Q2 2021 Deckers Outdoor Corp Earnings Call

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Good afternoon, and thank you for standing by welcome to the Deckers brands second quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode.

Following the presentation, we will conduct a question and answer session instructions will be provided at that time for you to queue up for questions.

Anyone has any difficulties hearing the conference call. Please press star zero for an operator since that time I would like to remind everyone that this conference call is being recorded.

I'd now like to turn the conference over to Aaron cooler VP of Investor Relations and corporate plan. That's Cohen. Please go ahead.

Hello, and thank you everyone for joining us today on the call is Dave powers, President and Chief Executive Officer, and Steve Fasching, Chief Financial Officer before we begin I would like to remind everyone of the company's safe Harbor policy. Please.

Please note that certain statements made on this call are forward looking statements within the meaning of the federal securities laws, which are subject to considerable risks and uncertainties. These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.

All statements made on this call today other than statements of historical fact are forward looking statements and include statements regarding the impact of Coke at 19 on our business and operations business partners and industry changes in consumer behavior, and the retail environment strength of our brands and demand for our products changes to our product allocation distribution and.

Tori management strategies changes to our marketing plans and strategies and investments in our business. Our anticipated revenues brands performance product mix gross margins expenses and liquidity position and our potential repurchase of shares.

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.

Forward looking statements involve numerous known and unknown risks and uncertainties and other factors that may cause our actual results to differ materially from any results predicted assumed or implied by the forward looking statements.

The company has explained some of these risks and uncertainties in its SEC filings, including in the risk factor section of its annual report on form 10-K, and quarterly report on form 10-Q, except.

Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements.

With that I'll now turn it over to Dave.

Thanks, Darren good afternoon, everyone and thank you for joining the call on behalf of Deckers I hope, everyone is doing well and stay safe and this unprecedented time.

Today, we will walk through an exceptional second quarter performance for the Deckers organization and highlight continued considerations related to the uncertain environment created by the COVID-19 pandemic.

I Miss rapidly evolving marketplace conditions, Deckers delivered a record second quarter as revenue increased by 15% versus last year to $624 million.

Gross margin increased by 80 basis points to 51.2%.

And we delivered earnings per share of $3.58.

Success in the quarter was driven by compelling and innovative product launches are powerful ecommerce and digital marketing engines that drove higher awareness and customer acquisition.

Optimization and redeployment of marketing spend that featured an authentic approach to storytelling, a clean and well managed marketplace that allowed for strategic account partnerships to amplify special product releases.

And the ability of our supply chain to pivot resources and navigate challenges.

Well the COVID-19 outbreak put a spotlight in our brands due to their lifestyle residents. These results more importantly highlight the strength of our brands and the positive impacts we have experienced from the successful execution of our strategy over the past few years.

As a reminder, the key elements of our strategy include Jeff.

Generating greater awareness and HOKA owning only to accelerate customer adoption globally, which was demonstrated by a 60% increase in brand revenue during the first half.

Driving DTC customer acquisition across all five of our brands with product and marketing tailored to the 18 to 34 year old demographic highlighted by a 182% increase in these customers year to date in the U.S.

Continuing to build the UGG brand heat through diversification of product that resonates with target consumers, leading to low levels of promotional activity, while selling a more balanced product assortment I.

Maintaining a disciplined approach to financial management, even as we continue to invest in this strategy.

The successful implementation of this strategy has led to the strong operating model and powerful brand portfolio. We have today with brands and products that are resonating with a larger and more diverse audience, we're experiencing high conversion rates and strong selling at full retail price, which will set the stage for future growth.

Our end demand brands omni channel capabilities and strategic expense management combined with exceptional organisational execution drove another successful quarter for Deckers I'd like to share my appreciation to our employees for their dedication and consistency in delivering results in these challenging times.

I'll now walk through the brand highlights from the quarter, starting with the fashion lifestyle group.

The fashion lifestyle group consists of the Oregon Koolaburra brands.

Global outperformance was driven by momentum behind a healthier and more balanced product assortment.

Historically, the second quarter had been driven by selling in classic product to wholesale accounts with the excitement. The brand has built around fluff men's and kids product August succeeding beyond core product with both selling and high full price sell through at wholesale and DTC.

Flux as the Paramount example of the progress is making to attract a diverse set of consumers with a broad array of product options. The.

The fluffy I remain the brand's top selling style from both the total parents perspective as well as in terms of wholesale sell through.

But the UGG team has also done a fantastic job building around the fluff, yet with complimentary product that is providing incremental growth.

New introductions during the quarter included the disco slide and fluffy to which were both among the top 10 styles purchased by customers, aged 18 to 34 years old.

Okay is having tremendous success, attracting new younger consumers.

Well flip product may have been the primary attraction to the brand for 18 to 34 year olds. We're excited by how many of these customers who bought fluff also purchase the recently launched classic clear many since its release over 60% of the classic clear many purchases online have been made by 18 to 34 year olds. This multi category purchase activity from younger.

Consumers speaks well to the brand's ability to capture share of closet, but fashion minded consumers.

Helping to amplify these new product introductions with their intended audience. The DDC team has collaborated with key wholesale partners to develop strategic launch brands plans for special products.

During the quarter. These included teaming up exclusively with the Victoria's Secret Pink Ambassador program to release, the fluffier and launching the brand's first ever ready to wear apparel collection in partnership with Nordstrom.

Ready to wear which we sometimes refer to as our tw is the UGG brands first apparel expansion beyond lounge wear and into street wear fashion.

The art Tw collection features Cozy fleece sure both FFO for and Shearling wardrobe items, highlighting the strength of our brand demand for our products and quality of our partnerships Nordstrom featured the our tw collection on their web sites landing page, which was the first time auger and that designation outside of the footwear category.

In addition, our ready to wear and retail teams have worked closely with Nordstrom to create a specialized shop in shop concept to feature the collection of both Nordstrom's, New York City flagship in December as well as our own in New York City flagship, which opens on November 19th.

Well ready to wear is not expected to drive significant revenue volume. This year sell through has been impressive and were encouraged to see cross category purchasing of ready to wear and footwear products.

