Deckers Outdoor Corp

NYSE:DECK

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and thank you for standing by. Welcome to the Deckers Brands First Quarter Fiscal 2023 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 and instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded.

I will now turn the call over to Erinn Kohler, VP, Investor Relations and Corporate Planning. Please go ahead.

[Erinn Kohler]

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 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; inventory and liquidity position; our potential repurchase of shares; and impacts of the macroeconomic environment on our operations and financial conditions.

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 and its SEC filings, 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.

[Dave Powers, President and Chief Executive Officer]

Thanks, Erinn. Good afternoon, everyone, and thank you for joining us today. I’m excited to dive into another quarter of exceptional results, which represent a strong start to fiscal year 2023 and further progress towards our long-term strategies. First quarter revenue increased 22% versus last year to $614 million, and we delivered earnings per share of $1.66. Revenue growth was primarily driven by HOKA as the brand achieved its first ever $300 million quarter. With strong HOKA growth, we were able to deliver another profitable first quarter as we continue to reduce the historical seasonality of our portfolio through the expansion of year round HOKA demand and further diversifying the category mix.

Importantly, our first quarter result demonstrated momentum behind our long-term vision to build HOKA into a multibillion dollar major player in the performance athletic space further diversify the UGG brands product, geographic and seasonal mix, grow our DTC business through consumer acquisition and retention, and drive international markets through strategic investments. We are making clear progress in each of these initiatives.

During the first quarter, HOKA delivered global revenue of $330 million, an increase of 55% versus last year. UGG products mix shifted into sandals away from seasonal fall styles. UGG regional mix shifted towards international regions, as these markets drove year-over-year revenue growth. Global DTC across all brands grew 15% as a result of increasing consumer acquisition and retention by 13% and 28%, respectively, and revenue from international markets increased 36% versus last year, which includes earlier distributor shipments.

These highlights reflect the strength of Deckers marketplace management and omni-channel capabilities across our portfolio of exciting brands. Our disciplined approach to managing brands, markets and distribution channels continues to serve us well, as we create the future of Deckers. While the macroeconomic environment is evolving quickly, I’m confident in a consumer demand of our brands and our team’s ability to remain nimble and deliver on our goals in this dynamic environment.

Steve will provide further details around our forward-looking expectations later in the call. In the meantime, let’s dive into the brand and channel performance for the first quarter of fiscal year 2023. Starting with the brand highlights, global HOKA revenue for the first quarter increased 55% versus last year to $330 million. This is a significant achievement that resulted in HOKA global revenue and the trailing 12 months, and in June 30, breaking the billion dollar barrier with much more growth ahead.

The HOKA brands exceptional growth also delivered a new milestone for Deckers as a whole with HOKA revenue representing more than 50% of total portfolio quarterly revenue for the first time. With its year on-demand that utilizes infrastructure during off peak UGG periods and full price selling at premium price points. The HOKA brands growing scale is improving Deckers overall quarterly financial and operational performance.

The HOKA brands strong quarter featured outstanding revenue growth across the brands far reaching global ecosystem of access points highlighted by international markets increasing 66% versus last year, led by the strength of the EMEA region, which was partially influenced by the timing of selling for our distributors as we strategically build new markets.

U.S. increasing 49% versus last year, with DTC growth leading wholesale global DTC increasing 58% versus last year, driven by continued momentum with retained consumers, as well as the continued acquisition of new consumers and global wholesale increasing 53% versus last year, as the brand increased market share and existing accounts and benefited from select doors added to strategic accounts. We were excited by the positive brand indicators and continued share gains that HOKA is building upon across its entire global distribution network.

A few highlights include increasing market share within U.S. run specialty, while commanding higher retail prices. Focus styles accounting for at least half of the top 10 styles according to aggregated U.S. run specialty store data. Doubling revenue in France led by gains in Paris, which was our third fastest growing European city during the quarter, and APAC driving the highest regional GDP growth rate led by strengthen both China and Japan as these countries benefited from stores eating awareness with consumers.

Across the globe HOKA stores have continued to build excitement with a new audience and drive compelling levels of traffic and purchase activity. This is especially exciting in China, which has been a slow build as HOKA took some time to find its voice with consumers local to the region. With a refined visual merchandising strategy enhancing the consumer experience, our China’s stores are now driving higher conversion rates and we’re better equipped as we open additional locations in the region.

In the U.S., the retail team continues to work towards opening the HOKA brands first permanent location in New York City during the spring of calendar year 2023. This is an exciting endeavor as the HOKA store will feature an elevated design that is fit for our premier performance brand. In the meantime, HOKA is opening a second New York City pop-up location near Lincoln Center within the next month. Our Chicago location which was opened in the last 3 months is seeing excellent traffic and driving strong conversion, giving us even greater confidence in a consumer appetite for HOKA retail stores.

We will take a disciplined approach to opening a limited number of doors. But we’re excited about the opportunity to engage with consumers in key cities around the world. Further on direct-to-consumer across global markets, HOKA continues to increase the number of acquired and retained consumers that remarkable levels compared to the prior year. During the quarter, DTC acquisition increased 48% and retention increased 58% versus last year, with gains among 18 to 34 year old consumers far outpacing these increases. This led to a 4 percentage point increase in the mix of 18 to 34 year old, among individuals purchasing from hoka.com.

We are seeing incredible momentum behind HOKA as the brand continues to inspire humans to fly over the earth. The HOKA brand ethos is echoed through its new globally integrated marketing campaign dubbed Fly Human Fly. This campaign was thoughtfully designed as an invitation for humans around the world to experience the HOKA arrived. As part of the campaign, HOKA launched the fifth edition of the Mach, which has quickly become a top 5 style for the brand, as well as a completely redesigned consumer website.

