Deckers Outdoor Corporation

Good afternoon, and thank you for standing by. Welcome to the Decker's Brands Third Quarter Fiscal 2019 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. If anyone has any difficulties hearing the conference call, please press star then zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded, and I'd now like to turn the call over to Aaron Kohler, Senior Director of Investor Relations and Corporate Planning. Please go ahead.

Thank you, everyone, for joining us today. On the call is Dave Powers, President and Chief Executive Officer, and Steve Fashing, 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 risk 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 anticipated financial performance, including but not limited to our projected revenue, margins, expenses, earnings per share, cost savings and operating profit improvement, as well as statements regarding our strategies for our products and brands. 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 factor 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. With that, I'll now turn it over to Dave.

Thanks, Erin, and good afternoon to everyone. Today we are excited to share the results of our fiscal third quarter. Our performance was well ahead of the guidance we provided last quarter and demonstrates the progress we continue to make on the strategies we laid out two years ago. We delivered sales of 874 million compared to guidance of 805 million to 825 million. And non-GAAP earnings per share was $6.59, versus guidance of $5.10 to $5.25. For the past few quarters, we've been talking about the improvements we are making across the business, including bringing compelling product to market, implementing thoughtful and controlled distribution strategies, elevating and segmenting product offerings, growing our non-UG brands, and improving gross margins and operating margins. These exceptional results underscore how well our teams have executed on each of these fronts. Importantly, the results go beyond just our UGG brand. While the third quarter has traditionally been viewed as an UGG quarter, we achieved impressive growth with our Hoka One One and Kulabora brands. These two brands significantly contributed to the growth of our business and further emphasized the progress the entire Decker's organization continues to make towards organically growing our brand portfolio. I'm incredibly proud of these accomplishments and very pleased to share our results. Now let's get into some of the details for the quarter, starting with the results produced by the Fashion Lifestyle Group. UGG sales were worth $761 million in the third quarter, up 3.6% to last year, and driving the majority of our upside to guidance. We communicated a strong global marketing campaign for the brand's 40th anniversary, alongside a very compelling product line. Overall, placement of core product in U.S. wholesale accounts was well-received by consumers, and our strategic approach to product allocation and segmentation created high full-price sell-through rates. Along with the great selling, as well as further improvement in our supply chain process, inventory levels significantly improved, and we are very pleased with how we exited the quarter. The revenue beat in the quarter was largely attributed to accelerated growth in our UGG men's business, as well as non-core styles in UGG women's, better full-price selling in domestic wholesale, as we controlled the distribution of our core classic, introduced select new points of distribution, and one with consumers, which led to additional reorders, fewer cancellations, and less promotional activity than we anticipated in our guidance. Improved performance in our domestic DDC channel, with better than anticipated selling in both retail and e-commerce. Cold weather in October and November aided in creating early demand, with strong full-price sell-in and sell-through. and some early distributed shipments in Europe, which were originally planned for the fourth quarter. This upside was partially offset by a challenging international environment, with lower-than-anticipated sales in our APAC region, in particular as we saw weakness in the region within our DDC channel, which fell below expectations for the UGG brand, and continued weakness in the European marketplace, which we believe is a result of region-specific factors, including struggles in the UK as Brexit talks continue and recent labor strikes during the quarter. We foresee continued challenges in the economies of these regions, and we will take this into account as we look towards next year. However, with the early success we have had with controlling the U.S. wholesale marketplace through our allocation and segmentation strategy, we are exploring ways to implement this approach in other global markets to improving the selling and heat of the brand internationally. The evolution of our product line is producing growth in key focus areas as planned, specifically UGG men's will re-experience significant gains with styles like the new Mel, which continues to capture market share with a younger consumer, and the increasingly popular Tasman Slipper, which more than doubled in volume versus prior year quarter. We are also seeing success of men's boots outside of the brand's core styling. We believe there is meaningful opportunity to reach a wider array of male consumers with broader wearing occasions, as evidenced by performance of styles such as the Hannon and the Seton. At the same time, several new women's styles also continued to gain traction, with high demand for the fluffy-ass slide and the neutral sneaker. Again, complementing our strong lineup of products during this year's fall season, we successfully executed our domestic wholesale core classic allocation and segmentation strategy. This resulted in an intentional shift of dynamic within the brand's revenue in the quarter. Specifically, the mix of product sales for the brand in the quarter resulted in Men's increasing its penetration of brand sales, rising to 15%. Total women's classics moderating to about 48%, with core classics units sold into the marketplace below last year's levels. Women's non-classics increasing its percent of total brand sales, driven by success in new styles, including significant growth in the women's shoe category, which nearly doubled in volume versus the prior year. This shift in the UGG brand's revenue composition demonstrates that we are continuing to make progress and becoming less reliant on core classic styles, allowing us to showcase the breadth of what the brand can offer with success. Coming off another strong holiday season, we plan to fuel the UGG brand momentum through new product collaborations, increased social media presence, and celebrity influencers. According to the MPD Group's Retail Tracking Service, UGG was the number one women's U.S. fashion footwear brand in the three months ending December 31st, up 11% from last year and commanding 8% of the market. Additionally, in the same time period, UGG was the number six men's U.S. fashion footwear brand, up 18% from year-ago levels. Performance in the UGG brand was also aided by favorable weather conditions, in particular in the U.S. with weather turning cold early in the season. These external variables sparked our incremental opportunity, allowing us to sell product early in the quarter with high sell-through rates at full price, experienced in wholesale accounts as well as in our own GDC channels. These conditions improved reorders and minimized in-season cancellations, resulting in less promotional activity in past years and reducing the amount of inventory being sold through closeout avenues. With the combined impact of these items significantly lifting both our top-line results and profitability. Culebora also made impressive strides in the quarter, performing above expectations and gaining significant market share in the family value channel. We saw success with the brand in existing accounts as well as new wholesale partners for the season, with strong consumer demand and sell-through. We are actively building the positioning of the brand in the marketplace for next year, and we are managing strategic placement with a clear vision of the brand's positioning. Now turning to the performance lifestyle group. Within our performance lifestyle group, the Hoka One One brand generated standout results and made significant gains versus the prior year, growing nearly 80% in the quarter. While the third quarter has not traditionally been the largest quarter for the brand, Hoka exceeded expectations and delivered its biggest revenue quarter ever, with $57 million in sales for the period. This upside is flowing through to our updated full-year projections, putting the brand at an estimated $220 million for the full year fiscal year 2019, representing over 40% growth versus fiscal year 2018. Not only did the brand surpass revenue expectations in the period, but it did so at a very profitable rate, with gross margins coming in above prior forecasts. This was mainly driven by strong full-price selling at volumes above prior guidance. The Clifton and Bodine franchises continued to sell well in the run specialty channel, where the brand once again increased market share, retaining the attention of the loyal runner as well as attracting the attention of new consumers. Product highlights aside from some of the larger volume core styles include the Gaviota, which has experienced fast growth, in particular gaining strength and popularity with our female consumer, focused on stability running and offering premium support, rebound, and durability. Continued growth with the popular Speedgoat trail running shoe and the Arahi, known for providing dynamic stability while staying true to the brand's offering of maximum cushion with minimal weight. Looking ahead, we are excited about the launch of new offerings in the brand's Sky collection, which we're confident will show that Hoka can be relevant in the hiking category. Along with the continued strength of its Core Run specialty product, the brand has strong momentum to close out another successful year. Now moving to the performance of our DDC channel. Our global DTC business delivered $392 million of revenue in the quarter, representing an increase of 2.6% versus the prior year, with DTC comps up 1.4%. We experienced a strong start to the season, mainly in the U.S., with strong full-price selling and minimal promotions throughout the holiday season. Additionally, we saw meaningful growth with our non-UG brands, specifically Hoka and Culebora. We captured the audience of new consumers on our e-commerce channel as we continue to target our younger consumer by offering new ways to connect with our brand and purchase through their online experience. According to YouGov, UGG brand impression among 18- to 34-year-old women reached an all-time high in Q3. In the calendar year, 1.9 million new consumers made purchases directly through our DDC channel across all of our brands for the first time. Overall, with these results being well above our prior guidance, I am excited to see the business achieving some of our long-term goals well ahead of schedule. We recognize that certain favorable dynamics that played a part in this past quarter's outcome may not always be attainable in future years. Nevertheless, I am proud of the team's Q3 fiscal 2019 execution, as we were able to attack our seasonal strategies and capture excess demand in a controlled marketplace. With that, I'll now turn the call over to Steve to provide more details on the financials.

