Deckers Outdoor Corporation

Good afternoon and thank you for standing by. Welcome to the Decker's brand third quarter fiscal 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 difficulty hearing the conference call, please press star then zero for an operator assistance at any time. I would like to remind everyone that this conference call is being recorded. I would now like to turn the conference over to Erin Kohler, Vice President, Investor Relations and Corporate Planning. Please go ahead, ma'am.

Hello, and thank you, everyone, for joining us today. On the call is Dave Powers, President and Chief Executive Officer, and Steve Foshing, 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, and earnings per share. 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. Please note that throughout this discussion, there may be references to certain non-GAAP financial measures for comparable prior year results. These non-GAAP financial measures refer to results before taking into account non-recurring charges that are not believed to be core to our ongoing operating results. Our non-GAAP financial measures are not adjusted for constant currency. While we did not have any non-GAAP financial adjustments for the third 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. With that, I'll now turn it over to Dave.

Thanks, Erin. Good afternoon, everyone, and thank you for joining us today. I'm proud to announce that our third quarter results exceeded expectations, with total company revenue increasing 7% over last year to $939 million and delivering earnings per share of $7.14. These results represent the largest revenue and earnings quarter in the history of Decker's brand. Our record performance was fueled by the strength of sales in our domestic UGG business, partially aided by a forward shift in consumer demand, as well as higher than anticipated sales in both our Hoka One One and Kulabora brands. We are very pleased that our third quarter results continue to evidence success within the key initiatives that we are actively pursuing. As a reminder, these include fueling Hoka growth, which experienced a 64% increase versus last year, reaching $93 million in a quarterly revenue for the first time, building the UGG men's business, which increased by 10% over last year, diversifying the UGG brand's product mix, again reducing reliance on core classics, and fostering emerging brands, with Coulibora growing 94% versus last year and capturing significant incremental market share. With the diversification of the UGG brand sales mix and explosive growth of both Hoka and Coulibora, The performance demonstrated in our largest quarter underscores the progress our organization is making on these focused investments. I'm excited to share more detail on our evolution, so let's get into the brand highlights, starting with the Fashion Lifestyle Group. As a reminder, the Fashion Lifestyle Group consists of our UGG and Coulibor brand. For UGG, global sales in the quarter grew by 3% versus last year to $781 million, representing the brand's largest quarter in its history. Growth in the quarter for the UGG brand was driven by its domestic business, as U.S. sales increased 8% over the same period last year. This domestic strength is highlighted by increased traction within the new male franchise, including meaningful contributions to the men's business, as well as extensions across women's and kids, continued strength in the fluff franchise, and significant gains in the kids' footwear business. We continue to experience success within our wholesale marketplace strategy in the U.S., driven by segmentation that offers differentiated consumer experiences across the breadth of our account and clean inventory in the channel through managed allocation, which has enabled the brand to open select new points of distribution, targeting younger and more fashion-forward consumers. The strength in our domestic business was partially offset by lower international sales, which experienced a 7% decline versus last year. which was in line with our expectations. While some of the weakness in the European market is related to macroeconomic events, we are in the process of addressing some brand-specific challenges that currently exist. As we have stated, in our mayor region, we are in the midst of a multi-year marketplace reset intended to reignite brand heat, rationalize marketplace inventory, consolidate the account base to feature partners who enhance the UGG brand, and provide a more differentiated experience across consumer touchpoints. In addition, the UGG team has begun to shift towards more localized marketing, PR, and digital marketing tools. We also recognize there are improvements to be made in our Asia-Pacific region, and we will be taking a similar marketing approach as we work to build brand heat in our APAC region as well. Taking a look at the UGG brand product offering, we continue to make strides in the diversification of our product line. For UGG men's in the quarter, this is the third consecutive year of double-digit growth. aided by investments made to drive awareness and consideration. Men's was prominently featured in both the New Mel marketing campaign and our holiday marketing campaign that featured the Marley family. As a result of these marketing efforts, UGG Men's experienced a mid-teens increase in brand consideration among all men and over a 50% increase with fashion-leading men, according to YouGov. The New Mel franchise continues to be a big driver of our men's success as both heritage products and new derivative styles introduced during the fall season helped deliver strong results. In particular, the new male zip and new male flex sold through very well in their introductory season. We also executed two successful collaborations during the quarter with leading lifestyle brands, Tarrant Preston and Bait. Both collaborations rapidly sold out of their respective pinnacle product offering. As a result of the brand's increased focus on men's messaging, products feeding with global influencers, and digital marketing efforts, UGG men's experienced a near 30% increase in 18- to 34-year-old consumer purchasing on UGG.com. The UGG product team has done a great job building a franchise around the new milk to complement the men's offer. Turning to our UGG women's business, we entered the holiday season with a strong setup in the U.S., highlighted by a clean wholesale channel, dedicated allocation, and targeted digital marketing tactics. As a result, the women's business performed well domestically based on accelerated momentum with younger consumers. Similar to men's in the third quarter, women's also experienced a near 30% increase in purchases with female consumers aged 18 to 34 years old in the U.S. Younger consumers gravitated to both heritage styles like the classic mini and classic short, as well as newer styles like the Fluff Yeah slide. And while styles like the Fluff Yeah were well-received globally, There is still work to be done to generate greater interest in the brand's diversified product offering in our international region. Drafting off the success of both women's and men's, our global kids' footwear business grew by 20% versus last