Deckers Outdoor Corporation

Good afternoon and thank you for standing by. Welcome to the Deckard-Fran third 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 an operator to assist you at any time. I would like to remind everybody that this conference call is being recorded. I'll now turn the call over to Erin Cooler, VP, 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 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 uncertainty. 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 facts, 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 and supply chain, 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 filing, including in the risk factors 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 today's call. I'm excited to review our third quarter results that underscore the momentum of our brand and their continued execution of key strategies as we build the future of Decker's brand. As we continue to navigate a challenging logistics environment, I reflect on both the exceptional demand for the UGG and HOKA brands and the added pressure we face to keep pace with their growth in a constrained environment. While we don't currently see signs that elevated logistics costs or supply chain bottlenecks will subside anytime soon, we do see value in supporting our strong brands through expediting key product inventory, giving our brands the opportunity to gain market share. Steve will provide a more detailed update on the status of our supply chain network and the actions we're implementing to provide our brands with the best opportunity to thrive in this challenging marketplace now and into the future. With that said, Decker's third quarter revenue increased 10% over the prior year to $1.188 billion, representing our largest quarter in history. We saw balanced growth across our entire brand portfolio as direct-to-consumer, wholesale, and multiple geographies drove impressive results. Performance in the quarter and throughout the year has been the result of our execution on our long-term strategies, including driving HOCA, diversifying UGG, building DTC, and developing our international market. More specifically, we have made progress across these key areas, as HOCA grew 30% in the quarter despite poor congestion and inventory constraints, and has grown 54% year-to-date over prior year, contributing half of our total portfolio's incremental revenue. UGG increased 8% over last year in Q3 and has driven double-digit growth year-to-date, propelled by global adoption of the brand's diverse product assortment. Direct-to-consumer growth outpaced wholesale growth, improving DDC mix to 50% of third-quarter revenue, up from 48% last year and 44% two years ago. and our international regions contributed a significant portion of global growth year-to-date, increasing 27% over the prior year and outpacing the U.S. increase of 19%. For UGG, our international regions have sold their most diverse offering of UGG products ever, which helped the brand deliver impressive global growth fiscal year-to-date. In addition, with HOCA continuing to expand its share of the global performance market, we believe our portfolio contains two of the strongest brands in the footwear industry, with much more promising growth ahead. Now let's get into some of the brand highlights, starting with UGG. Global UGG third quarter revenue was $946 million, reflecting an 8% increase versus last year and a 21% increase versus two years ago in the brand's largest quarter. These results, when combined with the UGG brand's outstanding first half, equate to fiscal year global revenue growth of 13% above last year and 21% above two years ago. Reflecting the continued steady growth in the U.S., which is up high single digits on top of last year's mid-teens increase, and a strong return to growth within the brand's international region, which have increased north of 20% versus last year and double digits versus two years ago, all of which has been fueled by a diverse assortment of compelling UGG products across gender and categories that are being embraced by a broader and younger consumer base. In terms of the UGG brand's success, year to date, the majority of growth has come from categories outside of women's classics boots. This includes continued gains across men's and kids' footwear, women's slippers and fluff, as well as apparels and accessories. While these categories are driving the bulk of UGG growth, it is important to note that women's classics have also performed very well this year. Fiscal year to date, women's classics boots have driven year-over-year revenue growth, represent a smaller percentage of total brand revenue, and reflect greater style diversity within the category as items outside of the core, such as the Ultra Mini, Classic Clear, and New Mel, have been key drivers of consumer acquisition this year. The New Mel, with its broad consumer appeal, is this year's largest dollar volume style across the entire UGG assortment. The UGG product and design teams have done a great job developing companion versions to build a franchise, which continues to be a large driver of men's growth. Additionally, our consumer data has shown that the adoption of Ugg men's products skews younger, as the 18- to 34-year-age group represents a larger portion as compared to the brand average, and the Numel remains the top acquisition style amongst these consumers. Our product teams are actively utilizing these insights to design new styles that will allow Ugg to build upon momentum with these target consumers. Turning to kids' footwear, Ugg has driven impressive gains in kids' categories over the past few years. We believe this is a strong indicator of brand health, as purchasing patterns reflect consumers buying UGG for the family, with the majority of top styles representing popular items from the men's and or women's product range. These bundled purchases are obviously great for increasing cart values and wholesale open to buy, but also act as a great avenue to introduce UGG to the next