Deckers Outdoor - Q2 2024

Transcript

Operator (participant)

Good afternoon, and thank you for standing by. Welcome to the Deckers Brands Second Quarter Fiscal 2024 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. If anyone has any difficulties hearing 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'll now turn the call over to Erinn Kohler, Vice President, Investor Relations and Corporate Planning.

Erinn Kohler (VP of Investor Relations and Corporate Planning)

Hello, and thank you everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer, and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's Safe Harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the federal 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 our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory levels, and promotional activity, and the impacts of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. Forward-looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements.

The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency.

In addition, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to, and may not be indicative of, its core operating results. With that, I'll now turn it over to Dave.

Dave Powers (President and CEO)

Thanks, Erinn. Good afternoon, everybody, and thank you for joining today's call. It's great to be here with you today to discuss our exceptional second quarter, where our two marquee brands experienced high levels of full price consumer demand, leading to revenue increasing 25% versus last year, eclipsing $1 billion for the first time in our September ending quarter. Gross margin improving 520 basis points versus last year, and diluted earnings per share increasing nearly 80% versus last year to $6.82. Our direct-to-consumer business was the fastest growing component of revenue growth in the second quarter, increasing nearly 40% versus last year, with HOKA growing 46% and UGG increasing 38%, as both brands experienced a greater than 30% global increase in consumer acquisition.

Our global wholesale business also put up strong revenue growth in the second quarter, increasing 19% versus last year, again, driven by our two largest brands, UGG and HOKA. Our wholesale accounts also continued to see incredible heat and momentum for our key styles across both brands. With this strong consumer demand, selling for wholesale in the quarter included some accelerated fall seasonal shipments, benefiting our first half results and increasing our confidence to achieve our outlook for the fiscal year. As we continue to focus on our strategic marketplace management, we are pleased to have captured this strong momentum of demand early in the year, particularly with these products capturing high levels of full price selling across all channels. As we focus on delivering the full year, I think it's important to reflect on our year-to-date performance.

We closed out a record first half for Deckers, with total portfolio revenue across all channels growing 19% versus last year, driven by HOKA revenue increasing 27% from global strength across its ecosystem of access points. UGG revenue increasing 18%, primarily from gains across international regions and global DTC. Total portfolio global DTC acquisition and retention increasing 29% and 27%, respectively, and international revenue across all brands increasing 23% versus last year.

While Steve will provide further details on our financial performance and related increased outlook later in the call, I'd like to emphasize how proud we are of the continued alignment of our strong near-term performance with Deckers' long-term objectives: to build HOKA into a multi-billion dollar performance brand, grow UGG through direct consumer connections with elevated products and experiences, expand DTC through consumer acquisition and retention gains, and drive international growth through targeted investments. With that, let's get into the highlights of our successful first half, starting with HOKA. Global revenue in the first half increased 27% versus last year. This impressive result reflects the HOKA brand's successful marketplace management execution, which is driving more business to DTC in conjunction with market share gains from high full price sell-through at our existing points of wholesale distribution.

HOKA revenue growth in the first half was led by direct-to-consumer, which increased 54% versus last year and represented 38% of revenue, up from 31% in the prior year. This was aided by global increases in brand awareness, according to Deckers' proprietary brand tracker study, consumer acquisition, which is up 47% versus last year, and consumer retention, which is up 52% versus the prior year. HOKA experienced significant growth in awareness across all major markets, with the U.S. growing to approximately 30% and international regions on average rising to mid-teens with much more room to grow. Specific to our gains in DTC in the first half, consumer acquisition in EMEA DTC nearly doubled to help achieve a 75% year-over-year increase in channel revenue for the region.

This represents great progress for our EMEA region, and though DTC remains a relatively small percentage of its total revenue, we see this expansion as a positive indicator that HOKA is increasingly resonating with the European consumer. As we have demonstrated in the U.S., thoughtfully building brand awareness through marketing activations and strategic marketplace presence serves as a catalyst to DTC acceleration as the brand begins to take hold with the local consumer. To that end, HOKA recently opened its first European flagship store in Covent Garden in London, giving the brand a powerful presence in one of the most influential footwear markets around the world. In the U.S., HOKA continues to deliver exceptional growth. DTC revenue increased nearly 50% versus last year for the first half, with strong growth among 18 to 34-year-old retained consumers, which increased to 70%.

We believe some of this demand was fueled by HOKA having increased resonance in the back-to-school time frame with college-age students. Brand loyalty among this group is especially exciting, given the increased potential lifetime value of repeat purchases. The HOKA marketing teams have done an exceptional job building global brand awareness through compelling Fly Human Fly campaign content, connecting with consumers at HOKA-sponsored events, and highlighting the incredible performances of HOKA athletes. We continue to sponsor key running events around the globe as part of our commitment to support the sport and provide a platform to showcase our innovative performance products. This includes events from 5Ks to elite ultramarathons for all types of athletes around the world, allowing us to elevate the brand with pinnacle performance-minded consumers and also to broaden worldwide awareness of the achievements capable in HOKA products.

This year's HOKA-sponsored UTMB, or Ultra-Trail Mont-Blanc World Series Finals, held in Chamonix, France, is the perfect example of our team's 360-degree collaborative approach to building HOKA brand awareness and performance credibility. This trail running event allows us to celebrate the roots of HOKA, which was born in the French Alps, further connecting the brand with European consumers. At the UTMB World Series Finals, the HOKA team set up a base camp that offered consumers the opportunity to engage with the brand in a unique way through athlete meet and greets, 24-hour product testing, and shoe personalization. We received overwhelmingly positive feedback on the experience and are already looking forward to leveraging these learnings at future events.

HOKA made its mark on the event, both from a product and athlete performance standpoint, with several impressive achievements, including HOKA athlete Jim Walmsley making history, becoming the first American man to win the Dacia UTMB, a 106-mile race that included more than six miles of elevation gain, completing the course in a record time of less than 20 hours. HOKA ranking tops among all brands with the most top five finishes across the series of three races, and HOKA remaining the number one brand worn by UTMB participants.