Thanks, Dave, and good afternoon, everyone. As you have heard, our results for the quarter are exceptional, and now I will take you through them in greater detail and provide an updated outlook for the fourth quarter and our full year of fiscal 2019. Please note, throughout this discussion, where I refer to non-GAAP financial measures, I'm referring to results before taking into account restructuring charges and other amounts that our management believes are not core to our ongoing operating results. Also note, our non-GAAP results are not adjusted for constant currency. A reconciliation between our reported GAAP results and the non-GAAP results can be found in our earnings release that is posted on our website under the Investors tab. Now to our results for the third quarter. As Dave mentioned, we achieved sales and profitability that was well ahead of our prior guidance, reaching a record third quarter result, of $874 million in revenue and $6.59 in non-GAAP earnings per share for the period. Revenue was above our prior high guidance by $49 million. Contributing to the revenue beat, we saw success in our key areas of focus, including non-core classic styles within UGG, as well as strength in our Hoka and Kulabura brands. Specifically, the incremental revenue volume above guidance was primarily driven by approximately $18 million in UGG domestic wholesale, with higher-than-expected sales in UGG men's and women's non-core styles, including women's shoes. $15 million from less promotional activity for the UGG brand, driving increased full-price selling, seeing in the top-line result, as well as improved gross margin. $8 million from HOKA, as the brand continued to see rapid expansion of market share in the run specialty channels. $2 million from Culebra as in-season reorders were strong, as well as some early European wholesale and distributor shipments originally planned for the fourth quarter. These highlights of accelerated sales were partially offset by some weakness seen internationally within our DTC channel, as the regional economies within Europe and Asia continue to face macro headwinds. Revenue compared to last year was higher by $63 million. The increase to last year was driven by UGG up $26 million from approximately $10 million of planned wholesale orders that shifted out of Q4 and into Q3 related to earlier introduction dates of product this year, $6 million of earlier European wholesale and distributor orders as compared to a year ago and our expectation for the quarter, and due to a change in online revenue recognition this year, $12 million that last year was deferred to Q4. Polka was up $25 million globally, and higher domestic sales also contributed from our Kulabura brand. Gross margins for the quarter was 53.8%, also significantly better than expected, and up 160 basis points versus last year. The majority of this improved result was driven by a less promotional environment and fewer closeout sales, which in turn helped drive higher full-price selling. In addition, We also benefited from our supply chain initiatives as we continue to implement improvements on our processes and deliver efficiency. On expenses, our non-GAAP SG&A was $228 million, up 3.4% to last year, but below implied guidance. The increase to last year was driven by an increase in variable sales expense related to the higher revenue in the quarter, as well as the planned increase in marketing spend as compared to last year. And as we continued to deliver on our operating profit improvement plan, we achieved improvements in our SG&A profile. The combined impact of these results drove net income above guidance by $40 million, with major contributions coming from $12 million from a less promotional environment than previously anticipated, $8 million from improved gross margins from continued supply chain improvements, $7 million of profit from higher sales driven by strong full-price selling, increased reorders, and fewer cancellations, $3 million from an improved tax rate, $2 million from earlier European shipment, and the majority of the balance coming from operating expense efficiencies driven by overhead and back-office support leverage. Non-GAAP diluted earnings per share was $6.59, compared to $4.97 last year and our guidance range of $5.10 to $5.25. The beat to our high-end guidance was driven by approximately $0.40 due to a less promotional environment, $0.25 from additional supply chain improvements and higher margins, $0.25 from incremental sales from higher reorders and fewer cancellations, $0.25 driven by operating expense efficiencies in the quarter, $0.14 from a favorable tax rate and reduced share count, and $0.05 from early European wholesale and distributor shipment. The non-GAAP adjustment in the quarter of $2.4 million in operating expense was primarily due to the net impact of a one-time legal credit. For the quarter, our tax rate was 20%. Now on to our balance sheet, which continues to remain strong at December 31st. Cash and equivalents were $516 million compared to $493 million this time last year. This increase includes using $286 million to repurchase shares over the past 12 months. Inventory was $342 million, down 14% compared to last year, and short-term borrowings of $600,000 was flat to last year. During the quarter, the company repurchased 249,000 shares of our common stock for a total of $27 million. As of December 31, 2018, the company had $89 million remaining under its $400 million share repurchase authorization. In light of our results and the confidence in our strategies to produce strong cash flow over time, the Board of Directors approved an increase of $261 million to the company's stock repurchase authorization as of January 29, 2019. Combined with the previous outstanding amount of $89 million, this brings the company's total stock repurchase authorization up to $350 million. Now moving on to our outlook. For the fourth quarter, we expect sales to be in the range of $360 million to $374 million and non-GAAP EPS between break-even to $0.10. The expected revenue range for the fourth quarter includes year-over-year impact, as we previously mentioned, related to the planned $10 million of wholesale orders that shifted out of Q4 and into Q3. the $6 million of early European wholesale and distributor orders that shipped in Q3 this year, and the change in online revenue recognition this year. Hence, the expected reduction for the quarter compared to last year. In addition, we have planned for some incremental strategic marketing spend in the fourth quarter and see this as an opportunity to continue to build momentum and drive brand heat that supports our growth initiatives. For fiscal year 2019, we are updating the financial guidance that we provided on the October call. We now expect sales to be in the range of $1.986 billion to $2 billion. Our outlook at the brand level has been updated to include UGG sales are now expected to be roughly flat after last year. POCA is now expected to be up in mid-40% range. TEVA is now expected to be up low single digits. and Sanuk is expected to be down mid-single digit. Turning to the remainder of the P&L, gross margins are now expected to be above 50.5%, which includes certain one-time benefits achieved this year. SG&A as a percent of sales are now anticipated to be below 36.5%, and operating margins are now expected to be in the range of 14.5% to 14.7%. And we are raising our non-GAAP diluted earnings per share, which are now expected to be in the range of $7.85 to $7.95 on a share count of approximately $29.9 million. Our guidance for the fourth quarter in fiscal 2019 excludes any potential non-GAAP charges, as well as the effect of any future share repurchases. Also, we had a tax adjustment in the third quarter, which reduces our expected tax rate for the year, and our guidance for fiscal 2019 now assumes an expected tax rate of approximately 20%. Additionally, we do not currently expect any impact to our business from the currently imposed tariff, but we will continue to monitor tariff decisions and work closely with our supply chain operations to identify risk mitigation strategies that should future tariffs begin to impact us. As we have previously mentioned, we have been actively shifting our production outside of China, and we currently have less than a quarter of our production being done there. The full year outlook for fiscal 2019 includes flowing through approximately $1.10 of our earnings per share improvement from the third quarter result, driven by $0.40 of an improved promotional environment 25 cents of higher revenue due to beneficial marketplace management aided in part by favorable weather conditions, 25 cents from additional supply chain improvements and higher margins, 14 cents from the updated tax rate as well as reduced share count, and 5 cents of the operating expense savings achieved in the third quarter. While we are not providing fiscal year 2020 guidance at this point in time, I think it is important to outline several items that should be considered one-time occurrences in fiscal 2019 and will not necessarily be anticipated to repeat in future periods. These items year-to-date include the benefit from high full-price selling with reduced promotions and closeouts in our peak selling season, significantly driving higher profit margins. reduced usage of air freight during the year, which may be needed in future periods, and increased profits from higher sales achieved in the fall season from strong reorders and fewer cancellations, in part aided by beneficial weather conditions. Therefore, in a normalized year, we anticipate that future results may include lower operating margin levels as compared to this year. In addition, future margins may also be impacted as we invest in our growth initiatives, including UGG Men's, UGG Women's Spring and Summer, and the HOKA brand, and supporting them with best-in-class digital marketing capabilities, product innovation, and improved speed to market. We remain committed to staying on the course and executing on our underlying strategic initiatives as we continue to build our brand and grow the business. Before handing the call back to Dave, I'd like to say how pleased I am with the results our team has been able to deliver this year to date. while demonstrating disciplined management of our brands and operations. We still have work to do before stepping into the next phase of our long-term plans, but I am confident that we are well positioned and on track to do so. Again, we will not be providing an updated fiscal year 2020 outlook on this call, but I look forward to providing you with an update on our year-end call in May. With that, I'll now turn it back to Dave for his closing remarks.