Given the positive response from primarily younger consumers, we feel this speaks well to the long term lifestyle opportunity for Oleg and our teams are already working to expand ready to wear with additional products and partners.

Continuing the theme of bug diversification and cross category purchasing I'd highlight that men's and kids product contributed to the majority of the brands incremental dollar growth in the quarter men.

Men's has had a strong start to the fall season, new Mel sell through was up over 150% versus last year and heritage slippers styles, such as the Ascot Tasman and scuff remain top sellers.

With the success of the fluff and the increased fashion the ability of the slipper category Mogas, releasing a men's specific version of fluff very soon so be on the lookout for that.

As mentioned on our first quarter call. The kids business is benefiting from the successful take down product in both womens and mens the new mill fluff, Yes, slide and the classic clear many were all part of the top five kids styles in the quarter and will look to further capitalize on this trend during the holiday.

From a regional standpoint, we continue to see bifurcation between the us and international regions within the U.S. Our brand. He is reaching new highs as the brand has increased customer acquisition by 187% and customer retention by 155% versus last year with the majority of the growth coming from younger customers.

In fact, 18 to 34 year olds represented 40% of online purchasers in the us during the quarter as compared to under 30% last year.

Complementing the unbranded direct to consumer success, our wholesale partners are also experiencing record levels of demand and product sell through rates.

Which may lead to some scarcity in the third quarter as reduced inventory levels are consumed.

Internationally as we have mentioned in previous calls and remains in the midst of a multi year risa in EMEA and the brand is also in the early stages of localizing marketing content for the Asia Pacific region.

In Europe, we're seeing positive signs with the brand is beginning to experience adoption of flood product. In addition to some small growth within men's and kids footwear. We're also intentionally reducing the amount of core classic product in the region, which remains a strategic headwind.

These are important shifts as we worked to rebuild brand heat and diversify the European region away from core product and build a healthier product mix akin to the successful transition we have made in the U.S.

Beyond building a more balanced assortment AGA is working to amplify the EMEA regions business online to help drive digital conversion in EMEA, We recently implemented our global eat project, which improves customer access and ease of use by offering additional languages currency and local payment types.

The launch of globally combined with the introduction of rewards in Europe is already helping attract new customers as Doug experienced a 135% increase in customer acquisition during the second quarter.

In the Asia Pacific region, we've made strides by partnering with top tier local celebrity Zao Dawn, you, who carries fashion credibility with the fan base, primarily age 20% to 30 years old. We've also developed a market relevant product collaboration with designer things Shang Wang famous for her deconstructive approach has featured in Bogan GQ.

These initiatives are aimed at improving brand perception with Chinese consumers and bring attention to new products. We are encouraged by the regions positive reception to new products like the classic clear Fluffier and just go slide but there is still plenty of work to be done to build brand heat.

While optimistic about some early indicators in the UGG brand's international business revenue declined as expected for the first half of fiscal 2021, primarily due to efforts to reduce core product in the marketplace.

While we don't anticipate meaningful improvement during this year of transition.

Is making important progress in building a new foundation of diversified product acceptance localized market relevant and strategic partnerships all designed to build a healthier brand with the ability to deliver growth over the long term.

The UGG brand domestic success is built on this model is fashion credibility through authentic collaborations social influencers and PR seating and we believe this approach will translate well to our international markets.

First half performance gives us the confidence that we're on the right path of exporting the strategy and building towards next year and beyond.

Moving to Koolaburra performance in the first quarter resulted from increased market share with top wholesale partners as well as improved category diversification through the expansion of men's and kids product.

Last year Koolaburra established itself as a top brand in the sub $100 category in which it competes within the family value channel and we'll look to maintain that position by building incremental market share. This holiday season, though.

Though footwear remains the primary focus koolaburra continues to expand its lifestyle appeal. This fall. The brand has partnered with Kohl's and QVC to develop a license loungewear collection, which comes on the heels of last year's successful collection of home license product.

Both again koolaburra are well positioned to drive demand with their respective customer bases. During this holiday season, However, I would like to remind everyone that we adjusted certain inventory buys at the outset of this year to mitigate the effects of COVID-19 in our business and this will limit the upside for both again Koolaburra. This holiday however, if.

Either brand fails to capture incremental upside due to these inventory constraints. We expect this will provide a clean marketplace for fiscal 2022.

Shifting to the performance lifestyle group, which is comprised of HOKA Teva incentives starting with HOKA performance was driven by increased adoption of our products through greater brand and product awareness combined with compelling product refreshes and a fast replenishment cycle among deckers investments over the past few years broadening the HOKA brand appeal beyond core runner.

As has been a primary focus.

Through market, leading innovation the HOKA team has refined products and expanded categories to attract a larger audience. While also maintaining the brand's authentic performance DNA.

During the quarter HOKA launched update to several key franchises each infused with bold innovation and design upgrades, including the Clifton seven Clifton edge Rincon too and the bond seven.

Regarding the Clifton franchise. These styles have received considerable positive PR, which included features in both gear patrol GQ and sales 22000 certified Sneakers Award.

For the rent Con originally introduced in July of 2019. The style has quickly become a top five seller for HOKA. The second edition of the RIN Con has been so well received that it recently won runner's World Best value Award in their autumn Winter 2020 Shoe guide.

And lastly in terms of notable product refreshes the bond I seven hit shelves in September and features the brand's most inclusive size range, helping to expand the addressable consumer base for HOKA since its release online the bond I seven has been home because brands top selling style.

Propelled by these product updates and innovations HOKA domestic wholesale returned to deliver meaningful second quarter growth. After the first quarter was disrupted by pin debit can do store closures.

As mentioned on our first quarter call HOKA delayed certain product launches to allow wholesalers to move through existing product, which provided an extra benefit to the brands second quarter wholesale revenue growth.

According to the NPD groups retail tracking service HOKA was able to both grow dollar volume and increased market share from 16.8% in August 2019% to 20.5% in August 2020, even though overall dollar sales of adult running shoes in the US run specialty channel declined in August 2020 as compared to.

