ll see how the year plays out. But what we’re encouraged by is a strong start to the year, continue to see growth in our DTC business, and growth with our HOKA DTC business. And then we’ll see how the year continues to play out.

Sam Poser: [Multiple speakers]

Dave Powers: Yes, I think one thing to note is we — sorry, Sam. We do have hard comps coming forward in the next three quarters, just something to be aware of. But I think we’re learning what’s possible with our DTC engine here. And so, this is very encouraging signs for us. The thing to keep in mind also is wholesale is a bit of a uncertain entity right now with inventory in the channel, there’s a lot of estimates it’s going to be a promotional back-half for the year. So, the way we’re looking at this is we’re trying to focus on the total consumer opportunity regardless of channel, and have the inventory available for our DTC business if whole continues to be a little bit more challenging or promotional, we’re confident that they’ll come to us, and with our marketing campaigns at the top of the funnel we can drive more direct — target traffic directly to our channels and DTC channels.

But this is certainly very encouraging, it’s right in line with our strategy to get the whole company at 50% DTC down the road. And we’re going to continue the hammer away at it.

Sam Poser: Thanks. And then lastly, you’re investing a lot in the SG&A, but you tend to roll it forward. Is this going to be another year like normal, where you don’t really see that leverage on all that SG&A until we come out of the — you can’t really roll it out of the fourth quarter again? Are we looking at it the same way?

Steve Fasching: Yes, I think the way we’re looking at it, Sam, is we’re coming out of a year, last year, our FY ’23, where we held back on some of those SG&A investments, and that was to offset some of the headwinds that we were experiencing on the gross margin. So, that was an intentional holdback to really deliver on our commitment to get to 18% operating margin. So, this year, as we’re seeing some of that gross margin expansion, it is affording us that opportunity to invest. So, we are looking at it, that’s embedded in our guidance for the year, of the approximate 18% operating margin, so again, with that gross margin expansion, taking that opportunity to invest in some of those things that we held back on last year. And we’ll see how we’re doing.

I think Q1 is a demonstration where we have invested a little bit more, so you’re seeing a little bit of an increase on that SG&A as a percentage of revenue in the quarter. So, we’ll continue to see. But I think it’s important that we continue to invest in these brands, part of that, as I mentioned, strategic investment in HOKA marketing. We know that there is an incredible opportunity out there, and this is an opportunity for us to continue to build international brand awareness. And then just on kind of the infrastructure in town, we’re in the competitive space. And with how well we’re doing, it’s important for us to remain competitive in that space as well. So, those are all things that we’re considering. But again, we’re delivering, in my mind, exceptional operating profit levels, and so it affords us the opportunity with this gross margin expansion to make those investments.

Dave Powers: Yes, and I think, this is from my perspective, I want to make sure that we have the operations at Deckers to take this business to $5 billion, $6 billion over the coming years. And so, we want to make sure, and I’ve said to my leadership team that we need to focus on infrastructure investment, innovation, the systems, data accessibility, global supply chain investments, DCs, that so we are ready for the growth when it continues to come. And in the past, some quarters we’ve pushed out marketing spend because we didn’t need it to hit our numbers, but we’re rethinking this. We’re much more strategic now. We want to make sure we’re doing more activity at the top of the funnel, connected TV, et cetera. And we have some great created from both HOKA and UGG that you’ll on connected TV this coming season, in fall.

And the ELT is completely aligned on where additional SG&A opportunities are going to go and how we prioritize them. So, if we see signs that there is opportunity to free up some more spend for some of these strategic initiatives, Steve and I are looking at it quick, we’re allocating the money fast so that teams can get on with it and create more upside. But I am excited about the opportunities of marketing for HOKA specifically, but also UGG, and UGG men’s, and some new exciting product launches coming this fall for both of them, and on the marketing side too.

Sam Poser: Thank you. Continued success.

Dave Powers: Thanks, Sam.

Operator: Thank you. And our next question today comes from Janine Stichter with BTIG. Please go ahead.

Janine Stichter: Hi, good afternoon, everyone, and congrats on the great quarter, and thank you for taking my question. I wanted to ask about the wholesale environment in the U.S. really for the UGG brand. Understanding the tough multiyear comparisons you have there, I’m just wondering what you’re hearing from your wholesale partners, both on their broader ordering patterns, and then specifically on sell-through for UGG? Certainly hearing it’s tough out there. And then also wanted to hear more about the UGG transitional franchises, sounds like they’re working really well on DTC, but wondering what the appetite is for that product at wholesale? Thank you.

