Deckers Outdoor Corporation

Q2 2024 Earnings Conference Call

10/26/2023

spk03: Good afternoon and thank you for standing by. Welcome to the Decker's Brand second quarter fiscal 2024 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'll now turn the call over to Erin Kohler, Vice President, Investor Relations and Corporate Planning.
spk00: 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.
spk02: Thanks, Erin. Good afternoon, everybody, and thank you for joining today's call. It's great to be here with you today to discuss our exceptional second quarter, where our two marquee brands experienced high levels of full-price consumer demand, leading to revenue increasing 25% versus last year, eclipsing $1 billion for the first time in our September-ending quarter, gross margin improving 520 basis points versus last year, and diluted earnings per share increasing nearly 80% versus last year to $6.82. Our direct-to-consumer business was the fastest-growing component of revenue growth in the second quarter, increasing nearly 40% versus last year, with HOCA growing 46% and UGG increasing 38% as both brands experienced a greater than 30% global increase in consumer acquisition. Our global wholesale business also put up strong revenue growth in the second quarter, increasing 19% versus last year, again driven by our two largest brands, UGG and HOKA. Our wholesale accounts also continue to see incredible heat and momentum for our key styles across both brands. With this strong consumer demand, sell-in for wholesale in the quarter included some accelerated fall seasonal shipments, benefiting our first half results and increasing our confidence to achieve our outlook for the fiscal year. As we continue to focus on our strategic marketplace management, we are pleased to have captured this strong momentum of demand early in the year, particularly with these products capturing high levels of full-price selling across all channels. As we focus on delivering the full year, I think it's important to reflect on our year-to-date performance. We closed out a record first half for Deckers, with total portfolio revenue across all channels growing 19% versus last year. driven by HOCA revenue increasing 27% from global strength across its ecosystem of access points, UGG revenue increasing 18%, primarily from gains across international regions and global DTC, total portfolio global DTC acquisition and retention increasing 29% and 27% respectively, and international revenue across all brands increasing 23% versus last year. While Steve will provide further details on our financial performance and related increased outlook later in the call, I'd like to emphasize how proud we are of the continued alignment of our strong near-term performance with Decker's long-term objectives to build HOKA into a multibillion-dollar performance brand, grow UGG through direct consumer connections with elevated products and experiences, expand GDC through consumer acquisition and retention gains, and drive international growth through targeted investments. With that, let's get into the highlights of our successful first half, starting with Hoka. Global revenue in the first half increased 27% versus last year. This impressive result reflects the Hoka brand's successful marketplace management execution, which is driving more business to DDC in conjunction with market share gains from high full-price sell-through at our existing points of wholesale distribution. Hoka revenue growth in the first half was led by direct-to-consumer, which increased 54% versus last year, and represented 38% of revenue, up from 31% in the prior year. This was aided by global increases in brand awareness, according to Decker's proprietary brand tracker study, consumer acquisition, which is up 47% versus last year, and consumer retention, which is up 52% versus the prior year. HOKA experienced significant growth in awareness across all major markets, with the U.S. growing to approximately 30%, and international regions on average rising to mid-teens with much more room to grow. Specific to our gains in DDC in the first half, consumer acquisition in EMEA DTC nearly doubled to help achieve a 75% year-over-year increase in channel revenue for the region. This represents great progress for our EMEA region, and though DDC remains a relatively small percentage of its total revenue, we see this expansion as a positive indicator that HOCA is increasingly resonating with the European consumer. As we have demonstrated in the U.S., thoughtfully building brand awareness through marketing activations and strategic marketplace presence serve as a catalyst to DDC acceleration as the brand begins to take hold with the local consumer. To that end, Hoka recently opened its first European flagship store in Covent Garden in London, giving the brand a powerful presence in one of the most influential footwear markets around the world. In the U.S., Hoka continues to deliver exceptional growth DDC revenue increased nearly 50% versus last year for the first half, with strong growth among 18- to 34-year-old retained consumers, which increased 70%. We believe some of this demand was fueled by HOKA having increased resonance in the back-to-school timeframe with college-age students. Brand loyalty among this group is especially exciting, given the increased potential lifetime value of repeat purchases. The HOKA marketing teams have done an exceptional job building global brand awareness, through compelling Fly Human Fly campaign content, connecting with consumers at HOKA-sponsored events, and highlighting the incredible performances of HOKA athletes. We continue to sponsor key running events around the globe as part of our commitment to support the sport and provide a platform to showcase our innovative performance products. This includes events from 5Ks to Elite Ultra Marathons for all types of athletes around the world, allowing us to elevate the brand with pinnacle performance-minded consumers and also to broaden worldwide awareness of the achievements capable in HOKA products. This year's HOKA-sponsored UTMB, or Ultra Trail Mont Blanc World Series Finals held in Chamonix, France, is the perfect example of our team's 360-degree collaborative approach to building HOKA brand awareness and performance credibility. This trail running event allows us to celebrate the roots of HOKA, which was born in the French Alps, further connecting the brand with European consumers. At the UTMB World Series Finals, the HOKA team set up a base camp that offered consumers