Q3 2021 Deckers Outdoor Corp Earnings Call
Third quarter fiscal 2021 earnings conference call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
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I'd now like to turn the conference over to Erinn, Kohler, Vice President Investor Relations and corporate planning. 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 note that certain statements made on this call are forward looking statements within the meaning of the federal.
These 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 1095.
All statements made on this call today other than statements of historical facts are forward looking statements and include statements regarding the impact of the COVID-19 pandemic on our business and operations business partners and industry changes in consumer behavior in the retail environment strength of our brands and demand for our products changes to our product allocation and segmentation.
And distribution strategy.
Changes to our marketing plans and strategies investments on our business our anticipated revenues brands performance product mix gross margin 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 looking statements involve numerous known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any results predicted assumed or implied by the forward looking statements.
The company has explained some of these risks and uncertainties in its SEC filings, including in the risk factors section of its annual report on form 10-K, and quarterly reports on form 10-Q.
Except as required by law or the listing rules of the New York Stock Exchange the company expressly disclaims any intent or obligation to update any forward looking statements.
With that I'll now turn it over to Dave.
Thanks, Aaron Good afternoon, everyone and thank you for joining us today I'm excited to dive into the details of an extraordinary quarter for the company and the exception of results that our teams have delivered.
But first I would again like to stress the of Paramount importance of the health and safety of our employees customers communities and stakeholders as they remain top of mind with everyone continuing to navigate the COVID-19 pandemic on but.
The half of Deckers I hope, everyone is staying safe and healthy.
Our third quarter results include record setting revenue of 1.078 billion and record earnings per share of $8 of 99.
Revenue grew by 15% over last year's third quarter to deliver Deckers first every quarter to exceed $1 billion.
The performance in the quarter was driven by delivering relevant and compelling product the consumers are demanding.
Focusing execution to maximize demand captured through direct to consumer channels engaging consumers with authentic and emotive product storytelling executing marketplace management that set the table for high product sell through in.
And our dedicated employees working tirelessly to deliver strong results despite the challenging environment.
To achieve these results we overcame both significant operational hurdles as well as macro pressures related to the ongoing pandemic.
Steve will be providing more context on these unique dynamics later on today's call.
We believe much of the strength, we have seen in our business fiscal year to date is the result of our continued execution and dedication to our long term strategies.
Including driving year round demand for AG through of diverse product assortment.
Accelerating consumer acquisition online, which increased 87% year to date across our portfolio of brands.
Prioritizing 18 to 34 year old consumers, which have accounted for the largest percentage increase in our U S customer database this year.
Managing the wholesale marketplace strategically, which has continued to benefit of margin in the U S and is progressing in EMEA glue.
Globalizing, the HOKA ecosystem, evidenced by the acceleration of international markets and spending responsibly to maintain high levels of profitability, while deploying investments in these key strategic areas.
While this last year has led to unique circumstances, allowing our brands to capitalize on positive momentum our underlying strategies remain central to Deckers long term growth and profitability profile.
As we adapt our operating model to these accelerated trends, we continued to recognize the need for additional infrastructure investments, allowing us to sustained strength in our business more to share on that front during our yearend earnings call on May <unk>.
Now I'll walk you through the brand highlights from the quarter, starting with the hug the double digit global growth rate in the third quarter was driven by.
The strength of the brands diversified and compelling product offering which has been embraced by our broader range of consumers.
Momentum with younger and fashion forward consumers targeted digital marketing and PR activations.
Increased purchase frequency from consumers shopping across multiple product categories significant brand heat in the U S with strong selling and sell through across multiple wholesale accounts paired with exceptional DTC engagement.
And traction with localized strategies for international markets, beginning to rebuild brand heat within Europe and Asia.
The UGG brand's success, particularly in the U S is the result of the brand's long term evolution as a leading global lifestyle brand through infusing brand DNA into new and expanded categories more specifically over the past four years <unk> has established an impressive resume of collaborations that have helped rebuild the brands fashion credibility.
This includes the recently announced collaborations with British designer, Molly Goddard and New York based designer of telephone Clements.
Mining Buzzworthy collaborations design innovation and strategically managed distribution through product allocations of segmentation and differentiation.
It has significantly reduced its reliance on core products, while significantly expanding other categories.
Evidenced the success of the strategy during the third quarter Women's classic product volume remained flat year over year, while the brand experienced growth across every other major categories, including women's non classic footwear highlighted by slippers, and the fluff franchise men's footwear, particularly the new male franchise inherited slippers.
Kids footwear through fund variations of popular men's and women's product and the new ready to wear collection, which was a resounding success. This season and will be expanded upon next fall with additional products and partnerships.
With this transformation beyond core products, the other consumer is becoming younger and more diverse.
During the third quarter <unk> experienced a 44% increase in customers the aged 18 to 34 year old in the U S, which was the largest increase of any group and represented the largest percentage of total customers.
<unk> continues to expand its audience with younger consumers. It has been critical to enhance the brand's E commerce engine and digital marketing expertise.
E Commerce platform has continued to evolve as part of Deckers overall digital transformation, but it has also become a strategic driver of the product development process through exclusive products by.
By creating products exclusive to DTC. The other team is able to both develop special events that drive traffic as well as create a faster feedback loop to enhance future products success with targeted consumers.
Momentum with younger consumers has been amplified by AEG, earning year round of attention from the emergence of the fluff franchise here.
Historically, many consumers search for AG products as weather turned colder however, with the evolution of fluff, which features year round product because the remaining top of mind with consumers.
In fact of brand search interest increased 18% for the entire calendar year 2020.
We have also observed fluff as a compelling acquisition vehicle for driving repurchase decisions on other categories specifically.
Specifically, our data highlighted many consumers who purchased fluff earlier this year returning to purchase of the classic clear many of this fall with more frequent attention from consumers and effective utilization of consumer insights and data analysis over the last nine months, we've witnessed an 89% increase in repeat purchases as compared to the <unk>.
Same period last year.
With more consumers, making multiple purchases the value of the more than 2 million new customers acquired so far this year becomes even more impactful to the future growth trajectory of the UGG brand.
