Deckers Outdoor Corporation

Good afternoon and thank you for standing by. Welcome to the Decker's brand second quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode. Following the presentation, we 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 zero for an operator assistance at that time. I would like to remind everyone that this conference call is being recorded. I'd now like to turn the conference over to Erin Kohler, VP of Investor Relations and Corporate Planning. Ms. Kohler, 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 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 the impact of COVID-19 on our business and operations, business partners, and industry, changes in consumer behavior in the retail environment, strength of our brands and demand for our products, changes to our product allocation, distribution, and inventory management strategies, changes to our marketing plans and strategies, investments in our business, our anticipated revenues, brand performance, product mix, gross margins, expenses, and liquidity position, and our potential repurchase of shares. 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 and 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. Good afternoon, everyone, and thank you for joining the call. On behalf of Decker's, I hope everyone is doing well and staying safe in this unprecedented time. Today we will walk through an exceptional second quarter performance for the Decker's organization and highlight continued considerations related to the uncertain environment created by the COVID-19 pandemic. Amidst rapidly evolving marketplace conditions, Decker's delivered a record second quarter as revenue increased by 15% versus last year to $624 million, gross margin increased by 80 basis points to 51.2%, and we delivered earnings per share of $3.58. Success in the quarter was driven by compelling and innovative product launches, our powerful e-commerce and digital marketing engines that drove higher awareness and customer acquisition, optimization and redeployment of marketing spend that featured an authentic approach to storytelling, a clean and well-managed marketplace that allowed for strategic account partnerships to amplify special product releases, and the ability of our supply chain to pivot resources and navigate challenges. While the COVID-19 outbreak put a spotlight in our brands due to their lifestyle resonance, these results more importantly highlight the strength of our brands and the positive impacts we have experienced from the successful execution of our strategy over the past few years. As a reminder, the key elements of our strategy include Generating greater awareness in Hoka One One to accelerate customer adoption globally, which was demonstrated by a 60% increase in brand revenue during the first half. Driving DDC customer acquisition across all five of our brands with product and marketing tailored to the 18- to 34-year-old demographic, highlighted by a 182% increase in these customers year-to-date in the U.S. Continuing to build UGG brand heat through diversification of product that resonates with target consumers, leading to low levels of promotional activity while selling a more balanced product assortment, and maintaining a disciplined approach to financial management even as we continue to invest in this strategy. The successful implementation of this strategy has led to the strong operating model and powerful brand portfolio we have today. With brands and products that are resonating with a larger and more diverse audience, we're experiencing high conversion rates and strong selling at full retail price, which will set the stage for future growth. Our in-demand brands, omni-channel capabilities, and strategic expense management, combined with exceptional organizational execution, drove another successful quarter for Deckers. I'd like to share my appreciation to our employees for their dedication and consistency in delivering results in these challenging times. I'll now walk through the brand highlights from the quarter, starting with the Fashion Lifestyle Group. The Fashion Lifestyle Group consists of the UGG and Culebora brands. Global UGG performance was driven by momentum behind a healthier and more balanced product assortment. Historically, the second quarter had been driven by selling in classic UGG product to wholesale accounts. With the excitement the brand has built around Fluff, men's, and kids' product, UGG is succeeding beyond core product with both sell-in and high full-price sell-through at wholesale and DTC. Fluff is the paramount example of the progress UGG is making to attract a diverse set of consumers with a broad array of product options. The Fluff Yacht remained the brand's top-selling style from both the total pairs perspective, as well as in terms of wholesale sell-through. But the UGG team has also done a fantastic job building around the Fluff Yacht with complementary product that is providing incremental growth. New introductions during the quarter included the Disco Slide and Fluffita, which were both among the top 10 styles purchased by customers aged 18 to 34 years old. UGG is having tremendous success attracting new, younger consumers. While Fluff product may have been the primary attraction to the brand for 18 to 34-year-olds, we're excited by how many of these customers who bought Fluff also purchased the recently launched Classic Clear Mini. Since its release, over 60% of the Classic Clear Mini purchases online have been made by 18 to 34-year-olds. This multi-category purchase activity from younger consumers speaks well to the brand's ability to capture share of closet with fashion-minded consumers. Helping to amplify these new product introductions with their intended audience, the UGG DDC team has collaborated with key wholesale partners to develop strategic launch plans for special products. During the quarter, these included teaming up exclusively with the Victoria's Secret Pink Ambassador Program to release the Fluffita and launching the UGG brand's first ever ready-to-wear apparel collection in partnership with Nordstrom. Ready-to-wear, which we sometimes refer to as RTW, is the UGG brand's first apparel expansion beyond loungewear and into streetwear fashion. The RTW collection features cozy fleece, sherpa, faux fur, and shirling wardrobe items. Highlighting the strength of our brand, demand for our products, and quality of our partnerships, Nordstrom featured the RTW collection on their website's landing page, which was the first time UGG earned that designation outside of the footwear category. In addition, Our ready-to-wear and retail teams have worked closely with Nordstrom to create a specialized shop-and-shop concept to feature their collection at both Nordstrom's New York City flagship in December, as well as our own New York City flagship, which opens on November 19th. While ready-to-wear is not expected to drive significant revenue volume this year, sale-through has been impressive, and we're encouraged to see cross-category purchasing of ready-to-wear and footwear products. Given the positive response from primarily younger consumers, we feel this speaks well to the long-term lifestyle opportunity for UGG, and our teams are already working to expand ready-to-wear with additional products and partners. Continuing the theme of UGG diversification and cross-category purchasing, I'd highlight that men's and kids' product contributed to the majority of the brand's incremental dollar growth in the quarter. Men's has had a strong start to the fall season. New Mel's sell-through was up over 150% versus last year, and heritage slipper styles such as the Ascot, Tasman, and Scuff remain top sellers. With the success of the Fluff and the increased fashionability of the slipper category, UGG is releasing a men's specific version of Fluff very soon, so be on the lookout for that. As mentioned on our first quarter call, the UGG Kids business is benefiting from the successful takedown product in both women's and men's. The new Mel, Fluffy-Ass Slide, and the Classic Clear Mini We're all part of the top five kids' styles in the quarter, and we'll look to further capitalize on this trend during holiday. From a regional standpoint, we continue to see bifurcation between the U.S. and international regions. Within the U.S., UGG brand heat is reaching new highs, as the brand has increased customer acquisition by 187% and customer retention by 155% versus last year, with the majority of the growth coming from younger customers. In fact, 18 to 34-year-olds represented 40% of online purchasers in the U.S. during the quarter, as compared to under 30% last year. Complementing the UGG brand's direct-to-consumer success, our wholesale partners are also experiencing record levels of demand and product sell-through rates, which may lead to some scarcity in the third quarter as reduced inventory levels are consumed. Internationally, as we have mentioned in previous calls, UGG remains in the midst of a multi-year reset in EMEA, and the brand is also in the early stages of localizing marketing content for the Asia-Pacific region. In Europe, we're seeing positive signs where the brand is beginning to experience adoption of fluff product in addition to some small growth within men's and kids' footwear. We are also intentionally reducing the amount of core classic product in the region, which remains a strategic headwind. These are important shifts as we work to rebuild brand heat and diversify the European region away from core product and build a healthier product mix akin to the successful transition we have made in the U.S. Beyond building a more balanced assortment, UGA is working to amplify the EMEA region's business online. To help drive digital conversion in EMEA, we recently implemented our Global E-Project, which improves customer access and ease of use by offering additional languages, currency, and local payment types. The launch of Globally combined with the introduction of UGG Rewards in Europe is already helping attract new customers, as UGG experienced 135% increase in customer acquisition during the second quarter. In the Asia-Pacific region, we've made strides by partnering with top-tier local celebrity Zhaodong Yu, who carries fashion credibility with a fan base primarily aged 20 to 30 years old. We've also developed a market-relevant product collaboration