Thanks, Steve. I think it is important to acknowledge that this quarter marks a significant point in our progression against our long-term target, as we have raised our guidance for the full fiscal year 2019 to include achieving up to $2 billion in revenue, with operating margins significantly exceeding the target of 13%, as well as fulfilling the commitment to deliver $100 million of operating profit improvement. And we are now on pace to deliver a year ahead of plan. In summary, Our success for the third quarter was highlighted by a strong product offering, rich with brand DNA, and relevant to a younger consumer base through new and existing wholesale accounts, thoughtful and controlled distribution through our UGG Core Classic allocation and segmentation strategy in the U.S. wholesale marketplace, and favorable weather conditions for which we remained appropriately positioned to capture increased in-season demand. all leading to accelerated revenue growth in UGG non-core styles, as well as impressive results in our HOKA and Kuldeboro brands, much less promotional activity in their prior years, driving significant gross margin profitability above expectations, and exiting the season with very low inventory in the wholesale channel, as well as reduced owned inventory versus prior year. In closing, I would like to congratulate the entire Decker's organization for executing an incredibly strong third quarter, and for their commitment to our brand as we step into the next stage of our evolution. Thank you to all of our stakeholders for their continued support and to employees for their focus and passion for the business. I am very excited about our results, but even more excited for what lies ahead. With that, we are now ready for Q&A.

Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. We also ask that you please limit yourself to one question and a single follow-up. And we will now pause momentarily to assemble our roster. And our first questioner today will be Camilo Leone with Canaccord. Please go ahead.

Hi. Thanks for taking the question, and congratulations. Fantastic quarter. Dave, I wanted to get your thoughts on how the conversations have unfolded with your wholesale partners with respect to the repositioning of the assortment and how you started out the season with more of the fashion-based products and how they've responded and if they've become the lead leaders in how you're now trying to reposition the plastic business and how that should influence and impact go-forward periods.

Yeah, great question. You know, we've been working for quite some time to get our wholesale partners to adopt more of the line beyond just the core classics because we believe there's real strength in that assortment, especially now that we're reaching a younger consumer. And it's just a much healthier, sustainable business over time. So I'm super excited about how the allocation strategy worked in core classics. You know, we contained the amount of inventory that was in the channel. We were very thoughtful on which accounts we gave Core Classics to and what quantities they had. And then we supplemented that with a segmented approach of non-classic styling across shoes, slippers, boots, et cetera. And I think what you're seeing in this quarter is the results of that work playing out, aided a little bit by some early cold weather to bring traffic and excitement to the brand. But the sell-through rates on core classics and in non-core classics inventory were exceptional. And so the accounts are very pleased with how we've been controlling the brand in the marketplace, how we've been positioning new accounts with segmented product offerings so everybody has something different and unique. And I think that that is a strategy that played out extremely well for us in Q3 and one that we're looking to employ in the international market starting in fall 2019. So I guess to answer your question, the feedback from the accounts has been very positive. They all had a good season. As you saw, we had high full-price sell-through. We didn't have to discount to drive sales, even though we were in December up against tough comps last year and exited the quarter extremely strong.

