Deckers Outdoor Corporation

Good afternoon, and thank you for standing by. Welcome to the Decker's 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'd 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 One One 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 am excited that consumers are finding more to love in the UGG brand's spring and summer offerings. This year, we have seen U.S. search interest rise by 50% over last year. In addition, UGG has also seen a significant increase in the key 18 to 34-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 U.S. 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 raining 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've 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 SINUC, 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 in 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 U.S. 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 their 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 2 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 Sanuk, for the quarter, sales came in approximately 3 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 the strategic decision to exit the warehouse channel with our Sanook 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 Sanook 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 open-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 Carbon X 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. markets. 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 direct-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 direct-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.