Deckers Outdoor Corporation (NYSE:DECK) Q3 2023 Earnings Call Transcript

Deckers Outdoor Corporation (NYSE:DECK) Q3 2023 Earnings Call Transcript February 2, 2023

Operator: Good afternoon and thank you for standing by. Welcome to the Deckers Brands Third Quarter Fiscal 2023 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. I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Erinn Kohler, VP, 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 level, and promotional activity, and the impacts 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 opened 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’ll now turn it over to Dave.

Dave Powers: Thanks, Erinn. Good afternoon, everyone and thank you for joining today’s call. I’m pleased to be here today highlighting another record quarter for Deckers Brands, as our teams were once again have able to successfully execute against our long-term strategic objectives to deliver standout results in a dynamic consumer environment. Our fiscal third quarter record setting results include, $1.35 billion in consolidated revenue, reflecting a reported 13% increase versus the prior year, and diluted earnings per share of $10.48. here as a progress during the third quarter included HOKA delivering record revenue of $352 million as a brand more than doubled its DTC business, while demonstrating momentum across the product line and significantly increased wholesale through both market share gains and select new strategic access points.

UGG increasing its mix of business in DTC to 60%, up from 54% last year as the brand drove an 8% increase in the channel. Total portfolio DTC increasing 19% versus last year, to represent 52% of volume with both HOKA and UGG contributing to this mix shift, an all-time-high for the third quarter, and our international revenue increasing 12% on a reported basis, and growing 25% on a constant currency basis, when adjusting for the significant FX headwinds. Deckers delivered exceptional performance in the quarter and continued progress with respect to our long-term objectives. Notably, our brands commanded strong full-price selling despite a highly promotional marketplace during the holiday season. While our brands did experience more normalized promotions relative to extremely low levels in the past few years, we were able to avoid significant discounting due to the strength of consumer demand for our products, as well as disciplined marketplace management through our omnichannel approach.

I’m thankful for the leaders throughout our organization who continue to prioritize long-term brand health and remain committed to our strategic pillars, allowing Deckers to maintain top-tier profitability. Our brands are well positioned for calendar 2023 as we end our fiscal year 2024 in April. Steve will provide further details in our updated guidance for this fiscal year, as well as how we’re thinking about the arduous macroeconomic environment. For now, let’s get into the brand highlights for the third quarter, starting with UGG. Global UGG revenue in the third quarter was $930 million, down 2% versus last year on a reported basis, but up low single digits on a constant currency basis. Overall, consumer demand for UGG was strong in the quarter as the brand delivered global gains in DTC across genders and categories, driven by a 21% increase in acquired consumers and a 17% increase in retained consumers.

The UGG brands’ healthy DTC performance was offset by unfavorable foreign currency exchange rate impacts across all channels, as well as lower wholesale revenue. This wholesale decline resulted from the unique shipment timing dynamics discussed at the outset of this fiscal year, which included an expectation that the third quarter would be impacted. Specifically, these earlier shipments drove temporarily elevated levels of inventory in the channel. As a result, and in line with our marketplace management strategies, the UGG brands’ attention shifted to selling through product already in the channel, to strategically reduce marketplace inventory, allowing DTC to capture demand upside, and limiting the need for excess promotional activity. From a style and franchise perspective, UGG continues to find success with fresh updates of iconic styles.

Throughout the year, consumers have continued to migrate to fashions that are uniquely UGG, such as the Classic Mini and Tasman, as well as more versatile derivatives of these products. The consumer demand for these products was quiet strong, and certain style color combinations even led to out of stocks. Our measured approach to buying aimed at driving improved inventory levels, combined with the high level of demand for these products, led to some scarcity in the marketplace. We see this approach as an effective tool to fuel demand and we’ll continue to optimize our pull model to bounce future supply. With respect to how these styles are performed, we’re encouraged to see the continued strength of adoption from the brands’ target segment of 18 to 34 year olds.

Among this segment in the US, the Classic Short remain the top seller, but the strongest growth came from the Classic Mini and Ultra Mini styles which ranked second and third, respectively. Platform Classics were also extremely popular with this age group, likely resulting from the brand heat generated through unpaid product gifting to A list celebrities which helped drive the hashtag, Platform UGGs as the brands’ number one social trending topic in the quarter. Among 18 to 34 year old males in the US, UGG brand consideration reached an all-time-high in the third quarter, UGG has increasingly seen this segment of consumers adopt versatile slipper hybrids like the Tasman and Classic Slip-On as consumers continue broadening their wearing occasions of iconic styles.