Last year, the premium service atmosphere run specialty stores remains an important acquisition vehicle for the HOKA brand, especially when considering the higher conversion rates experienced when customers try on our products.

Globally, HOKA customer acquisition, and retention online increased 81% and 92% respectively as compared to last year, even though most of the brand's wholesale doors were opened during the quarter.

However, these increases were due to the HOKA marketing teams efforts to optimize digital media targeting to acquire 18 to 34 year old consumers by strategically prioritizing this audience HOKA experienced a 124% increase of consumers aged 18 to 34 led by recently released styles such as the clip than seven Clifton edge and.

Khan too.

Importantly, HOKA is driving direct to consumer growth across the globe, while still very small as compared to the U.S. International Hogan DDC has increased more than 150% in the first half of this year.

Growing the brand's global online business is especially important as the inability to hold in person events persist.

We're dedicating marketing spend to build the HOKA audience online and stay relevant with existing consumers through compelling product innovation.

As we said in our first quarter earnings call the $500 million milestone for HOKA is much closer than we previously anticipated and with the brand. He in demand. We're experiencing right now HOKA has potential to reach $500 million by fiscal year end there.

The rapid acceleration of HOKA reaffirms, our confidence in the brand's aspirations to eclipse the $1 billion mark over the longer term.

Turning to Teva growth in the brand was fueled by a 78% increase in acquired customers online Kevin is turning out to be the go to brand for the modern outdoor consumer highlighted by the brands founding roots in the Grand Canyon.

Year to date through September at Teva maintained its position as the top outdoor water sandal brand in the us in terms of market share increasing market share over the last year in each of the past nine months. According to the NPD group's retail tracking service.

However, consumers have been the driving force behind this growth and Teva as the brand has experienced a 76% year over year increase in purchasers age 18 to 34 years old which was already the brand's highest indexing age bracket.

Looking to fall Teva is focused on capturing continued wallet share from this demographic to the brand's expanded hike and camping collections.

Teva is already experiencing a surge in demand for the brands MBR franchise, both online and with key wholesale partners such as ARIA where product will be featured across all doors in their fleet.

For Sunoco brand performance was hurt by a soft department store channel. However, we were encouraged by the recovery within serve specialty as coastal town saw an increased outdoor participation important.

Importantly, sooner posted its second consecutive quarter of robust direct to consumer growth, which was helped by a 40% increase in customer acquisition online.

We are excited to receive feedback from the brands online audience has snoke, we'll be introducing new product innovations in the coming months.

With respect to channel performance in the second quarter, all five of our brands experienced exceptional growth online driving our mix of DTC revenue to increase from 18% last year to 28%. This year. This is despite the significant improvements in our wholesale business and inclusive of the recovery efforts within our own retail stores as compared to the.

Disruption experienced in the first quarter from.

From a comparable sales perspective direct to consumer increased 86% versus last year, approximately 95% of our own retail stores were open for the entire second quarter and as of this week. All stores are open in total global direct to consumer revenue increased 74% versus last year's second quarter performance was driven by country.

New customer acquisition online and a sequential improvement in retail performance as compared to the first quarter global.

Global wholesale revenue in the second quarter increased 2% as compared to last year growth in the quarter was primarily driven by HOKA, but mostly offset by a decline in Oleg that.

The decline in wholesale revenue differs from a regional standpoint international wholesale revenue declined due to the ongoing marketplace initiatives previously mentioned, while domestic wholesale revenue decreased as both Prebook orders were conservatively adjusted at the height of the pandemic and all he has successfully shifted open to buy with retailers.

Toward lower priced products, such as slippers, fluff and kids footwear.

The UGG wholesale revenue declined in the second quarter was somewhat tempered by our global effort to shift Q3 shipments forward, allowing our distribution center teams to focus on DTC fulfillment to.

To summarize we are extremely pleased with our brands performance and operational execution in the second quarter with the demand we're experiencing in our brands. We are anticipating operational challenges related to DC capacity inventory timing and availability as well as third party shipping logistics that will limit the upside of our brands in the third quarter, though.

Though less than ideal circumstances, I'm confident in our teens resilience and ability to manage the effects in our business, while protecting the snack city of our strong brands.

Ill now hand, the call over to Steve to provide more details on our second quarter financial performance as well as some additional thoughts on managing the balance of fiscal 2021, Steve.

Thanks, Dave and good afternoon, everyone looking back at the past six months, we are proud of how our business has performed over the opening half of our fiscal year in the midst of a global pandemic, while consumer behaviors are rapidly shifting with changing lifestyles, our brands and product offerings have been placed in a unique position.

And as demonstrated by our results our product proposition is resonating with consumers, helping to drive an exceptional quarter in particular IOG has benefited from consumers working and learning from home as the brand has been known to provide consumers with the feeling of comfort and security.

And at the same time HOKA benefited from its increasing awareness and positioning within the expanding active category. These.

These trends helped drive attention to the work our brands are doing and created awareness of our innovative line of products.

While much of the current environment remains uncertain, we continue to focus on delivering great products that amplify our brands and meet consumer demands.

Now for more detail on our second quarter results.

Revenue in the second quarter was $623.5 million up 15% versus the prior year performance as compared to last year was primarily driven by.

Global HOKA growth of 83%, which experienced balanced gains across all regions and channels, but also benefited from first quarter product launches that were delayed to the second quarter.

And global growth, which was up 3% versus the prior year to $415 million. This.

This increase for the quarter was driven by robust global direct to consumer growth of 69% as well as approximately 25 to 30 million of earlier global shipment of product to wholesale and distributor counts as we work to decrease some of the logistical load on Q3, although.

Although as expected the overall wholesale AWG business experienced lower revenue for the quarter versus last year as many wholesale partners plan more cautiously this year due to uncertainty at the onset of the pandemic as well as the impact of our international reset.

Gross margins in the second quarter were up 80 basis points over last year to 51.2%.

Gross margins increased due to favorable channel mix as DTC increased as a proportion to the total business.

Favorable brand mix with the sizable increase in HOKA volume and benefits from favorable exchange rates.