with designer Fengsheng Wang, famous for her deconstructive approach as featured in Vogue and GQ. These initiatives are aimed at improving brand perception with Chinese consumers and bringing attention to new products. We're encouraged by the region's positive reception to new products like the Classic Clear, Fluffita, and Disco Slide, but there is still plenty of work to be done to build brand heat. While optimistic about some early indicators in the UGG Brands international business, revenue declined as expected for the first half of fiscal 2021, primarily due to efforts to reduce core product in the marketplace. While we don't anticipate meaningful improvement during this year of transition, UGG is making important progress in building a new foundation of diversified product acceptance, localized market relevance, and strategic partnerships all designed to build a healthier brand with the ability to deliver growth over the long term. The UGG brand's domestic success is built on this model of fashion credibility through authentic collaborations, social influencers, and PR seeding, and we believe this approach will translate well to our international markets. First half performance gives us the confidence that we're on the right path of exporting this strategy and building towards next year and beyond. Moving to Coulibora, performance in the first quarter resulted from increased market share with top wholesale partners, as well as improved category diversification through the expansion of men's and kids' product. Last year, Coolabora established itself as the top brand in the sub-$100 category in which it competes within the family value channel, and will look to maintain that position by building incremental market share this holiday season. Though footwear remains the primary focus, Coolabora continues to expand its lifestyle appeal. This fall, the brand has partnered with Kohl's and QVC to develop a licensed loungewear collection, which comes on the heels of last year's successful collection of home licensed product. Both UGG and Coulibora are well positioned to drive demand with their respective customer bases during this holiday season. However, I would like to remind everyone that we adjusted certain inventory buys at the outset of this year to mitigate the effects of COVID-19 in our business, and this will limit the upside for both UGG and Coulibora this holiday. However, if either brand fails to capture incremental upside due to these inventory constraints, We expect this will provide a clean marketplace for fiscal 2022. Shifting to the performance lifestyle group, which is comprised of Hoka, Teva, and Sanuk. Starting with Hoka, performance was driven by increased adoption of our products through greater brand and product awareness, combined with compelling product refreshes and a fast replenishment cycle. Among Decker's investments over the past few years, broadening the Hoka brand's appeal beyond core runners has been a primary focus. Through market-leading innovation, the Hoka team has refined products and expanded categories to attract a larger audience, while also maintaining the brand's authentic performance DNA. During the quarter, Hoka launched updates to several key franchises, each infused with bold innovation and design upgrades, including the Clifton 7, Clifton Edge, Rincon 2, and the Bondi 7. Regarding the Clifton franchise, these styles have received considerable positive PR, which included features in Vogue, Gear Patrol, GQ, and Self's 2020 Certified Sneakers Awards. For the Rincon, originally introduced in July of 2019, the style has quickly become a top five seller for Hoka. The second edition of the Rincon has been so well received that it recently won Runner's World Best Value Award in their Autumn-Winter 2020 Shoe Guides. And lastly, in terms of notable product refreshes, the Bondi 7 hit shelves in September and features the brand's most inclusive size range, helping to expand the addressable consumer base for Hoka. Since its release online, the Bondi 7 has been the Hoka brand's top-selling style. Propelled by these product updates and innovations, Hoka Domestic will wholesale return to deliver meaningful second quarter growth after the first quarter was disrupted by pandemic-induced store closures. As mentioned on our first quarter call, HOKA delayed certain product launches to allow wholesalers to move through existing product, which provided an extra benefit to the brand's second quarter wholesale revenue growth. According to the NPD Group's Retail Tracking Service, HOKA was able to both grow dollar volume and increase market share from 16.8% in August 2019 to 20.5% in August 2020, even though overall dollar sales of adult running shoes in the U.S. run specialty channeled declined in August 2020 as compared to last year. The premium service atmosphere of run specialty stores remains an important acquisition vehicle for the HOKA brand, especially when considering the higher conversion rates experienced when customers try on our products. Globally, HOKA customer acquisition and retention online increased 81% and 92% respectively as compared to last year, even though most of the brand's wholesale doors were open during the quarter. Part of these increases were due to the HOKA marketing team's efforts to optimize digital media targeting to acquire 18 to 34-year-old consumers. By strategically prioritizing this audience, HOKA experienced a 124% increase of consumers aged 18 to 34, led by recently released styles such as the Clifton 7, Clifton Edge, and Rincon 2. Importantly, HOKA is driving direct-to-consumer growth across the globe. While still very small as compared to the U.S., international hoka ddc has increased more than 150 percent in the first half of this year growing the brand's global online business is especially important as the inability to hold in-person events persists we're dedicating marketing spend to build the hoka audience online and stay relevant with existing consumers through compelling product innovation as we said in our first quarter earnings call the 500 million milestone for hoka is much closer than we previously anticipated And with the brand heat and demand we're experiencing right now, Hoka has the potential to reach $500 million by fiscal year end. The rapid acceleration of Hoka reaffirms our confidence in the brand's aspirations to eclipse the $1 billion mark over the longer term. Turning to Teva, growth in the brand was fueled by a 78% increase in acquired customers online. Teva is turning out to be the go-to brand for the modern outdoor consumer, highlighted by the brand's founding roots in the Grand Canyon. Year-to-date through September, Teva maintained its position as the top outdoor water sandal brand in the U.S. in terms of market share, increasing market share over the last year in each of the past nine months, according to the MPD Group's retail tracking service. Younger consumers have been the driving force behind this growth in Teva, as the brand has experienced a 76% year-over-year increase in purchasers aged 18 to 34 years old, which was already the brand's highest indexing age bracket. Looking to fall, Teva is focused on capturing continued wallet share from this demographic through the brand's expanded hike and camping collections. Teva is already experiencing a surge in demand for the brand's Ember franchise, both online and with key wholesale partners such as REI, where product will be featured across all doors in their fleet. For Sanuk, brand performance was hurt by a soft department store channel. However, we were encouraged by the recovery within surf specialty as coastal towns saw an increased outdoor participation. Importantly, Sanook posted a second consecutive quarter of robust direct-to-consumer growth, which was helped by a 40% increase in customer acquisition online. We are excited to receive feedback from the brand's online audience as Sanook will be introducing new product innovations in the coming months. With respect to channel performance in the second quarter, all five of our brands experienced exceptional growth online, driving our mix of DDC revenue to increase from 18% last year to 28% this year. This is despite the significant improvements in our wholesale business and inclusive of the recovery efforts within our own retail stores, as compared to the disruption experienced in the first quarter. From a comparable sales perspective, direct-to-consumer increased 86% versus last year. Approximately 95% of our own retail stores were open for the entire second quarter, and as of this week, all stores are open. In total, global direct-to-consumer revenue increased 74% versus last year's second quarter. Performance was driven by continued customer acquisition online and a sequential improvement in retail performance as compared to the first quarter. Global wholesale revenue in the second quarter increased 2% as compared to last year. Growth in the quarter was primarily driven by HOCA, but mostly offset by a decline in UGG. The decline in UGG wholesale revenue differs from a regional standpoint. International UGG wholesale revenue declined due to the ongoing marketplace initiatives previously mentioned. while domestic UGG wholesale revenue decreased as both pre-book orders were conservatively adjusted at the height of the pandemic, and UGG has successfully shifted open-to-buy with retailers toward lower-priced products such as slippers, fluff, and kids' footwear. The UGG wholesale revenue decline in the second quarter was somewhat tempered by our global effort to shift Q3 shipments forward, allowing our distribution center teams to focus on DTC fulfillment. To summarize, we are extremely pleased with our brand's performance and operational execution in the second quarter. With the demand we're experiencing in our brands, we are anticipating operational challenges related to DC capacity, inventory timing and availability, as well as third-party shipping logistics that will limit the upside of our brands in the third quarter. Though less than ideal circumstances, I'm confident in our team's resilience and ability to manage the effects in our business while protecting the sanctity of our strong brands. I'll now hand the call over to Steve to provide more details in our second quarter financial performance, as well as some additional thoughts on managing the balance of fiscal 2021. Steve?

