Q2 2022 Deckers Outdoor Corp Earnings Call

Good afternoon, and thank you for standing by.

Welcome to the Deckers brands second quarter fiscal 2022 earnings conference call. At this time all participants are in a listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties here.

Here in the conference call. Please press Star Zero for operator assistance at any time I would like to remind everyone that this conference call is being recorded I will now turn the call over to Erinn Kohler, Vice President of 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 Companys Safe Harbor policy. Please note that certain statements made on this call are forward looking statements within the meaning of the federal Securities laws.

Which are subject to considerable risks and uncertainties. These forward looking statements are intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.

All statements made on this call today other than statements of historical fact are forward looking statements and include statements regarding changes in consumer behavior strength of our brands and demand for our products changes to our product allocation segmentation and distribution strategies changes to our marketing plans and strategies changes to our capital allocation strategies that <unk>.

Pass of the COVID-19 pandemic on our business, our anticipated revenues brand performance and 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 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.

<unk>.

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, Darren good afternoon, everyone and thank you for joining today's call.

Deckers delivered another quarter of strong top line growth made further progress towards key strategies and continued investing to support long term growth opportunities.

Second quarter revenue of $722 million represents an increase of 16% versus the prior year and 33% over the second quarter two years ago.

Steve will provide additional second quarter context later in the call.

Now I'd like to highlight the strength of our first half as we build towards delivering an exceptional fiscal year 2022.

Six months into this fiscal year Deckers has driven revenue growth of 35% over last year and earnings per share of $5 37, compared to $3 30 in the previous year.

Performance in the first half exemplified the execution of key strategies as HOKA achieved exceptional global growth delivering back to back quarters about $200 million contributing 35% of total revenue up from 28% last year.

And <unk> continued to diversify its product portfolio growing double digits across men's kids and noncore women's footwear as well as apparel and accessories further establishing itself as a globally relevant lifestyle brand the increasing global footprint of HOKA as well as the UGG brand's expansion beyond women's footwear, our driving factors of Deckers ever.

Dilution to a portfolio of powerful lifestyle brands.

While we are building towards a bright future decades is not immune to growing pains and global logistics pressures.

Everyone else, we have been experiencing logistics bottlenecks that have led to large volumes of our product in transit as of September 30th for currently view ourselves as less vulnerable than others due to a lower exposure to southern Vietnam factory production.

Our bottlenecks are largely related to import congestion, which is primarily affected the UGG brand is the second quarter. Historically represents peak levels of fall product arriving from overseas factories.

While we successfully shifted more of shipments into the first half in response to anticipated logistic issues, we experienced significant delays in containers being processed and released at the ports during the second quarter.

We are working diligently with our logistics partners to reprocess These shipments and we'll continue to do so.

Steve will provide more details on the global logistical challenges, we're experiencing and the actions we've taken to mitigate our risks later in the call as.

As we navigate through these challenges we will leverage our omnichannel organization to ensure our brands are getting in front of target consumers with every opportunity to gain a share of closet with a prioritization of high quality full price sales.

Moving to the brand highlights global AG second quarter revenue increased 8% versus last year to $448 million.

Performance was driven by the brand's diversified product assortment, reflecting a growing penetration of men's kids and noncore women's footwear as well as growth in apparel and accessories.

Direct to consumer mix remains well above pre pandemic levels. However, the second quarter is still primarily reflected fall product selling to wholesale accounts.

As you may recall sell through of our product during last year's fall season was robust which resulted in depleted marketplace inventories. This provided the opportunity for <unk> to leverage its marketplace management strategy and reset wholesale inventories with its most diverse product assortment to date.

One of the key drivers of bug product diversification and acquisition of new and younger consumers has been the brand's fluff franchise.

Jeff has been a leading element of brand diversification in the U S over the past few years.

The UGG product team has continued to infuse excitement and newness into the franchise with additional fund colors and patterns of the original fluff, Yeah, which remained the number one DDC acquisition style in Q2, and new outdoor versions, such as the Opel a feeder and disco slide.

We're excited to see the franchise begin to resonate internationally as well with over 40% of franchise growth being generated outside of the U S. In the second quarter.

Another area of strength. This year has been men's footwear, which increased revenue north of 20% in the second quarter. We've been encouraged by the steady increase in consumer adoption of the men's product line as we invest to build awareness and consideration among male consumers.

Development of the UGG men's business is most prevalent in the U S where the brand continues to drive record high levels of consideration among 18 to 34 year olds with popular products such as the Tasman logo versions of the scuff and colorful versions of the new mill.

The Tasman in particular with its hybrid slippers sneaker attributes is evolving into a very popular style experiencing considerable growth and helping to make our brand for the whole family.

During the second quarter. The CASM was a top five style with newly acquired male and female consumers.

With its increased adoption and relevance among younger consumers. The UGG team introduced a companion style to the Tasman known as the test as a platform version of the Tasman. The Tad is already gaining the attention of consumers and was recently pictured on several high profile models attending New York fashion week.

Beyond footwear, the UGG brand is entering its second fall season with its expanded ready to wear apparel collection. The team has done a fantastic job designing and apparel assortment, featuring cozy fleece, Sherpa, fulfer and surely wardrobe items at compelling price points that offer value to the consumer.

In support of our commitment to building the lifestyle appeal above this September the.

Brand launched its first ever apparel dedicated marketing campaign, and Influencer program to drive category awareness the.

The campaign has already generated over 500 million press impressions, including coverage on Bogan in style in.

In addition to the brand's strategic category marketing investments AGA is expecting to further enhance its apparel and accessories relevance with the second and third product drops of the tell far collaboration.

These upcoming product drops feature hats, hoodies robes and other exciting products.

These items will be featured online as well as at Selfridges pop up shop in the United Kingdom, which speaks to the UGG brand's successful repositioning and increased adoption in Europe as well as greater acceptance of August the head to toe brand UGG.

