Q3 2020 Earnings Call

Hello.

And thank you. Everyone for joining us today on the call is Dave Powers president and chief executive officer and 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 about 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 Thursday 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 expensive 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 both of these risks and uncertainties and it's SEC filings including in the risk factor section of its annual report on Form 10-K and quarterly reports on Form 10-Q , except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward-looking statements. Please note that throughout this discussion there maybe references to serve non-GAAP Financial measures for comparable prior-year results these non-GAAP Financial measures refer to results before taking into account non-recurring charges that are not believed to be core to our ongoing. Yep.

In results are non-GAAP Financial measures are not adjusted for constant currency while we did not have any non-GAAP .

Adjustments for the third quarter of fiscal 2020 a Reconciliation between our reported gaap and non-GAAP results for the prior-year can be found in our earnings release that is posted on our website under the investors happy with that. I'll now turn it over to Dave.

Thanks, Aaron. Good afternoon everyone and thank you for joining us today. I'm proud to announce that our third quarter results exceeded expectations with total company Revenue increasing 7% over last year two thousand nine hundred and thirty nine million and delivering earnings per share of $7.14. These results represent the largest revenue and earnings quarter in the history of Deckers Brands off. Our record performance was fueled by the strength of sales in our domestic of business partially aided by a forward shift in consumer demand as well as higher than anticipated sales in both our own. I own a walk-in cooler Brands. We have very pleased that our third quarter results continue to evidence success within the key initiatives that we are actively pursuing.

As a reminder these include feeling hookah growth which experienced a 64% increase versus last year reaching $93 million in a quarterly revenue for the first time building the Ugg men's business which increased by 10% over last year diversifying the brand product mix again reducing Reliance on core Classics and fostering emerging brands with grass growing 94% versus last year and capturing significant incremental market share.

with the

Location of the Ugg brand sales mix and explosive growth of both hoga and Culebra the performance demonstrated in our largest quarter underscores. The progress our organization is making on these folks Investments. I'm excited to share more detail on our Evolution. So let's get into the brand highlights starting with the fashion lifestyle group as a reminder the fashion lifestyle group consists of our and cooling off brands for Global sales in the quarter grew by 3% versus last year to $781 million representing the brands largest quarter in its history growth in the quarter for the office and was driven by its domestic business as Us sales increased 8% over the same period last year this domestic strength is highlighted by increased traction within the new Mal franchise including meaningful contributions to the men's business as well as extensions across women's and kids.

Continued strength in the fluff franchise and significant gains in the kids footwear business.

We can.

Continue to experience success within our wholesale Marketplace strategy in the US driven by segmentation that offers differentiated consumer experiences across the breadth of our accounts and show me inventory in the channel through manage our locations, which has enabled the brand to open select new points of distribution targeting younger and more fashion-forward consumers the strength in our domestic business wage partially offset by lower International sales, which experienced the 7% decline versus last year, which was in line with our expectation while some of the weakness in the European market is related to macro-economic events. We are in the process of addressing some brand specific challenges that currently exists as we have stated in our mayor region. We are in the midst of a multi-year Marketplace reset intended to re-examine rationalized Marketplace inventory consolidate the account base to feature Partners who enhance the brand and provide a more differentiated experience across consumer touch points.

in addition

The team has begun to shift towards more localized marketing PR and digital marketing tools.

We also recognize there are improvements to be made in our asia-pacific region and we will be taking a similar marketing approach as we work to build brand heat and our Apec region as well.

Taking a look at the Ugg brand product offering we continue to make strides in the diversification of our product line for Ugg men's in the quarter. This is the third consecutive year of double-digit growth off by Investments made to drive awareness and consideration men's was prominently featured in both the new mail marketing campaign and our holiday marketing campaign that featured the Marley family.

As a result of these marketing efforts bugmans experienced a mid-teens increase in brand consideration among all men and over a 50% increase with fashion Leading Men according to you guys.

The new mail franchise continues to be a big driver of our men success as both Heritage products and new derivatives Styles introduced during The Fall season help deliver strong results in particularly the new place up a new mail Flex sold through very well in their introductory season. We also executed to successful collaborations during the quarter with leading lifestyle Brands Heron Preston and bait them. Both collaborations rapidly sold out of their respective Pinnacle product offerings as a result of the brand increased focus on men's messaging products eating with global influencers and digital marketing efforts Dead Man's experience in your 30% increase in eighteen to thirty-four year old consumer purchasing on

Do you have a product team has?

Done a great job building a franchise around the new milk to complement the men's offer.

Turning to our women's business. We enter the holiday season with a strong set up in the US highlighted by a clean wholesale Channel dedicated allocation and targeted digital marketing tactics as a result. The Women's Business perform. Well domestically based on accelerated momentum with the younger consumers similar to men's in the third quarter women's also experienced a near 30% increase in purchases with female humor is eighteen to thirty-four years old in the US.

Younger consumers gravitated to both Heritage Styles like the classic Mini and classic short as well as newer Styles like the fluff. Yeah slide and while Styles like the fluffy were well-received. I believe there is still work to be done to generate greater interest in the brands Diversified product offering and our International regions.