From a product standpoint, first half HOKA growth was driven by a variety of categories and styles, which includes, among others: the Clifton franchise, which benefited from the ninth edition launch, as well as new successful lifestyle versions with suede uppers. Stability staples like the Arahi and Gaviota franchises, the latter of which launched its fifth edition during the second quarter, as we are seeing increased adoption of this category from consumers. Trail and hike favorites, the Challenger and Anacapa franchises benefiting from new innovations incorporated in recent updates. Speed shoes highlighted by the Rocket X refresh and the all-new Mach X. And new lifestyle options, including the popular Solimar and Transport styles. We remain encouraged by the breadth of category adoption across the innovative HOKA product assortment, which continues to evolve and attract new consumers to the brand.

We are implementing greater segmentation across the ecosystem of HOKA access points to ensure our accounts are best positioned to serve their respective consumers and emphasize DTC as the pinnacle destination to experience the full depth of the brand's product offering. For the balance of the year, the HOKA team remains focused on executing its marketplace management strategy, which includes a focus on building global brand awareness and heat to increase demand, which is helping to drive high full price sell-through at DTC and across wholesale, allowing the brand to deliver healthy growth with best-in-class margins and inventory turns. Complemented by several new innovative product launches coming up in our fourth quarter, we expect HOKA to continue delivering strong results for the remainder of this fiscal year and well beyond.

Now shifting to UGG. Global revenue in the first half increased 18% versus last year. The brand's strong first half performance was driven primarily by high levels of brand heat, disciplined marketplace management, leading to product scarcity on key styles exiting last fall, and intentional pull forward of the brand's fall marketing campaign relative to past years. We currently have the most cohesive, globally aligned product, marketing, and consumer targeting strategy I've ever seen for UGG. Marketplace management has been a core strength of the UGG brand for some time now. The allocation and segmentation of core and popular new styles continues to serve the brand well, helping drive high levels of full price sell-through. Last year, we shared that we did not fully capture demand on several key styles.

As we began this fiscal year, we strategically developed targeted inventory that caters to the brand's most popular products and seeded the fall marketing campaign, Feels Like UGG, in July, as opposed to the typical September time frame. From July 15 to August 15, we saw a groundswell of influencer public service announcements reminding consumers to buy UGG now. Videos using hashtag UGGs received over 25 million views during that time frame, and UGG saw twice the level of engagement on Instagram as compared to last year. We believe the UGG team's strategic marketing shift served as a catalyst for earlier fall consumer demand globally. In the US specifically, this shift helped fuel greater back-to-school demand, with search interest increasing 46% versus last year, according to Google Trends.

To keep this momentum going, at the tail end of September, UGG celebrated the official kickoff of hashtag UGG season with music superstar Cardi B, whose video announcement featuring the new Classic Dipper had nearly 20 million views. This resulted in significant press and media coverage of our launch, with influential publications such as Billboard and Vogue featuring UGG. Brand heat created by the UGG team directly translated to incredible first half results, particularly from the global D2C business and international regions, which both experienced a revenue increase of above 25% versus last year.

Furthermore, UGG gross margins benefited from transitional and fall products selling at full price during the second quarter. This dynamic is in contrast with prior years, where the brand's D2C business has historically been more weighted towards end of spring and summer products that generally carry a lower average selling price. The Tasman franchise, including the Tazz platform, as well as the Classic Mini and Ultra Mini franchises, have been the focal products of UGG's search interest and revenue growth in the first half, as expected.

We are also excited that some of the new fall franchises are beginning to resonate with consumers as well, including the aforementioned Classic Dipper, a key globally marketed style, the all-gender hybrid weather collection, which includes modernized weather-ready versions of the Tasman and Neumel, and the Lowmel, a sneaker hybrid take on the original Neumel. UGG is well-positioned to capture consumer demand during the holiday season with great products like these. Considering the demand we've seen thus far, we are already in chase mode for a select group of popular items and colors for which we are expediting production to ensure greater D2C inventory through the season.

The UGG brand's first half growth sets us up well, especially when factoring the signals of a weakening global economy and lower consumer confidence. Given this dynamic, we are glad to have captured some demand earlier to help reduce the pressure of competing with more promotional brands during this upcoming holiday season, as we seek to continue selling premium UGG products at full price. Moving on to our discussion of consolidated channel performance. Global growth was across both direct-to-consumer and wholesale, with D2C being the primary driver of revenue gains in the first half, increasing 37% versus last year.

Our portfolio experienced D2C strength relative to last year across consumers with acquired and retained increasing 29% and 27% respectively, brands with HOKA and UGG revenue increasing 54% and 26% respectively, regions with international and domestic revenue increasing 48% and 34% respectively, and channels as consumer demand was robust in stores and online. Additionally, we saw a double-digit increase in average selling price as a result of a greater mix of HOKA, higher full price selling for UGG, combined with a focus on fewer proven SKUs and more favorable foreign currency exchange rates. Regarding global wholesale, revenue in the first half increased 11% versus last year. Growth was driven by strength in UGG and HOKA, as well as across both our domestic and international regions.

Market share gains continue to be the primary avenue of wholesale growth for HOKA, which is now the top-selling brand in U.S. run specialty stores in aggregate, according to third-party market sources. HOKA has also quickly become the top-running brand with key strategic partners in applicable doors. Our teams are extremely proud of the HOKA brand's top market share achievement, which further validates the brand's performance-rooted credibility. UGG wholesale performance in the first half is right in line with our strategy this year, with international regions fueling the majority of growth while the brand maintains its strong business in the U.S. With these first half results, it is clear that our marketplace management strategies are working well, positioning our brands to excel during the holiday quarter and capture increased consumer demand across their respective ecosystems of access points.