As the UGG customer database grows so does the strength of its insights provided by a centralized marketing teams for example, consumer insights revealed the 18 to 34 year olds in the U S, where the driving factor behind the new male becoming a top global style for AGA in the third quarter.
While volume growth of the style was impressive even more exciting was the increase in 18 to 34 year old purchases of the new male who more than doubled over last year and our domestic DTC channel.
With the insights developed around the new male consumer we believe that the recently introduced men's fluff product will also resonate well with this consumer.
First launch in November the men's fluffy and fluffy styles of remodel by NBA legend, Dennis Rodman and the UGG brand's chaotic fun campaign the.
Of the UGG team is excited by the positive PR impressions gained from men's Slough, which sold out in its initial allocation online and is selling well with key wholesale partners.
From a regional standpoint as expected growth in the third quarter was driven by the U S where according to Yougov UGG reached new all time highs in brand consideration.
Purchase intent brand impression brand buzz among women, aged 18 to 34.
Over the past three years, the UGG brand's domestic business has added nearly $200 million to the third quarter alone.
Which we feel is a result of our successful strategy to build brand heat and tightly manage our segmentation and diversification efforts.
While a great deal of the domestic strength. This year has been driven by owned ecommerce performance and this continued in the third quarter per soda of domestic wholesale partners. During the fall season increased 42% versus last year.
Because of the UGG marketplace strategy wholesale success was broad based given the strength of our sell through other wholesale partners. This fall of experience very little promotional activity in season, ending inventories in the market or out of historically low level.
Internationally of continues to see progress in the multi year reset in EMEA over the last year hug has exited approximately 20% of wholesale accounts in Europe and significantly reduced the core classic product in the marketplace.
While revenue in Europe remains a strategic headwind in Q3 due to our ongoing marketplace reset in COVID-19 related challenges margins improved as <unk> drove a healthier product mix and reduce the need for promotional activity.
Overall, we feel the UGG brand is headed in a positive direction in Europe, evidenced by fiscal year to day online consumer acquisition, increasing 97% over last year with favorable consumer acquisition and strength of strategic youth accounts in the region. We believe <unk> could return to growth in EMEA next fiscal year.
With the holiday season behind US we are now shifting our focus towards growing brand heat and consumer attention for the spring and summer seasons.
Clearly the strategy, we have implemented over the past few years in the U S continues to pay dividends and we are excited by this year's progress with international markets.
We still have investments to make in order to rebuild brand heat in these international regions, but feel increasingly positive that our strategy to build diversified product acceptance through fashion credibility is working congratulations to the other team on executing of fantastic quarter.
Shifting to <unk> global performance was driven by strength of momentum across the brands entire ecosystem.
Among all access points building the brands online consumer acquisition and retention has been a primary focus for hooker.
Through optimized digital marketing and Geo targeting Pogo has managed to increase consumer acquisition on line by 117% fiscal year to date, while also doubling consumer retention year over year.
With the growing audience online and dedicated consumer replenishment trends Hooker has been able to cross the $100 million DTC revenue Mark in just the first nine months of fiscal year 2021, with this acceleration on line DTC revenue now represents nearly 30% of poker revenue fiscal year to date up from 21% last year.
<unk>.
Importantly, HOKA is also firing on all cylinders with wholesale partners as the brand has doubled both the awareness and consideration among consumers outside of core runners occur.
According to the NPD group's retail tracking service hook of dollar sales in the U S run specialty channel increased 19% for the three months ending December 2020, compared to the same months over the prior year.
This growth is despite overall dollar sales of adult running shoes sold through this channel decreasing 4% for the three months ending December 2020.
For calendar year 2020 of the brand's top three strategic wholesale accounts sold more than $100 million of hooker product at retail value highlighting both the strength of these relationships and the relative size of the HOKA brand's direct to consumer business.
As we have discussed in the past we are constantly evaluating hooker distribution to ensure optimized consumer access points.
Earlier this year, we began testing Dick's sporting goods with the limited number of doors and product and so far the partnership has been mutually beneficial.
The spring Hooker will be slowly increasing its store count with Dick's and we'll continue to evaluate as appropriate ideally testing. These additional access points for HOKA will expose the brand to a larger audience as we work to build further awareness and consideration.
During the quarter poker growth was powerful across the globe in every region and we have been encouraged to see the brands international growth rate continued to outpace domestic.
While revenue dynamics remain in favor of domestic due to the differences in distribution models, 54% of units in Q3 were sold internationally.
This speaks to the Hooker brands global appeal and opportunity overseas as the brand expands.
From a product standpoint Hooker continues to be recognized with awards for its innovative technology and designs. Some of the awards received during the third quarter include the.
The Clifton edge being named best running shoes, and the Rolling Stones Essentials 2020 the.
The Bondi seven being named best for long runs and outside magazine's best running shoes of 'twenty 'twenty, One winter guide and.
In the Hooker Gore-tex shake dry run jacket being named best running jacket in the 2021 Women's Health Fitness Awards.
We are proud to see not only core heritage hoak of products like the Bondi receiving recognition, but also new product innovations like the Clifton edge and shake dry run jacket obtaining of claim we are still on the very infancy of hooker apparel, but it's promising to see such a positive response. So early in the development process.
On the innovation front Hooker has been working to bolster its fly collection, which represents the brand's roster of speed shoes, we.
We believe these lead with speed shoes are an important acquisition vehicle for younger consumers and I'm excited to share some of the HOKA brand's recent and upcoming launches in the category, including the rocket X, which launched in Q3, the carbon X two which launched in January and the Mark for which launches in March.
Similar to the original carbon X that was worn by Jim Walmsley, while setting a new world record 50 mile time in 2019. The X two was launched with the world record breaking 100 K attempt.
While Jim was a few second shy of the World record. This time he shot of the American record and it was an incredible event to showcase the brand we know Jim will be back from more record breaking attempts and believe this event further demonstrates the global opportunity that lies ahead for <unk> and are supporting athletes congratulations to Jim on this incredible achievement.
