Q2 2020 Earnings Call
Good afternoon, and thank you for standing by welcome to the Deckers brands second quarter fiscal 2020, <unk> earnings Conference call.
At this time all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.
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I'll now turn the call over to Aaron core Senior director Investor Relations in corporate planning.
Go ahead.
Hello, and thank you everyone for joining us today on the call as Dave powers, President and Chief Executive Officer, and Steve Fossett, 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 Oh.
All statements made on this call today other than statements of historical fact are forward looking statements and include statements regarding our anticipated financial performance, including but not limited to our projected revenue margins expenses and earnings per share as well as statements regarding our strategies for our products and brands.
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 it's as you see 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.
Please note that throughout this discussion there maybe references to certain non-GAAP financial measures for comparable prior year results. These non-GAAP financial measures refer to results before taking into account nonrecurring charges that are not believe to be core to our ongoing operating results. Our non-GAAP financial measures are not adjusted for.
Constant currency well, we did not have any non-GAAP financial adjustments for the second quarter fiscal 2020, a reconciliation between our reported GAAP and non-GAAP result for the prior year can be found in our earnings release that is posted on our website under the investors tab.
With that I'll now turn it over to Dave.
Thanks, Aaron Good afternoon, everyone and thank you for joining us today.
The Deckers team has delivered yet another strong quarter.
For the second quarter fiscal 2020 revenue increased by 8% versus last year to 542 million gross margins came in above 50% and we delivered earnings per share of $2.71.
These results are above the high end of our guidance range due to the outperformance in the HOKA only only brand as well as the strength seen through early shipments related to the of brands domestic business.
During the second quarter, we continue to drive momentum in our key initiatives as HOKA continued to experience explosive growth.
Men's boots increased by high teens percentages.
Women's noncore expanded through the flood franchise and our online performance was strong.
The Deckers team is focused on the execution of these key initiatives and I believe our commitment to investing in marketing and innovation have been central to the strength of our results.
Our results also highlight the organization's focus and discipline to drive healthy top line growth, while maintaining our top tier levels of profitability.
I'll now review the brand highlights from the quarter, starting with the fashion lifestyle group.
The fashion lifestyle group consists of the Oregon Koolaburra brand.
For Oleg Global sales and the second quarter were up 2% versus the prior year to 405 million driven by continued strength domestically with some offsets in our EMEA region.
The health of our domestic business has been driven by a clean marketplace. Thanks to our allocation and segmentation strategy as well as targeted investments in digital marketing NPR.
Oh brand interest in the U.S. was up 11% in the quarter versus last year, According to Google trends.
In particular, we have seen another 20 plus percent increase in customer acquisition within the key 18 to 34 year old demographic. This targeted demographic increase has been driven by the powerful organic P. R earned by the young brand, which includes several high profile celebrities photographed wearing our product.
From a product perspective, the fluff, yes slide shows no signs of slowing down the hybrid sandals slipper has been a steady acquisition vehicle for new consumers online. In addition to continued momentum in the wholesale channel.
The other team has built a thoughtful plan for lifecycle management aimed at optimizing the fluff franchises differentiated points of distribution.
The women's non core business is also experiencing early success with the newly launched classic family, which is a fashion forward take on our iconic classic boot.
The design team has done a fantastic job of delivering compelling new product with strong ties to our heritage styling.
I believe the classic Sam combined with new products featured in the recent launch for Women's Classics Revolution campaign go a long way in highlighting the depth of the I'd brands differentiated product offering.
Due to these new product introductions and segmented distribution strategy, our women's business has experienced an increase in adoption from younger consumers.
On the men side I'm pleased with the early response to the New Mail nation marketing campaign, our largest ever men specific campaign, which drove a double digit increase in the number of male consumers to have dotcom with over half of them being new to the brand.
For the campaign, we partnered with the actor in fashion influence or Lucas about whoever represents the UGG brand Ito subdividing convention and changing culture.
On the heels of New Mail Nation Hug released its second limited edition collaboration with fashion designer Heron Preston.
The collection features to heritage styles, the Tasman slipper and the classic many with updated features and benefits.
Both the Newmont nation marketing campaign and collaboration efforts are aimed at driving increased awareness and consideration from young male consumers and I look forward to the results they will drive in our third quarter.
On the international front, we're in the early stages of a multiyear plan to reset the marketplace in our mayor region.
As a reminder of the marketplace reset in Europe is similar to the strategy that we successfully implemented in the domestic wholesale marketplace over the past few years.
This strategy is intended to clean up inventory in the marketplace consolidate the account base to focus on partners, who best represent the brand and provide a more differentiated consumer experience.
The angle of this strategy aims to enhance the consumer experience with the brand.
We believe this strategy has been key to our domestic success and as a result, we're working to drive successful implementation in the EMEA region.
The revenue headwind of these actions in addition to the impact of currency is in total estimated to be approximately $25 million to $30 million for the remainder of the fiscal year.
