Earnings Call: Q2 2021

Oct 29, 2020

Good afternoon, and thank you for standing by. Welcome to the Deckers Brands Second Quarter Fiscal 2021 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. I would like to remind everyone that this conference call is being recorded. I'd now like to turn the conference over to Erin Koller, VP of Investor Relations and Corporate Planning. Ms. Koller, please go ahead. 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 the impact of COVID-nineteen on our business and operations, business partners and industry changes in consumer behavior in the retail environment strength of our brands and demand for our products changes to our product allocation, distribution and inventory management strategies changes to our marketing plans and strategies investments in our business our anticipated revenues brand performance product mix gross margins expenses and liquidity position and our potential repurchase of shares. 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 and 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 ks 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. With that, I'll now turn it over to Dave. Thanks, Erin. Good afternoon, everyone, and thank you for joining the call. On behalf of Deckers, I hope everyone is doing well and staying safe in this unprecedented time. Today, we will walk through an exceptional second quarter performance for the Deckers organization and highlight continued considerations related to the uncertain environment created by the COVID-nineteen pandemic. Amidst rapidly evolving marketplace conditions, Deckers delivered a record second quarter as revenue increased by 15% versus last year to $624,000,000 gross margin increased by 80 basis points to 51.2 percent and we delivered earnings per share of 3 point 58 Success in the quarter was driven by compelling and innovative product launches, our powerful e commerce and digital marketing engines that drove higher awareness and customer acquisition, optimization and redeployment of marketing spend that featured an authentic approach to storytelling, a clean and well managed marketplace that allowed for strategic account partnerships to amplify special product releases and the ability of our supply chain to pivot resources and navigate challenges. While the COVID-nineteen outbreak put a spotlight in our brands due to their lifestyle resonance, these results more importantly highlight the strength of our brands and the positive impacts we have experienced from the successful execution of our strategy over the past few years. As a reminder, the key elements of our strategy include generating greater awareness in HOKA ONE ONE to accelerate customer adoption globally, which was demonstrated by a 60% increase in brand revenue during the first half, driving DTC customer acquisition across all 5 of our brands with product and marketing tailored to the 18 to 34 year old demographic, highlighted by 182% increase in these customers year to date in the U. S. Continuing to build UGG brand heat through diversification of product that resonates with target consumers, leading to low levels of promotional activity while selling a more balanced product assortment and maintaining a disciplined approach to financial management even as we continue to invest in this strategy. The successful implementation of this strategy has led to the strong operating model and powerful brand portfolio we have today. With brands and products that are resonating with a larger and more diverse audience, we're experiencing high conversion rates and strong selling at full retail price, which will set the stage for future growth. Our in demand brands, omni channel capabilities and strategic expense management combined with exceptional organizational execution drove another successful quarter for Deckers. I'd like to share my appreciation to our employees for their dedication and consistency in delivering results in these challenging times. I'll now walk through the brand highlights from the quarter starting with the Fashion Lifestyle Group. The Fashion Lifestyle Group consists of the UGG and Koolaburra brands. Global UGG performance was driven by momentum behind a healthier and more balanced product assortment. Historically, the Q2 had been driven by selling in classic UGG product to wholesale accounts. With the excitement the brand has built around fluff, men's and kids product, UGG is succeeding beyond core product with both sell in and high full price sell through at wholesale and DTC. Fluff is a paramount example of the progress UGG is making to attract a diverse set of consumers with a broad array of product options. The Fluff Yeah remained the brand's top selling style from both the total pairs perspective as well as in terms of wholesale sell through. But the UGG team has also done a fantastic job building around the fluff yeah with complementary product that is providing incremental growth. New introductions during the quarter included the disco slide and fluffita which were both among the top 10 styles purchased by customers aged 18 to 34 years old. UGG is having tremendous success attracting new younger consumers. While fluff product may have been the primary attraction to the brand for 18 to 34 year olds, we're excited by how many of these customers who bought fluff also purchased the recently launched Classic Clear Mini. Since its release, over 60% of the Classic Clear Mini purchases online have been made by 18 to 34 year olds. This multi category purchase activity from younger consumers speaks well to the brand's ability to capture share of closet with fashion minded