Before I hand it off to Steve to discuss our results in more detail, I'll note that we also announced our plan to divest Sanuk. At Deckers, we're focused on the most effective allocation of our resources that are in alignment with long-term objectives. Consumers have long valued Sanuk for its fun, innovative, and comfort-first products. Over the coming months, we will work to find the right owner to support the brand's next chapter while we continue to execute our growth priorities. Thanks, everyone, and now I'll hand it over to Steve.

Steve Fasching (CFO)

Thanks, Dave, and good afternoon, everyone. We are excited by the strong performance HOKA and UGG continue to exhibit through the first half of fiscal year 2024, stemming from our strategic marketplace management execution that continues to benefit our brands. As Dave covered, HOKA drove another quarter of strong growth led by DTC, while UGG demonstrated broad-based growth across regions and channels by continuing to captivate consumers and elevate its presence around the world. Our record second quarter revenue exemplifies the exceptional demand for our brands, and we look forward to continuing this momentum as we enter our largest and most complex fiscal quarter. While ongoing macroeconomic challenges persist, we believe we are well positioned to navigate this dynamic marketplace.

With a strong financial framework and in-demand brands, we remain committed to building the foundation for success that drives long-term sustainable growth. Now, let's get into the details of Second Quarter results. Second Quarter fiscal 2024 revenue was $1.092 billion, representing an increase of 25% versus the prior year. On a constant currency basis, revenue grew 24% versus last year. Growth in the quarter was primarily driven by strong demand experienced across the HOKA DTC channel, which increased 46% versus last year and contributed to delivering total brand revenue of $424 million for the quarter. Broad-based UGG growth across regions and channels, delivering $610 million of revenue, with global DTC increasing 38% and wholesale increasing 25%.

With the HOKA brand's performance consistent with our expectation, the outsized UGG growth in the second quarter benefited from, first, a higher level of wholesale shipments in Q2 this year than in the past couple of years were captured in the first quarter, as transit times have reduced, supply chain logistics have improved, and availability of inventory is more consistent relative to during the pandemic.

Second, seeding the fall global UGG campaign earlier in the quarter, reminding consumers of the scarcity that took place in the prior year, which created brand heat and demand for those same popular styles that sold out quickly last year, driving earlier consumer purchasing this year. And third, an increased level of demand for the brand during the back-to-school period, which signaled some wholesalers to desire shipments on an accelerated timeframe relative to our original plan.

Gross margin for the second quarter was 53.4%, up 520 basis points from last year's 48.2%. Second quarter gross margin benefited from lower ocean freight rates, favorable UGG product mix, partially driven by earlier fall demand, favorable UGG full price mix, favorable channel mix, with DTC continuing to grow faster than wholesale, and a slight benefit from foreign currency exchange rates. SG&A dollar spend in the second quarter was $358 million, up 22% versus last year's $294 million as we continue investing in key areas of the business. As a percentage of revenue, SG&A was 32.8% versus 33.6% in the prior year, 80 basis points lower than last year. This resulted primarily from the aforementioned timing considerations regarding earlier consumer demand and timing of certain spend.

Our tax rate was 23.8%, which compares to 21.2% for the prior year. These results culminated in diluted earnings per share of $6.82 for the quarter, which is just over $3 above last year's $3.80 diluted earnings per share, representing EPS growth of 79%. This increase in diluted earnings per share was approximately evenly split between gross margin benefits and higher revenue, with a small benefit from a reduced share count resulting from the share repurchases made over the past year. Turning to our balance sheet at September 30th, 2023, we ended September with $823 million of cash and equivalents. Inventory was $726 million, down 21% versus the same point in time last year, and during the period, we had no outstanding borrowings.

During the second quarter, we repurchased approximately $185 million worth of shares at an average price of $534.53. As of September 30th, 2023, the company had approximately $1.1 billion remaining authorized for share repurchases. Now, moving into our updated guidance for fiscal year 2024, we are increasing our full year revenue guidance to be approximately $4.025 billion from our previous guidance of approximately $3.98 billion. This increase now equates to a full year growth expectation of approximately 11% versus last year. From a brand perspective, we now expect UGG growth of mid-single digits, up from our prior expectation of low single digits. This upside comes from the continued strength of global brand heat driven by robust early demand.

We still expect full year HOKA revenue growth of above 20%, with third quarter percentage growth anticipated to be slower due to this year's timing of product launches being weighted towards the fourth quarter, and we have reduced our expectation for Teva due to softening macro backdrop. In addition to our fiscal year 2024 updated revenue outlook, gross margin is now expected to be in the range of 52.5%-53%, reflecting the strength of UGG full-price selling in the second quarter as the brand was able to capture DTC demand early. SG&A, as a percentage of sales, is now expected to be in the range of 34%-34.5%, as we continue to invest in key areas of the business. Operating margin is now expected to be approximately 18.5%, reflecting the improvement in the gross margin.

Our effective tax rate is still projected to be in the range of 22%-23%, and we are increasing our diluted earnings per share expectation to now be in the range of $22.90-$23.25. Please note, this guidance excludes any charges that may be considered one-time in nature and does not contemplate any impact from additional share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include, but are not limited to, changes in consumer confidence and recessionary pressures, inflationary pressures, geopolitical tensions, labor shortages, and fluctuation in foreign currency exchange rates.

We are proud of the first half performance by the HOKA and UGG brands, two of the strongest in our industry, which led us to increase revenue guidance heading into the back half of our fiscal year, despite what appears to be a more challenging macroeconomic environment. The HOKA brand's global gains in awareness, combined with the early fall demand we are seeing from UGG, give us the confidence to achieve this exceptional outlook. Thanks, everyone. I'll now hand the call back to Dave for his final remarks.

Dave Powers (President and CEO)

Thanks, Steve. HOKA and UGG have delivered incredible results for the first half, and we believe our company is well-positioned to deliver on the increased full fiscal year objectives we outlined today. Marketplace management remains paramount to the ongoing success of Deckers and our continued ability to buck industry trends as we build awareness and drive demand for our brands. Our proficiency in the implementation and delivery of strategic objectives is what truly differentiates Deckers as an organization, allowing our brands to create lasting consumer connections. We are focused on continuing to deliver meaningful consumer experiences with great products, and dedicated to doing so with our long-term objectives at the forefront of everything we do.

