Deckers Outdoor Corporation

Good afternoon, and thank you for standing by. Welcome to the Decker's Brands third quarter fiscal 2023 earnings conference call. At this time, all participants are in 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, 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 Foshing, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the federal securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory levels, and promotional activity, and the impacts of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. 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. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. In addition, the company reports comparable direct-to-consumer sales on a constant currency basis, for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. 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 pleased to be here today highlighting another record quarter for Decker's brands, as our teams were once again able to successfully execute against our long-term strategic objectives to deliver standout results in a dynamic consumer environment. Our fiscal third quarter record-setting results include $1.35 billion in consolidated revenue, reflecting a reported 13% increase versus the prior year, and diluted earnings per share of $10.48. Key areas of progress during the third quarter included HOKA delivering record revenue of $352 million as the brand more than doubled its DDC business while demonstrating momentum across the product line and significantly increased wholesale through both market share gains and select new strategic access points. UGG increasing its mix of business in DTC to 60%, up from 54% last year, as the brand drove an 8% increase in the channel. Total portfolio DTC increasing 19% versus last year to represent 52% of volume, with both HOCA and UGG contributing to this mix shift, an all-time high for the third quarter. and our international revenue increasing 12% on a reported basis and growing 25% on a constant currency basis when adjusting for the significant FX headwinds. Decker's delivered exceptional performance in the quarter and continued progress with respect to our long-term objectives. Notably, our brands commanded strong full-price selling despite a highly promotional marketplace during the holiday season. While our brands did experience more normalized promotions relative to extremely low levels in the past few years, we were able to avoid significant discounting due to the strength of consumer demand for our products, as well as disciplined marketplace management through our omnichannel approach. I'm thankful for the leaders throughout our organization who continue to prioritize long-term brand health and remain committed to our strategic pillars, allowing Deckers to maintain top-tier profitability. Our brands are well positioned for calendar 2023 as we end their fiscal year 2024 in April. Steve will provide further details on our updated guidance for this fiscal year, as well as how we're thinking about the arduous macroeconomic environment. For now, let's get into the brand highlights for the third quarter, starting with UGG. Global UGG revenue in the third quarter was $930 million, down 2% versus last year on a reported basis, but up low single digits on a constant currency basis. Overall, consumer demand for UGG was strong in the quarter as the brand delivered global gains in DTC across genders and categories, driven by a 21% increase in acquired consumers and a 17% increase in retained consumers. The UGG brand's healthy DTC performance was offset by unfavorable foreign currency exchange rate impacts across all channels, as well as lower wholesale revenue. This wholesale decline resulted from the unique shipment timing dynamics discussed at the outset of this fiscal year, which included an expectation that the third quarter would be impacted. Specifically, these earlier shipments drove temporarily elevated levels of inventory in the channel. As a result, and in line with our marketplace management strategies, the UGG brand's attention shifted to selling through product already in the channel to strategically reduce marketplace inventory, allowing DDC to capture demand upside and limiting the need for excess promotional activity. From a style and franchise perspective, UGG continues to find success with fresh updates of iconic styles. Throughout the year, consumers have continued to migrate to fashions that are uniquely UGG, such as the Classic Mini and Tasman, as well as more versatile derivatives of these products. The consumer demand for these products was quite strong, and certain style color combinations even led to out-of-stocks. Our measured approach to buying, aimed at driving improved inventory levels, combined with the high level of demand for these products, led to some scarcity in the marketplace. We see this approach as an effective tool to fuel demand and will continue to optimize our pull model to balance future supply. With respect to how these styles have performed, we are encouraged to see the continued strength of adoption from the brand's target segment of 18 to 34-year-olds. Among this segment in the U.S., the classic short remained the top seller, but the strongest growth came from the classic mini and ultra mini styles, which ranked second and third respectively. Platform classics were also extremely popular with this age group. likely resulting from the brand heat generated through unpaid product gifting to A-list celebrities, which helped drive the hashtag platform UGGs as the brand's number one social trending topic in the quarter. Among 18 to 34-year-old males in the U.S., UGG brand consideration reached an all-time high in the third quarter. UGG is increasingly seeing this segment of consumers adopt versatile slipper hybrids like the Tasman and classic slip-on as consumers continue broadening the wearing occasions of iconic styles. Beyond these hybrids, male consumers gravitated towards heritage winter boots such as the Butte as well as weatherized versions of iconic styles like the new Mel. Brand heat remains at an all-time high based on the exciting new products designed for the brand's target audience. Supplementing these fantastic inline products our teams develop each season, UGG continues to build fashion credibility through collaborations, the most recent of which was with designer Shane Oliver, the founder of Hood by Air. Shane's futuristic take on UGG Classics was covered by several high-profile outlets, including Vogue, Complex, and Hypebeast. These aspirational styles continue to drive excitement in the line and bring awareness to a new audience of consumers. From an international standpoint, UGG showed growth on a constant currency basis despite revenue being down versus last year on a reported basis. This was led by DDC as acquired and retained consumers in the channel each grew 38% versus the prior year. International wholesale was down versus last year as UGG lapped the supply chain disruption which pushed additional shipments into the prior year's third quarter. Strength in the UGG brand's international regions is largely attributed to the