Thanks, Dave, and good afternoon, everyone. Looking back at the past six months, we are proud of how our business has performed over the opening half of our fiscal year. In the midst of a global pandemic, while consumer behaviors are rapidly shifting with changing lifestyles, our brands and product offering have been placed in a unique position. And as demonstrated by our results, our product proposition is resonating with consumers, helping to drive an exceptional quarter. In particular, UGG has benefited from consumers working and learning from home, as the brand has been known to provide consumers with a feeling of comfort and security. And at the same time, HOKA benefited from its increasing awareness and positioning within the expanding active category. These trends help drive attention to the work our brands are doing and created awareness of our innovative line of products. While much of the current environment remains uncertain, we continue to focus on delivering great products that amplify our brands and meet consumer demands. Now for more detail on our second quarter results. Revenue in the second quarter was $623.5 million, up 15% versus the prior year. Performance as compared to last year was primarily driven by Global HOCA growth of 83%, which experienced balanced gains across all regions and channels, but also benefited from first quarter product launches that were delayed to the second quarter. And global UGG growth, which was up 3% versus the prior year to $415 million. This increase for the quarter was driven by robust global direct-to-consumer growth of 69%, as well as approximately $25 to $30 million in of earlier global shipment of product to wholesale and distributor accounts as we work to decrease some of the logistical load on Q3. Although, as expected, the overall wholesale UGG business experienced lower revenue for the quarter versus last year, as many wholesale partners planned more cautiously this year due to uncertainty at the onset of the pandemic, as well as the impact of our international reset. Gross margins in the second quarter were up 80 basis points over last year to 51.2%. Gross margins increased due to favorable channel mix as DTC increased as a proportion to the total business, favorable brand mix with the sizable increase in HOCA volume, and benefits from favorable exchange rates. SG&A dollar spend was $190.4 million, up 8% from last year's $175.9 million. The increase was primarily driven by higher marketing and warehouse costs that were partially offset by savings from travel and retail expenses. This all resulted in an earnings per share of $3.58, which compares to $2.71 in last year's second quarter. The $0.87 improvement versus last year was primarily driven by a higher proportion of DTC and HOCA business, with offsets from lower UGG wholesale revenue and greater marketing spend and warehouse costs. Our balance sheet remains strong, and as of September 30th, cash and equivalents were $626 million, up from $178 million at September 30th of last year. Inventory was down 13% to $484 million from $559 million at the same time last year. and we had $9 million in short-term borrowing under our existing credit line as compared to $13 million last year. Our existing credit lines have an available balance of $463 million. And during the quarter, we did not repurchase any shares. During this period, we historically provide an update on our sheepskin pricing. We continue to see stable pricing in the sheepskin market, and we expect no change in our sheepskin costs for fiscal 2022. Please note this does not constitute gross margin guidance for next year, as our sheepskin costs are only one component of our gross margins. As we've now completed the first half of fiscal 2021, we remain disciplined in our approach to planning the second half of the year, as we are aware of the unique circumstances surrounding the upcoming holiday season. We are mindful of shipping constraints during the upcoming peak, including not only our own operations, but also the operations of third-party shipping and logistics services that we utilize. The logistics infrastructure, both internal and external, will continue to be tested by current challenges paired with unknown pandemic developments, which could be significantly impacted by a second wave of the disease or any impacts from government orders or restrictions. While remaining vigilant, we will tightly manage the business and drive opportunities where we see potential for success, all with our primary focus on the long-term health of our business and a continuation of driving success through our strong brands and innovative product offering. Looking to the back half of fiscal 2021, we're conscious of the historical size and relevance that our third quarter represents to full-year revenue and earnings. In a typical year, the three months representing our third quarter equates to more revenue than we've recognized over the first six months. This dynamic, combined with the extraordinary circumstances of the pandemic, place additional pressure on our third quarter this year and may lead to reaching capacity thresholds that have yet to be experienced year to date. These capacity thresholds will be tested at our retail stores, given that the October through December in-store purchase volume typically represents two to three times the volume of any other three-month period. Additionally, While we are comfortable with current inventory levels, in a year where we tempered inventory buys at the outset to reduce risk, we may see demand outpace supply with certain product. In these cases, we will be challenged with meeting the in-season demand, but at the same time, it will continue to drive brand heat, encourage full price selling, and result in a clean marketplace for the fourth quarter and beyond. With all that said, and given the continued uncertainty caused by the COVID-19 pandemic, We will once again not be providing specific guidance for fiscal year 2021 at this time. However, I will update some of the major themes of our business. For context, we observed complex pandemic impacts in the first half of the year, including some tailwinds from the acceleration of e-commerce, brand heat and attention resulting from changing consumer trends, extended consumer adoption of categories providing the unique comfort of UGG, and heightened consumer awareness of HOCA. While we anticipate that some of these trends may continue to provide opportunities, they may be dampened by the headwinds yet to be experienced that are particularly relevant during our peak season in the back half of the year. Specifically, pressure from shipping constraints with third-party providers. higher costs associated with our own warehouse operations in the current environment, product scarcity on key styles that are selling faster than anticipated, and increased marketing costs to capitalize on the momentum of our brands and stay top of mind with consumers. With these considerations in mind, we are approaching the back half of fiscal 2021 with the possibility that UGG revenue may fall below last year levels as the brand is up against potential capacity constraints some earlier shipments into Q2, retail traffic pressure, and continued work with our international business reset. And as Dave mentioned, we continue to see growth with HOKA, but at a lower rate than experienced in the first half, yet on the path to $500 million. And we anticipate higher expenses resulting from marketing spend to keep our brands top of mind, warehouse costs for safety measures and higher wages, and increased IT expenses as we build out appropriate support systems for our accelerating e-commerce platform. Before I hand the call back to Dave, I would like to say how pleased we are with the results of our first half, as it gives us confidence that the organization can manage through the current near-term challenges while remaining committed to our long-term vision. Our brands are in a great place, the company is well positioned, and we are excited about the opportunities that lie ahead. Thanks, everyone. And now I'll turn the call back to Dave for his closing remarks.