Dave Powers: Yes, good questions. This is a — it’s always a funny quarter for UGG because we’re dealing with deliveries into wholesale, getting ready for fall, we have some leftover from spring, and we’re comping — particularly this quarter, for UGG, we’re coming a lot of fluff business from last year. So, it is a little bit noisy. But the good news that we’re seeing in here is how the consumers are reacting. Brand interest is up dramatically, especially in 18 to 34-year-olds. The styles that we have invested in with heavy inventory, this coming fall, the Tasman and the Ultra Mini and platform styles. We sold out of those styles last year. We’re getting back in inventory now. They’re already selling through very well despite the heat waves that are going around across the country.

So, the indicators that we are seeing for the UGG brand, consumer interest, consumer buzz, excitement around these franchise styles, and even a couple of new styles that we just launched early, a sneaker and then a — it’s more — I forget the name of it, but it’s an UGG style that has a knit upper on it. Those are in the top 10 of UGG.com, so, a lot of reasons to be excited. Wholesale partners, they know they need UGG to be successful this season. They know that there is opportunity in these key styles that we’re getting after, and those are the things that we have focused our buys on for them. The other key thing to keep in mind is we have reduced our SKU count dramatically in UGG. So, last year at this time, we were over 600 SKUs heading into fall.

This year, we’re just over 400. And so, we’ve cleaned up the assortment. We’ve funneled our inventory into these key styles that we know there is high demand for. And we’re getting the marketing behind those styles to really drive high level of interest and sell-through. On the traditional styles, one of the top selling styles globally is the Scuffette. And so, we’re still seeing a lot of interest and renewed interest with younger consumers in some of our core classics. But what’s really encouraging is the iterations with the platform style really leveraging the Tasman, the Neumel, these Ultra Mini styles, and then new iterations that we’re going to be launching in the fall and holiday. We’ve just been through a great deal of work under Anne and the marketing team’s leadership on resetting our brand positioning and defining our brand codes and design, and applying those to our core classics, and iterating off of those with new materials, and new outsoles, and different shapes is bringing some really exciting product to market.

And I think you’re going to see some of that start to happen this fall, and continue through spring, and next fall as well.

Janine Stichter: Great. And on the SKU count reductions, are there any potential gross margin savings that might go along with that?

Dave Powers: Yes, short and long-term, right? And so, I just reviewed with the leadership team yesterday, the fall ’24 line. And the teams all said to us, “Listen, this is — we’re doing less work, and the styles that we’re spending more time on are getting better and better, and more exciting.” And so, I think you’re going to see both in focused, you’re going to see it in quality in aesthetic and design, and you’re ultimately going to see a margin opportunity a little bit as well. We haven’t flushed that out yet, and we don’t have it in any of the guidance or anything, but certainly when brands go through this work there is certainly opportunity for margin savings.

Janine Stichter: Great, thanks so much.

Dave Powers: Thank you.

Operator: Thank you. And our next question comes from Paul Lejuez with Citi. Please go ahead.

Kelly Crago: Hi, guys. This is Kelly on for Paul. Got a couple questions for you, first on the gross margin in the first quarter, looks like it came in a little bit light of expectations, and that’s despite HOKA DTC driving upbeat. So, just curious what the driver of that was? I think you’ve mentioned some select closeouts of seasonal inventory. Curious if that was not planned going into the quarter. Any color there would be great. Thanks.

Steve Fasching: Kelly, this is Steve. I think on the quarter, we pretty much delivered kind of to our expectation. I know some of the models may have been a little bit higher than we were. My guess is where you may have been a little bit higher was around a promotion assumption and potentially a foreign currency assumption. When we look at the 330 beat, that’s a pretty substantial beat, in line with what were thinking. Just to give you some sense of how that broke down, the freight channel mix in brand was around 450 basis points of it, and that was offset by about 100 basis points which was a mix of promo and foreign currency. So, just depending on how you factored that into your model, but generally speaking, in line, but yes, as we mentioned we did do some closed out to seasonal items in Q1, which is impacting that gross margin.

Kelly Crago: Was that across both UGG and HOKA?

Dave Powers: Yes, it was sum of both in the quarter.