successful ongoing marketplace reset activities completed over the last few years, which included a revamped approach to product and marketing, helping drive greater synergies in product adoption across the globe. Overall, we are very pleased with the performance of UGG this fall. The brand continues to attract new consumers and drive more business through direct-to-consumer with a loyalty program that now has amassed over 7 million members worldwide. We feel great about the brand's ability to offset more normalized promotional activity through a strategic shift in channel mix, which also helped reduce marketplace inventories heading into the spring 2023 season. We expect UGG to finish the fiscal year in a position of strength, as demand for the brand's compelling products that are resonating with consumers globally has never been stronger. Shifting to HOCA. Global revenue for the third quarter was $352 million, representing an increase of 91% versus last year on a reported basis, another quarterly revenue record for HOCA. Just two quarters ago, we celebrated HOCA achieving $1 billion of revenue on a trailing 12-month basis. And with the quarter just delivered, the brand has now eclipsed $1 billion of revenue over the last nine months into December 2022. HOCA growth in the third quarter was driven by share gains with run specialty accounts in the wholesale channel as product flow improved this year relative to last, allowing HOCA to increase sell-through, added points of distribution with select strategic accounts as the brand has been slowly expanding throughout the year, global DDC revenue more than doubling versus last year, as consumer acquisition and retention increased 95% and 109% respectively, and a favorable comparable period, as wholesale shipments were disrupted in the prior year due primarily to port congestion. We believe the Fly Human Fly marketing campaign has been a key catalyst for the Hoka brand's DDC strength throughout the year, which has driven a higher growth rate than wholesale in each quarter thus far this fiscal year. During the third quarter, targeted marketing activations in Chicago and New York City helped drive a 22% increase in brand awareness, a 27% increase in consideration, and a 33% increase on purchase intent in these markets over the next six months. We also believe these markets have seen a halo effect from the additional brand visibility created by pop-up stores, which have continued to perform well for HOKA. In particular, we saw significant gains among 18- to 34-year-old consumers, who in the U.S. and EMEA drove the largest year-over-year increase of any age group during the third quarter. We have been increasingly encouraged by the broad product adoption from females in this coveted demographic, who appear to be actively searching Hoka.com for what is new and exciting on a regular basis, giving us confidence in the investments we are making to build brand awareness globally. The all-new Salomar Cross Trainer is the perfect example of this trend. The Salomar launched earlier this fall without significant marketing dedicated to the shoe, but still landed in the top five of styles purchased by females aged 18 to 34 years old in this quarter. Hoka is also resonating well with males in this demographic. but we see a great deal more opportunity to further expose the brand's product depth by testing access points that specialize in serving this target consumer. Importantly, even with the expansion beyond run specialty distribution, the brand is hyper-focused on delivering in that core channel as well. According to aggregated U.S. run specialty store data, during December, HOKA increased market share by 5 percentage points versus last year, delivered the highest average product turns and maintain a gross margin well above the channel average. In terms of our wholesale partner access points in the third quarter, We are extremely proud of the Hoka brand's performance as it continued to build market share in a highly competitive marketplace. With the strength of consumer demand for the brand, Hoka was able to maintain its high percentage of full price business, even with the incremental access points with strategic accounts. Though early days in some of the brand's new doors, the feedback on Hoka performance has been exceptional. On the product side, Hoka has continued to introduce award-winning footwear. In October, Hoka was featured in the 2022 Men's Health Sneaker Awards, with the Bondi 8 being chosen for the most comfortable cushion and the Kaha 2 Gore-Tex noted as the best hiking sneaker boot. In addition, Outside Magazine published its Winter Gear Guide for 2023, selecting the Mafate Speed 4 as the best shoe for fast and rugged trail runs. All of us at Deckers are excited for what is to come for the Hoka brand, starting with a couple of innovative product launches planned for the fourth quarter and more to come in fiscal year 2024 and beyond. In terms of consolidated channel performance in the third quarter, we saw strong growth in both global DDC and wholesale, but the majority of revenue growth was driven by global DDC, which increased 19% versus last year on a reported basis and 22% on a DDC-comparable basis. DDC strength was driven by impressive global consumer acquisition and retention across the entire portfolio, which increased 44% and 38% respectively. From a dollar growth perspective, global HOKA DDC volume more than doubled, and UGG DDC increased 8% on a reported basis versus the prior year, driving over $100 million of combined incremental revenue. On the wholesale side, Consolidated global revenue increased 8% on a reported basis versus last year. Growth was driven by HOKA brand market share gains and existing points of distribution, as well as incremental business from added doors with select strategic accounts. For the total portfolio, the increased token volume was partially offset by lower wholesale shipments for UGG, where the brand focused on selling through existing inventory to reduce the need for promotional activity. Evidencing this success and illustrating the underlying brand heat during the season, UGG wholesale unit sell-through in the U.S. increased mid-single digits in Fall 2022 as compared to Fall 2021. With the exceptional demand our brands were able to capture through DDC, combined with the strategic actions taken on the UGG wholesale front, our third quarter DDC mix increased from 50% last year to 52% this year. In the third quarter, our brands achieved the highest DDC mix ever for our historically largest quarter, which represents great progress towards our long-term objective of a 50% mix of DDC business for the entire fiscal year across the portfolio. Alongside our disciplined omni-channel approach, I would like to shout out our amazing design teams that continually bring compelling new products to market. The combination of these talented teams creates the exceptional experience with our products that consumers have come to love and expect from our brands. With that, I'll turn the call over to Steve to provide further details on the third quarter performance and an update on our fiscal year 2023 guidance.