Beyond these hybrids, male consumers gravitated towards heritage winter boots such as as well as weatherized versions of iconic styles like the . Brand heat remains at an all-time-high based on the exciting new products designed for the brands target audience. Supplementing these fantastic inline products, our teams developed heat season, UGG continues to build fashion credibility through collaborations. The most recent of which was with designer Shayne Oliver, the founder of Hood by Air, Shayne’s futuristic take on UGG Classics was covered by several high profile outlets, including Vogue, Complex and Hypebeast. These aspirational style continue to drive excitement in the line and bringing awareness to a new audience of consumers. From an international standpoint, UGG showed growth on a constant currency basis, despite revenue being down versus last year on a reported basis.

This was led by DTC as acquired and retained consumers in the channel each grew 38% versus the prior year. International wholesale was down versus last year, as UGG lapped the supply chain disruption which pushed additional shipments into the prior years’ third quarter. Strength in the UGG brands international regions is largely attributed to the successful ongoing marketplace reset activities completed over the last few years, which included a revamped approach to product and marketing, helping drive greater synergies in product adoption across the globe. Overall, we’re very pleased with the performance UGG this fall. The brand continues to attract new consumers and drive more business through direct to consumer with a loyalty program that now has massed over 7 million members worldwide.

We feel great about the brands’ ability that offset more normalized promotional activity through a strategic shift in channel mix, which also helped reduce marketplace inventories heading into the spring 2023 season. We expect UGG to finish the fiscal year in a position of strength as demand for the brands’ compelling products that are resonating with consumers globally has never been stronger. Shifting to HOKA. Global revenue for the third was $352 million, representing an increase of 91% versus last year on a reported basis. Another quarterly revenue record for HOKA. Just two quarters ago, we celebrated HOKA achieving $1 billion of revenue on a trailing 12-month basis, and with the quarter just delivered, the brand has now eclipsed $1 billion of revenue over the last nine months, ended December 2022.

HOKA growth in the third quarter was driven by share gains with one specialty account in the wholesale channel as product flow improved this year relatively to last, allowing HOKA to increase sell through, added points of distribution with select strategic accounts as the brand has been slowly expanding throughout the year, global DTC revenue more than doubling versus last year, as consumer acquisition and retention increased 95% and 109%, respectively. And a favorable comparable period as wholesale shipments were disrupted in the prior year due primarily to port congestion. We believe the Fly Human Fly marketing campaign has been a key catalyst for the HOKA brands’ DTC strength throughout the year which has driven a higher growth rate than wholesale on each quarter thus far this fiscal year.

During the third quarter, targeted marketing activations in Chicago and New York City helped drive a 22% increase in brand awareness, a 27% in consideration and a 33% increase on purchase intent in these markets over the next six months. We also believe these markets have seen a halo effect from the additional brand visibility created by popup stores which have continued to perform well for HOKA. In particular, we saw a significant gains among 18 to 34 year old consumers, who in the US and EMEA drove the largest year-over-year increase of any age group during the third quarter. We have been increasingly encouraged by the broad product adoption from females in this coveted demographic, who appeared to be actively searching hoka.com for what is new and exciting on a regular basis.

Giving us confidence and the investments we’re making to build brand awareness globally. The all new , our cross trainer is the perfect example of this trend. The Solimar launched earlier this fall without significant marketing dedicated to the shoe, but still landed in a top five of styles purchased by females aged 18 to 34 years old in this quarter. HOKA is also resonating well with males in this demographic, but we see a great deal of more opportunity to further expose the brands’ product depths by testing access points to specialize and serving this target consumer. Importantly, even with the expansion beyond run specialty distribution, the brand has hyper-focused on delivering in that core channel as well. According to aggregated US run specialty store data, during December, HOKA increased market share by 5 percentage points versus last year, delivered the highest average product turns and maintain a gross margin well above the channel average.

In terms of our wholesale partner access points in the third quarter, we are extremely proud of the HOKA brands’ performance as that continued to build market share in a highly competitive marketplace. With the strength of consumer demand for the brand, HOKA was able to maintain its high percentage of full-price business even with the incremental access points with strategic accounts. Though early days in some of the brands’ new doors, the feedback on HOKA performance has been exceptional. On the product side, HOKA has continued to introduce award-winning footwear, in October, HOKA was featured in the 2022 Men’s Health Sneaker Awards with Bondi 8 being chosen for the most comfortable cushion, and the Kaha 2 GORE-TEX noted as the best hiking sneaker boot.

