Deckers Outdoor Corporation

Good afternoon and thank you for standing by. Welcome to the Decker's Brands first quarter fiscal 2022 earnings conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference call, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Erin Kohler, Vice President of Investor Relations and Corporate Planning.

Hello, and thank you everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer, and Steve Fasching, 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 changes in consumer behavior, strength of our brands and demand for our products, changes to our product allocation, segmentation, and distribution strategies, changes to our marketing plans and strategies, changes to our capital allocation strategies, the impact of the COVID-19 pandemic on 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, 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 us today. We are excited to discuss a strong start to fiscal year 2022 for our portfolio of category-leading brands. First quarter revenue increased 78% versus last year to $505 million. Gross margin increased 130 basis points to 51.6%, and we delivered a profitable June-ended quarter with earnings per share of $1.71. While unique marketplace dynamics contributed to this result, we believe the growing influence of HOCA, with its more evenly spread seasonal volumes, will continue to drive our organization towards a more balanced business across quarters. Performance in the first quarter was driven by global wholesale growth of the UGG, HOCA, and Teva brands, whose compelling products are continuing to build market share and overcome the disruption in the channel that began during the pandemic. The direct consumer growth in HOKA, as the brand continues to build awareness through digital marketing, introduced innovative products and category disruptors that drive new consumer acquisition and deliver a consistent consumer experience for online replenishment. Additionally, our brands are benefiting from strategic marketplace management globally, which continues to drive high rates of full price selling across our entire portfolio of brands. This quarter represents further progress toward our long-term strategies, which include accelerating consumer adoption of the HOKA brand globally to build the brand's revenue to $1 billion and beyond, building UGG as a year-round global lifestyle brand through a diverse product offering, and executing a digital-first approach by prioritizing direct-to-consumer acquisition online and working towards a direct business that will represent 50% of total revenue for the company over time. While we remain firmly committed to these strategies over the long term, it is important to recognize certain aspects unique to fiscal 2022 related to lapping the pandemic, which is still having varying effects in different locations. Specific to the quarter just completed, we experienced higher wholesale shipment volumes as well as earlier shipments as compared to the prior year. The earlier shipments primarily relate to replenishment of depleted UGG wholesale account inventories that resulted from exceptionally high levels of sell-through during fiscal 2021. These earlier shipments for UGG, combined with strong demand for spring and summer products across our entire portfolio of brands, drove a significant increase in our wholesale business. Given the momentum of our brands and their respective market share opportunities, we are focused on meeting consumers where they want to shop to optimize growth in this less than certain marketplace. but remain committed to driving direct to consumer demand over the longer term. Steve will provide more detail around the unique dynamics we are anticipating for the balance of this year later in the call. For now, I will share more detail around first quarter brand and channel level performance and some context for the remainder of fiscal 2022. Starting with the brand highlights. Global UGG first quarter revenue increased 71% versus last year to $213 million. Performance was driven by strength in domestic and international wholesale as the brand lapped disruption in last year's spring season and refilled depleted domestic inventory that resulted from record sell-through in the prior season. Growth of international DTC as UGG benefited from localized marketing investments to reignite the brand in Europe and China, which was partially offset by softness and domestic DTC resulting from the decline of extraordinary slipper growth unique to last year's stay-at-home orders. The strength of global UGG wholesale resulted from the brand's marketplace management strategies that left UGG with unusually lean inventories entering the year. This positioned UGG to accelerate some would-be fall shipments, helping avoid anticipated bottlenecks in the supply chain, and providing the brand with an opportunity to meet in-store consumer demand. We saw this strategy play out effectively, as online traffic for UGG was predictably lower than last year's exceptionally high levels, while sell-through at physical retail was strong. With a highly fluid consumer environment, we're managing our omni-channel business to ensure UGG has a meaningful presence where the brand's target consumers intend to spend. However, we continue to closely manage our product allocation and segmentation strategies to ensure UGG maintains healthy levels of full-price sell-through. UGG continues to see high levels of consumer demand as the brand maintained positive mindshare with 18 to 34-year-olds in the U.S. According to YouGov, brand consideration among women in this group remained roughly flat to last year's record highs, and among men, UGG brand consideration is at an all-time high. These new levels of consideration among men are leading to the growth of UGG