Deckers Outdoor Corporation

Good afternoon and thank you for standing by. Welcome to the Deckers Brands First Quarter Fiscal Year 2020 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 and zero for operator assistance at any time. I would like to remind everyone that today's conference call is being recorded. I'd now like to turn the conference call over to Erin Kohler, Senior Director, Investor Relations and Corporate Planning. Ma'am, you may begin.

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 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 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, everyone. As shown by the first quarter results posted this afternoon, we are off to a solid start in fiscal year 2020. For the quarter, our portfolio of brands posted gains in revenue as well as earnings versus the prior year, with the most material contribution of top-line growth coming from the Hoka Oneone brand. As new product launches paired with enhanced marketing activations continue to build brand momentum. In the first quarter of fiscal 2020, revenue was up 10% versus last year to 277 million. We delivered gross margin of 47% and a loss per share of 67 cents. These results are above the high end of the guidance that we provided for the quarter as we benefited from earlier delivery of wholesale and distributor shipments in the UGG brand and saw continued success in the Hoka brand, including the boost from the introduction of the Carbon X. The strength seen in the first quarter provides us with added confidence in achieving our increased fiscal 2020 guidance, which Steve will walk you through later in the call. The results for the quarter are a testament to the work our teams are doing to strengthen our brands by bringing compelling product and experiences to our consumer. As I look at the industry, I see Decker's leading in innovation with two of the most exciting product launches this season in the Hoka Carbon X and the UGG fluff franchise. We're making progress in reshaping our business and I believe our investments in marketing and innovation will continue to push our brands ahead of the competition. I'll now review the highlights from the quarter, starting with the fashion lifestyle group. UGG global sales in the first quarter were up 2% over last year to 139 million, driven by a high teens increase in domestic sales. The strength of our domestic business was fueled by both wholesale and DDC growth. As was planned, international sales were down versus last year, but we are in the early stages of a marketplace reset in our EMEA region as we better position our brands in the marketplace. As I think about the progress we are making, I'm excited that consumers are finding more to love in the UGG brand's spring and summer offering. This year, we have seen US search interest rise by 50% over last year. In addition, UGG has also seen a significant increase in the key 18 to -year-old demographic, where the number of online purchases in the quarter grew by 86% versus the previous year. And aligned with our company's initiative around digital growth, UGG Rewards is starting to make a noticeable impact, with nearly 40% of US e-commerce revenue being driven by loyalty customers. From a revenue perspective, UGG gained a significant incremental dollar contribution from the newly introduced fluff collection. Our marketing activations, including a partnership with Born This Way Foundation, helped drive excitement around the entire collection of fluff product, which we feel is unique to UGG and true to the brand's DNA. The fluff collection is driving incredibly high sell-through rates, as well as attracting new consumers to the brand. The collection has been praised by high-end publications and positively endorsed by a number of high-profile celebrities. Importantly, brand attention is being gained in a seasonal period in which UGG has traditionally not been top of mind. Partially offsetting the UGG brand's Q1 performance was the soft start to the sandal season, as a result of rainy conditions across much of the country early in the quarter. It is also important to note that our strategy of controlling marketplace supply of core product, which is designed to reduce the sales of core product during Q1 in order to drive sales of true spring and summer product, also impacted the brand's top line results. That said, we believe this is an important step towards building a more meaningful spring business for UGG. I am encouraged by domestic growth and the progress the brand is making towards a healthier mix of product. Just three years ago, more than half of products sold during our first quarter were autumn and winter boots. However, this year we reduced the mix of boots to less than 40%. On top of that, UGG was once again a top 10 spring brand at Nordstrom, capturing healthy growth versus the prior year, and is performing exceptionally well at Nordstrom's anniversary sale. This is further evidence that UGG is able to address counter seasonal demand in the spring and summer timeframe, and remains focused on building traction in styles that are incremental to the core offering. Turning to the performance lifestyle group, which is comprised of Hoka, Teva, and Sanuk. Beginning with Hoka, the brand's investments in product innovation, as