In addition, Outside Magazine published its Winter Gear Guide for 2023, selecting the Mafate Speed 4 as the best shoe for fast in rugged trail runs. All of us at Deckers are excited for what is to come for the HOKA brand, starting with a couple of innovative product launches planned for the fourth quarter and more to come in fiscal year 2024 and beyond. In terms of consolidated channel performance in the third quarter, we saw strong growth in both global DTC and wholesale, but the majority of revenue growth was driven by global DTC which increased 19% versus last year on a reported basis, and 22% on a DTC comparable basis. DTC’s strength was driven by impressive global consumer acquisition and retention across the entire portfolio, which increased 44% and 38%, respectively.

Photo by Pesce Huang on Unsplash

From a dollar growth perspective, global HOKA DTC volume more than doubled and UGG DTC increased 8% on a reported basis versus the prior year, driving over $100 million of combined incremental revenue. On the wholesale side, consolidated global revenue increased 8% on a reported basis versus last year. Growth was driven by HOKA brand market share gains and existing points of distribution as well as incremental business from added doors with select strategic accounts. For the total portfolio, the increased HOKA volume was partially offset by lower wholesale shipments for UGG, where the brand focused on selling through existing inventory to reduce the need for promotional activity. Evidencing this success and illustrating the underlying brand heat during the season, UGG wholesale units sell through in the US increased mid-single-digits in fall €˜22 as compared to fall 2021.

With the exceptional demand our brands were able to capture through DTC combined with a strategic actions taken on the UGG wholesale front, our third quarter DTC mix increased from 50% last year to 52% this year. In the third quarter, our brands achieved the highest DTC mix ever for our historically largest quarter, which represents great progress towards our long-term objective of a 50% mix of DTC business to the entire fiscal year across the portfolio. Alongside our disciplined omnichannel approach, I would like to share out our amazing design teams that continually bring compelling new products to market. The combination of these talented teams create the exceptional experience with our products that consumers have come to love and expect from our brands.

With that, I’ll turn the call over to Steve to provide further details on the third quarter performance and an update on our fiscal year 2023 guidance.

Steve Fasching: Thanks, Dave and good afternoon, everyone. Adding to Dave’s remarks, I would like to express how encouraged we are with the performance of our brands as we continue to operate in a very dynamic consumer environment. We are fortunate that our two largest brands are very healthy and proving resilience in a highly competitive marketplace, due primarily to their differentiated and compelling product offering. While HOKA continues to drive incredible growth as again shown in this quarter, UGG was able to deliver relatively flat reported revenue, as compared to last year’s record revenue in a much more difficult consumer and macroeconomic environment that included a significant foreign exchange rate impact. In constant currency, the UGG brand delivered growth of low-single-digits in the quarter.

Our organization’s continued commitment to long-term strategic decision-making and disciplined approach to spending in an unchartered environment propelled Deckers to yet another record quarter. Now, let’s get to the specifics of the third quarter financial performance. Third quarter fiscal 2023 revenue was $1.346 billion, representing an increase of 13% versus prior year. On a constant currency basis, revenue grew 17.5% versus last year. Growth in the quarter was driven by continued expansion of HOKA, which more than doubled its global DTC business through impressive increases in consumer acquisition and online retention, and increased wholesale revenue by 83% versus last year due to market share gains and select increased points of distribution with strategic partners.

HOKA also benefited from an easier comparison to last year’s third quarter when wholesale shipments were disrupted by inventory delays that resulted from port congestion. Gross margin for the third quarter was 53%, which is up 70 basis points from last year’s 52.3%. The most material drivers of gross margin in the quarter were a significant benefit from reduced freight costs, which was partially offset by unfavorable foreign currency exchange rates as compared to the prior year period. Additional gross margin impacts in the quarter included benefits from favorable channel mix with DTC growing faster than wholesale, favorable brand mix as the sales of our HOKA brand increased and price increases implemented at the end of last year. These were partially offset from more normalized promotions and closeout activity for UGG relative to minimal discounting last year.

SG&A dollar spent in the third quarter was $350 million, up 7% versus last year’s $328 million. As a percent of revenue, SG&A was 160 basis points lower than last year, primarily due to benefits in the quarter from foreign currency remeasurement. But it still remains a headwind in the fiscal year-to-date through December, and a lower ratio of marketing to sales as we shifted the timing of HOKA campaign spent into the fourth quarter to align with the launch of spring 2023. Our tax rate was 23.7%, which is higher than last year’s 20.5% primarily due to jurisdictional mix of business. These results combined with favorable interest income relative to last year, and a lower share count drove earnings per share to $10.48, which is more than $2 and 24% higher than last year’s $8.42 per share.