Overall, I'm encouraged by the progress against making with a variety of consumer segments and look forward to continued strides in our holiday quarter as we launch our largest ever holiday campaign.
The holiday campaign will celebrate the gift of ACOG with a Los Angeles based alias music family look out for that launch over the coming weeks.
Turning to Koolaburra global sales in the second quarter increased 41% versus the prior year to $26 million.
Koolaburra growth was aligned with the brand strategy of gaining market share and the domestic wholesale family value channel.
We're excited to be launching koolaburra with a few new partners. This season in conjunction with the increased demand experienced with our existing partners.
The brand is also testing some category extensions. This fall, which includes a launch of license home product with Kohl's.
Having said that our near term focus for the brand remains on building compelling footwear targeted for the family by your channel.
At the close of the second quarter I feel both us and Koolaburra are well positioned to capture holiday demand through segmented and differentiated product in their respective channels of distribution.
Shifting to the performance lifestyle group, which is comprised of HOKA ONEOK any teva and Sonac.
HOKA continues to exceed expectations for the second quarter HOKA global sales increased by 50% to 78 million.
Similar to the first quarter, the HOKA brands growth is well balanced with strike domestically internationally and across both wholesale and direct to consumer channels.
From a product perspective, the HOKA brand experience success in both its core franchises as well as with new product introductions.
The franchise front Clifton in bond I continue to experience significant growth year over year.
In the meantime, HOKA is also finding success with new styles, such as the Carbonex and Rincon, which are bringing new consumers to the brand.
The hook evolution is best evidenced by recently, becoming the number two brand in terms of run specialty market share for the month of August According to NPD.
The RIN Con was released in July with a target to acquire high school in college days athletes. This innovative new silhouette was designed with the lightweight cushion expected in a typical HOKA shoe, but a more accessible price point.
The coordinated were income marketing campaign was highly successful in the quarter with 50% of online consumers, new being new to the brand and nearly 40% of those consumers represented in the 18 to 34 year old demographic.
In terms of new product launches for the spring 2019 season, I'm happy to announce that every single new product HOKA launched won an award.
These accolades ranged from the rain con winning editors choice by Runner's World to the Carbonex, winning gear of the year from outside magazine.
This recognition is a direct result of developing innovative high performance product and combining it with the right marketing and distribution.
Perhaps to everyone involved in these impressive achievement. This is yet another indication of the strength of our product and innovation engine at Deckers.
Shifting to Teva global sales in the second quarter increased by 7% to 23 million.
The Universal and Hurricane franchises continue to drive brand momentum. So much so that Teva was able to regained the title of number one in market share within the sport sandal category for the spring 2019 season According to NPD.
The brand had an impressive spring season, both in terms of revenue performance and brand heat.
Whatever was featured in the New York Times as well as an article invoke that gave 10 of the honor of being called quote shoe of summer.
Congrats to the Teva team and a great spring season.
Looking to fall, we are encouraged to see the MBR franchise and corresponding marketing campaign has continued to be an acquisition vehicle for the brand driving a nearly 50% increase in search interest according to Google trends.
For Sunoco global sales in the second quarter were 11 million most of the decline versus last year is attributable to the weakness in the yoga sling franchise.
As noted during our Q1 earnings call. We've made the strategic decision to exit the warehouse channel to focus on healthier full price channels.
We expect sales volumes will continue to decline for the balance of F. why 20.
We remain focused on exploring healthier avenues for brand distribution as we work to reposition it in the marketplace.
All of Deckers brands and marketing teams are making great strides on building compelling product with targeted and diverse consumers in mind in conjunction with a strategic global marketing plan that enables increased investments.
Brands strong PR. In addition to focus digital marketing efforts or what drove first half performance and I look forward to additional progress on that front.
Moving to channel performance in the second quarter global wholesale increased by 9% versus the prior year, driven primarily by domestic expansion and.
Okay, and Koolaburra as well as international expansion of HOKA and Teva.
Gains in HOKA and Teva internationally have mostly been driven by the strength of our Asia Pacific region.
In aggregate international wholesale was slightly down versus the prior year to due to the agrees that in EMEA as well as negative pressure from foreign currency exchange rates.
From a direct consumer perspective comparable sales increased 7% versus the prior year with total DTC sales up 5% versus the second quarter last year.
E Commerce continues to drive gains in the DTC channel.
Which has been led by the strength of again HOKA.
The HOKA brands gains in DTC are shifting the channel mix dynamics for the brand, which is leading to an improved gross margin profile.
Well, largely a selling quarter, our second quarter performance was solid but the deckers team remains focused on delivering our largest third quarter ever I'm confident that with the recent momentum of the business, we are well positioned for the back half of the year.
I'll now hand, the call over to Steve to provide more details in our second quarter financial performance as well as outlook for the third quarter and our full fiscal year Steve.
Thanks, Dave and good afternoon, everyone.
As Dave just mentioned, we have tremendous momentum in the business and have delivered a record second quarter.
