Hoka’s sales catapulted 90.8 percent in the fiscal third quarter ended December 31, helping Deckers Brands surpass Wall Street estimates and lift its guidance for the year. On an analysts’ call, Dave Powers, Deckers’ CEO, said Hoka “more than doubled its DTC business, while demonstrating momentum across the product line and significantly increased wholesale through both market share gains and select new strategic access points.”
Overall, earnings at Deckers Brands grew 19.6 percent to $232.9 million, or $10.48 a share, easily ahead of Wall Street’s consensus estimate of $9.61. Sales jumped 13.3 percent to $1.35 billion compared to $1.19 billion, surpassing the consensus estimate of $1.26 billion. On a constant-currency basis, sales climbed 17.5 percent.
Other highlights in the quarter included Ugg delivering relatively flat growth in the quarter despite a significantly more challenging macroeconomic environment that included a significant foreign exchange rate impact. The shearling brand benefited from an emphasis on DTC channels to mitigate the impact of elevated inventory levels and high promotions at wholesale.
Total portfolio DTC increased 19 percent versus last year, to represent 52 percent of volume with both Hoka and Ugg contributing to the mix shift, an all-time-high for the third quarter. International gains also stood out as sales improved 12 percent on a reported basis and grew 25 percent on a constant currency basis.
Powers also noted that both Ugg and Hoka saw strong full-price selling despite a highly promotional marketplace during the holiday season. He said, “While our brands did experience more normalized promotions relative to extremely low levels in the past few years, we were able to avoid significant discounting due to the strength of consumer demand for our products, as well as disciplined marketplace management through our omnichannel approach.”
Hoka’s Revenues Vault 91 Percent
The star of the show was Hoka, which reached $352.1 million in sales in the quarter compared to $184.6 million a year ago.
“Just two quarters ago, we celebrated Hoka achieving $1 billion of revenue on a trailing 12-month basis, and with the quarter just delivered, the brand has now eclipsed $1 billion of revenue over the last nine months, ended December 2022,” said Powers.
Powers said Hoka’s growth in the third quarter was driven by share gains with one specialty account in the wholesale channel as product flow improved since last year; added points of distribution with select strategic accounts that have included Dick’s Sporting Goods, REI and Foot Locker; global DTC revenue more than doubling versus last year as consumer acquisition and retention increased 95 percent and 109 percent, respectively; and easy comparisons as year-ago wholesale shipments were disrupted by port congestion.
On the marketing front, Powers cited the “Fly Human Fly” campaign as a “key catalyst” driving DTC growth and the benefits of targeted marketing activations in Chicago and New York City that helped drive a 22 percent increase in brand awareness, a 27 percent in consideration and a 33 percent increase on purchase intent in those markets over the next six months. Powers said, “We also believe these markets have seen a halo effect from the additional brand visibility created by popup stores which have continued to perform well for Hoka.”
Hoka is also finding success reaching younger consumers, with 18-to-34-year-olds in the U.S. and EMEA driving the largest year-over-year increase of any age group during the third quarter. Said Powers, “We have been increasingly encouraged by the broad product adoption from females in this coveted demographic, who appeared to be actively searching hoka.com for what is new and exciting on a regular basis.”
By channel, Hoka increased its market share in run specialty by 5 percentage points in the quarter versus last year, delivering the highest average product turns and maintaining a gross margin well above the channel average. Hoka was also able to maintain its high percentage of full-price business even with the new points of distribution. Power said, “Though early days in some of the brands’ new doors, the feedback on Hoka performance has been exceptional.”
On product, the Bondi 8, Kaha 2 Gore-Tex and Mafate Speed 4 were all called out in product reviews by media outlets. Powers said, “All of us at Deckers are excited for what is to come for the Hoka brand, starting with a couple of innovative product launches planned for the fourth quarter and more to come in fiscal year 2024 and beyond.”
Ugg’s Sales Up Low Single-Digits On Currency-Neutral Basis
Ugg’s sales decreased 1.6 percent in the quarter to $930.4 million but was up low-single digits on a constant currency basis.
Powers said consumer demand for Ugg was strong as the brand delivered global gains in DTC across genders and categories, driven by a 21 percent increase in acquired consumers and a 17 percent increase in retained consumers. The DTC strength, however, was offset by unfavorable foreign currency exchange rate impacts across channels, as well as lower wholesale revenue.