year. The kids' business benefited from strong partnerships with key wholesale accounts that are helping to expand consumer touchpoints and undoubtedly saw a positive impact from a holiday marketing campaign that emphasized the brand's offering for the whole family. The exposure and positive response to this family campaign led to the success of takedown styles from women's and men's, including the Fluffy Ass Live and New Melt. The brand's results underscore the progress being made towards a more diversified product mix, as at a global level, the brand grew year over year, with men's increasing as a percentage of brand sales, women's non-classic increasing as a percent of brand sales, and total women's classic product, which includes core and derivatives, purposely declining as a percentage of brand sales, with the balance of the business including kids and non-footwear experience and gain. Diversifying the UGG brand's revenue composition remains top of mind and we'll continue to focus on amplifying our heritage styles while complementing the product offering with exciting new products rich with brand DNA. Overall, the UGG brand had an exceptional peak season, and I'd like to congratulate the team on a well-executed third quarter. Turning to Coolabora, Global sales in the third quarter increased by 94% versus the prior year to $39 million, delivering a few million above our guided expectations. This growth was driven by gains in market share within the domestic wholesale marketplace. Additionally, this fall, Kulibora introduced a men's and toddlers' assortment for the first time, and both product lines displayed strong sell-through with our wholesale partners. Congratulations to the entire Kulibora team on a fantastic quarter of record-breaking revenue. Both UGG and Culebora have done an impressive job capturing holiday demand with great product, strong marketing, and a clearly differentiated target consumer. Shifting to the performance lifestyle group, which is comprised of Hoka, Teva, and Sanook. Hoka brand global sales increased by 64% versus last year to a record $93 million. Hoka experienced growth both domestically and internationally across all channels of distribution. The Hoka brand acquired new consumers online through brand discovery, while also seeing a migration of consumer replenishment. In the third quarter, Hoka nearly doubled the number of consumers acquired on hokaoneone.com. The Hoka brand has made great strides in creating a seamless consumer experience through the entire brand ecosystem, which includes a strong network of wholesale partners and direct-to-consumer channels. At the same time, our marketing efforts are focused on building brand awareness and driving consumer demand by highlighting the experiences made possible by Hoka products. The third quarter featured the launch of the Hoka brand's Time 2 campaign, which tells real stories of human experiences with Hoka. The campaign kicked off with the Time to Reimagine video, which has garnered significant impressions across social platforms, helping drive more than a 50% increase in brand search interest, according to Google Trends. From a product perspective, the brand's iconic Clifton and Bondi styles continue gaining market share in the U.S.-run specialty channel. According to NPD's retail tracking service, Hoka claimed the number two brand ranking based on dollars over the summer and has maintained this position each month since, while gaining share at a steady pace. While these gains are driven by the Hoka brand's strong partnership with Wholesale Account, the direct-to-consumer business continues to grow at a rapid pace. For the third consecutive quarter, the direct-to-consumer business doubled over the prior year. Helping to drive these gains, HOKA has also doubled the number of GDC purchasers aged 18 to 34. This has been aided by the introduction of the Rincon and Carbon X styles, as both have over-indexed with younger consumers as compared to the brand average. The HOKA product and e-commerce teams have done an impressive job of collaborating to align on product launch timing to ensure the brand is consistently driving traffic to the website. During the quarter, the brand launched an update to its flagship trail running shoes, the Speed Goat 4. The launch propelled the style sales to more than double last year's third quarter volume, with over half the volume coming from international reasons. The hookah brand is also beginning to experience traction from the trail category beyond the Speed Goat. The Tour Ultra, featured as part of the brand's collaboration with the lifestyle brand opening ceremony, has sold well across both domestic direct, the consumer, and our Asia-Pacific wholesale channel. In terms of the Ahoka brand's international business overall, the brand has reached an inflection point as for the first time, units sold internationally for the quarter were higher than units sold domestically. We think this speaks well to the global opportunity and runway for Ahoka. Moving to Teva and Sanuk, global sales in the third quarter were in line with expectations at $17 million and $8.5 million, respectively. While Teva was down year-over-year due to a shift in the timing of European distributed orders, the brand is on track to deliver its full fiscal year. During the fourth quarter, Pebble will be announcing a significant brand update that coincides with the launch of its Spring 2020 product line. Meanwhile, the Sanuk brand declined as anticipated in our guidance, as it continued to face headwinds from the challenging surf specialty channel, as well as the brand's decision to exit warehouse distribution. The Sanuk team remains focused on exploring healthier distribution opportunities in an effort to reposition the brand. With respect to our Q3 channel performance, global wholesale sales increased 9% versus the prior year, driven primarily by domestic expansion in UGG, HOCA, and Culebora, as well as international expansion of HOCA. It is worth noting that for the second consecutive year, our third quarter domestic wholesale revenue grew by double digits. International wholesale was slightly up versus the prior year due to growth in HOCA being largely offset by the UGG reset in EMEA, as well as negative pressure from foreign currency exchange rates. From a direct-to-consumer perspective, comparable sales increased 5% versus the prior year, with total direct-to-consumer sales up 6% versus the third quarter last year. E-commerce continues to drive gains in the DDC channel, which has been led by the strength of UGG and HOKA. The UGG brand's DDC growth was primarily driven by domestic sales online, which included moving our annual UGG Closet event up by one week compared to last year in order to improve our ability to capture end of season demand. I'm very pleased by the execution of all of our brands to deliver Decker's largest quarter in history. I'm looking forward to closing out another strong year of performance as we remain focused on delivering the fourth quarter. I'll now hand the call over to Steve to provide more details on our third quarter financial performance, as well as an updated outlook for the fourth quarter and full fiscal year.