As gene a dollar spend was $190.4 million up 8% from last year's $175.9 million. The increase was primarily driven by higher marketing and warehouse costs that were partially offset by savings from travel and retail expenses.

This all resulted in earnings per share of $3.58, which compares to $2.71 in last years second quarter.

The 87 cents improvement versus last year was primarily driven by a higher proportion of DTC and HOKA business with offsets from lower wholesale revenue and greater marketing spend and warehouse costs.

Our balance sheet remains strong and as of September Thirtyth cash and equivalents were $626 million up from $178 million at September Thirtyth of last year.

Inventory was down 13% to $484 million from $559 million at the same time last year.

And we had $9 million in short term borrowing under our existing credit line as compared to $13 million last year.

Our existing credit lines, having available balance of $463 million.

And during the quarter, we did not repurchase any shares.

During this period, we historically provide an update on our sheepskin pricing, we continue to see stable pricing in the sheepskin market and we expect no change in our sheepskin costs for fiscal 2022.

Please note. This does not constitute gross margin guidance for next year as our sheepskin costs are only one component of our gross margins.

As Weve now completed the first half of fiscal 2021, we remain disciplined in our approach to planning the second half of the year as we are aware of the unique circumstances surrounding the upcoming holiday season.

We are mindful of shipping constraints during the upcoming peak, including not only our own operations, but also the operations of third party shipping and logistics services that we utilize.

The logistics infrastructure, both internal and external will continue to be tested by current challenges paired with unknown pandemic developments, which could be significantly impacted by a second wave of the disease or any impacts from government orders or restrictions.

While remaining vigilant, we will tightly manage the business and drive opportunities, where we see potential for success.

All with our primary focus on the long term health of our business and a continuation of driving success through our strong brands and innovative product offerings.

Looking to the back half of fiscal 2021, we're conscious of the historical size and relevant that our third quarter represents to full year revenue and earnings.

In a typical year at the three months, representing our third quarter equates to more revenue than Weve recognized over the first six months.

This dynamic combined with the extraordinary circumstances of the pandemic placed additional pressure on our third quarter. This year and may lead to reaching capacity thresholds that have yet to be experienced year to date.

These capacity thresholds will be tested at a retail stores given that the October through December in store purchase volume typically represents two to three times the volume of any other three month period.

Additionally, while we are comfortable with current inventory levels in a year, where we tempered inventory buys at the outset to reduce risk we may see demand outpaced supply with certain product.

In these cases, we will be challenged with meeting the in season demand, but at the same time. It will continue to drive brand heat encourage full price selling and result in a clean marketplace for the fourth quarter and beyond.

With all that said and given the continued uncertainty caused by the COVID-19 pandemic, we will once again not be providing specific guidance for fiscal year 2021 at this time however.

However, I will update some of the major themes of our business.

For context, we observed a complex pandemic impacts in the first half of the year, including some tailwinds from the acceleration of ecommerce brand heat and attention, resulting from changing consumer trends extended consumer adoption of categories, providing the unique comfort.

And heightened consumer awareness of HOKA.

While we anticipate that some of these trends may continue to provide opportunities. They may be dampened by the headwinds yet to be experienced that are particularly relevant during our peak season in the back half of the year spin.

Specifically pressure from shipping constraints with third party providers.

Higher costs associated with our own warehouse operations in the current environment.

Product scarcity on key styles that are selling faster than anticipated.

And increased marketing costs to capitalize on the momentum of our brands and stay top of mind with consumers.

With these considerations in mind, we are approaching the back half of fiscal 2021 with the possibility that of revenue may fall below last year levels as the brand is up against potential capacity constraints. Some earlier shipments into Q2 retail traffic pressure and continued work with our international business risk.

That.

And as Dave mentioned, we continue to see growth with HOKA, but at a lower rate than experienced in the first half yet on the path to $500 million.

And we anticipate higher expenses, resulting from marketing spend to keep our brands top of mind warehouse costs for safety measures and higher wages and increased expenses as we build out appropriate support systems for our accelerating ecommerce platform before I hand, the call back to Dave I would like to say how pleased we are with the results of our first half.

As it gives us confidence that the organization can manage through the current near term challenges while remaining committed to our long term vision. Our brands are in a great place. The company is well positioned and we are excited about the opportunities that lie ahead.

Thanks, everyone and now I'll turn the call back to Dave for his closing remarks.

Thanks, Steve as I reflect on a unique first half I'm proud of our organizations collaborative efforts to prioritize the consumer and deliver results. Our brand teams have done an excellent job delivering compelling and innovative product.

Our omni channel organization has been the engine driving product messaging executing sales and providing analytics to inform future brand success repair.

For Paramount to the first half success. This year has been our operations teams with heavy lifting being done by our product development team distribution center employees customer service specialist and all other individuals working throughout our supply chain.

Huge thank you to everyone of our employees for their continued execution of our strategies. During these very challenging times.

And along with performance. It is our organizations believes that we have a responsibility to continue to do business in the right way and Deckers continues to drive forward our DSD initiatives.

I'm pleased to report that we have recently been recognized by Investor's business Daily has the 15th rank company in their top 50 best SG companies list for 2020. This is an.

Improvement from our number 20 ranking last year and I note that we are the sole footwear or apparel company included in the top 52.

To that end I'm excited to share that our creating change Fytwenty annual corporate responsibility report will be released tomorrow, highlighting the tremendous progress made by our global organization and F. Y 20. The report will be posted on our website and I encourage you to check it out.

On that note and in the spirit of making a positive impact earlier. This month Deckers held its first ever art of kindness week, which was an organized effort to encourage employees across the globe to give back through volunteerism.

Collectively im proud to report that our teams contributed more than 2000 hours to assist over 200 organizations ultimately, reaching many individuals who need help in these trying times three.

We remain focused on these types of efforts in the midst of a pandemic, while driving business growth is a testament to deckers values and approach. It is these values exemplified by our dedicated employees and top performing brands that just yesterday earned deckers. The honor of being named footwear News company of the year for 2020, I'd like to thank and congratulate our employ.

Please on this well deserved achievement.