This approach, alongside our flexible operating model, financial discipline, innovation across fashion and performance brands, and our purpose-led culture, are what empowers our highly engaged employees to deliver exceptional results and shareholder value. I'd like to thank our entire executive leadership team and all of our employees across the organization for their continued dedication to Deckers' values as our company seeks to do good and do great. For more information on these efforts, I'd encourage you to read our forthcoming FY 2023 Creating Change report, which launches next week. Thanks, everyone, for joining us here today, and thank you to all of our stakeholders for your continued support. We look forward to continue sharing the exciting future ahead at Deckers. With that, I'll turn the call over to the operator for Q&A. Operator?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. We ask that everyone limit themselves to one question and one follow-up. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Kernan from TD Cowen. Please go ahead.

John Kernan (Managing Director)

Excellent. Congrats on a phenomenal quarter. And I guess wanted to hone in on UGG. Obviously, tremendous momentum as you go into Q3. Q3 is almost 50% of the full year, sometimes in terms of total revenue. So just curious, given all the momentum you see, particularly in DTC in Q2, how should we think about UGG in the back half of the year, and particularly Q3?

Dave Powers (President and CEO)

Yeah, this is Dave. It's a great question. First of all, I want to recognize the momentum that, you know, you called out, what the UGG brand experienced in Q2. The team did a phenomenal job of recognizing the opportunity earlier in the year, capturing, you know, demand that we left on the table last year, cleaning up the marketplace, you know, putting some exciting activations in place with Cardi B and other influential, you know, partners for that brand. And the buzz is something that, in my experience at the company, I have never witnessed before. It's palpable. You know, the full price sell-through, the health of the marketplace, the teams just collectively have done an amazing job across the globe to set this brand up for success.

You know, we're really excited that we were able to capture some demand early in the season before, you know, holiday shopping and before there's potential slowdowns in the marketplace. So we're set up incredibly well. We're optimistic that this is gonna continue for us, you know, throughout the year. We're mindful of the fact that this could be a challenging marketplace, so we're not, we're not naive to that fact, but we are prepared for it. As we mentioned in prepared remarks, you know, some of the key styles that we we put into the marketplace this year have sold out or sold very well so far.

We're in a bit of a chase mode in some of those styles, but I think across the board, we feel really confident that, you know, we have a breadth of product across many silhouettes that are performing well. We have inventory in the right places, a little bit lean in some, but, you know, we're going to react and chase those. We've eliminated a lot of noise in the assortment in the marketplace. We have incredibly powerful campaigns and activations across the the franchises and the brands. We have an exciting new launch of UGG Extreme, which is a winter lifestyle collection that we're gonna start investing in in a deeper way.

And we have great relationships with our wholesale partners. They need us, you know, especially in this environment. We wanna stay above the promotional marketplace, so we don't get-- we don't wanna get caught up in that. We wanna maintain a healthy and clean marketplace and continue to drive real strength through our DTC channel. That's our strategy, and it's working well so far. We're really excited how the fall season has kicked off, and we feel really good about how it's gonna continue.

John Kernan (Managing Director)

Got it. Maybe one quick follow-up, just on the margin profile in the back half of the year. It looks like SG&A dollars are planned out, on a growth basis, pretty significantly. Can you just talk to some of the investments you're making behind UGG and HOKA?

Dave Powers (President and CEO)

Yeah, I'll let Steve get into the details. But you know, the top four things that we're investing in, which is similar to what we talked about earlier in the year, which is important for us to maintain this level of growth going forward and to be able to continue to grow these brands, is really around people, talent, and culture. You know, we're big believers that our culture is one of our, our secret sauce components, so to speak, and that we have incredibly motivated and collaborative teams that are fired up to win. We're continuing to invest in innovation. You know, we have a powerful innovation pipeline that we wanna continue to bolster, that supports all of our brands.

Systems and data, you know, I don't think there's a company out there right now that feels good about their systems and data, where they're at. We're not alone there. We, you know, we have some work to do there, but we wanna be providing our teams with the right level of visibility so they can run their businesses effectively, and leverage, you know, AI technologies coming down the pike. And then continue to heavily invest in marketing. We feel that in a constrained environment, and a lot of other peers are struggling, you know, with inventory and promotions and lower margins, with our profile right now, we have an opportunity to continue to take share in this environment, and we're gonna stay aggressive with marketing dollars to do that.

Steve Fasching (CFO)

Yeah, John, this is Steve. I think, you know, just to kind of further on Dave's comments, you know, what we've said now for a number of years is that, I think, one, we're very well financially disciplined as an organization, and we're very careful about where we're placing investments. You know, and I think an indication of that is the increase in the operating margin that we're now guiding to. And so I think we're taking these times of performance, and using that to invest in the business, and that's what we've been saying for the past few quarters, is that, you know, trust us, we're gonna make the investments in the right places.

We know that sales have been outpacing what we originally thought, and so we are making the proper investments, as Dave said, in the business, that continue to drive these levels of sales. I think we're demonstrating you know, marketplace management, disciplined investment approach, and that's the way we're operating. And even with that increased investment, leveraging some of the increase in the gross margins to lift our profitability for the year. So, we're doing it in a very strategic, thoughtful, disciplined way.

Dave Powers (President and CEO)

Yeah, and the last thing I would add on that, as you guys know, we've worked hard to, you know, ensure that more of our SG&A is variable versus fixed, and so we maintain a pretty agile, flexible model should we need to cut back on some of those things in the second half of the year.

John Kernan (Managing Director)

Got it. Thank you.

Dave Powers (President and CEO)

Thanks, John.