The upgraded website features a brand new aesthetic that elevates product presentation with greater technical detail and enhances the visibility of brand values and storytelling throughout the site. Fly human fly has been live for just over a month now. And we’ve been very pleased with the consumer response and feedback for our wholesale partners. But the fly human fly landing page at hoka.com, 83% of visitors were new, which aligns with the campaign’s intent to reach a new audience. We believe this campaign will have a significant impact on building awareness of HOKA as we expand the brand into a multibillion dollar major player in the performance space over the long-term.

Speaking of performance, I’d like to congratulate HOKA sponsored athlete, Adam Peterman, for winning the 100 mile 2022 Western states race. This was an incredible feat for Adam having this been his first time ever competing in 100 mile race. He won while wearing recently launched HOKA Speedgoat 5, which is a completely redesigned version of the brand’s most popular trail shoe with less weight and enhanced traction with Vibram Megagrip to inspire confidence in any terrain.

Results like these emphasize that HOKA brands leadership is a premier performance brand, enabling athletes to achieve peak levels of performance. Other congratulations to Adam and all the other athletes who competed in this year’s HOKA sponsored Western states 100.

Moving to UGG, global revenue in the quarter decreased 2% versus last year to $208 million dollars. Outperformance was driven by higher international wholesale and distributor selling that was offset by category shift dynamics, impacting the brands global direct-to-consumer business. The UGG brands international regions continue to experience benefits from the marketplace allocation and segmentation strategies implemented to build brand heat and increased demand overseas. With core fall product limited in the marketplace that was able to drive full price sell through during the past holiday season, and generate open buy opportunities in the spring season, driving the quarter’s results.

UGG captured incremental market share with transition styles such as the Ultra Mini and Coquette as well as the newly launched Sport Yeah sandal, all of which are driving sell through. Briefly touching on the category dynamics impacting UGG global DTC. Over the last couple of years, the Fluff franchise experienced increased relevance as consumers turn to UGG for comfortable and stylish hybrid slippers to wear in the home.

Expecting shifts in consumer behavior towards outdoor wearing, the UGG product team continued to evolve the franchise with the introduction of more spring, summer and outdoor ready styles, which included the Sport Yes Sandal. Sandals were the standout category for UGG during the quarter showing the strong demand for the brand outside of the fall and winter timeframe. While successful in shifting consumer adoption from heritage fluff franchise styles into beach ready styles.

The lower average selling price in the sandal category created a revenue headwind relative to the exceptional volumes of Fluff that were sold during Q1 in the last 2 years. That said, the Fluff Yeah continues to be as top style among acquire and retain consumers, including with 18 to 34 year old.

Across a global direct-to-consumer even though revenue dollars are below last year due to these product mix shifts, demand for UGG remain robust as the brand experienced increases of 8% and 13% and acquired and retain consumers respectively versus the prior year. Importantly, international DTC acquisition and retention gains are trending well ahead of these global figures as we continue to build brand heat overseas. He styles driving new consumer acquisition globally include the aforementioned Fluff Yeah and Sport Yeah, as well as the Clem in golden star fashion sandals, and the Tasman franchise which continues to be on fire.

We are encouraged by the continued consumer interest and broader adoption of the UGG brands diverse product assortment. Overall, the first quarter represented a solid start to the year for UGG. We believe UGG is well positioned to drive a successful fiscal year 2023. And I’m even more excited for the brand’s future, after our recent announcement of Anne Spangenberg as the President of Fashion Lifestyle.

Anne as a proven leader with meaningful experience building brands across our industry, most recently serving as Nike’s Chief Merchant, and has already hit the ground running in the last few weeks as she begins to immerse herself with all things UGG, and engage with our talented brand team and cross functional business partners. In her new role, and we’ll be building upon the strategic priorities for UGG, focusing on product diversification, consumer adoption and franchise evolution across our omni-channel marketplace. I’d like to welcome, Anne, and thank the UGG team for the cross functional collaboration and teamwork that enabled the brand to maintain a strong position in the market as we work to fill this role.

From a channel performance perspective in the first quarter, global wholesale segment revenue including distributors was the primary driver of growth increasing 25% versus last year. Strengthen these channels resulted primarily from continued global market share gains for HOKA, as well as the benefits from added doors with strategic accounts. UGG also contributed to wholesale revenue gains based on the continued adoption of the brand’s diverse product assortment among international regions, which continue to benefit from marketplace reset activities.

On direct-to-consumer global revenue for the first quarter increased 15% versus the prior year. DTC growth was driven by significant increases in consumer acquisition and retention for the HOKA brand, which was partially offset by the category and seasonal dynamics unique to the UGG brand that I covered earlier in the call. Overall, our direct-to-consumer business continues to benefit from the HOKA brands growing influence, especially in quarters outside of historical peak selling periods for UGG.

The quarter just completed HOKA represented 53% of DTC revenue, which is up from 39% last year and 27% 2 years ago, with nearly all of the HOKA brands DTC business occurring through e-commerce, our most profitable channel. This brand shift dynamic is a creative to our bottom line.

With that, I’ll hand the call over to Steve to provide further details on our first quarter financial results, as well as our reaffirmed outlook on fiscal year 2023.

[Steven Fasching, Chief Financial Officer]

Thanks, Dave, and good afternoon, everyone. As Dave just shared our first quarter results demonstrated great progress toward the fiscal year guidance that we outlined in May, while we advanced a number of key initiatives for our business this quarter. HOKA was the primary driver of performance as the brand continues to build global market share. UGG revenue came in slightly lower than last year primarily due to category shifts occurring during the quarter, as well as lapping earlier selling during the prior year. But we feel the brand is well positioned to deliver another strong year and are excited for what lies ahead under Anne’s leadership.