Doug is making great headway, attracting new consumers in EMEA is just under half of the brand's second quarter online purchases were new to the brand.

Key styles driving consumer acquisition in the region, where the classic many classic clear in the men's Ascot.

Moving on to China, I am pleased to report that AGA is making excellent progress as the region posted the highest growth rate across the globe during the second quarter.

Beyond significant revenue growth August experiencing success on a number of fronts in China, including launching a second regional specific collaboration with designer Feng Zhang Wang which is helping our reconnect with the Chinese fashion consumer using.

Using a broader and more inclusive community of Influencers to creative with greater frequency of consumer touch points.

Building, the DTC business by driving increased traffic and conversion at stores.

And generating consumer excitement with bold new product offerings, including key styles, such as the classic clear ultra mini and the <unk> Peter.

Looking towards the second half of fiscal 2022 for <unk>, we expect to drive sell through of the brand's diversified product assortment, both with our wholesale partners and through our direct to consumer channels.

We have confidence in the continued strong demand for the UGG brand and are actively working to mitigate macro supply chain challenges to deliver peak holiday season sales.

Lastly on the UGG front you may have seen a recent released that uggs brand President Andrea O'donnell left the company to pursue a tremendous career opportunity and we wish her the best.

Fortunately, we have a strong team in place, which was recently bolstered by the addition of two vice presidents there'll be leading the marketing and women's product teams.

While we identify a new permanent leader for the brand I'm excited to be overseeing the talented <unk> team and build on their establishment of AGA, the global leading lifestyle brand that creates both exciting and luxurious products for passionate consumers.

Shifting to Hooker global revenue in the second quarter increased 47% versus last year to $210 million.

The HOKA ecosystem continues to experience exceptionally balanced growth across the brands global points of distribution and portfolio of products.

HOKA is maintain a strategic and thoughtful approach to distribution management. Our goal is to build an audience of consumers through authentic performance driven product innovation.

Notionally connected inclusive marketing and a premium consumer experience across all the brands access points.

The brand continues its highly selective approach to distribution expansion and remains focused on building market share through avenues that have the resources to educate consumers on the benefits and differentiators of HOKA.

With that in mind, and a focus on increasing brand awareness in key markets. HOKA recently opened pop up retail stores in New York and Los Angeles as well as the brand's first owned and operated stores in China.

<unk> retail strategy is in the infancy stage. The brand is testing multiple strategies and learning from our results and feedback to provide the ultimate consumer experience, which currently features community events and workshops designed to bring HOKA consumers together.

So too soon to make any definitive statements on HOKA stores, we've been very pleased with the initial response from a foot traffic sales and service perspective.

<unk> is already benefiting from Deckers organization will retail expertise developed in connection with the UGG brand. This wealth of experience is proving valuable in the early days of establishing HOKA store operations and highlighting the synergies gained by operating a portfolio of brands.

Once we land on the optimum consumer experience and concept for OCA stores will look to open additional locations in China first to serve that mono brand market and then began exploring longer term opportunities in North America and Europe.

A key piece of our long term retail strategy is the development of a compelling apparel product line that can provide a broader consumer experience at our <unk> stores.

Conversion to apparel purchasing is proving to be more successful in our stores than online as HOKA has sold a higher percentage of apparel at retail compared to e-commerce since the stores have opened.

While we are still very early in developing the HOKA apparel strategy and product line. We are actively building an exceptional team to support this phenomenal brands long term opportunities so stay tuned.

On the digital front HOKA was able to grow its consumer audience through a 97% increase in global acquisition online during the quarter the.

The brand has been prioritizing digital marketing avenues that target 18 to 34 year old consumers.

As a result, Hygge DTC acquisition significantly over indexes towards these younger consumers. We are pleased to see that the younger consumers are adopting the HOKA brand both through its heritage Clifton and Bondi styles as well as through newer styles aimed at the demographics such as the Mark for the <unk> III.

From an international perspective, DTC remains a much smaller proportion of the business, but HOKA is scaling its DTC mix very quickly as DTC growth is significantly outpacing wholesale.

Considerable gains in consumer acquisition and retention in the U K and Germany two of the HOKA brands key focus markets are driving the exceptional growth rate of EMEA DTC.

The EMEA region continues to be the HOKA brand's largest international region worldwide HOKA is gaining momentum and through the first half of this year every global region has posted double digit growth as compared to last year.

I also want to highlight the HOKA brand's recent announcement of a multiyear sponsorship for the <unk> World series.

The Ultra trail Du, Mont Blanc, or <unk> for short is the world's ultimate running trail circuit, which includes over 20 events on six continents in 2022 spas.

Sponsoring the <unk> as the Premier technical footwear, and apparel partner is a big marketing and promotional opportunity for HOKA, we will leverage this partnership to build awareness of the brands globally relevant performance driven products.

A big thank you to the Hygge marketing team for making this sponsorship or reality.

Heading into the final months of 2021, the HOKA team has been reviewing consumer insights market research and product launch calendar for spring 'twenty, two and input cost pressures to determine if there are strategic actions, we can take to navigate this dynamic environment as.

As we've done with our other brands HOKA has identified specific products for which there is opportunity to increase price to better align with competitive offerings.

Really offset macro input cost pressures and maintain the brand's premium positioning and relative margin strength versus peers.

The HOKA team also continues to review planned product launch dates and we will make strategic adjustments to ensure healthy full price sell through of existing and future models just as the brand has done in the past.

<unk> is well positioned to gain greater market share globally as the brand expands consumer awareness through strategic marketing activations, including event sponsorships pop up retail digital targeting and forthcoming brand campaigns congratulations to the entire <unk> team on another stellar quarter. We look forward to continued brand execution for <unk>.

The second half of fiscal year, 2022, and beyond as HOKA builds to a multibillion dollar leader and the performance lifestyle space.