the opportunity to engage with the brand in a unique way through athlete meet and greets, 24-hour product testing, and shoe personalization. We received overwhelmingly positive feedback on the experience and are already looking forward to leveraging these learnings at future events. HOKA made its mark on the event, both from a product and athlete performance standpoint. with several impressive achievements, including Hoka athlete Jim Walmsley making history, becoming the first American man to win the Dacia UTMB, a 106-mile race that included more than six miles of elevation gain, completing the course in a record time of less than 20 hours. Hoka ranking tops among all brands with the most top five finishes across the series of three races, and Hoka remaining the number one brand worn by UTMB participants. From a product standpoint, first half HOKA growth was driven by a variety of categories and styles, which includes, among others, the Clifton franchise, which benefited from the 9th edition launch, as well as new successful lifestyle versions with suede uppers, stability staples like the Yorahi and Gaviota franchises, the latter of which launched its 5th edition during the second quarter, as we are seeing increased adoption of this category from consumers, Trail and hike favorites, the Challenger and Anacapa franchises benefiting from new innovations incorporated in recent updates, speed shoes highlighted by the Rocket X Refresh and the all-new Mach X, and new lifestyle options including the popular Solimar and transport styles. We remain encouraged by the breadth of category adoption across the innovative Hoka product assortment, which continues to evolve and attract new consumers to the brand. We are implementing greater segmentation across the ecosystem of HOCA access points to ensure our accounts are best positioned to serve their respective consumers and emphasize DTC as the pinnacle destination to experience the full depth of the brand's product offering. For the balance of the year, the HOCA team remains focused on executing its marketplace management strategy, which includes a focus on building global brand awareness and heat to increase demand, which is helping to drive high full-price sell-through at DDC and across wholesale, allowing the brand to deliver healthy growth with best-in-class margins and inventory turns. Complemented by several new innovative product launches coming up in our fourth quarter, we expect HOKA to continue delivering strong results for the remainder of this fiscal year and well beyond. Now shifting to UGG. Global revenue in the first half increased 18% versus last year. The brand's strong first-half performance was driven primarily by high levels of brand heat, disciplined marketplace management leading to product scarcity on key styles exiting last fall, and intentional pull forward of the brand's fall marketing campaign relative to past years. We currently have the most cohesive, globally aligned product, marketing, and consumer targeting strategy I've ever seen for UGG. Marketplace management has been a core strength of the UGG brand for some time now, the allocation and segmentation of core and popular new styles continues to serve the brand well, helping drive high levels of full-price sell-through. Last year, we shared that we did not fully capture demand on several key styles. As we began this fiscal year, we strategically developed targeted inventory that caters to the brand's most popular products and seeded the fall marketing campaign, Feels Like UGG, in July as opposed to the typical September timeframe. From July 15th to August 15th, we saw a groundswell of influencer public service announcements reminding consumers to buy UGG now. Videos using hashtag UGGs received over 25 million views during that timeframe, and UGG saw twice the level of engagement on Instagram as compared to last year. We believe the UGG team's strategic marketing shift served as a catalyst for earlier fall consumer demand globally. In the U.S. specifically, this shift helped fuel greater back-to-school demand, with search interest increasing 46% versus last year, according to Google Trends. To keep this momentum going, at the tail end of September, UGG celebrated the official kickoff of hashtag UGG season with music superstar Cardi B, whose video announcement featuring the new classic Dipper had nearly 20 million views. This resulted in significant press and media coverage of our launch. with influential publications such as Billboards and Vogue featuring UGG. Brand Heat created by the UGG team directly translated to incredible first half results, particularly from the global DDC business and international regions, which both experienced a revenue increase of above 25% versus last year. Furthermore, UGG gross margins benefited from transitional and fall products selling at full price during the second quarter. This dynamic is in contrast with prior years, where the brand's DDC business has historically been more weighted towards end of spring and summer products that generally carry a lower average selling price. The Tasman franchise, including the TAS platform, as well as the Classic Mini and Ultra Mini franchises, have been the focal products of UGG's search interest and revenue growth in the first half, as expected. We are also excited that some of the new fall franchises are beginning to resonate with consumers as well. including the aforementioned Classic Dipper, a key globally marketed style, the all-gender hybrid weather collection, which includes modernized weather-ready versions of the Tasman and New Mel, and the Low Mel, a sneaker hybrid take on the original New Mel. UGG is well-positioned to capture consumer demand during the holiday season with great products like these. Considering the demand we've seen thus far, we are already in chase mode for a select group of popular items and colors, for which we are expediting production to ensure greater DDC inventory through the season. The UGG brand's first-half growth sets us up well, especially when factoring the signals of a weakening global economy and lower consumer confidence. Given this dynamic, we are glad to have captured some demand earlier to help reduce the pressure of competing with more promotional brands during this upcoming holiday season, as we see to continue selling premium UGG products at full price. Moving on to our discussion of consolidated channel performance. Global growth was across both direct-to-consumer and wholesale, with DDC being the primary driver of revenue gains in the first half, increasing 37% versus last year. Our portfolio experienced DDC strength relative to last year, across consumers with acquired and retained increasing 29% and 27% respectively, brands with HOCA and UGG revenue increasing 54% and 26% respectively, regions with international and domestic revenue increasing 48% and 34% respectively, and channels as consumer demand was robust in stores and online. Additionally, we saw a double-digit increase in average selling price as a result of a greater mix of HOCA, higher full-price selling for UGG, combined with a focus on fewer proven SKUs and more favorable foreign currency exchange rates. Regarding global wholesale, revenue in the first half increased 11% versus last year. Growth was driven by strength in UGG and HOCA, as well as across both our domestic and international regions. Market share gains continue to be the primary avenue of wholesale growth for HOCA, which is now the top-selling brand in U.S.