Q3 2022 Deckers Outdoor Corp Earnings Call
Sure.
Good afternoon, and thank you for standing by.
Welcome to the Deckers brands third 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.
Instructions will be provided at that time for you to queue up for questions.
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I would like to remind everybody that this conference call is being recorded.
I'll now turn the call over to Erinn, Kohler, VP 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.
Our 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 facts are forward looking statements and include statements regarding changes in consumer behavior strength of our brands and demand for.
Our product changes to our product allocation segmentation and distribution strategy changes to our marketing plans and strategy changes to our capital allocation strategy. The impact of the COVID-19 pandemic on our business and supply chain are anticipated revenues brand 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 <unk>.
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 I'm excited to review our third quarter results underscore the momentum of our brands and their continued execution of key strategy as we build the future of Deckers brands.
As we continue to navigate a challenging logistics environment I'll reflect on both the exceptional demand for the UGG and HOKA brands and the added pressure, we face to keep pace with the growth in a constrained environment.
While we don't currently see signs at elevated logistics costs or supply chain bottlenecks will subside any time soon we do see value in supporting our strong brands through expediting key product inventory, giving our brands the opportunity to gain market share.
Steve will provide a more detailed update on the status of our supply chain network and the actions we're implementing to provide our brands with the best opportunity to thrive in this challenging marketplace now and into the future.
With that said Decker's third quarter revenue increased 10% over the prior year to $1 188 billion.
Representing our largest quarter in history.
We saw balanced growth across our entire brand portfolio as direct to consumer wholesale and multiple geographies drove impressive results.
Performance in the quarter and throughout the year has been the result of our execution on our long term strategy.
<unk> driving.
Diversifying.
Building DTC and developing our international market.
More specifically, we have made progress across these key areas as hooker grew 30% in the quarter, Despite port congestion and inventory constraints and has grown 54% year to date over prior year contributing half of our total portfolio was incremental revenue.
<unk> increased 8% over last year in Q3, and has driven double digit growth year to date propelled by global adoption of the brands diverse product assortment.
Direct to consumer growth outpaced wholesale growth improving DTC next year, 50% of third quarter revenue up from 48% last year and 44% two years ago.
In our international regions contributed a significant portion of global growth year to date, increasing 27% over the prior year and outpacing the U S increase of 19%.
Our international regions have sold and most diverse offering of products ever which helped the brand delivered impressive global growth fiscal year to date in.
In addition, with HOKA continuing to expand its share of the global performance market. We believe our portfolio contains two of the strongest brands in the footwear industry with.
With much more promising growth ahead.
Now, let's get into some of the brand highlights starting with <unk>.
Global AG third quarter revenue was $946 million, reflecting an 8% increase versus last year, and a 21% increase versus two years ago and the brand's largest quarter.
These results when combined with the UGG brand's outstanding first half equate to fiscal year global revenue growth of 13% above last year and 21% above two years ago.
Reflecting the continued steady growth in the U S, which is up high single digits on top of last year's mid teens increase.
And a strong return to growth within the brands international regions, which have increased north of 20% versus last year and double digits versus two years ago, all of which has been fueled by a diverse assortment of compelling products across gender and categories that are being embraced by a broader and younger consumer base.
In terms of the UGG brand success year to date, the majority of growth has come from categories outside of women's classics.
This includes continued gains across men's and kid's footwear, womens slippers, and fluff as well as apparel and accessories.
While these categories are driving the bulk of our growth. It is important to note that women's classics have also performed very well this year fiscal year to date women's classics boots have driven year over year revenue growth represent a smaller percentage of total brand revenue that reflects greater style diversity within the category as items outside of the core such as the ultra.
Classic clear and new mill have been key drivers of consumer acquisition this year.
The new mill with its broad consumer appeal. This year's largest dollar volume style across the entire AGA assortment.
Product and design teams have done a great job developing companion versions to build a franchise, which continues to be a large driver of men's growth.
Additionally, our consumer data has shown that the adoption of augment product skews younger as the 18 to 34 year age group represents a larger portion as compared to the brand average and the new male remains a top acquisition style amongst these consumers.
Our product teams are actively utilizing these insights to design new styles that will allow us to build upon momentum with these targeted consumer.
Turning to kids footwear has driven impressive gains in kids categories over the past few years.
We believe this is a strong indicator of brand health as purchasing patterns reflect consumer's buying for the family with the majority of top styles, representing popular items from the mens and womens product range.
These bundled purchases are obviously, great for increasing cart values in wholesale open to buy but also act as a great Avenue to introduce us to the next generation of consumers.
Beyond footwear has been focused on acquiring new consumers through a compelling apparel assortment.
To build awareness in the category of developed its first ever apparel dedicated marketing campaign, which helped drive a 40% increase in apparel consumer acquisition year to date.
Consumers have responded, particularly well to ready to wear sportswear and outerwear items that contain visual of DNA local treatment and deliver on the expected feeling of AR.
This was the first season for a number of retailers carrying yoga apparel, many of whom are concentrated in the Houston sports lifestyle channel.
These channels have been driving strong performance with footwear for some time now and we're excited that they're onboard to expand into a head to toe offerings.
On the domestic front. This is the fourth consecutive year <unk> has delivered strong year to date growth in the U S where brand consideration remains at an all time high among 18 to 34 year olds. According to Hugo <unk>.
The brand's development of a more youthful and diverse product assortment as well as the ongoing U S. Wholesale marketplace management strategy has helped us strategically expand within youth and sports lifestyle account.
<unk> has built market share across its account base, the youth and sports lifestyle accounts has significantly outpaced growth with department stores.
Additionally, <unk> has driven significant gains in DTC acquisition with 18 to 34 year olds over the past two years as this age group has grown at a 25% CAGR year to date over the same period in fiscal 2020.
