Deckers Outdoor Corporation

Good afternoon, and thank you for standing by. Welcome to the Decker's Brand fourth 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. Instruction 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 zero for operator assistance at any time. I would now like to remind everyone that this conference call is being recorded. I'll now turn the call over to Aaron Kohler, VP of Investor Relations and Corporate Planning. Please go ahead.

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 the impact of COVID-19 on our business and industry, changes in consumer behavior in the retail environment, strength of our brands and demand for our products, changes to our distribution and inventory management strategies, and our anticipated financial performance, cost savings, and liquidity position. 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 are not reporting any non-GAAP financial adjustments for the fourth 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. As our fiscal year 2020 came to an end, communities around the world were experiencing impacts from the spread of the COVID-19 pandemic. On behalf of the Decker's organization, I'd like to extend our thoughts to everyone affected by the virus and share our deepest gratitude to all the individuals on the front lines of this crisis, especially the healthcare workers and first responders. I'd also like to thank all of our employees for their efforts during this unprecedented time. The entire Decker's organization understands that this is a very difficult time for many people. I'm proud of how our employees and brands have risen to the occasion to serve communities in need through programs such as our Better Together initiative that we launched to support COVID-19 pandemic relief efforts. Through monetary contributions, we're working to support small businesses in our community and the individuals they employ. In addition, our brands are contributing in-kind donations of product. To date, we've donated over 10,000 pairs of shoes to first responders and essential workers. At Decker's, we believe doing good is central to the success of our employees, brands, and organization as a whole. We'll continue to do our part in supporting those in need through these trying times. We are all in this together. Given the extraordinary circumstances, today's dialogue is going to follow a different structure than our past earnings calls. To outline, I'll begin with a discussion on how we're responding to and navigating through the crisis. then give an update on the status of our operations, as well as walk through some of the trends we're seeing in the business through the first half of our first quarter, and finish with a condensed overview of our fourth quarter and fiscal year 2020 performance, which will include some details on the pandemic success in our business in the fourth quarter. Steve will then review the numbers in more detail and expand on some of our COVID-19-related action items. After that, we'll be happy to take questions. From a business perspective, the COVID-19 pandemic has had and will continue to have widespread effects across our entire industry. However, I believe Decker's is well positioned to weather these impacts with the foundation of the organization we have created over the past three years. We have built a resilient portfolio of healthy brands, delivered levels of operating profit that are top tier among our peer group, and most importantly, we maintain a robust liquidity position of over a billion dollars between our cash balance, and available borrowings under our credit facilities. As we plan for fiscal year 2021 and beyond, our leadership team is focused on protecting the progress we've made in our brands as well as our position as a best-in-class organization. We've developed numerous scenarios in evaluating the pandemic's potential impact on our business with an eye on the timing of when the consumer reemerges into what we would call the new normal. Our scenario planning has produced action plans intended to mitigate related headwinds while at the same time preparing us for the future state of business. We're positioning our brands to deliver a compelling experience in what we anticipate will be a much different consumer landscape and selling environment. With that in mind, we've taken the following actions to empower the Decker's organization to emerge stronger exiting the pandemic, including protecting our brands, maintaining the effectiveness of our organization and preserving our strong liquidity position, reallocating marketing spend to prioritize digital growth while supporting strategic areas of brand-level investment, and adjusting inventory buys to reflect more conservative scenarios of consumer demand with a focus on skew productivity and high-velocity product turns, and learning from new ways of working, including working remotely and leveraging technology. In addition to these actions, we are holding frequent discussions with our wholesale partners as we work in tandem to support the health of our brands. We continue to monitor updates from health officials, expert agencies, and local authorities to inform our decision-making process. Steve will provide more details later in the call on how these actions inform our fiscal 2021 planning. From an operations perspective, our Moreno Valley Distribution Center has continued to operate since reopening. This DC is operating at a modified and slightly limited capacity due to increased social distancing measures taken as a precaution to maintain employee safety. The safety of our employees is our top consideration as we make adjustments to our operations. As a result, we may experience some challenges as we approach peak months of shipping late in our second quarter and early in the third quarter. These are all factors relevant to our scenario plan. We are also making adjustments to the operations of our retail store fleet to appropriately accommodate updated health and safety measures in order to protect our retail store employees as well as our customers visiting our physical locations. We are intentionally reopening at a measured pace and using the early learnings to shape our broader go-forward strategy. Our direct-to-consumer leadership is empowering retail associates with educational tools and training related to the new working environment. With the small number of doors that we have reopened, we are encouraged to see consumers actively reengaging with the off-brand stores. In terms of stores open versus closed as of this week by region, About 20% of North America's stores are open and operating in a very limited capacity. Roughly half of