Operator (participant)

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

Jonathan Komp (Senior Research Analyst of Active Lifestyles (Apparel, Footwear & Fitness))

Yeah. Hi, good afternoon. Thank you. I wanna ask about HOKA, just to follow up. Could you maybe share a little more detail on the product shifts you mentioned and how that might impact the growth rates in Q3 and Q4? And then, as we think about really the pipeline into next calendar year, just how are you thinking about, you know, staying ahead of the competition? Everyone seems to be chasing the maximalist cushioning trend. And any color what you're hearing from your retail partners in terms of some of the order, order trends?

Dave Powers (President and CEO)

Yeah, great question. I'm glad you asked that. So to put a little bit of color on how we're thinking about the launches in the second half of the year. You know, we're strategically pushing launches into the Q4 timeframe. That's when we really get into the, you know, the beginning of the spring-summer season, when running starts to kick in again. Traditionally, you know, the holiday season is, is kind of less exciting, so to speak. Still a lot of volume to do, but we wanna make sure that we come out really powerfully at the beginning of spring next year, in our Q4 timeframe. It also allows us to stay out of the fray of a promotional marketplace in Q3.

We're anticipating that, particularly, you know, in the athletic space, where there's, you know, a lot of situations where it's over-inventoried, with a lot of inventory in the channel and the slowdown of the marketplace, we feel we're better to stay, you know, above the fray, so to speak. I don't wanna launch, you know, two of our major, major, you know, innovation launches coming in Q4, in Q3, when there's a lot of markdowns and promotions going on. The teams have strategically decided to push those launches to Q4. I can tell you the innovation that is coming out in two of our launches are incredibly exciting. Then we'll address, you know, how the oversized trends are evolving for us, and we're taking that very seriously.

We don't want to lose that dominant position in the category that we created. There is a lot of activity, obviously, from competitive brands, you know, going in that direction. Some good, some bad, but, you know, the bottom line is we're not as differentiated as we were three or four years ago with that type of profile. You know, our technology, our focus on materials and geometry, product testing, use of plates, different foams, different compounds, et cetera, continues to be at the forefront of everything we do. We are addressing the fact that, you know, people may want a little bit of low profile.

They want different uses for their product. We think there's a tremendous opportunity in trail and hike. We're going to go heavy after that. We have a dominant position in, in that already. So it's top of mind for the teams. I think Stefano, you know, as the interim president of the HOKA brand, with the brand leadership team, has done an exceptional job of fast-tracking our innovation pipeline, and we're excited to unveil some of those new concepts coming up in Q4.

Steve Fasching (CFO)

Yeah, and I think, John, just to add on that, is this aligns with the strategy that we've laid out. So this is, this is not a change. You know, as we've said, the importance of controlling the marketplace, product in the marketplace, maintaining full price selling, continuing to build brand awareness, aligns with our full year outlook, and so we're continuing to operate on that. No change on that front. You know, as you can see by Q2 performance, seeing still good growth, with the HOKA brand, and really impressed with what we continue to deliver, but we're gonna be tight on marketplace management, and that's our strategy, and that's what's paying off.

Dave Powers (President and CEO)

Yeah, I think, you know, I think the theme here is really maintaining a healthy marketplace for the HOKA brand. And, you know, listen, it, HOKA's having an exceptional year. You saw the results in the first half of the year. You know, on a promotion event or level, you know, we were dominant at the UTMB event this year in Chamonix, France. Our athlete won the race, first American male winner ever in that contest. Two weeks later, our athlete won the Ironman championship in Nice, France. Actually, just today, it was announced by Footwear News that HOKA is the brand of the year. You're seeing the increases in, you know, in awareness and acquisition from our consumers. Our full price selling is exceptional. We're still dominant in the run specialty channel.

We've got tons of momentum here, and we wanna make sure that it doesn't get ahead of us, and that we manage the marketplace effectively to continue to drive strength in DTC. I think the strategy that the teams have laid out and the cadence of product introductions and innovation is spot on. A lot of reasons to be excited, but at the same time, you know, we're not naive to the fact that this sector is having some challenges right now, and Q3 is, you know, people are talking about the fact that it may be really tough.

We haven't quite seen that just yet, but, you know, again, it's a sector economic issue that we're gonna pay close attention to, but we wanna maintain scarcity in the marketplace, full price sell-through, and keep this brand moving at a healthy pace.

Jonathan Komp (Senior Research Analyst of Active Lifestyles (Apparel, Footwear & Fitness))

That's very, very helpful. Thank you. And Steve, if I can just ask one follow-up on the financial guidance for the year. If I look at sort of the implied second half performance, it looks like you're implying operating margins down, maybe close to a couple hundred basis points year-over-year, and EPS kind of flat to down slightly. Just could you help us make sense of that after the first half? This is obviously such strong year-over-year growth rates on both of those. Thank you.

Steve Fasching (CFO)

Yeah, I think it's a good question. And yeah, as you're looking at the second half, you know, part of this is recognizing that part of Q2 was benefiting from earlier sales of planned sales that we had in the second half of the year, right? And so while we're raising our overall year, it's not the full beat of that, what we've experienced in Q2, because some of those sales, at this point in time, appear to be timing. We'll see how the marketplace plays out kind of in the back half. But combined, that with some of the timing of back half sales moving into Q2, passing through what we think is a full year lift, it is taking some of the sales out of the back half a little bit.

But with the overall improvement in the year, and as you know, John, I keep saying, we're focused on the year, not quarters. We are lifting our full year, we're lifting our full year gross margin, we're lifting our full year operating margin. So like, like Dave said, we're managing the business for the long run. We're not managing the business on a quarter-to-quarter basis. We look at the full year. That's how we're guiding the full year, and some of that outperformance in Q2 is allowing us to make these additional investments.

Jonathan Komp (Senior Research Analyst of Active Lifestyles (Apparel, Footwear & Fitness))

That makes sense. Thanks again.

Steve Fasching (CFO)

Thank you.

Operator (participant)

The next question comes from Paul Lejuez of Citi Research. Please go ahead.