Critical to this success has been the product adoption among those younger consumers who are purchasing both heritage products like the classic short and mini but also new franchises like the new mill fluff Tasman and classic clear.
From an international standpoint regions outside of the U S. A a kind of approximately half of <unk> growth this year with EMEA and China driving the majority of gains over last year.
Approximately three years ago, <unk> implemented a marketplace reset strategy in the EMEA region based on the successful strategy that reignited the brand in the U S. This.
This involves a reduction of wholesale accounts to the tune of approximately 35% over the last three years allocate.
<unk> and segmenting core product and elevating brand positioning while also working to create demand for our complementary products and new categories.
Beyond the marketplace activities in EMEA.
Marketing team began localizing global content to more effectively connect with consumers living in European and Asian countries.
More recently developed market specific collaboration and brought on local influencers to help highlight some brands compelling product.
These actions have helped drive the international turnaround, which.
Which is now delivering growth and high full price sell through with the brand's most diverse product assortment effort.
Importantly, the return to growth of international of regions aligns with our global category growth initiatives further aiding the brand diversification into categories outside of women's classics.
Fiscal year to date women's core classics and derivatives have moderated to below 40% of international revenue.
This is more in line with the U S and compares to north of 50% just three years ago.
With a tightened supply of core product international regions are driving healthy growth with popular global styles, such as the fluff franchise Ultra many classic clear and the new mill.
By highlighting new categories, reducing the supply of core products and tailoring marketing campaigns to local consumers.
<unk> begun to expand its audience to younger consumers in both Europe and China.
In Europe . This has led to new strategic points of distribution in the Houston sports lifestyle channel.
Volume generated with these retail partners is still relatively small, but growing significantly faster than average and at the U. S is any indication. These emerging segments can be a big driver of growth in volume in the future.
Similar to the U S. We believe younger consumers are leading the UGG brand's increased popularity among international market. The brand has worked hard to create localized content that resonates with sub 35 age consumers in their respective markets in Germany, France, and the UK. This age group is driving over 40% of traffic conversion from paid social.
In China at this age group is driving GDP growth in key franchises, including global styles, such as left in the classic clear. The UGG team has a lot to be proud of with the progress. It has made as the brand continues to drive global growth with a diverse assortment of in demand product.
Looking ahead, we're excited to build upon this year's head to toe demand is a compelling new rainwear proposition that features two new styles. The <unk> leader in attachment X, which we believe will help the brand further expand its year round appeal to consumers around the world.
We are already receiving great feedback on the sell through of this collection of rainwear product and are excited to share more on our year end call.
Congratulations to the team on a great fall season, and we look forward to continued success. This spring shifting to Helga global revenue in the third quarter was $185 million, reflecting a 30% increase versus last year and nearly double the volume of two years ago, despite dealing with stock outs and delayed inventory polka performed well in the <unk>.
Quarter.
Driven by global strength in the direct to consumer channel, which increased 52% over last year and continued global wholesale market share gains, particularly among international regions.
As unit growth outpaced domestic fiscal year to date global Hunker revenue has increased 54% versus last year, reflecting strength across the brands ecosystem of access points as domestic international wholesale and direct to consumer continue to drive impressive growth from a direct to consumer standpoint, we have seen strong global demand.
<unk> year to date as U S search interest increased 74% over the prior year According to Google trends.
New consumers visiting the European Hooker Web site during Q3 increased 88% over last year, helping the region maintained the highest DTC growth rate, thus far in fiscal 'twenty, two and drove more than 30% increase in conversion rate during China's double 11 event demonstrating improved awareness in the region.
DTC continues to be a great Avenue for hooker to make connections with consumers drive replenishment and increased category adoption is it more effectively displays the breath of the brand's product assortment.
We are actively testing and developing the hooker consumer experience at pop ups in the U S and to owned locations in China.
In China, we plan to utilize strategic retail locations to continue building <unk> brand awareness as we develop the marketplace further and create a model for future wholesale partners to leverage in the U S. We have seen great engagement from consumers that pop up locations and are exploring other select cities to test the HOKA experience.
At the same time HOKA is building the experience at DTC brand continues to build credibility and awareness with consumers through partnerships with strategic retailers.
This spring Hogan will be strategically expanding with key partners to satisfy incremental demand and further augment the brand's market share. We are pleased that our partners have continued to express excitement about the HOKA brand and their desire to expand further and we look forward to continuing to grow those relationships at the same time, we remain disciplined in our approach to steadily.
And sustainably building HOKA to a multibillion dollar brand overtime.
Turning to product highlights for the third quarter, we launched the Bondi X at the beginning of October . This innovative style combines a signature cushion of a traditional bondi carbon fiber play to give out to get some more propulsive inefficient right.
The Bondi X launch drove significant traffic to <unk> dot com, 65% of which were first time visitors with style was even named one of the best running shoes. According to <unk> 2021 Fitness Award.
Beyond the bond IX the HOKA brand is expanding consumer awareness with two of its newer franchises the rig count in the market.
Both franchises were designed for an audience of consumers under 35 years old the.
The <unk> team strategically developed drink comment mark social content for platforms possessing a higher concentration of this key demographic.
As a result, the rig count and Mark have been key catalysts for the HOKA brand's accelerated acquisition of younger consumers and these franchises are driving superb growth.
On the collaboration front HOKA partner with global luxury brand Montclair to release, a limited edition of the <unk>.
This was a great opportunity to for <unk> to build global awareness by partnering with a well known European fashion luxury brand.
The collaboration drove significant positive PR for HOKA and sold out in the first hour of availability.