With ongoing uncertainty in the macroeconomic environment, we’re continuing our disciplined and responsible approach to managing our business and will remain nimble to react to this dynamic environment. Our demand signals lead us to believe that our portfolio brands will continue to resonate well with consumers. And though not immune to the macroeconomic headwinds, Deckers has historically demonstrated an ability to course correct when necessary. We remain committed to our long-term strategies that have continued to serve us well, and we’ll build upon the strong operating model we have built over the last 5 years.

Now, let’s get into the details of our first quarter fiscal year 2023 results. First quarter fiscal 2023 revenue was $614 million, up 22% versus prior year. HOKA revenue increased 55% versus last year accounting for nearly all of this quarter’s revenue growth due to the exceptional demand experienced across the brands global ecosystem of access points, and improved inventory availability. For the first time ever, HOKA represented more than 50% of total portfolio quarterly revenue, and over the last 12 months ended June 30, the brand has delivered over $1 billion of revenue.

Gross margin for the quarter was 48%, which is down 360 basis points from last year’s 51.6%. This aligned with our first half direction that anticipated headwinds from higher freight costs from ocean and air as well as impacts from unfavorable foreign currency exchange rates that we anticipate will pressure margins for the remainder of this year.

Additionally, first quarter gross margin was impacted by product mix and normalized promotional activity for UGG as the brand sold more sandals and discounted select styles in line with pre-pandemic activity and channel mix shifting towards the wholesale and distributor segment, in particular, our international distributor business that shipped product earlier than in years past. These headwinds were partially offset from benefits from increased revenue mix of HOKA is the brand commanded the highest gross margin in the portfolio during Q1 and benefits from HOKA price increases.

SG&A dollar spend in the first quarter was $238 million, which is up 20% from last year’s $199 million. As a percentage of revenue, we delivered 60 basis points of leverage to help offset freight and FX impact to gross margin. Our tax rate was 21.3%, which compares to 21.9% in the prior year. These results drove diluted earnings per share of $1.66 for the quarter, which was $0.05 below last year’s $1.71 per share.

Turning to our balance sheet. At June 30, 2022, we ended June with $695 million of cash and equivalents. Inventory was $840 million, up 83% versus the same point in time last year. And important to note that last year’s inventory levels were below normal operating levels as a result of supply chain disruption and during the period we had no outstanding borrowings. During the first quarter, we repurchased approximately $100 million worth of shares at an average share price of $260.12. As of June 30 2022, the company had approximately $354 million remaining under its stock repurchase authorization.

Subsequent to quarter end, the Board of Directors approved an increase of $1.2 billion on top of the company’s existing share repurchase authorization, which now in total represents more than 15% of our market capitalization, highlighting the board’s confidence in our long-term strategic plan.

Now for supply chain update. Over the last several quarters, we’ve shared an update on the status of our logistics network and our continued mitigation efforts as we navigate macro supply chain disruption. We are pleased that there have been relative improvement in this area in Q1, but I will share some brief thoughts before I touch on our fiscal year 2023 outlook. Transit times have improved relative to last year, but we are still experiencing latency and lower visibility into the timing of inventory with nearly 40% in transit, and thus are continuing to prioritize holding inventory in the country of sale.

For example, during the first quarter inventory generally arrived earlier than anticipated, as a result, we shipped more product out. However, with low visibility into when certain shipments will arrive, we are comfortable holding higher levels of inventory to enable our brands to meet the significant marketplace demand we are seeing. So difficult to predict the timing of when inventory will land, we expect that heightened inventory levels will continue throughout this fiscal year.

On the cost front, we are confident that the price increases implemented in the HOKA and UGG brands will offset freight headwinds and help bolster second half margins to deliver our full fiscal year 2023 guidance. Given the earlier arrival of inventory, we now expect to use less air freight than originally anticipated for the HOKA brand. However, as the dollar has continued to strengthen, we are anticipating greater currency headwinds, and this reduction in planned airfreight should help offset these currency pressures.

Now, turning to our guidance. And with these dynamics in mind, we are reaffirming our full fiscal year 2023 guidance, which as a reminder includes revenue growth of 10% to 11% versus last year, gross margin 50 basis points higher than last year anticipating approximately 51.5%. SG&A at approximately 34% of revenue and operating margin in the range of 17.5% to 18%; a tax rate in the range of 22% to 23%; and with the share repurchase executed during the first quarter just completed, diluted earnings per share will now be expected to be in the range of $17.50 to $18.35, reflecting a $0.10 increase.

While we have maintained our overall guidance, I’d like to highlight a few additional items contemplated within the guidance, which include stronger HOKA revenue growth now expected to increase in the 40% range versus last year, reflecting upside from greater inventory availability, which aligns to our expectation of using less air freight than originally anticipated, and incremental foreign currency headwinds, primarily affecting UGG growth due to the brands wholesale business model and concentration of planned growth from the international regions.

This reaffirmation of guidance excludes any charges that may be considered onetime in nature, and does not contemplate any impact from additional share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include but are not limited to further impacts of the ongoing COVID-19 pandemic on our operations and economic conditions, including supply chain disruptions, constraints and related expenses, labor shortages, inflationary pressures, changes in consumer confidence and recessionary pressures, further strengthening of the U.S. dollar and geopolitical tensions.

While macroeconomic uncertainty persists, we believe in the power of our brands and continue to see positive signs of consumer demand. Deckers has a history of remaining nimble displaying the unique ability to react as marketplace dynamics evolve, and we are well positioned to deliver compelling revenue growth and top tier operating margins.

