Deckers Brands management pointed to execution on their long-term strategy, including driving Hoka growth, diversifying Ugg into a year-round brand, building direct-to-consumer (DTC), and developing the international market as drivers for a strong fiscal third-quarter performance that outpaced Wall Street expectations. While the top-line results aligned with analysts’ expectations for the quarter ended December 31, 2021, the company easily outpaced bottom-line estimates as DECK shrugged off the effects of supply chain issues.
Net sales increased 10.2 percent (+9.7 percent currency-neutral) to $1.19 billion in fiscal Q3 compared to $1.08 billion in the year-ago comp period and a 27 percent increase versus two years ago. Third-quarter growth was reportedly driven by the company’s two largest brands, Ugg and Hoka, as International Ugg increased 29 percent versus last year, led by a return to growth in the EMEA region and an acceleration in China. Global Hoka sales increased 30 percent, aided by a more than 50 percent increase in DTC sales.
International regions increased 27 percent in the quarter while the U.S. increased 19 percent in the three-month period ended December 31.
Direct-to-consumer growth outpaced wholesale growth, improving DTC mix to 50 percent of third-quarter revenue, up from 48 percent in fiscal Q3 in the prior year and 44 percent two years ago.
Global DTC revenue increased 13 percent versus the prior year and grew 42 percent versus two years ago. From a comparable sales perspective, direct-to-consumer increased 11 percent versus last year, fueled by strength in both retail stores and online. Ugg and Hoka drove the majority of the year-over-year dollar volume increases, but DTC demand was said to be robust across the portfolio.
“In the constrained supply environment we have experienced this year, our omnichannel capabilities proved advantageous in reducing the impact on the Ugg brand business,” Powers continued.
Global wholesale revenue in the third quarter increased 7 percent versus the year-ago period and 14 percent versus two years ago. Growth in the quarter was primarily driven by international Ugg and global Hoka with a slight offset from a reduction in domestic Ugg that resulted from earlier shipments of fall products compared to the prior year.
Global Ugg revenue was $$945.9 million in the fiscal third quarter, reflecting an 8 percent increase versus $876.8 million in the year-ago period and a 21 percent increase versus two years ago in 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 percent above last year and 21 percent above two years ago,” shared company President and CEO Dave Powers on a conference call with analysts. He said the growth reflected “continued steady growth in the U.S.,” up high-single-digits on top of last year’s mid-teens increase and a strong return to growth within the brand’s international region, which increased more than 20 percent versus last year, and double-digits versus two years ago.
In terms of the Ugg brand success, year to date, Powers said the majority of growth had come from categories outside of the women’s Classic boots, which includes continued gains across men’s and kids’ footwear, women’s slippers, and fluff as well as apparel and accessories.
“While these categories are driving the bulk above growth, it is important to note that women’s classics have also performed very well this year,” cautioned Power. “Fiscal year to date, women’s Classic boots have driven year-over-year revenue growth, represent a smaller percentage of total brand revenue and reflect greater style diversity within the category.” He said items outside of the core, such as the Ultra Mini Classic Clear and Neumel have been key drivers of consumer acquisition this year.
The Neumel is the year’s largest dollar volume style across Ugg’s assortment, and companion versions are a large driver of men’s growth. Powers said that consumer data showed them that the adoption of Ugg men’s product skewed younger, as the 18-to 34-year-old age group represents a larger portion as compared to the brand average. The Neumel remains a top acquisition style among these consumers.
Beyond footwear, Powers said that Ugg has focused on acquiring new consumers through a compelling apparel assortment.
“To build awareness in the category, Ugg developed its first apparel dedicated marketing campaign, which helped drive a 40 percent increase in apparel consumer acquisition year-to-date,” Powers shared. “Our consumers have responded well to ready-to-wear sportswear and outerwear items that contain visual Ugg DNA, logo treatment and deliver on the expected feeling of Ugg. This was the first season for several retailers carrying Ugg apparel, many of whom are concentrated in the youth and sports lifestyle channels. These channels have been driving strong performance with Ugg footwear for some time now.”
On the domestic front, Powers said this is the fourth consecutive year Ugg had 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.
“The brand’s development of a more youthful and diverse product assortment and the ongoing U.S. wholesale marketplace management strategy has helped us strategically expand within youth and sports lifestyle accounts,” he explained. “While Ugg has built market share across its account base, the youth and sports lifestyle accounts have significantly outpaced growth with department stores.” He also said Ugg had driven significant gains in DTC acquisition with 18-to-34-year-olds over the past two years. The demographic age group has reportedly grown at a 25 percent compounded annual growth rate (CAGR) year-to-date over the comp period in fiscal 2020.
“Critical to this success has been the product adoption among those younger consumers who are purchasing heritage products like the classic short and mini, but also new franchises like the Neumel, Fluff, Tasman, and Classic Clear,” Powers added.