With respect to channel performance in the second quarter global wholesale revenue increased 21% versus prior year, and plus 23% versus two years ago.

Wholesale comparisons continue to be unique as we're lapping some disruption in the prior year and currently facing macro logistics pressures and bottlenecks that have altered shipment timing as compared to historical patterns.

Ogan HOKA drove wholesale growth as ugly as refilling depleted marketplace inventories, while gaining incremental volume in new categories and hooker continues to gain market share globally.

From a direct to consumer standpoint, global revenue increased 3% versus last year, and plus 79% versus two years ago HOKA.

<unk> drove the majority of DTC growth has remained pressured by exceptional demand last year that resulted from pandemic tailwind benefiting the brand online while <unk> declined as compared to last year. The brand is still plus 37% above pre pandemic second quarter DTC volume.

HOKA DTC increased 81% versus last year, which is on top of the prior year's triple digit increase.

Reflecting the brand's consumer acquisition gains and greater repeat purchasing from an existing consumers.

Before handing off to Steve I want to take a moment to recognize our company brands and employees recent activities on our sustainability ESG and DDI fronts, which we believe are a positive contributor to our company culture local communities and consumer passion for our brand.

A few key highlights from our recent achievements include introducing its icon impact collection, which was thoughtfully designed using low impact materials in combination with offsets to make the collection carbon neutral.

Teva launching the remember collection that features 100% recycled rip stop upper material.

All of our brands, reducing their per pair emissions in fiscal year 2021, as compared to fiscal year 2020.

And our employees around the globe participating in another art of kindness week during which we collectively donated over 4300 hours contributing to 317 organizations around the world.

A big thanks to our employees for their continued dedication to giving back. Additionally, I'm excited to announce that our 2021 corporate responsibility report will be released next week.

The report contains a great deal of information on Decorous, corporate social responsibility journey, including the filing and approval of science based targets and the setting of robust carbon reduction targets I'd encourage you all to take a look as this report highlights the passion and commitment of our company and our employees to do good and do great.

With that I'll hand, the call over to Steve to provide further details on our second quarter financial results status of the dynamic supply chain challenges the industry is facing as well as our updated fiscal year 2022 outlook.

Thanks, Dave and good afternoon, everyone. We're excited by the demand our brands continued to exhibit through the first half of this fiscal year as Dave covered August setting up the holiday season with its most diverse product assortment to date and HOKA is delivering exceptionally balanced strong growth and market share gains across regions channels and categories.

While the supply chain remains a headwind to overcome the performance of our brands. Thus far is the result of our team's dedication to executing deckers long term strategies as we manage through near term disruption the strength of our brand portfolio, our flexible operating model and robust balance sheet gives us confidence in our ability to successfully navigate the evolving.

<unk> marketplace now, let me get into the second quarter results.

Second quarter fiscal 2022 revenue with $722 million representing.

Representing a 16% increase versus last year, and a 33% increase versus two years ago.

Q2 growth versus last year was driven by our two largest brands <unk> and HOKA as wholesale increased 19% versus last year as we ship more product into the channel, though we did experienced pressures from port delays and HOKA continued to deliver impressive growth across all channels with an increase of 47%.

Gross margins for the second quarter were down 30 basis points versus last year to 59% the decrease as compared to last year was related to increased usage of airfreight for the UGG and HOKA brands and higher than prior year proportion of wholesale shipments as we refill marketplace inventories and lap disruption from the prior year.

With positive offsets coming from favorable brand mix as Coca continues to increase as a percentage of total company sales favorable foreign currency exchange rates and fewer closeouts at a higher margin rate.

SG&A dollar spend for the quarter was $239 million up 25% from last year's $190 million.

Higher spend was primarily driven by greater marketing expense to fuel brand heat highlight new categories and increased localized content.

Increased compensation costs, as we onboard new talent to support our growing organization and higher variable expenses related to increased volume for our warehouse logistics and <unk>.

Our tax rate was 21%, which compares to 26% last year.

This all resulted in diluted earnings per share of $3 66 for the quarter, which compares to $3 58 in last year's second quarter. The <unk> <unk> increase versus last year was primarily driven by revenue growth of the UGG and HOKA brands with offsets from increased SG&A spend primarily related.

To increase marketing and head count supporting the growth of the business.

Turning to our balance sheet at September 32021, we ended September with $746 million of cash and equivalents.

Inventory, including units in transit was $636 million up 31% from $484 million at the same time last year, and we had no outstanding borrowings.

During the second quarter, we repurchased approximately $54 million worth of shares at an average price of $406 that brings the year to date total share repurchase as of September $30 million to $136 million at an average share price of $356.

And as of September 32021, the company had $675 million remaining under its stock repurchase authorization.

Before discussing our updated outlook for fiscal year 2022, I'd like to provide some context on the current state of our supply chain, our disruption mitigation efforts and trends we are seeing.

Starting with footwear production I can confirm the majority of our products are produced in Vietnam. However, due to the location of our factories, which are primarily in northern Vietnam as well as the seasonality of our business and strategic product prioritization, we do not expect factory shutdowns that occurred in the second quarter to cause a material negative Todd.

Line effect on our full year fiscal 2022 guidance to put this in perspective less than 10% of our Vietnam production today is done in the southern region, which experienced shutdowns during the second quarter.

However, our team successfully shifted a material portion of this production to alternative existing partner factories by leveraging our dual sourcing strategy, which allows us to manufacture same styles and multiple factories, while we were able to nimbly shift production locations. The expected timing of these receipts will be later than we previously planned.

Those still expected within the current year.

As part of our ongoing sourcing strategy to support the growth of our brands and in an effort to further mitigate impacts into fiscal year 2023, we've secured additional production lines in new geographic locations with our existing partners and have also onboarding, new long term strategic factory partners and.