Thanks, everyone. I’ll now hand the call back to Dave for his final remarks.

[Dave Powers, President and Chief Executive Officer]

Thanks, Steve. We are quite pleased with the start to fiscal year 2023. As our portfolio drove revenue growth above 20% in the first quarter, and our organization continued to make progress against key strategic initiatives. I want to congratulate the entire HOKA team and all of the shared service individuals that support the brand on reaching the billion dollar revenue milestone. This is a huge feat for HOKA but also for Deckers as a whole to have a second brand in our portfolio to reach this significant point of scale.

The exciting part for our company is that we believe HOKA has much more growth ahead as the brand stays laser focused on rhis strategic expansion plan. The brand’s fly human fly campaign is just the beginning of our journey to build awareness and broaden the consumer aperture for HOKA.

From a talent perspective, we are fortunate to have bolstered our executive leadership team with the recent promotion of Angela Ogbechie to Chief Supply Chain Officer, and the hiring of Anne Spangenberg as President of Fashion Lifestyle. I’m excited to be working closely with both of these experienced leaders and look forward to their contributions that are sure to further enhance Deckers workplace culture, and drive success against our long-term strategic initiatives.

I’d also like to thank our executive leadership team and all of our employees for remaining flexible and staying focused on our goals, while managing through transition. With our strong portfolio of brands, dedicated employees and discipline management of the business, I don’t think I’ve ever been this excited for the opportunities ahead for Deckers. And I view the Board of Directors recently approved increased to our share repurchase authorization, which in total now represents more than 15% of Deckers current market capitalization as an impressive vote of confidence in our company, brands, people and strategic plan for the future of our organization. A big thank you to all of our stakeholders for your continued support.

With that, I’ll turn the call over to the operator for Q&A. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jonathan Komp with Robert W. Baird. Please go ahead.

[Jonathan Komp, Robert W. Baird & Co.]

Thank you. Good afternoon. I want to ask just first on the UGG brand. Curious to maybe get your thoughts on just the overall health of the UGG brand in the marketplace, maybe this is more of a domestic question. But just levels of inventory comfort with orders that you may have with your wholesale partners and just overall thoughts on how you expect UGG to fare in the current environment?

[Dave Powers, President and Chief Executive Officer]

Yeah. This is Dave. I can answer the beginning of that. We’re pleased with how UGG is performing. It’s down a little bit for the quarter as expected. And that’s largely due to us trying to lap the Fluff Yeah business from last year. So you can attribute pretty much all the miss or the decline versus last year, I should say, to the Fluff franchise. And we’ve made up some ground on that with Sport Yeah, and some of the other classic slippers which are doing well. But the Sport Yeah is at a lower price point. So, as an example, on our e-commerce website in the U.S., sales were down for UGG brand, but units were up. So it’s a quarterly dynamic, we’re working through the tail end of the fluff business. But their core business across the globe is still strong and healthy. Our order book is strong and healthy.

And, we feel that our chances are good in the rest of the year and we certainly have the inventory in place to do that. Steve can talk a little bit more about the inventory. But the good news is we have inventory here. It’s here earlier, and we’re able to get it to our accounts earlier. So the setup from a brand perspective, going into the back half of the year is still looking good. But we’re being a little bit cautious here, because it’s still early in the year and there’s a lot of concerns about over inventory in the channel and the consumer.

But as far as the brand health goes globally, we’re still seeing very positive signs, order books are still looking healthy. And we have inventory should the business be there to be after.

[Steven Fasching, Chief Financial Officer]

Yeah, I think, Jon, just to add on to that, as Dave said, order books holding up we’re seeing strong demand for the brand so we feel good about that. As we said on inventory, we were going to bring inventory in earlier this year, so kind of on message we’re delivering on that. That is contributing to an increase in our inventory levels, which again, just remind everybody at last year’s levels were unusually low and below normal operating level. So feel okay with the inventory, where it stands, that will continue to build, but we’re well positioned from that standpoint to fulfill the orders that we have. And we’re continuing to see consumer response to it. So still very positive on how UGG is performing and the outlook.

And then just to remind everybody, we’re coming off too strong years of UGG growth. And as we said well documented through last year, it was replenishing depleted levels of inventory in the channel. So we’re comping strong growth as well as replenishing inventory and feel comfortable about that.

[Jonathan Komp, Robert W. Baird & Co.]

Yeah, great. And then maybe just one separate question on HOKA. Dave, I think you mentioned broadening the aperture of the brand, and I wanted to just follow-up and get your thoughts, maybe both near-term any specific initiatives, and then longer-term? What your views of that comment, and the opportunity for HOKA that you see today?

[Dave Powers, President and Chief Executive Officer]

Yeah, it’s really related to two things. One is just expanding the reach of the product to reach new consumers, and then also expanding our reach internationally, particularly in China. But this is at its core, a running brand, and we have incredible authenticity, and are very important brand in that space. And we’ll maintain that authenticity as we go forward. Hence, the Western states and the UTMB, and the Ironman championships that is the core of this brand, and always will be. But we obviously see expanded opportunity in trail and hike, and then in walking and also lifestyle. So, we are well aware of the fact that there’s a broad base of consumers that are purchasing the HOKA brand across age groups demographics and end use.

And so with the new Fly Human Fly campaign that we launched, reestablishing our authenticity in ultra sports with the events that I mentioned. And at the same time speaking to a broader base consumer that is into the brand for a lifestyle perspective, or walking perspective, or just overall comfort. So we welcome all those consumers, we consider them athletes, they’re on their feet all day, and they need performance footwear, and we’re working on ways to establish more communication and engagement with those folks, while staying true to the authenticity of the brand. And that’s more on a product standpoint, we’re not necessarily opening up new distribution to go after those consumers.