men's continuing to outpace that of the total brand. Helping to drive more consumer love and connection for the brand, UGG recently held its fifth annual Proud Prom event in partnership with the Pacific Pride Foundation. This event is an inclusive opportunity for UGG to connect with local LGBTQIA plus and allied youth from Santa Barbara and surrounding coastal communities that celebrates identity and love. This year's event featured friends of the UGG brand that included musical artists Little Nas X and actress Harry Neff. Further on the brand building front, UGG has continued to engage with brands and designers to create powerful product collaborations that elevate the brand's fashion credibility and perception among consumers. In June, UGG teamed up with famed fashion designer Telfar Clemens' namesake brand, Telfar, to release the first of multiple product collaborations. The first product drop sold out on UGG.com in just a few hours, but more importantly, garnered positive press for the brand, which included features in leading fashion publications. We are excited to once again collaborate with this exciting designer as we unveil the second UGGxTelfar product drop in September, which will include more footwear and apparel items. From an international perspective, we have been pleased with the progress in Europe and Asia Pacific as the brand is building a younger audience through greater acceptance of the UGG brand's diverse product line. We are gaining confidence in the UGG brand's turnaround based on continued positive response from consumers in both regions. During the first quarter, GDC acquisition in Europe and the Asia Pacific region more than doubled pre-pandemic first quarter levels. And these new consumers are purchasing products such as fluff, sandals, and sneakers. With the strong sell-through UGG is experiencing within wholesale accounts, growth in our international DDC business, and exciting spring product innovations to come, UGG is well positioned for continued progress in the spring and summer season next year. Looking ahead to the balance of this fiscal year, we expect UGG to continue experiencing elevated levels of global wholesale demand as we replenish domestic inventories and reignite the brand in Europe and China, maintain positive momentum with younger consumers around the world, and work to convert a higher percentage of consumers to repeat purchases across categories, accelerate international GDC demand by showcasing the brand's diversified product offering through localized marketing tactics, and mitigate pressures related to lapping heritage slipper demand in the U.S. Overall, we feel very positive about the UGG brand's start to this year, and the teams are working hard to acquire new and repeat consumers around the world with bold and exciting products that provide the luxurious feeling of UGG. Moving to HOKA, global revenue for the first quarter increased 95% versus last year to $213 million. This quarter represented a significant milestone for Deckers and HOKA, as the brand's revenue slightly surpassed that of UGG for the first time in the company's history. As has become standard for HOKA, growth was balanced across the brand's ecosystem of access points, with all regions and channels of distribution experiencing impressive growth. HOKA continues to build its consumer base through a combination of disruptive product innovation, emotionally connected inclusive marketing, and a consistent consumer experience based on the premium quality of the brand's products and distribution partners. Helping to drive the HOKA growth during the quarter, the brand launched an update to its flagship Clifton franchise with the introduction of the Clifton 8. This eighth-generation Clifton features the brand's all-new innovative ultralight mid-cell foam, which is designed to offer maximum cushion with an energetic response to each step. Consumers have enthusiastically embraced this franchise update, making the Clifton 8 a top five style for Hoka.com, despite only launching in June. Search interest for Hoka in the US continues to expand, as the brand experienced a 69% increase versus last year's first quarter, according to Google Trends. The Clifton 8 launch helped boost traffic to Hoka.com during the quarter, and on top of that, Hoka continues to build awareness with new consumers through targeted digital marketing. During Q1, 72% of online traffic was from consumers who had not previously shopped on the Hoka website. We have been encouraged by the loyalty of consumers who buy Hoka online. During Q1, the number of consumers who purchased Hoka two or more times increased 46% versus the prior year. Through these repeat purchases, Hoka is expanding closet share with existing consumers as the brand is seeing adoption across multiple categories. To help achieve this goal, the Hoka team is building innovative products in trail, hike, and fitness categories. At the beginning of July, Hoka launched a brand new hiking silhouette known as the Anacapa, which is available in low and mid heights. We are excited about the launch of this franchise, which is intended to build market share in the hiking category and attract new consumers to the Hoka brand. This hiking boot features recycled materials, waterproof construction, and a Vibram MegaGrip outsole. but most importantly is built with lightweight HOKA technology to feel like a sneaker. Coinciding with the ANACAPA launch, HOKA has teamed up with non-profit organization SolTrack to encourage outdoor exploration by participating in the HOKA X SolTrack Hike Challenge on the Strava application. While virtual consumer touchpoints like the Strava Challenge have been great avenues to connect with consumers globally, we have been excited about the return of in-person events over the last few