That's great. So would it be fair to say that clearly the weather was a benefit to business and it was a benefit to all outerwear customers? businesses this holiday season, but if it weren't for this very favorable weather pattern, the positioning was such that it was still within an advanced stage of season figures. Is that really the learnings and the takeaway from this strategic shift that we should embrace?

Yeah, I think like you said, the weather early on was a catalyst to kind of spur the excitement in UGG and the product there, but if it wasn't for the compelling product across the board that we've been working on for quite some time. And this is really the first year you're seeing the full assortment and a segmented approach hit the market with some new distribution we wouldn't have done as well as we did. And I think if you look at a high level, like we said on the call in the script, this wasn't just an UGG story this quarter. HOCA did tremendously well, their best quarter ever, which traditionally Q3 isn't their largest quarter of the year. And I think you're starting to see the impact of HOCA and also Culebra and the portfolio approach to this business have a bigger impact. And we all feel great about the fact that we're less reliant on core classics and weather dependent in Q3.

Great. And this is one of my last questions. So last conference call you alluded to getting close to committing to a mid-single-digit sort of long-term revenue growth target. Could you just help explain what the components of that would be? Clearly, coca is on this tremendous growth path. You mentioned future investments and continued investments in coca and the women's spring line and men's. Maybe you could contextualize how would you think about those components of the business in context to the core classics business and how would you think about the different growth rates for you to to achieve that in the single digits?

Yeah, I mean, we're not giving, obviously, long-term guidance at this point, but I still firmly believe that mid-single digits is achievable in the long term over the next three to five years. We do have significant growth drivers, as we've talked about. First and foremost, we're going to maintain the strength of the core classics business. We don't see that as a major growth driver, but more of just a healthy annual business that we can continue to build on. But men's will continue to be a growth driver. New categories outside of core classics in women's and also in spring and summer. Hoka will be significant. As we said before, we see that brand getting to $300 million to $500 million in the next three to five years. And I think when you add up all those components, you get to a mid-single-digit growth level that we think is sustainable over the next three to five years.

Fantastic. Great job on the court again. Good luck the rest of the year. Thanks, Carmelo.

And our next questioner today will be Jonathan Komp with Baird. Please go ahead.

Yeah, hi. Thank you. I wanted to start just following up on UGG and some of the upside. And, Dave, if you could maybe talk a little bit more or give more detail on the shape of the quarter. You alluded to it a little bit, but just more color on how things played out. And then also coming into this year, and the start we've had, how things have trended, and what that means for current inventory availability and kind of early order trend, if you would.

Yeah, I think I covered a lot of it. I think one thing that's important to note is, again, we started off strong in October and November. If you remember last year, we had an extremely strong December, and we planned that business conservatively going into this quarter or this year. Fortunately, we started out the gates very strong with some of the new products, that was hitting the marketplace, as well as some cold weather early in October, which proved to be more of a catalyst to getting the business jump-started. But, again, I think it was the strength of the men's offering across the board, driven by the new melon on Tasman styles and some of the fashion boots. The Adirondack style in women's was a top seller for us, again, even though we raised the price. We still saw double-digit growth in that style alone versus last year. Shoes and sneakers and women's led by the NutraSneaker and slippers led by the Fluffy Hat franchise. Those are normally not big drivers in the business, but we saw those really kicking in in October, November through existing and new wholesale distribution as well as online that created excitement for the brand and I think had a halo effect on the classics, but I think what the difference is is this wasn't a classics-led business this year. I think it was across-the-board strengths And we maintained control of the marketplace through pricing. So there was very little, if any, discounting going on. We entered the season very healthy and clean from an inventory perspective. We maintained that through strong full-price sell-throughs and tightly managed reorders going in through December. And even though December was a little bit challenging, we had enough momentum in the business to finish the quarter strong and made some decisions that – You know, actually, we decided not to promote or drive closeout sales, even though we could have in some cases. And we felt it's better to maintain a healthy positioning in the marketplace, strong full price selling for our consumers and our accounts, and then exit the quarter with healthy inventory levels going into Q4 and next year's sell-in. So it played out nicely. And again, we've been working on this for a couple years, as you know, the segmentation and allocation and product assortment, coupled with the new brand positioning. And we're still feeling good about that positioning going forward. As far as Q4 goes, you know, the weather has been up and down, playing a little bit of, you know, have an impact on the business in some cases. We still have some challenges internationally. Some of the shifts of deliveries and accounting principles that went into Q3 make this quarter look a little bit lower than we anticipated originally, but still strong, sell-through, still good handle on the inventory in the marketplace. We're not doing a lot of closeouts, and then being bolstered by the strength of HOCA.