Regions outside of the U.S. have reportedly accounted for approximately half of Ugg’s growth in the year-to-date period, with EMEA and China cited as driving the majority of gains over last year.
“Approximately three years ago, Ugg implemented a marketplace reset strategy in the EMEA region based on the successful strategy that reignited the brand in the U.S., explained Powers. “This involved a reduction of wholesale accounts to the tune of approximately 35 percent over the last three years, allocating and segmenting core product and elevating brand positioning while also working to create demand for complementary Ugg products in new categories.”
Women’s core classics and derivatives have reportedly moderated to below 40 percent of international revenue in the nine-month fiscal year-to-date period through December 31. “This is more in line with the U.S. and compares to north of 50 percent just three years ago,” said Powers. “With a tightened supply of core product, international regions are driving healthy growth with popular global styles such as the Fluff franchise, Ultra Mini, Classic Clear and the Neumel.”
By highlighting new categories, reducing the supply of core products, and tailoring marketing campaigns to local consumers, Ugg has begun expanding its audience to younger consumers in both Europe and China.
“Similar to the U.S., we believe younger consumers are leading the Ugg brand increased popularity among international markets,” said Powers. “The brand has worked hard to create localized content that resonates with the sub-35 age consumers in their respective markets. In Germany, France and the U.K., this age group is driving over 40 percent of traffic conversion from paid social. In China, this age group is driving DTC growth in key franchises, including global styles such as left and the Classic Clear.
Hoka brand global revenue in the third quarter was $184.5 million, reflecting a 30 percent increase versus $141.6 million for the comparable period last year. Sales were nearly double the volume of two years ago, despite dealing with stockouts and delayed inventory.
“Hoka performed well in the quarter, driven by global strength in the direct-to-consumer channel, which increased 52 percent over last year, and continued global wholesale market share gains, particularly among international regions as unit growth outpaced domestic, Powers shared. “Fiscal year-to-date global Hoka revenue has increased 54 percent versus last year, reflecting strength across the brand’s ecosystem of access points as domestic, international, wholesale and direct-to-consumer continue to drive impressive growth.”
Powers said Hoka brand U.S. YTD search interest increased 74 percent over the prior year, according to Google trends. New consumers visiting the European Hoka website during Q3 increased 88 percent over last year.
Teva brand net sales for the third quarter increased 31.4 percent to $20.6 million, compared to $15.7 million for the comp period in the prior year.
Sanuk brand net sales for the third quarter decreased 13.4% to $6.1 million, compared to $7.0 million in the year-ago period.
Other brands, primarily composed of Koolaburra, net sales for the third quarter decreased 16.6 percent to $30.6 million, compared to $36.7 million in the comparable year-ago period.
Gross margins for the fiscal third quarter were down 470 basis points to 52.3 percent of sales 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 air freight,” said company CFO Steve Fasching. “The increased 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 $$327.8 million, up 15 percent from the prior year’s $285.2 million. Increased spend was said to be primarily driven by greater marketing expense to “increase localized content highlight new categories and fuel brand heat globally” and higher warehouse expenses.”
Diluted EPS of $8.42 per share came in above Wall Street’s consensus estimate of $8.19 but was down 57 cents per share from the year-ago period. The decline was said to be 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 Hoka and Ugg and benefits from a lower tax rate and share count. Sales of $1.188 billion were in line with Wall Street’s average estimate of $1.18 billion.
DECK ended December 2021 with $998 million in cash and equivalents. Inventory, including in-transit, was $551 million, up 80 percent from $305 million at the same time in the prior year, with the large majority of that increase still in transit and delayed due to port congestion.
“The most material challenge facing our business continues to be prolonged transit times for items produced overseas to reach our warehouses,” Fasching shared on the conference call. “This has led to a much higher proportion of inventory classified as in-transit. At September quarter-end, we noted that approximately 45 percent of inventory was in-transit, compared to roughly 20 percent in the prior year at the same point in time. As of December 31, we have not seen improvement as approximately 50 percent of our inventory remained in transit, which compares to roughly 25 percent in the prior year at 12/31. 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 emphasis on receiving product into the country of sale at the expense of inventory efficiencies in the short term. We will continue to utilize airfreight where strategically necessary to import products and leapfrog port congestion to maintain share.”
DECK is now expecting sales in the range of $3.03 billion to $3.06 billion, representing growth of approximately 19 percent to 20 percent over fiscal year 2021, up from 18 to 20 percent growth forecast on the fiscal Q2 call. Gross margin is now expected to be at or slightly below 51.5 percent of sales. Included in this is the company’s annual spend on freight which is now projected to be $100 million over last year. SG&A is still expected to be approximately 34 percent of revenue, and DECK expects operating margin to land within the prior range at approximately 17.5 percent of revenue.
Deckers narrowed its prior earnings per share expectation to a range of $14.50 to $15.15 for full fiscal year 2022.
Photo courtesy Ugg