consumers. Helping to amplify these new product introductions with their intended audience, the UGG DDC team has collaborated with key wholesale partners to develop strategic launch plans for special products. During the quarter, these included teaming up exclusively with the Victoria's Secret PINK ambassador program to release the Plafida and launching the UGG brand's first ever ready to wear apparel collection in partnership with Nordstrom. Ready to wear, which we sometimes refer to as RTW, is the UGG brand's 1st apparel expansion beyond loungewear and into streetwear fashion. The RTW collection features cozy fleece, sherpa, faux fur and shearling wardrobe items, Highlighting the strength of our brand, demand for our products and quality of our partnerships, Nordstrom featured the RTW collection on their website's landing page, which was the first time UGG earned that designation outside of the footwear category. In addition, our ready to wear and retail teams have worked closely with Nordstrom to create a specialized shop in shop concept to feature the collection at both Nordstrom's New York City flagship in December as well as our own in New York City flagship which opens on November 19th. While ready to wear is not expected to drive significant revenue volume this year, sell through has been impressive and we're encouraged to see cross category purchasing of ready to wear and footwear products. Given the positive response from primarily younger consumers, we feel this speaks well to the long term lifestyle opportunity for UGG and our teams are already working to expand ready to wear with additional products and partners. Continuing the theme of UGG diversification and cross category purchasing, I'd highlight that men's and kids product contributed to the majority of the brand's incremental dollar growth in the quarter. Men's has had a strong start to the fall season. Newmel sell through was up over 150% versus last year and heritage slipper styles such as the Ascot, Tasman and Scuff remain top sellers. With the success of the fluff and the increased fashionability of the slipper category, UGG is releasing a men's specific version of fluff very soon, so be on the lookout for that. As mentioned on our Q1 call, the UGG Kids business is benefiting from the successful takedown product in both women's and men's. The new Mel, Fluffy Ass Slide and the Classic Clear Mini were all part of the top 5 kids styles in the quarter and we'll look to further capitalize on this trend during holiday. From a regional standpoint, we continue to see bifurcation between the U. S. And international regions. Within the U. S, on brand heat is reaching new highs as the brand has increased customer acquisition by 187% and customer retention by 155% versus last year with the majority of the growth coming from younger customers. In fact, 18 to 34 year olds represented 40% of online purchasers in the U. S. During the quarter, as compared to under 30% last year. Complementing the UGG brand's direct to consumer success, our wholesale partners are also experiencing record levels of demand and product sell through rates, which may lead to some scarcity in the Q3 as reduced inventory levels are consumed. Internationally, as we have mentioned in previous calls, UGG remains in the midst of a multiyear reset in EMEA and the brand is also in the early stages of localizing marketing content for the Asia Pacific region. In Europe, we're seeing positive signs where the brand is beginning to experience adoption of fluff product in addition to some small growth within men's and kids footwear. We are also intentionally reducing the amount of core classic product in the region, which remains a strategic headwind. These are important shifts as we work to rebuild brand heat and diversify the European region away from core product and build a healthier product mix akin to the successful transition we have made in the U. S. Beyond building a more balanced assortment, UGG is working to amplify the EMEA region's business online. To help drive digital conversion in EMEA, we recently implemented our Global E project, which improves customer access and ease of use by offering additional languages, currency and local payment types. The launch of Global E combined with the introduction of UGG Rewards in Europe is already helping attract new customers as UGG experienced 135% increase in customer acquisition during the Q2. In the Asia Pacific region, we've made strides by partnering with top tier local celebrity, Xiaodong Yu, who carries fashion credibility with a fan base primarily aged 20 to 30 years old. We've also developed a market relevant product collaboration with designer Fengshan Wang famous for her deconstructive approach as featured in Vogue and GQ. These initiatives are aimed at improving brand perception with Chinese consumers and bringing attention to new products. We're encouraged by the region's positive reception to new products like the Classic Clear, Flafida and Disco Slide, but there is still plenty of work to be done to build brand heat. While optimistic about some early indicators in the UGG Brands international business, revenue declined as expected for the first half of fiscal twenty twenty one, primarily due to efforts to reduce core product in the marketplace. While we don't anticipate meaningful improvement during this year of transition, UGG is making important progress in building a new foundation of diversified product acceptance, localized market relevance and strategic partnerships all designed to build a healthier brand with the ability to deliver growth over the long term. The UGG brand's domestic