We’re pleased with the business index, but we’re in less than 20% of their stores, just starting to go into footlocker and opening more stores globally, particularly in China, where we’re seeing a broad base of consumers coming into our stores and on our websites really loving the brand. But what’s also incredibly exciting on the lower age spectrum is 18 to 34 year olds are increasingly purchasing the HOKA brand. We’re starting to hear comments about people are trading their all white Nikes, for all white HOKAs, so that’s very encouraging for us as well. And we knew a lot of optimism going into the account – of Foot Locker account to see what we can do with the younger consumer there too.

[Jonathan Komp, Robert W. Baird & Co.]

That’s great color. Thanks again.

[Dave Powers, President and Chief Executive Officer]

Thanks, Jon.

[Steven Fasching, Chief Financial Officer]

Thank you.

[Operator]

The next question comes from Sam Poser with Williams Trading. Please go ahead.

[Sam Poser, Williams Trading, LLC]

Good afternoon. Thanks for taking my questions. Well, I’m just going to do my normal question. Can you give us that you sort of talked a little bit about it on earlier, but can you give us wholesale revenue by category or brand, please?

[Erinn Kohler]

Hi, Sam, sure. This is Erinn. So wholesale distributor net sales, I’ll give you just that component by brand. So for UGG, that was $138 million, HOKA $232 million, Teva $47 million, Sanuk $11 million, and then all other which includes Koolaburra $2 million. So that gets you to your total wholesale distributor of $429 million.

[Sam Poser, Williams Trading, LLC]

Thank you very much. Then a couple of – two more. You lost a bunch of sales in UGG, evenly a good quarter in the third quarter of last year. How are you seeing the third quarter of this year now that your inventory is flowing better? And then with HOKA you’re doing $330 million, can you give us some idea of the cadence to get to the 40% increase that you’re thinking about, because $330 million well above any quarter you’ve ever had. And is that a new normal? Or how should we think about the flow of revenue there to get to the 40%?

[Dave Powers, President and Chief Executive Officer]

Yeah, so I’ll start with UGG. And then, I’ll let Steve tackle the HOKA question. So we’re optimistic about UGG in the queue in Q3, as you said, we were late on inventory last year. We potentially missed some sales last year. And the good news is that we have inventory, obviously, in the channel earlier, and we have more inventory coming. So from an inventory standpoint, I think we’re going to be in very good shape for Q3. There’s just a lot of questions out there still on the consumer level of promotions, et cetera. We’re not – we’ve in the last couple of years for UGG in Q3, we’ve been very, very clean, minimal promotions, tight on inventory.

We see a little bit of return to normalize season, but we’re not expecting or modeling in heavy promotional activity at this point. We want to protect the health of the brand and not chase top-line, because we think we can make up a lot of revenue if we need to, on the year with HOKA. But as far as how the setup looks, we’re in inventory position, we have exciting new product launches in the UGG brand, we think are going to resonate very well. And we have a new campaign, a holiday campaign that we’re working on right now. So as far as tackling the opportunity, we’re in good shape. I think their question is their macroeconomic environment globally, and what that’s going to do to not necessarily just the brand, but the wholesale partners, who are tight on inventory as well or heavy on inventory in general.

[Steven Fasching, Chief Financial Officer]

Yeah, then Sam on the HOKA question, what we said and kind of indicated in a strong quarter one performance, where we ship more product was increased availability of inventory in June, and that was largely driven by HOKA. And so that gave us an opportunity to ship product more than what we kind of anticipated could happen with the availability of inventory, that was largely HOKA driven, right? And so, I think what you’re seeing in the quarter is our ability to get that product into the market a little bit sooner than what we expected, which is always encouraging and will closely watch them sell through. But that’s what’s driving some of this timing issue.

And, again, going back to why we’re not giving quarterly guidance. We’re just seeing timing, shifting between quarters. And so it’s very difficult with what we’re dealing with to kind of precisely show when things are going to go. But when we have an opportunity to move product out a little bit earlier than what we anticipated, we’re going to take full advantage of it. And that’s really what you’ve seen with HOKA in this quarter.

[Sam Poser, Williams Trading, LLC]

Yeah. One last thing, do you expect the DTC business to outgrow wholesale this year, given sort of the some of the maneuvers at the end of last year in the wholesale shipments?

[Steven Fasching, Chief Financial Officer]

Yeah, I think right now, the way we’re kind of looking at things is equivalent between those channels. So, still early and we’ll see, but right now, the way we’re looking at is kind of equivalent.

[Sam Poser, Williams Trading, LLC]

Thank you for continued success.

[Dave Powers, President and Chief Executive Officer]

Yeah. Thanks, Sam.

[Operator]

The next question comes from Laurent Vasilescu with Exane BNP Paribas. Please go ahead.

[Laurent Vasilescu, Exane, Inc.]

Good afternoon. Thank you very much for taking my question. I wanted to follow-up on HOKA and the global marketing campaign. Dave, were there any key learnings you could share with us from that campaign? And can you remind us, I think in the 10-K for fiscal year 2022 marketing was about 8% of sales meaningfully up over from like a few years ago got 5%, which is great to see. Steve, where do you think marketing goes for this fiscal year? And can you maybe talk a little bit about the nuances, the spread maybe in terms of marketing spend, as a percentage of sales differed between the two big brands?