well as its story sharing philosophy, are propelling the brand forward, as evidenced by first quarter performance with revenue growth of 69% versus the prior year, with equal strength both domestically and internationally, more than doubling new consumer acquisition versus the prior year, and the CarbonX launch, which drove nearly 800 million impressions globally, and delivered strong sales online, 40% of which were first time DTC purchasers. I am incredibly proud of the collaborative effort to launch the CarbonX list last May. CarbonX was designed as a limited release that has exceeded sales expectations. Consumers are raving about the experience of the CarbonX, as seen by overwhelmingly positive online product reviews. We feel the CarbonX launch event impressions drove serious momentum and brand awareness, leading up to a key release in our Clifton franchise. In June, the brand introduced the Clifton 6, the most innovative update to one of Hoka's core franchises. Despite just one month of availability in the marketplace, the Clifton 6 has driven very high sell-through rates, and is ranked as the number one or two shoe of any brand, in nearly all US wholesale specialty running accounts. This is a testament to the Hoka team's dedication to franchise management, and ability to improve on a popular product through a commitment to innovation. In conjunction with these new product launches, Hoka continues to invest in building awareness. As a result, the brand recently entered a partnership with Lifetime Fitness, creating an authentic engagement opportunity with the potential to attract new consumers into the Hoka ecosystem. Hoka and Lifetime seek to empower people in all aspects of their health journey through numerous activations that showcase real and positive change, regardless of size or scale. Shifting to Teva, the brand outperformed our expectations by about two million, but declined by 4% versus last year, due to the strategic decision to adjust the European wholesale model from direct to distributor. For the quarter, the brand experienced impressive growth in both the Universal and Hurricane franchises. Moving to Sunook, for the quarter, sales came in approximately three million below our expectations, primarily due to the softness in the yoga-sling franchise. As we've done over the past two years, we continue to evaluate our distribution opportunities across our entire portfolio of brands. Aligned with the organization's commitment to strong brand management, we have made it a strategic decision to exit the warehouse channel with our Sunook brand. While this decision will have a negative impact on fiscal 20 revenue, it's the right move for the health of the brand. Moving forward, this provides a better environment for Sunook to focus on other under-penetrated channels. Moving to channel performance, wholesale increased 11% over last year, driven primarily by the domestic expansion of UGG and Hoka. As a note, part of the increased wholesale volume was due to the timing of UGG shipments, which Steve will walk you through later in the call. In total, our domestic wholesale business grew by 15% versus prior year, despite this being the first time that we constrained selling of UGG Core Classic products during the first quarter. Aligned with this strategy, we worked with our wholesale customers to shift the use of -to-buy dollars for true spring and summer product, while at the same time reducing the amount of closeouts year over year. Strength domestically was also driven by Hoka growth, as the brand gained market share in existing accounts and experienced increased volume in both the Clifton and Bondi franchises, benefiting from the additional brand attention due to the CarbonX launch in May. Domestic wholesale strength was partially offset by softness in our international UGG business. As we have previously indicated, we continue to see headwinds on the international front for the brand, but are addressing with the learnings we've gained from our implemented distribution strategies in the U.S. market. Our Hoka brand continues to gain momentum within international wholesale, as the brand is building important awareness during its early stages of growth outside the U.S. We are engaging in marketing activities that are impactful on a global scale. Specifically, we're beginning to see the benefits of these marketing activations, including our CarbonX launch and Hoka's sponsorship of Ironman events in countries around the world. From a DTC perspective, comparable sales increased 16%, with total -to-consumer sales up 10% versus last year's first quarter. This was led by strong performance from our e-commerce channel, where both UGG and Hoka contributed materially to the growth and exceeded our expectations. Similar to our wholesale channel, our domestic -to-consumer business was the primary driver of growth. Overall, Decker's delivered another strong performance. Though it remains our smallest quarter, I'm proud of the progress we've made to increase the size of our spring and summer business, as we have grown our first quarter revenue by 32% over the past two years. I'll now hand the call over to Steve to provide more details on our first quarter financial performance, as well as outlook for the second quarter and full fiscal year.