Yeah, Jen, this is Steve. Just to kind of add on to what Dave's saying, I think in terms of how we looked at the quarter for the way it played out, it pretty much played out the way we thought, and then You know, with less promotion, we saw some lift in revenue, and then we saw some timing impacts. So the timing impacts that we picked up in Q3 is really what's impacting Q4. Q4 hasn't changed from the way we looked at it, other than we shipped some product earlier in Q3. So, you know, exactly kind of what Dave said, with an allocation strategy in place, we sold to that. We sold above that in additional categories. that gave us really the upside kind of in Q3. And Q4, while it's a take back from last year, when you take into account the timing that went into Q3, it's still pretty much what we planned. And then flowing through that full beat, or at least about $1.05 of the beat from Q3 for the full year, is just been a kind of a reflection of how well our setup was for Q3 and the execution on our Q3.

Understood. And maybe just a follow-up on the call-outs around the Asia-Pacific business. I don't know if you can contextualize what you saw a little bit better there. And, you know, any more commentary on what actions you might take to try to address whatever it is you're seeing?

Yeah, I think, you know, our goal is to always control what we can control. And I think, you know, I always look at kind of our international markets and you know, in the last couple years as probably a year behind our strategies that we're executing first in North America. So the marketplace management tactics that we just saw play out in Q3 in North America, we'll be rolling those out to the international markets starting in fall 19. So with regards to Asia Pacific and the China business, there's some macro challenges in that marketplace with consumer sentiment. We had some weather challenges in the marketplace, particularly in southern China. And those are the major factors outside of the brand itself.

Understood. Thank you.

Thank you.

And today's next questioner will be Sam Poser with Susquehanna Financial Group. Please go ahead.

Thank you for taking my questions. I just want to go back into, like, how would you weight it? Would you weight the success you had with UGG in the quarter as, more weather-related or more of the segmentation brand control weighted?

Yeah, it's a great question, and there's no exact number or breakdown to that. But from where we stand, it's more weighted towards the marketplace management of the brand and the focus on brand positioning and product. So, Certainly, as you know, Sam, managing the inventory and the channel, the allocation of classics is a big component of that and creating demand in the consumer and for the accounts. And then bolstering that with an exciting product offering that is segmented by consumer and channel and account. I believe the majority of the upside is from that. And we're looking at it as aided by weather but not driven by weather.

And I think the other thing, Sam, too, talking just about the strategy, how well HOCA did. I think that further shows kind of how the strategy and the marketplace approach, not only with UGG, but HOCA is working, too. Correct. Yeah. Thank you.

I have two more. Can you give us some idea of the year-over-year DTC versus in the total wholesale EBIT, you know, whatever? I assume that they both were good, but probably it was a big beat on the wholesale line, I would guess.

Yeah, it's a bigger beat on wholesale, right? So we saw stronger wholesale outperformance than we did in DTC. You're right. Both did perform well. But also DTC was impacted by, I think it's 11 stores closed this year versus last. So, you know, on a year-on-year, we had headwinds with store closures related to retail and But, again, strong performance in DTC, kind of stronger performance in wholesale. So the proportion of our wholesale beat is bigger than the DTC.

Yeah, and the other piece to remember on that is December last year, DTC had an exceptional last couple weeks in the quarter driven by the cold weather that came late. We were unable to capitalize on that in wholesale, but we were able to capitalize it on in DTC. Okay. And we didn't have that same dynamic this year, and we made the decision to not be as promotional in DTC this quarter.

And then lastly, inventory levels. Can you give us the year-over-year percent increase or dollars, however you want to do it, for UGG and for HOCA, just so we can understand sort of where this inventory is?

Yeah, we don't normally break that out, but I can kind of directionally tell you. So total company was down 14%, so ended the quarter at 342. That compared to 396 a year ago. The UGG inventory was down more than the company average, so UGG inventory down more than the 14%. And HOKA, you know, as we... gear up for spring, summer, and we have some new category introductions coming. We brought inventory in earlier. That was actually up year on year.

Okay. Thank you so much, and continued success. Okay. Thanks, Adam.

And our next questioner today will be Dana Telsey with Telsey Advisory Group. Please go ahead.

Good afternoon, and congratulations on the very impressive results. As you think about... Thanks, Dana. As you think about the less promotional environment, how did pricing change? Did pricing change on any of the categories? And what are you planning for pricing going forward? And did you get gross margin improvement from all brands?

So I'll handle the first one and Steve can handle the second one. We actually have been working on pricing for quite some time, and particularly in North America, to make sure that we're competitive. I guess the competitive mind, there are competition out there and also by account with some of the new segmentation. So we feel that we actually had pricing set correctly. There were a couple of styles that we made decisions to change to be a little bit more competitive. bringing those down, but we maintain healthy margins across the board regardless of category. We don't see any significant price changes going into next year. What we're trying to do, you know, going into next year in FY20 is to add more value into some of the product at the prices we have, more functional capabilities such as waterproof capabilities in some of the fashion boots and women's. The pricing overall, we felt we were set correctly. We were competitive. A lot of value in the pricing for the consumer, and I think that played through in the full price sell-through.