And thank you for showing us what is possible with HOKA performance.
We believe that with continued innovation and the speed space Hooker will continue to build awareness with consumers aged 18 to 34, the main consumer acquisition momentum, which fiscal year to date has increased 167% versus last year in the 18 to 34 year old demographic in the U S.
With just under $400 million on revenue in fiscal year to date, we're confident hook of across the $500 million of revenue milestone for fiscal year 2021, we look forward to sharing more on the hooker growth path on our yearend earnings call in May.
With respect to channel performance from the third quarter E. Commerce growth was exceptional helping to drive our mix of DTC revenue to 48% up from 44% last year.
This is the.
<unk> domestic hub with offsets from international related to marketplace reset initiatives underway.
In summary, global demand for Hooker domestic strength in ujiji, omni channel execution, and disciplined approach to strategic investment and an incredible display of resiliency by our employees operationally led deckers to double digit quarterly revenue and earnings growth in the midst of of pandemic.
On behalf of the entire leadership team. Thank you to all of our employees across the globe, the relentless resolved and getting the job done deliver these record results.
I'll now hand, the call over to Steve to provide more details on our third quarter of financial performance.
As well as some additional thoughts on the remainder of fiscal 2021 and beyond Steve.
Thanks, Dave and good afternoon, everyone. As you just heard Deckers third quarter performance was incredibly strong and speaks well to the success of our strategy is driving demand for our brands. While this year has been full of unique circumstances. Our performance has been enabled by the work we have undertaken to transform deckers to of digitally led org.
Renovation with strategically managed distribution channels and innovative product creation the consumers demand.
I am proud of our organization's ability to effectively manage our resources overcome operational obstacles manage with financial discipline and achieved exceptional results in the face of adversity.
I am confident that as we move forward and beyond the pandemic our brands in the organization are positioned to emerge with continued growth opportunities strength and discipline.
Before moving into our results for the quarter I would like to start with a little context.
Back on our second quarter earnings call, we laid out a number of tailwind as experienced in the first half of our fiscal year. These.
These tail winds included compelling products that are resonating with consumers in the current environment.
The accelerated adoption of E commerce, our brands benefiting from consumer trends shifting towards casualization as people continue to work from home and heightened awareness of HOKA.
With the results. We just delivered we were able to capitalize on these variables in the third quarter as well. We also discussed some potential headwinds that we anticipated could impact the third quarter as we stepped into our peak season to.
To quickly summarize the assumed challenges where the potential for both owned and third party shipping constraints are.
The second wave pandemic impact on operations.
Limitations, resulting from inventory purchase reductions at the onset of the pandemic and finally higher shipping and warehouse costs related to increased safety and hazard pay as well as increased marketing cost to capitalize on brand momentum.
And I am pleased to say that through some advanced planning early in the quarter hard work on the part of our employees close partnership with many of our accounts and a dedicated consumer base, we were able to mitigate much of the anticipated impact.
More specifically actions taken to address these headwinds were to bring on incremental shipping capacity with additional partners.
Create greater utilization of DC bypass shipments to wholesale customers.
Implement effective safety measures that helped limit our own retail store closures and allowed shipping to remain operational at our California distribution center for the duration of the quarter.
In some cases shift consumer demand for out of stock items to other available products.
And a measured approach to managing spend during the quarter.
Overall, the net impact of these factors helped to drive our exceptional results for the quarter and our business was aided by demand that drove much stronger revenue than anticipated.
Now for financial specifics revenue in the third quarter was 1.078 billion.
Up 15% versus the prior year performance as compared to last year was primarily driven by global outgrowth of 12% to $877 million.
Which was fueled by of domestic increase of 20%, partially offset by the continued international reset, but worth noting that we saw improving signs throughout the corp.
And global HOKA growth of 52% to $142 million, which experienced a 92% increase in DTC and of 40% increase with wholesale.
Gross margins in the third quarter were up 290 basis points over last year to 57%. The increase in gross margin was related to the strong full price selling environment of ugly as demand far outweighed supply, helping significantly limit any promotional activity.
Favorable channel mix as DTC increased as a proportion of the total business.
Very limited wholesale closeouts as demand outpaced supply from many styles.
And benefits from favorable exchange rates during the quarter.
SG&A dollar spend was $285 2 million up 13% from last year's $251 $9 million.
Higher spend was primarily driven by variable marketing warehouse and logistic costs and performance based compensation, partially offset by savings from lower travel and retail expenses.
This all resulted in record earnings per share of $8 99, which compares to $7 14 in last year's third quarter.
The $1 85 improvement versus last year again was driven by increased revenue volume seen from the growth in UGG and HOKA brands of <unk>.
Higher proportion of full price of revenue and a higher mix of DTC revenue.
Favorable currency rates and SG&A leverage in the quarter as revenue accelerated much faster than expenses with some offsets from greater spend on marketing warehouse and performance based compensation as well as the combined impacts of a higher tax rate and higher share count.
Our year to date performance has delivered significant operating margin expansion in comparison to the same period last year.
This has been driven by factors, including DTC mix, increasing significantly with the acceleration of our E commerce business and while we still anticipate growth going forward. The magnitude of the shift is not anticipated to continue.
Our historically low promotional environment, resulting from very high demand significantly minimizing both discounting and closeouts.
And temporary operating expense savings with discretionary constraints employed early in the year at the onset of the pandemic.
With these benefits, partially offset by rising freight expense that could go higher on the future and our strategic investments in marketing that we intend to continue fueling going forward.
For the quarter, our tax rate was 22, 2% driven by higher mix of domestic and DTC business.
Our balance sheet remains strong and as of December 31, cash and equivalents were $115 7 billion.
Inventory was $305 million down 17% from $366 million at the same time last year and.
And we had no short term borrowings under our existing credit line as compared to $6 million last year.
Our existing credit lines have on available balance of $474 million.
During the quarter, we did not repurchase any shares earlier this year at the onset of the pandemic, we paused our share repurchase activity, but now intend to recommence share repurchase under the existing $160 million outstanding authorization in future periods.