Thanks, Steve. As I reflect on a unique first half, I'm proud of our organization's collaborative efforts to prioritize the consumer and deliver results. Our brand teams have done an excellent job delivering compelling and innovative product. Our omni-channel organization has been the engine driving product messaging, executing sales, and providing analytics to inform future brand success. But paramount to the first half success this year has been our operations teams, with heavy lifting being done by our product development teams, distribution center employees, customer service specialists, and all other individuals working throughout our supply chain. A huge thank you to every one of our employees for their continued execution of our strategies during these very challenging times. And along with performance, it is our organization's belief that we have a responsibility to continue to do business in the right way, and Decker's continues to drive forward on ESG initiatives. I'm pleased to report that we've recently been recognized by Investors Business Daily as the 15th ranked company in their top 50 best ESG companies list for 2020. This is an improvement from our number 20 ranking last year, and I note that we are the sole footwear or apparel company included in the top 50. To that end, I'm excited to share that our Creating Change FY20 Annual Corporate Responsibility Report will be released tomorrow, highlighting the tremendous progress made by our global organization in FY20. The report will be posted on our website, and I encourage you to check it out. On that note, and in the spirit of making a positive impact, earlier this month, Decker's held its first ever Art of Kindness Week, which was an organized effort to encourage employees across the globe to give back through volunteerism. Collectively, I'm proud to report that our teams contributed more than 2,000 hours to assist over 200 organizations, ultimately reaching many individuals who need help in these trying times. To remain focused on these types of efforts in the midst of a pandemic while driving business growth is a testament to Decker's values and approach. It is these values, exemplified by our dedicated employees and top performing brands, that just yesterday earned Decker's the honor of being named Footwear News Company of the Year for 2020. I'd like to thank and congratulate our employees on this well-deserved achievement. In closing, I have a high degree of confidence in our strategy, portfolio of brands, and top-tier operating model, to navigate through these short-term challenges while also investing in our digital transformation to support growth over the long term. Thank you to our shareholders for your continued support. With that, I'll turn the call back over to the operator for Q&A. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. The first question today comes from Camilo Lyon with BTIG. Please go ahead.

Thanks. Good afternoon, guys, and great job on the execution. I wanted to first ask about your relative inventory position. I think, Steve, you said you feel comfortable with your inventory, but demand trends could exceed supply, and you're noting that as a cautionary point to watch out for. I'm wondering what categories specifically you're anticipating being under-inventoried in, and do you have the ability or have you tried shifting purchasing behavior or intent to comparable categories or SKUs that are in a better stock position.