In addition, we plan to carry more inventory this year and into next year as we do not anticipate any near term resolution to the global supply chain disruption and it will also act as a hedge to inflationary pressures expected in FY 'twenty three.

From a logistics standpoint, we're not unique in that we are dealing with significant delays at ports related to not only prolonged processing times for ship cargo, but also a shortage of trucks chassis and drivers while the challenges at the port of Los Angeles and long Beach have been widely reported the issue is not isolated to those ports and port <unk>.

Trains have postponed shipments to our warehouses in Q2.

In a typical year roughly 20% of inventories in transit at the end of September but this year with the bottlenecks that we have experienced approximately 45% of our inventory was in transit.

Even with product beginning to move off the water as well as packed and staged at the warehouse some of our wholesale partners are experiencing labor shortages and logistic constraints in their own operations, which is further hindering our ability to deliver shipments in a timely manner.

Additionally, on the international front, we have experienced numerous startup challenges during our three PL distribution center transition in Europe, and expect there will be continued pressures as they refine their systems and delivery levels, while the transition has been difficult, especially in light of the challenging global logistics environment. This is a critical investment.

To create long term capacity that will facilitate anticipated growth in the UGG and HOKA brands for years to come we will continue to work closely with our provider to assist with improving throughput as their operations come up to speed.

From a freight expense standpoint, the entire industry continues to face higher costs for Ocean containers. In addition, as production and port delays persist on top of delays arising from production shifts in Vietnam. We will continue to utilize elevated levels of airframe, which is considerably more expensive whenever it is needed to maintain.

<unk> strategic product launches.

As Dave mentioned, the HOKA brand is implementing targeted price increases for specific products, which will help partially offset higher airfreight costs, but we will still expect there will be some level of gross margin compression as.

As with the rest of our peers in industry, we're dealing with a number of challenges, but I have the utmost confidence in our employees and their resilience to overcome these hurdles.

With that context in mind, we are adjusting our outlook to reflect the supply side risks.

For the full fiscal year 2022, we are reiterating our expected top line revenue growth of 18% to 20%, which equates to revenue in the range of 3.01 billion to 3.06 billion, including expectations of HOKA growing 50, plus percent over last year with confidence the.

Brand can eclipse $875 million of revenue outgrew.

Our growing high single digits, reflecting pressure on the prior high end of the range due to shipment disruption Teva still growing in the high teens range and Culebra and <unk> expected to be approximately flat to last year.

Gross margin is now expected to be approximately 51, 5%, which is lower than our prior guidance due to further pressures from increasing costs related to ocean containers and greater utilization of air freight as port congestion and trucking scarcity has worsened.

SG&A is now expected to be approximately 34% of revenue, reflecting our operating models agility in this dynamic environment to flex our variable spend with targeted temporary reductions.

We anticipate these expense adjustments will help offset further gross margin pressure, allowing us to maintain the prior high end of our operating margin range at 18%. We are lowering the bottom end of the operating margin to 17% to reflect current port congestion conditions that may necessitate more airframe.

We still expect a tax rate of approximately 23%.

Taking into account the risk factors I've mentioned, along with the share repurchase executed in the second quarter. We are expanding our earnings per share guidance range for fiscal year 2022 to now be in the range of $14 and 15.

$215 15.

While we have tried to incorporate what we know at this point our full year guidance does not anticipate any further significant supply chain disruption excludes one time charges and does not contemplate impact from additional share repurchases.

Although supply chain pressures have grown across the entire industry, we remain confident in maintaining our prior topline revenue guidance as our brands continued to experience exceptional marketplace demand.

Actions our teams have taken to preserve this outlook include bringing greater levels of inventory earlier to mitigate delays and inflationary cost pressures utilizing our dual sourcing network to offset factory closures and disruption at.

Adding production capacity and further diversifying our country level exposure of factories and partners.

Increasing airfreight usage to ensure our brands are opportunistically gaining market share in this competitive environment strategically evaluating and leveraging our brands price elasticity and remaining nimble and responding to new challenges as they arise.

A combination of these efforts has enabled us to maintain the top end of our operating margin outlook, while expanding the range of our earnings guidance to reflect the current challenges of the supply chain environment Deckers continues to deliver strong growth with excellent levels of profitability and is operating from a position of strength. Thanks, everyone.

I'll now hand, the call back to Dave for his final remarks.

Thanks, Steve the company's performance over the past six months highlights the strength of our brand portfolio and value of our operating model our largest brands hug in HOKA are delivering compelling growth in the midst of historic levels of supply chain disruption.

In spite of this turmoil the company continues to generate strong cash flow that enables our leadership team to continue making key strategic investments that will contribute to deckers long term growth and success.

Our focus remains to increase global awareness and adoption of HOKA as we work towards building a powerful multibillion dollar performance brand.

Build the global adoption of <unk> across a diverse set of consumers categories seasons and regions.

And acquire consumers direct into our ecosystem with the goal of scaling our DTC mix of business to 50% of revenue overtime.

We are proud of our employees continued progress on these key initiatives and appreciate their buy in to make our collective organizational success a reality.

In the last 18, plus months, which are unprecedented in modern history, our employees have proven the value of our collaborative and winning culture.

This reflects both our financial performance, but also in the progress we continue to make on the ESG and D I fronts.

I'm delighted to share that the culture of Deckers as being recognized outside of our organization as well.

Earlier. This month decades was ranked sixth on Newsweek's list of the 100 most loved workplaces.

On behalf of the board and the management team I am extremely proud of this distinction as we continue to live our values by fostering a positive environment that allows employees to come as you are ready.

Recognition like this matters a great deal, especially when we are building our workforce for the future for.

For more on our global efforts supporting Deckers culture and values I would once again encourage everyone to take a look at our 2021 corporate responsibility report that will be released next week.