This quarter is yet. Another example of the progress we have made in growing our brands well at the same time delivering improved levels of profitability.
And now I'll walk you through some of the elements of the quarter.
Revenue was 542 million up 8% versus last year and above the high end of our guidance range of 515 million to 525 million.
Of the better than expected performance approximately 10 million was driven by the HOKA brand was exceptional results both in wholesale and direct to consumer channels.
With the balance of the be driven by earlier domestic wholesale shipments for the UGG brand.
Overall gross margins were up 20 basis points over last year to 50.4%.
This result was an improvement over our implied guidance with the main drivers of the variance to expectation coming from savings from the utilization of less expensive freight options and improvement from higher gross margin rates on closeout sales.
And the favorable mix with the HOKA brand, increasing its penetration to the total company beyond what we had anticipated including incremental growth in E Commerce.
These partially offset by channel mix as wholesale grew faster than DTC.
In terms of SGN a expense our dollar spend was up 8.9% to 175.9 million compared to last year's gap spend of 161.5 million, an up 9.1% compared to last year's non GAPP spend of 161.2 million.
Spend was aligned with how we guided the quarter. This increase versus last year was driven primarily by incremental marketing investments that had been put in place to drive awareness around the HOKA brand of men's product as well as the extended of women's offerings.
This all resulted in earnings per share of $2.71 compared to last year's GAAP earnings per share of $2.48 last year's non-GAAP earnings per share of $2.38 and the high end of our guidance range of $2.15 to $2 in 25 cents.
The 46 cents beat to the high end of our guidance came from 15 cents of increased HOKA performance 15 cents, a favorable gross margins, including savings in freight and a higher margin rate achieved on closeouts sales.
10 cents from earlier domestic wholesale shipments from the UGG brand.
Three cents from reduced share count related to the repurchase of shares in the second quarter and three cents from a lower tax rate for the second quarter due to timing of discrete tax entries, partially offset by the reduced interest income.
During the quarter, we repurchased approximately 1.1 million shares of the company's common stock at an average price of $145. Some 31 cents for a total of $155 million.
As of September Thirtyth, 2019, $160 million remains available under our share repurchase authorization.
Our balance sheet at September Thirtyth remains strong as cash and equivalents were $178 million down 2% from $182 million at September Thirtyth of last year, which includes repurchasing $155 million worth of shares during the second quarter.
Inventory was up 8.5% to 559 million from 515 million at the same time last year.
And we had 14 million in short term borrowings under our credit line as compared to $71 million last year.
Before moving onto our updated guidance I'd like to reiterate the performance achieved in the first half of fiscal 2020 as compared to the first half of last year.
Our portfolio of brands delivered $819 million in revenue, representing a 9% increase versus prior year driven by a disciplined approach to driving our key initiatives.
Strong gross margins of 49.2% were achieved an increase of 46 basis points.
And even with the strategic reinvestment, we experienced SG need leverage with operating expense decreasing as a percentage of revenue.
All this leading to a 27% increase in operating income for the first half of the year and the nearly 50% increase in earnings per share versus the first half of last year.
Now moving onto our outlook for the third quarter of fiscal 2020, we expect.
Revenue to be in the range of $885 million to $900 million, which anticipates growth in the range of 1% to 3%. This is on top of the strong increase that we experienced in the third quarter of last year.
To provide some additional color on the brand elements, we expect to be roughly flat as the domestic strength will be largely offset by international pressures.
Strong growth with both the HOKA and Koolaburra brands.
A year over year decline in that Teva, EMEA business, which will be offset with growth in Q4 due to the timing of the distributor orders.
And lower sales incentives.
With this resulting in earnings per share to be in the range of $6.30 to $6 in 40 cents.
Within our third quarter guidance, we expect global wholesale reorders for the UGG brand to equal cancellations and we are expecting an increase of promotional activity as compared to the prior two years.
Next for fiscal year 2020, we are updating our financial guidance, we are increasing sales from our prior range of 2.1 to 2.1 to 5 billion to now be in the range of 2.115 billion to 2.14 billion.
An increase of $15 million.
This increase in guidance reflects the strength and the momentum that we continued to see in the HOKA brand with a raise related to the second quarter performance as well as the lift on the balance of the year for the brand.
Our expectations for the HOKA have continued to climb well beyond our original outlook for the year.
But it is important to keep in mind that with this increase our near term ability to chase further incremental revenue for HOKA is limited due to timing of inbound inventory.
As we pivoted into the peak selling season for the UGG brand, our full year outlook for our remains consistent with our original guidance for fiscal 2020.
At flat to low single digit revenue growth.
As previously mentioned our outlook assumes a higher level of promotional activity as compared to last year and remains unchanged for the back half of the year.
To summarize our updated outlook for the full year at a brand level is as follows.
Revenue expectations remain flat to up low single digits HOKA is now expected to be up in the mid to high 40% range. Teva is still expected to be approximately flat inclusive of the EMEA distributor channel shift. So nook is expected to be down in the 30% range and Koolaburra is still expected to grow in the.