months. In June, Hoka was the title sponsor of the Western States Endurance Run, which is the world's oldest 100-mile trail race. This event was the first trail ultramarathon to be covered by a live stream telecast with over 30 hours of coverage from start to finish. Congratulations to Hoka athlete Jim Walmsley, who wore the brand's Evo Speedgoat trail shoe and Adventure Bucket Hat to win the Western States event for the third consecutive year. The HOKA team's approach to product, marketing, and distribution has been highly effective in building consumer awareness and an affinity for the brand. With the brand rooted in performance running, we continue to see higher awareness among those consumers, but recently the growth of total consumers aware of HOKA has outpaced increases in awareness among runners, according to our proprietary HOKA brand tracking data. We view this as an important positive step in the evolution of HOKA and expanding the brand's addressable audience. For the balance of this year, we anticipate HOKA growth will continue at an impressive rate, though lower than the quarter just experienced, driven by new consumer acquisition as the brand expands global awareness, including a key market focus in Germany, the UK, and China, innovative product updates and increased category adoption from consumers, market share gains with wholesale partners across the globe, greater global brand presence through in-person event sponsorship, and higher frequency product drops to maintain excitement with loyal consumers. As we continue to scale HOKA, we are building the right team for the brand's long-term future success. As you may have seen in a press release not long ago, the brand has hired two key footwear design and apparel team members intended to enhance the evolution of HOKA over the next three to five years. Shifting to Teva, global revenue in the first quarter increased 66% versus last year to $58 million. What is truly impressive about the standout quarter from Teva is the brand's growth in both fashion with its Heritage Universal franchise and function with the more rugged Hurricane franchise. Strength in the Hurricane franchise, we feel, has been driven by the brand's roots in the Grand Canyon, as national parks have seen record attendance this year. From a GDC perspective, Teva delivered solid growth on top of last year's extraordinary increase. As compared to last year's first quarter, where Teva more than doubled consumer acquisition, The brand maintained a similar number of acquired consumers this year, increased retained consumers by 41%, and saw a 10% increase in average order value among online purchasers. Additionally, growth of 18- to 34-year-old consumers continued to outpace total consumer growth, leading to younger consumers maintaining the largest mix among all age groups for Teva. For the balance of this year, Teva is expected to build market share with closed-toe products such as the brand's Ember franchise, and increased DDC consumer acquisition and continue to grow the already high percentage of loyalty among 18- to 34-year-olds. With respect to channel performance in Q1, global wholesale revenue increased 140 percent as compared to last year. Wholesale growth was unique this quarter as a result of disruption in the channel last year, refilling domestic UGG inventories that were depleted from record product sell-through and shipping UGG product earlier than in prior years in order to mitigate macro supply chain pressures. As a result, UGG wholesale is up significantly relative to the past couple years. HOCA also experienced meaningful growth as the brand is building market share and benefiting from the CliftonAid launch. From a direct consumer standpoint, global revenue increased 15% versus last year's first quarter. HOCA drove the majority of DDC growth as the UGG brand was pressured by exceptional demand last year that resulted from the stay-at-home orders benefiting online sales in the slipper category. Because of the pandemic's disruption of both owned and wholesale physical retail locations last year, we experienced a significant increase in DDC mix during the first quarter of fiscal year 21. Given physical store reopenings and shifting consumer shopping patterns, we saw a decline of DDC penetration this quarter as compared to last year, but have been pleased to maintain DDC mix above pre-pandemic levels. Longer term, our focus remains on building DDC towards representing approximately 50% of our total business. Before I hand off the call to Steve, I wanted to take a moment to highlight some of our brand's recent activities on the sustainability, ESG, and DEI fronts, which we believe are having a positive impact on consumers' passion for our brands and the culture at the company. Over the past few months, our Deckers Gives program provided meaningful donations as nominated by our employees and community to 10 nonprofit organizations championing racial and social justice. We have improved the diversity of hiring, with 49% of new hires over the past year coming from BIPOC communities. HOKA received the 2020 Vendor Partner of the Year Award from REI in recognition of the brand's performance and commitment to doing business in the right way, and our employees are close to finishing our first-ever Plastic-Free July competition, which aims to reduce the abuse of single-use plastics. Here at Decker's, we have a philosophy known as do good and do great, which is a core value that drives and inspires our company and our people to make a positive impact. Our progress in the ESG and DEI space exemplifies this philosophy, and our journey continues. With that, I'll hand the call over to Steve to provide further details on our first quarter financial results, as well as our updated outlook on fiscal year 2022. Steve?