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    Deckers Outdoor Corp (DECK)

    Q3 2024 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$128.81Last close (Feb 1, 2024)
    Post-Earnings Price$139.29Open (Feb 2, 2024)
    Price Change
    $10.48(+8.14%)

    What went well

    • Deckers Brands reported an exceptional quarter with record growth in the UGG brand, driven by a strong innovation pipeline and global consumer resonance, marking what the CEO describes as "the most exciting quarter I've ever seen for UGG with regard to global brand heat".
    • The company's strategic focus on managing its marketplace by prioritizing Direct-to-Consumer channels over wholesale is yielding significant benefits, notably in gross margin expansion, and is a model they plan to reinforce moving forward.
    • Deckers remains confident in achieving its long-term targets, including potential revenue of $5-6 billion and 50% DTC mix, due to strong performance across brands and regions, particularly with the UGG and HOKA brands, and the strength of international markets.

    What went wrong

    • Gross Margin Expansion May Not Be Sustainable: Management indicated that the exceptional gross margin increase of 580 basis points to 58.7% in Q3 was due to factors such as extremely low promotional activity, benefits from UGG pricing actions, and very low freight costs, which "are above normalized levels and [are] not something we anticipate will repeat to the same degree."
    • Leadership Transition Could Introduce Uncertainty: The CEO, David Powers, announced his retirement effective August 1, and while his successor is experienced, leadership changes can pose risks to strategic execution and company performance.
    • Future Sales May Be Impacted by Inventory Levels and Shipment Timing: The company acknowledged that low inventory levels on key styles and pulling forward UGG wholesale shipments into Q3 (which typically occurred in Q4) could have a "small impact on sales in the fourth quarter."

    Q&A Summary

    1. Operating Margin Sustainability
      Q: What's the long-term operating margin outlook?
      A: Steve Fasching explained that they view the business as a high-teen margin business. When the company performs exceptionally well, like in Q3, they allow some of that margin to run through, resulting in operating margins above the high-teens. They carefully watch where to invest and will continue this approach, focusing on long-term health rather than short-term gains.

    2. UGG Growth Prospects
      Q: Can UGG continue its strong growth?
      A: David Powers emphasized that UGG is now considered a growth brand within the portfolio. The brand is in a very different position than in the past, diversifying beyond core boots into slippers, hybrid innovations, and versions of sneakers, appealing to a younger and more diverse global consumer. They remain confident in the growth opportunities for UGG and expect healthy mid-single-digit growth rates, with potential for more if they optimize men's and apparel lines.

    3. Pricing Strategy and Gross Margins
      Q: How are price increases impacting margins?
      A: The company strategically implemented price increases on a handful of best-selling UGG styles, which significantly boosted revenue. Gross margin expanded by 580 basis points, with about 340 basis points coming from price increases and reduced promotions. They will continue to evaluate pricing but do not plan broad-based increases, focusing instead on appropriate pricing for consumers.

    4. Direct-to-Consumer Focus
      Q: Is inventory being shifted to DTC channels?
      A: David Powers stated they are not forcing inventory away from wholesale to DTC but have improved at allocating inventory to their stores to avoid missed sales. The strong brand momentum means that if wholesale partners run low, consumers turn to their stores and website, benefiting the DTC business. Their marketplace management strategy is working, containing the wholesale channel and flowing demand to DTC, which is boosting gross margins.

    5. HOKA Brand Momentum
      Q: What drives HOKA's expected Q4 acceleration?
      A: HOKA had a great Q3, and Q4 is expected to be strong due to refill orders fulfilling demand and exciting new product launches. There are no plans for new door expansions, but they will continue to evaluate opportunities based on market performance and sell-through.

    6. New Product Launches
      Q: Any updates on new product introductions?
      A: David Powers mentioned the upcoming launch of a new "super sneaker" brand developed by Deckers X Lab, featuring sophisticated styling and advanced technologies like carbon plates and modern materials, priced above $200. They are excited about its potential and plan a soft launch in the coming weeks.

    7. Addressable Market Expansion
      Q: How has UGG's addressable market changed?
      A: The total addressable market for UGG has increased as the brand is adopted for different use cases beyond boots, including sneakers and hybrid products. A younger demographic is embracing the brand, and international markets are growing at a faster rate, expanding growth opportunities.

    8. Order Timing Shifts
      Q: Were there timing shifts affecting Q3 and Q4?
      A: Some wholesale deliveries occurred earlier in Q3, slightly impacting Q4. The strong sell-through in Q3 led to business expected in Q4 happening sooner, but the full-year outlook was raised to reflect this strength.

    9. Performance-Related Compensation
      Q: How will strong performance affect bonuses?
      A: Due to the strong performance in FY24, there is an increase in performance-related compensation. This will reset to approved budget levels in FY25.

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