In closing I have a high degree of confidence in our strategy portfolio of brands and top tier operating model to navigate through these short term challenges while also investing in our digital transformation to support growth over the long term. Thank you to our shareholders for your continued support with that I will turn the call back over to the operator for today.

Operator.

Thank you we.

We will now begin the question and answer session.

Good question.

And then one on your touched downtown.

Using a speakerphone please pick up your handset before pressing the keys.

It was just a question. Please press Star then two please.

Please limit yourself to one question and one follow up.

The first question today comes from Camilo Lyon with HP, Inc. Please go ahead.

Thanks, Good afternoon, guys and great job on the execution.

Well.

I wanted to.

First ask about.

Youre relative to inventory position I think Steve you said, you feel comfortable with your inventory, but demand trends are.

Could exceed supply.

And you are noting that as a as a cautionary pointed to watch out for I'm wondering.

What category, specifically are anticipating dean under inventoried in and do you have the ability or have you tried shifting purchasing behavior intend to comparable categories. Our skews that are in better stock and a better stock position.

Sure ill go first and then maybe Dave can jump in absolutely kind of what you said, we are taking a look at so with inventory down 13%, we're comfortable with where we have inventory as I said.

Onset of the pandemic, we did make some strategic reductions in styles.

What weve seen really over the course of the last six months is a non.

And acceleration.

On on certain styles, specifically kind of Super sandal categories, we've done very well.

And as a result of that we have run short now in the time. Since then we have look to bring more inventory in and we're in the process of doing that so we intend to bring more inventory.

And in this quarter as well as Q4 that will help kind of fill out some of those.

Shortages on on styles colors sizes.

But if there is disruption that will create.

Some challenges logistically, so we're doing a lot to overcome that.

You know, we're bringing things in Canada as quickly as we can.

With those identified styles and where we may be short we are steering.

Customers to styles that we have more in stock on so all of the above right. We want to take advantage of the brand heat that we have going the consumer demand that's out there for these styles. We want to use that then it's an opportunity where we have scarcity to push them into other products that we do have in style.

Yeah, that's exactly right and we're seeing as a consumer shift to other products and other categories, but generally speaking whether its slipper classic fashion boots winter winter boots were seeing strong sell through particularly in DTC, but also at wholesale of all the categories, including.

Including ready to wear so the demand for the brand at a high level remains very strong as you see in the accelerated interest over the quarter younger consumers are adopting the brand at new levels.

We've we've increased our rate of 30 18 to 34 year old way of 180% for the quarter.

And we're chasing the inventory, where we can so we feel confident that.

If there is no logistic disruptions will be in good place I think that a healthy place where our brand to be in this chase mode and you know while we are focused on delivering Q3, we're really focused on the long term health of the brand and the set up that this demand.

And healthy marketplace.

Means for us over the long term.

And a lot of potential right now.

That's great.

Just two more volatile it to fall asleep.

Steve You mentioned last quarter that you are anticipating cancellations to outpace preorders.

Is that still the case.

Then on a longer term basis, Dave maybe would love your intention to this year, you're looking to reach at least mid teens, probably 15, maybe a little bit above 15% EBIT margin this year they shop.

Operating.

Metrics there.

Clearly you've taken the brand to the next level with a new demographic coming in where do you see the long term margin opportunity.

Can this be a high teens or low twentys business overtime.

I'll go. So this is Steve I'll go first.

Really kind of as we think about.

Where we're at.

Okay.

On the inventory and cancellations, it's why we're not giving guidance right. We don't know whats going to happen kind of at wholesale if everything holds up we won't have the cancellation issue.

If things get more challenging from a logistics standpoint. Some retail is closed there may be cancellation. So that's really what we want to see kind of over the course of the next couple of weeks I think it's too early to tell and kind of why we're holding off on guidance, yes, yes exactly.

To your question on kind of longer term, we're looking at this right now it has had a conversation with the board a few weeks ago.

You know I guess, the best way to think about it is we're committed and we've proven that over the last three plus years to this mid teens operating margin.

But there is going to have to have to be some investment.

In the next coming one two years to be able to take advantage of the opportunities that we're now seeing.

You know our long term strategy through Cobra is actually probably then accelerated with the shift to E commerce younger consumers coming in and the increased marketing spend but.

But we're going to need to invest in further capabilities to optimize that ecommerce engine, even more than we already have to provide better data and analytics capabilities systems improvement.

And just continuing to fuel the growth of these brands through marketing our marketing is paying off.

Tremendously right now and we increased our marketing spend over the past quarter by 30%. So this is this is one of those situations where the engine is firing on all cylinders that we need to keep it going so.

I would say were you can you can count on us to deliver on mid tier operating margins, what do we get up above 16 17, 18%.

The the opportunity is there, but it all depends on how fast we're going to have to invest in the mid short to mid turned to be able to.

There is nothing compared to what's coming in the next couple of months and so that's really when the the capacity of taken.

Taking inbound deliveries that are in some cases delayed because of logistics from Asia Pacific into.

Into the D C and at the same time, turning around and putting product into the marketplace, that's where the pinch could come.

In the next couple of months and that's what we're really mindful urban planning for so haven't seen major disruptions yet within our control we have seen them in logistics, but.

We're feeling confident in our ability.

<unk> managed through it but as Steve said there.

Still so much uncertainty.

Coming up ahead of us.

With regards to kind of marketing you know we are very surgical in our marketing now we ever center of excellence on digital marketing and spend around the world and we we navigate based off return on spend by brand channel and region and so we're we're conscious of the fact that we're there may be a constraint on upside doing a marketing and we're putting.

ER marketing dollars in places, where we know we'll get the payoff such as hooker to continue to that grow that brand and you saw the 80 plus percent growth in queue too.

Different markets, you know, where we're releasing some money to continue to assist international in the transition of the brand and just you know we're testing at the same time. So the marketing is paying off were adept adopting a younger consumer we're getting multiple purchases from a younger consumer within the quarter normally.

You know, we wouldn't see purchases for a product more than once a year traditionally a classic style, but.

But now we're getting people many consumers that bought the fluff earlier and Q2 came back and purchase the unclear. So the marketing is paying off it's driving overall, Brandon and awareness and buzz about the brand.