<unk> like this are a great indicator of the brand's growing appeal beyond its traditional performance routes and into the space of fashion, while fashion is not a top priority for hooker right now we see this as an opportunity for the brand to capitalize on more broadly in the future.
Clothes, HOKA I'd like to congratulate the entire team for the brand being named footwear News' brand of the year. This is a fantastic accomplishment and speaks to the incredible momentum of HOKA brand marches closer to $1 billion in revenue and beyond.
We have enormous confidence in the brand's ability to continue building share in a highly competitive marketplace.
While we continue to operate in this constrained environment, we're prioritizing the fulfillment of polka demand so carefully balancing stringent quality standards as the brand's growth has required adding further manufacturing capacity.
Ramping production of this highly technical performance product will require some additional time, but our measured approach will ensure <unk> is built to become a long term major player in the performance space.
While delivering the quality product our consumers expect.
With respect to channel performance in the third quarter global direct to consumer revenue increased 13% versus the prior year and plus 42% versus two years ago.
From a comparable sales perspective direct to consumer increased 11% versus last year fueled by strength in both retail stores and online.
<unk> drove the majority of the year over year dollar volume increases, but DTC demand was robust across the portfolio.
Facing bottlenecks during the UGG brand's historical peak period of demand. We took specific actions that benefited our DTC, which included encouraging preorders on key styles to help smooth demand.
Carrying a broader exclusive assortment that provided the option of alternate in stock products, where there were shortages and offering the option to purchase back ordered products that had incoming inventory and a constrained supply environment. We have experienced this year, our omnichannel capabilities proved advantageous in reducing the impact on the UGG brand's business.
From a wholesale perspective global revenue in the third quarter increased 7% versus last year and 14% versus two years ago.
Growth in the quarter was primarily driven by international and global HOKA was slight offsets from a reduction in domestic.
That resulted from earlier shipments of fall product as compared to the prior year wholesale comparisons remain unique as macro logistics pressures and bottlenecks continue to alter shipment timing as compared to historical pattern.
With that I'll hand, the call over to Steve to provide further details on our third quarter financial results status of the dynamic supply chain challenges facing our industry and our updated fiscal year 2022 outlook Steve. Thanks.
Thanks, Dave and good afternoon, everyone I'd like to Echo Dave's remarks regarding the success of our key strategies.
With three quarters of the year now behind us, including the peak holiday season, we feel great about the strength of our brand portfolio throughout the year as driven global growth with a diverse assortment that is resonating with consumers across multiple categories, including apparel and accessories at the same time Hooker continues to build share with <unk>.
<unk> performance products across its ecosystem Abaxis point.
The growth delivered by our two largest brands was achieved despite significant supply chain disruption that we expect to remain a headwind for the foreseeable future. While this challenge persists, we have a great deal of confidence in the demand for our brands bolstered by our omnichannel capabilities flexible operating model and fortified balance sheet.
Similarly, we believe that prioritizing our long term strategic goals will allow our brands to remain successful and drive continued market share gains.
Now for the financial specifics of Q3 results third quarter fiscal 2022 revenue was $1 188 billion.
Representing a 10% increase versus last year, and a 27% increase versus two years ago.
Q3 growth was driven by our two largest brands <unk> and HOKA as international increased 29% versus last year led by a return to growth in our EMEA region and an acceleration in China.
And global HOKA increased 30% aided by a more than 50% increase in DTC.
Gross margins for the third quarter were down 470 basis points versus last year to 52, 3% the decrease as compared to last year was due to higher freight costs as ocean container rates have significantly increased third party delivery fees have increased and we have used a substantial amount of airfreight the increased <unk>.
Cost in freight, including all of these components amounted to approximately $55 million above last year in the quarter.
SG&A dollar spend for the quarter was $328 million up 15% from last year's $285 million.
Increased spend was primarily driven by greater marketing expense to increase localized content highlight new categories and fuel brand heat globally as well as higher warehouse expenses as we grow our logistics network and other variable expenses.
Our tax rate for the quarter was 25%, which compares favorably to the 22, 2% last year due to discrete tax benefits and a higher proportion of international revenue.
This resulted in a diluted earnings per share of $8 42 for the quarter, which compares to $8 99 in last year's third quarter. The 57% decrease versus last year was primarily driven by lower gross margins that resulted from higher freight costs higher marketing warehouse.
And variable expenses with partial offsets from the revenue growth of our two largest brands and benefits from a lower tax rate and share count.
Turning to our balance sheet at December 31, 2021, we ended December with $998 million of cash and equivalents.
Inventory, including in transit was $551 million up 80% from $305 million at the same time last year with the large majority of that increase still in transit and delayed due to port congestion.
And we had no outstanding borrowings.
During the third quarter, we repurchased approximately $131 million worth of shares at an average price of $369 12.
Fiscal year to date through December we have repurchased approximately 736000 shares spending a total of $267 million.
At December 31, 2021, the company still had $544 million remaining under its stock repurchase authorization.
Before we move into our final outlook update for fiscal year 2022, I'd like to provide an update on the status of our logistics network and the actions we are taking to mitigate future effects on our business.
The most material challenge facing our business continues to be prolonged transit times for items produced overseas to reach our warehouses. This has led to a much higher proportion of inventory classified as in transit at September quarter end, we noted that approximately 45% of inventory was in transit, which compared to roughly 20% in the prior year at the same point in time.
As of December 31, we have not seen improvement as approximately 50% of our inventory remained in transit, which compares to roughly 25% in the prior year at 12 31, we.
We do not expect this issue to be resolved near term and as a result, we plan to carry elevated levels of inventory at fiscal 2022 year end and into fiscal year 2023, placing an emphasis on receiving product into the country of sale at the expensive inventory efficiencies in the short term we will continue to.
Utilized air freight where strategically necessary to import products and leapfrog port congestion to maintain share.