Sure, Camille. I'll go first, and then maybe Dave can jump in. Absolutely kind of what you said we are taking a look at. So with inventory down 13%, we are comfortable with where we have inventory. As I said, at the onset of the pandemic, we did make some strategic reductions in styles. What we've seen really over the course of the last six months is an acceleration on certain styles, specifically kind of slipper sandal categories we've done very well. And as a result of that, we have run short. Now, in the time since then, we have looked to bring more inventory in, and we're in the process of doing that. So we intend to bring more inventory in this quarter as well as Q4 that will help kind of fill out some of those shortages on styles, colors, sizes. You know, if there's disruption, that will create some challenges logistically. So we're doing a lot to overcome that. You know, we're bringing things in kind of as quickly as we can with those identified styles. And where we may be short, we are steering customers to styles that we have more in stock on. So all of the above, right? We want to take advantage of the brand heat that we have going. the consumer demand that's out there for these styles. We want to use that then as an opportunity where we have scarcity to push them into other products that we do have in style.

Yeah, that's exactly right. And we're seeing the consumer shift to other products and other categories, but generally speaking, whether it's slippers, classics, fashion boots, winter boots, we're seeing strong sell-through, particularly in DTC, but also at wholesale of all the categories, including ready-to-wear. So the demand for the brand At a high level, it remains very strong, as you've seen the accelerated interest over the quarter. Younger consumers are adopting the brand at new levels. We've increased our rate of 18- to 34-year-olds way over 180% for the quarter, and we're chasing the inventory where we can. So we feel confident that if there's no logistics disruptions, we'll be in good place. I think it's a healthy place for our brand to be in this chase mode. And while we're focused on delivering Q3, we're really focused on the long-term health of the brand and the setup that this demand and healthy marketplace means for us over the long term. We're just seeing a lot of potential right now.

That's great. Just two follow-ups, please. Steve, you mentioned last quarter that you were anticipating cancellation to outpace reorders. Is that still the case? And then on a longer-term basis, Dave, maybe we'd love your insights into this. You're looking to reach at least mid-teens, probably 15, maybe a little bit above 15% of your margins this year. Very strong operating metrics there. Clearly, you've taken the brand to the next level with a new demographic coming in. Where do you see the long-term margin opportunity? Can this be a high-teens or low-20s business over time? Mm-hmm.

I'll go, so this is Steve, I'll go first. You know, really kind of as we think about where we're at on the inventory and cancellations, it's why we're not giving guidance, right? We don't know what's gonna happen kind of at wholesale. If everything holds up, we won't have the cancellation issue. If things get more challenging from a logistics standpoint, some retail is closed, there may be cancellations. So that's really what we want to see kind of over the course of the next couple weeks. I think it's too early to tell and kind of why we're holding off on guidance.

Yeah, yeah, exactly. To your question on kind of longer term, you know, we're looking at this right now. We just had a conversation with the board a few weeks ago. You know, I guess the best way to think about it is we're committed, and we've proven that over the last three-plus years, to this mid-teens operating margin. But there is going to have to be some investment in the next coming, you know, one to two years to be able to take advantage of the opportunities that we're now seeing. You know, our long-term strategy through COVID has actually probably been accelerated with the shift to e-commerce, younger consumers coming in, the increased marketing spend. But we're going to need to invest in, you know, further capabilities to optimize that e-commerce engine even more than we already have, to provide better data and analytics capabilities, systems improvements, and just continue to fuel the growth of these brands through marketing. Our marketing is paying off tremendously right now, and we increased our marketing spend over the past quarter by 30%. So this is one of those situations where the engine is firing on all cylinders, but we need to keep it going. So I would say you can count on us to deliver on mid-tier operating margins, whether we get up you know, above 16, 17, 18%. The opportunity is there, but it all depends on how fast we're going to have to invest in the mid, short to mid-term to be able to keep the top line going at, you know, what we're shooting for is high single digits, you know, double-digit percent growth over the next few years.

Got it. Sounds good. Good luck in the holiday. Take care. Thanks, Camilo. Thanks, Camilo.

The next question comes from Paul Lejouet with Citi Research. Please go ahead.

Hey, thanks, guys. I'm curious if you're already seeing some of these constraints happening in your business, or have you been able to manage through them this quarter thus far? And I guess I'm kind of also curious on the marketing side, It doesn't make sense to spend as much marketing as you are, given your concerns about potentially not being able to meet demand. Do you risk perhaps disappointing some customers if you can, in fact, meet that demand? Thanks.

Yeah, I would say so far the teams have done an incredible job, which I referenced in the script, on managing our distribution and our logistics to date. We've had to put in place social distancing measures. We've had to pay more to employees for hazard pay, et cetera. Recruiting has been a challenge. So they've done an incredible job working through this and working with the order book and the sales team to balance deliveries. So far, we haven't seen major disruptions, but the level of put-through that we're going through right now is nothing compared to what's coming in the next couple months. And so that's really when the capacity of taking inbound deliveries that are in some cases delayed because of logistics from Asia-Pacific, into the DC and at the same time turning around and putting product into the marketplace, that's where the pinch could come in the next couple of months. And that's what we're really mindful of and planning for. So haven't seen major disruptions yet within our control. We have seen them in logistics, but we're feeling confident in our ability to manage through it. But as Steve said, there's still so much uncertainty coming up ahead of us. With regards to kind of marketing, You know, we are very surgical in our marketing now. We have our center of excellence on digital marketing and spend around the world, and we navigate based off return on spend by brand, channel, and region. And so we're cautious of the fact that where there may be constraints on upside due to marketing, and we're putting our marketing dollars in places where we know we'll get the payoff, such as HOKA, to continue to grow that brand. And you saw the 80-plus percent growth in Q2. Different markets, you know, we're releasing some money to continue to, assist international in the transition of the UGG brand. And just, you know, we're testing at the same time. So the marketing is paying off. We're adopting a younger consumer. We're getting multiple purchases from a younger consumer within the quarter. Normally, you know, we wouldn't see purchases for, you know, UGG products more than once a year, traditionally a classic style. But now we're getting people, you know, many consumers that bought the fluff earlier in Q2 came back and purchased the UGG Clear product. So the marketing is paying off. It's driving overall brand and awareness and buzz about the brand. I don't have a lot of concerns about missing sales and wasting marketing spend. I think we're very efficient on that and very targeted, and so far it seems to be working really well.