I don't have a lot of concerns about missing sales and wasting marketing spend I think we're very efficient on that and very targeted and so far it seems to be working really well, yeah, and I think poachers to add on that I think the other thing on the constraints is really third party logistics.

So we are hearing from you know third.

Third party freight companies logistics constraints, and that's going to be really universal. So that is one thing we're keeping a close eye on so one is kind of constraints within.

Within really what we control, but also what's outside of our control.

And we are seeing signals around that so that's something that we're gonna watch carefully and look to find alternatives to to work around some of those situations kind of on the marketing just add to what Dave said.

You know, where we are marketing to certain styles that may be low on inventory. There is an opportunity to shift some of that marketing. So the first question to Camilla said, we can start to shift some of that marketing to product that we have in stock. So we have an opportunity to kind of move that in stock and then I think the other important component is really our international reset.

We can use money. So this is not just about domestic it's about how we can accelerate some of our international reset and deploying some of that marketing money around kind of repositioning our brands and products and awareness in the international market Yep.

And as we said in Q1 call and we will continue to stay focused on we want to take.

This opportunity steel market share wherever we can so we won't say aggressive on marketing.

Continuing to drop innovative exciting products in the marketplace, bringing younger consumers.

And we're going to have to continue to spend marketing dollars to do that but but it's really know about scaling the global opportunity based on the success that we're seeing in the domestic market.

Gotcha I'm, just so could I just ask what percent of the ready to what were some of the businesses is ready to wear and same question for hookah what percent of the power.

Yeah, So ready ready we're for August less than 10%, it's Moby high single digits right now it's a small.

Business right now, but this.

This ready to wear lunch for US was really a test of proof of concept test.

And the results have been phenomenal.

The price points are perfect.

They're the styling and the detailing is resonating with a yoga consumer and we launched it primarily as you know in DTC and with Nordstroms and this is the first time and Nordstrom has ever put us on their landing page for apparel.

They are incredibly pleased with the sell through we've had a lot of account, calling trying to get their hands on the product.

So for US what this means is there's just a lot of opportunity. This on this category to the next three to five years. So now we're just another opportunity for us to invest in in our design and creative talent and go to market town for that category.

So small, but very exciting from a launch perspective hookah apparel is even smaller you know that's really early stages of development. There. We are working with some folks externally to bring in some more talent to to ramp that up.

But you know the $500 million a billion dollars numbers that we have put out there we don't believe those need and apparel business to hit those targets. So.

So it would be incremental to that those kinds of numbers at this point, but early days of hookah, it's less than probably 3% of total sales.

Thank you good luck.

Alright, Thanks, a lot.

Next question comes from Jonathan calm with Bert. Please go ahead.

Yeah. Thank you just to follow up on the all the commentary you've given on August which is really helpful thinking about the third quarter and really the second half here are are you, saying.

Steve when you look at the scenarios and some of the planning are you, saying, there, there's no scenarios, where where uncomplete flatter up for the period or just trying to gauge the degree of the constraints that are out there relative to potential scenarios hand did you call out any explicit costs that we should be thinking about for for something else.

J sticking backs.

Yeah. So John again, we're not giving guidance what I wanted to call really to attention is we're dealing we're kind of in the middle of a pandemic, we're dealing with constraints and so we have seen growth in the first half as.

As I mentioned and mentioned on last call. We're looking and did successfully move some product in queue too that would traditionally go in Q3.

And so it really depends and again. This is again why we're not giving guidance is it depends on what happens if it's a clean Q3.

But you know given everything we're seeing it's hard hard to see no disruption.

In Q3, that's how we're kind of looking at and planning for it so.

I just want to.

Provide a little bit of caution as we think about it there's been some shifting and product we have because of the onset conservative.

Cuts that we made in terms of inventory, we're up against some constraints on an inventory. So we're gonna do the best that we can but it's it's gonna be work and we're working against some external factors that we're gonna have little control over.

And the setup for Q4 in spring product looks promising as well, but it all depends on how we're able to get through Q3 before we get to that point.

Okay. That's that's really helpful. In that maybe a broader question Unhook I know you've talked about this billion dollar.

Plus aspiration for awhile, just thinking about you know at least that incremental 500 million compared to this year.

Nearly a quarter of your total company sales today could you just talk through what are the margin implications of that given the doesn't.

Doesn't mix shift that will drive towards oak.

They're overtime.

Yeah I'll go first the you know what we've said historically in it's channel compared to August is a little bit better and so as the proportion of polka you know the the.

The gross margin implications are that you know if we don't get into situations, where we're having to discount again, we're dealing with a brand that is on fire growing 80% of court, which is crazy.

We can hold full price selling so as long as we can do that margins are by equivalent channel compared to us slightly better but.

But at the same time, then we're also spending more on marketing.

So as a brand that is still being discovered by many we spend considerably more on developing Hawker in brand awareness some consumer awareness with that brand. So from a gross margin standpoint as long as the brand is hot and continues to grow like it is and there's little promotion around that brand. It is incrementally positive but at the same time, we're also investing.

Suitably Moore.

In developing that brand and building that brand.

Okay. That's really helpful. Thank you good luck for holidays all.

Alright, Thanks John.

Next question comes from Tom Nick went South with Wells Fargo. Please go ahead.

Hey, guys takes it thanks for taking my question.

Spoke a lot about capacity constraints, no, both internal and external and kind of seemed like.

You know for the most part you are speaking in reference to argue.

Do the same constraints or or anything like that apply to <unk>.

And you know it would seem to to get the $500 million this year.

You don't need.

The growth in the back half of the year, how God would be much slower than it was in the first half.

So so you know is there anything you know preventing you from you know.

Far exceeding up.

500 million debate number and it's it's it's a big gross number but I mean, it kind of seems like with the momentum and the brand.

The the growth rates that you've been cheap even in the midst of the pandemic that.

Yeah, it it could even be better than that.

HM.

Yeah, I think Ah Ah Ah jumping on that to keep in mind that you know some of the deliveries in the business that weird tends to do in Q1 for okay ended up happening in queue too because the wholesale being closed for most of the Q1, so hence the 80 plus percent growth but.