Drafting off the success of both women's and men's our Global kids footwear business grew by 20% versus last year the kids business benefited from strong Partnerships with key wholesale accounts that are helping to expand consumer touch points and undoubtedly SAR positive impact from a holiday marketing campaign that emphasize the brands offering for the whole family the exposure and positive response to this family campaign led to the access of take down styles from women's and men's including the fluff. Yeah slide and new mail.

the brands

To underscore the progress being made towards a more Diversified product mix is that a global level the brand grew year-over-year with men's increasing as a percentage of brand sales woman's non-classic wage increasing as a percent of brand sales and total women's classic product which includes core and derivatives purposely declining as a percentage of brand sales with the balance of the business including kids 9-foot. We're experiencing games.

Diversifying the ugh Brands Revenue composition remains top-of-mind and will continue to focus on handful sighing Our Heritage Styles while complimenting the product offering with exciting new product rich with Brandon over all the Ugg brand had an exceptional peak season, and I'd like to congratulate the team on a well-executed third quarter.

Turning to koolaburra Global sales and third quarter increased by 94% versus the prior-year 239 million delivering a few million above are guided expectation this growth wage by gains and market share within the domestic wholesale Marketplace additionally this fall koolaburra introduced a men's and toddlers assortment for the first time and both product lines displayed strong sell through with our wholesale Partners. Congratulations to the entire club or team on a fantastic quarter of record-breaking Revenue both ugh and Culebra have done an impressive job capturing holiday Demand with great product with strong Marketing in a clearly differentiated Target consumer.

Shifting to the performance lifestyle Group, which is comprised of polka polka brand Global sales increased by 64% versus last year to a record 93 million dollars hook it experience both domestically and internationally across all channels of distribution the hookah brand acquired new consumers online through brand Discovery while also seeing a migration of consumer replenishment in the third quarter open nearly doubled the number of consumers acquired on the hookah brand has made great strides in creating a seamless consumer experience through the entire brand ecosystem which includes a strong network of wholesale partners and direct-to-consumer channel.

At the same time our marketing efforts are focused on building brand awareness and driving consumer Demand by highlighting. The experiences made possible by hookah products, the third quarter features of the hookah brands time to Campaign which tells real stories of human experiences with Hoka the campaign kicked off with the time to reimagine video which has garnered significant Impressions across platforms helping drive more than a fifty percent increase in brand serious interest according to Google Trends from a product perspective the brands iconic Clifton in Bondi Styles continue gaining market share in the US run specialty Channel according to NPD is retail tracking service polka claim the number two brand ranking based on dollars over the summer and has maintained this position each month since while gaining share at a steady pace.

Well, these gains are driven by the hookah brand strong partnership with wholesale accounts the direct-to-consumer business continues to grow at a rapid pace.

For the third consecutive quarter, the direct-to-consumer business doubled over the prior-year helping to drive these gains folk has also doubled the number of DDC purchasers aged eighteen to thirty-four years. This has been aided by the introduction of the Rincon and carbon textiles has both have over indexed with younger consumers as compared to the brand average.

The hookah product in e-commerce teams have done an impressive job of collaborating to a line on product launch timing to ensure the brand is consistently driving traffic to the website during the quarter the branch and update to its Flagship trail running shoes the speed go for the launch propelled the style sales to more than double last year's third quarter volume with over half the volume coming from international region off brand is also beginning to experience traction from the trail category beyond the speed goat the tour Ultra featured as part of the Brand's collaboration with the Lifestyle brand opening ceremony has sold well across domestic direct-to-consumer and our asia-pacific wholesale channel in terms of the hookah brands international business over all the brand has reached an inflection point as for the first time it's sold internationally for the quarter or higher than units. So domestically we think this speaks well to the global opportunity and runway for a hoga.

Moving to Tampa and Global sales in the third quarter. We're in line with expectations that 17 million and 8.5 million respectively while tablet was down.

Every year due to a shift in the timing of European distributor orders. The brand is on track to deliver its full fiscal year during the fourth quarter have it will be announcing a significant brand update to coincide with the life of its spring 2020 product line. Meanwhile, the Sunoco brand declined as a anticipated in our guidance as it continued to face headwinds from the challenging stare specialty Channel as well as the brass to exit warehouse distribution, the sanook team remains focused on exploring healthier distribution opportunities in an effort to reposition the brand with respect to our Q3 Channel performance Global, wholesale sales increased 9% versus The prior-year Driven primarily by domestic expansion and ugh polka and Culebra as well as International expansion of hoga.

It's worth noting that for the second consecutive year our third quarter domestic wholesale Revenue grew by double-digits international wholesale was slightly at versus the prior-year due to growth and hookah lounge largely offset by the ugly set annamayya as well as negative pressure from foreign currency exchange rates.

Let me Direct.

Consumer perspective comparable sales increased 5% versus the prior-year with total direct-to-consumer sales up 6% versus the third quarter last year eCommerce continues to drive gains in the wrong Channel, which has been led by the strength of ugh and hoga the Ugg brand DDC growth was primarily driven by domestic Sales Online, which included moving our annual Ugg closet event up by one week compared with last year in order to improve our ability to capture end-of-season demand.