More specifically with the rate of growth our brands are experiencing, particularly <unk>, which is more consistent demand throughout the year as well as a greater percentage of at once business.
Aligning sufficient inventory levels with elevated demand has become increasingly difficult to help offset this issue. We have stepped up our airfreight usage to supplement ocean and port delays with shipping by air is causing gross margin compression.
Our strategy is to prioritize cocoa market share and the ultra competitive performance footwear space and as such we are willing to maintain higher airfreight usage to fulfill this demand. Meanwhile, the HOKA team is actively working through product launch adjustments to best align with the current logistics environment.
On pricing, we spoke last quarter about raising prices on select hocus styles. This spring and taking a look at for the fall of 2022 season. Our product teams have completed a thorough review of their respective brand price elasticity and are continuing to adjust prices on targets dials accordingly.
While these changes can help offset some of the inflationary pressures on materials, we still expect elevated freight expense to be a near term headwind above these pricing adjustments. Please note. This does not constitute gross margin guidance for next year as pricing and freight are only a few of the many variables that factor into our gross margin forecast.
From a factory production standpoint, we maintain a network of strategic third party manufacturers and have been actively seeking additional production lines with existing and potential new partners. Despite ongoing activities. We expect some of our growth in the upcoming fiscal year to be limited by manufacturing capacity constraints.
To ensure product quality and integrity, particularly with <unk> given the complex nature of the brand's high performance products. It will take time to ramp up additional production. These efforts are made more difficult by the existence of the ongoing pandemic, we will provide a more thorough update on our fiscal year 2023 expect.
Patients during our year end call in May.
Now with that context in mind and moving to guidance for the full fiscal year 2022 on revenue we are narrowing our range to reflect a $20 million increase on the low end and maintaining the high end of our prior guidance now expecting a range of 3.03 billion to three points.
<unk> 6 billion.
This represents growth of approximately 19% to 20% over fiscal year 2021.
Gross margin is now expected to be at or slightly below 51, 5% included in this is our annual spend on freight that is now projected to be $100 million over last year.
SG&A is still expected to be approximately 34% of revenue.
And we expect our operating margin to land within the prior range at approximately 17, 5% of revenue.
We now expect a tax rate of approximately 21, 5% for the year and taking these into account we are narrowing our prior earnings per share expectation to a range of $14 50.
To $15 and 15 four.
For full fiscal year 2022.
At this point, our full year guidance does not anticipate additional significant supply chain disruption beyond what we have covered here today excludes one time charges and does not contemplate impact from additional share repurchases.
We look forward to providing additional updates on next year during our fourth quarter call in May thanks, everyone and I will now hand, the call back to Dave for his final remarks.
Thanks, Steve.
Our brands have performed exceptionally well this year, notwithstanding and logistical challenges facing our industry fiscal.
Fiscal year to date Deckers has delivered revenue growth of 22% above last year, and 37% above two years ago, while maintaining top tier operating margins among peers.
Our impressive margins have been achieved as we continue investing in the long term future of our organization and prioritize growing the market share of our exceptional brands.
All while navigating headwinds related to the global pandemic and supply chain disruption.
As I said at the opening our brands are incredibly well positioned across the globe, but demand continues to outpace our current ability to supply it and we are managing the business to deliver strong results in this uncertain environment.
We have continuously evolved our strategies to mitigate the impacts of the dynamic state of the logistics environment key actions. We are taking include tightening our product assortments to increase SKU efficiency.
Raising prices selectively based on assessing the competitive landscape of our brands.
Utilizing the strength of our balance sheet to carry increased levels of inventory in response to supply chain disruption.
Optimizing channel mix to fulfill consumer demand and scaling production to support the growth of our brands.
With the realities of the current logistics environment, we recognize that <unk> will remain in chase mode for much of the upcoming year.
Polka has tremendous runway ahead, and we will continue to provide the resources necessary to build <unk> into a major multibillion dollars player and the performance space.
On behalf of the entire leadership team I'd like to recognize and thank our employees for how well they have managed an intense workload, especially as we all continue to deal with the added stress and struggles caused by the ongoing pandemic. We are doing our best to support our employees and their families through this difficult period of uncertainty. Thank you all for joining us.
Today, and thank you to all of our stakeholders for your continued support we look forward to sharing more on the bright future of Deckers brands.
With that I'll turn the call back to the operator for Q&A operator.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset.
Keith.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, 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 Camilo Lyon with BT AG. Please go ahead.
Thank you good afternoon, everyone and very nice job in that.
The tough environment.
Yes.
Hi Ali.
Let me start off the conversation on where you left off on <unk>, if we could.
David You said that it's going to remain in chase mode.
<unk> up 30% is certainly nothing too.
Right.
Nice add for sure at the fantastic growth rate, but clearly it seems like you could have done more if you had more product can.
Can you help us think about what the right run rate is going forward given.
Everything you said about the lack of it.
Inventory availability and the slow build that you expect to see on alternatives.
Factoring in manufacturing partners to ramp up.
That production.
Yes, I appreciate the question and obviously, it's a pretty dynamic environment, 30%. As you said, we're proud of that result, considering all the challenges we had getting inventory through the bottleneck and obviously, we had to spend a little bit more on air freight to mitigate some of those challenges.
And what we've seen quite honestly in the last six months as the demand for the brand has accelerated from what we thought was going to be six months ago.
And so we are in chase mode. It's a good position to be in it's challenging in this environment.
Think we'd be closer to a 50% growth rate on an annual basis.
And that could be higher depending on what inventory, we can get into the into the country and get it out to the marketplace to the consumer but generally speaking we're pleased with the makeup of the HOKA business globally, we're seeing great traction in the international markets in North America continues to be very strong.