From an internal perspective, we don't have a lot of constraints on Hogan inventory or chasing the inventory as fast as we can we're in pretty good shape heading into the back half of the year in inventory and hookah.

And the demand is still there, it's really relying more on kind of the macro environment and an external factors for us.

About it and they used to be.

I guess I'm.

Sorry, just the biggest challenge that we're facing is just the it's really the last seven to eight weeks of the quarter on where DDC ramps have dramatically and at the same time or in bounding product and shipping out to wholesalers, that's that period of time, where.

That's that's where were exercising caution here because there's so many different factors that could and get.

Get in the way of that being successful, but that's that's in dynamic less so on Hogan.

Understood that's helpful and you know on on.

Maybe this is.

Question to answer at the moment, but obviously that there's been a lot of noise lately.

Pre covid with.

Bradley said in Europe, and stuff like that you know when.

You know when when sort of everything's normal when we're past covid win yep.

International reset is done.

No what what what kind of growth should.

Be generating I mean to say it's.

Single digit grow or is it something better than that so the western that I mean, I'm just kind of wondering like.

In a in a normal environment like little.

How should we come about I'll go over the long term.

Yeah, I know it's a good question I you know I would I would say, it's probably low single digits, you know under 5%, but healthy sustainable you know full price sale.

<unk> growth and what's encouraging for me right now is to see you know again, how many new young consumers have now adopted hug.

To their consideration set and they're choosing to come to our website. They are looking for new product, they're bright they're buying you know from our website more than once and a quarter across categories. We've even see you know.

A healthy mix of consumers, who bought footwear and ready to wear.

We haven't seen that before and so I think you know if you look at the success of the fluff franchise and the and the slipper Sandal you know.

Hybrid phenomenon that we've created there's still a lot of.

Longevity and that trend, it's less about being inside and slivers and it's more about fashion the amount of new consumers, we have in our database and our ecosystem that we can know.

Manage for you know and optimize the lifetime value of those consumers.

The excitement that's happening in men you know were lunching fluff product for men's in the next couple of weeks with an exciting ambassador that you'll see shortly.

They're ready to wear opportunity and if we can get international Ah.

Through their transformation and heading to positive territory again.

You could see this as pretty healthy sustainable long term growth and we were optimistic about where the brand is.

It's the healthiest and most exciting I've seen it since I've been here over eight years and.

And so we feel good about the potential going forward.

Great. Thanks.

Thanks, very much and that's the way this holiday season.

Thank you.

Your next question comes from John came in with College. Please go ahead.

[noise], yes excellent. Thanks for taking my question and congrats on all the momentum.

Thanks, Sir I'm gonna too.

Ask you on E. The.

The Knicks shipped to D T C and Hulk obviously.

See drunk tremendous gross margin expansion in the first half of the year and also dropped a lot of SG&A leverage.

D T C and hocus shifts senior.

Stimuli should continue on in the back half of the year, how should we think about your margin structure and.

In the back half relative to the performance you had in the first half month on the gross margin asked you a lot.

Yeah, I'll take that one again.

Haven't given guidance, but I think that the way to think about really kind of the back half is you start getting up against the kind of bigger numbers. So you know Q1 Q2 are huge on a percentage basis, because those tend to be kind of smaller smaller quarters and now as you get into really the back half your your up again.

<unk> kind of bigger numbers. So the expansion that you saw in the first half is not necessarily indicative of what you'll see in the second half clearly we're gonna have similar impacts from the changing dynamic.

The impact will not be as much as what you saw really in the first half.

Yeah.

The strength of DDC upside.

I'm a percent growth perspective is more dramatic and hug hook is more just kind of holding steady as as a trend that they've been on but the the jug business from a DTC perspective, as a super Super strong.

Yeah, certainly a lot of momentum maybe just one more follow up would be when you think about that.

<unk> dollar run rate of sales for Hulk. What are you. Most excited about from my category level and geographic level to get you to give you that confidence and it's doubling that business.

Well I think you know, it's obviously still found it and core authentic running and continuing to be a leader in that category in some cases, we're seeing.

We're and number two in some cases number one market share already but the difference between us and the number one market shareholder which tends to be Brooks generally speaking you know.

We could almost double our market share, it's still the neck and neck with Brook. So there's still a lot of opportunity in the core run specialty channel.

Two things that get me most excited or just the expansion to a broader set of consumers. So it's more.

Consumers that aren't just buying it just for running it's every day athletics or lifestyle.

And we're starting to see that broad base of consumers being attracted to the brand for the performance attributes that it provides.

We still want to keep our distribution tight.

Focusing on our tight ecosystem of very selected wholesale partners key accounts and then driving E. Commerce. So we can optimize that business in a long term, but I think the real unlocked. The billion is is continued acceleration of our EMEA business.

Particularly online we've made quite a view investments over the last year to allow the E commerce business there to flourish and we're seeing positive results on that but it's still small compared to the U S.

And then I think when you think beyond a billion, it's really Asia Pacific and we're we're just getting started in China, obviously, that's a massive opportunity for us, but we think we can get to that $1 billion.

It's real strong growth continuing in the U S and accelerated growth and EMEA and then beyond that is just.

Even more upside once we get into those territory's in Asia Pacific in newer categories.

That's excellent congrats on all success.

Alright, Thanks John.

The last question they will come from Sam Patterson Air was soft Lahaina. Please go ahead.

Thank you I'm honored to be last.

Oh gosh.

Okay. I can you just some housekeeping and then I have some more detailed questions could you give us either the revenue or the revenue growth for a wholesale by brand for.

Or D T C by brand for each brand.

You gave of.

Whatever it was and and but can you give the rest of them for modeling purposes. Please for the quarter Yep.

Yep sure Sam So hug wholesale for the quarter was 292, so 292 million polka was 108.

<unk> was called 18 Snook was six.

All else was call at 28, and then our DTC was 172.

Okay, great. So I've got a couple of questions other than that I guess, you've talked a lot about the transformation going on an E E M.