[Dave Powers, President and Chief Executive Officer]

Yeah, I’ll talk a little bit about HOKA. This is the first global campaign that the brand has ever done. So we felt that it’s important to refresh the messaging and the communication from the brand. And, we’ve obviously evolved our thinking as to what this brand can be for folks globally. And, we’ve been on a track of inspiring athletes all around the world of all types to get active and be there for them. And so this is a way for us to bring all the different product launches that we go through, whether it’s a Clifton, or Bondi, or Speedgoat, to have a little bit more consistency in the look and feel of the campaign to have a consistent tone of voice and to be more consistent with global consumers around the globe.

So we’re very pleased with how it’s been received. We’re getting very positive feedback from our wholesale partners. We’re getting very positive KPIs on our website. The amount of new visitors for the quarter was up tremendously and very healthy for us, as you see in some of the retention and acquisition figures are all heading in the right direction. And we think this is a foundation and a story that we can continue to build on head to toe and build real power, and an aspirational positioning for the brand. So far, so good. I think we need to add in a little bit more grittiness, if that’s the right word into the campaign and pull off some of the great performances and athletes in the UTMB and Western states in Ironman and leverage those influencers a little bit more in the campaign. But we feel the platform is right. The redesign of the website is proven to be very successful so far, our landing page, spend time and dwell time and conversion rates are up.

And so we’re very pleased. But it’s the beginning of a long journey with this campaign. And but so far, we’re seeing great adoption globally, and positive reaction from consumers and wholesale accounts.

[Steven Fasching, Chief Financial Officer]

Yeah. Hi, Laurent, this is Steve. Just on the marketing spend. We – over the past few years, we have been increasing marketing spend. As it relates to brands, we spend more in marketing on proportional basis to sales on HOKA and we do other brands, and that is part of what’s driving our overall market increase and marketing as a percentage of revenue increase. What we’re seeing, as Dave just articulated is great productivity with our marketing spend. And what’s contributing to building brand awareness, as we talked about quite a bit, HOKA brand awareness is still relatively low in comparison to other brands.

And so, with the marketing spend, with the campaigns that we’re launching, we’re seeing great productivity and how that’s driving consumer awareness of the brand and building brand awareness. So it’s a lever that we’re using very efficiently and productively and will continue to do that. And as you’ve seen with the global campaign, and as Dave said, we’ll continue to refine and continue to build awareness through those campaigns.

[Laurent Vasilescu, Exane, Inc.]

That’s great. Great to hear. And then as a follow-up question, I think, you mentioned in your remarks, Dave, on Foot Locker, maybe you can give us a little more granularity on what type of consumer you’re seeing there. What’s the response? And then, Steve, I think in your 10-K, you signed another lease for a pretty significant distribution center. That should be up and running over the next year or two followed by the Indiana Distribution Center last year. Can you just maybe kind of frame up the need for that? Is that is that to really focus on the multibillion dollar target for HOKA. Is there a channel effort there? It’s in wholesale DTC any color on that would be very helpful. Thank you

[Dave Powers, President and Chief Executive Officer]

Sure. I’ll tackle Foot Locker first. So it’s early days, we just put the product in Foot Locker. It’s in a handful of position stores that we feel are right for the consumer going after, which is younger, more athletic minded, but still fashion minded consumer in stores that we think the Foot Locker group can represent the brand positively, and then we’re online with some styles as well. So too early to share any results, but I will say that, we’re pleased with how it’s the launch has gone, we’re pleased with the feedback we’re getting from footlocker. As I mentioned, we’re seeing younger consumers, more increasingly adopt the brand. So we feel good about it long-term. So far, so good at the launch, we’re going to take our time and maintain the discipline that we always have with expanding distribution, much like we’ve done with Dick’s.

But both of those are strategic and reaching consumers where they want to shop in environments that can showcase the brand in a positive way, they’re both doing that. And we’re going to continue to monitor and see how things go. But there’s no major plans to drastically increase door count. We’re still in less than 20% of Dick stores. And you can see the results we’re getting through our own DTC channels, so very healthy right now. And we’ll continue to monitor these and trickle out distribution.

[Steven Fasching, Chief Financial Officer]

Yeah. And just on the distribution centers, Laurent, we are, as you mentioned, expanding our presence and space available that is in part to handle the growth that we anticipate with the business and specifically kind of help handle the additional growth in the HOKA business. We do have levers as well. So there – we have other arrangements in 3PLs that we can change distribution patterns. But we have our main facility in Moreno Valley. We’re increasing space in the Midwest, as you mentioned, we also have some distribution through 3PLs on the East Coast that we can also look at. So it’s helping us plan for the future. We know these things take time. What I would also say is, we’re introducing more automation. And so a big part of what we’re developing in the Midwest is an increased automated fulfillment center, so being able to be efficient as we get those up and running efficiently. So more to come on that, but that’s how we’re looking at that.

[Laurent Vasilescu, Exane, Inc.]

That’s just great to hear. Thank you very much for taking my questions.

[Steven Fasching, Chief Financial Officer]

Right.

[Dave Powers, President and Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Jim Duffy with Stifel. Please go ahead.

[Jim Duffy, Stifel Financial Corp.]

Thank you. Good afternoon. Really nice, guys. I wanted to ask about the state of wholesale channel inventories in this specialty running channel, HOKA has clearly been a share gainer. But the category has been very strong. Do you feel HOKA has caught up on having inventory in equilibrium in that channel now? And then, I’m curious if you’re seeing any indications of moderating growth in the category that that’s catching some of the other brands wrong footed on inventory?