Mid 50% range.
Turning to the remainder of the piano gross margins are expected to be approximately 50.8%.
[noise] gionee as a percent of sales are anticipated to be slightly lower than 36%.
Operating margins are now expected to be approximately 15%.
And we are raising our expected earnings per share to be in the range of $8 in 90 cents to $9.05 on a newly updated share count of approximately 28.7 million shares with a full year tax rate of 20.5%.
The roughly 45 cent raising earnings per share is being driven by increases of 20 cents from higher HOKA brand sales, including the second quarter B and raised expectations for the back half of the year.
20 cents related to the second quarter share repurchase and 15 cents from favorable second quarter gross margins.
These partially offset by 10 cents of additional expense added in the second half as we continue to shift our expense profile from fixed to variable spend allowing us to reinvest in our key initiatives and support our increased full year revenue outlook.
Our guidance for the third quarter in fiscal year, 2020 excludes any potential non-GAAP charges as well as the effect of any future share repurchase. Additionally, we believe that we've been able to mitigate any material impact from tariffs in the current fiscal year 2020.
On that topic, we're continuing to assess the impact of tariff policy decisions going forward.
Is there still are a lot of factors to work through we're not yet providing an estimate on the impact beyond fiscal year 2020.
We are evaluating options that can potentially offset these increased costs, including considerations of pricing power within our brands as well as continuing conversations with our suppliers who are willing to work with us.
As a reminder, we have stated that less than 20% of our current global production is created in China and shipped to the United States.
During this period, we also provide an update on our sheepskin pricing, we continue to see stable prices in the sheepskin market and we expect no change in the sheepskin cost for fiscal 2021.
This does not constitute our gross margin guidance for next year as our sheepskin costs are only one component of our gross margins.
With our strong first half results behind us we remain confident in delivering the expectations outlined for the balance of the fiscal year, our full year guidance imply second half revenue growth of 2% to 4% versus last year. This is on top of the 5% growth achieved in the second half of fiscal 2019.
To summarize our full year guidance, we're now projecting topline growth in the range of 5% to 6% with the intention of delivering a 15% operating margin.
To achieve this the Deckers organization is focused on executing our strategies in the upcoming peak holiday season.
And while there is work ahead of us I would like to thank the team for their continued dedication and energy put into our brands everyday with that I'll now turn it back to Dave for his closing remarks.
Thank you Steve.
As I look back on the first half of this year I'm encouraged by the progress we've made on our key initiatives. This includes investing in marketing to drive brand, he and awareness and HOKA of men's and women's noncore.
Building, our technology tools and talent base to advance analytical capabilities and drive efficiencies and how we connect with consumers both existing and acquired and using innovation to develop incremental opportunities that can add value to our brand portfolio.
I would like to thank all of the Deckers employees across the globe for their continued devotion to delivering strong results through the execution of our strategies.
Before I turn the call over to Kuna away as you may have seen in our earnings press release earlier. This afternoon, Mike Divine has been appointed to the role of Chairman of the Board Mike has been on the board for the past eight years and assumes the role from John given.
I look forward to working with Mike and this capacity.
John will remain on the board and I would like to thank him for his leadership as chairman of the past few years had been transformational for Deckers and John has been a great partner in this journey John's insight and expertise has been instrumental in our progress and I am extremely grateful for his contributions to the Deckers organization.
And as always I would like to thank all of our stakeholders for their continued support I'm excited about the opportunities in front of us and the direction. Our organization has had with that we'll now open the call to Kuni operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one and you touched on phone if you're using most speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
As a reminder, please limit yourself to one question and one follow up to allow equal access to all participants at this time, we will pause momentarily to assemble a roster.
So first question today comes from Jonathan Komp.
Please go ahead.
Yes, hi, thank you.
Maybe start with the brand and curious to hear a little more color.
Yeah, what you're seeing in the marketplace I know you called out some earlier deliveries I'm curious maybe what drove that done then.
If you look to the third quarter, just given how favorable conditions, where last year any any updated thoughts on what you expect over the next few months as the cycle some of that favorability.
Yeah. John This is Dave you know the early deliveries were just opportunistic one of our accounts or couple of our accounts were open to receiving some inventory a little bit earlier three took advantage of that.
The setup for the quarter looks good as you know we've been working particularly in North America to really clean up the channel.
Going into this season coming out of a strong last year. The inventory is very clean. The accounts are set up we've had a little bit of a warm start in the season, but the sell through the still get a wholesale.
And I think we're poised with the diversification efforts in the segmentation and allocation plans.
For a good quarter, obviously as you heard there's some softness still in the European market.
A lot of that is by design with the segmentation and allocation strategy in the market reset.
Coming out of the UK, there, but still some macro headwinds with Brexit going on and the Malays of the UK consumer.
But all in all I think the way that we have been focusing on a younger consumer diversifying the product offering managing the marketplace very tightly working with our key wholesale partners.
And going into the back half half of the year with increased marketing investment.