To thank you all for joining us here today and to thank all of our stakeholders for your continued support we look forward to sharing Deckers continued bright future with you.

With that I'll turn the call over to the operator for Q&A operator.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.

Our first question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.

Afternoon, everyone and definitely tricky navigating everything seems like Youre moving through it as you think about the navigation of the supply chain headwinds and you mentioned the percentage of goods in transit was 45% at the end of September what does that look like going forward, how do you see that developing.

And how much is pressure from the wholesale partners impacting your inventory levels and getting goods that they just have a follow up.

Sure Dan This is Steve I'll take a first stab at it and then Dave can jump in I think in terms of cadence how we're looking at it is.

As we've said in the script, we're going to be buying more inventory. This year, because we while we don't know exact timing.

And we're focused on the year, we do want to make sure that we have goods in place to sell so as we see it.

Our ending position at Q2, we had about the same amount of inventory in the warehouses a year ago, even though we have that 30% increase so we're going to continue to process that inventory. There is a bit of a domino effect that the delays are going to impact other inbound inventory. So we're very focused on <unk>.

Assessing what we can.

Through the port congestion, we will supplement it with air freight where appropriate especially around product launches.

And so we're going to continue to do that I think the strategy of buying more inventory early on at the beginning of this year was the right strategy.

And so the inventory is not the issue demand is not the issue. It's just our ability to process inventory work through port congestion and as we said trucks and chassis as well as working with our wholesale customers to get them to pick it up because they're experiencing similar challenges with arranging trucks and drivers so overall.

<unk>.

We would have liked to have done more.

We're dealing with what we have and I think we've got a good strategy to approach it.

I would echo that and I think as Steve said, we were proactive in getting ahead of this with increasing our production at the end of last year going into the beginning of this year and making sure we had plenty of goods.

To sell knowing that prices are going to go up in that supply chain challenges could persist that's proven to be true. The good news is the inventory is on its way and we have a large number on on the water in transit.

And we feel confident that we will have the inventory.

Particularly as it relates to <unk> in Q3.

In the marketplace going into peak season, whether that's at wholesaler DTC will be prepared for the busy season, a bug and then.

The next piece of that is just preparing for Q4 first.

But also really HOKA when business starts ramping up so it's a day by day navigation of when it's going to be here, how it's going to get here, but we have incredible relationships with our.

Factory partners, we have incredible relationships with our wholesale partners.

And we're all in this together to get the inventory out to the consumer's path.

And best positioned as we can.

Thank you and then my follow up.

The follow up is about pricing are you taking to ice van hook up and hug and if so how much how do you see that evolving.

Yes, so we didn't do a lot of price increases generally speaking for this current fall HOKA has taken prices up.

Surgically I would say they.

They are big styles, starting in spring introductions.

And thats embedded in the guidance and then for <unk>.

Fall 'twenty two.

We will be taking prices up for the UGG brand and.

I am confident that based on the strength of the brand and the consumer sentiment in the market, we have the ability to do that.

Unfortunately, there are a lot of the inventory that we have coming into the pipeline is at a lower cost basis than it will be next year. So that works to our advantage, but we will be taking price increases.

Going into FY 'twenty three starting in the fall with <unk>.

Thank you.

Thank you.

Our next question comes from Jonathan Komp from Robert Baird. Please go ahead.

Yeah, Hi. Thank you first question just on the August the update to the sales guidance for the year.

And bringing down the top end could you maybe just comment how that looks across channels wholesale versus DTC.

And not looking for guidance into next year, but how long do you expect some of these challenges to continue.

As we think into next year.

Yes.

Steve.

And to that the challenges with <unk> really its not a demand challenge at all we still have very strong demand from our consumer and our.

Our wholesale accounts are telling us today generally speaking still want the product.

So it's more about the ability for us to get product out of the distribution network.

Due to the bottlenecks in Q2, but the demand is very strong. So it's just a matter of getting caught up.

With TVN.

I think John in terms of the guidance and how we're looking at.

We shaved a little off the top end and I think that has to do as we've said around the disruption that we're seeing and.

The port congestion so inability to get some product on time, we think it's going to put some pressure on our ability to sell to that high end, that's going to be I think equally felt as we look at it now the dynamics that we don't know yet is really how the selling season plays out.

Assuming things improve from where we were at the end of Q2, and we were able to get more product process through our warehouse will be able to process those wholesale orders.

Again, then depending on what happens there will determine how we handle DTC business. So we could see an increase.

In our DTC business with improvement in product, but that'll be dependent too on how much honestly, we ship early in the next kind of month and a half or so.

Hard to say kind of how the channels work out, but we're going to be prepared that if there is some disruption to shipping and our wholesale customers will pick that up through our DTC channel. So we're remaining pretty flexible on that hard to say exactly how that plays out.

Just a little bit of caution because of the disruption that we've seen again, the domino effect of when that's going to.

And how that's going to play out, but we will be prepared to pick up any of those wholesale sales that may get missed with our own DTC business. Yes, we saw that last year. When there was scarcity in the marketplace for wholesale we saw consumers going direct to our DTC channels, mostly our web site at the time.

Hence the challenge on the comp this year in that channel, but I think as I said going into November December we have the inventory and.

And we will be ready depending on how the consumer wants to shop.

Okay. That's very helpful. And then one follow up on gross margin the full year outlook the change.

Is that all related to freight and could you maybe further quantify what you're embedding now and then when we look at the implied second half gross margin it looks.

Maybe 150 basis points or more.

Although the second half of 'twenty fiscal 2020.

Just wanted to maybe ask how youre thinking about the pricing that you're planning and how that might offset.

<unk> inflation.

What's the right way to think about the baseline for gross margin going forward.

Yes, sure John So before we guided to just under I think 53, we're now about 51 and a half that difference is really increased ocean freight as well as more air freight.