Strong sell through.
The challenge is is that accelerated demand has put more pressure on the supply chain. So we've had to go through.
Additional sourcing partners in the far east.
And that doesn't happen overnight, obviously, so with the challenge of.
Slowed inbound into the DC on a regular basis.
On new factories to be able to keep up with the increased demand over the next year and beyond.
There's a lot going on there, but the bottom line is the demand is exceptional.
Teams are doing everything they can to keep the brand heat and going and stealing market share.
And as you saw in the quarter and the year were spending money to maintain that the sales even at 30%. So we are are creating a lot of product. That's a headwind that we've absorbed this year, while still delivering guidance of a healthy operating margin at the end of the year.
And something we're going to continue to evaluate but we are taking what I would say is a more cautious but aggressive stance.
And on the HOKA brand and all of our brands with the goal is continuing to drive topline and steal market share where we can.
And then we have to pay some more in airfreight in the short term to enable that growth and continue the dominant pace that OCA has.
We're comfortable doing that and we're figuring out how do we absorb that but still deliver top tier results, which is what we're doing.
And confident that we can mitigate the challenges going forward.
Great. Thanks for that Dave that's certainly a great position to be in.
Okay.
I guess on that same sort of broader topic in terms of gross margin and pricing actions that you're taking.
And layering that into how you're diverting product from wholesale to DTC.
Okay.
How do you think about the balance of those inputs.
To protect the share that you have but also continue to deliver that growth that you have been experiencing is there.
Added intention to raise price.
To mitigate the what seems to be like.
Well long duration of airfreight expenses into next year.
And do you expect to Steve or prioritize your DTC channel more than you have been.
Again served that direct customer more so.
Yes, I mean these are all what youre, describing all the levers that we get to pull in this environment and the good news is that the strength of the brands gives us the ability to raise prices, where we think we can.
To give you a little bit more clarity on that HOKA started raising prices in December .
Spring product in on some of the Bondi Clifton <unk>.
And not a lot of that price increase is hitting right now in this quarter in Q1.
Roughly around 6% to 8% increase across the board and the HOKA brand is continuing to look at opportunities going into fall and next spring to continue to do that to offset some of the headwinds in supplier cost from an AG perspective, we've been raising prices.
Strategically and surgically over the last couple of years.
But we are taking.
<unk> look at the assortment for this coming fall and Youre going to see some price increases.
Mostly on some of our bigger style is not the classic short, but youll see it a new mill in the classic mini and the few areas, where we are going to be raising prices. We have a good deal of inventory coming in for <unk>, which is at the older price the cost of making that product, which is good for us so that helps with the logistics headwinds and then some of the price.
Increases that we think we can put in will also help on the margin going forward, but.
I think.
To make it Super clear, we don't see the challenges with supply chain and the bottlenecks at the port getting better for quite some time.
So we're taking that stance going forward.
What we're experiencing now is going to continue.
And we're planning the business going forward with that in mind until we see signs that things are opening up but we have not seen any of those signals yet yes.
Steve just to add to that you mentioned, increasing price to offset on air we're not necessarily theme.
We're looking to offset the air in correct, yes.
So.
<unk> that we have are offsetting material inflation and ocean freight, but we see are more as transitory.
Does that get better we're not certain but we won't be able to completely offset the increase.
The next question comes from Laurent <unk> with Exane BNP. Please go ahead.
Good afternoon, and thank you very much for taking my question.
Rose, 8% in the quarter.
That's pretty impressive considering there was a lot of concerns out there.
Dave could you maybe potentially quantify if there was a material shift.
<unk> physical because I think you've talked about 50% of the inventory was in transit.
Yes, I think you're kind of you're saying is there a shift between quarters remember we haven't we haven't talked much about the quarter cadence. So we're really looking at this kind of on a full year basis I know various models kind of had different scenarios in terms of what kind of what was projected.
Yeah, as we've said largely the year is being delivered as we said unexpected from an AUM perspective, so as we said at the beginning of the year, we expected that there are going to be.
Shipment.
<unk> issues between quarters, which is part of the reason that we haven't given quarterly guidance I think earlier on we anticipated more growth on the front half of the year, we've seen some of that drift.
Into the back half, but I think from a how.
How we're seeing the cadence of the year from an <unk> perspective.
We're still on target with kind of what we've said and we've seen the cadence of the business.
Kind of continue as we expect and.
In good shape I think I agree with you I think there was some concern on the performance.
In the quarter I think we've demonstrated the brands has performed well.
Demand is still very strong and consumers are seeking the brand out.
Yes, and I would add.
If your question was do we see inventory deliveries shift from Q4 into Q3.
No because we were chasing inventory.
The majority of the quarter. There was some shift of Q3 into Q2 that we contemplated in the year to date result, but I think what's important in the quarter for August just to understand where the growth came from and a lot of the growth came from international regions, which is something we've been working on in transforming those marketplaces to a younger more diverse.
Audience and diverse product offering.
Consolidating wholesale accounts in your marketplace.
And attracting and having success with a younger consumer.
With new product franchises, such as the fluff in the classic clear and the Tasman. So I'm excited about the fact that it's right on strategy, what we've been working on in those regions for the past few years, we're starting to see the results of that it's very exciting and it just shows the strength and the global appeal of this brand in the fashion product that we're putting into the assortment.
That's great to hear and then I'd love to hear more about HOKA one on the product launches for example, the Kalana I know it's Super early just launched on the website just love to get some read.
On that assortment.
And then I think a few quarters back you talked about getting to 50% of the company.
How do we think about I'd love to hear how the stores the <unk> stores the pop up a bit.
In North America, and how what the early reads are on the hook a store in Shanghai as we think about store expansion over time for the brand.