Thanks, Dave, and good afternoon, everyone. As Dave just mentioned, we are encouraged with our start to the year, and now I would like to take you through our first quarter financial results, then provide details on our outlook for the second quarter and updated full fiscal year 2020. Please note that throughout this discussion, I refer to certain non-GAAP financial measures for comparable prior year results. Where I refer to these non-GAAP financial measures, I'm referring to results before taking into account non-recurring charges that our management believes are not core to our ongoing operating results. Also note, our non-GAAP results are not adjusted for constant currency, with the exception of our -to-consumer comparable sales. While we did not have any non-GAAP financial adjustments for the first quarter of fiscal 2020, a reconciliation between our reported GAAP and non-GAAP results for the prior year can be found in our earnings release that is posted on our website under the Investors tab. Now to our results. For the first quarter, revenue was 277 million, up 10% to last year, and above our high guidance of 260 million. Compared to our guidance, approximately seven million of the revenue upside was related to timing of UGG brand shipments. Approximately three million was from stronger UGG DTC performance, and the majority of the remaining balance was driven by outperformance with the Hoka brand. More specifically, UGG timing upside was from early shipment of wholesale orders globally that were originally anticipated for the second quarter. The stronger UGG DTC performance was driven by strong adoption of spring summer styles led by our fluff franchise. And the strength of our Hoka brand was driven by the Clifton 6 introduction and bolstered by the launch of CarbonX. As we look at the first quarter, we are very pleased to see success with these drivers of the business as we continue to shift business to spring summer quarters, not only through the diversification of the UGG offering, but also through the accelerated growth of the Hoka brand, which has a much more balanced distribution across all four quarters. In comparison to last year, the revenue increase was predominantly Hoka, which benefited from the new styles such as the CarbonX and the newly redesigned Clifton 6. Gross margins were up 109 basis points over last year to 47% and in line with expectation. The main drivers of the year over year increase were favorable mix of brand revenue, gross margin rate expansion, fewer closeout sales, with gains partially offset by channel mix, as well as currency headwinds. To provide more detail, the favorable mix of brand revenue and the gross margin rate expansion was driven by Hoka, which carries a higher gross margin than other brands in the first quarter due to seasonality. At the same time, it is experiencing successful full price selling of core product and offerings within our category extensions. Related to the improvements in closeouts, we have improved our distribution model and have become less reliant on closeout volume in the first quarter, primarily driven by the UGG brand as we have shifted our focus to selling more season appropriate styles in the period. Moving to SG&A, our dollar spend was 161.4 million, up 4.6 from last year's gap SG&A spend of 154.4 million and up 4.9 to last year's non-gap SG&A spend of 153.9 million. The increase in a prior year in SG&A was driven by incremental marketing spend of approximately $6 million. In comparison to implied guidance, we experienced savings in the first quarter, largely coming from reduced marketing originally intended for the first quarter, as we saw opportunity to move this spend to later in the year with positive organic search trends tracking in the first quarter and favorable payroll costs as we experienced deferred hiring of certain headcount. During the quarter, we also received a tax refund. More specifically, we finalized a settlement related to prior years. As a result of the settlement and receiving the refund in the quarter, we recognized the full amount in Q1. While we expected to receive payment this year and our guidance for the year assumed this, we were uncertain of the timing and therefore it was factored into the rate for the full year and spread across the year. This all resulted in a loss per share that came in at 67 cents compared to last year's gap loss of $1 and last year's non-gap loss of 98 cents. This also compares to a guidance range of a loss of $1.25 to a loss of $1.15. The 48-cent beat to our high guidance of loss per share came from approximately 14 cents from the tax refund recorded in the quarter, 10 cents from earlier shipment of UG wholesale orders, 10 cents from increased performance in the Hoka brand, 10 cents from operating expense savings driven by the delayed hiring as well as marketing spend that is now planned and moved later in the year, and 5 cents from stronger UG DTC performance. Our balance sheet at June 30th remains strong as cash in equivalents were $503 million, up from $418 million at June 30th of last year. Inventory was up 9% to $473 million from $436 million at the same time last year, and similar to last year, we had no material short-term borrowings under our credit lines. During the quarter, we repurchased 227,000 shares of the company's common stock at an average price of $154.36 for a total of $35 million. As of June 30th, 2019, $315 million remains available under our share repurchase authorization. Now, moving on to our outlook. For the second quarter of fiscal 2020, we expect revenue to be in the range of $515 million to $525 million, and earnings per share to be in the range of $2.15 to $2.25. When combined with our first quarter performance, this outlook provides a strong first half expectation for fiscal 2020, including revenue growth for the first half of roughly 5 to .5% when compared to the first half of fiscal 2019, and non-GAAP earnings per share growth in the range of 8 cents to 18 cents, representing approximately 6% to 13% growth versus the first half of last year. As we have now completed our US distribution center consolidation, I think it is important to note that we have planned for a more level-loaded quarter end. As a result, we anticipate that some UG product that has traditionally shipped in the final week of Q2 will now ship in Q3. As we ramp up our first year and we create more efficiencies with our distribution operations. Now, for our full fiscal year 2020, we are raising our guidance to account for the better than expected performance in Q1. The upside we are flowing through to the full year guidance equates to 20 cents in earnings per share. Our updated full year guidance includes raising our revenue expectation to the range of $2.1 billion to $2.125 billion, $2.25 billion. With recognition that our outlook for the Hoka brand has been lifted, now assuming sales are growing in the high 30% range for the year, partially offset by reductions in the Sunook domestic wholesale business related to the decision to eliminate distribution in the warehouse channel. And upside in the UG business that we saw in Q1 is now projected to be offset by currency headwinds in the rest of the year. Gross margins are expected to be approximately 50.5%, SG&A at or slightly better than 36% as we defer a portion of our first quarter savings to marketing efforts and technology investments later in the year. All generating an operating margin of approximately 14.5%. Also, based on an updated view on tax, we now expect our rate to be .5% for the full fiscal year. These updates, combined with the share repurchase executed in the first quarter, we are raising our earnings per share for the fiscal year 2020, now to be in the range of $8.40 to $8.60 on a share count of approximately 29.4 million shares. This 20-cent raise in earnings per share guidance for the full year is being driven by approximately 6 cents from the net impact of the revised revenue expectation driven by the full year increase in HOCA projections partially offset by the strategic reset in Sanuk. 6 cents from operating expense savings from the first quarter. 5 cents from the better tax rate, now reflecting an estimated .5% for the full year effective tax rate. And 3 cents from the recent share repurchase activity in the first quarter. Our guidance for the second quarter and fiscal year 2020 excludes any potential non-GAAP charges, as well as the effect of any future share repurchase. Recognizing there have been recent movements in foreign currency exchange rates, we are partially hedged for our exposure in this fiscal year, and our updated guidance incorporates the impact of our exposure on any unhedged amounts. We believe that the -over-year impact of foreign currency exchange rate fluctuation remains at approximately a 40 basis point headwind on our margins. On tariffs, we continue to monitor tariff policy decisions closely, and still do not anticipate any financial impact related to the recently imposed tariffs. As a reminder, we have stated that less than 20% of our current global production is created in China and shipped to the United States. To further mitigate current risk of exposure to potential new tariffs on China imports, we have taken the opportunity to receive some inventory ahead of the normal cadence, which is partially contributing to the 9% increase in our total inventory balance at June 30, 2019, as compared to levels at the same point last year. With that, I'll now turn it back to Dave for his closing remarks.