Yeah, and I think, Paul, just to add on that, I think the other thing on the constraints is really third-party logistics. So we are hearing from third-party freight companies logistics constraints. And that's going to be really universal. So that is one thing we're keeping a close eye on. So one is kind of constraints within really what we control, but also what's outside of our control. And we are seeing signals around that. So that's something that we're going to watch carefully and look to find alternatives to work around some of those situations. Kind of on the marketing, just to add to what Dave said, where we are marketing to certain styles that may be low on inventory, there is an opportunity to shift some of that marketing. So to the first question to Camila said, we can start to shift some of that marketing to product that we have in stock. So we have an opportunity to kind of move that in stock. And then I think the other important component is really our international reset. We can use money. So this is not just about domestic. It's about how we can accelerate some of our international reset and deploying some of that marketing money around kind of repositioning our brands and products and awareness in the international markets.

Yep. And as we said in Q1 call and will continue to stay focused on, we want to take this opportunity to steal market share wherever we can. So we want to stay aggressive on marketing, continue to drop innovative, exciting products in the marketplace, bring in younger consumers, and we're going to have to continue to spend marketing dollars to do that. But it's really now about scaling the global opportunity based on the success that we're seeing in the domestic market.

Gotcha. Could I just ask what percent of the UGG business is ready-to-wear? And same question for HOKA, what percent is apparel?

Yeah, so ready-to-wear for UGG is less than 10%. It's probably high single digits right now. It's a small business right now, but this ready-to-wear launch for us was really a test, a proof-of-concept test, And the results have been phenomenal. You know, the price points are perfect. The styling and the detailing is resonating with a younger consumer. And we launched it primarily, as you know, in DTC and with Nordstrom's. And it was the first time Nordstrom's ever put us on their landing page for apparel. They're incredibly pleased with the sell-through. We've had a lot of accounts calling, trying to get their hands on the product. So for us, what this means is there's just a lot of opportunity on this category for the next three to five years. So now we're just another opportunity for us to invest in design and creative talent and go-to-market talent for that category. So small, but very exciting from a launch perspective. HOKA apparel is even smaller. That's really early stages of development there. We are working with some folks externally to bring in some more talent to ramp that up. But the $500 million, the billion dollars numbers that we have put out there, we don't believe those need an apparel business to hit those targets. So it would be incremental to those kinds of numbers at this point. But early days of HOKA, it's less than probably 3% of total sales. Got it. Thank you. Good luck, guys. Great. Thank you. Thanks, Paul.

The next question comes from Jonathan Komp with Baird. Please go ahead.

Yeah, thank you. Just to follow up on all the commentary you've given on UGG, which is really helpful thinking about the third quarter and really the second half here. Are you saying, Steve, when you look at the scenarios and some of the planning, are you saying there's no scenarios where UGG could be flatter up for the period? Or just trying to gauge the degree of the constraints that are out there relative to potential scenarios. And did you call out any explicit costs that we should be thinking about for some of the logistic impacts.

Yeah. So, John, again, we're not giving guidance. What I wanted to call really to attention is, you know, we're dealing – we're kind of in the middle of a pandemic. We're dealing with constraints. And so we have seen growth in the first half. You know, as I mentioned, you know, and mentioned on last call, we're looking and did successfully move some product in Q2 that would traditionally go in Q3. And so it really depends, and again, this is, again, why we're not giving guidance, is it depends on what happens. If it's a clean Q3, but given everything we're seeing, it's hard to see no disruption in Q3. That's how we're kind of looking at UGG and planning for it. So I just want to provide a little bit of caution as we think about it. There's been some shifting in product. We have because of the onset conservative cuts that we made in terms of inventory, we're up against some constraints on inventory. So we're gonna do the best that we can, but it's gonna be work and we're working against some external factors that we're gonna have little control over.

Yeah, and the setup for Q4 and spring product looks promising as well, but it all depends on how we're able to get through Q3 before we get to that point.

Okay, that's really helpful. And maybe a broader question on HOKA. I know you've talked about this billion-dollar-plus aspiration for a while. Just, you know, thinking about, you know, at least that incremental $500 million compared to this year, you know, it's nearly a quarter of your total company sales today. Could you just talk through, you know, what are the margin implications of that, given the mixed shift that will drive towards HOKA even further over time?

Yeah, I'll go first. What we've said historically in its channel compared to UGG, it is a little bit better. And so as the proportion of HOCA, the gross margin implications are that if we don't get into situations where we're having to discount, again, we're dealing with a brand that is on fire, growing 80% a quarter, which is crazy, we can hold full price selling. So As long as we can do that, margins are by equivalent channel compared to UGG slightly better. But at the same time, then, we're also spending more on marketing. So as a brand that is still being discovered by many, we spend considerably more on developing HOCA and brand awareness and consumer awareness with that brand. So from a gross margin standpoint, as long as the brand is hot and continues to grow like it is and there is little promotion around that brand, it is incrementally positive. But at the same time, we're also investing considerably more in developing that brand and building that brand.

Okay. That's really helpful. Thank you, and good luck for holidays. All right.

Thanks, John.

The next question comes from Tom Nickick with Wells Fargo. Please go ahead.

Hey, guys, thanks for taking my question. You know, you spoke a lot about, you know, capacity constraints, you know, both internal and external, and, you know, it kind of seemed like, you know, for the most part, you were speaking in reference to UGG. You know, do these same constraints or anything like that apply to HOCA? And, you know, it would seem to, you know, to get to $500 million this year, you don't need, you know, the growth in the back half of the year for HOKA would be much slower than it was in the first half. So, you know, is there anything, you know, preventing you from, you know, far exceeding? I know $500 million is a big number. It's a big growth number. But, I mean, it kind of seems like with the momentum and the brand and the growth rates that you've been seeing, even in the midst of the pandemic, that, you know, it could even be better than that.