success is built on this model of fashion credibility through authentic collaborations, social influencers and PR seating and we believe this approach will translate well to our international markets. First half performance gives us the confidence that we're on the right path of exporting this strategy and building towards next year and beyond. Moving to Koolaburra, performance in the Q1 resulted from increased market share with top wholesale partners as well as improved category diversification through the expansion of men's and kids product. Last year, Koolaburra established itself as the top brand in the sub $100 category in which it competes within the family value channel And we'll look to maintain that position by building incremental market share this holiday season. Though footwear remains the primary focus, Koolaburra continues to expand its lifestyle appeal. This fall, the brand has partnered with Kohl's and QVC to develop a licensed loungewear collection, which comes on the heels of last year's successful collection of home license product. Both UGG and Koolaburra are well positioned to drive demand with their respective customer bases during this holiday season. However, I would like to remind everyone that we adjusted certain inventory buys at the outset of this year to mitigate the effects of COVID-nineteen in our business and this will limit the upside for both UGG and Koolaburra this holiday. However, if either brand fails to capture incremental upside due to these inventory constraints, we expect this will provide a clean marketplace for fiscal 2022. Shifting to the Performance Lifestyle Group, which is comprised of HOKA, Teva and Sanuk. Starting with HOKA, performance was driven by increased adoption of our products through greater brand and product awareness combined with compelling product refreshes and a fast replenishment cycle. Among Deckers investments over the past few years, broadening the HOKA brand's appeal beyond core runners has been a primary focus. Through market leading innovation, the HOKA team has refined products and expanded categories to attract a larger audience while also maintaining the brand's authentic performance DNA. During the quarter, HOKA launched updates to several key franchises, each infused with bold innovation and design upgrades, including the Clifton 7, Clifton Edge, Rincon 2 and the Bondi 7. Regarding the Clifton franchise, these styles have received considerable positive PR, which included features in Vogue, Gear Patrol, GQ and Salves 2020 certified sneakers award. For the Rincon originally introduced in July of 2019, the style has quickly become a top five seller for HOKA. The second edition of the Rincon has been so well received that it recently won Runner's World Best Value Award in their autumn winter 2020 shoe guide. And lastly, in terms of notable product refreshes, the Bondi 7 hits shelves in September and features the brand's most inclusive size range, helping to expand the addressable consumer base for HOKA. Since its release online, the Bondi 7 has been the HOKA brand's top selling style. Propelled by these product updates and innovations, HOKA domestic wholesale returned to deliver meaningful second quarter growth after the Q1 was disrupted by pandemic induced store closures. As mentioned on our Q1 call, HOKA delayed certain product launches to allow wholesalers to move through existing product, which provided an extra benefit to the brand's 2nd quarter wholesale revenue growth. According to the NPD Group's retail tracking service, HOKA was able to both grow dollar volume and increase market share from 16.8% in August 2019 to 20.5% in August 2020, even though overall dollar sales of adult running shoes in the U. S. Run specialty channel declined in August 2020 as compared to last year. The premium service atmosphere of run specialty stores remains an important acquisition vehicle for the HOKA brand, especially when considering the higher conversion rates experienced when customers try on our products. Globally, HOKA customer acquisition and retention online increased 81% 92% respectively as compared to last year even though most of the brand's wholesale doors were opened during the quarter. Part of these increases were due to the HOKA marketing team's efforts to optimize digital media targeting to acquire 18 to 34 year old consumers. By strategically prioritizing this audience, HOKA experienced a 124% increase of consumers aged 18 to 34, led by recently released styles such as the Clifton 7, Clifton Edge and Rincon 2. Importantly, HOKA is driving direct to consumer growth across the globe. While still very small as compared to the U. S, International HOKA DTC has increased more than 150% in the first half of this year. Growing the brand's global online business is especially important as the inability to hold in person events persists. We're dedicating marketing spend to build the HOKA audience online and stay relevant with existing consumers through compelling product innovation. As we said in our Q1 earnings call, the $500,000,000 milestone for HOKA is much closer than we previously anticipated. And with the brand heat and demand we're experiencing right now, HOKA has potential to reach $500,000,000 by fiscal year end. The rapid acceleration of HOKA reaffirms our confidence in the brand's aspirations to eclipse the $1,000,000,000 mark over the longer term. Turning to Teva, growth in the brand was fueled by a 78% increase in acquired customers online. Teva is turning out to be the go to brand for the modern outdoor consumer highlighted by the brand's founding roots in the Grand Canyon. Year to date