Thanks, Steve. While our first quarter exceeded expectations, it remains the smallest period in our fiscal year, and there is still heavy lifting ahead of us to meet our objectives for the year. That said, I am excited about the progress we continue to make within the organization as we reinvest in marketing tactics to drive brand heat and awareness, fueling growth within UGG Men's, UGG Women's Non-Corps, and the Hoka Brands, with increases in digital outreach, experiential marketing, and event-driven spend, as we build on our technology and tools with added talent that will advance our analytical capabilities and create new ways to connect with consumers and develop incremental opportunities that can add value to our brand portfolio in the future. Going forward, the organization remains dedicated to continuous innovation. Our design, development, and innovation teams have been significant contributors in pushing the boundaries of product innovation for Deckers, and we look forward to seeing continued enhancements in the near future. I'd like to thank all of our employees across the Deckers organization for their exceptional efforts in this past quarter and their continued commitment to the successful execution of our strategies. With that, I'll turn the call back over to the operator for Q&A. Operator?

Ladies and gentlemen, we'll now begin the -and-answer session. To ask a question, you may press star and then one in a telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys to ensure the best sound quality. If at any time your question has been addressed and you would like to withdraw your question, you may press star and two. In the interest of time, we do ask that you please limit yourselves to one question and a single follow-up. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Jonathan Combe from Robert W. Baird. Please go ahead with your question.

Yeah, hi, thank you. I wanted to ask about the strike you're seeing, especially domestically with UG, given the strategy to de-emphasize the classics and really focus on some new product categories that are working in the non-core periods. And, Dave, when you look forward and kind of look at the success you're seeing with that strategy, does that at all change how you're viewing kind of the product strategy going forward and the seasons ahead and anything you could talk to about kind of the next evolution and some of the core seasons as you continue to de-emphasize the classics?

Yeah, thanks, Jonathan. That's a great question. And it's pretty exciting to see the momentum that the team is building in North America, particularly through all of our channels. And what's great about it is we are driving the business through new introductions of spring and summer product. And as you heard on the earnings script, the shift away from reliance on boots in the quarter and the growth coming from new product introductions in seasonally relevant product, such as the Fluff franchise, which is a massive success for us. We're learning a lot from that. It's also allowing us to reach new consumers and bring new consumers and younger consumers into the brand, which is great because they traditionally come in through the classic and then explore more of the brand. But we're seeing a large number of younger consumers coming directly to the brand for the first time, particularly in our DDC channels, purchasing that product that they're wearing in season. So it gives us a lot of confidence that if we hit the right product design, coupled with the right social and PR strategy and marketing tactics, that we can really move the needle in these categories and in the quarter. It also tells us that big ideas in product, something that is distinctly UGG in DNA and disruptive in the marketplace, is a method for us to continue to drive success in new categories. So we had a fantastic meeting with the UGG product team yesterday and talked about the learnings from Fluffia and how we translate that into future seasons across different categories and also into men's. And I think you're going to see more of these more sizable, meaningful launches. Fewer, bigger launches is the approach for us going forward. But now that we have the attention of a younger consumer and credibility in spring and summer gives us a lot of confidence going forward. And then we just need to employ the same strategy globally.

And are you willing to share any kind of thoughts on where that could go in terms of some of the new categories? I know for UGG you've talked about the sneaker opportunity from time to time, but any additional thoughts there?

Yeah, you know, I've always been a fan. We've always said the money's in the middle, so it's kind of new innovations that are probably crossovers or hybrids of two categories. So we'll have limited success, and we can be successful in pure sneakers, but I think it's the mashup of sneakers and sandals. So you can provide the comfort with the UGG DNA. That's something that's unique that nobody else can do. I think that's where the strength of our brand is. And we have quite a few products within that coming out of our innovation team and our design teams. And I think that, you know, it's interesting. This fluff product is in our P&L, it's classified as a slipper, but the consumer sees it as a sandal. And so I think that that tells you that it has broader shoulders, and it's very disruptive and interesting, and it's something that nobody else can do. And I think that's the formula going forward.

Yeah, great. And then just to follow up, Steve, on the guidance, just to understand, sorry if I missed it, did you update at all what you're expecting UGG to grow for the full year, if there's any changes there? And then the new guidance for HOCA as well, is that just flowing through the first quarter upside and not really changing the balance of the year assumptions?