Yeah, and then just kind of on the amounts, Dana, you know, what we said in the prepared remarks was, you know, we think the left promotional activity contributed about $15 million. We think, you know, in the quarter that's a little below $15 kind of 200 basis points of improvement on the gross margin. You know, as we kind of then extrapolate that out, you know, that's not something we would necessarily plan kind of for next year. So, when I talked about my one-time adjustment, you know, we think for the year it's probably worth 100 to 150 basis points that we picked up, which is really a combination of better full-price sell-through, as well as some of the air freight benefits that we received last quarter. So as we're looking out forward, again, we haven't given guidance, but we think we benefited in the current year probably around 100 to 150 basis points that we wouldn't necessarily figure into next year. It doesn't mean it couldn't repeat, but we wouldn't figure it in next year.

And then just one last follow-up. How is the new distribution performed, whether it's ASOS, Urban Outfitters, and how do you see your goals for that going forward?

Yeah, all well. Across the board, generally speaking, those have all performed well for us. We have some assortment opportunities in places like Foot Locker where the core new mail has sold well to that consumer, but we see opportunities for evolving that specifically for their consumer. But generally speaking, inventory levels and sell-through have been healthy, and the accounts are pleased.

Thank you.

Thank you.

And our next questioner today will be Jim Duffy with Stifel.

Please go ahead. Thanks. Good afternoon, guys. Terrific quarter. Hey, Jim. Thank you. Steve, the question for you, the objective EBIT margin, you were talking about 13%. You're now looking at high 14s for the fiscal 19. If I heard you correctly in response to Dana's question, you're thinking 15%. there's maybe 100, 150 BIPs of give back in the gross margin. Are there organic areas of improvement in the gross margin that are going to be an offset to that?

Yeah. So, again, we are, you know, as we indicated, you know, we're not completely through all of the COG savings in our original plan that we articulated kind of two years ago. So, we do think there is some smaller incremental improvement that's still to come next year. So while there will be kind of, we wouldn't factor in these one-time benefits that we saw this year, there will be a bit of a setback, but there will be smaller, not like what you've seen kind of in the last two years in terms of gross margin improvements, but there is still some opportunity for a little bit more improvement.

Good. And then you've been tightening the belt for some time now. It sounds like some planned areas of of reinvestment, and you spoke to some of those. Is there additional savings, wraparound savings, into fiscal 20 that can be an offset to some of that reinvestment?

The way we're looking at it, and we haven't given guidance, but we think, as Dave mentioned, there's more top-line growth. We think through kind of discipline management of SG&A that we can achieve leverage. It doesn't necessarily mean it's going down, but there can be some offsetting savings as we look out to next year.

Okay, great. And then last one for me, just updated thoughts on objective retail footprint, given what you saw coming out of the key selling season.

Yep.

Yeah, we're continuing to make progress on operationalizing our fleet and improving store performance, more so on improving the operating contribution of that fleet, and the teams have made great progress there. We've been doing a lot of renegotiating of leases when leases come up, and that has allowed us to keep some stores open when we may have had them on the closure list. So it's one of the things we're continuing to evaluate. You know, part of that optimization is continuing to optimize labor, elevating the presentation and storytelling in store, getting new core categories to activate, such as men's and lifestyle, improving merchandising, and renegotiating leases. So, you know, we're moving away from setting a target of stores out there, but I think the goal is to make sure that the overall fleet is hitting our internal operating margin metrics that we've established. The teams are making good progress on that, and it's something we're going to continue to evaluate as part of our overall strategy.

Very good. Thank you. Thank you, guys.

Thanks, Jim.

And our next questioner today would be Chris Vezio with Wedbush.

Please go ahead. Good afternoon, gentlemen, and congratulations as well on a really great quarter. Thanks, Chris. I just want to, just on the UGG brand, if I have this correct. So flat for this year right now is the outlook. But I recall because of the segmentation and some of the strategic alignment and some retail store closings, there was $50 million in sales that kind of came out of that brand. So if we kind of back into it, maybe we'd be up low single without some of those changes. Is that sort of how we should think about the UGG brand as we sort of move forward, as the ability to generate sales? low single-digit growth or any color about any changes to segmentation strategies as we go into next fiscal year that we should be mindful about?

Well, I think I'll speak to the changes in strategy. I would say no. I think we're going to continue to build on those strategies. I think the allocation and the holdback of Classics in the channel has proved to be healthy and created some demand across the brand. In the marketplace, I think the segmentation This is really the first full year where we've seen true product created specifically for accounts and a younger consumer. That's played out really well, so we're going to continue to build on that. And I think some of those new categories will start to be meaningful and help us get to that low single-digit growth over time while still maintaining a tight control of the core classics business.