Paul Lejuez (Managing Director)

Hey, thanks, guys. Curious if you could talk about the HOKA DTC business, how that trended during the quarter, and if there's any comments you can make about quarter to date. And then also, on the UGG side, you had some unmet demand last year. You mentioned you're, you're in chase mode again on some UGG, UGG styles. I'm curious about your ability to chase, and what are your assumptions for the second half, on being able to fulfill that, that demand? Thanks.

Steve Fasching (CFO)

Okay, Paul, some of that was a little hard to hear, but I'm gonna... I'll take my best shot. This is Steve. On the HOKA DTC business, you know, strong, very strong Q2, up 46%. We look at that factor as, you know, the real true demand signal. We know there are going to be fluctuations with wholesale orders of when they flow, and we closely watch the DTC performance. Having that up 46% in Q2 is just another strong demonstration of how well HOKA is resonating, you know, with consumers, so very encouraged by that. I think as we've said, and as Dave just articulated, kind of how we're thinking about Q3 and back half, managing the marketplace, we don't want to get into a promotional environment.

We know there is a lot of competition out there that's over inventory. We're seeing a lot of promotion. HOKA is not in that space. We're not having to promote like other brands are. And so how we continue to build this brand forward, you know, and then build toward a bigger fourth quarter type increase on percentage terms as we have those new style intros planned for Q4. And then your other or second part of the question was chasing. Do you wanna go, Dave?

Dave Powers (President and CEO)

Yeah, I'll talk about that one. So, you know, I think one thing I think is important to clarify is if you go back three or four years and you look at the UGG brand and what, you know, drove the business, it was really one of two styles. It was all basically Classic, you know, short, mini. And outside of Classic, we had, you know, varying degrees of success with other styles. You know, if you go back seven or eight years, it was the Bailey Bow and Bailey Button. But, you know, we were more, quite honestly, of a one-trick pony in those days. The way the brand has evolved, the assortment is we have, you know, now five-six top-selling franchises.

If you look at the Tasman, the Tazz platform, the Ultra Mini, the Ultra Mini platform, some of the styles like the, the Classic Dipper, there's a lot more assortment and variation in styles and heights and platforms, et cetera, to choose from. And the good news is that they're all resonating very well, and we have good early reads on things like, UGG weather styles, the, the new Neumel weather and the Classic weather program. And at the same time, the team has edited the line by about 30% versus prior years. So you have inventory that we can put, you know, traditionally went into lower selling styles. We put that inventory into the top five to 10 styles this year.

You know, with Anne, Anne's help on getting the teams focused and putting more emphasis behind these key styles from a marketing perspective, we've also been able to put more depth in those styles and inventory. Now, a couple of them, we are selling faster than expected due to the earlier demand, but the teams have reacted quickly. We have the ability to chase some inventory, not a ton, but I think, you know, going into the back end of December, we'll be in good shape on some of these key styles. So we feel like we have the inventory to do what we need to do. It's not a bad thing to leave a little bit of demand on the table if that's the case.

At the same time, we have a very exciting launch with UGG Extreme, the UGG Extreme collection coming in, which is a new category of focus for us going forward. I think we're in pretty good shape. We have the inventory in the right styles, which we didn't last year, and I think the teams have done a great job of adjusting and cleaning up the assortment, putting more power across the five to 10 styles that are really driving the growth.

Steve Fasching (CFO)

Yeah, and I think, Paul, just to add to that, you know, one of the things with the strength that we've seen in Q2 on some of the styles that have been very popular and we're selling down the inventory, we are looking to expedite some of that back in, but there's a limit, right? And we won't necessarily be able to chase every sale, nor would we want to chase every sale. So, we'll see how things play out, but we're set up very well. It is the driver of our full year increase. So we're very encouraged going into the back half of the year.

Paul Lejuez (Managing Director)

Thanks, guys. Enough.

Steve Fasching (CFO)

Thank you.

Operator (participant)

The next question comes from Sam Poser of Williams Trading. Please go ahead.

Sam Poser (Equity Analyst)

Thank you for taking my question, guys. First of all, Erinn, you got most of it, but Teva, Sanuk and other for-- are my normal question. And then I have a follow. I have a whole bunch of questions.

Erinn Kohler (VP of Investor Relations and Corporate Planning)

Hi, Sam. Sure. I'll start off with that. So for the second quarter, for global wholesale and distributor, as you noted, some of this I think you can pull out of what we said, but for UGG, $452 million, HOKA, $263 million, Teva, $12 million, Sanuk, $3.3 million, and that leaves you with other at just about $30 million.

Sam Poser (Equity Analyst)

Okay. All right, so just get this out of the way. With Sanuk and that you're gonna, are you, are you gonna take that as a discontinued operation and going into the balance of the year? Or how should we think about that, in the guidance and so on?

Steve Fasching (CFO)

Yes, Sam. So no, we're not looking to break that to discontinued operations. So we'll continue to report it as we seek to find a buyer. So that's the current plan.

Sam Poser (Equity Analyst)

Yeah. Yeah. Okay. And then, with the way this is flowing in the back half, was there a lot of pull forward in the UGG wholesale business? I mean, should we expect UGG wholesale, especially in the third quarter, to be down, given how much, you know, how much came in in Q2?

Steve Fasching (CFO)

Yeah, so again, depending on your model, because we haven't guided the quarter. So, but yes, what we're basically saying is there is a portion of wholesale orders that occurred in Q2 that you may have planned for in Q3, and that is, you know, what's leading to the increase in the UGG performance. So again, we haven't given quarterly guidance, so I don't know exactly how you had it broken out. But yes, I think it's safe to say that some of the increase in UGG that we've seen in Q2 is wholesale orders that were moved forward into Q2.