And very pleased by the execution of all of our Brands to deliver Deckers largest quarter in history. I'm looking forward to closing out another strong year performance as we remain focused on delivering the fourth quarter off now hand the call over to Steve to provide more details on our third quarter financial performance as well as an updated outlook for the fourth quarter and full fiscal year.

Thanks, Dave and good afternoon. Everyone is you just heard our third-quarter performance, exceeded our expectations and speaks to the strength of Our Brands. The disciplined approach to investing in our brands has been a major driver of the organization's success this year as we've been able to drive brand awareness with Hoka build brand heat with ugh, including an emphasis on men's and an increase in our engagement with consumers in the digital Marketplace all while maintaining top tier levels of profitability. I'll now walk you through the third quarter results in more detail and provide an updated Outlook page or the fourth quarter and our full-year fiscal 2020. Revenue was 939 million up 7.4% versus last year and $39 above the high end of our guidance range of $885 to $900.

Of the better than expected.

Revenue approximately 8 million was driven by the hookah brand with tremendous results across the globe with our wholesale Partners as well as direct-to-consumer channels seven million was delivered by better than anticipated domestic ugh business driven by net in season reorders and led by the strength in kids business the new Mal franchise and the fluff franchise and approximately 3 million dollars driven by Rico captured in the cooler brand with the balance of the upside performance largely timing related as we captured sales earlier in Q3 that were previously anticipated in Q4 is approximately fifteen million coming from the Ugg DTC business and five million from earlier ugh wholesale shipments.

Well, we saw growth domestically in the Ugg brand beyond our expectations. We continue to see challenges as anticipated in the brands international business, which was impacted by both branch and macro issues in our European region.

Gross margins were up 30 basis points over last year to 54.1% The gross margin result was approximately 100 basis points above are implied Guidance with the beep coming from lower promotional activity than planned in our domestic wholesale business delivering strong selling and High full price sell-through for a third consecutive year.

well the strength of

Lug domestic wholesale margins pared with increased Revenue drove Improvement above our expectation. We remind mindful of the dynamic promotional environment. We continue to face as we did experience higher promotion activity in our International markets for the Ugg brand as compared to last year.

From an expense standpoint are dollar spend was up 11.8% to 251.9 million dollars compared to last year's Gap spend of 225.4 million and up 10.6% compared to last year's non-GAAP spend of 227.8 million as a percentage of sales expense delivered versus the prior-year which was aligned with our implied guidance as we continue to exist in our key initiatives the impact of these results drove earnings per share of $7.14 compared to last year's gaap earnings per share of $6.68 off last year's non-GAAP earnings per share of $6.59 and our guidance range of $6.30 to $6.40 the $0.74 beat to the high end of our guidance long-range came from approximately $0.25 from sales in late December previously anticipated for early January twenty five cents from lower promotional activity in the domestic wholesale business wage.

fifteen cents from better than

Affected hookah results and ten cents from higher reorders in the Ugg in cooler Brands domestic wholesale business.

For the quarter. Our tax rate was 21.4% compared to our anticipated tax rate of 21% our balance sheet at December 31st remains strong as cash and equivalents were six thousand 17 million inventory was 366 million up 7% versus the same point in time last year and we had 6.6 million in short-term borrowings under our credit line as compared with six hundred thousand last year.

With the delivery of the financial results that I've just shared with you. Our third-quarter execution has allowed us to once again raised our expectations for the full fiscal year as we look for that. We place a high importance behind controlling our distribution in ugh focusing on growth opportunities within the brand and fueling Hoka momentum across the globe with that said page updated outlook for the fourth quarter of fiscal 2020. We expect sales to be in the range of 392 million to 400 two million and earnings per share in the range of $0.35 to $0.45.

fourth quarter

You guidance compared to last year includes brand expectations of Hoka expected to increase in the high 40% range have expected to increase in the mid-to-high teens inclusive of the plan a distributor business shift into Q4 koolaburra up High Teens, so knocked down approximately 50% due to the previously mentioned exit of the warehouse business in the corridor off and expect it to be down approximately 8 to 11 % due to ongoing reset and pressure in Europe the previously mentioned timing shift into Q3 and while it's still fairly a component of risk related to the potential lower DTC demand related to current travel restrictions in China.

In addition fourth quarter earnings per share guidance is further impacted by planned expense growth as we continue to fuel our growth initiatives and lower gross margins primarily due to the temperature European distributor shift and continued currency pressure.

moving

To the full-year Outlook with the over performance of the quarter. We are now raising our outlook for the full year for our fiscal year 2020 guidance. We are increasing Revenue guidance to now be the range of 2.15 billion to 2.16 billion in increase of twenty million on the high end of our previous guidance range are updated Outlook at the Brand level includes Revenue still expected to be flat to up low-single digits poker. Revenue is now expected to reach approximately $350 million have a revenue is still expected approximately flat Sanuk revenue is still expected to be down in the mid thirty percent range and koolaburra revenue is still expected to grow to approximately 70 million.