our OMEA stores are open. Approximately 20% of our stores in Japan are open, and all of our own retail stores in China are open. Though a portion of our stores have opened across the globe, most of them were closed for the majority of the 45-day period I'll be outlining momentarily. We'll continue to adjust store openings, as well as our warehouse operations, based on the guidance provided by health officials, expert agencies, as well as federal, state, and local officials. From a sourcing standpoint, we have a network of financially strong and well-managed strategic partners, from material vendors to factories. With the help of our sourcing and materials teams, we have worked closely with our strategic partners to ramp up quickly after the COVID-19-related closures. At this point, we do not have any major concerns from a sourcing perspective. From an employee standpoint, across North America, Europe, and Japan, our corporate teams have temporarily transitioned to a work-from-home environment where possible by defined roles. I'm pleased with how our employees have stepped up and proven to be highly productive in this new and dynamic environment. We'll look to health officials, expert agencies, and local authorities to identify both the timing of when to return to offices and what adjustments will be necessary to provide a safe space, including the appropriate social distancing measures. I'll now walk through our first quarter fiscal 2021 performance to date as compared to last year, which includes April 1st through May 15th. While these trends relate to what we are currently experiencing, due to the historical seasonality of our business, this time period only represents roughly 5% of our annual sales volume and thus is not necessarily indicative of the dynamics that we anticipate for future periods. On that note, as we move later into the first quarter, our business becomes more wholesale-weighted and marketplace dynamics for the upcoming months remain fluid. Overall, the business is trending down single digits quarter to date as compared to last year, with wholesale trending down in the mid-30% range and direct-to-consumer trending up in the high 40% range. Wholesale trends are being driven by store closures, as many wholesalers are not taking new shipments of product while stores remain closed. We've remained in close contact with our wholesale partners as we work together to support our brands. Our brands are experiencing different impacts from the current wholesale environment, and this is a low period of volume for UGG and Coulibora, while our Hoka One One brand is spread more evenly throughout the year. For Hoka, we've made adjustments to our product launches and inventory purchasing to better allow our wholesale partners to capture consumer demand with existing inventory as they're able to reopen stores and work to best leverage their online presence. For our direct consumer business, as I mentioned, the majority of our 145 stores remain closed but we're seeing triple-digit e-commerce growth driven by full-price selling of both UGG and HOKA, helping to offset some of the volume lost from retail. I would note that the first quarter is traditionally a lowest period of direct-to-consumer volume, and the mix of HOKA e-commerce is disproportionately larger to the total DC volume than in other quarters. We have been very encouraged by the consistently strong interest in our UGG and HOKA brands, as evidenced by Google Trends over the last two months. with of-search interest up 73% over last year and HOKA search interest growth being second highest among peer brands. We think this speaks well to the power of our brands, that consumers are actively searching and buying our products during a historically low period of consumer demand. We are also experiencing a substantial gain in new customer acquisition online, which has been great news as we know that customers entering our online database have a higher lifetime value and purchase frequency than those purchasing in stores. We are especially excited about UGG customer acquisitions, as this is typically a lower volume period for the brand, and our strategy aims to convert these new customers into repeat purchases down the road in the holiday period. I would like to caution though, as we move into the second and third quarters, retail volume typically becomes more impactful to our overall results, and we do not expect e-commerce to fully capture lost retail sales volume in the event that stores remain closed or limited in operation. From a global brand perspective, our quarter-to-date performance by brand across all channels compared to last year through May 15th include bugged down mid-single digits due to lower wholesale shipments resulting from doors remaining shut, as well as the impact of our own retail store closures. However, we are very encouraged to see the pent-up demand being captured through our e-commerce channel. Hoka up in the low 30% range. And though 45 days is a small portion of the full year, we are going to continue fueling the brand with the goal of sustaining growth above fiscal 2020. And Tevasa and Sunup down in the low 40% and mid 30% ranges respectively, as these brands are experiencing a heavier impact due to the seasonality of their businesses, with Colabora representing an immaterial volume during this period of the year. While we feel positive about the trends we're seeing in the business, there are still plenty of hurdles to overcome in a challenged consumer environment with social distancing practices in place and recessionary concerns that could pressure discretionary spending. Moving into our discussion on fourth quarter and fiscal year 2020 performance, revenue in the fourth quarter of fiscal 2020 was down 5% versus last year to $375 million. With the shortfall driven by an approximate $25 million headwind, from unforeseen COVID-19 impacts. As a reminder, we provided fourth quarter guidance on January 30th, and at that time, we had only anticipated preliminary estimates of COVID-19 impacts in our China business. To provide a little more color in how our performance was impacted by this event in the fourth quarter, our prior guidance anticipated China headwinds of approximately $5 million for the quarter compared to last year, mostly driven by store closures, and our performance aligned with this expectation. As the pandemic spread to Europe, we saw significant deterioration of the quarter-to-date growth rate trend in the region, shifting from over 20% over last year at the end of February to just 6% over last year at the end of March. As the United States shut down in mid-March, we have been trending around 3% over last