generation of consumers. Beyond footwear, UGG has been focused on acquiring new consumers through a compelling apparel assortment. To build awareness in the category, UGG developed its first-ever apparel dedicated marketing campaign, which helped drive a 40% increase in apparel consumer acquisition year-to-date. Our consumers have responded particularly well to ready-to-wear sportswear and outerwear items that contain visual UGG DNA, local treatment, and deliver on the expected feeling of UGG. This was the first season for a number of retailers carrying UGG apparel, many of whom are concentrated in the youth and sports lifestyle channels. These channels have been driving strong performance with UGG footwear for some time now, and we're excited that they are on board to expand into a head-to-toe UGG offering. On the domestic front, this is the fourth consecutive year UGG has delivered strong year-to-date growth in the U.S., where brand consideration remains at an all-time high among 18- to 34-year-olds, according to YouGov. The brand's development of a more youthful and diverse product assortment, as well as the ongoing U.S. wholesale marketplace management strategy, has helped UGG strategically expand within youth and sports lifestyle accounts. While UGG has built market share across its account base, the youth and sports lifestyle accounts have significantly outpaced growth with department stores. Additionally, UGG has driven significant gains in DDC acquisition with 18- to 34-year-olds over the past two years, as this age group has grown at a 25% CAGR year-to-date over the same period of fiscal 2020. Critical to this success has been the product adoption among those younger consumers who are purchasing both heritage products like the Classic Short and Mini, but also new franchises like the Numel, Pluff, Tasman, and Classic Clear. From an international standpoint, regions outside of the U.S. have accounted for approximately half of UGG's growth this year, with EMEA and China driving the majority of gains over last year. Approximately three years ago, UGG implemented a marketplace reset strategy in the EMEA region based on the successful strategy that reignited the brand in the U.S. This involved a reduction of wholesale accounts to the tune of approximately 35% over the last three years, allocating and segmenting core product, and elevating brand positioning while also working to create demand for complementary UGG products in new categories. Beyond the marketplace activities in EMEA, the UGG marketing team began localizing global content to more effectively connect with consumers living in European and Asian countries. More recently, UGG developed market-specific collaborations and brought on local influencers to help highlight the brand's compelling products. These actions have helped drive the international turnaround of UGG, which is now delivering growth and high full-price sell-through with the brand's most diverse product assortment ever. Importantly, the return to growth of international UGG regions aligns with our global category growth initiatives, further aiding the brand's diversification into categories outside of women's classics. Fiscal year to date, women's core classics and derivatives have moderated to below 40% of international revenue. This is more in line with the U.S. and compares to north of 50% just three years ago. With a tightened supply of core product, international regions are driving healthy growth with popular global styles such as the Fluff franchise, Ultra Mini, Classic Clear, and the new Mel. By highlighting new categories, reducing the supply of core product, and tailoring marketing campaigns to local consumers, UGG has begun to expand its audience to younger consumers in both Europe and China. In Europe, this has led to new strategic points of distribution in the youth and sports lifestyle channels. The volume generated with these retail partners is still relatively small, but growing significantly faster than average, and if the U.S. has any indication, these emerging segments can be a big driver of growth and volume in the future. Similar to the U.S., we believe younger consumers are leading the UGG brand's increased popularity among international markets. The brand has worked hard to create localized content that resonates with sub-35 age consumers in their respective markets. In Germany, France, and the UK, this age group is driving over 40% of traffic conversion from paid social. In China, this age group is driving GDC growth in key franchises, including global styles such as Fluff and the Classic Clear. The UGG team has a lot to be proud of with the progress it has made, as the brand continues to drive global growth with a diverse assortment of in-demand products. Looking ahead, we are excited for UGG to build upon this year's head-to-toe demand with a compelling new rainwear proposition that features two new styles, the Drizlita and the Tasman X, which we believe will help the brand further expand its year-round appeal to consumers around the world. We are already receiving great feedback on the sell-through of this collection of rainwear products and are excited to share more on our year-end call. Congratulations to the UGG team on a great fall season, and we look forward to continued success this spring. Shifting to HOKA. Global revenue in the third quarter was $185 million, reflecting a 30% increase versus last year and nearly double the volume of two years ago. Despite dealing with stockouts and delayed inventory, Polka performed well in the quarter, driven by global strength in the direct-to-consumer channel, which increased 52% over last year, and continued global wholesale market share gains, particularly among international regions, as unit growth outpaced domestic. Fiscal year today, global HOKA revenue has increased 54% versus last year, reflecting strength across the brand's ecosystem of access points as domestic, international, wholesale, and direct-to-consumer continue to drive impressive growth. From