Dave Powers (President and CEO)

Yeah, I think what is still to be determined is how much of the upside we captured in Q2 was just earlier demand or brand heat that will continue through Q3. Either way, I think we're positioned well, you know, depending on how the market moves. At this point, you know, the demand seems strong and healthy, and we think it should continue. As we said, we're heading into an unknown macro environment that is hard to say what it's gonna look like. We're optimistic that some of that demand was brand heat that will continue through Q3.

Sam Poser (Equity Analyst)

And then on HOKA, the same kind of question: Given that you're moving a big launch away or moving launches out, does that mean that the wholesale business in Q3, you know, would look more like Q2, and then, you know, maybe as a percentage, but then accelerate into Q4. But there's no real reason for DTC, it appears to slow down very much. I mean, that's good momentum on new products. You've launched a lot of new products in the last few weeks, I've noticed.

Steve Fasching (CFO)

Yeah. Sam, it's a good question, and there's kind of different ways to look at it. I think, as I said, and Dave has said, we haven't changed the way we're looking at HOKA for the year. I think that's most important. Remember, the underlying fundamentals of that is a very controlled wholesale marketplace, right? As we think about Q3, as Dave talked about, we are controlling wholesale in that Q3 period because we want the market to be seen as we're launching some new product in Q4. I think that's an important underlying. The other then is, remember, we had very large DTC comps a year ago. When you're looking at some of those, our DTC comps last year, Q3, was 107; I think Q4 was, like, 97%.

So we're coming off of very big growth quarters a year ago. So that's the other thing to consider, right, as we're talking about this. So there's growth. Then the other thing I think to take into account is what we've said about full year growth. So as we've said full year growth, our first half has exceeded that average full year growth guide number, which means, by definition, the second half is gonna be a little bit lower because we're controlling, again, that wholesale component of the marketplace. This is part of our strategy. Now, as we talk and some of our partners have discussed, there will be some wholesale expansion at the end of our Q4, right?

So that won't necessarily get captured in our back half, but it's a set up for next year. So again, everything is playing out like we've said. The brand continues to perform very well, and I think there are some dynamics that are in there that are important to understand, but most importantly is the brand continues to perform very well.

Dave Powers (President and CEO)

Yeah, and the last thing I would add to that is, last year we were opening new doors in Q3, so there was some door expansion, and so the set up quantities led to some of the growth in those doors. This year, we're still maintaining a net neutral through Q3 on door growth. So, you know, so comping that door growth last year could have a little bit of an impact on the wholesale performance, too.

Sam Poser (Equity Analyst)

Got you. And then lastly, Dave, you've been now how long at Deckers?

Dave Powers (President and CEO)

A little over 11 years.

Sam Poser (Equity Analyst)

Does that make you-

Dave Powers (President and CEO)

We've had a long relationship, Sam.

Sam Poser (Equity Analyst)

Does that make you-

Dave Powers (President and CEO)

What's that?

Sam Poser (Equity Analyst)

the elder statesman? Does that make you the elder statesman?

Dave Powers (President and CEO)

No.

Sam Poser (Equity Analyst)

You were in charge of that collaboration?

Dave Powers (President and CEO)

No, I was excited to see it, but I don't want to take credit for that. That was Anne and the team.

Sam Poser (Equity Analyst)

Okay. All right. Thanks very much, and have a continued success.

Dave Powers (President and CEO)

Thanks, Sam.

Steve Fasching (CFO)

All right. Thanks, Sam.

Operator (participant)

The next question comes from Laurent Vasilescu of BNP Paribas. Please go ahead.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Good afternoon. Thank you very much for taking my question, and congrats on such solid results. I wanted to ask about HOKA. Dave, I think you mentioned that HOKA International grew 44% in the quarter. If that's the case, maybe can you just give a little bit of color, just what you saw by, by region? What's driving that growth? You know, I think you mentioned a little bit about Europe, but how did you think-- how did you see the growth between wholesale and DTC? Was there a spread between that internationally? Maybe, Steve, I don't know if you can maybe give us some guardrails into how-- just how you're thinking about international HOKA growth, for the year.

Dave Powers (President and CEO)

Yeah. So we can validate that number. I don't know that it was exactly 44%, but, you know, the bottom line is that we are very excited about, you know, the growth that we experienced internationally. You know, that's been a focus of ours for across all of our brands. The international teams are doing a tremendous job at creating, you know, brand heat in that marketplace, and then also managing the marketplace effectively across DTC and wholesale. The real strength of the growth that we saw in Q2 was really DTC led, particularly in Europe, exceptional results. Now, smaller percent of our total business, but, we think that speaks to the, you know, the health of the brand and the demand for that consumer as we're investing in more marketing in the region.

The events, such as we mentioned, UTMB and the Ironman, were held in Europe, so there's a lot of buzz around the brand there. And, you know, we're just getting better at managing that brand from a DTC perspective, investing in that team and the capabilities over there. So really, the growth is being driven primarily by the DTC channel. Wholesale is still strong, but as we said, you know, in the U.S., we're managing that tightly to create the excitement and the awareness, but still really ultimately drive the business to DTC, and, you know, that's a formula we're gonna continue to lean on going forward. What was the other question? There was a third question for Steve there.

Steve Fasching (CFO)

So, Laurent, I think the number you quoted was total company international DTC growth.

Dave Powers (President and CEO)

Yeah.

Steve Fasching (CFO)

So, we didn't provide the HOKA component. So the total 44%, I think that you quoted, was total company international DTC growth. I think then just your question on HOKA, to me was a little bit about how do we see HOKA internationally expansion for the year. You know, I think what we see, some of the trends that we're seeing are similar to what we saw in North America probably a year or two ago, right?

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Yeah.

Steve Fasching (CFO)

So how we're seeing HOKA show up in the run community, and then beyond the run community is similar, but further behind. And so this bigger expansion or faster growth in percentage terms is another indication that that seems to be the case, that we're seeing the HOKA brand resonate with consumers. Kind of starts with runners, run community, and begins to build out as awareness grows. Very similar trend to what we've seen in North America. So in that international arena, we're a little bit behind where we were. Still very early innings for both domestic and international, but a little bit earlier on internationally, and that's why we're seeing those growth percentages high in total company, but you can extrapolate that to the HOKA brand as well.