As we continue to navigate the global pandemic, we will not be providing specific guidance on the fourth quarter, but we do want to highlight a few considerations as we look to finish out the fiscal year.
We expect revenue to grow in comparison to last year's fourth quarter more specifically on <unk>, we see growth with our domestic business as we lap last year's impact of delayed and cancelled wholesale orders and physical retail store disruption at the onset of COVID-19.
But we continue to expect pressure on our international wholesale business as we are still in the midst of of marketplace reset.
And on HOKA, we expect global growth as the brand continues to drive the year round demand and continue to see expectations of annual revenue exceeding the $500 million milestone.
Then on costs with the success, we saw in Q3 and an ability to bring increased awareness to our spring summer offerings. We plan to increase our marketing efforts. This will likely result in a significant increase in our marketing spend for the quarter and as we continue to navigate the global pandemic, we continue to experience higher cost.
Related to logistics and warehouse fulfillment.
These include increased safety measures put in place at our distribution center.
Expedited freight to replenish inventory of depleted in demand styles and accelerated spend to increase logistics capacity.
In addition, with these strong results, we will see higher performance based compensation costs related to our higher level of performance for the year.
Therefore, when factoring these considerations in and recognizing the Q4 represents one of our smaller revenue quarters, the spend increase will be disproportionate to revenue.
All potentially resulting in the lower earnings per share for the quarter year over year, but still delivering strong results for the full year.
Before I hand, the call back to Dave I would like to say how pleased we are with our fiscal year to date performance. Our teams have done an enviable job managing through operational and macro challenges, while ensuring the long term vision of the organization remains intact.
Our brands are full of momentum the company remains well positioned and we are prepared for the opportunities that lie ahead.
Thanks, everyone and I'll now turn the call back to Dave for his closing remarks.
Thanks, Steve to close today's call I want to once again recognize our employees for staying committed to each other and to the success of our company throughout the year filled with uncertainty I am so appreciative of how our teams rose to the occasion and enabled our brands to deliver exceptional results.
As of this hard work that goes both two of the strongest brands on the footwear industry that of both leaders in their respective spaces of fashion and I predict performance.
While this year of presented challenges and our strategy has allowed us to capitalize on certain extraordinary circumstances. There is no doubt our brands benefited from the unique consumer environment, where spending pattern shifted away from experiences and into products.
As consumers look to brands and products that fit their needs for the current environment, we saw an acceleration of engagement with our brands.
And as Steve noted in his comments, we believe the results just delivered will not be sustained at these levels in the longer run as we return to a more normal environment and invest in our brands to continue to deliver growth globally.
We will provide more insights regarding these investments on our fourth quarter call, but I think it is important to note in the year of lease our accelerated growth little to no promotion and constrained corporate spending while navigating a global pandemic. These results are exceptional.
The deckers, we'd like to say is our organization performed well it enables us to do good with that in mind, we have continued to enhance our ESG programs and increased both our charitable contributions and our employee hours donated well above last year.
Doing good and doing great is that the core of Deckers values and is the primary reason behind our leadership in the ESG Arena.
Moving forward I have the utmost confidence in our strategies our portfolio of brands and exemplary operating model that now more than ever give credence to the long term trajectory of Deckers brands.
Thank you to all of our stakeholders for your continued support.
That I will turn the call back over to the operator for Q&A operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
The first question comes from <unk> line of <unk> <unk>.
Go ahead.
Okay.
Thanks, and good afternoon, everyone great job on the on the.
The results today.
Dave just kind of any sort of debt to Angela White, you Youre kind of your last comments were.
The question that we get a lot of is how do you. How do we think that you will play you will lap the stronger than the EC and slippers. This past year and how do you pivot away from.
The work from home categories that you've leveraged.
Maybe if you could help us understand the categories and how the category of shifted during Covid and how they might chip back line normalization occurs and the.
Then secondarily on gross margin.
With Hoak and now starting to really gain momentum.
And the margins of that business, reaching scale of apparently.
How should we think about your long run gross margin.
The outlook when you channel mix stabilizes.
Yeah. Thanks, a lot of other great questions and the.
The strength first of all of the strength of the quarter with double digit growth, which I think we all are excited to say, we haven't seen that in some time.
Really driven by a diversified product offering so it's.
In past years, we were talking about how much the classics drove the business and how important the weather was and as you can tell we didnt mentioned either of those.
Specifically in the call and Thats because.
We're seeing broad based success across all of the categories in women's but also in men's and kids and including apparel.
Flipper of its certainly a driver of the success of the fluff franchise continues to grow.
Provide upside for us, but core heritage slippers, as well such as Tasman of Aynsley at Ascot.
But classics the core classics business revenue is relatively flat and the growth came from non classic boots, such as the classic clear the <unk>.
Altra many.
The new mill in fact, the new male of this quarter globally was the number one style.
All of gender than in the U S. The men's new mail as the number one style.
For the quarter.
In U S. Wholesale so it's great to see that our diversification efforts are paying off certainly there is the level of <unk>.
Tailwind from Covid in the work from home environment.
But what's exciting to see as we are bringing in as we mentioned the younger consumer they're shopping more frequently we saw consumers come into the franchise in Q2.
Purchased on our website the flu.
<unk> product, but they came back in Q3 and day to day purchased the classic clear.
And one of the things that I've learned in my tenure at the company here is that once the consumer then they're always on and we're bringing in younger more diverse consumer than we ever have before and I think the long term value of those consumers gives us real confidence that at the slipper trend does.
The start to wane or the tailwind from Covid and work from home slows down a little bit we have new consumers that have now fallen in love with the brand.
On a different way than our prior consumers that were adjusted the classic and on occasion, it's much of our fashionable now on.
Obviously, the co labs on the brand heat in the press that we're getting globally.
Putting us on a new light, we're now casinos of global fashion lifestyle brand not just the boot brand.
And I think with the innovation that the teams have and how we're evolving the slipper category to not just work from home, but where.
<unk>.
From a fashion statement.