Turning to the remainder of the p&l. We are increasing our gross margin expectation to now be approximately 51.5% as we are passing through the lower promotion activity experienced in the third quarter and increasing our projection for the fourth quarter sg&a, as a percent of sales are still expected to be slightly below 36% off raising our operating margin to now be at or slightly better than 15.5% and we are raising are expected earnings per share to be in the range of $9.40 to $9.50 on a share count of approximately 28.7 million shares with the full year tax rate still projected to be approximately 20.5%

Updated guidance represents flowing through just over fifty basis points of improved operating margin predominantly driven by the better-than-expected gross margin experienced in the third quarter off this improved outlook for the fiscal year, which equates to a 45% raise in our earnings per share on the high end of our guidance is driven by $0.25 from a lower promotional environment fifteen cents from the hookah brand and $0.05 from an improved outlook on the margins in the fourth quarter our guidance for the fourth quarter and fiscal year 2018 excludes any potential non-GAAP charges as well as the effect of any future share repurchases.

During our second quarter earnings call in October . We provided an annual update on our sheepskin pricing due to current events. I would like to remind everyone we expect no change to our skin cost for fiscal 2021 as is our normal course of business. We have contracts in place which are used to mitigate the impact of volatility within such commodity prices off again, please note that sheepskin costs are only one component of our gross margins and this update is not constitute gross margin guidance for next year.

with that

I'll turn it back to Dave for his closing remarks.

Thanks Steve as we are now in the final quarter of fiscal 2020. We are on track to deliver another year of accelerating top-line Revenue growth with our raise for your guidance representing a 67% increase over last year. Our results continue to demonstrate that our strategies are working and are at the foundation of our organizations continued Evolution. This groundwork will enable us to approach opportunity go ahead with confidence and I look forward to updating you in next year's plans during our year end earnings call in May.

In closing I'd like to share my appreciation for the collaborative efforts demonstrated by the entire Deckers organization and delivering our largest quarter in history. Thank you to all of our stakeholders Faith continued support with that. We are now ready for Q&A operator.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to enjoy life. And please press two. Please limit yourself to one question into one follow-up at this time. We'll pause momentarily to assemble our roster.

And our first question will come from Jonathan with beard, please go ahead.

Yeah. Hi. Thank you. I just wanted to start maybe on the margin performance and maybe a broader question about the environment during the holiday. I mean particularly look like the weather was helpful yet. So I got performed in the margin was strong and so maybe just starting with you know, why you think the margin exceeded your expectations and then how to think about the fourth quarter, especially given the gross margin comparison there.

Yeah. Hey John , this is Dave. I'll give you some context and I'll let Steve get into the specifics on that. But you know, I think if you go back to the the way that the team has been managing the brand in the marketplace with distribution Quality Distribution and the diversification of product away from classics, you know, and we've said this before we believe we're becoming less whether Reliant that said we did have pockets of life upside based on weather throughout the quarter, but just I think what we've seen is the diversification of the product and how we're engaging with the consumers to drive that far beyond just weather related products that we've had to struggle with in the past and are also seeing healthy margin because full price shelters are strong. Particularly North American Market. We didn't chase top line with promotional activity and you're seeing some of that carry over into Q4. So about the marketplace was challenging and department stores, you know struggled in places the strength of the brand the diversification of the product dead.

And then just focusing on full price Quality Sales for the health of the brand short and long-term vs chasing the Top Line those all contributed to it. We started off January a little bit soft.

In the North American Wholesale Channel as well just based on consumer Trends but we've we've held clear on not promoting the brand that the extensive top-line. There's only seen that in the results. Yeah. Yeah John's this is Steve the deep-set. I think what we saw was, you know, compelling product in the marketplace. We did have a nice set up so that definitely helped having to clean Marketplace wage. Um also helped, uh, so going into the quarter cleaner and the wholesale channel was it was a good set up for us and then we did have a nice start into the quarter. So, you know from wage applied in our guidance we've had in our guidance, you know, we did better on the promotion side that was largely driven in the domestic component of the business. We did have some promotion related to get International but you know, from what we were thinking would happen, you know, we did it was about 60 to 80 basis points. Probably a liquid.

The better in the quarter than what we had thought related to the promotion and then just to note on cue.

For you know with kind of a strong clean sell-through, we've increased our margin on Q4. So we moved some of that conservative promotional that we had factored into Q4. Yeah, and then the last thing on Q3 is was also helped by the strength of augment at 10% growth as well as kids augmenting some of the month the verification efforts right then maybe just looking forward for the brand. I got two questions one. Just when you look at some of the the non Co whether she's no categories, you know, so that sneakers and sandals the men's some of the other categories maybe just highlight some of the drivers you have coming up for for uggs there and then month and that just separately the Europe reset maybe any kind of status update on kind of where you think you are versus you know, how long you think the reset actions may still be ongoing?

Yeah, you know as we mentioned in the script, there's a couple franchises that are emerging within a brand that are really resonated with the younger consumer and providing what we think is healthy long-term opportunity. And the first is the new melt franchise. We've been building that in the men's business over the last couple of years and we had a major campaign called new mail Nation this fall which helped tremendously to drive that home business as well as a durations in man's we've also expanded that now into women's and it's become a top-five style and the Women's Business. I need the kids. So it's it's resume the younger more diverse consumer and that's creating some excitement in the brand and that's a franchise that we will definitely continue to build on both domestically and internationally the other one which we've talked a lot about a year is the fluff franchise and that showed continued strength this past quarter. It's a big part of our Focus going into Q4 in q1 of next year. We have a lot of innovation in the pipeline that we think is dead.