Thanks, Dave, and good afternoon, everyone. As you just heard, our third quarter performance exceeded our expectation and speaks to the strength of our brand. The disciplined approach to investing in our brand has been a major driver of the organization's success this year, as we've been able to drive brand awareness with HOCA, build brand heat with UGG, including an emphasis on men's, and an increase in our engagement with consumers in the digital marketplace, all while maintaining top tier levels of profitability. I'll now walk you through the third quarter results in more detail and provide an updated outlook for the fourth quarter and our full year fiscal 2020. Revenue was $939 million, up 7.4% versus last year, and $39 million above the high end of our guidance range of $885 million to $900 million. Of the better than expected revenue, approximately $8 million was driven by the Hoka brand, with tremendous results across the globe. with our wholesale partners as well as direct-to-consumer channels. $7 million was delivered by better-than-anticipated domestic UGG business, driven by net in-season reorders, and led by the strength in Kiv Business, the New Mouth franchise, and the Fluff franchise, and approximately $3 million driven by reorders captured in the Kulibora brand. with the balance of the upside performance largely timing-related as we captured sales earlier in Q3 that were previously anticipated in Q4, with approximately $15 million coming from the UGG DTC business and $5 million from earlier UGG wholesale shipments. While we saw growth domestically in the UGG brand beyond our expectations, we continue to see challenges as anticipated in the UGG brand's international business. which was impacted by both brand and macro issues in our European region. Gross margins were up 30 basis points over last year to 54.1%. The gross margin result was approximately 100 basis points above our implied guidance, with the beat coming from lower promotional activity than planned in our UGG domestic wholesale business, delivering strong sell-in and high full price sell-through for a third consecutive year. While the strength of the UGG domestic wholesale margins paired with increased revenue drove improvement above our expectation, we remain mindful of the dynamic promotional environment we continue to face as we did experience higher promotional activity in our international market for the UGG brand as compared to last year. From an expense standpoint, our dollar spend was up 11.8% to $251.9 million compared to last year's gap spend of $225.4 million and up 10.6% compared to last year's non-GAAP spend of $227.8 million. As a percentage of sales, expense delevered versus the prior year, which was aligned with our implied guidance as we continued to invest in our key initiative. The impact of these results drove earnings per share of $7.14 compared to last year's GAAP earnings per share of $6.68, last year's non-GAAP earnings per share of $6.59, and our guidance range of $6.30 to $6.40. The 74-cent beat to the high end of our guidance range came from approximately 25 cents from sales in late December previously anticipated for early January, 25 cents from lower promotional activity in the UGG domestic wholesale business, 15 cents from better-than-expected HOKA results, and 10 cents from higher reorders in the UGG and Coulibour brand's domestic wholesale business. For the quarter, our tax rate was 21.4% compared to our anticipated tax rate of 21%. Our balance sheet at December 31st remains strong as cash and equivalents were $617 million. Inventory was $366 million, up 7% versus the same point in time last year. And we had $6.6 million in short-term borrowings under our credit line as compared to $600,000 last year. With the delivery of the financial results that I've just shared with you, our third quarter execution has allowed us to once again raise our expectations for the full fiscal year. As we look forward, we place a high importance behind controlling our distribution in UGG, focusing on growth opportunities within the UGG brand, and fueling HOCA momentum across the globe. With that said, in our updated outlook for the fourth quarter of fiscal 2020, we expect fails to be in the range of $392 million to $402 million, and earnings per share in the range of $0.35 to $0.45. Fourth quarter revenue guidance compared to last year includes brand expectations of Hoka expected to increase in the high 40% range, Teva expected to increase in the mid to high teens, inclusive of the planned distributor business shift into Q4, Kulabura up high teens, Sunuc down approximately 50% due to the previously mentioned exit of the warehouse business in the quarter. And UGG expected to be down approximately 8% to 11% due to ongoing reset and pressure in Europe, the previously mentioned timing shift into Q3. And while it's still early, a component of risk related to the potential lower DTC demand related to current travel restrictions in China. In addition, fourth quarter earnings per share guidance is further impacted by planned expense growth as we continue to fuel our growth initiatives and lower gross margins primarily due to the Teva brand's European distributor shift and continued currency pressure. Moving to the full year outlook, with the overperformance of the quarter, we are now raising our outlook for the full year. For our fiscal year 2020 guidance, we are increasing revenue guidance to now be in the range of $2.15 billion to $2.16 billion, an increase of $20 million on the high end of our previous guidance range. Our updated outlook at the brand level includes UGG revenue still expected to be flat to up low single digits. POCA revenue is now expected to reach approximately $350 million. Teva revenue is still expected to be approximately flat. Sanuk revenue is still expected to be down in the mid-30% range. And Culebra revenue is still expected to grow to approximately $70 million. Turning to the remainder of the P&L, we are increasing our gross margin expectation to now be approximately 51.5%. As we are passing through the lower promotional activity experience in the third quarter, and increasing our projection for the fourth quarter. SG&A as a percent of sales are still expected to be slightly below 36%. We are raising our operating margin to now be at or slightly better than 15.5%. And we are raising our expected earnings per share to be in the range of $9.40 to $9.50 on a share count of approximately 28.7 million shares, with the full-year tax rate still projected to be approximately 20.5%. Our updated guidance represents flowing through just over 50 basis points of improved operating margin, predominantly driven by the better-than-expected gross margin experienced in the third quarter. This improved outlook for the fiscal year, which equates to a 45-cent raise in our earnings per share on the high end of our guidance, is driven by 25 cents from a lower promotional environment, 15 cents from the HOKA brand, and 5 cents from an improved outlook on the margins in the fourth quarter. Our guidance for the fourth quarter and fiscal year 2020 excludes any potential non-GAAP charges as well as the effect of any future share repurchases. During our second quarter earnings call in October, we provided an annual update on our sheepskin pricing. Due to current events, I would like to remind everyone we expect no change to our sheepskin costs for fiscal 2021. As is our normal course of business, we have contracts in place which are used to mitigate the impact of volatility within such commodity prices. Again, please note that sheepskin costs are only one component of our gross margin, and this update does not constitute gross margin guidance for next year. With that, I'll now turn it back to Dave for his closing remarks.