It gives me real optimism on that as well. So the brand has never been stronger I truly believe that or seeing demand outpaced supply in Q3 with broad based across all categories and genders head to toe and the need of momentum, we're starting to see in Europe and Asia as well.
Gives us real confidence that this isn't just the onetime COVID-19 situation, that's the real strength of the brand across the.
Broad based.
On the hook of margin question I'll, let Steve answer that.
But certainly the HOKA margin is healthy for us and as we drive more business online and to our E. Commerce from DTC channels, both for <unk> and HOKA that benefits us and you saw the margin in the quarter 57, I believe that's probably an all time high for us on a quarter like this and Thats driven by a combination of.
The full price sell through at wholesale and then obviously the DTC mix on the strength of OCA.
Laying into that as well so again broad based success in any of the thrill of confidence that we can continue down this path going forward, but Dave do you want to add one of them.
Probably just a little bit more color in terms of as we think about normalizing on the gross margin I think on the quarter. We saw about 100 basis point due to promotion.
As we think about that going forward that would normalize we wouldn't necessarily can kind of really as much.
The full price selling that we saw on the current quarter and then we did have a little bit of channel mix.
And then FX, which is probably about another 100 basis points and that we would also begin to see normalized as we get into kind of a more normal quarter with more promotion.
In the normal environment, and then knock the FX lit lift that we saw on the current quarter either so.
So we're going to do everything we can to maintain these levels of channel mix and continuing to drive upside on DTC, but longer term it is.
Hard to say at this point, what the supply chain environment will look like overseas with the tariffs and demand in logistics and other things that we'll have to consider so there will be some headwinds in the future growth. We're doing everything we can to maintain healthy levels of margin.
Great. Thank you for that color. So Steve just to clarify that was 200 basis points in the quarter for the overall right.
Yes.
I'd say 200 debt would do.
Due to the exceptional quarter that we would attribute.
And then.
And it always changes right as you think about promotion on how much but.
I think the very clean quarter as we've talked about in the prepared remarks.
Definitely contributed at least the 100 basis points.
As I said FX of about 50, and then channel mix with the higher proportion of DTC. We would expect some of that to come back is there with the higher proportion of DTC selling in the current quarter.
Got it and if I could sneak sneak one in one off on the non hotel.
Dave I think you said that over half the pairs are sold internationally, but thats not the mix kind of dollars of effective so clearly youre using distributors on.
What's the intention there to either bring those.
The distributor sales to direct or more to a wholesale how do you think about it.
Improving the profitability of those international direct sales.
Yes, nothing to share on that front, yet, but trust that something we're taking a good look at longer term, we do believe that we'll make control the market.
That served us better obviously from a margin and also of consumer data.
Perspective to have the DTC channel.
So we're keeping a close eye on that Theres a lot of heavy lifting thats involved in that and we will share a little more color on investments going forward and to be able to maintain this level of growth.
But it's certainly something that we're keeping a close eye on and longer term at the great opportunity.
Excellent congrats again on a great quarter.
Thanks Bill.
The next question comes from Jonathan Komp of Baird. Please go ahead.
Yes, hi, great. Thank you maybe just the broader question on the August start.
Dave just given all of the new customers, we've brought into the brand domestically and then.
Getting past the distribution clean up in Europe, just on any broader thoughts on how large you think the opportunity here is for.
If you look out into the future years.
Yes, I think certainly of the inventory levels at the theater, how we've ended this quarter and how clean the channel is that's kind of serve us well going into next year and beyond.
Like I said the demand broad base globally is very very strong.
The strength of what we're seeing now with.
We returned to growth in FY 'twenty two for Europe.
And then some.
Opportunities that we're seeing in China.
Are you optimistic about it I think one of the things that we're learning and we learned over the last six months is the power of localized marketing efforts and Thats, what youre seeing in both Europe, and China to be driving adoption of new categories, such as fluff resetting the brand from a consumer perspective.
We're going to continue to invest to drive that growth. So we still think.
There is definitely growth in the UGG brand globally and when you start looking at these new categories.
And the strength of men's which was the driver of this past quarter.
As well as kids in apparel, it's the very exciting proposition going forward.
I think just to add onto that the diversity that we saw a product from Q3 was really impressive so had its most diverse selling quarter probably ever.
And more just near term on other than how do you think about in a marketplace that supply is obviously the last when demand for multiple styles.
Should we expect that the play out from a wholesale order book perspective.
Just thinking over the next fall what the.
The replenishment factor might look like.
Yes.
Youre not going to share any details of that on this call. We will have a little more color on the next call but.
As you said there is great demand out there and.
What's impressive about it is diversified across consumer and category by our account segmentation and the teams have done an amazing job of.
Cementing our distributions and then of supplying them with relevant product so.
On the past, where everybody was clamoring to get their hands on the classic each account now has.
On a different assortment that works for them and we're servicing them more specifically than we ever have before so that bodes well for the order book there.
They are seeing new new opportunities with younger consumers and as I said mens when you start looking at folks like Genesco and foot locker group, there is great opportunity to expand into new consumers and style. So.
At this point, that's the best way to look at it but the demand is certainly very very strong.
Okay.
Understood I appreciate the color. Thank you.
Yep. Thank you.
The next question comes from Paul <unk> of Citi. Please go ahead.
Hey, guys. Thanks.
Wanted to ask about inventory down on a ton.
Im curious how much of that was planned.
Versus whether you might be seeing some supply chain the.
Swaption.
Function of just stronger sell throughs.
Maybe if you could talk about how youre planning inventory over over the next couple of couple of quarters.
And then also curious about the hook of business. If you could give us an update on the apparel initiative.
Where are you in terms of building the design talent.
When should we expect to see a greater emphasis on on.
On the push into the the apparel category.
Yeah, you bet. So on the inventory side of the intentional side of this was on the international regions.
As we've talked about with the transformation of the European market.
Cleaning up inventory of creating more of a pull model, particularly in classics the or.
Inventory levels were expected to come down on there that the strength of the brand and the demand helped us get there faster than we anticipated, but that was up by design.
And then also in Asia, specifically, China cleaning up the channel there as well so those where it can't work that the teams in those regions where.