We feel we're in a solid position.
Just the John you know just to add on that right.
And as we look at the domestic wholesale business. It's good channel for US is relatively clean which is why our customers want product and we have an ability to ship on products. So we'll take advantage of that.
As Dave said, you know international will be down as we reset Europe , but other than that.
The signs are good at this point.
And the product is resonating yeah.
We are hearing you know we are hearing of some softness in the channel at a macro level.
Obviously, there's some news out there about southline softness than some of the wholesale partners managing tightly with their inventory.
But as far as our brands that up, particularly with a clear bar and HOKA, we're still seeing healthy demand and good positioning.
Yeah, that's that's encouraging to hear.
Maybe maybe one on HOKA, then just given that when I look over even our trailing 12 month basis I think you've added about 100 million revenue to the to the brand which is quite impressive.
Just wondering as you look kind of break in theater. The next phase of growth any updated thoughts on.
You know the that team and the infrastructure and kind of the level investment and place to support the growth maybe longer term as some of the inventory constraints become less so.
Yes, I think one of the beauty of Decker is an argument our platform that we've been working on over the last few years really.
Prove our capabilities across the board is to be able to support the growth and the hyper growth of the the HOKA brand and obviously with the margin profile that brand the efficiencies we've created across the organization, we're well positioned to continuing to invest not only just in marketing dollars, but innovation design for thing of that brand and for that.
Distribution globally so.
No, it's it's exceeding our expectations.
We're in a little bit of chase mode on inventory, but we're in good shape to be able to capture the demand at this point.
We're planning for continued strong growth in that brand and so we are you will see as we guide the beginning going into up by 21 continued investment to be able to continue the growth of that brand and its really a global opportunity.
As you know North America wholesale.
DTC is very strong for that brand, but we're seeing tremendous growth still in Europe , Japan, and we haven't really started going after Chinese so.
I'm very pleased very excited with the the acceptance and the demand coming from the consumer innovation pipeline is still strong and design that are signs that will be coming out of the next six to 12 month.
We feel we'll continue that momentum and we're going to continuing to invest that it yeah.
Great International opportunity Yeah.
Continuing to see kind of that brand resonate on an international front in a lot more out on that international front.
Great and maybe just last one if I could maybe bigger picture for the organization.
Steve or Dave.
Your planning this to be the third year of mid single digit topline growth and.
To reset the operating margin back to 15% here or just any broader thoughts on.
How you view kind of the growth trajectory going forward for the company and any sort of kind of algorithm even at a high level to think about it has a sustainable level.
Yeah, you know we've worked hard to get to this point and I get the teams a lot of credit for their discipline, while at the same time for really building strong healthy brand across our global marketplace and.
For US there is no looking back we are continuing down the path. We think that we have some very meaningful and important brands of the consumer and our wholesale partners.
And we believe that we can still continue this level of growth in mid single digits and then you know 15.
That operating margin for the foreseeable future for sure.
Okay. Appreciate all the color. Thank you.
Thanks.
The next question today comes from Jim Duffy with Stifel. Please go ahead.
Thanks, Good afternoon.
First I wanted to ask about the purpose whole turn in the European business, Dave can you give us some milepost to look for.
For your progress with that.
I know you've been through this forward in the U.S. market, what do you expect to come out the other side with the European business.
Yeah, as we said before that the multiyear strategy and we we do have proof of concept with the strategy in North America, which took US you know two to three years to really get to the real strength of where we are now so I would expect the same in Europe . This is the really the first time that we have been pulling back on inventory with the allocation strategy.
And reducing the amount of off price sales part of what you're seeing in the take down of the projection. This year the decision to not chase.
Sales.
We're more focused on creating a healthy long term position for the UGG brand versus chasing a revenue number and I think thats. The right thing to do the teams have been working very hard on on the allocation strategy, there and making sure that each account is differentiated point of view and going after the right consumer with the appropriate product.
My sense is we'll come out the ended this year in a much better inventory position and cleaner marketplace and then we can really start the reset going into F. why 21 for fall 2000.
Great then Dave I wanted to ask about local brands at some good success.
Non performance running styles.
The upon issues can you talk a little bit about.
Opportunities you see beyond just the performance running category for the bulk of brand.
Yes. The first thing I would say is all the product as performance base and they're all built for running as our core and running and hiking obviously is our.
Core target.
That being said a lot of our styles are being debated by a non runner consumer both on the fashion side as you see some of the HOKA brand and kind of the top fashion boutiques across the globe, which is very exciting.
But I think more importantly, the you know the.
The average consumer from an athletic standpoint people are wearing HOKA.
Starting to run again or from our casual lifestyle perspective, but the performance attributes of that ultra lightweight cushion to performance and that ride resonates with the casual consumer as well and so I think you're seeing starting to see a lot more consumers adopt it because they just love how it feels.
And hopefully some of those consumers are also getting back into running again same time.
Great. Thank you.
Yep.
Our next question today comes from Sam Poser with Susquehanna. Please go ahead.