a direct-to-consumer standpoint, we have seen strong global demand for HOKA year-to-date as U.S. search interest increased 74% over the prior year, according to Google Trends. New consumers visiting the European HOKA website during Q3 increased 88% over last year, helping the region maintain the highest DDC growth rate thus far in fiscal 22, and drove a more than 30% increase in conversion rate during China's Double 11 event, demonstrating improved awareness in the region. DDC continues to be a great avenue for HOKA to make connections with consumers, drive replenishment, and increase category adoption, as it more effectively displays the breadth of the brand's product assortment. We are actively testing and developing the Hoka consumer experience at pop-ups in the U.S. and owned locations in China. In China, we plan to utilize strategic retail locations to continue building Hoka brand awareness as we develop the marketplace further and create a model for future wholesale partners to leverage. In the U.S., we have seen great engagement from consumers at pop-up locations and are exploring other select cities to test the Hoka experience. At the same time HOKA is building the experience at DDC, the brand continues to build credibility and awareness with consumers through partnerships with strategic retailers. This spring, HOKA will be strategically expanding with key partners to satisfy incremental demand and further augment the brand's market share. We are pleased that our partners have continued to express excitement about the HOKA brand and their desire to expand further, and we look forward to continuing to grow those relationships. At the same time, we remain disciplined in our approach to steadily and sustainably building HOKA to a multi-billion dollar brand over time. Shifting to product highlights for the third quarter, we launched the Bondi X at the beginning of October. This innovative style combines the signature cushion of a traditional Bondi with a carbon fiber plate to give athletes a more propulsive and efficient ride. The Bondi X launch drove significant traffic to HOKA.com, 65% of which were first-time visitors. The style was even named one of the best running shoes according to GQ's 2021 Fitness Awards. Beyond the Bondi X, the Hoka brand is expanding consumer awareness with two of its newer franchises, the Rincon and the Mach. Both franchises were designed for an audience of consumers under 35 years old. The Hoka team strategically developed Rincon and Mach social content for platforms possessing a higher concentration of this key demographic. As a result, the Rincon and Mach have been key catalysts for the Hoka brand's accelerated acquisitions of younger consumers, and these franchises are driving superb growth. On the collaboration front, Hoka partnered with global luxury brand, Moncler, to release a limited edition of the Hoka Mafade Speed II. This was a great opportunity for Hoka to build global awareness by partnering with a well-known European fashion luxury brand. The collaboration drove significant positive PR for Hoka and sold out in the first hour of availability. Collaborations like this are a great indicator of the brand's growing appeal beyond its traditional performance roots and into the space of fashion. While fashion is not a top priority for Hoka right now, we see this as an opportunity for the brand to capitalize on more broadly in the future. To close Hoka, I'd like to congratulate the entire team for the brand being named Footwear News Brand of the Year. This is a fantastic accomplishment and speaks to the incredible momentum of Hoka as the brand marches closer to a billion dollars in revenue and beyond. We have enormous confidence in the brand's ability to continue building share in a highly competitive marketplace. While we continue to operate in this constrained environment, we are prioritizing the fulfillment of HOKA demand, though carefully balancing stringent quality standards as the brand's growth has required adding further manufacturing capacity. Ramping production of this highly technical performance product will require some additional time, but our measured approach will ensure HOKA is built to become a long-term major player in the performance space. while delivering the quality product our consumers expect. With respect to channel performance in the third quarter, global direct-to-consumer revenue increased 13% versus the prior year and plus 42% versus two years ago. From a comparable sales perspective, direct-to-consumer increased 11% versus last year, fueled by strength in both retail stores and online. UGG and HOCA drove the majority of the year-over-year dollar volume increases, but DDC demand was robust across the portfolio. Facing bottlenecks during the UGG brand's historical peak period of demand, we took specific actions that benefited UGG DDC, which included encouraging pre-orders on key styles to help smooth demand, carrying a broader exclusive assortment that provided the option of alternate in-stock products where there were shortages, and offering the option to purchase back-ordered products that had incoming inventory. In the constrained supply environment we have experienced this year, our omnichannel capabilities proved advantageous in reducing the impact on the UGG brand's business. From a wholesale perspective, global revenue in the third quarter increased 7% versus last year and 14% versus two years ago. Growth in the quarter was primarily driven by international UGG and global HOCA, with slight offsets from a reduction in domestic UGG that resulted from earlier shipments of fall products as compared to the prior year. Wholesale comparisons remain unique as macro logistics pressures and bottlenecks continue to alter shipment timing as compared to historical patterns. With that, I'll hand the call over to Steve to provide further details on our third quarter financial results, status of the dynamic supply chain challenges facing our industry, and our updated fiscal year 2022 outlook. Steve?