Thanks, Steve. As we are now in the final quarter of fiscal 2020, we are on track to deliver another year of accelerating top-line revenue growth, with our raise for your guidance representing a 6% to 7% increase over last year. Our results continue to demonstrate that our strategies are working and are at the foundation of our organization's continued evolution. This groundwork will enable us to approach opportunities ahead with confidence, and I look forward to updating you on next year's plans during our year-end earnings call in May. In closing, I'd like to share my appreciation for the collaborative efforts demonstrated by the entire Decker's organization in delivering our largest quarter in history. Thank you to all of our stakeholders for their continued support. With that, we are now ready for Q&A. Operator?

We will now begin the question and answer session. To ask a question, you may press doors and 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press 2. Please limit yourself to one question into one follow-up. At this time, we'll pause momentarily to assemble our roster. And our first question will come from Jonathan Komp with Beard. Please go ahead.

Yeah, hi. Thank you. I just wanted to start maybe on the margin performance and maybe a broader question about the environment during the holiday. I mean, it didn't particularly look like weather was helpful, but yet, you know, ag outperformed and the margin was strong. And maybe just starting with, you know, why you think the margin exceeded your expectations and then how to think about the fourth quarter, especially given the tough gross margin comparison there.

Yeah, hey, John, this is Dave. I'll give you some context. And I'll let Steve get into the specifics on that. But, you know, I think if you go back to the way that our team has been managing the brand in the marketplace with clean distribution, quality distribution, and the diversification of product away from classics, you know, and we've said this before, we believe we're becoming less weather reliant. That said, we did have pockets of upside based on weather throughout the quarter. But just I think what we've seen is the diversification of the product and how we're engaging with the consumers to drive that beyond just weather-related products that we've had to struggle with in the past. And we're also seeing healthy margins because full-price sell-throughs were strong, particularly in the North American market. We didn't chase top line with promotional activity, and you're seeing some of that carry over into Q4. So while the marketplace was challenged and department stores, you know, struggled in places, The strength of the brand, the diversification of the product, and then just focusing on full price quality sales for the health of the brand short and long term versus chasing the top line. Those all contributed to it. We started off January a little bit soft in the North American wholesale channel and DDC as well, just based on consumer trends. But we've held clear on not promoting the brand at the expense of top line. You're seeing that in the results.

Yeah, Jen, so this is Steve. As Dave said, I think what we saw was, you know, compelling product in the marketplace. We did have a nice setup, so that definitely helped. Having a clean marketplace also helped. So going into the quarter, cleaner in the wholesale channel was a good setup for us, and then we did have a nice start into the quarter. So, you know, from what we implied in our guidance or have had in our guidance, You know, we did better on the promotion side. That was largely driven in the domestic component of the business. We did have some promotion related to the international, but, you know, from what we were thinking would happen, you know, we did – it was about 60 to 80 basis points, probably a little bit better in the quarter than what we had thought related to the promotion. And then just a note on Q4 – And with kind of a strong, clean sell-through, we've increased our margin on Q4, so we removed some of that conservative promotional that we had factored into Q4.

Yeah, and then the last thing on Q3 was also helped by the strength of augments at 10% growth as well as kids augmenting some of the diversification efforts.

Great. And then maybe just looking forward for the UGG brand, I got two questions. One, just when you look at some of the non-cold weather seasonal categories, you know, so the sneakers and sandals, the men, some of the other categories, maybe just highlight some of the drivers you have coming up for UGG there. And then just definitely the Europe reset, maybe any kind of status update on kind of where you think you are versus, you know, how long – Do you think the reset actions may still be ongoing?