[Steven Fasching, Chief Financial Officer]

Yeah, Jim, this is Steve. Good question. We’re watching that carefully. And as you mentioned, we are growing our presence and inventory has increased, we are not at some inventory levels, of some of the others, but our productivity is much higher than other brands. So run specialty is highly productive, I think, we’re probably the most productive brand in many of those outlets, that’s leading to significant turnover of that inventory, so our ability to fulfill it. So, I think, again, as inventory increases, as we have more inventory available, we’re going to continue to feed that channel, there’s more opportunity, I think, and our teams believe that as well. So we’re going to continue to take advantage of that. And now especially with a better inventory position, we’re better positioned to continue to go after that business.

[Dave Powers, President and Chief Executive Officer]

And I think also, we’re hearing a little bit that some of the run specialty accounts are full, in general with not just HOKA inventory, but all their inventory. So there’s a limited capacity to be able to bring in additional inventory. But as Steve said, the productivity of HOKA versus others is exceptional, high retail, high margin full price sales. So but we have the inventory now and on the way to be able to manage that channel much better than we have in the last two years. We were really in chase mode.

[Jim Duffy, Stifel Financial Corp.]

The brand indicators super encouraging five of the top 10 styles that’s really impressive.

[Dave Powers, President and Chief Executive Officer]

Yeah. Yeah. And the other thing on that is we are working on in a more innovative launches. So we’re going to bring innovation and new ideas to market faster, and we’re going to use a lot utilize that channel to do some tests and learn along the way as well and get some new innovative products out faster, utilizing DTC and the run specialty channel at the beginning of calendar year 2023.

[Jim Duffy, Stifel Financial Corp.]

Great. And Dave, I also want to ask about the addition of Anne Spangenberg, what’s the particular skill set that Anne brings to you that makes her well suited to lead the fashion lifestyle division. And what are the areas you’re most excited about her opportunities to have an impact?

[Dave Powers, President and Chief Executive Officer]

Yeah, we are collectively, as ELT as a board and as an organization very excited to have and join the company. She has been here now almost three weeks, she’s hit the ground running. She has been a fantastic addition to the ELT. I would say first and foremost, she is the right kind of leader for Deckers. She’s an inspirational leader. She’s an empathetic leader. She’s got incredible experience over her years in Nike, all within merchandising, and storytelling, and brand building. She spent 3 years on the ground in China, redeveloping repositioning that market, and oversaw just a massive business for Nike.

And so, the core talent that we love about Anne, she is an exceptional merchant, first and foremost, she understands and appreciates products, she understands how to bring product to market in a compelling way with head to toe storytelling. She knows footwear and apparel. And she’s not from the fashion space. But you know, we have a full team of people who are experts in that space. And what we’re really looking for here is an inspirational leader who can get the best out of that team.

And at the same time, really editing and amplifying our storytelling, which is something a lot of people learned from Nike over the years. So we think just the combination of her leadership and merchandising experience, the global execution that she was overseeing at Nike gives us great leadership for this brand and can unlock the true potential of this brand going beyond the $2 billion that it’s at now.

[Jim Duffy, Stifel Financial Corp.]

Very good. Thank you, guys.

[Dave Powers, President and Chief Executive Officer]

Thank you.

[Operator]

The next question comes from John Kernan with Cowen. Please go ahead.

[John Kernan, Cowen Inc.]

Excellent. Thanks for taking my question. Congrats on another great quarter.

[Dave Powers, President and Chief Executive Officer]

Thank you.

[John Kernan, Cowen Inc.]

Could you talk to price increases you realized in Q1 and what you’re planning for the back half of the year and the impact to gross margin as you’re planning? Thank you.

[Steven Fasching, Chief Financial Officer]

Yeah, John, this is Steve. We haven’t changed anything from what we’ve said previously. So, we have introduced at the beginning of this calendar year price increases related to HOKA, we’re seeing that drive some of the gross margin improvement. Clearly, that’s being and has been offset with the higher freight. It’s helping mitigate some of the pressures. And we’ll continue to face that relate into the next quarter. What we’ve also said and haven’t changed our stance on is price increases on related select product for UGG, that’ll really kick in our Q3. Again, that was part of what we indicated on our initial guidance. So we haven’t changed anything there. So no change in terms of how we’re thinking about price increases, we’re going to continue to monitor that. But our prices are pretty well set for the seasons, and would be more a future opportunity, not anything we would expect in this year.

[Dave Powers, President and Chief Executive Officer]

Yeah, I think for UGG, specifically, we raised prices and about 30% on the line for Q3. So, but in places where we think we can get it, and we’ve heard that from our wholesale partners that we can get that as well. Yeah.

[John Kernan, Cowen Inc.]

Got it. Maybe just one quick follow-up. You mentioned specialty running being a little bit full on the wholesale side of things for HOKA. Anything else any other detail you can give as it relates to the wholesale channel for both UGG and HOKA. We have heard some updates from some of your peers in the sector. And it does sound like there’s some caution building in that wholesale channel.

[Dave Powers, President and Chief Executive Officer]

Yeah, I mean, from what I’m hearing,, I wouldn’t necessarily say it’s caution. But I think wholesalers are filling up on inventory. They’ve been light, for many of their key brands over the last couple of years. And they’re filling up. And logistics is still a challenge for brands and wholesalers. Space is becoming a challenge. And so we’re hearing a little bit about that out there in the marketplace, which is why we think it’s good that we got inventory in early and we were able to get inventory into the channel to capture that space. So I think it’s going to be a dynamic this year that wholesale is going to have to work through as they tried to fill up their inventories and get back in the right position heading into the rest of the year. So we don’t see it really affecting our business yet. Demand is still strong, brand health is so strong. We’re not hearing you know, about crazy cancellations or anything. It’s pretty normalized. So we still feel good about our chances. But that is a dynamic that we’re hearing about.