through September, Teva maintained its position as the top outdoor water sandal brand in the U. S. In terms of market share, increasing market share over the last year in each of the past 9 months according to the NPD Group's retail tracking service. Younger consumers have been the driving force behind this growth in Teva as the brand has experienced a 76% year over year increase in purchasers aged 18 to 34 years old, which was already the brand's highest indexing age bracket. Looking to fall, Teva is focused on capturing continued wallet share from this demographic through the brand's expanded hike and camping collections. Teva is already experiencing a surge in demand for the brand's Ember franchise, both online and with key wholesale partners such as REI, where product will be featured across all doors in their fleet. For Sanuk, brand performance was hurt by a soft department store channel. However, we were encouraged by the recovery within serve specialty as coastal towns saw an increased outdoor participation. Importantly, Sanuk posted a 2nd consecutive quarter of robust direct to consumer growth, which was helped by a 40% increase in customer acquisition online. We are excited to receive feedback from the brand's online audience as Sanuk will be introducing new product innovation in the coming months. With respect to channel performance in the Q2, all 5 of our brands experienced exceptional growth online, driving our mix of DTC revenue to increase from 18% last year to 28% this year. This is despite the significant improvements in our wholesale business and inclusive of the recovery efforts within our owned retail stores as compared to the disruption experienced in the Q1. From a comparable sales perspective, direct to consumer increased 86% versus last year. Approximately 95% of our owned retail stores were open for the entire Q2 and as of this week all stores are open. In total, global direct to consumer revenue increased 74% versus last year's Q2. Performance was driven by continued customer acquisition online and a sequential improvement in retail performance as compared to the Q1. Global wholesale revenue in the Q2 increased 2% as compared to last year. Growth in the quarter was primarily driven by HOKA, but mostly offset by a decline in UGG. The decline in UGG wholesale revenue differs from a regional standpoint. International UGG wholesale revenue declined due to the ongoing marketplace initiatives previously mentioned, while domestic UGG wholesale revenue decreased as both pre book orders were conservatively adjusted at the height of the pandemic and UGG has successfully shifted open to buy with retailers toward lower priced products such as slippers, fluff and kids footwear. The UGG wholesale revenue decline in the Q2 was somewhat tempered by our global effort to shift Q3 shipments forward, allowing our distribution center teams to focus on DTC fulfillment. To summarize, we are extremely pleased with our brand's performance and operational execution in the Q2. With the demand we're experiencing in our brands, we are anticipating operational challenges related to DC capacity, inventory timing and availability, as well as 3rd party shipping logistics that will limit the upside of our brands in the Q3. Though less than ideal circumstances, I'm confident in our team's resilience and ability to manage the effects in our business while protecting the sanctity of our strong brands. I'll now hand the call over to Steve to provide more details in our Q2 financial performance as well as some additional thoughts on managing the balance of fiscal 2021. Steve? Thanks, Dave, and good afternoon, everyone. Looking back at the past 6 months, we are proud of how our business has performed over the opening half of our fiscal year. In the midst of a global pandemic, while consumer behaviors are rapidly shifting with changing lifestyles, our brands and product offering have been placed in a unique position. And as demonstrated by our results, our product proposition is resonating with consumers helping to drive an exceptional quarter. In particular, UGG has benefited from consumers working and learning from home as the brand has been known to provide consumers with a feeling of comfort and security. And at the same time, HOKA benefited from its increasing awareness and positioning within the expanding active category. These trends help drive attention to the work our brands are doing and created awareness of our innovative line of products. While much of the current environment remains uncertain, we continue to focus on delivering great products that amplify our brands and meet consumer demands. Now for more detail on our Q2 results. Revenue in the Q2 was $623,500,000 up 15% versus the prior year. Performance as compared to last year was primarily driven by global HOKA growth of 83%, which experienced balanced gains across all regions and channels, but also benefited from Q1 product launches that were delayed to the Q2. And global UGG growth, which was up 3% versus the prior year to $415,000,000 This increase for the quarter was driven by robust global direct to consumer growth of 69% as well as approximately 25,000,000 to 30,000,000 dollars of earlier global shipment of product to wholesale and distributor accounts as we work to decrease some of the logistical load on Q3. Although as expected, the overall wholesale UGG business experienced lower revenue for the quarter versus last year as many wholesale partners planned more cautiously this year due to uncertainty at the onset of the pandemic as well as the impact of our international reset. Gross margins in the 2nd quarter