Yeah, you know, as we mentioned in the script, there's a couple franchises that are emerging within UGG brand that are really resonating with the younger consumer and providing what we think is healthy long-term opportunity. And the first is the New Mail franchise. We've been building that in the men's business over the last couple years. We had a major campaign called New Mail Nation this fall, which helped tremendously to drive that. business as well as iterations in men's. We've also expanded that now into women's and it's become a top five style in the women's business and into kids. So it's resonating with a younger, more diverse consumer and that's creating some excitement in the brand and that's a franchise that we will definitely continue to build on both domestically and internationally. The other one which we've talked a lot about this year is the Fluff franchise and That showed continued strength this past quarter. It's a big part of our focus going into Q4 and Q1 of next year. We have a lot of innovation in the pipeline that we think is going to be really exciting and expanding that franchise beyond just the current use occasion and also eventually getting some traction in the men's business as well. We've actually had a lot of demand from our male consumer for Fluffy App product and expanding that into kids as well. So those would be the two lead franchises. In addition to that, we are going aggressively after the sneaker opportunity, as we have been in key markets. We just had an exciting launch in Paris just recently with a Japanese retail partner and really continuing to ignite some excitement for the brand at the high-end PR level and with exciting collaborations and influencers. With regards to EMEA, we've talked about this for a couple quarters now. We're in the midst of a multi-year reset there. I'd say we're probably, you know, just getting through year one of that reset. It's very similar to what we went through with the U.S. three or four years ago, cleaning up inventory, cleaning up distribution, you know, focusing on controlling full-price sales through the classics. It's a little bit more challenging there because we can't influence, you know, prices in the market like we can in the U.S., but we're working through that. There's also some macro issues happening there. in the UK, particularly in the Europe business right now with the retail and then Brexit, et cetera. So we're taking it slow. We're looking at this from a long-term perspective, controlling the marketplace. And as I said, we're not chasing discounting to keep the top line going. And so that's what's great about the strength in domestic businesses. We can afford to make some of those resets in EMEA for the health of the long term. And we'll continue to focus on elevating that and maintain the strength of the classics business through the next couple of years.

Okay, that's great. I appreciate all the thoughts. You got it.

Our next question will come from Tom with Wells Fargo. Please go ahead.

Yeah, good afternoon, guys. This is Matt for Tom. Congrats on a good quarter. Just a couple questions here. First on UGGs. How do inventories look at retail coming out of the holidays? And then another strong quarter for HOKA. Just wondering at what point you guys think about expanding distribution of the brand? And I want to follow up on margins.

Okay. This is Steve. I'll take the UGG and the channel inventory. Still good. You know, it's up a little bit from where we were a year ago. but comfortable with the levels, really, that we're seeing. And the feedback that we've gotten, you know, really good, strong sell-through in Q3. So I think we feel good about where the inventories sit coming out of the quarter.

With regards to HOCA, you know, this is an exciting story, not only for Deckard, but also for the marketplace internationally. And as we said in the call, in the script, you know, we had success in the quarter in all regions and all channels. The momentum of the brand is exceptional, and, you know, we think things are going to continue to accelerate. From a distribution standpoint, I think one of the things that is working very well is the tight control of distribution. So we don't have really broad-based distribution expansion planned in the short term. We are exploring a couple smaller options that we'll test in the short term, but really, you know, really, really focused on maintaining our positioning and taking more share in the Run Specialty channel globally, enhancing our outdoor distribution. You know, REI is a critical and key partner of ours, and we're having great success with them and others. And that playbook is being implemented also in Europe in our APAC regions, and then really driving replenishment and new acquisition opportunities through our own e-commerce site and the growth in that channel as you're seeing the business, but also in the and the margin is very strong as well. So we're going to continue down this path. We're calling it the HOKA ecosystem where we showcase the brand in a tight, elevated distribution at wholesale and drive additional purchases to our website, and we're going to stay the course on that for a while.

That's very helpful. Thanks. And then just last one on margins. You know, there's been a lot of SG&A spend this year relative to recent memory. Should we think of this year as peak investment year, or how should we think about that?

Yeah, I think I'll take this one and Dave can jump in. You know, I think one of the things that we have seen, especially a lot of the work that we've done, we have taken, you know, as part of our profit improvement plan, we've taken a lot of expense out. As we're rebuilding Brand Heat, as we're moving into some of the new initiatives, you know, we are investing in those initiatives. And that's where you're seeing the increase in the current year. And it's delivering results. So, you know, we think the spend is appropriate this year. We'll give guidance on kind of how we're looking at next year. But, you know, we're investing more in marketing, so we're increasing that variable component of our spend. And it's something that we're going to be able to watch closely. But it's an important part with, you know, the brands growing as rapidly as they are that we continue to feel that through marketing and investment.

Yeah, and I would say overall we have an excellent handle on the SG&A across the organization, and the teams have done an incredible job of, you know, making sure we're tight in areas that we can leverage, but also identifying our key growth drivers across the organization, which we've, you know, talked about in HOCA and UGMEN, you know, ultimately getting through apparel, Culebora. And I think we're just in a unique position where we've right-sized the organization. We have very healthy mid-team operating margins. And we're allowed the opportunity to further invest in the growth of these brands, which we need to do. It's a very competitive environment. We're fighting for share in all of our channels. We have some challenges in EMEA that we need to work through. And Steve and I and the teams are managing this very tightly, shifting expenses from fixed to variable and being able to adjust based on the growth of the brand and the results we're seeing in revenue, but also the return on marketing expense. We're very happy with how things are going there. We're confident that we're making investments in the right places, and we're seeing those returns. And as long as that's the case, we're going to continue to fuel it.