year through March 15th, but saw this decline to 8% below last year by the end of March, with combined impacts of retail store closures as well as reduced wholesale shipments. Despite the fourth quarter impacts, full-year fiscal 2020 performance remained strong, as revenue grew by 6% versus the prior year to $2.133 billion, and earnings per share increased 9% versus the prior year to $9.62. Becker's fiscal year 2020 performance is a result of having great brands that have built lasting relationships with consumers, and continue to build awareness and momentum through targeted, focused investments, complemented by a disciplined approach to managing expenses. Turning to the brand highlights during fiscal year 2020, starting with the Fashion Lifestyle Group, which is comprised of our UGG and Koolaburra brands. For full year fiscal 2020, global UGG sales declined by 1% versus last year to $1.521 billion. Considering lost revenue in Q4 due to COVID-19, UGG would have been roughly flat to last year, which is inclusive of a large headwind related to the European marketplace reset in progress. In contrast to the headwinds of the brands in international businesses, UGG grew by 5% in the United States for the second consecutive year. The UGG brand strength in the U.S. has been driven by high levels of brand heat through PR and targeted marketing investments, driving brand search interest up 8% as compared to last year. Winning with younger consumers, as DVC purchasers aged 18 to 34 increased by 29% versus last year. Increased loyalty, membership, and purchasing, as enrollment and UGG rewards increased 60%, and revenue from members grew 19% as compared to last year, with members spending more on average. And a diversified product mix, as the Fluffiat and New Mail franchises both drove significant growth. We'll look to build on the strength of our domestic business as we weather the evolving economic and retail landscape in fiscal 2021 and look to capitalize on the brand's strength as work from home becomes a new normal for many of our consumers. The Yacht Team has made compelling progress in the brand's domestic business over the past three years and is focused on protecting the brand's sanctity that they've worked so hard to build. Moving to Koolagora, global revenue in fiscal year 2020 grew by 58% versus last year, The Coulibora brand's performance was fueled by another year of strong full-price sell-through and market share gains within the domestic family value channel. Coulibora also experienced success with its licensed home business and has plans to expand to licensed loungewear this fall in an effort to further extend the brand's lifestyle appeal. Given the value proposition of the brand, we believe Coulibora will be poised to capture demand from budget-conscious consumers in the coming year. Moving to the performance lifestyle group, which is comprised of the Hoka, Teva, and Sanook brands. Starting with Hoka, global revenue for fiscal year 2020 increased by 58% versus last year to $353 million. The Hoka brand far outperformed our expectations from the outset of this year. Hoka growth has been consistently balanced across the globe in the brand's domestic and international businesses and across both wholesale and direct-to-consumer channels. This balance has been achieved due to the team's dedication to what we refer to as the HOKA ecosystem, which provides a universally elevated consumer experience across all regions and channels of distribution. Leveraging the organizational expertise that exists in a multi-brand portfolio, the HOKA brand has quickly evolved its digital presence to become a core strength and represent the ultimate access point of the brand. HOKA Digital has become a serious driver of both customer retention and new customer acquisition. Both retained and acquired customers nearly doubled year-over-year in the Hoka brand's global direct-to-consumer business. The Hoka brand's success in fiscal year 2020 is the result of great heritage products, new product innovation, and continued refinements of the Hoka ecosystem attracting new consumers. Hoka has significant momentum, and while broader market trends may limit the brand's incredible growth rate in fiscal year 2021, we're going to continue investing in HOKA to fuel our brand-led and consumer-informed marketplace strategy. Turning to our Teva and Sanuk brands, global revenue in fiscal year 2020 was $138 million and $51 million, respectively. Both the Teva and Sanuk brands are attracting consumers with innovative product introductions that feature sustainability stories. This includes Teva's Strap Into Freedom campaign, highlighting their use of recycled materials, now on nearly all their original sandal straps. Similarly, Sanook continues to offer eco-friendly options, including their vegan collection. To amplify these efforts and embrace the ever-changing surf specialty space, the Sanook brand has recently streamlined operations to work directly with our internal innovation department, known as Decker's Labs. By collaborating directly with Decker's Labs, we're creating cost efficiencies in the business while also reinvigorating the Sanook brand's innovation engine. With respect to channel performance, global wholesale sales increased 7% for the full fiscal year. Fiscal 2020 performance was driven primarily by domestic strength in the HOKA, UGG, and Kulabora brands. Domestic wholesale has now grown over 9% for two consecutive years based on the strength of these brands. For the year, international wholesale increased low single digits due to HOKA brand's expansion being partially offset by the ongoing European reset of the UGG brand, That is similar to the strategy we successfully implemented in the UGG brand's domestic wholesale marketplace. We also experienced negative pressure from foreign currency exchange rates. Global direct-to-consumer sales increased 3% for the full fiscal year. Comparable sales for full fiscal year increased 5% versus the prior year. Please note that our GDC comp for fiscal 2020 has been adjusted to exclude the final weeks of March retail volume as a result of COVID-19. For the full year, DDC performance was driven by global growth of the HOKA brand, as the brand nearly doubled its e-commerce volume year over year, and domestic strength of the UGG brand online. We've been intently focused on enhancing the adoption of our brands online over the past few years, and this will be a primary focus in fiscal 2021 with the disruption of the retail landscape. With that, I'll hand the call over to Steve to provide more details on the fourth quarter and fiscal 2020 results. as well as some additional thoughts on fiscal 2021.