Exciting and expanding that franchise Beyond just the current use use the case.

And also eventually getting some Traction in the men's business as well. We've actually had a lot of uh demand from our mail consumer for fluffy a product and extend that into kids as well. So those are the be the choice to lead franchises in addition to that. We are, you know going aggressively after the sneaker opportunity as we have been in key markets. We just had an exciting lunch in Paris just recently bought with the Japanese retail partner and freely continuing to ignite some excitement for the brand at the high end p r level and with exciting collaborations and influencers with regards to a Maiya, you know, we've talked about this for a couple of quarters now, we're in the midst of a multi-year reset their I'd say, we're probably, you know, just getting through a year one of that reset. Very similar to what we went through with the three or four years ago cleaning up inventory cleaning up distribution, you know, focusing on controlling full price sell through the classics. It's a little more challenging there because we can't log

Uh influence, um, you know prices in the market like we can in the US but we're working through that. There's also a some macro issues that happening in the UK.

A particularly in the Europe business right now with the retail and then brexit etcetera. So we're taking it we're taking it slow or we're looking over this looking at this from a long-term perspective or controlling the market place. And as I said, we're not chasing discounting to keep the top line going and so that's that's what's great about the strengths and domestic businesses. We can afford to make some of those resets in a month for the help that a long-term and will continue to focus on elevating that and maintain the the strength of the classics business through the next couple of years.

Okay, that's great. I appreciate all the thoughts.

You bet.

Our next question will come from Tom with Wells Fargo, please go ahead.

Yeah, good afternoon guys, this is Matt Bellamy on for Tom grab some good quarter. Just a couple of questions here. First on bugs inventories. Look at retail coming out of the holidays and then another strong quarter for a Hoka. Just wondering at what point you guys think about expanding distribution of the brand and then one follow-up on margins.

Okay, this is Steve. I'll take the lug in the channel inventory still good, you know, it's up a little bit from where we were a year ago, but comfortable with the levels really that we're seeing and the feedback I've gotten you know, really good strong sell-through in Q3. So I think we're we feel good about where the inventory sit coming out of the corner with regards to hoga. You know, this is this is an exciting story not only for Deckers but also for the marketplace internationally and as we said in in the call and the script, you know, we had success in the quarter in all regions and all channels off a mentem of the brand is exceptional and you know, we think things are going to continue to accelerate from a distribution standpoint. I think one of the things that is working very well is to take control of distribution Thursday. We don't have really broad based distribution expansion plans in the short-term. We are exploring a couple smaller options that will will test in the short term but really dead.

You know really really focused on maintaining our positioning and taking more share in the Run specialty Channel globally.

Enhancing our outdoor distribution, you know REI is a critical and key partner of ours and we're having great success with them and others in that Playbook is being implemented also in Europe and our Lounge APAC regions and then really driving, you know, replenishment and new acquisition opportunities to our own D Commerce site and this and the growth and that channel as you're seeing the big change but also in the in the margin is very strong as well. So we're going to continue down this path. We're calling it The Hookah ecosystem where we you know, showcase the brand and a tight elevated distribution at home and drive additional purchases to our website and we're going to stay the course on that for a while. That's very helpful. Thanks, and I just last one on margins, you know, there's been a lot of sg&a spend this year relative term memory. Should we think of this year as Peak investment year or how should we think about that?

Yeah, I think I'll take this one and Dave can jump in. You know, I think one of the things that we have seen especially is a lot of the work that we've done we had taken, you know, as part of our profit Improvement plan. We taken a lot of

Out as we're rebuilding brand heat as we're moving into some of the new initiatives, you know, we are investing in those initiatives and that's where you're seeing the increase in the current year and it's dead. It's delivering results. So, you know, we think the spend is appropriate this year will give guidance on kind of how we're looking at next year. But you know, we are we're investing more in marketing song increasing that variable component of our spend and it's something that we're going to be able to watch closely but it's an important part with you know, the brands growing as rapidly as they are that we continue age feel that through marketing investment. Yeah, and and I would say overall we have we have an excellent handle on the sg&a across the organization and the teams have done an incredible job of you know, making sure we're Titan areas Thursday. We can leverage but also identifying our key growth drivers across the organization which we buy, you know talked about in Hokah and ugh meds, you know, ultimately getting through a Peril cooler Bora wage.

And I think we're just in a unique position where we right side the organization. We have very healthy mid-teen operating margins and we're allowed the opportunity to further invest in the growth of these Brands which we need to do. It's a very

Set of environment we're fighting for share and all of our channels. We have some challenges in Amaya that we need to work through and Steve and I and the teams are managing this very tightly shifting expenses from birth fixed variable and being able to adjust based on the growth of the brands and the results we're seeing in Revenue, but also that returned our marketing spend. So we're very happy with how things are going there. We're confident that we're making investments in the right places and we're seeing those returns and as long as that's the case we're going to continue to feel it.

Helpful. Thanks guys. Congrats on the quarter right? Thanks, Matt.