Turning to our balance sheet. At December 31st, 2022, we ended this fiscal third quarter with $1.058 billion of cash and equivalents. Inventory was $723 million, up 31% versus the same point in time last year, primarily to support the continued growth of the HOKA brand, which was light on inventory in the prior year due to factory delays, with some offset from UGG inventory being down year-over-year, and during the period we had no outstanding borrowings. During the third quarter, we repurchased approximately $45 million worth of shares at an average price of $350.25. As of December 31st, 2022, the company had approximately $1.46 billion of remaining authorized for share repurchases. Now, moving to our updated outlook for full fiscal year 2023.

We are increasing our full year revenue guidance to be up 11% to 12% from our previous range of up 10% to 11%. This increase now equates to a full year revenue range of $3.50 billion to $3.53 billion. This is being driven by HOKA upside as the brand continues to exceed expectations in DTC and build market share across global wholesale access points. Reflecting this update, HOKA growth is now expected to increase in the low 50% range for the fiscal year 2023 as compared to fiscal year 2022, implying more than $450 million of incremental revenue versus last year. The HOKA brands increased fiscal year revenue guide now implies a second half growth rate in the high 40% to low 50% range, with total dollar volume that is slightly greater than the first half, reflecting the brands’ balanced revenue across the year.

Due to last year’s supply chain disruption that impacted quarterly wholesale revenue timing, the HOKA brands’ growth rate in the fourth quarter will be lower than the brands’ typical run rate. With that said, we expect to see continued robust DTC demand from consumers driving strong growth in that channel. UGG revenue is still expected to be down mid-single-digits on a reported basis, implying a year-over-year decline in the fourth quarter as the brand laps abnormal events in the prior year. As a reminder, in the fourth quarter of last year, UGG had late arriving fall inventory, which wholesale customers would historically cancel, but instead they kept their orders preferring to procure inventory on the earlier side for the future seasons. This resulted in additional growth in the prior year fourth quarter that is not expected to be repeated.

Additionally, UGG DTC benefited from backorder product that shipped in January last year. Further, of all our brands, UGG is the most globally exposed brand, and as a result, continues to face the most significant headwinds from an unfavorable foreign currency exchange rates as compared to last year. Beyond our increased revenue outlook for full fiscal year 2023, gross margin is still expected to be approximately 50.5%, SG&A as a percentage of sales is still expected to be approximately 33%; operating margin is still expected to be in the range of 17.5% to 18%. Our effective tax rate is still expected to be approximately 22%. And our increased diluted earnings per share is now expected to be in the range of $18 to $18.50. As a reminder, due to the disruptive nature of how the second half of last year played out, the company pushed hard to improve the availability of our products earlier this year, and that strategy has served us well, and due to this push, more products shipped earlier this year, and that, combined with currency headwinds have placed pressure on the reported percentage growth in the fourth quarter.

With that said, we believe viewing our increased expectation for the full fiscal year more holistically is a better measure of the progress our brands are making. In this context, we are delivering on what we said and have continued to increase our full fiscal year outlook, despite a harsher impact from foreign currency fluctuations, as compared to initial expectations at the outset of this year. Please note, this guidance excludes any charges that may be considered one-time in nature, and does not contemplate any impact from additional share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include, but are not limited to, further supply chain disruptions, constraints and related expenses, labor shortages, inflationary pressure, changes in consumer confidence and recessionary pressures, further strengthening of the US dollar and geopolitical tensions.

As we approach the end of our fiscal year, I wanted to provide further context around the state of our business. On Logistics, the level of disruption, delays and corresponding freight costs relative to the same point in time last year has continued to improve, though they remain elevated versus pre-pandemic levels. While the ongoing outbreak in China is not currently impacting footwear production or transit times in a material way. We are experiencing some minimal operational hurdles, and we’ll continue to watch this situation closely. In terms of inventory, we’ve continued to see improvement in the ratio of inventory growth to sales growth over the last few quarters, as was signaled in our expectations throughout this year. While still working to optimize levels, we feel good about our current inventory position, which is up over last year to satisfy increased HOKA demand.

We still anticipate unique year-over-year comparisons based on disruption in the supply chain, as well as the dynamics of the HOKA brands’ increasing mix of both revenue and inventory, especially as it’s more even quarterly revenue cadence compared to UGG. Regarding promotional activity, as we have discussed over the last few quarters, the marketplace has become increasingly influenced by higher levels of markdown activity. While our brands have maintained a high percentage of full price business, there has been a return to more normalized levels of promotion experienced prior to the pandemic, particularly with the UGG brand. HOKA has largely avoided additional discounting beyond the historical model update flow. Given the dynamics of the marketplace, which is dealing with higher channel inventory, we are well positioned having managed inventory into the wholesale channel, while leveraging our DTC capabilities, selling earlier and at higher margins, gaining share and exceeding our original expectations on the year.