<unk> focused on it and anticipating but the demand helped us accelerate that even further of Steve I'll, let you comment on the total company, yes, So Paul kind of as we saw total company down it was really all brands, except for Hooker <unk> inventory was up but as you would expect of with the brand growing kind of over 50% trying to.
Keep pace with that growth is the challenge I think from an inventory perspective, as Dave said lower than what we thought but helped us kind of chase incremental sales going forward. There are still disruption in the supply chain. So we'll be working to bring inventory.
And of as quickly as we can.
As we continue to see demand so that'll be an area that we're working very closely with our with our suppliers.
Really to make sure that we're getting inventory and so as we've completed it as we've seen inventory levels in the channel significantly lower.
It's a big focus of our supply chain to manage that inventory and manage that incoming inventory. So pleased with the position, but also know it's lower than what we expected and so how do we replenish it really going forward, yes, I think it gives us the great opportunity to kind of reset in the channel and I know the teams are working on that it also allows us to get on.
Orders in earlier, which will help with our supply chain and our production.
Going into this year, which we know will be challenging, but we're getting ahead of that because of the current situation.
But it allows us to really set the channel the way, we want it to be and to maintain the strength of and the positioning of the brand.
The end control it better by the distribution type, whether it's DTC or wholesale or depending on the account and wholesale so.
Its an enviable position for us to be in and we're going to take advantage of it as best we can.
On the Hooker side, what we said before still holds true we see this as of $1 billion brand.
With footwear doing the majority of that business and we're still focused on that.
Wendy the president of the HOKA brand of myself and the rest of the VLT are evaluating the apparel opportunity, we do believe longer term.
This is of significant opportunity for us, but youre looking two to three years out before it has a real meaningful impact but.
But we want to do it right we want to make sure that we do hire the right design talent to your point and that we have the operational and distribution.
<unk> in place to be able to do it in a quality of way.
We're known for the innovation and the bold approach to footwear and.
And we need to have the right design talent and supply chain to be able to do that also on apparel and it's something that we're very excited about and as we talk about investments going forward.
<unk> not just in <unk>, but also in AG is going to be a key area of investment for us over the next couple of years.
Got it thanks.
Follow up can you talk a little bit about the out of the business within within China. So of what Youre, what youre seeing there in terms of what's working what's not how do you feel about the marketing.
And how do you plan to invest in that in that region over the next couple of quarters.
Yes, it's a great question a year ago.
The.
Two years ago, now actually end of the year has gone by so fast.
No.
Stefano our lead of Omni channel Andrea of the President of the UGG brand and the leadership team involved with China and the brand here.
Put a plan in place to transform that business that was traditionally a classics driven approach our business there.
It still is in large part, but with the focus on localized marketing on utilizing local influencers, creating excitement around the fluff franchise and other fashionable styles such as the of classic clear, which blew out in no time in China, we're starting to see a turnaround on that business and.
And again, it's beyond the classic its new fresh exciting styles from the fashion perspective.
The impression of the brand is improving based on the localized marketing efforts and the Influencers that we're using there in.
And this quarter was successful from an inventory cleanup of both for ourselves and our partners over there, which again allows us to set the channel going into FY 'twenty two of the way we want to see it and make sure that we're still driving healthy full price sales at a diversified offering and we're confident that we continue on that path, but it is going to take investment.
As Steve mentioned in the.
The script.
And we are starting to reinvest in this quarter Q4, we were on shy on investment last year for obvious reasons, but now in Q4 on going into FY 'twenty, two China is going to be of pretty significant focus for us and investments not just in <unk> and marketing, but also to get hooked off the ground on a real meaningful way.
Got it. Thank you guys. Good luck.
Thank you.
The next question comes from Sam Power of Williams trading. Please go ahead.
Yes.
I changed my mind named Here's Dave.
Highlight the.
Happy new year.
A couple of questions number one.
How should we think I mean, given given the clean inventory and everything else in the way.
The momentum of these brands should we consider.
On.
The gross margin in the fourth quarter to have the similar year over year increase in basis points and then the same question with SG&A. You said yesterday. It was gonna be elevated is that going to be in line sort of with the percent change. We saw in Q3 or is that going to be higher than that.
Yes, I'll take that Sam <unk>.
So on the SG&A, it's going to be more right because we've been holding back really kind of through the pandemic as Dave just said and even as we've looked at marketing.
Now I think with the success that we're seeing.
With the brand the need to invest more and to drive spring business as well. So we're looking at how you can drive an increased kind of spurring some of our business year over year and.
And that is contributing to a disproportionate increase in the SG&A spend in Q4, so again haven't given full guidance, but.
Of that.
To be seen in Q4 than on the gross margins I would not extrapolate what we saw in Q3 from a gross margin perspective year over year into Q4.
I think some of the the tailwind that we saw in Q3 were much bigger than what we would anticipate in Q4, so I wouldn't necessarily increase Q4 gross margins like you saw in Q3, we won't be getting we'll get some but not not the extent that you saw in Q3.
And I would say from an investment standpoint on SG&A. We do have we believe we are of significant opportunity in spring and summer business, particularly from the UGG brand obvious on OCA, but we want to take advantage of this time right now with the momentum of that brand to really drive success in the spring and summer this quarter.
Honestly, we're looking at the full year results, which will be exceptional.
Based on Q3.
But we want to make sure that we're continuing to invest to drive opportunities for the long term.
Thanks, and then lastly, just some housekeeping stuff could you give us either of the wholesale of the direct to consumer by brand.
On the absolute dollars for Cabo.
So the pure coke and so on.
Okay. So of wholesale sales in Q3 for <unk>.
Call It 408 nine.
<unk> was call. It 101 wholesale Teva was 12 one.
<unk> was three eight and this is in millions and then other brands was 32.2.
And then you come back on both the quantity.
Okay.
Thanks, so much I appreciate it sure.
Sure. Thanks, Dave.
The next question.
<unk> comes from Tom <unk> of Wells Fargo. Please go ahead.
Hi, everybody. Thanks for taking my question.