Our next question will come from Dana telsey with telsey Advisory Group, please go ahead good after good afternoon everyone and congratulations on the results as you think about the the same store sales that you generated this this quarter. What would the components in complexion of the camps that that that were delivered and lastly on the European business? What is your time frame for the Europe business? And what should we look for look at in terms of Stepping Stones to show the progress going forward. Thank you.

I'll take the first.

And so, you know r d t c cop was up 4.7% As you know, we don't break out retail Andy, but clearly e-com performed very strongly urge. You know, I think retail for the most part was kind of within our expectations but but down and so, you know, it's something that we're constantly looking at, you know, that's something that we've talked about really for the last couple of years of how we're shaping our Fleet and how we're improving performance. So something that we're going to continue to monitor clearly retail plays an important strategic element wage, um in in how we go to market and so that's going to be a continued area that that we're going to look at you know, and it's something that we are working on Thursday and improving in some of the stores that have been underperforming and for those that have underperformed we've closed so that's you know, something that will continue to monitor, uh and work as we progress along

yeah, I know three guards to

European business, you know and just to clarify that is a nug specific challenge that we're having in the mayor region. I would say Dana were you know, we're coming out of year. One of a three-year reset name is Lee some declines that we had planned for and some challenges that I mentioned. But you know, I would expect to see really the real indicator of brain consideration in that Marketplace. We tracked it on a regular basis and we'll do our best to keep everyone updated through our quarterly calls. It's you know, we have a lot of internal conversations around marketing using local influencers versus global influencers Thursday. We're wrapping up our digital marketing Tools in that region to really Drive excitement and brand consideration. And then I would say probably an f y 21 you start to see the business office with return to growth in FY 22 at this point.

Thank you.

Our next question will come from Sam poser with Susquehanna, please.

Go ahead. Good afternoon. Thank you for for taking my question. Can we talk a little bit about China and the consumer choice and what you're seeing initially with the coronavirus ads as well as I don't have a lot of production there now, but also, you know the what you're seeing with the timing of production out of whack as well.

Yes, I'll start with that and Dave can jump in. I think you know as we said we do have a factor in there a little bit on more the demand-side from a supply-side. Most of a product is coming out of Vietnam. So we haven't seen at this point any disruption from a supply-side issue as I said, you know, we we we have put in a an element around the demand related to China and restrictions in China. As I also said it's still very early. So it's really hard to know where this is going to go and how it's going to suck. But at this point, you know with the majority of our supply coming out of Vietnam from a supply issue. We're in good shape, but we'll see how things develop.

Yeah, I don't really have much more.

Add on to that I think it's it's kind of a wait-and-see not just for us in the marketplace what this does to the global Chinese consumer, you know and impacts in other regions in the retail business as a result of that, you know, we do have teams and Shanghai we have team and Guangzhou, you know, they are challenged but it's he's said to the the risk of the business right now. We think we have like Quantified. There may be a little bit of impact on internal kind of development off work over the next few months, but we don't see that as a significant impact of the business going forward, but we're obviously going to continue to monitor it closely and also keeping a close eye on the health and the well-being of our teams.

And and then secondly in regard to Hoke, what percent of that business is is I have a couple of questions there what percentage domestic wage versus International and then is that entire that entire DTC is is digital. Is that correct?

On the DDC is All Digital at this point. Yes, correct. Yeah the on the hookah break. We haven't given specific numbers but from a a dollar a pack active. It's I think it's we're about two-thirds a little less on domestic and 1/3 kind of international. Yeah, and those are they also mentioned. This is the first time that we saw your unit sales in the year or the international business Eclipse that in the US and so keep in mind there. It's largely much bigger portion of wholesale business than a large distributor business office. So the average, you know price on a product there is lower because of that but we're excited about the the unit growth which means more of shoes on more feet across the globe which means adoption is increasing. It just gives us more excitement around the opportunity internationally.

And when do you take and when would you take I mean?

When would you go to a JV and subsidiary there? How you know what scale do you need to think about, you know flipping it out of the distributor model and in addition to the area or JV model? Yeah. Nothing to share there right now. We're continuing to evaluate opportunities for that long term in all regions. And so, you know right now we're staying a course in building brand helping us subsidiary markets supporting the Distributors. We have actually done that with our Canadian market. So this would be the first year in FY twenty one that is fully owned and run by us. We did that in Japan about three or four years ago and it's proved very successful. So it's something we're considering as we look at the long-term strategic Outlook of this and making sure that operationally we are ready to do that if we get to that point.

All right. Thanks very much success.

Our next question will come from Jim Duffy with stifel please. Go ahead.

Hi, this is Peter McGoldrick on for Jim. Thanks for taking my question. I was first interested as to hoga continues to deliver upside to the plan. Where are you seeing the engine is in in brand recognition and then further could you speak to the brand marketing and product strategy as you look to recruit younger consumers and has this evolved at all as you've grown my scale? Yeah, I think you know the answer the question two areas that we're seeing work. Well is is new product introduction to the carbon Act and the rink on those are resonating with the younger consumer consumers who want to go faster, but still want the the overall benefits from the cushion experience life provides. So we're going to continue to do that. We're going to continue the formula. We're we're using real consumer experiences in hookah product to tell that so leveraging the time to campaign.