Yeah, good question, John. We really aren't changing the UGG. So, you know, kind of positive low single digits is what the guidance is for the year related to the UGG brand. No change there. There is a significant change in HOCA. So I think before we were in the mid-20 range, and we're now in the higher 30 percent range. So that's where you're seeing an uptake on HOCA, but it is being offset by the -to-take back, as we pulled out of that warehouse channel. But net net, still an increase on the full year revenue number.

Okay, and HOCA, just to understand it, it looks like you're kind of around 30 percent or a little below for the balance of the year in terms of the implied growth after the big growth in the first quarter. So just curious if you changed your assumptions after the first quarter at all for HOCA?

Yeah, so it is up a little bit, you're right. I mean, this is, we saw tremendous growth in the current quarter. You know, that's the 69 percent that we're talking about. So, you know, well ahead. As we get into later quarters in the year, those are bigger historic quarters for HOCA. So that's why the growth rate will drop a little bit on a percentage term.

Okay, got it. All right, thank you very much. Okay, thank you.

Our next question comes from Paul Wedgews from Citi. Please go ahead with your question.

Hi, this is Kelly on Sopal. Thanks for taking my question. On the U.S. wholesale business, you're still seeing strong momentum there. Could you just shed some light on how much that growth over the last couple of years has been driven by expanded distribution in places like Macy's, Amazon, versus, you know, organic growth in core wholesale accounts?

Yeah, so Kelly, this is Dave. So I think what you're seeing this quarter is very little increased distribution over last year. You know, we spent the last three years or so in incubating new distributions such as Macy's and Urban Outfitters and Footlocker and a couple smaller kind of boutiques in addition to, you know, the important department stores. And we've actually closed more accounts than we've opened. So what we've been doing is consolidating distribution, elevating to the key players in the industry. And so the majority of the growth you're seeing now is increased door count within those channels or within those stores or chains, I should say, sorry, but just better penetration and sell-through across the board. So we're seeing it both in wholesale with those accounts and also in our GDC channel.

Great. Thank you. And just on QQ in particular, I know there were some timing shifts around UG, some of that benefiting the first quarter, and I think you mentioned some shifting into the third quarter. So could you just provide a little bit more detail of where you're planning the UG business in the second quarter?

Sure, Kelly. So what we have is we'll have the UG business compared to last year down just a little bit, and that's really that shifting into Q3. So we did bring kind of 10 million forward into Q1, and then we'll have a little bit going out on the back end from Q2 to Q3. So that's the, call it down, kind of low single digits. Okay.

And lastly, just on the HOCA brand, just curious, the margin profile there, how does that compare to the company average, and are there any opportunities to expand margins then over time?

Yeah, so the margins on HOCAs, we've kind of said, are very similar to UG in the channel, so in wholesale similar channels, in DTC similar margins. So, you know, very strong margins, as we indicated on the prepared remarks, you know, what's also helping drive some of the HOCAs is less closeout that we're seeing. And so, you know, we can continue to kind of drive that full-price selling it was a very clean quarter. So, you know, I don't know how much more upside there is, you know, kind of on the surface within channel. Clearly there's upside as we drive more DTC business with the HOCA business. So from a channel mix, there's more opportunity as we make our DTC business with HOCA bigger.

Great. Thank you.

Our next question comes from Ross Lacerro from Telsey Advisor Group. Please go ahead with your question.

Thanks for taking my question. Can you give a little more color on the case order? How is the monthly performance?

What do you, yeah, help me out a little bit. What are you looking for in terms of?

I guess just trends from April, May, June. Did they improve at all? And then just a follow-up on that. Now that the weather is through for Sandals, that reflect the tail.

Yeah, I think, you know, interestingly, the months were pretty steady. They were strong from the get-go in the beginning of the quarter. You know, in HOCA, it was really ignited by the launch of the CarbonX and the PR and the press and the buzz that the brand got from that launch. And then when we officially launched the Clifton6, that maintained the momentum. So that's been pretty steady through the quarter. UGG was a little bit softer in the beginning due to some of the Sandals challenges, but that was offset by the Fluffy app franchise. And that's continued to be strong through the quarter. So they were pretty steady all along.

Yeah, I would say on that, just what we observed is kind of that normal cadence. We definitely see a pick-up in the latter half of the quarter. You know, I think as we saw kind of within the industry, there was some softness with the industry. I think we saw strength with UGG and a normal cadence within the quarter and a normal cadence of the business picking up kind of later in the quarter.

Okay, great. And then can you talk about how the men's business is doing for UGG and I guess how it's performing relative to your expectations?

Yeah, the men's business is still small in Q4 and Q1 for that gender. The strength of men's, what we're really seeing the growth is coming in in Q2 and Q3, really driven by the new male franchise. So we had some good product launches in sneakers and shoes, but they weren't enough to really move the needle in men's. So we have work to do and opportunity, I would say, for men's in that time of year. And we had a good meeting on that yesterday and some learning that we're taking from women's in the fluff franchise and other categories and translating that into men's for spring and summer. But the real strength of men's where we're seeing the growth is definitely in fall, winter, through the new male and winter boot category at this point.