Helpful. Thanks, guys. Congrats on the quarter. Thanks, Matt.

Our next question will come from Dana Telsey with Telsey Advisor Group. Please go ahead.

Good afternoon, everyone, and congratulations on the results. As you think about the same-store sales that you generated this quarter, what were the components and complexity of the comps that were delivered? And lastly, on the European business, what is your timeframe for the Europe business, and what should we look at in terms of stepping stones to show the progress going forward? Thank you.

I'll take the first one. So, you know, our DTC comp was up 4.7%. As you know, we don't break out retail and e-com, but clearly e-com performed very strongly. You know, I think retail, for the most part, was kind of within our expectations but down. And so, you know, it's something that we're constantly looking at. You know, it's something that we've talked about really for the last couple of years of how we're shaping our fleet and how we're improving performance. So something that we're going to continue to monitor. Clearly, retail plays an important strategic element in how we go to market. And so that's going to be a continued area that we're going to look at. And it's something that we are working on and improving in some of the stores that have been underperforming. And for those that have underperformed, we've closed. So that's something that we'll continue to monitor and work as we progress along.

Yeah, and with regards to the European business, you know, and just to clarify, that is an UGG-specific challenge that we're having in the May region. I would say, Dana, we're coming out of year one of a three-year reset. Obviously some declines that we had planned for and some challenges that I mentioned. But, you know, I would expect to see really the real indicator of brand consideration in that marketplace. We track that on a regular basis. and we'll do our best to keep everyone updated through our quarterly calls. We have a lot of internal conversations around marketing, using local influencers versus global influencers. We're ramping up our digital marketing tools in that region to really drive excitement and brand consideration. And then I would say probably in FY21, you start to see the business level out with return to growth in FY22 at this point.

Thank you.

Our next question will come from Sam Poser with Susquehanna. Please go ahead.

Good afternoon. Thank you for taking my question. Can we talk a little bit about China and the consumer and what you're seeing initially with the coronavirus as well as a lot of production there now, but also what you're seeing with the timing of production out of China as well?

Yes, I'll start with that and Dave can jump in. I think, you know, as we said, we do have a factor in there a little bit on more of the demand side. From a supply side, most of our product is coming out of Vietnam. So we haven't seen at this point any disruption from a supply side issue. As I said, you know, we have put in an element around the demand related to China and restrictions in China. As I also said, it's still very early. So it's really hard to know where this is going to go and how it's going to end up. But at this point, you know, with the majority of our supply coming out of Vietnam from a supply issue, we're in good shape. But we'll see how things develop.

Yeah, I don't really have much more to add on to that. I think it's kind of a wait and see, not just for us in the marketplace, what this does to the global Chinese consumer, you know, and impacts in other regions and retail business as a result of that. You know, we do have teams in Shanghai. We have a team in Guangzhou. You know, they are a challenge, but as Steve said, to the rest of the business right now, we think we're about quantified. There may be a little bit of impact on internal kind of development work over the next few months, but we don't see that as a significant impact to the business going forward. But we're obviously going to continue to monitor it closely and also keeping a close eye on the health and the well-being of our teams.

And then secondly, in regard to HOKA, What percent of that business is – well, I have a couple questions there. What percent is domestic versus international? And then is that entire – that entire DTC is digital. Is that correct?

Yeah, the DTC is all digital at this point, yes, correct. Correct.

Yeah, on the HOCA breakout, we haven't given specific numbers, but from a dollar perspective, I think it's worth about two-thirds, a little less on domestic and one-third kind of international.

Yeah, and as we also mentioned, this is the first time that we saw unit sales in the Europe or the international business eclipse that in the U.S., so keep in mind there it's largely domestic. a much bigger portion of wholesale business than a large distributor business. So the average price on a product there is lower because of that, but we're excited about the unit growth, which means more shoes on more feet across the globe, which means adoption is increasing. It just gives us more excitement around the opportunity internationally.

And when would you take... I mean, when would you go to a JV and subsidiary there? How, you know, at what scale do you need to think about, you know, flipping it out of the distributor model and into a subsidiary or JV model?

Yeah, nothing to share there right now. We're continuing to evaluate opportunities for that long term in all regions. And so, you know, right now we're staying the course in building brand health in our subsidiary market, supporting the distributors, We have actually done that with our Canadian market, so this will be the first year in FY21 that is fully owned and run by us. We did that in Japan about three or four years ago, and it's proved very successful. So it's something we're considering as we look at the long-term strategic outlook of this and making sure that operationally we are ready to do that if we get to that point.

All right. Thanks very much, and good success. Thanks, Sam.

Our next question will come from Jim Duffy with CFO. Please go ahead.

Hi, this is Peter McGoldrick calling for Jim. Thanks for taking my question. I was first interested, as HOKA continues to deliver upside to the plan, where are you seeing the increases in brand recognition? And then further, can you speak to the brand marketing and product strategy as you look to recruit younger consumers? And has this evolved at all as you've grown with scale?