Making sure that we're reaching.

Consumers as we have been in really cultivating younger consumers through some of the efforts that the field marketing reps are doing across the region continuing to show up in the right Avenger really staying authentic for the channel continues to innovate at a fast pace, you know, and what's great now about the breadth of the brand is it is being adopted by a large diverse consumer across the board and we are seeing growth and excitement and penetration into the younger consumer. So we're just going to continue to cultivate that and you'll see that any increased marketing spend in the approach that we're taking and the product pipeline, you know will continue to build on the successes that we've had in our core franchises of Bondi Clifton and speedgoat. The carbon next product is going to continue to evolve looking at great opportunity to expand that across the board and we're very pleased with the introduction of the Rincon product and see that as a key Evolution going forward as well.

Thank you, then on the sourcing situation. I know.

That you're locked in on sheepskin for next year given the drought and fire situations in Australia. Can you help us think about any risks that you may be considering 4022 or the size of any exposure there? Yeah, so you normally would get that update, but I can give you just a little bit of clarity that we're covered in 22222. So we're fully covered for 20 21 and we're comfortably covered for 2022 and we'll be able to provide more of an update but you know the the supplies Thursday we have locked in we feel comfortable with the position that we have really definitely over the next year and well into two 2022. Yeah, and and in addition to that keep in mind that we have been leveraging the development of pure and materials as an alternative to. Sheepskin that's growing as a proportion to the line as we get into more diverse products and more fashionable product and wage.

And price points that balances out the demand for a twin fin twinface sheepskin and it's also helping margin or retail opportunities as well.

Okay, then last one with holiday 19 in the bag. Can you give us an update on how big the core Classics franchise is and how much bigger than that is then any emergent French sizes like a new mail or fluff or fluffy? Yeah.

Yeah, it's a total woman's Classics, you know, we've been hovering in the last few years below fifty percent. We're now turning closer to 40 just you know, just above 40% So part of that is on purpose with how we're controlling distribution allocation of the women's Classics franchise and some of that is also bolstered by the fact that you are seeing success in men's and other areas such as the fluffy area. And with that strategy is working. We have more progress that we need to make in the international markets. Those are still a little bit more heavily penetrated some of the in the core Classics but as the adoption of the fluffing are the categories increase in those markets and we finish out the segmentation allocation work. We hope to see the same results in those International markets and being real less Reliant overall.

All right. Thank you, very

watch

thank you. Our next question will come from Paul Lewis with City research, please go ahead. Hey guys, Paul. Just curious how you're thinking about the long-term margin in the hope of business and how you balance the piece of margin expansion with Investments necessary and home business and also curious and hookah, what percent of that the hope of business is Footwear versus other categories and how do you see that progressing over the next several years? Thanks.

I'll answer the second question first and I'll let Steve into the first one currently, hookah is probably about ninety nine percent Footwear. And you know, when you look at the long-range opportunity G brand and we've talked about getting you know, two and Beyond the five hundred million dollar point, you know, there's a lot of Runway still within just Footwear. We're incubating apparel. There's going to be a launch that's coming out in the same quarter, which is a DDC only launched in the US to you know, see what the appetite is for apparel and test but the teams are you know, a hundred percent focused on evolving the footwash business continuing to take market share but we do see longer-term three to five years down the road that this can be a much bigger brand Beyond just Footwear and we think Apparel in gear as an opportunity within that as well and then all the way we're thinking about the margin, you know, it depends on a number of factors, but clearly on the domestic business where we have opportunity for margin Improvement is with my God.

Kind of more customers online and we have seen that happening that's helping Drive some upside on the margins. So, you know as we've talked about before, you know is consumers are introduced to the to the office and um

Through the wholesale Channel there is a migration online as they get further down into repeat purchases. So we're continuing to see that Trend probably a little bit stronger than what we earlier often identified and then you know to to the question earlier that we got as we look at International markets, you know, the further opportunity there is how we capture sales both from our own thoughts in the Wholesale Distributor markets conversion to to online business. So a lot more opportunity to drive to higher-margin business, but we're still growing the brand. So we're bringing customer saying it's about how we we're bringing customers in through all channels and as they, you know further engage with the brand our opportunity is how we engage with them online and drive that margin further wage. Yeah and the mix of online business as a percentage of the total is that increases obviously the margin gets exponentially better and we're able to capture that consumer, you know for the long-term lifetime value of that sale and then our dishwasher

Marketing efforts in our return on digital marketing spend against our website is exceptional. So we're going to continue to fuel that at the pace of the growth that we're seeing.

Thanks. Can I just go back to the Chinese question for a second user mind is what percent of your sales are in China and I think you didn't indicate any sort of percentage coming from China. Did you mean to bother that you don't have anything sourced in China at this point? Just curious what that percentage is? Yeah, just right now we're at with Summer coming from China's is just about 10% maybe a little bit less. And so we'd factored that into the what we spoke about earlier with the risk and then the long-range view of the company in margin opportunity off everything sale. I don't know ten percent of yeah shipments that are at risk coming out of that market and you know as we know as you know, the teams have done a fantastic job to give them credit for migrating out of China over the last three years. Not only have we quickly migrated to New Markets and Vietnam and Beyond but the quality of our product has improved over time in the margins have been improved as a result dead.

represent a sales in China

and if we get

yeah getting up for

yeah, we what we've said specifically to that is one kind of in the current court or what we factored in trying to still relatively small in terms of international markets. We spoke about half of that to Europe 40% of that is a pack and when you look at a pack, it's now kind of split between China and Japan largely.

