Deckers Brands Q2 Powered By Hoka’s Momentum

By Thomas J. Ryan

<span style="color: #999999;">Deckers Brands lifted its full-year guidance after reporting both earnings and sales for the second quarter handily surpassed guidance due to accelerated sales momentum at Hoka One One. Hoka’s revenues are now expected to be up in the mid-to-high 40 percent range in the current fiscal year.

That’s up from a projection of growth in the high-30 percent range for the year provided when Deckers reported first-quarter results in August. In May, in reporting fourth-quarter 2019 results, Deckers had predicted Hoka’s sales would grow in the mid-20 percent range in the current fiscal year.

On a conference with analysts, David Powers, CEO and president, said overall results were above the high end of guidance due to the out-performance in the Hoka brand as well as the strength seen through early shipments related to the Ugg brands’ domestic business.

“During the second quarter, we continue to drive momentum in our key initiatives as Hoka continues to experience explosive growth, Ugg’s Men’s boots increased by high teen percentages, Ugg Women’s noncore expanded through the Fluff franchise and our online performance was strong,” said Powers.

In the quarter ended September 30, net earnings reached $77.8 million, or $2.71 a share, up 8.8 percent from adjusted earnings of $71.5 million, or $2.38, a year ago. Net earnings came to $74.4 million, or $2.48, in the year-ago period due to a lower tax rate.

EPS of $2.71 far exceeded the company’s guidance that had called for earnings in the range of $2.15 to $2.25 as well as Wall Street’s consensus estimate of $2.33.

Net sales increased 8.0 percent to $542.2 million. On a constant currency basis, net sales increased by 9.5 percent. Deckers had expected sales to arrive in the range of $515 million to $525 million.

Among brands, the star was Hoka, which grew sales by 49.9 percent to $78.1 million, marking the 10th consecutive quarter of over 30 percent year-over-year growth.

“Hoka continues to exceed expectations,” said Powers. Similar to the first quarter, Hoka’s growth was well balanced with strength domestically, internationally and across both wholesale and direct to consumer channels.

From a product perspective, Hoka’s two leading franchises, Clifton and Bondi, continue to experience “significant” growth year-over-year. At the same time, new styles such as the Carbon X and Rincon are bringing new consumers to the brand. Said Powers, “The Hoka evolution is best evidenced by recently becoming the number two brand in terms of run specialty market share for the month of August, according to NPD.”

The Rincon, released in July, featured a more accessible price point and was targeted to acquire high school and college-aged athletes. Said Powers, “The coordinated Rincon marketing campaign was highly successful in the quarter with 50 percent of online consumers new being new to the brand and nearly 40 percent of those consumers represented in the 18-year-old to 34-year-old demographic.”

For spring 2019, every new product Hoka launched won an award, including the Rincon winning Editor’s Choice by Runner’s World and the Carbon X Winning Gear of the Year from Outside Magazine.

“This recognition is a direct result of developing innovative high-performance products and combining it with the right marketing and distribution,” said Powers.

<span style="color: #999999;">Ugg is by far Deckers’ largest brand and saw sales for the second quarter increased 2.2 percent to $404.9 million. The brand is expected to represent about 70 percent of Deckers’ sales in fiscal 2020.

Ugg’s gains reflect continued strength domestically that offset declines in the EMEA region. Powers said, “The health of our domestic business has been driven by a clean marketplace, thanks for our allocation and segmentation strategy as well as targeted investments in digital marketing and PR.”

Ugg brand interest in the U.S. was up 11 percent in the quarter versus last year, according to Google Trends. Ugg also saw another 20-plus percent increase in customer acquisition within the key 18-year-old to 34-year-old demographic. The gains were supported by several high-profile celebrities photographed wearing Ugg products.

Among styles, the Fluffy Yeah slide “shows no signs of slowing down” and is bringing new customers to the brand. The women’s non-core business is also experiencing early success with the newly launched Classic FM that’s helping provide differentiation as well as increased adoption from younger consumers.

On the men’s side, Neumel Nation, the brand’s largest men’s marketing campaign, drove a double-digit increase in the number of male consumers to Ugg.com, with over half of them being new to the brand.

Internationally, the EMEA region continues to undergo a reset for Ugg similar to the one that supported healthier growth for the brand in the U.S., including cleaning up inventories and consolidating wholesale accounts. The revenue headwind from the EMEA reset is expected to total $25 million to $30 million for the remainder of the fiscal year.

Said Powers, “I’m encouraged by the progress Ugg is making with a variety of consumer segments and look forward to continued strides in our holiday quarter as we launched our largest ever holiday campaign.”

Koolaburra, a casual brand similar to Ugg aimed at the domestic wholesale family value channel, saw sales increase 41 percent to $26 million. New partners are being added this fall for Koolaburra and the brand is launching a licensed home product with Kohl’s.