Yes, so just on the product launches, obviously with the supply chain challenges.
The brand team has had to.
Just on the fly the timing of different launches based on where they can get all the inventory here in time et cetera. It's early days and the Kalana. We're excited about what that could do from a.
Cross training perspective, and bringing that type of running product to a unique consumer that's looking for that from us.
But we'll continue to innovate and expand into different categories. As we go forward, but it's early days in that style.
I think from a.
Store perspective, we're very pleased with how things have gone so far the store in New York is far exceeding expectations and I think that is.
A good signal when you have awareness of our brand.
You can see strong growth the experience that we're seeing in China is good from a.
Traffic perspective, but conversion isn't quite as high as we'd like to be and so that just speaks to people getting familiar with the brand over time.
It's early days in China people still relatively unfamiliar with the brand, but the experience that our stores are providing for the consumer there and giving confidence to our partners in the marketplace.
It's very strong and so we're pleased with how things are going but but heavy lift over time to get China to where it needs to be but we're off to a good start and then real optimism around where the store concept could do as we expand into the U S and Europe over time as well.
And then.
Steve.
Just on the DTC mix I think what youll see in the quarter as we had strong DTC performance and it was especially strong in December .
So we benefited with some short supply out in the wholesale channel consumers coming directly to us and I think that starts to demonstrate the strength of our DTC and omni capabilities.
Not necessarily representative of where the mix will be on a full year basis is stronger in this quarter, but a good demonstration of the progress that we're making on that front.
Great. Thank you very much for all the color.
Thanks Brent.
The next question comes from Jonathan Komp with Robert W. Baird. Please go ahead.
Yes, hi, Thank you good afternoon, I wanted to ask about the AG business. The performance could you maybe share a little more color on the third quarter D to C performance there.
If you could give some color on U S versus international and just how we should think about the fourth quarter would be helpful.
Yes, the DTC business for <unk> was very strong as Steve said, particularly in the back half of December we saw a real uptick in that business.
That continues to be a solid driver for us and just speak to the consumers' demand for the product if they can find it in wholesale where they like to shop. They are coming to our website and we're doing our best to service them.
Broadly speaking I'm very pleased with how the UGG brand is evolving and has evolved away from the core classics business. We're still we still have a robust and healthy business there.
But it's much more diverse across.
<unk>.
Pauls and shorts and many taz.
Tasman and new metals et cetera.
The new mill is a runaway story right now it's the number one style across men's and women's do.
Doing credibly, well and it's being adopted globally and in.
Sports lifestyle channel that is really driving a lot of business.
Men's is on the upside as we've spoken about kids is on the upside and then when you look at apparel that business is now starting to contribute to some of the growth.
That business is up 50% year to date, and what's still a lot of upside in that category as well. So when you think about where this brand was.
A few years ago to where it is now diversified across gender and category and then head to toe and Super pleased with how we're seeing the international regions evolve and both in wholesale and E Commerce.
Yes, we could have done more business in the quarter with Doug. If we had we were able to get our hands on more inventory in that slowly come in in Q4.
But again the brand is in very good place.
Management of the assortment and the Skus in the marketplace is very tight and very strong full price sell through is there margins are healthy.
A lot of reasons to be optimistic for a brand of this size certainly not the upside and on an annual growth basis that you see with <unk>, but still very strong in the context of the footwear industry.
Yes, that's really helpful. And then maybe one follow up on the freight picture the 100 million that you've called out Steve This year or just any thoughts directionally, how that could look going forward and then.
In the broader context is the right way to think about it.
That $100 million this year you'd be north of 20% operating margin. So is that still eventually a level you think you can get to once.
Once everything normalizes understanding there is a lot of uncertainty of when that happens.
Yes, so yes, thanks, Ed good question and clearly something that we're looking at we haven't given guidance, but I think the way you are looking at it is right.
In terms of what the impact is now we did in the current year cut back in other areas. So those are probably things, we wouldnt necessarily cutback in a normal year. So youre right in terms of the $100 million. If you add that back you get to kind of a 20%, but we have course corrected during the year and not spend as.
As much in some other areas of the business that we that we typically would so I would say stay tuned we'll be able to give you a better picture of what that looks like.
And then the other thing is it just trying to determine when.
All of this begins to normalize I think.
A big component of the $100 million, it's clearly airfreight were hopeful.
That things begin to normalize and so we wouldn't have to use as much air freight in the future, but still there is factory disruption theres still port congestion and with a brand like cocoa, we are having to use more air.
And what we even anticipated three months ago. So that's something that we're still watching I think the other thing just to be.
<unk> is the increase in ocean freight and so I think thats going to take a lot longer.
Then the air too to begin to normalize so we'll see.
How all that shakes out I think we're going to learn more in the next three months and we'll be able to give you a better perspective of.
What that looks like in a couple of months on the year end call.
And I think at that point, we'll be able to share I mean, we still need to make some investments in the business to sustain the growth and afford from a logistics standpoint, Dcs infrastructure systems talent.
With this kind of demand and growth ahead of US there is going to be some additional investments will need to make them, we'll talk more about that going forward. So.
Yes.
No that we could have done 20% this year with if we had taken out the air freight.
It makes us feel good and I'm really proud of the team's ability to adjust this year to still deliver on our operating margin guidance.
At this point considering the fact that we had to absorb a $100 million bogie in the year that just speaks to the flexibility of our model.
Capabilities that leadership team.
Yeah, great. Thanks again.
Okay.
The next question comes from Sam Poser of Williams trading. Please go ahead.
Good afternoon, Thanks for taking my questions I have a.
And I'm going to be the mall, one I would love for you to give us the.
Sales by wholesale or DTC, whatever you prefer by brand and update the full.
Full year guidance by brand <unk> as expected.