Good afternoon, and thanks for taking my question.
Could you give us.
The breakdown of where the where this expected promotional incremental promotional activity is supposed to come from because I believe in Europe . Your promotional last year. So can you just walk through that expectation, especially I guess, both in Q3 in Q4.
Yes, absolutely.
You know, we're expecting in our guidance right increased level of promotion over last year, we think that will be wholesale with some of the retailers that we're working with so thats what we've embedded.
We'll see how it plays out right.
The biggest part of our season is still ahead of US we'll see how the consumer shows up you know early signs are good sell through clear inventory. So.
It's a kind of a wait and see.
And we'll see kind of what happens, but but where it's mostly factored is is kind of in wholesale with a little bit that you'll see in our DTC business.
And as you said salmon, we're not expecting to play into that.
The need to be able to to need to do that in the European business.
But we do have the ability to do that if necessary in North America home Bill and I think as we discussed on last call. If there is upside to the seasons is probably more in the margin side than the sales.
And could you give us some idea except the gross margin to be in the third quarter.
Yep.
Yes, so we're kind of implied in our guidance it.
Roughly down about 90 basis points from last year.
Gotcha and then.
And then also.
Their expenses I know you're switching is variable model, but are there expenses looking ahead, the sort of expect to fall away next year.
Given some of the work you're doing in international markets that should.
Some of that probably caused.
Maybe.
So and so forth can you give us some idea there just looking ahead.
Yes, we havent.
Given anything out on 21, and something clearly that we'll look at I wouldn't right now factor in kind of anything from a significant expense reduction a lot of the work that we're doing is kind of with the infrastructure that we have so.
Once we get back to growth will need infrastructure to support that growth. So there will be able to kind of use our existing infrastructure to lever growth as we returned to growth on the.
National So.
From that standpoint, again, we haven't given guidance on next year, but I wouldn't expect a significant fall off I think into the earlier question about how we look at our profile you know looking at a 15% operating margin.
You know, we're going to spend appropriately as we have now seen a lot of our gross margin efforts come through.
And then.
The shift to variable that we're talking about is really about how we invest more in marketing to drive the initiatives to build brand awareness around the things that we're doing so building awareness with HOKA building awareness with men with.
Building awareness with spring summer.
Women's and as well so.
And when we look at that still a lot opportunity.
Thank you I've two questions one what tax rate do you expect for the fourth third quarter and lastly.
Can you give us the direct or the wholesale sales by brand. So we don't have to wait for the Q. So.
These are the model everything going forward. Please thank you.
Yes, sorry, so the tax rate.
For Q3, we haven't given that but there is going to be some fluctuations between Q3, and four but roughly where we're kind of modeling that like 21 percentage rate for Q3.
And then I think your second question was just the.
Sorry, it was the wholesale breakout for again Q2, no for the wholesale or the DTC breakout by brand for the second quarter that comes out in the queue, but it really would help us model everything.
One or the other than we come back into the other one.
Yes.
I can dig that out so the.
You want it in total wholesale.
No like for like like coal sale was the.
Have a wholesale was the.
Okay, Okay Yep.
Sure Gotcha. So of the 542 332 was brand wholesale.
Roughly 61 million was HOKA brand wholesale.
Teva with 17.
So with eight.
And Koolaburra was around 25.
Thank you very much continued success.
Alright.
The next question today comes from Rosslyn Sarah.
We'll see advisory group. Please go ahead.
Yes, thanks for taking my questions and congratulations on the corridor.
Just had a question we've been hearing a lot about sustainability.
In the market right now can you talk about what you're doing for that and how your messaging it to the customer.
Yes, the great question and.
I think if you've seen some of the the people into our website. Our deckers website I'll start there weve couple of years ago, we put out some sustainability goals, we commerce seven bites 27.
They have guided you know a lot of the activities around sustainability for Deckers, but also of each our brands and over the last three to six months each of the brands is doing a individual work too.
Improve the way they operate across the planet.
Both in product and then and just kind of operational.
Areas as well.
I can't get into all the specifics that are happening right now, but there is work being done and you're going to seize them more conversations happening in the marketplace with each of our brands around efforts, there, making but it's probably best that a brand level versus the deckers level.
To focus into that because there is.
Unique approaches.
To this space.
Based on the brand positioning and the relevancy in that marketplace and for the consumer.
But I am excited to say that is something that deckers as an organization has taken seriously.
We are standing behind it with our global.
Seven by 77 by 27 goals and within each of the brands and the work that they're doing it I think you'll see some continued evolution in the product that we're bringing to market.
Short term.
Great. Thanks, and on the men side, you said the men's boots were up double digits, but did you can we get a little more color on men's overall.
Mens overall.
For Q2.
Yes.
Yeah. So other than just men's is growing at a faster than the average overall so men's is up more than the average.
Okay, great. Thanks, a lot yet really really focused on Q3, if you've seen our new Mel Conant, New mail nation marketing campaign their efforts in the script.