Among its remaining brands, Teva’s sales for the quarter increased 6.7 percent to $23.0 million. Universal and Hurricane franchises continue to drive brand momentum and helped Teva regain the lead market share within the sports sandal category for the spring 2019 season, according to NPD. Said Powers, “The brand had an impressive spring season, both in terms of revenue performance and brand heat,” including being featured in the New York Times as well as Vogue declaring the brand as “Shoe Of Summer.”

Sanuk’s sales decreased 22.4 percent to $10.7 million with most of the decline attributable to the weakness in the Yoga Sling franchise. Powers said volumes for Sanuk are expected to continue to decline for the balance of fiscal 2020 due to a decision announced in its first-quarter conference call to exit the warehouse club channel to focus on “healthier full price channels,” said Powers.

Powers said he was encouraged by the strength in the Ember franchise and Sanuk overall remains “focused on exploring healthier avenues for brand distribution as we work to reposition it in the marketplace.”

<span style="color: #999999;">Companywide, wholesale sales for the quarter increased 8.7 percent to $443.5 million, driven primarily by domestic expansion in Ugg, Hoka and Koolaburra as well as international expansion of Hoka and Teva. Gains in Hoka and Teva internationally were mostly been driven by the strength of the Asia-Pacific region.

Direct-to-consumer, (DTC), sales increased 5.1 percent to $98.7 million with comps advancing 7.2 percent. E-commerce continues to drive gains in the DTC channel, led by Ugg and Hoka. Hoka’s DTC gains are shifting the channel mix dynamics for the brand to support an improved gross margin profile

Domestic sales increased 14.9 percent to $358.0 million. International sales decreased 3.2 percent to $184.2 million and were down 0.5 percent on a constant currency basis. International was impacted by the Ugg reset in EMEA as well as negative pressure from foreign currency exchange rates.

Gross margin was 50.4 percent compared to 50.2 percent for the same period last year. The improvement over implied guidance was due to savings from the utilization of less expensive freight options, an improvement from higher gross margin rates on closeout sales and the favorable mix with the Hoka brand expanding beyond expectations, including incremental growth in e-commerce. These partially offset by channel mix as wholesale grew faster than DTC.

SG&A expenses were $175.9 million compared to GAAP SG&A expenses last year of $161.5 million and non-GAAP SG&A expenses last year of $161.2 million.

Operating income was $97.1 million compared to GAAP operating income of $90.4 million for the same period last year and non-GAAP operating income of $90.7 million for the same period last year.

The 46-cents net EPS beat to the high end of guidance came from 15 cents of increased Hoka performance, 15 cents of favorable gross margins including savings in freight and a higher margin rate achieved on closeout sales, 10 cents from earlier domestic wholesale shipments from the Ugg brand, 3 cents from reduced share count related to the repurchase of shares in the quarter and 3 cents from a lower tax rate for the quarter due to timing of discrete tax entries, partially offset by the reduced interest income.

On tariffs, Steve Fasching, CFO, said Deckers believes it has been able to mitigate any material impact from tariffs in the current fiscal year 2020. He noted that as previously stated, less than 20 percent of the company’s current global production is created in China and shipped to the U.S.

“As there still a lot of factors to work through, we are not yet providing an estimate on the impact beyond fiscal year 2020,” said Fasching. “We are evaluating options that can potentially offset these increased costs including considerations of pricing power within our brands as well as continuing conversations with our suppliers who are willing to work with us.”

For the current fiscal year ending March 31, 2020, updated guidance includes:

• Net sales are now expected to be in the range of $2.115 billion to $2.140 billion, up from $2.1 billion to $2.125 billion previously.
• Gross margin is now expected to be approximately 50.8 percent, up from 50.5 percent previously.
• SG&A expenses as a percentage of sales are projected to be slightly lower than 36.0 percent. SG&A was previously projected to be at or slightly better than 36.0 percent.
• Operating margin is now expected to be approximately 15.0 percent, up from a range of 14.5 percent to 14.7 percent previously.
• Diluted earnings per share now expected to be in the range of $8.90 to $9.05, up from $8.40 to $8.60 previously.

For the third quarter ended December 31, net sales are expected to be in the range of $885 million to $900 million, up between 1 and 3 percent from $873.8 million a  year ago. EPS is expected to be in the range of $6.30 to $6.40, down from adjusted EPS of $6.59 last year.

Shares of Deckers were trading off about 4 percent Friday afternoon as third-quarter guidance came in lower than Wall Street’s consensus target.

In a note, Stifel’s Jim Duffy wrote that the “extremely beneficial weather” of the FW18/19 season creates challenging comparisons for the flagship Ugg brand and the near-term direction of the stock likely depends on cooperative weather for Ugg.

“Longer-term,” Duffy wrote, “We remain impressed with the strategic direction for the Ugg brand in North America (product diversification, younger target audience, segmentation strategies, etc.) and expect implementation of the same playbook for Europe can bring a turn in FY21 (cleaning up channel inventory and distribution in FY20).”

Photo courtesy Hoka One One