Great. Thanks a lot.

You bet.

Our next question comes from Sam Poser from Susquehanna. Please go with your question.

Good afternoon. Thanks for taking my question. Can you give us the specifics on how much UGG, sorry, both UGG and HOCA wholesale and retail grew? I know it's coming out in the queue, but that would help us a lot. And I've got a couple other ones, too.

Yeah, I think, Sam, on breaking out the channel UGG performance, we'll let that come out in the queue. But good, I would say, from the numbers that we've reflected, kind of clearly HOCA very strong wholesale performance globally. So not only North America business, very strong HOCA performance really across the globe. I think from a wholesale perspective on UGG, we saw a strong performance domestically in the wholesale channel and internationally kind of more to expectation. But that's on the international front, as we indicated in the prepared remarks, kind of more of where we saw some early shipments. But again, from a global perspective, if you take out the early shipments, wholesale performed pretty much to kind of what we expected with a little bit of overperformance in our DTC channel related to UGG in North America.

Thank you. Okay, I've got a couple more things. Number two, sticking with UGG, how many dollars moved from Q3 to Q2? Because you said part of the guidance for UGG in Q1 was shifting from Q1 to Q4. So why wouldn't – I mean, is this just – demand is good. Isn't this just going to keep shifting? Or you just don't know that yet and you're being – discretion is the better part of valor.

Yeah, so it's a good question. I think one of the things that we're seeing, and it's a little bit harder for us to just – to predict is that as inventory channels – they were clean last year. They're even cleaner this year. What we're seeing is with the success of UGG that retailers are asking for product earlier because they want to make sure that they have the product. And so that's where we're seeing these shifts. It's a good indication. It's the strength of the health of the brand. But it is – it's hard to know exactly. One, they're seeing strong sell-through. They also want to make sure that they're getting product for the fall setup. So that's where we're seeing kind of people taking it earlier this year than where they have, say, a year or two ago. And we'll fulfill it. Like we've said, we will guide and project to kind of what we see on the order book, but also if a customer is asking for a product sooner than that, we'll be ready to deliver. And then just a note really kind of on the shift out of Q2 to Q3. That's us being a little bit conservative with the first year of our consolidated DC. You know, a year ago we looked at really the last week, and there is a lot of activity that goes out that last week of the quarter. So as we've consolidated our DC, we're pushing a little bit of that out into Q3. Now, we may get orders where customers want it a little bit sooner, but we want to balance out that load because it's a big load in that final week. And so we want to be mindful of what our capacity is and kind of constraints with the new consolidated DC.

And then lastly, have a wholesale – could you give us what the wholesale equivalent revenue would have been given that – the shift of the European business?

Yeah, we're saying it's about – I think it's three to four million on that shift. Yeah, so a $4 million shift.

So then, I mean, so what would HOKA – I'm sorry, what would TEVA have been if it had just been as normal, you know, everything was as if, you know, if it was apples to apples? Would you have been up? Yeah. You would have been up a little. You would have added DC's business, it looks like. You probably would have been like four to four percent, four or five percent, is that right?

Yeah, that's correct. Yep, that's about right.

And are you still pleased with the fact that you've done this now that things are getting better? Are they getting better because you've done?

Maybe a little bit of both. I think it was the right call. It allows the European teams to focus on our core businesses and then have somebody who is strong in the region focus on, you know, expanding the TEVA business in a local way. We'll continue to evaluate it over time, but I think it was the right thing as we were looking at profit improvements and focus on the organization. It's great to see that the distributor is managing the business so well, which means the teams are working closely with those partners and they have the expertise required. So I would say it was the right call. We're pleased with how it's going and it gives us an opportunity to reevaluate down the road.

Thank you very much. Continue to success.

Thanks,

Sam. Our next question comes from Tom Nickick from Wells Fargo. Please go ahead with your question.

Hey, everybody. Thanks for taking my question. Just a little bit of modeling minutia about the, I guess, your three smaller brands. I guess I'll start with, you know, Sunuk. You've got the pullback of the distribution in the U.S. Should we assume that that, you know, down, you know, 20, 25 percent that you saw in Q1 is basically what it should look like across the balance of the year? Yeah,

I think that's fair. Yeah.

All right. Teva, I think last time you guided it flat, you know, it was down a little bit in Q1. Should we still assume flat for the year or should we assume maybe it's down a little bit because of the shift?

No, flat, flat with the shift.

All right. And then just lastly, I don't think there was anything mentioned about KulaBura on the call. Just, you know, how should we think about that for this year?

So kind of same as what we've said before, we don't see much change there, but significant growth. So kind of up mid-50 percent range is kind of how we're looking at that. Yeah. Help the order board. Yeah, Q1 is really not a KulaBura quarter. You'll start to see that really ramp up. All right. Sounds good. Thanks very much. Thanks, Tom.

Our next question comes from Jim Duffy from Stiefel. Please get ahead with your question.