On currency, we’ve continued to experience impacts on our results from unfavorable foreign currency exchange rates. In the fourth quarter, we are expecting an approximate impact of $20 million to revenue, and our expected headwind for the full fiscal year 2023 remains at approximately $100 million. Finally, as we finish out our fiscal year 2023 and look to deliver another exceptional year, we are also reflecting on the actions we took to manage our expense base and the tradeoffs made to deliver these results. While we are not yet providing guidance for fiscal year 2024, and as our business expands, we will continue to review and invest in those areas that will drive the organization forward, especially as we start to see gross margin expansion.

In this highly competitive environment, those further investments will support talent, innovation, technology, and enterprise infrastructure, which are all critical to our continued success. Thanks, everyone. And now I’ll hand the call back to Dave for his final remarks.

Dave Powers: Thanks, Steve. We are proud of our strong results and ability to navigate a challenged consumer landscape through our marketplace managing strategies tailored to each of our unique brands. Exiting the holiday season, we are encouraged by and have great confidence in the strength of our brands and the exciting future ahead. With the brand heat we’re seeing on HOKA and UGG in particular, we feel Deckers is well positioned. Both brands operate on a pull model, and we believe the strong relationships our brands have built with key wholesale partners will serve us well. Deckers’ strategic brand marketplace management, omnichannel capabilities and flexible operating model continue to be the driving forces behind our company’s sustained success.

But Deckers’ success is ultimately made possible by the hardworking employees who go above and beyond to deliver consistent results aligned with our long-term strategic goals. Thank you, everyone for joining us on the call today. And thanks to all of our stakeholders for your continued support. We look forward to sharing more as we continue to build towards Deckers’ exciting future. With that, I’ll turn the call over to the operator for Q&A. Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. And our first question today will come from Laurent Vasilescu with Exane BNP Paribas. Please go ahead.

Aubrey Tianello: Hey, everyone. This is Aubrey Tianello on for Laurent. Can you guys hear me okay?

Dave Powers: Yep €“

Steve Fasching: We can hear you.

Dave Powers: Welcome.

Aubrey Tianello: All right, thanks for taking our questions. Wanted to start on the wholesale side, up 8% in the quarter, I think last quarter you talked about the channel being down slightly in 2H. Maybe just talk about what you’re seeing in that channel, how it’s progressed versus 90 days ago?

Dave Powers: Yeah, you’re talking about second half or Q3, Q4? What specifically are you talking about the quarter?

Aubrey Tianello: The wholesale up 8% in the quarter. But I think you spoke to wholesale being down slightly in 2H on the last call. Just any you know color you can give on whether that’s still the view or if something’s changed?

Dave Powers: Yeah, I let Steve get into specifics. But I think you know, a lot of this and he will explain this in more detail as the call goes on. But it’s just the timing of deliveries versus last year. So that’s the big part of the dynamic and then shifts between Q3 and Q4. But Steve I don’t know if you have more color on that.

Steve Fasching: Yeah. I think you know, when we get into the quarterly discussion, it’s a little bit about what we alluded to at the beginning of the year. We knew that given €“ coming out again, Q4, just to remind everyone, where we shipped product last year in Q4, that was going to impact Q3 and Q4 of this year in terms of wholesale growth. So we took the opportunity to sell products in. We had wholesale customers participating and wanting to hold some of that product that they didn’t sell in Q4, which we knew would impact Q3 and Q4 of this year. So I think, as we see Q3 and Q4 play out, it’s much to our expectation and a little bit better, which is why we are increasing our full year outlook. We knew kind of between quarters, there would be some disruption in the current year, again, why we didn’t guide quarterly.

But I think continuing to see strong demand with our wholesalers. This is a bit of you know impact from pandemic and supply chain disruption experienced last year, still playing through this year. It is impacting how we see wholesale growth in the current year, but we knew that, right and it goes a little bit back to the point I made in the prepared remarks, which was, we were going to take every opportunity to get products in early in the year to make sure that we have an opportunity for strong sell through during the season, which is exactly what we’ve seen. And our brands continue to perform well and resonate with customers. So both on the UGG side, and especially as you can see in the numbers on the HOKA side. So, again, really pleased with our performance, again, don’t want to get hung up on quarterly percentage changes, because really, we’re measuring the health of the business on the year and that’s our outlook on the race for the year.