50%.
Plus on the prior guidance.
High single digit and so if you could update that and I also wanted to know about what the merchandize margin improvements are.
<unk> out all the other stuff.
And inventory by brand and in transit, but Brad Thank you very much.
Hi, Sam it's Erin so I'll provide you with the global wholesale and distributor sales for the third quarter just completed so far.
Backlog of $432 1 million.
$122 6 million, Kevin 16 3 million.
With $3 1 million and then other largely cologuard at $24 2 million.
Yes.
Thanks.
Yes, and then just the guidance by brand Sam.
This is Steve really not a significant change we've held the top end of the range. So feel comfortable with what we've given before we've lowered the sorry increased the bottom end of the range.
Can attribute that largely.
To some improvement in the.
Q3 performance. So there again range is consistent with what we've guided to before and pretty consistent with what we said last time as well.
And then I saw you all.
Yes.
Sorry quickly follow up on that one does that mean that we would expect a sort of a much larger.
Sales in Q4 for our folks to get it up to around that 870 number that you ensure it on the last call that number is going up and going to accelerate in Q4.
That's how we're looking at it yes.
Okay, Okay, some inventory timing.
And then I asked about merch margin got it.
Inventory as well.
Yes, so merch margins I mean generally speaking the work that the teams are doing is to absorb additional costs that we're starting to see whether those materials or labor embedded into the.
The product cost so I would say that the margin upside is.
Any upside that we see will come and price increases the regular work that we're doing on merchandize margins is really to maintain the level of margins that we have now versus.
Finding efficiencies and opportunities to increase margin in this environment. So.
And and we're taking a long term view of this as I said, we're reducing SKU counts were being more focused.
And we're investing in and eliminating unnecessary products in the line and trying to make this more efficient, but it's really maintaining margins at this point versus looking for upside in this in this challenging environment.
And then inventory.
Brand.
But brett.
Yes, I can give you inventory by brand I don't have the in transit right in front of me, but.
Roughly speaking yes.
As I said in total the in transit is just above 50%.
So 50% of the 551 is in transit the $5 51 as it roughly breaks out by brand is about $350 million.
On.
130 on hope.
<unk> 27 on Teva, Ken on the Nook.
A little over 26 on Culebra.
Thanks very much.
Continued success alright.
Alright, Thanks Sam.
The next question comes from Paul <unk> with Citi. Please go ahead.
Hey, Thanks, guys a couple questions I'm curious from this product comes in when it does come in late.
Sort of cancellation rates youre seeing for each of the brands and also curious if you have to offer discounts when the product has come in later or is it more an environment, where your wholesale partners are just taking whatever you've got whenever you get it done.
The first question and second you mentioned something earlier I think about new partners. So just wanted to hear a little bit more detail.
What's going on there and on the wholesale business curious if you can talk about sales to the same customers versus new customers.
<unk> in terms of the growth for that business this year.
Sure.
The installation and start with I'll start with.
Okay. This is Steve so we're not seeing significant cancellations I think to the point you made.
We're seeing kind of what we are lower than what we expected in terms of cancellations. So there.
As the brands continued to remain in demand continue to sell.
Customers are happy to get product, so we're not seeing anything.
That we didn't expect so I think from a cancellation perspective everything is as we anticipated.
And the second question was new.
New partners in Asia. So I think you might be referring to what I said earlier about hooker retail stores.
But the best way to think about that is.
Partners that we have on the distributor model over in Asia.
Seeing very strong demand in those.
Partners outside of China, and Japan, Australia, and some of the Southeast Asia countries and then in China, What I really meant there is over time, we will.
<unk>.
Mirrored the model that we've established for us with a handful of healthy one.
Owned retail stores, and then third party wholesale.
Partners in region, who can run stores for us so in China. What I was speaking to is having a retail presence and showing that we are investing in the brand and creating a compelling experience for the consumer that's all good for the distributors potential partners.
We are evaluating at the moment to see how deckers is getting behind Hogan and give them a lot of confidence for this brand going forward.
Got it.
When we look back at the Holdco growth this year.
How did it look in.
Terms of sales to existing customers or new doors, new partners, how does that breakdown.
Yes, I mean, we're we've been able to get inventory to our partners again sell through is exceptional.
With existing partners, primarily in the run specialty.
But as we've talked about before dicks.
<unk> is continuing to see very strong success.
We're continuing to slowly and strategically expand with them as a partner.
And so the results and the feedback from all of our wholesale partners aside from frustration on delivery and timing that the teams had to deal with is very strong.
Speaking to the product and.
And the demand for the brand and how awareness is increasing so.
All good signs there and that's on a global level.
This really truly a matter of keeping up the demand right now, which we see accelerating on a regular basis.
Okay. Thanks, good luck.
Thank you.
Yes.
The next question comes from Jim Duffy with Stifel. Please go ahead.
Thank you good afternoon.
Understood.
Question about the UGG brand and whether North America, whether it wasn't super cooperative.
Selling season.
The brand has been diversified to the point, where the weather just isn't a consideration than it used to be.
Are there other.
Kind of changes.
To the brand and composition.
Making more insulated.
Weather impacts.
Yes, it's a good question whether used to be make or break for the UGG brand. Because we were still relying on just kind of core products and didn't have a lot of.
Non weather related options are fashionable options. So that's changed dramatically I think whether now is it's either a small multiplier up or down a few percentage points, that's probably the way to think about it.
It was warmer than we expected in December but.
The strength of the brand and the fashion product, even though the classic still performed well, but it's really new male Tasman in the fluff franchise that.
That was driving the upside in those tend to be less weather resistant for us.
And as.
Whether it's starting to.
The month of January where weather is cold in the northeast we're still <unk>.
To see strong demand for the brand so.