Thanks. Good afternoon, guys. Great start to the year. Thanks. I wanted to ask about HOCA and maybe talk a little bit about how you guys are thinking about the opportunity. Do you have any consumer insights you can share on awareness, the age demographics, repeat purchase frequency, that type of thing?

Yeah, I think it's safe to say the awareness is increasing. I think the last time we looked at it in North America was roughly around the 12 percent. I don't have the exact figures in front of me, but it's definitely improving. And I think you're seeing that as resulting in the sales, the top of funnel exercises that the team has been doing, particularly the Carbon X event, which was a massive success, the way the teams pulled that off with breaking two world records in an event that was resonating on a global scale and launching a brand new innovative product. That brought 800 million and growing, I should say, still improving impressions to the brand on a global level. So the awareness is improving. The average age, it's a little bit older than we would like, I think. And so there's opportunity to target younger consumers through some of our marketing tactics. And I just had a conversation with the brand on that yesterday. But it's also a higher price point product. So we need to make sure that we're balancing out the high level of performance and technical characteristics of that product and price point with shoes like the Rincon, which we just launched, which is a little bit more affordable price point, a little bit more for an everyday runner. And I forget, what was the third point you just asked? It was about repeat purchases. Oh, yeah. I think what we're seeing is that the repeat purchases are happening a little bit faster than we originally thought. And so we're getting new consumers into the brand through our DDC channels. But I think with the new product launches and some of the new extensions that we're seeing, we're starting to get people who are buying more products more often. There's a bit of a cult following for the brand, if you can't tell, where people are, you know, as soon as something goes up on the website that's new, new launches or new styles, people are just grabbing them. So it's a combination of repeat purchase on a core style that people are replenishing on. But also when we launch something new, the tribe that's following the brand is jumping on those as well.

And Dave, when you think about the competitive set and the marketplace as a whole, how do you think, what's the framework to think about how big this brand could become over time?

You know, I've always said I could see a path to half a billion dollars for this brand. You know, I think that the real opportunity is probably bigger than that. We don't want to get ahead of ourselves, but we are thinking big with Hoka. And we see this as a game changer for Decker's long term. So it's exciting to see the acceleration of the business, the adoption of the business globally in all channels. The innovation engine is strong. The marketing tactics are working very well. The tight and controlled distribution is driving high full price selling. So there's a lot there. The momentum and the conversation, the buzz about the Hoka brand is improving. And it just gives us confidence that we can reach some of those aspirational goals in the next three to five years. Hard to put a number on it right now, but I think if you look at Hoka in the context of some of the other running brands out there, the runway is pretty significant for us.

Great. Thanks for that perspective.

Thank you. Our next question comes from Mitch Comets from Pivotal Research. Please go ahead with your question.

Yeah, thanks for taking my questions. I've got three. Dave, let me just follow up where Jim left off. I know you don't want to necessarily say, you know, Hoka is going to be 500, you know, three to five years or whatever it is. But is there any way you can kind of address where the lowest hanging fruit is in terms of maybe product categories or distribution or regions to go from where you are today to a number or, you know, to what you think it could be in three to five years? Where is, you know, the path of least resistance, I suppose?

Well, there's still opportunity. And it's a good question. There's still opportunity in the existing channel, particularly international. You know, we're still opening up additional accounts international and penetrating those doors at a deeper level is one area. The same with e-commerce international. We're still setting up the mechanics of some of our sites on the international level. But if we take the playbook that's being incorporated in the U.S. with regards to e-commerce, you know, I think there's a substantial amount of international growth coming out of e-commerce and just elevating awareness in the markets for wholesale. So without even adding any additional distribution points, there's substantial growth. I think over time, you know, there could be expanded distribution to reach new consumers as we as we get into, you know, accelerating the outdoor hiking and trail business. There's other categories that we think we could explore over time and then also reaching the younger consumer. I think if you look at all those different components on a global scale and you think about places like China and Japan down the road, you know, there's that's where a lot of the growth can come from. We have two franchises that are driving the majority of the business now, which is the Bondi and the Clifton, as you know. But some of the new launches like the Carbon X, the Sky Collection and hiking, the Rincon, those are starting to gain traction in new distribution points, which will add to the Clifton and the Bondi franchise over time.

Got it. That's helpful. Thanks for the color. And then Steve, on the gross margin guidance for the year, I think you effectively raised, I think you took up the low end of the range. I believe you said that gross that Q1 gross margin was unplanned. I'm just wondering if you change any assumptions, particularly for the fall holiday season. I know you've talked about, you know, some challenges, year over year challenges on the gross margin line in terms of the favorable environment last year. And I'm just wondering if you kept those assumptions or if anything's changed in terms of your thinking.