So.
When I look at four.
For the fourth quarter, and then I guess beyond book.
I know you said.
Growing but I was wondering if you could contextualize that a little bit.
It would see between the easy compare the brand momentum.
The.
Yeah.
Channel inventories being extremely low like you talked about on the call, which would give an opportunity for some restocking.
Yes, the strength in the.
Fluff in the spring.
The spring style.
It would seem like this could end up being like a really really strong.
<unk>.
So I was just kind of wondering if you could contextualize the.
A little bit on how you're thinking about it for Q4 and maybe into early FY 'twenty two.
Yeah, I think Tom it's a little bit hard it's again, why we're not giving guidance.
See opportunity. We're also dealing as I kind of mentioned on the previous question from supply.
Constraint with bringing inventory in and so forth. So that's affecting Q4, so we're really not.
Net of inefficient to give a lot we see clearly from something.
Something like we've said when we were approaching the fall winter season. The demand is there the opportunity is there we still have to manage through kind of inventory, bringing inventory in expediting inventory.
And Thats really what why we're not giving kind of more specifics the opportunity is there for us.
But there are some constraints in the system.
As we continue to kind of navigate the current environment. So I would just say.
The opportunity to do more is there, but there are other constraints that will.
The provide headwinds against the.
The ability to meet the demand thats out there right now.
And still a very uncertain environment, we still have store closures in the U K and sporadically across the world.
We're going to be coming into Q1 up against last year's pandemic and that's mixed.
The results based on the category in the region and channel. So there's a lot to navigate still but the.
You can't deny the demand on the strength of the brand at the current time, but we just had the balance that was still the fact that we're still on an uncertain environment.
Got it and just a quick follow up.
Dave when I look at the balance sheet I see almost $1 2 billion cash.
And obviously some good cash generation of the business overall and I know you said you're looking to <unk>.
Restart to the the.
Our buyback program.
<unk>.
Would there be a scenario where M&A line.
Start to.
Become more appetizing to you.
So the third leg of the stool so to speak of.
Does that not in the cards right now.
Yes, Tom I think it's a good question and clearly.
We're having a lot of lot of conversation around capital allocation.
With the cash that we have on hand, now, having our strongest quarter of the year behind us and having an exceptional result for the quarter.
It gives us opportunity to look at a number of things and so the.
That is what we're doing right now more conversations management and the board in terms of capital allocation.
I would say more to come but recommencing our share repurchase is a good start to that.
Yes, I think listen we have incredible opportunities with organic growth with our brands and we need to make sure that first and foremost we're executing on that opportunity and that includes global expansion.
<unk> the expansion of of OCA, particularly in China, which were really just getting started still apparel opportunities and then also the necessary infrastructure to support the kind of growth both of our DTC channel the globally and the logistics to wholesale so.
We continue to look at where to invest our money, we feel like the first places organic growth opportunities and talent and resources in our digital transformation.
M&A is something we're certainly always keeping an eye on but honestly.
I think smaller with high growth potential as more on our wheelhouse kind of big transformative acquisition.
Understood.
Well congratulations on the great quarter on a great year.
Thank you Sir.
Thanks, Bob.
The next question comes from Dana Telsey of Telsey Advisory Group. Please go ahead.
Good afternoon, everyone and congratulations on the quarter on the success as you think about the marketing spend which is increasing.
Whereas the marketing spend going what have you seen in terms of marketing spend in particular through any channel.
Where you may see higher returns and then on average.
The average cost.
Change in average cost in terms of what Youre seeing on the on product and then lastly on the shipments and shipping surcharges. How much is that impacting next quarter is as compared to this quarter in terms of what you're seeing thank you.
Yes, Thanks, Dana on the marketing side I believe this is a real strength of Deckers and the way, we set up our marketing spend and a centralized team that manages all of our spend for our brands.
Globally by region by channel and consumer type and we manage that very closely as a leadership team. We review those numbers on an ongoing basis and are continually fine tuning the dials to optimize spend digital spend is obviously, what's driving a great deal of our business but.
But also you have to give credit to the PR teams across our brands that are just doing an amazing job of creating brand heat at the top of the funnel and then we're driving that down to our DTC channels through effective marketing tactics.
Obviously, we have.
All of the traditional marketing channels that we've been using over the years everything from Facebook and email and Instagram, but we did some great tests over the last six months with Snapchat, and Pinterest and using influencers than consumer generated contact.
And those of all paying off extremely well also so.
Just getting more targeted more specific with our trend in our I'm, sorry, our spend by channel and consumer type.
And then as I said, putting more into the regions, but more localized content leveraging local user generated content in those regions and then amplifying the strength of our.
Our reach through localized channels, particularly in China, where they have different channels.
Channel than we do in the U S, but the philosophy the approach the the.
The financial Guardrails around our marketing spend on an expected return on investment is managed the essentially across the globe and then we have fantastic teams on ground.
In regions, who are localizing it for the best return so we're going to continue to invest in marketing.
If you think about it even at the rates. We're spending now we still haven't really investing to the extent, we should in men's particularly outside of the U S or apparel.
And particularly in China, there is still a lot of opportunity for us to invest.
But certainly and hoped to drive awareness of that brand. So it's working it's very productive and there is a lot more opportunity for us to drive growth through increased marketing spend.
And then Dave just to answer I think the other two questions were on average selling price so average selling price for the company.
<unk> is actually going up and that's being driven by hotel and the higher proportion of DTC business, so as that proportion of increased.
And a higher proportion of hooker it is driving our ASP.
Now within.
Where you have kind of in corresponding channels, you will have a slight decrease of diversity has increased and we're selling more product and lower price products. So interesting dynamics overall again, driving higher asps, but some dynamics within the brand and the healthy way driving kind of diversity of product.
And then your question on shipping costs and.
This relates a little bit to a previous question about gross margin per quarter for on a proportional basis, we're seeing higher expert the expedited shipping costs as we're trying to bring in inventory due to the depleted inventory that we currently have facing so that's going to be a headwind on our on the gross margin as you look at Q4.