Kelly Crago: Got it. And then, on the — so, HOKA wholesale grew in low-double in the first quarter, I think the distributor transition was impacting that. Is there any way to quantify, so we could kind of understand that underlying wholesale growth and how that should trend for the rest of the year? Is the accounting distributor transition 1Q-specific, or does it carry forward? Any color domestically versus international on the wholesale growth side in HOKA? And then, lastly on that determined door perspective, your sort of gross door, new door opening for HOKA, and then, sort of on that basis as well? Thank you.

Dave Powers: Sure, Kelly. There is a lot in there. Let me try to thrive some of that. So, you are right, we did do, and Italian distributor conversion, so that is impacting. A year ago Q1 would have picked up the distributor order, which would have covered multiple quarters in the wholesale model. So, you are seeing some kind of delay of those sales in the Italy market. We have not talked about how much that is, but not a huge number and a Q1 impact, but safe to say, within millions of dollars in terms of what the impact was. But you will see pick up in the wholesale business later. So, that was impacting some of the wholesale distributor growth in Q1. Then the other parts of your question were…

Steve Fasching: HOKA wholesale in general and door account.

Kelly Crago: Yes…

Dave Powers: Yes. So, what we are looking at just in terms of with specific to HOKA door account, wholesale, is what your question was?

Kelly Crago: Yes, pretty much.

Dave Powers: Yes, I think the way we are looking at it is, on our prior call we talked about kind of no global net new doors. We are going to continue to evaluate and see what that looks like. We are probably seeing some growth in North America, and some declines on the international business as we are cleaning up some of that distribution. And then we will continue to monitor. So, that was kind of point in time as we see demand and performance with these doors within accounts will continue to evaluate that.

Steve Fasching: But no real change in strategy.

Dave Powers: But no change in strategy. Yes.

Kelly Crago: Got it. Thank you.

Dave Powers: Thank you.

Operator: Thank you. And our next question today comes from Jonathan Komp with Baird. Please go ahead.

Jonathan Komp: Yes, thank you. Dave, I want to follow-up on a comment you made, I think you said you are building the infrastructure to be $5 billion to $6 billion consolidated revenue company, would that be on sort of three to five-year horizon, I don’t know any thoughts on that. And I guess thinking about the next couple of billion of revenue, how would you see that split across the brands? I’m just curious if you had any more color on those comments.

Dave Powers: Yes, let me grab my LRP necessarily. That’s just generally speaking, like, my job as CEO I need to be looking three to five years out, you know, and based off where we are today and on the cash flow hitting $4 billion mark, my head is like, “Okay, so do we get to $5 billion and $6 billion, what it’s going to take from the team perspective and infrastructure perspective, category expansion, all those things.” So, when I put out, say, $5 billion or $6 billion, that’s just generally thinking, “Hey, down the road, we are going to get to these numbers. I don’t have anything to share with how that is.” But certainly if you put the pieces together you could see it happening as well, with the current growth we are seeing.

In HOKA, I think you’re going to see a resurgence of UGG over the coming years in Anne’s leadership, and hopefully we get Teva to be a meaningful number in the coming years as well. So, it’s within line of sight for sure, but I don’t want to put a timeline or brand mix or any of that yet, it’s early days, but the opportunity we see is this company to be a $5 billion-$6 billion business over time for sure.

Jonathan Komp: Got it, I appreciate that color. Thank you. And maybe related, a bigger picture question on HOKA and category expansion, how are you thinking about lifestyle, fitness, other categories, especially it looks like there are some very favorable reviews of — the transport access in new category, it looks like a hard shoot to get a hold of, so just curious how you’re thinking about a broader category expansion potential for HOKA?

Dave Powers: Yes, we are in the transform; myself right now have trouble finding it honestly. So, that one surprised us. I was actually little bit skeptical about how that was going to received in the marketplace. It’s not necessarily positioned as a performance shoe, although I do running it and work out in it, and so, it’s very versatile. But I think it’s showing us that there is more aperture and appetite for HOKA to being meaningful in the lifestyle space, whether that is color ups or fabric changes or design details and some of our franchise styles. We pull things out of the vault. I mean we’re 10-year-old now, we have things actually in the vault that customers ask for. But there is opportunity for new styles like the Transport and the TransportX that we tested this year.