Yeah, I think I'll jump in on that. Keep in mind that some of the deliveries and the business that we were intended to do in Q1 for HOKA ended up happening in Q2 because the wholesale being closed for most of the Q1, so hence the 80-plus percent growth. But from an internal perspective, we don't have a lot of constraints on HOKA. The inventory, we're chasing the inventory as fast as we can. We're in pretty good shape heading into the back half of the year in inventory in HOKA. And the demand is still there. It's really reliant more on kind of the macro environment and external factors for us.

Got it.

And just put the – Sorry, just the biggest challenge that we're facing is just the – it's really the last seven to eight weeks of the quarter on UGG where DDC ramps up dramatically. And at the same time, we're inbounding product and shipping out to wholesalers. It's that period of time where that's where we're exercising caution here because there's so many different factors that could get in the way of that being successful. But that's an UGG dynamic, less so on HOCA.

Understood. That's helpful. And on UGG, I know maybe this is a tough question to answer at the moment, but Obviously, you know, there's been a lot of noise lately, you know, even pre-COVID with the brand reset in Europe and stuff like that. You know, when sort of everything's normal, when we're past COVID, when the, you know, international reset is done, like, you know, what kind of growth should be? UGG be generating? I mean, is this a, you know, a mid single digit grower? Is it something better than that? Something worse than that? I mean, I'm just kind of wondering, like, in a normal environment, like, what, you know, how should we think about UGG over the long term?

Yeah, you know, it's a good question. You know, I would say it's probably low single digits, you know, under 5%, but healthy, sustainable, you know, full price, failed growth, and What's encouraging for me right now is to see, you know, again, how many new young consumers have now adopted UGG into their consideration set. And they're choosing to come to our website. They're looking for new products. They're buying, you know, from our websites more than once in a quarter across categories. We even see, you know, a healthy mix of consumers who bought footwear and ready-to-wear. We haven't seen that before. And so I think if you look at the success of the Fluff franchise and the slipper-sandal hybrid phenomenon that we've created, there's still a lot of longevity in that trend. It's less about being inside in slivers and it's more about fashion. The amount of new consumers we have in our database and our ecosystem that we can now manage and optimize the lifetime value of those consumers The excitement that's happening in men's, you know, we're launching fluff product for men's in the next couple of weeks with an exciting ambassador that you'll see shortly. The ready-to-wear opportunity. And if we can get international through their transformation and heading to positive territory again, you could see this as pretty healthy, sustainable long-term growth. And we're optimistic about where the brand is. It's the healthiest and most exciting I've seen it since I've been here over eight years, and so we feel good about the potential going forward.

Great to hear. Thanks very much, and best of luck this holiday season.

Thank you.

The next question comes from John Tiemann with Cohen. Please go ahead.

Yes, excellent. Thanks for taking my question, and congrats on all the momentum.

Thanks. Thanks, John.

ask you on the, you know, the mixed shift to DTC and HOKA obviously drove tremendous gross margin expansion in the first half of the year and also drove a lot of SG&A leverage. The DTC and HOKA shift, you know, seemingly should continue into the back half of the year. How should we think about your margin structure in the back half relative to the performance you had in the first half both on the gross margin and SG&A line?

Yeah, I'll take that one. Again, I haven't given guidance, but I think the way to think about really kind of the back half is you start getting up against kind of bigger numbers. So Q1, Q2 are huge on a percentage basis because those tend to be kind of smaller quarters. And now as you get into really the back half, you're up against kind of bigger numbers. the expansion that you saw in the first half is not necessarily indicative of what you'll see in the second half. Clearly, we're going to have similar impacts from the changing dynamic. The impact will not be as much as what you saw really in the first half.

Makes sense. The strength of DDC, you know, upside from a percent growth perspective is more dramatic in UGG HOKA is more just kind of holding steady as to the trend that they've been on, but the UGG business from a DTC perspective is super, super strong.

Got it. Certainly a lot of momentum. Maybe just one more follow-up would be when you think about that billion-dollar run rate of sales for HOKA, what are you most excited about from a category level and geographic level to get you, you know, to give you that confidence in doubling that business?

Well, I think, you know, it's obviously still founded in core authentic running and continuing to be a leader in that category. You know, in some cases, you know, we're seeing we're number two, in some cases, number one market share already. But, you know, the difference between us and the number one market shareholder, which tends to be Brooks, generally speaking, you know, we could almost double our market share and still be neck and neck with Brooks. So there's still a lot of opportunity in the core run specialty channel. The two things that get me most excited are just the expansion to a broader set of consumers. So it's more consumers that aren't just buying it just for running. It's everyday athletics or lifestyle. And we're starting to see that broad base of consumers being attracted to the brand for the performance attributes that it provides. We still want to keep our distribution tight. We're focusing on our tight ecosystem of very selected wholesale partners, key accounts, and then driving e-commerce so we can optimize that business for the long term. But I think the real unlock to the billion is continued acceleration of our EMEA business, particularly online. We've made quite a few investments over the last year to allow the e-commerce business there to flourish, and we're seeing positive results on that, but it's still small compared to the U.S. And then I think when you think beyond a billion, It's really Asia Pacific, you know, and we're just getting started in China. Obviously, that's a massive opportunity for us, but, you know, we think we can get to that billion-dollar mark with real strong growth continuing in the U.S. and accelerated growth in EMEA, and then beyond that is just, you know, even more upside once we get into those territories in Asia Pacific and newer categories.

That's excellent. Congrats on all the success. All right. Thanks, John.

The last question today will come from Sam Poser with Sasquahanna. Please go ahead.

Thank you. I'm honored to be last. Guys, just some housekeeping, and then I have some more detailed questions. Could you give us either the revenue or the revenue growth for wholesale by brand or DTC by brand for each brand? You gave a... whatever it was, but could you give the rest of them for modeling purposes, please, for the quarter?

Yep, sure, Sam. So UGG wholesale for the quarter was $292, so $292 million. HOCA was $108. Teva was, call it, $18. Sanook was $6. All else was, call it, $28. And then our DTC was $172. Okay, great.