[John Kernan, Cowen Inc.]

Understood. Thank you.

[Dave Powers, President and Chief Executive Officer]

All right. Thanks, John.

[Steven Fasching, Chief Financial Officer]

Thanks, John.

[Operator]

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

[Paul Lejuez, Citigroup Inc.]

Hey, thanks, guys. I’m curious if maybe you could talk a little bit more about the trends that you saw on the DTC side of the business for each of the brands as you kind of progressed throughout the quarter have things kind of held steady throughout, if you saw sort of ups and downs in the business on the DTC side, or maybe a deterioration issue is moved along again, both for UGG and HOKA. And curious if you could just talk about the inventory a little bit more, I think you mentioned your – you had a high percentage of goods in transit, just curious what the comparison was, versus a year ago and what inventory looks like in terms of units on hand versus last year? Thanks.

[Dave Powers, President and Chief Executive Officer]

Yeah, so I’ll talk about e-commerce a little bit. As you saw from the HOKA results, very healthy quarter for UGG, we did see a lift with the new campaign and the launch, when that kicked in. And so that helped in the back half of the quarter, created a little more excitement, a little more awareness, the first time visitors was in the 70% range. And so, very healthy business has continues to be repeat purchasers, new consumers, younger consumers coming to the site, better KPIs, as I mentioned, on the landing pages and conversion on those pages. So that’s really good. And it’s broad base, it’s across all categories is not really a standout amongst the group. It’s just the whole brand is seeing that level of interest in adoption.

Within UGG, the real challenge for DTC, as I mentioned is within the slipper category. And, it’s a combination of the Fluff business slowing down dramatically from where it was a year ago, still aided by the pandemic. So that’s slowed down but we’ve made up some ground with the Sport Yeah. But it’s at a lower price point. So as I mentioned, revenue in DTC was down or e-commerce was down for UGG, but units were up. So I think, as I said, at the point in time dynamic has still think the core business, so I know this core businesses feel strong, heritage slippers still strong, and men still strong. A little softness in kids, but that was also politely related.

So aside from that, the brand is still performing on expectation in the categories that we needed to. And as I said, as we get into Q2 and Q3, the Fluff dynamics will be behind us, and it’ll be a more normalized business.

[Steven Fasching, Chief Financial Officer]

And then, Paul, just a little bit on the inventory, in terms of the in transit percentage wise were a little bit better, but on a higher dollar amounts, so we have higher dollar amounts still in transit. I think that’s important to note. And then embedded in that inventory this year versus last year is about $70 million more of additional freight, as rates increased throughout last year. So we’re dealing with a significant amount more of freight, embedded in those higher inventory values as well. And then the other with large percentage increase related to HOKA is we’re ramping the HOKA inventory to support the growth in that business that’s contributing to the higher inventory balance. And just to remind everyone, the average price on a HOKA is greater than the average. So that’s contributing to a lift as well.

[Paul Lejuez, Citigroup Inc.]

Did you say, did you give a breakdown of HOKA versus UGG inventory?

[Steven Fasching, Chief Financial Officer]

No. We don’t.

[Paul Lejuez, Citigroup Inc.]

Okay. Thanks, guys. Good luck.

[Steven Fasching, Chief Financial Officer]

All right.

[Dave Powers, President and Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Jay Sole, and this will be the last question. He’s with UBS. Please go ahead.

[Jay Sole, UBS Group AG]

Great. Thank you for taking my question. You gave a bunch of the key factors that impacted the gross margin in the quarter. Is it possible to give us a little bit more detail around say how much the supply chain cost effective, the gross margin and basis points and then on the supply chain, you mentioned, you’re starting to see some improvement. And you give us a sense of how much it’s improved and what kind of visibility you have into the trajectory of those challenges, maybe getting easier as we go through the fiscal year?

[Steven Fasching, Chief Financial Officer]

Yeah. Sure, Jay. So this is Steve. So of the 360 basis point decline versus last year in the quarter, roughly 260 of it is increased freight. So that’s related to both ocean and air, because we did use some air in Q1, which a year ago, we didn’t start using air freight last year until later in the year. So that’ll be where we’re going to have some headwinds in the first half of the year versus tailwinds when you get into the latter part of the year, so roughly 260 on freight, there’s about 50 basis points related to FX and then everything else were kind of all the other things that we stated. Yeah. And just to remind you, the freight again, as we talked about is inclusive of air and ocean. And then the second part of your question was?

[Jay Sole, UBS Group AG]

Just on the supply chain, you said, some improvements, like – yeah, how do you think it trends from here?

[Steven Fasching, Chief Financial Officer]

Yeah, so what we’re seeing and this is what’s contributed to the strong first quarter. We have seen an improvement, as we mentioned, in the prepared remarks. So product is flowing in a little bit sooner than what we anticipated. So we’re seeing things flow. The visibility is still limited, as I mentioned in the prepared remarks, too. So we’re still trying to get better gauges on arrival of inventory. Good news is, on the West Coast port, labor negotiations, that’s still ongoing, so we haven’t seen disruption related to that. But again still ongoing, so we’ll keep a close eye on that.

So again, seen inventory come in better, which is good, gives us an ability like we demonstrated in the quarter with June and with HOKA and ability to move it out and be in a better position than we were a year ago in order to kind of meet some of the demand. So we’ll see how things go. We’re continuing to work on that continuing to look at ways to improve, but encouraged by some of the improvements that we have seen, but continuing to look for further improvement.

[Jay Sole, UBS Group AG]

Got it. Okay. Thank you so much.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.