Yeah, I think, you know, to answer the question, two areas that we're seeing work well is new product introductions. So the CarbonX and the Rincon, those are resonating with the younger consumer, consumers who want to go faster but still want the overall benefits from the cushion experience that HOKA provides. So we're going to continue to do that. We're going to continue the formula where we're using real consumer experiences in HOKA product to tell that. So leveraging the Time 2 campaign, making sure that we're reaching diverse consumers as we have been, and really cultivating younger consumers through some of the efforts that the field marketing reps are doing across the region, continuing to show up in the right events globally, staying authentic to the channel, continuing to innovate at a fast pace, You know, and what's great now about the breadth of the brand is it is being adopted by a large, diverse consumer across the board, and we are seeing growth and excitement and penetration into the younger consumer. So we're just going to continue to cultivate that, and you'll see that in increased marketing spend and the approach that we're taking. And the product pipeline, you know, will continue to build on the successes that we've had in our core franchises of Bondi, Clifton, and Speedgoat. The CarbonX product is going to continue to evolve, and we're looking at great opportunities to expand that across the board. And we're very pleased with the introduction of the Rincon product and see that as a key evolution going forward as well.

Thank you. Then on the sourcing situation, I know that you're locked in on Chiefskin for next year. But given the drought and fire situations in Australia, can you help us think about any risks that you may be considering for fiscal 22 or the size of any exposure there?

Yeah, so normally we give that update, but I can give you just a little bit of clarity. So we're covered into 2022, so we're fully covered for 2021, and we're comfortably covered for 2022. and we'll be able to provide more of an update. But, you know, the supply that we have locked in, we feel comfortable with the position that we have really definitely over the next year and well into 2022.

Yeah, and in addition to that, keep in mind that we have been leveraging the development of pure and materials as an alternative to pure sheepskin. That's growing as a proportion to the line as we get into more diverse products and more fashionable products and different price points. That balances out the demand for pure twin-face sheetskin, and it's also helping margin and retail opportunities as well.

Okay. Then last one with Holiday 19 in the bag. Can you give us an update on how big the Core Classics franchise is and how much bigger that is than any emergent franchises like Numel or Fluffy F?

Yeah, so total women's classics, you know, we've been hovering in the last few years below 50%. We're now trending closer to 40%, you know, just above 40%. So part of that is on purpose with how we're controlling distribution and allocation of the women's classics franchise. And some of that is also boasted by the fact that you are seeing success in men's and other areas such as the Fluffy app. And that strategy is working. We have more progress that we need to make in the international markets. but those are still a little bit more heavily penetrated. Some of them are in the core classics, but as the adoption of the new mail and the fluff and other categories increase in those markets and we finish out the segmentation and allocation work, we hope to see the same results in those international markets and being less reliant overall.

All right. Thank you very much. Thank you.

Our next question will come from Paul Luiz with Citi Research. Please go ahead.

Hey, guys, Paul Lishway. I'm just curious how you're thinking about the long-term margin in the HOKA business and how you balance the pace of margin expansion with investments necessary in that business. And also curious on HOKA, what percent of the HOKA business is footwear versus other categories, and how do you see that progressing over the next several years? Thanks.

I'll answer the second question first, and I'll let Steve answer the first one. Currently, Hoka is probably about 99% footwear. And, you know, when we look at the long-range opportunity in the brand, and we've talked about getting, you know, to and beyond the $500 million point, you know, there's a lot of runway still within just footwear. We're incubating apparel. There's going to be a launch that's coming out in the next quarter, which is a DDC-only launch in the U.S. to – you know, see what the appetite is for apparel and test. But the teams are, you know, 100% focused on evolving the footwear business, continuing to take market share. But we do see longer term, three to five years down the road, that this can be a much bigger brand beyond just footwear. And we think apparel and gear is an opportunity within that as well.

And then, Paul, the way we're thinking about the margins. It depends on a number of factors, but clearly on the domestic business where we have opportunity for margin improvement is with migration of more customers online, and we have seen that happening, and that's helping drive some upside on the margin. So as we've talked about before, as consumers are introduced to the brand through the wholesale channel, there is a migration online as they get further down into repeat purchases. So we're continuing to see that trend probably a little bit stronger than what we earlier identified. And then, you know, to the question earlier that we got, as we look at international markets, you know, the further opportunity there is, how we capture sales both from our owned markets and the wholesale, distributor markets, conversion to online business. So a lot more opportunity to drive the higher margin business, but we're still growing the brand. So we're bringing customers in. It's about how we're bringing customers in through all channels. And as they, you know, further engage with the brand, our opportunity is how we engage with them online and drive that margin further.

Yeah, and the mix of online business as a percentage of the total, as that increases, obviously, the margin gets exponentially better and we're able to capture that consumer for the long-term lifetime value of that sale. And then our digital marketing efforts and our return on digital marketing spend against our website is exceptional, so we're going to continue to fuel that at the pace of the growth that we're seeing.

Thanks. Can I just go back to the China question for a second? Use your mind as what percent of your sales are in China and I think you didn't indicate any sort of percentage of your sourcing coming from China. Did you mean to imply that you don't have anything sourced in China at this point? I'm just curious what that percentage is.

Yeah, just right now where we're at with sourcing coming from China is just about 10%, maybe a little bit less. And so we factored that into what we spoke about earlier with the risk and then the long-range view of the company and margin opportunity. I don't know. 10% of shipments that are at risk coming out of that market. And, you know, as we know, as you know, the teams have done a fantastic job. I have to give them credit for migrating out of China over the last three years. Not only have we quickly migrated to new markets in Vietnam and beyond, but the quality of our product has improved over time, and the margins have improved as a result.