Very great very positive response to that campaign as we said that's driving interest at the brand and traffic.
But the product is really a Q3 products, we should see the bigger impact.
That business happening over the next couple of months focused on the new mill in winter boots.
Great. Thanks.
The next question today comes from partly Hughes of Citi Research. Please go ahead.
Hi, Thanks, guys can you give me talk about gross margin trend by channel what was the well shells, where the driver of the improvement this quarter. When you look at each channel relative to two itself.
So curious if you've seen a lot of fluctuations are and consistency.
We can't get just on weather out there and I guess I'm kind of curious how you would look at what percent of your assortment would you consider weather dependent this year versus what percentage of was last year. Thanks guys.
Yes.
Yes, a little bit maybe just through them the margin walk rather than kind of breaking it out. So you know a year ago were at 50.2.
This this year, we're at the 50.4, so 20 basis point improvement.
60 basis point of improvement through margin expansion, so thats, just achieving better margin on product.
Yeah, as we continue to work on those efforts.
We had as I mentioned part of a driver of the.
Increase in our margin was was really kind of better full price selling so less promotion a better margins on our close out that was about.
80 basis point, and then we had it take away.
Really from FX about 70 basis points.
The channel mix, because we had more wholesale growth.
That was about a 2020 basis take away and then kind of miscellaneous other stuff roughly 20 basis points. So.
That's kind of the walk.
On the year on year.
Yes.
Hi, selling benefit than both channels, where you're referring to both channels there.
A lot of it came yes, I mean, you could where we're doing close out so where we have reduced selling.
Online was better as well as some of our traditional close out through home.
Yeah, and with regard to the weather question for the UGG brand generally speaking the whole brand is somewhat a weather dependent without.
With the exception probably leopards.
But what we've been doing over the last few years is to reduce our dependency on cold weather.
Related products. So for example, we've reduced the reliance on core classic we brought a lot more fashion boots into the assortment across men's and women's I think some of the diversified product that you've seen toward the younger consumer.
As of less weather dependent diversifying into men's is less reliant on the core classic business. So we're used to be kind of a one trick pony, which is at the core classic across all the channels the diversification effort the fashion ability of the brand.
The diversification across new consumers has given us more fashion relevance and less weather dependency across the board and I think that served well last year and it's all the stronger this year and it gives us something that's kind of continuing to evolve. So it's less certainly we're still dependent on the weather just like everybody else is but I think were much.
More fashion relevant to the consumer now that is looking for product from us just beyond.
Kind of cold weather product.
And so you have you actually seen more consistency in the business, even though the weather's been inconsistent as a result of those strategies.
Okay.
I would say so I would say we've seen improvement in other other added less weather dependent categories, absolutely, yes for sure.
Okay. Thank you guys. Good luck.
Thanks.
The next question today comes from Tom Nicky with Wells Fargo. Please go ahead.
Hi, good afternoon, thanks for taking not taking my question.
Quick one on the gross margins I think you said Q3 should be down 90 ish basis points, which would mean that Q4 would be down.
Quite a bit.
Basically double that amount in basis points.
Just a function of meal harden multiyear compares as it gets terrorists.
Any sort of color around that would be would be helpful.
Sure So you're right Tom you've kind of got the numbers right that is how we're looking at the back half of the year.
It's a combination of the things that you mentioned.
The big price.
Big point will be the comparison that we have to last year right. So we are we are assuming a higher promotional back half than what we saw last year as you recall last year was.
Pretty exceptional year, especially Q, sorry exceptional back half of the year.
You know as.
We saw sell through at full price incredibly strong so not what we normally see which is kind of why we're taking a slightly more conservative approach as we look at the back half of this year, but.
That will be the biggest component of that take back we'll see how the season plays out.
But we do have.
Higher promotional environment.
Factored into the back half and then there is always a component of.
FX in there.
And then you'll have some impact potential with the.
Tariff.
Pete so.
That's kind of how we're looking at it we'll see we'll see how it plays out in terms of what the margin is but but you're right and the biggest component of that will be our assumption around.
A more promotional environment than what we saw last year and the backup.
That's helpful. Thanks, just hey.
Longer term picture about.
I think obviously.
It's one of the more.
Interesting long term growth stories and.
In the footwear space.
Based on your guidance this year, it's going to get to something in the $300 million to $350 million range.
Is there any sort of.
Multiyear target you could give some sort of.
Potential.
You know revenue base for the brand that you could see in the next couple of years.
Yeah. This is Dave I mean, where do you know, we're not ready to prepared to give that kind of guidance right. Now I will say that we do think this has a significant upside and the strength of the brand that you're seeing now we see that continuing going into next slide 21 and beyond.
Sites are set above over the next two or three years 500 million and beyond.
Got it just a quick.
Another one on okay.
Yeah, I know you're still early stages international there.
Could you give us some sort of sense as to what the domestic versus international split is for the Alcobra.
Yes, it still about two thirds domestic one third international.