EMEA and a pack what I mean, you know as you see it today, what's the timetable for being sort of.

You know for being out of you know the let's say the beginning stage of how the U S.

No turn when the U S turn really kicked in which would be a few you're a couple of years ago.

Yeah. My sense, you know that's been obviously challenge because of the Covid situation, both in Europe and.

Asia Pacific, particularly China.

That being said, we have seen some signs of promise with category adoption. So the phenomenon of the flip franchise in the U S hasn't really hit Europe, or China, yet, but in the last weeks of the quarter, we're starting to see some excitement around those categories younger consumers positive.

Strong sell through.

Of those categories, but also the brand so.

The increase marketing the focus on PR and collaborations the new ambassador that we signed in China.

Those are all so far showing positive results.

Not big enough to move the total country needle because we still have some.

Scarcity.

Work to do as far as resetting the classics business, but people are starting to see the the.

[noise] brand as.

You know more fashion relevant brand and they have in the past so I would say you'll start to see the return to growth probably next fall in those markets.

And gives us an indication of where we can go from there, but I think the work at the teams are doing right now and the way we are shifting investments in our approach to be tailored to each of those markets.

Is working well the teams are doing a great job and I think you'll start to see you know like I said that return to growth probably next fall into.

FY 22 and beyond.

Thanks, and then.

You would talk to earlier or I'm previous calls about the test will talk to you were doing with Dicks could you give us an update there and how they're managing it and you know what the plans may be and then lastly, and I've got others. Lastly, you know you talk about the New York flagship myself 58 Street clothes, where is the store gonna be.

Yeah I guess.

Yes, I'm trying to remember what your first question was.

Alright that you had to access so yeah. The 11th store test has been going very well, they're very pleased to sell through has been strong you know we tested with them. It was like three or four years ago with small test and the results were not good.

A whole different ballgame now so.

Again, we're managing that relationship closely pleased with the results and what they're selling we're not looking to expand dramatically with those with that account just yet again.

Again, it's it's very strategical and methodical Ah.

Approach as to how and if we go much bigger index, but so far the results are very promising.

And down the road you know, we're also exploring opportunities with.

The foot locker banner as well early camera, an ongoing conversations there yet but still.

I'm really cautious about the timing of when we go into those new accounts.

And then the New York.

Yep, So it's on fifth Avenue.

Oh.

Yeah, we don't have the exact it's right across from the MBA store on fifth Avenue.

Tremendous.

Location highly visible to floor has lots of windows.

Great foot traffic, both local and tourists going by there.

It's Ah, it's our largest store ever.

Two floors, and it's kind of showcase all the ready to wear a new store design be much more fashion focused and we have been in the past lots of color and excitement.

And then some great storytelling, an experience for the brand with an elevated service model for Omnichannel capabilities.

And at home for testing a lot there.

And then a new mobile pass system to go along with that so.

There's a lot to be excited about obviously the timing we wish was better but this will be a catalyst for the brand globally and we'll be looking to roll out the new store concept to keep partners and other flagship locations as time permits over for the time is right over the next coming years, but there's great storytelling.

To be able to do and I'm excited for.

Everybody listening in the consumer to go in and experienced the ready to wear collection and a new look for the for the face of Oak.

Thanks could I have one more.

Yeah. The opening date on that is November 19th Sam.

Yep. Thank you just just to confirm so so.

Your D T C O D T C business in queue for is gonna be hampered by does it hampered by a store traffic or is it gonna be hampered by product availability in the amount you can ship you know because of will it be capacity constraints in stores that can't be overcome by ecommerce or is it.

Or is it what's going on in the distribution center.

Or both.

Yeah, just so I'm clear on that same you said queue for you mean or two three I'm, sorry 2323, yeah.

It is yeah. It is really more just about constraints.

So one will be from Ah.

From a retail how much traffic is allowed in stores you know some of them all based stores what does the malls look like can people get in.

So that's gonna be kind of the one constraint and then I would say as I mentioned before just externally will be what shipping capacity. It looks like so the more we can direct E commerce and the more we can capture early is beneficial right. It helps us navigate I think some of the what I'll say them our macro.

Evil constraints that are more out of our control we're doing the best that we can kind of that's under our control, which is really about inventory management, bringing more product in this year than we did a year ago and a quarter, where we have constraints as we have lower inventory going into Q3. So those are all the things that were.

We're working with and and you know trying to get to the consumer the demands they're.

They are showing up online.

We're confident in our ability to kind of fulfilled that if there are not.

Constraints in place, but we know there's going to be some so yeah.

Okay.

So go ahead of him.

Do you think you can be I mean do you. When you said <unk> overall, you know is unlikely be up in the corner or is that more of a wholesale issue or more of a direct to consumer issue or do you expect direct to be up just it can't be up as much.

As queue to nearly as much as cute too because of the level of numbers. Yeah. So it's more a wholesale focus just being able to be able to get inventory through the pipeline and chasing inventory.

DDC, we still think we'll be able to have shows some growth there were up against big numbers last year. If I remember last year was a very strong quarter for us, particularly in DTC in stores. So that velocity is going to be hard to comp, but we're confident that DTC can to continue to be strong and the last thing I'll say before we end the call and all this is.

15% growth in this environment is exceptional, but I can't stress how enough how hard it is and how hard people are working to ship to be able to.

To cover this kind of increased demand in our distribution centers in our online businesses and chase. This inventory is really hard to do and I give them our team's a ton of credit to be able to do that.

And we're heading into the biggest.

In some ways the demand for our brands has never been stronger, but we're heading into the most of uncertainty we've ever faced and we have more demand on our website and our straining our systems and we've ever seen before we're handling it extremely well so far but like I said when we get into these last few weeks of.

November into December and that pinch point for getting product to consumers. That's the area that we're really.

Cautious about.

Because this is hard work and being able to ship. This quickly with those kinds of shifts in consumer demand as a strain and we're handling it well, but that's what we're focusing on providing some caution.

Thanks, so much and conclude and stuff.

Yep.

This concludes our question and answer session and also concludes that conference. Thank you for attending today's presentation. You may know that's kind of.