Got it. And percent of sales from China?

I don't know if we've given that before.

Yeah, what we've said specifically to that is, one, kind of in the current quarter, what we've factored in, China's still relatively small. In terms of international markets, we've said about half of that's Europe. Forty-ish percent of that is APAC. And when you look at APAC, it's now kind of split between China and Japan largely.

Thank you. Good luck.

Okay.

Thanks, Paul.

And our next question will come from Mitch Cummins with Pivotal Research. Please go ahead.

Yes, thanks for taking my questions. Dave, I was hoping you'd give a little bit more color on the UGG men's business. I think you said it was up 10% in the quarter. What percent of total UGG is men's now? And then it sounded like New Mile was particularly strong. I don't know if you could speak to how much year-over-year growth you saw in New Mile. Then I have a follow-up. Yeah. Yeah.

Yeah, right now men's, you know, it's tracking as we planned it. As you know, we've been talking about this for the last few years now and migrating men's to a younger, more fashion-oriented consumer with different distribution away from the traditional slipper and classic business. We're now at about 15% of the total penetration. We think the potential there is closer to 20% over time. But it's really being driven by the new male franchise and some of the winter boots in that in that business. So the new MAO has continued to resonate both at core distribution but also at new distribution like the Foot Locker and Foot Action, Real Strength and Journeys. We've opened up some sport lifestyle distribution in the AMEA market, which is starting to perform well. It hasn't resonated to the same extent in Europe and Asia that it has in the U.S. yet, but it's in early days of introduction of that consumer. So we're leveraging the marketing playbook that has worked well in the U.S., which is collaborations and high-level influencers and ambassadors for the brand, showing the product in a new and exciting way. We're going to continue down that path. At the same time, we're seeing success in derivatives of that, the Harkland boot, which is a little bit slimmer and more appropriate to an international consumer, leveraging the Butte franchise, which is our leading winter boot, and then leveraging existing styles like the Tasman Slipper, which is also being worn by younger high school, college-age students. So, you know, we feel good about the reach of the consumer and the diversity of the product, and the teams are working very fast to iterate as much as we can on these and take advantage of the opportunity. And as I mentioned earlier on, there is also opportunity, we think, in the Fluff franchise to translate that to the male consumer as well.

Got it. And then that's helpful. Thanks. And then, Steve... Just real quickly on the Q3 beat, I think you said that roughly 20 million of the sales upside was timing. Five million of that was wholesale. And I get that. You should be able to see if there are orders pulled forward or not. But you also said that 15 million was DTC. I just want to have a better sense as to how you can engage the timing of DTC. How do you know that that's timing versus just outperformance of the quarter?

Good question. So one thing we did this year is we pulled forward our UGG Closet event. So last year we had it in January. This year we pulled it into the last week of December. And we saw two things. One, we saw it perform, but we saw it perform better than what we expected. And we did see a corresponding lull to the start of January. So, you know, that was a case where we saw a product selling better stronger in that last week where we thought some of that might trickle really into the first part of January. And so capturing that sale late in December and the lull, you know, we put to timing as people were buying the product earlier.

Yep. All right. Thanks, guys. Good luck. Okay. Thanks, man.

Pardon me, everyone. We will now take the last question of the call from Janine Stitcher with Jeffrey. Please go ahead.

Hi. Thanks for fitting me in, and congratulations. Just one more on COCA. So really impressive growth there. Is there anything in terms of capacity constraints that would prohibit you from growing at the level that you've been growing in the coming quarters? And then also just one on Coolaburra. You know, it's been a small brand, but all of a sudden it's kind of becoming a little bit more noticeable. How should we think about the potential growth there? And then if you could just help us understand how much of the growth is coming from extended distribution versus just better sell-through with your existing partners. Thank you.

Yeah, this is Dave. So on the capacity, it's a great question. And first I would say I give the teams a lot of credit. You know, this explosive growth is a lot more than we had anticipated or planned for. So the teams have been able to quickly chase not only production capacity but materials and be able to keep the flow of inventory in those core products to the extent that we're not really missing sales, but we are capitalizing on the opportunity. And we've had great discussions internally on making sure that we are preparing for continued acceleration of that brand working closely with our partners. The teams have been over in China within the last month and a half, working closely with our factory partners, both on machinery to be able to produce the shoes, but also the capacity. And we feel really good about our opportunity to continue this rate of growth. With regards to Coulibor, we're very excited about the reaction to the brand by the consumer, how that brand is performing at retail, and at the retail prices that consumers are paying for it. We've had a great, obviously, initial launch over the last couple of years with Kohl's. Footwear business is strong. We actually just launched, if you guys haven't noticed, this fall we had a home launch with them through our licensed partner, which was also very successful at Kohl's. We're looking at ways to expand that as well. We're not really looking to expand distribution for Kohl's. It's really around penetration and existing partners. And then there's opportunity to expand the business in Europe. We had a soft launch this fall. Things went well. We had some little bit of late deliveries on product, so we didn't capitalize on the full opportunity. But it is going to be something that we're going to continue to go after. And we're looking at this longer term as not just a footwear brand, but really a lifestyle brand. And we're incubating business opportunities to be able to capture that now.

That's helpful. Thank you very much.

Thank you. Thank you.

This concludes our question and answer session, as well as our conference. Thank you for attending today's presentation. You may now disconnect.