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.