So if you look at the first half of the year. The first half of the year a lot of that inventory was transported before we're seeing the increases around ocean freight. So we're anticipating a much bigger hit in the second half.

Related to ocean freight increases so the inventory thats in transit and flowing in now is coming in at a higher freight cost than also supplementing it with more air freight that we expect to experience in the second half.

The price increases that were implementing with OCA will help offset but it's still relatively small in the big scheme of things.

Yes, it's able to help mitigate it to a very small extent.

That less than 150 basis point margin hit on the year that we're now projecting is really ocean freight increases largely that we expect to experience in the second half as well as some supplemental airfreight that.

That we did do and will do more of in the second half and we've taken a conservative approach on it so it could improve but right now from where we stand today, calling the ball. This is what we think is prudent.

Okay, and just to clarify with your pricing strategy throughout next year or is it.

Do you think it's enough to trend more back towards your 2021 levels of gross margin or should we be thinking back towards 2020, more sort of a baseline going forward.

That's the goal is to get it back and so the price increases discussions that we're having now brand a pretty broad base, including.

Some kind of core classics and the mix still early days, but that's how we're thinking about it and get back to normalized level and I think John on that early to tell right and it's going to be dependent on when we begin to see normalized freight around containers. So what we're experiencing this year hopefully we arent necessarily.

See on an ongoing basis. So the sooner we can get back to a more normalized level that will be.

Tailwind on the margin front and then on the air freight Additionally, with the extra inventory that we're bringing in this year.

Should provide a tailwind for us, but don't want to be a little careful about getting too far ahead of ourselves on on how much margin take back we get next year.

Yes understood.

Understood I appreciate it thanks, Okay. Thanks John.

The next question comes from cumulative Lion from <unk>. Please go ahead.

Thank you.

Good afternoon.

Just a clarifying question first on on the Q2.

From a revenue number that you reported it looks from our math that you.

You had about $75 million to $100 million of that delay in shipments is that about the right ballpark to think about in terms of what you experienced from a.

<unk>.

From a.

Supply chain transit perspective.

Yes, I think again.

We're looking at the whole year haven't giving guidance, but if you look at what we were expecting in terms of inbound inventory that remained in transit, yes, youre right in terms of how much you could probably extrapolate what we thought we could have turned on that inbound inventory that got really hung up in transit during the quarter.

Okay, Great and then I guess the question is is it.

It sounds like Thats still in transit that has not ships out to wholesale is that.

Is that the right assumption there.

Correct. So when we say in transit it means it has not arrived at our warehouse. So it's in the process so either on containers or in the poor.

On their way to the warehouse.

For the Montana.

Yes. So is it fair to say that that Q2 shifts will be William.

It will be absorbed in Q3 or is that still uncertain.

I would say back to my earlier comment about a domino effect.

<unk> be able to make all that up so there is a bit of a trickle down so I wouldn't add that myth back into Q3, because we're experiencing a domino effect in <unk>.

We are seeing right. There is a continued backlog at the ports.

Yes, no definitely it's it's pretty pervasive and I think it's gotten worse.

With each day that passes.

Okay, So you've talked about taking on more inventory.

Okay.

A few different times on the call that you're concerned about demand trends.

Can you just give us some examples of the demand signals that you have been seeing.

Probably most importantly at wholesale.

And then secondarily as we think about.

The comments around taking on more inventory to alleviate any further disruptions.

How do you feel about it.

What are the discussions I should say with your wholesale partners in terms of any cancellations at me.

Has it been discussed.

And if those if that inventory does come back who can statement of those cancellations or.

Or are using your own DTC is the preferred mechanism to satisfy demand as you get deeper and deeper into the holiday season.

Sure I'll start and then I'll, let Dave I think again from a demand perspective, there's more demand out there.

Then we can ship right.

The build in inventory that Youre seeing.

And our ability to get product to wholesale customers.

As a part of that port congestion and delay we have had conversations with our customers and said kind of here our new expected dates do you still want product or not in most cases, absolutely. They recognize how important both <unk> and <unk> are to their businesses and so people aren't walking away from orders because they recognize.

Sure.

Their need to have that product on their shelves. So we're working through that with them if they feel it's too late.

We will take some cancellations and then that's our opportunity to fulfill those sales through DTC and we will take that at a higher margin. So.

That's how our approach it yes.

Yes, and the signals from wholesale to continuing to be healthy. So hence that's why they're saying we want the product and as we can get it will work with you and we're getting creative on how we get product that these accounts, but the sell through are healthy across the board for both brands and as Steve said as there's more demand than we can fulfill at the moment.

But we're confident that theyre going to converge coming into the busy season. So we will have inventory depending on what the channel is where the consumer wants to shop.

That sounds great, especially with the weather forecast for London Winter.

Cold and Snowy one so it should be good last question just on that inventory composition, but all data.

So you are taking on a bigger a bigger bet on.

What are the what are the styles that you think you've taken a bigger bet on just the core classics or is it a broader array of products.

It's some classics.

A big part of it is product that we can carryover if necessary. So it's not liability product generally speaking.

And then some obviously the big seasonal selling like the fluff in the clear.

New male Tasman those styles, that's where the meat of the inventory has been heading into spring some new product introductions.

Evolving into outdoor sandals, and then HOKA.

Again, driven by Clifton and Bondi RIN Con top five styles that are doing the business.

The initial drops or kind of one and done until they get a new delivery coming in so.

Again, it's product that we know the consumers are going to want when they can get it.

And then if we need to carry a little bit over it sets us up with a bit of a margin tailwind going into next year, because it's at a lower cost basis, and it's a product that we know we can sell.

Ron and heading into FY 'twenty three if necessary.

Excellent best of luck guys.

Alright.

The bottom line there Camilo is we want the inventory in the country, we don't want it on a transit or in a factory and so that's been our stance and staying aggressive on getting at here.