Okay, all right thanks very much.
Okay. Thank you.
The next question comes from Janine Stichter of Jefferies. Please go ahead.
Hi, Good afternoon. Thanks for taking my question just one more on the gross margin. Thank you called out less expensive phrase the driver just trying to understand what's going on there I think last year. It was the driver of course, Virginia that Didnt expect it to continue and then I think you'd called out planning to use more expensive freight and the second quarter. This year. So is there anything structural going on there.
Hi are looking at freight and how should we think about that continuing.
Yeah, I think the way we're looking at freight.
You historically up to last year, we used more airfreight I think we've gotten better at bringing product in so thats helped alleviate some of that.
Need to bring in airfreight.
We have used a little bit more this year than we did last year as we're bringing.
Inventory in where we see spikes in demand largely like Coca.
So I think we are and demonstrated by our margin improvement we are better at how we're bringing product and we've been working with our factories doing better job level loading them.
That's helping us bring inventory in its also helping us schedule a little bit better. It is also.
I'm showing up as we bring inventory in a little bit earlier as well.
So I think through a lot of the efforts and the margin improvements that we're achieving we're kind of seeing that pay offs. So.
Well always use some air freight we didnt use quite as much as what we had anticipated in our guidance in Q2.
We did use some but not nearly the extent that we thought we'd but and it's something that we'll continue to look at.
So kind of to your question.
Things have changed and improved I think we're doing slightly better job, but there will always be cases, where you're going to have to use some of it, especially when you have kind of hot product and.
A brand that's in demand like Coca.
General cost and freight overall is not in the coming down yeah.
That's helpful. Thanks.
Then just one question on the franchise it sounds like that's still growing nicely into more than a year and now can you talk about where that growth is coming from is it new accounts is that deeper penetration. The accounts already and then how are you seeing the customer you acquire from that franchise. She find out there how are you seeing her migrate out.
Yes, it's a great question and it's something that we're really excited about on a number of fronts. First is we are attracting a younger consumer.
And a large portion of that arent consumer is first time purchases to our website. So it's serving as a vehicle for acquisition as well as driving the business for us and the short and long term. So we're going to continue the diversification first vacation efforts.
Still using key partners in those youth accounts to reach that consumer, but it really is across the board, where it's worth performing at least in North America.
Thats style isn't resonating as well and places like China and outside of the UK just yet.
But the demand for that product going into the back half of the air and into next year is very strong and we think this is a franchise that we can build on through continued diversification efforts and design a marketing.
Distribution efforts for quite some time.
Great. Thank you very much.
Thank you.
I asked the question today comes from Mitch Kummetz pivotal research. Please go ahead.
Yeah, Thanks for taking my questions.
Steve I was hoping you could reconcile a couple of pieces of the guidance for me I think you said for Q3.
It's flat, but I think you said that us would be up.
And then I know you also set a hug reorders equal cancellation. So I know last year that was not positive, including the U.S.. So I'm trying to understand how if you know.
If the if the reorder cancellation side of us worse, but.
Domestic log is still up is the difference that you expect due to see to grow a lot or that the order book going into.
Q3 is a lot stronger than a year ago I'm just trying to understand how you get there yeah. The piece I think you might be missing is the AWG international wholesale is down and that's driven by the reset that we're talking about in Europe as well as currency impact on our international business No I get the international that's specific to the U.S. because you expect us to.
<unk> up but I would think that into your Wes the reorder cancellation piece, you're expecting a work worst than a year ago. So it seems like a difference will then be DTC or the order book and I don't know if that's the case.
Yes. It yeah. It we are up it's a small number.
Okay.
Yeah Yeah.
Okay.
And then also for Q3, you are saying gross margin down down 90, Bips I know you're expecting more promotions. This year than last can you say how much of the down 90 specific to the promotions I mean is it like down 100 or down 200, or the promotions and yeah. There's puts and takes elsewhere that gets you.
At a 90 the.
How much are yes so.
Thank you you nailed it so it yet the promotion is down more than the total because we have some positive offsets.
Okay.
And then I guess, maybe just one last one since I'm glass in the queue when you're given the numbers to Sam I kind of why does it I'm I'm kind of my model and it looks like Oh, DTC was down roughly 5% in the quarter is that just all about the reduction in the store comp is there any way you can speak to a kind of the.
Comp performance of AWG due to see was that up in the quarter.
So DTC.
On the 542 was call it 99 million right a year ago, we did.
Just under 94 million. So the total DTC was up now that will be all brands and a lot of that was HOKA right. I mean, HOKA ecommerce was up huge roddick.
I think HOKA DTC it looks like just but by the numbers you gave was up like 100% I'm just trying to understand what the DTC did in the quarter. If you got that specific maybe not yeah, you'll see you'll see it on the Q when it comes out but the DTC was down and that's going to be the down will be some.
You are retails as well as our right.
More challenging retail.
Okay, Alright, alright, thanks for your helped good luck okay. Thanks.
This does conclude our question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect your lines.