Because on again on a proportional basis, we'll be looking to increase that.
Thank you.
Thanks Dana.
On the last questioner today will be Jim Duffy with Stifel. Please go ahead.
Thank you guys and great execution through at all.
I cannot I wanted to talk about international markets, Dave really encouraging to hear you expect from growth for EMEA in fiscal 2022, I know a big part of the success in North America has been through diversifying the consumer base are you seeing similar success.
The customer base in EMEA and Asia are you seeing the same kind of uptake with men.
And the same side of the.
Same kind of.
Age group diversification.
Yes, it's a good question, Jim and we are starting to see signs of that we've traditionally in Europe, particularly in really driven by the U K have had just to kind of our core consumer a little bit older consumer.
And Thats why you saw the business stagnate over the last few years.
But with the focus on a more diverse consumer and speaking to them on a really authentic way.
<unk> share that we are showing up in the right points of distributions such as JD sports foot locker and asos.
In the U K and also the Lando.
Across Europe.
And then just showing more exciting.
Fresh relevant product on influence there is having a positive impact in <unk>.
Whats encouraging to me is we're starting to see younger consumers come into the brand for the first time through fashion product. It's not the traditional classic that they are buying for the first time they are buying fluff theyre buying classic clear they are buying ultra many of them. So it's a new way to enter the brand it's much more fun and fashionable.
Consumer that's coming into the brand and they are seeing more of wearing opportunities versus just when the cold weather hits and putting on their classic boot. So we're starting to see early days of that the slipper in the fluff.
Phenomenon.
Was slower to take hold in Europe, and Asia, but we did start to see that over the last three to six months in those markets and it's certainly a <unk>.
<unk> opportunity as we go into FY 'twenty two in those international markets the.
Other areas as I said, the ultra and many of the class of clear, but also range is a great category for us and we're starting to see a lot of traction there. We've had some production issues with the rain boots in the past, but now that we're bringing those to market. We're seeing great success, there as well. So we do believe that the playbook. So to speak that has enabled the growth in.
In North America, 20% growth in North America for the quarter.
Is the playbook that will serve us well on international are starting to see early signs of success.
Great and then I was pleased and frankly surprised here the new mill was the number one style globally are you seeing.
Balance penetration of that of course region through is that more of the north American put all of the outlets and catch up to be done in other international markets.
Yes, it's similar to what we are seeing them of a lot of our.
The new revenue drivers as it takes hold in the U S. First and then we see of trickling into the European and International Asia Pacific market. So.
We've been driving the new milk business.
Pretty hard in North America, it hadn't really taken hold in the international markets until the last three to six months. So it is an emerging opportunity for us in those markets, which is great and again the <unk>.
Strength of the men's new Mel and also we have of women's new miles. So the combination of both to those two styles.
It gives us great opportunity going forward and it's also of style that is.
Really exciting when you start thinking about iterations on that and creating seasonal styles with materials and co labs and things of that sort.
I think it's going to be the style, it's got a tremendous runway for us going forward.
Thank you Steve.
There's been a lot of questions around the inventory, but I'm just curious on the mechanics specific to the December quarter were you able to pull forward receipts to deliver some of that upside in the third quarter or was that not how we should think about it. It was really just consuming inventory who is already on the book. So I am curious in that December quarter.
Did you indeed consume any of the airfreight expense.
And then sort of way that you can put some shape around the airfreight impact to the margin in the fourth quarter.
Yes.
Good question I think you had multiple so I'll try to unpack some of that in terms of what happened in Q3, I would say, we consumed mostly inventory that we had our inbound inventory that came in and went out in the quarter.
And Thats why youre seeing inventory down kind of nearly 17%. So it was more about.
Selling out the inventory that we had we also as I mentioned kind of shifted some of the orders to in stock inventories. So that helped lower inventory too so where we didn't have inventory and the inability to bring it in or have it come in in Q3 shift some of that into product that we did.
That was the successful move.
And then in talking about kind of Q4.
We're still working through components of that as I said as a proportion of again the expedited amount that will be coming in in Q4 will be higher remember, but Q3 is the much bigger quarter. So.
Not necessarily giving direction on a specific gross margin, but kind of I think where your question was in relationship to one of the previous questions was can we proportionately flow the.
Jim level of lift in Q3 of that or similar into Q4, and I'm, saying no don't do that because.
Because of our depleted inventory as we're shifting to more spring summer trying to get that inventory and we are having to expedite it we're still working through some disruptions in the supply chain. So we haven't necessarily quantified that but I would say.
As you were thinking to build out Q4, Q I would not extrapolate Q3, some of those headwinds exist.
No doubt.
Hoping you can quantify the airfreight impact in Q4, and then really the other you're expecting the airfreight to continue to have consequences on the first half of fiscal 2022.
Yeah, I think potentially I think there is of disruption.
On.
I can tell you in <unk>.
Q3, the headwind of FX on the gross margin was probably 20% to 50 basis points.
And so on a gross margin basis, I would think that will be bigger in kind of Q4 again on the on a comparable basis.
Don't see things getting better in the next six months. So I think for the foreseeable future. We're going to continue to have kind of disruptions in the supply chain I think theres pressure on factories to get product out there is pressure on shipping companies to get ships across the <unk>.
<unk> cost of containers going up there is issues within logistics within the ports of moving containers.
And then just getting into your warehouse and then trying to turn it around so.
Multiple steps, we're still seeing headwinds now.
I think did a very good job in Q3, but it took a lot.
Things arent getting better like we have not seen things get better at this point, yes. The.
The silver lining is the brands are strong.
The customers although they.
Im disappointed they are willing to wait to get the product because the demand for it is so strong but the costs are still there and sorry, Jim just to clarify I misspoke I think I said FX. It's freight rate was the <unk> to 50 basis point, yes, sorry, yes.
That makes more sense.
Well great guys. Thank you so much.
Congratulations on the great quarter.
Thanks again take care.
This concludes our question and answer session and the Deckers brands third quarter of fiscal 2021 earnings Conference call. Thank you for attending today's presentation. You may now disconnect.
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Yes.
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