Dave Powers (President and CEO)

Yeah, and the new store opened in Covent Garden in London is off to a great start, and we're seeing that formula play out, which is a mix of performance and, you know, everyday runners and lifestyle driving the results there. A lot of tourists experience the brand for the first time in our stores. Our own stores and our partner stores in China continue to perform well also.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

That's, that's great to hear. So thank you for that. And then, Dave, I think last quarter, during the Q&A, you alluded to the launch of a, of a new brand that might be small, but maybe just can you give us an update on where that stands and, with the potential divestiture of Sanuk, does that give you capacity, just bandwidth, time, resources to, to potentially, pursue M&A at the same time as of launching a new brand?

Dave Powers (President and CEO)

Yeah, they're really two separate events. You know, it's not that Sanuk was holding us back from, you know, building and launching a new brand. So we look at these separately as just fine-tuning our model. You know, just to speak to the Sanuk decision for a second, you know, I'm really proud of how the teams have managed this brand over the last few years from a marketplace management standpoint, and the product right now is very, very strong. But what we've realized is that the journey to scale that brand so that it's meaningful in our portfolio is just too long. There's other things that we think we can invest in, and we think that, you know, this is a brand that the consumers love.

It deserves a good home and somebody who can, you know, is a priority for them versus, you know, a fourth or fifth brand in our portfolio. You know, it's a tough decision emotionally and financially, but I think it's the best thing for the company and the brand to do this. With regards to the new brand we're working on, you know, I don't want to give away too much, you know, to our competition, but we're excited. We're gonna be, you know, taking the best of HOKA and UGG and all the, you know, learnings we have from those two brands and creating what we're calling a super sneaker brand, you know, across various categories. We have the distribution channels, we have the DTC network.

We have a lot of leverage in the marketplace and some really innovative, exciting products. It'll be a long haul, but we think this is a space that is emerging and that we want to make sure that we have some skin in the sneaker game going forward beyond HOKA. And then as far as M&A goes, you know, listen, we have enough organic growth here in our portfolio for the next foreseeable future in years. We're always keeping our eyes on it. We've looked at a lot of opportunities, and, you know, with regards to what it would do for our company financially, and workload and disruption, nothing has, you know, come across our desk that we're excited about yet, but it's always top of mind for us, and we're continuing to look.

But we think, you know, listen, we have Teva that has opportunity down the road, and we think we can create a new brand and launch that and see if we can make some exciting inroads with both those, those brands while we focus our real efforts and attention on UGG and HOKA.

Laurent Vasilescu (Managing Director and Senior Equity Analyst)

Very helpful. Thank you very much for taking the questions.

Dave Powers (President and CEO)

Thank you.

Steve Fasching (CFO)

Our last question today comes from Janine Stichter from BTIG. Please go ahead.

Janine Stichter (Managing Director and Consumer Retail and Lifestyle Brands Analyst)

Hi, congrats on the great quarter, and thanks for fitting me in. Question on HOKA. Wanted to hear more about what you're seeing at some of the more recent doors that you've been in over the last few years, Foot Locker, D**k's, I think you've recently tested JD. Just curious what the sell-throughs look like there, and if you have any thoughts on the type of consumer you're getting, if it's helping you kind of broaden the aperture of the consumer you reach with HOKA. On UGG, would just love to hear a bit more about international. I think you talked quite a bit about international strength at HOKA, but would just love to hear more about what you're seeing there with UGG, and if the momentum is similar versus what you're seeing in the U.S. Thank you.

Dave Powers (President and CEO)

Yeah, good question. HOKA door performance, new doors, you know, that we have opened up are performing very, very well. I was talking to Stefano, who's overseeing that brand right now. You know, the new doors that we've opened over the last year in new accounts, all performing very well. High, high level of full price sales, strong turns, you know, stealing market share, you know, run specialty stores, where we have a number one position there that we're fighting, you know, every day to maintain, and we want to build out on that position. New doors in Foot Locker and D*ck's and JD, et cetera, they want more. That's a good sign, and the way that we're performing those doors is right in line with what we would hoped would happen.

But we're managing it tightly as we have been doing, so that we maintain full price selling and healthy turns and gross margins for our partners. It's a good question on the type of consumer. You know, Foot Locker, as an example, was a strategic play, not just from a volume play, but also strategic to reach a younger lifestyle consumer, both male and female, and we're seeing that happen. I think, you know, some of the success in Q2 was probably back to school business that we hadn't really realized before. And with our focus on 18 to 34-year-old consumers and college athletes, we're seeing that pay off.

And so it's exciting to see, you know, high school athletes and college athletes and beyond gravitating to our brand, going to those doors, looking for the brand, making the choice of HOKA over a traditional, you know, Nike Dunk or Air Force 1. That's super exciting. We're gonna keep a close eye on that because we don't want that to be a big spike and then go away, so we need to manage that tightly, and the lifestyle teams are all over that and working with our accounts to make sure that it's a healthy business for the long term. And then on UGG International, similar to what Steve was saying in HOKA, you know, UGG is an international, particularly in Europe, is at the point where UGG was a couple of years ago, really healthy, strong growth.

They've been working hard on local marketing activations and leveraging PR in the region, and, you know, the new product is resonating extremely well across the board, but particularly with younger consumers there. And, it's really exciting to see. And, you know, we haven't been in this position in Europe, in quite some time, but the momentum is real, the brand heat is improving. The, you know, the level of, acquisition and consideration for our consumers are all heading in the right direction. So, we think this is an opportunity to build on this, particularly in the UK and Germany, our two biggest markets. And, we're gonna continue to play this playbook out and get more aggressive with marketing activations in the region.

Janine Stichter (Managing Director and Consumer Retail and Lifestyle Brands Analyst)

Great. Thanks so much, and best of luck.