We feel really good about the fact that we've kind of mitigated that weather impact and how important it was for our success.
By having a much more diverse and interesting fashionable product assortment that isn't so weather reliant and we're going to continue to build on that for sure.
And then I think if you look at the rain product Thats in now.
That's always been a big opportunity for us and we have finally come to market.
With that I think is a really compelling and exciting assortment in that category. We see continued upside there and so youre going to see us build up after that opportunity across men's women's and kids as well.
Understood.
Yes, Steve a couple of clarifications on your margin commentary first the $100 million in freight that you mentioned is the key.
Convention for that comparable to the 40 million that you mentioned with the September quarter reports, so effectively youre planning $60 million incremental so that the right way to think about it.
Yes, so in <unk>.
You've asked the question a couple quarters ago. So yes in terms of we have stepped up the incremental amount the full year is $100 million.
For all of freight so not only the additional air freight, but inclusive of the increased rates related to ocean freight.
Got it.
Okay, and then you made a comment in the prepared remarks, you talked about pricing actions and looking out to fiscal 'twenty three.
We should not consider this gross margin guidance you talked about pricing.
Not being able to fully offset the freight.
What other variables should we be considering as.
As we think out with.
With that and as part of the uncertainty and the reason you stopped short of providing gross margin guidance. Just you don't know what type of relief you might get on the freight.
In fiscal 'twenty three.
Yes, good question, Jim and thanks for asking because we can provide a little clarification because it is challenging in the current environment and that is why we're being careful about it.
And we got the question before I think John asked but just in terms of some of the components of it.
We're having to use.
More air freight than what we previously anticipated.
First question and part of that is just with some of the disruption that we're seeing continued port congestion.
And having.
In demand brands, and especially with Coca we need to airfreight that in.
That's going to be a continued kind of headwind.
Until we start to see some normalization around the port congestion.
Not seen any signs of that yet so that is.
A bit of an unknown as to how long that will continue so we want to be careful about.
What we're seeing in respect to when we can expect to see that reduce or normalized right. So and I think as I said in three months hopefully we're seeing some improvements. So we can give you a better update but right now nothing points to that I think the other consideration in headwinds that we're dealing with.
As much of the inventory that we brought in this year has put a headwind pressure related to the ocean freight so we've been inbound in inventory.
<unk>.
The increased expense is largely impacted Q3 and beyond the first two quarters were still at inventory freight levels that were at lower rate.
So that will be a continued headwind for us as we go into FY 'twenty three and again, we will be able to provide a better perspective on FY 'twenty three in three months, but those are the headwinds that we're continuing to face.
As I said in the prepared remarks, we were hopeful that we would see some improvement we are still seeing a high level nearly twice what we saw a year ago with in transit inventory. So with these costs still where they are at with still using error rate in more than what we previously anticipated. It's just really difficult in this environment to be able to give.
You clear guidance on what that gross margin means.
And so how that relates to prices is because we know some of this error, we will reduce in time, we just don't know when we're not pricing that into our product price increases.
So we are increasing prices that are offsetting material increases we are increasing pricing.
That's helping offset some of the increase in ocean that we expect will continue but.
But we're not contemplating trying to offset airfreight and that as we said in the prepared remarks, it's a strategic decision on our part to get product in here to meet demand. That's in the market, we want to maintain and grow market share.
So thats the strategic levers that we're using and it does come at some gross margin compression, but we're willing to take that and then as that eases off will be in a better position, where youll see some gross margin expansion.
Understood. Thank you for that clarification.
Part of the point is youll be consuming inventories brought in at those higher freight rates into fiscal 'twenty three.
That's correct correct, yes.
Okay. Thank you guys.
Alright, Thanks, Tim.
And our last question today comes from Jay sole with UBS. Please go ahead.
Great. Thank you so much deeper you want to ask about you mentioned brand awareness is rising I believe you just talked about from a marketing standpoint, as you look into fourth quarter and a little bit into <unk>.
Next fiscal year, what are some of the strategies you have to continue to raise awareness for hooker and maybe some of the events through some of the opportunities to continue to elevate the brand and.
Where it's not just in the U S but globally.
Yes, good question Jay.
The need to continue to market. This brand is intense.
And I think.
And it's beyond just the amount of dollars you throw at it the partnerships are crucial.
We're really proud of our global Iron Man partnership and Thats, having an impact on all the international regions as well, we're looking to expand that where we can into other opportunities continuing to work with our our athletes both and insights on product, but also expanding the breadth and the awareness of the brand.
Supporting our community around the globe those are all part of the things that we do on a regular basis, that's true to our brand and.
Really important for the continued success.
But over the past year, we brought in a new head of marketing to the brand.
Norman Delaney, who is doing a great job in cheese.
<unk> embarked on a project, where we're looking at bringing on a global or we have brought on a global agency of record.
To take what we're doing from a marketing perspective to the next level I think we've been very good at events and independent launches a product.
But we're looking for and this new approach going forward are much more consistent voice and message and look and feel for the brand going forward on a global scale, so youll see that to start to happening.
In Q1 Q2.
We're going to be launching a new updated website with the brand and some of that new creative will start showing on that over the summer and then we'll continue to build on that but the regional global teams are very excited about the new partner for marketing and agency perspective, and then I think this is going to just be another boost to the brand to have an elevated consistent.
Global.
Marketing story that we can.
Create more consistency across other product launches and in the markets.
And then we also signed on in addition to Iron Man, our sponsorship of the primary sponsor of the <unk> series going forward.
These are very important races in the space have global reach and Theyre very at Pinnacle positioning for both Hardcourt runners, but also we everyday runner and fitness enthusiasts.
Got it thank you so much.
Thank you Jay.
Yeah.
This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.