Steve. This is maybe the first time I'll ever say get as much inventory as you possibly can.

Yeah exactly.

Good luck guys.

Thank you Ed.

Question comes from Sam Poser from Williams. Please go ahead.

Thank you guys for taking my questions.

Some of the questions have sort of been answered. So first of all before we get started can you give us the wholesale revenue or the direct to consumer revenue by brand just wanted to ask it on the call, but I didn't do last time, so sure Erin This is Kevin.

Hi, Sam so global wholesale and distributor combined for each of the brand.

349 million for <unk> $147 million 19.

19 million <unk> 7 million and other 23.

Thank you.

And then.

I just want to follow up on the inventory.

Concur with Camilo, right, now, which is shocking but that's.

But the question really is is what does the inventory look like today like if you took your inventory that was 636.

Now how much of that is actually left the building and what does that number look like today.

Both from.

Total and then transit like if you just as of.

Today.

Yes, so I'm not sure I follow exactly what Youre trying to get at Sam Let me try to answer and you can follow up I think he is asking of that.

Inventory that was in transit and sitting in the DC.

No I mean, I'm, just saying you have 636 million less.

No.

45% of that Soma water, but today what is your total inventory and how much of that is in transit. So just exactly the same number but as of.

Today.

Okay.

Yes, I think we will not give that but I think your question is is.

The in transit that we had at end of September being processed and the answer is yes, we are processing some of that.

Do we still have a higher proportion of in transit today than we did a year ago. Yes. There is some improvement so clearly with the seasonality of this is the time, we're bringing in a lot of inventory and that's what got.

Caught up in some of this port congestion, it's going to take a little bit of time to clear that and we're not seeing the improvements to move through that inventory at the port Thats why youre still hearing about ships lined up outside the port of Los Angeles and long Beach. So.

We are where we're at in our business cycle and the seasonality of <unk> business. There is improvement, but we still have a ways to go with in transit of 45% compared to 20%.

Lot of inventory to work through and because we're not unique in this everybody else's I think battling a similar issue so.

We will be able to share more later.

But hopefully we're going to start to see some improvements we are seeing some just due to where we're at in line.

But there are still some pretty significant congestion in the port.

And then one last thing just when you think about the 300.

49 million that you did.

<unk> of wholesale in the quarter.

How should we think I mean if.

Is a $400 million wholesale number or you know in that let's call. It four to.

For the slightly higher number.

For Q3 is that a reasonable number to think about given the movements around and so on.

Or is that it.

Could you give us some help there yes.

Yes, I think I think the way you're asking it somewhat to have Camilo asked his question was given how much inventory. We had in transit had we been able to process that in Q2 would that have driven our <unk> number.

North to a number you are talking about yes, we would.

But we will see what normal cadences some of Thats being us driving that wholesale replenishment in Q2, so that was a bigger number that we're working toward and continuing to work toward but yes to answer. Your question could we have done more had we had more inventory yes.

Hello, I'm really talking about Q3.

Thinking about 400.

So call. It 420 is that a range that is reasonable.

<unk>.

Sort of within where you're thinking about your wholesale business for the full year is that am.

Am I in the ballpark.

<unk>.

On that number.

We are we going to be.

Big number it's an important quarter, we can't really guesstimate.

T C, but you sort of know what what's where would you sort of know what you think it can get through.

Yes.

I mean, I think yes again.

Potential, we're not giving guidance on the quarter.

And we're still working through congestion in the port, but yeah. I mean, you could do that we could do that we could have done that last quarter, it's all dependent on ability to get inventory in and processed and out to our customers.

How much have you gotten in and process in the last three weeks.

Well, we haven't gotten into that but we're processing.

Yeah.

Alright, but again I mean, yes.

I understand I look I'm, just trying to get my arms around the whole thing. So yes, I mean, you definitely have plenty of ammunition, that's just a matter of getting it through the process.

That's right that's right and we're doing everything we can and like I said based on the guidance for the year. We think we can deliver what we said last quarter.

And the mix might change between argon HOKA little bit, but based on how the trends are continuing and the demand being strong.

We feel confident we can deliver the year.

Thanks, very much and good luck alright, thanks, Tim.

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

Thanks, Hello, Thank you for taking my question.

We hope you guys are are hanging in there doing well.

I wanted to start just by asking you you've got a fairly narrow selling window for what's the risk that other product kits delivered too late and that selling window and becomes carryover inventory.

Burden on next year, what can you do too.

Try to prevent that.

Well I think we're doing everything we can to prevent that scenario of happening and the good news is we know from what we saw last year. When there was lack of inventory in the wholesale channel that people came running through our DTC channel and I think that gives us a lot of confidence in.

And we're gearing up for that in November December should that be the case.

If for some reason we can't get all the inventory that we want out into the marketplace to the consumers and Theres carryover, we do think that.

January and February is still going to be strong month for us and I think.

And a lot of ways Christmas is going to be late this year for people. So I think there will be still an opportunity in Q4 to sell some of that product.

As I said a lot of this is kind of core carryover product in the UGG brand that we can sell next year and the benefit of that is that it will be at a lower cost basis than any new inventory, we start producing today from next year. So it's a miscommunication plan, where we said hey, we want to get as much inventory as we can in the pipeline the demand continues to be super strong.

We're going to do everything we can to make Q3 and the year with Doug and if we don't we have carryover inventory.

Willing to do that so that we have inventory to go into next fall and as I said at a better cost basis.

And just to add on that Jim.

A question I think a couple of things I'll add one as Dave kind of said is yes.

As everybody knows with all the supply chain constraints going on this year that the holiday selling season, probably extended on both ends right people are being told by more early we're encouraging people to buy more early as well.

They'll continue to buy up to the holiday season and for those areas where people didnt get what they want we expect that there will be demand in January so that's the way we're looking at that today's point, we're happy to fulfill that through DTC. If our wholesale customers wanted to do that too. We're happy to provide inventory you can tell by our inventory number we've got it coming in.