The wholesale decline resulted from earlier shipments of product that have temporarily elevated levels of inventory in the channel. Said Powers, “In line with our marketplace management strategies, the Ugg brands’ attention shifted to selling through product already in the channel, to strategically reduce marketplace inventory, allowing DTC to capture demand upside, and limiting the need for excess promotional activity.”
Demand was boosted by fresh updates of iconic styles, including the Classic Mini and Tasman, with certain style color combinations leading to out of stocks. Powers said, “Our measured approach to buying aimed at driving improved inventory levels, combined with the high level of demand for these products, led to some scarcity in the marketplace. We see this approach as an effective tool to fuel demand and we’ll continue to optimize our pull model to bounce future supply.”
Ugg is similarly gaining traction with younger consumers. Among 18-to-34-year-olds females in the U.S., the Classic Short remains the top seller, but the Classic Mini and Ultra Mini styles are seeing the fastest growth. Among 18-to-34-year-old males in the U.S., slipper hybrids like the Tasman and Classic Slip-On as well as heritage winter boots are resonating with brand consideration among that male demographic reaching an all-time-high in the third quarter.
Internationally, sales grew on a constant currency basis due to DTC gains. Wholesale sales declined internationally as supply chain disruptions had pushed additional shipments into the prior year’s third quarter. Powers said international growth for Ugg continues to benefit from ongoing marketplace reset activities.
“Overall, we’re very pleased with the performance Ugg this fall,” said Powers. “The brand continues to attract new consumers and drive more business through direct-to-consumer with a loyalty program that now has massed over 7 million members worldwide. We feel great about the brands’ ability that offset more normalized promotional activity through a strategic shift in channel mix, which also helped reduce marketplace inventories heading into the spring 2023 season.”
Among its smaller brands, Teva’s sales increased 48.3 percent to $30.5 million and Sanuk’s decreased 7.4 percent to $5.6 million. Its Other Brands division, primarily composed of Koolaburra, saw sales decrease 12.1 percent to $26.9 million.
Gross Margins Benefit From Reduced Freight Costs
The earnings improvement was helped by a 70 basis points increase in gross margins, to 53 percent, reflecting reduced freight costs that offset unfavorable foreign currency exchange rates. Additional gross margin impacts in the quarter included benefits from favorable channel mix with DTC growing faster than wholesale, favorable brand mix as the sales of Hoka increased and price increases implemented at the end of last year. These were partially offset by more normalized promotions and closeout activity for Ugg relative to minimal discounting last year.
SG&A grew 7 percent overall in the quarter but was reduced 160 basis points as a percent of sales, primarily due to benefits from foreign currency remeasurement and a shift in a Hoka launch campaign.
Inventory was up 31 percent at the quarter’s end, primarily to support the continued growth of Hoka, which was light on inventory in the prior year due to factory delays, with some offset from Ugg inventory being down year-over-year.
Looking ahead, Deckers increased its full-year revenue guidance to be up 11 percent to 12 percent, up from a previous range of up 10 percent to 11 percent. Hoka’s growth is now expected to increase in the low-50 percent range, up from “up to 50 percent” previously.
For the second half, Hoka’s growth rate is expected in the high 40 percent to low 50 percent range in the company’s second half. Due to last year’s supply chain disruption that impacted quarterly wholesale revenue timing, Hoka’s growth rate in the fourth quarter will be lower than the brands’ typical run rate, although continued robust DTC growth is expected.
Ugg revenue is still expected to be down mid-single-digits on a reported basis for the fiscal year, implying a year-over-year decline in the fourth quarter. Ugg faces challenging year-ago comparisons in the fourth quarter as the year-ago quarter saw a boost from late arriving fall inventory. Ugg’s growth rate is also being impacted by unfavorable foreign currency exchange rates.
Gross margin is still expected to be approximately 50.5 percent for the fiscal year, SG&A as a percent of sales is still expected to be approximately 33 percent, and operating margin is still expected to be in the range of 17.5 percent to 18 percent. EPS guidance for the year increased to a range of $18 to $18.50, up from a previous range of $17.50 to $18.35.