-run specialty stores in aggregate. according to third-party market sources. HOKA has also quickly become the top-running brand with key strategic partners in applicable doors. Our teams are extremely proud of the HOKA brand's top market share achievement, which further validates the brand's performance-rooted credibility. UGG wholesale performance in the first half is right in line with our strategy this year, with international regions fueling the majority of growth while the brand maintains its strong business in the U.S. With these first half results, it is clear that our marketplace management strategies are working well, positioning our brands to excel during the holiday quarter and capture increased consumer demand across their respective ecosystems of access points. Before I hand it off to Steve to discuss our results in more detail, I'll note that we also announced our plan to divest Sanuk. At Deckers, we're focused on the most effective allocation of our resources that are in alignment with long-term objectives. Consumers have long valued Sanook for its fun, innovative, and comfort-first products. Over the coming months, we will work to find the right owner to support the brand's next chapter while we continue to execute our growth priorities. Thanks, everyone, and now I'll hand it over to Steve.
spk01: Thanks, Dave, and good afternoon, everyone. We are excited by the strong performance HOKA and UGG continue to exhibit through the first half of fiscal year 2024. stemming from our strategic marketplace management execution that continues to benefit our brands. As Dave covered, HOKA drove another quarter of strong growth led by DTC, while UGG demonstrated broad-based growth across regions and channels by continuing to captivate consumers and elevate its presence around the world. Our record second quarter revenue exemplifies the exceptional demand for our brands. And we look forward to continuing this momentum as we enter our largest and most complex fiscal quarter. While ongoing macroeconomic challenges persist, we believe we are well positioned to navigate this dynamic marketplace. With a strong financial framework and in-demand brands, we remain committed to building the foundation for success that drives long-term sustainable growth. Now let's get into the details of second quarter results. Second quarter fiscal 2024 revenue was $1.092 billion, representing an increase of 25% versus the prior year. On a constant currency basis, revenue grew 24% versus last year. Growth in the quarter was primarily driven by strong demand experienced across the HOCA DTC channel, which increased 46% versus last year. and contributed to delivering total brand revenue of $424 million for the quarter, and broad-based UGG growth across regions and channels, delivering $610 million of revenue, with global DTC increasing 38% and wholesale increasing 25%. With the HOKA brand's performance consistent with our expectation, the outsized UGG growth in the second quarter benefited from, first, a higher level of wholesale shipments in Q2 this year that in the past couple of years were captured in the first quarter as transit times have reduced, supply chain logistics have improved, and availability of inventory is more consistent relative to during the pandemic. Second, seeding the fall global UGG campaign earlier in the quarter reminding consumers of the scarcity that took place in the prior year, which created brand heat and demand for those same popular styles that sold out quickly last year, driving earlier consumer purchasing this year. And third, an increased level of demand for the brand during the back-to-school period, which signaled some wholesalers to desire shipments on an accelerated timeframe relative to our original plan. Gross margin for the second quarter was 53.4%, up 520 basis points from last year's 48.2%. Second quarter gross margin benefited from lower ocean freight rates, favorable UGG product mix partially driven by earlier fall demand, favorable UGG full price mix, favorable channel mix with DTC continuing to grow faster than wholesale, and a slight benefit from foreign currency exchange rates. SG&A dollar spend in the second quarter was $358 million, up 22% versus last year's $294 million, as we continue investing in key areas of the business. As a percentage of revenue, SG&A was 32.8% versus 33.6% in the prior year, 80 basis points lower than last year. This resulted primarily from the aforementioned timing considerations regarding earlier consumer demand and timing of certain spend. Our tax rate was 23.8%, which compares to 21.2% for the prior year. These results culminated in diluted earnings per share of $6.82 for the quarter, which is just over $3 above last year's $3.80 diluted earnings per share, representing EPS growth of 79%. This increase in diluted earnings per share was approximately evenly split between gross margin benefits and higher revenue, with a small benefit from a reduced share count resulting from the share repurchases made over the past year. Turning to our balance sheet, at September 30, 2023, we ended September with $823 million of cash and equivalents. Inventory was $726 million, down 21% versus the same point in time last year, and during the period, we had no outstanding borrowings. During the second quarter, we repurchased approximately $185 million worth of shares at an average price of $534.53. As of September 30, 2023, the company had approximately $1.1 billion remaining authorized for share repurchases.
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