Yeah, and I think, Chris, just to add on that, what we've talked about, it really is, execution on everything we've been talking about, especially the last year and two years bigger. What we intended and I think what we successfully executed was really a strong allocation and segmentation strategy this year. The idea was it was going to put some pressure on growth for UGG. We knew that. That's kind of the way we laid it out. The quarter played out a little bit better, but with that strategy in place, what it did do was build sales in other categories, as Dave mentioned. And so now going forward, you know, we are building off that base. So you're going to start to see that growth kind of coming next year.

Yeah, and I also think that the success of UGMEN in the quarter is a great indicator of some of the opportunity going forward as well. You know, that has reached contribution of 15% of the total brand sales now, up from 13% last year. We still think there's significant opportunity in men's with new consumer and in global distribution. And that's what we're going to continue to focus on to bolster the total line of the UGG brand as well.

Okay. That's helpful. Thanks. And then just, Steve, I want to go back to your comment about some of these one-time benefits this year. Breaking from sort of the full price sales, reduced uses of air freight, et cetera. And just a comment about potentially lower operating margin. Is it fair to say that you would potentially consider reinvesting some of the operating margin benefits that you've seen, which has outperformed back into the business, whether it's marketing, things of that nature? Sure. Or how should we interpret that comment?

Absolutely. That's exactly the way we're looking at it. And, you know, I think, again, this quarter somewhat demonstrates the opportunity that we have, not only with UGG and kind of the success that we saw in those areas, but, again, with HOCA and Culebra. And so we do intend to use some of those dollars of overperformance to reinvest in the business to drive some of these drug drivers that we have.

Yeah, I think it's our responsibility to do that going forward for the long-term health of the brand and the business with sustainable, healthy growth. You know, we've proven that we have growth drivers and opportunities in HOCA, in UGMEN, in non-core category product in women's. Spring and summer continues to be an opportunity for us. We had a great meeting earlier this week about segmenting our marketing spend going forward differently by quarter and allocating against different categories globally. and I think with additional marketing efforts targeted against the right consumer, we can continue to drive growth in the UGG brand. In addition to that, I think we have some investments to make in IT and digital marketing, and so we're going to balance the spend and the operating margin improvements over the next three to five years to be focused on healthy, sustainable growth but returning good value back to shareholders, and we think we're in a great position to start doing that.

Okay, sounds good. I appreciate it, and all the best. Okay, thanks, Chris. Thank you.

And the next questioner today will be Mitch Cummins with Pivotal Research. Please go ahead. Oh, I apologize. It is Laurent Vacheloux with Macquarie. Please go ahead.

Oh, good afternoon. Thanks for taking my questions. Thank you for all the color on the revenue shift between 4Q and 3Q. I'm just curious, any thoughts on how should we think about the international versus U.S. revenue change for the fourth quarter? Should we assume the international is down mid-teens while the U.S. is flattish?

Yeah, I think when you say down, you're saying compared to last year, right?

Correct, yeah.

Yeah, so I think that's a fair way to kind of look at it.

Okay, okay, very helpful. And then on gross margins for the fourth quarter, it's implied to be slightly down if we take the annual guidance. Is that the right way to think about it in terms of maybe down 50 bits, and can you maybe talk about the headwinds and tailwinds for the implied fourth quarter?

Yeah, it's kind of more flattish to last year, and I think the way to look at that was, As we looked at the quarter, we saw a very strong January last year. This year, January started out not as strong as a year ago. So as you recall, there was a little bit of a different weather pattern last year versus this year. Last year, cold late December carried through January. This year, we had a good colder quarter. kind of October, November, but warm December that carried through the beginning of January. And there's a lot of selling in January. So, you know, we've included that really in our guidance of how we're looking at fourth quarter. So it's not down as much as you said, more flattish to down a little bit, really taking that into consideration.

Okay, that's very helpful. And then I want to follow up on air freight initiatives. I think last, obviously last quarter, there was a benefit. Was there a benefit this quarter? And then ask a different way, how much do you air freight as a percentage of your overall business? And where do you think that goes over the next year?

Yeah, we haven't necessarily kind of given that. You know, what we said last order. As you recall, we said there was about $6 million of air freight that we had planned that we didn't use. And so we think going forward, that won't necessarily always be the case. It's going to kind of depend on how we're bringing product to market, where the orders are, how quickly we need to bring product in. Clearly, we have gotten better and we think there will be improvements from where we were a year ago. We think this year was an extremely clean year, and we'll be a little bit conservative, because you know there's going to be certain styles, especially as we move beyond kind of the core classics, that there's going to be a need to bring product in quickly to the market. So we'll be anticipating some of that.

Yeah, I think that's the right way to think about it. You know, in the past, we've had to use air freight to compensate for poor planning or inventory management. I think we've addressed all that. And going forward, we're going to use it more strategically to chase business with fast-tracking products and getting after opportunities that arise in the quarter.

Okay, very helpful. Thank you very much, and best of luck.

Thank you. And this will conclude our question and answer session as well as today's conference call. Thank you all for attending today's presentation and you may now disconnect your lines.