So I got a couple of questions other than that. I guess you've talked a lot about the transformation going on in EMEA and APAC. What, I mean, you know, as you see it today, what's the timetable for being, you know, sort of, you know, for being at a, you know, let's say the beginning stage of how the U.S., you know, turn, when the U.S. turn really kicked in, which would be a few years, a couple of years ago? Yeah.

Yeah, my sense, you know, it's been obviously challenged because of the COVID situation, both in Europe and Asia Pacific, particularly China. That being said, we have seen some signs of promise with, you know, category adoption. So the phenomenon of the fluff franchise in the U.S. hasn't really hit Europe or China yet. But in the last weeks of the quarter, we're starting to see some excitement around those categories. younger consumers, positive, strong sell-through of those categories, but also the brand. So the increased marketing, the focus on PR and collaborations, the new ambassador that we signed in China, those are all so far showing positive results. Not big enough to move the total country needle because we still have some scarcity work to do as far as resetting the classics business. But people are starting to see the UGG brand as a more fashion-relevant brand than they have in the past. So I would say you'll start to see return to growth probably next fall in those markets and give us an indication of where we can go from there. But I think the work that the teams are doing right now and the way we're shifting investments in our approach to be tailored to each of those markets is working well. The teams are doing a great job. And I think you'll start to see, like I said, that return to growth probably next fall into FY22 and beyond.

Thanks. And then you had talked earlier on previous calls about the test with HOKA you were doing with Dick's. Could you give us an update there and how they're managing it and what the plans may be? And then lastly, and I've got others, but lastly, you talked about the New York flagship. I saw 58th Street closed. Where is this store going to be? Yes.

I'm trying to remember what your first question was. Dick's Tech. I read that. Yeah, Dick's. Yeah. So, yeah, the 11th store test has been going very well. They're very pleased. The sell-through has been strong. You know, we tested with them I think it was like three or four years ago, a small test, and the results were not good. It's a whole different ballgame now. So, again, we're managing that relationship closely, pleased with the results and what they're selling. We're not looking to expand dramatically with that account just yet. Again, it's a very strategical and methodical approach as to how and if we go much bigger in DICs, but so far the results are very promising. And down the road, you know, we're also exploring opportunities with the Foot Locker banner as well. Early and ongoing conversations there, but still really cautious about the timing of when we go into those new accounts. And then the New York store? Yep. So it's on Fifth Avenue. I don't have – yeah, we don't have the exact – It's right across from the NBA store on Fifth Avenue. Tremendous location, highly visible, two floors, lots of windows, great foot traffic, both local and tourist going by there. It's our largest store ever, two floors, and it's going to showcase all the ready-to-wear, a new store design, be much more fashion – focused than we have been in the past, lots of color and excitement, and then some great storytelling and experience for the brand with an elevated service model for omni-channel capabilities. We're testing a lot there. And then a new mobile POS system to go along with that. So there's a lot to be excited about. Obviously, the timing we wish was better, but this will be a catalyst for the brand globally, and we'll be looking to roll out the new store concept to key partners and other flagship locations as time permits over, or the time is right over the next coming years. But, you know, there's great storytelling that we're going to be able to do, and I'm excited for everybody listening and the consumer to go in and experience, you know, the ready-to-wear collection and a new look for the face of UGG.

Thanks. Could I have one more? Yeah, the opening date on that is November 19th, Sam. Yeah, sorry. Thank you.

Just to confirm, so so your DTC of DTC business in Q4 is going to be hampered by, is it hampered by store traffic or is it going to be hampered by product availability and the amount you can ship, you know, because of, will it be capacity constraints in stores that can't be overcome by e-commerce or is it, or is it what's going on in the distribution center or both?

So when, Yeah, just so I'm clear on that, Sam. When you said Q4, you mean our Q3.

Q3, I'm sorry, Q3, Q3.

Yeah, it is really more just about constraints. So one will be from a retail, how much traffic is allowed in stores, some of the mall-based stores, what do the malls look like, can people get in? So that's going to be kind of The one constraint, and then I would say, as I mentioned before, just externally, will be what shipping capacity looks like. So the more we can direct e-commerce and the more we can capture early is beneficial, right? It helps us navigate, I think, some of the, what I'll say, our macro level constraints that are more out of our control. You know, we're doing the best that we can kind of that's under our control, which is really about inventory management, bringing more product in, this year than we did a year ago in a quarter where we have constraints as we have lower inventory going into Q3. So those are all the things that we're working with and, you know, trying to get to the consumer. The demand's there. They're showing up online. We're confident in our ability to kind of fulfill that if there are not constraints in place. But we know there's going to be some, so.

Yeah, and I would say... Go ahead, Sam. Do you think you can be – I mean, do you – when you said UGG overall, you know, is unlikely to be up in the quarter, is that more of a wholesale issue or more of a direct-to-consumer issue? Or do you expect direct to be up, just it can't be up as much as Q2 – you know, nearly as much as Q2 because of the law of large numbers?

Yeah, so it's more wholesale focused, just being able to get inventory through the pipeline and chasing inventory there. DTC, we still think we'll be able to show some growth there. We're up against big numbers last year. Remember last year was a very strong quarter for us, particularly in DTC and stores. So that velocity is going to be hard to comp, but we're confident that DTC can continue to be strong. And the last thing I'll say before we end the call on all this is 15% growth in this environment is exceptional, but I can't stress enough how hard it is. and how hard people are working to ship. To be able to cover this kind of increased demand in our distribution centers and our online businesses and chase this inventory is really hard to do. And I give our teams a ton of credit to be able to do that. And we're heading into the biggest, in some ways, the demand for our brands has never been stronger, but we're heading into the most uncertainty we've ever faced. And we have more demand on our website and are straining our systems than we've ever seen before. We're handling it extremely well so far, but like I said, when we get into these last few weeks of November into December and that pinch point for getting product to consumers, that's the area that we're really cautious about, because this is hard work, and being able to shift this quickly with those kinds of shifts in consumer demand is a strain, and we're handling it well, but that's where we're focusing on providing some caution.

Thanks so much, and continued success. Thank you.

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