And we think that there is emerging opportunity in lifestyle, it’s not just people wearing a running shoe anymore, they want shoes made for all day wear, that feel like running shoes, but have a little bit of a different aesthetic, and we see a massive opportunity there not only within the HOKA brand, but we are working on launching a new brand actually in Spring’s timeframe, to go after some of that opportunity as well. So, as far as category growth, right now if you ask Stefano and the team, we are focused on being to maintaining our dominant position in run, we want to be number one in hike and trail over the coming years. We think that’s a tremendous opportunity, and that’s an important category that’s growing within the category, but also has lifestyle implications as well, and then really cultivating the lifestyle, distribution and consumer with performance product that has a little bit of a different aesthetic.

If you think about down the road, different categories, we are exploring other categories as well, and those things take time to develop. So, we are having the teams on the sidelines looking at different opportunities, like different categories, whether it’s court shoes or whatever that maybe. But we are thinking that way for the long-term, but right now we are really focused on run, hike and the lifestyle opportunity.

Jonathan Komp: That makes sense. Just last one, Steve, if I could, your gross margin this year you’re still guiding in a couple of hundred basis points below your peak, and if I compare to back then your HOKA revenue contribution has doubled in mix. So, just how should we think about that opportunity to get back to 53% or 54% gross margin over time?

Steve Fasching: Yes, I think if you are looking back kind of two years ago, the big difference will be around just the promotion assumption. So, that was pretty clean, I would say, very clean selling in terms of hardly any promotion. You are right; as we are looking at the HOKA contribution increasing we are going to continue to see an increase. As we see a higher proportion of DTC increase, we will also see gross margin expansion. So, what you are seeing, I think this year from where we were a couple of years ago, similar assumption around promotion and we will see how that plays out this year, and then going forward beyond that is higher proportion of HOKA should continue to give us some gross margin expansion opportunities as well as the higher proportion of DTC business.

Jonathan Komp: That’s great. Thank you.

Operator: Thank you. And our final question today comes from Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Hi, good afternoon, everyone. Dave, you had mentioned Teva and Sanuk, what is happening with those two brands now? How do you see their progress this year? And then, if you think about inventory levels, it certainly seems very clean, how you’re looking for the progress of inventory going forward? Thank you.

Dave Powers: Yes, thanks, Dana, good question. We don’t talk very often about Teva and Sanuk, and from the quarter results it makes sense there is questions about them. We recently have reorganized our smaller brands, Teva, Sanuk, and some incubation work that we’re doing, and emerging brands for leveraging resources, and we are resetting those brands. So, we have a new leader there, Lee Cox, who spent a lot of time in the HOKA brand early days, he is appointed to get a long-term strategy for both of those brands, and right now they’re doing brand works, so, resetting their positioning, tightening their positioning and proposition, understanding who their consumers are deeply, and elevating their innovation pipeline. So, I would say the biggest opportunity right now that we see down the road in the short and long-term is Teva.

We have looked at a number of brands externally that we could acquire, and quite honestly, none of them look as good as Teva does. It’s a beloved brand. It’s got a great 30-plus year history, and a lot of heritage product. And it’s healthy in the marketplace. It’s got great margins, and we think that is a brand that we invest in for the long-term. So, right now it’s just about resetting the marketplace. That’s where you’re seeing some degradation in the top line, and both Teva and Sanuk were cleaning things up, and we basically getting — gearing those up to go back at it with a new and improved version of both brands. But the Teva opportunity is continued within sports sandal, and we are working on trail sandals for that brand, we are going to be launching early next year, which we think will be clearly exciting, trail running sandals, and then, also expanding into closed toe and year-around business through our innovation engine.

So, we won’t see dramatic changes in this year in the P&L for any perspective, but you will start to see improvement going into FY’25, both on the top line and bottom line, particularly for the Teva brand that’s a bigger opportunity. And then, we have some ideas of what Sanuk could be, and we will see if those play out over the next coming years as well.

Steve Fasching: And then, Dana, just on the inventory, the way we are thinking about, so to your point, we have made significant improvements from our year-ago period, which we had more elevated inventory, a lot more in transit inventory. So, that has resolved and improved — we are in a much better position this year. You will continue to see that improvement continue in the quarters of this year, won’t necessarily be to the same percentage extent, but we were making improvements kind of all of last year. And so, you will continue to see us make improvements, not necessarily to the same level that you saw in Q1.

Dana Telsey: Got it. Thank you.

Steve Fasching: Okay.

Dave Powers: Thanks, Dana.

Operator: Thank you. And ladies and gentlemen, this concludes today’s question-and-answer session, and today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful evening.