We're going to be able to deal with it so I think.

That's our approach the other components I think that's important on the inventory is that we're looking at carryover style. So as we knew we were going to buy more inventory. This year, we were careful with the inventory that we selected that we were buying more.

So that if we did have to carry some over it would be limited in terms of seasonal styles or.

Specific non carryover styles that we wanted to limit. So again, we've been careful I think.

Again, the right approach in terms of bringing more on to navigate some of the disruption that we're seeing but that's kind of how we're seeing it play out and then we'll see what happens.

Great. Thanks for that I wanted to ask a quick one on HOKA, if I may what we're hearing from some other players in the athletic category, they're going to be in a position of inventory deficiency in that March quarter, suggesting HOKA has great opportunity for market share gains how long do you think about.

Market share gains in revenue versus margin and the tradeoff from using expedited freight and so forth to capitalize on that opportunity.

Well I think certainly Q4 for us our Q4 ending in March is a big opportunity for HOKA. The order book is strong hence you see our guidance maintaining we.

We have inventory on the way, we had minimal disruptions due to Vietnam, Vietnam production, but we've been dual sourcing that so the product is being made is just a little bit behind.

Our priority is to maintain strength in the marketplace and steal share and if we have to spend a little money to do that and protect acute for top line.

That's the right approach to do both short term and long term.

And I think Jim also on that we are buying more we're more confident with HOKA. We're buying more inventory that is one area that we are willing to spend more on airfreight to expedite that and so that is absolutely a trend. If we see in Q4, we are going to be prepared to try to capitalize on we're going to continue to stay.

Super aggressive on HOKA.

The competitive marketplace have newcomers coming in including ourselves that are stealing share from some of the heritage running brands. It's continuing to have incredible momentum for us we do see this as a long term multibillion dollars play and we're not taking this quarter to quarter, but we don't want to miss any opportunity to steal share and get in receipt of consumers.

<unk>.

Excellent. Thank you guys. Appreciate you taking my question you.

You bet.

The next question comes from Janine Stichter from Jefferies. Please go ahead.

Hi, everyone. Thanks for taking my question.

There's a little bit and talk about Europe. It sounds like the adoption there as the fluff franchise has really picked up just curious what inning, you think youre Anna and if you feel like it's following a similar path the recovery we've seen in the U S. And then secondarily just wanted to check on sheepskin costs have you lock those in for next year yet. Thank you.

Yes. Good question. So yes, we are seeing good momentum in both Europe and in Asia with the fluff franchise being picked up this year more so than it was last year. So the trend that started in the U S is expanding globally.

Good news for Us and we do think that that franchise is going to continue to be a key part of the brand going forward, including iterations that are in the pipeline to expand into a little bit more outdoor usage.

That is a new leg of the stool so to speak for the UGG brand going forward.

As far as Europe goes it's great that we are seeing that adoption. We're also seeing younger consumers coming into the brand, which is fantastic and we've been working on that for a long time.

The unfortunate pieces of that this year, the demand is going to be higher than the supply and that challenges the growth opportunity that.

We were hoping for in the transition and turnaround of that marketplace. So it may take a little bit of longer until we return to full time consistent growth we.

We were hopeful that we could do it this year, but I think some of the bottlenecks are.

Going to slow that down, but it's definitely not because of demand is slow it's really really driven by the port congestion.

And then turning to Steve on the Sheepskin, we are not seeing a material increase cost and sheepskin and yeah. I think just one important note to also make is that as deckers becomes bigger and bigger and the product is much more diversified in HOKA becomes a bigger part are dependents on sheepskin is a lot less than where it was historically.

No.

We're moving away with the proportion of sheepskin makeup of our Cogs, but at this point as we look out at next year, we are not seeing a material increase in our sheepskin costs, yes.

Great. Thank you very much.

You bet.

And our last question comes from Jay sole from UBS. Please go ahead.

Great. Thanks, so much my.

My question is just about thinking about gross margins for next year given the comments you just made about sheepskin.

<unk>, Ken but given the pricing that you are taking lapping airfreight and some of the extra costs that had been in the P&L. This year does it favorably change the way youre thinking about margins for next year.

On a normalized basis no. It doesn't I think this year, we're getting hit with some headwinds that should not reoccur in future. Although we don't know the duration of this yet so I think that's going to be independent factor that we don't yet know.

I would say removing all of the noise of the current year, we're not thinking about margins different so in terms of product margin really no change, where we have opportunity as the increased proportion of our DTC business.

And then I think we will see how the current situation plays out and then when freight rates begin to normalize and I think we will then be in a better position to provide some outlook next year, yes.

What we've said to the team is don't think of this as a short term hedge.

Headwind, meaning the increased cost in the supply chain. This is here to stay.

I think it's going to be with us for at least a year or two it may never go back to normal levels due to wage increases materially increase as shipping costs. So.

We are planning our business as though those new levels are going to remain the good news is that things improve next year than we have opportunity.

And they were taking price increases too.

Give us the margins that we need going forward despite the cost increase so.

That's how we're thinking about it again, we're staying aggressive and if things start to ease up a bit on pricing.

We'll be in better shape and Thats a combination of price increases that we're taking and also having some carryover inventory at a lower margin.

And then we will be spending less on air freight and other costs and we can reinvest back into the business. It's not all going to fall to the bottom line. We are focused on the long term and investing in our key strategic growth priorities.

And so that's really.

Priority number one is talent capabilities and awareness for our brand.

And then we will we will manage through that.

Got it okay. That's super helpful. Thank you so much.

Alright, great. Thanks.

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

[music].

Yes.

Yes.

Okay.

[music].

Okay.

[music].

Sure.

Okay.

Okay.

[music].

<unk>.

Yes.