Yeah, so I think what we're flowing, you're right, Mitch. What we've done is we've basically taken out the low end. So guiding gross margins to the 50 and a half kind of more firmly. And the pick up there is the brand mix that we're seeing contributing to lift in the gross margin. So with the success that we're seeing with HOCA and the increase that we've now projected for the HOCA business for the full year, that's what's lifting the low end of the margin kind of up and giving us more confidence at that high end. And

continuing to clean up

the market. Price less,

off-price sales,

wholesale, I mean the warehouse. Yep. And then my last question, just on sandals, I know it was a bit of a challenge on the HUD side because of the weather, but it didn't sound like there were any issues with Teva and Sunuk, which I think of being more sandal-oriented brands for you guys. So I was hoping you might just be able to provide some color on that.

Yeah, I think there was a little bit of softness earlier on. You know, Teva is also seeing great success in some of their core franchise styles. The original collection is still very strong and has kind of weathered the weather issue better. Sunuk overall, you know, performing, but the continued decline of the yoga sling franchise for that brand is where we saw the biggest hit.

Got it. All right. Thanks, guys. Good luck. Tim.

Thanks,

Mitch. Our next question comes from Chris Spizia from Web Bush. Please go ahead with your question.

Good afternoon, guys. Nice job on the quarter. My first question, just on DTC comp, up to 15, that's pretty impressive. Any color you can provide, I know you said domestic was a big driver to that, just between digital, physical stores, just ends. Obviously, what's the outlook for the balance of the year? I think the performance is flat, low single. I'm just curious, given Q1's performance, any change in your thought process for the year?

Yep. Good question. So you're right, Chris. I mean, really strong comp on the quarter. Where we saw success was domestic. We saw, I think, a lot of that was being driven online. We don't break it out, but clearly our online performance was well ahead of our expectation, which really kind of drove the overperformance. So, you know, kind of as we look at it, where we really were above expectation was kind of domestic and then a very strong online performance. As we look kind of at the balance of the year, you know, from a guidance perspective, we are looking at kind of positive, low single to positive, mid single digit type comp numbers. You know, it was still a big part of the season to come. So clearly, confidence with what we've picked up in the first quarter. But again, our first quarter is our smallest quarter. So I think it's a good signal for us going into the year, but we still have, you know, our biggest quarters ahead of us. So, but, you know, again, I think, you know, what we saw in Q1, especially domestic, especially with what we saw online, you know, confidence going into the rest of the year.

Yeah, and this is Dave. I think it also, you know, forces the conversation about how do we learn from that and leverage those results for the rest of the year globally, particularly in e-commerce. We talked about the new amount of new consumers coming to the brand for both UGG and HOCA online. You know, the performance marketing capabilities that we've developed in this region which we're taking global are working extremely well. The PR tactics that the brands are employing and storytelling with powerful, you know, launches and colabs, those are all driving top of funnel awareness, which is, you know, resulting in strong interest in traffic to the, you know, the scale of the business. There's a website, we now need to leverage those learnings to drive traffic to the stores, and that's something the teams are focusing on.

And Dave, just a follow up on that. I know things like afterpay and quadplay play a factor at times in driving demand. The others have seen that. I know you put this in last year. I'm just curious, is that, are you learning more from that? Is that accelerating? Is that contributing all to the acceleration on the digital side?

Yeah, we're pleased with it. It's still a small piece of the total business, but it is helpful for the younger consumers that come to our site. Especially with a brand like UGG, with the average price point of that product. So early days, but I think the teams have done a great job of making our shopping experience simple for the consumer, no matter where they're coming from and how they wanna pay. And I think what we're really excited about it also is the loyalty program of rewards and the amount of business that that's driving. And it was about 40% of total business in the quarter for UGG came from loyalty consumers versus last year about 25%. So that's again something that we wanna continue to build on and leverage our omnichannel capabilities across stores and online. To build that because the lifetime value of those consumers is very strong. They spend more money, their average transaction is higher, they come to the brand more often. And we're looking at how we can leverage that on a global scale and potentially also for the whole brand.

Okay, and just finally, just real quick here, just on the spacing of gross margin, you did nicely in Q1. The guidance is down around 100 basis points or so. I know Q2 last year, there was some great expense. I'm just curious, how do we think about pretty consistent or is one quarter maybe a little bit heavier on the pressure than another or just any color about that would be helpful?

Thanks. Yeah, thanks Chris. I think as we look at it, we are, as you mentioned, kind of guiding the year down. You're right, Q2 does incorporate some freight. We are using freight this year, so we do expect to see some impact of that in Q2. Really as we look at the rest of the year, I think it's pretty consistent in terms of our kind of lower expectations so that bringing it down 100 basis points, I would say pretty consistent as you look at the back half of the year. And again, just some background on that as we do have a higher assumption around using air freight primarily Q2 and then just some of our estimates around how the promotional environment potentially plays out in kind of Q3, Q4, hence the take down in the back of the year. And then we'll also have some FX headwinds, as I mentioned, that we have unhedged amounts still out there so dependent on reflecting the current rates that we currently have, we have a little bit of an impact as well in the back half.

Got it. Okay, thank you very much, Shalman. All the best. Okay. Thanks, Chris.

And ladies and gentlemen, we've reached the end of the allotted time for today's question and answer session. I'd like to thank you for attending today's presentation. You may now disconnect your lines.