Thank you. Goodbye. Okay. Thanks.

And our next question will come from Mitch, It's with pivotal research, please go ahead. Yes. Thanks for taking my questions if I was so when you give a little more color on the man's business, but I think you said it was up 10% in the quarter what percent of total is men's now and then it's kind of like new mail was particularly strong. I don't know if you could speak to how much your year-over-year growth you saw in new mile off. I have a follow-up. Yeah. Yeah right now men's, you know, it's tracking as we planned it as you know, we've been talking about this for the last few years. Now. I'm in migrating meant to a younger more fashion oriented consumer with different distribution away from the traditional slipper and classic business. We're now at about 15% of the total penetration. We took the potential there is it's closer to 20% over time, but it's really being driven by the new mail franchise and some of the winter boots in that in that business. So the new mail has continued age

resonate both Accord District

But I'll also at new distribution like stuff but Footlocker and Footaction real strength and Journeys, we've opened up some sport lifestyle distribution in the market wage starting to perform. Well, it hasn't resonated to the same extent in Europe and Asia that it has in the US yet, but it's in early days of introduction of that consumer. So we're leveraging off the marketing play book that has worked well in the US which is collaborations and and high-level influencers and ambassadors for the brand showing the product in a new and exciting way. We're going to continue down that path at the same time. We're seeing success in derivatives of that of that the Heartland Boot and which is a little bit Slimmer and more appropriate to an international consumer leveraging the the franchise which is they are are leading winter boot and then leveraging existing Styles like the Tasman slipper, which is also being warned by younger high school college-age students wage.

so, you know, we feel good about the the reach of the consumer in the diversity of the product and the teams are working very fast to iterate as as

Much as we can in these and then take advantage of the opportunity. And as I mentioned in earlier on there is also opportunity. We think in the flood franchise to translate that to the mail consumer as well. And then Thursday, that's helpful. Thanks. And then Steve just real quickly on the Q3 beat. I think you said that roughly twenty million of the sales upside was timing or five million of that was home cell and and I get that you should be able to see if their orders pulled forward or not. But then you also said that fifteen million was DTC. I just went have a better sense as to how you can tie Em. Are you engaged the timing of how do you know that that's timing versus just out performance in the quarter?

Good question. So one one thing we did this year is we pulled forward are on closet event. So last year we had it in January this year. We we pulled it into the last week of December and we saw two things one. We saw it performed, but we saw performed better than what we expected and we did see a corresponding lull to the start of January . So you said that was a case where we saw product selling stronger in that last week where we thought some of that might trickle really into the first part of January and so capturing that same late in December and the low, you know, we put two timing as people were were buying the product earlier. Yep. All right. Thanks guys. Good luck.

Pardon me everyone. We will now take the last question of the call from Janine pitcher with Jeffries, please go ahead. Hi. Thanks for getting mana and congratulation. Just one more on Thursday. So really impressive growth there. Is there anything in terms of capacity constraints that would prohibit you from growing at the level that you've been growing in the coming quarters, and then also just one on koolaburra, you know, it's been a small box and all this in this kind of becoming a little bit more noticeable. How should we think about the potential growth there? And then if you could just help us understand how much of the growth is coming from extended distribution vs. Just better cell phone or assisting Partners. Thank you.

Yeah, this is Dave. So on the capacity, it's a great question. And and first I would say I get the teams a lot of credit, you know, this this explosive growth is a lot more than we had anticipated off and four. So, you know, the teams have been able to quickly Chase not only you know production capacity but materials and be able to keep the the fuel of the side of the home of inventory and those core products, you know to the extent that we're not really missing sales, but we are capitalizing on the opportunity and we've had great discussions internally on me make sure that we are preparing for continued acceleration of that brand working closely with our partners the teams have been over in China within the last month and half working closely with our Factory Partners both on a Machinery to be able to produce the shoes but also the capacity and we feel really good about our opportunity to continue this rate of growth with regards to cooler board. You know, we're very excited about dead.

The reaction to the brand by the consumer how they are.

That brand is performing at retail and at the retail prices that consumers are paying for it. We've had a great obviously initial launch over the last couple of years with Cole's Footwear businesses strong. We actually just thought if you guys haven't noticed, uh, this fall we had a home lunch with them through our license partner, which was also very successful at Kohl's we're looking at ways to expand that as well. We're not really busy to expand distribution for colds. It's really around penetration and existing partners, and then there's opportunity to expand the business in Europe . We had a soft launch this fall theme. Well, we had some little bit of late deliveries on products. We didn't capitalize in the full opportunity but it is going to be something that we're going to continue to go after and we're looking at this longer-term as as not just a footwear brand but really A Lifestyle brand and we're incubating business opportunities to be able to capture that now,

That's helpful. Thank you very much.

Thank you. Thank you.

This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.