were up 80 basis points over last year to 51.2%. Gross margins increased due to favorable channel mix as DTC increased as a proportion to the total business, favorable brand mix with the sizable increase in HOKA volume and benefits from favorable exchange rates. SG and A dollar spend was $190,400,000 up 8% from last year's $175,900,000 The increase was primarily driven by higher marketing and warehouse costs that were partially offset by savings from travel and retail expenses. This all resulted in an earnings per share of $3.58 which compares to $2.71 in last year's 2nd quarter. The $0.87 improvement versus last year was primarily driven by a higher proportion of DTC and HOKA business with offsets from lower UGG wholesale revenue and greater marketing spend and warehouse costs. Our balance sheet remains strong and as of September 30, cash and equivalents were $626,000,000 up from $178,000,000 at September 30 last year. Inventory was down 13% to $484,000,000 from $559,000,000 at the same time last year. And we had $9,000,000 in short term borrowing under our existing credit line as compared to $13,000,000 last year. Our existing credit lines have an available balance of $463,000,000 And during the quarter, we did not repurchase any shares. During this period, we historically provide an update on our sheepskin pricing. We continue to see stable pricing in the sheepskin market and we expect no change in our sheepskin costs for fiscal 2022. Please note this does not constitute gross margin guidance for next year as our sheepskin costs are only one component of our gross margins. As we've now completed the first half of fiscal twenty twenty one, we remain disciplined in our approach to planning the second half of the year as we are aware of the unique circumstances surrounding the upcoming holiday season. We are mindful of shipping constraints during the upcoming peak, including not only our own operations, but also the operations of third party shipping and logistics services that we utilize. The logistics infrastructure, both internal and external, will continue to be tested by current challenges paired with unknown pandemic developments, which could be significantly impacted by a second wave of the disease or any impacts from government orders or restrictions. While remaining vigilant, we will tightly manage the business and drive opportunities where we see potential for success, all with our primary focus on the long term health of our business and a continuation of driving success through our strong brands and innovative product offering. Looking to the back half of fiscal twenty twenty one, we're conscious of the historical size and relevance that our Q3 represents to full year revenue and earnings. In a typical year, the 3 months representing our Q3 equates to more revenue than we've recognized over the 1st 6 months. This dynamic combined with the extraordinary circumstances of the pandemic place additional pressure on our Q3 this year and may lead to reaching capacity thresholds that have yet to be experienced year to date. These capacity thresholds will be tested at our retail stores given that the October through December in store purchase volume typically represents 2 to 3 times the volume of any other 3 month period. Additionally, while we are comfortable with current inventory levels, in a year where we tempered inventory buys at the outset to reduce risk, we may see demand outpace supply with certain product. In these cases, we will be challenged with meeting the in season demand, but at the same time, it will continue to drive brand heat, encourage full price selling and result in a clean marketplace for the Q4 and beyond. With all that said and given the continued uncertainty caused by the COVID-nineteen pandemic, we will once again not be providing specific guidance for fiscal year 2021 at this time. However, I will update some of the major themes of our business. For context, we observed complex pandemic impacts in the first half of the year, including some tailwinds from the acceleration of e commerce, brand heat and attention resulting from changing consumer trends, extended consumer adoption of categories providing the unique comfort of UGG and heightened consumer awareness of HOKA. While we anticipate that some of these trends may continue to provide opportunities, they may be dampened by the headwinds yet to be experienced that are particularly relevant during our peak season in the back half of the year, specifically pressure from shipping constraints with 3rd party providers, higher costs associated with our own warehouse operations in the current environment, product scarcity on key styles that are selling faster than anticipated and increased marketing costs to capitalize on the momentum of our brands and stay top of mind with consumers. With these considerations in mind, we are approaching the back half of fiscal twenty twenty one with the possibility that UGG revenue may fall below last year levels as the brand is up against potential capacity constraints, some earlier shipments into Q2, retail traffic pressure and continued work with our international business reset. And as Dave mentioned, we continue to see growth with HOKA, but at a lower rate than experienced in the first half, yet on the path to $500,000,000 And we anticipate higher expenses resulting from marketing spend to keep our brands top of mind, warehouse costs for safety measures and higher wages and increased IT expenses as we build out appropriate support systems for our accelerating e commerce platform. Before I hand the call back to Dave, I would like to say how pleased we are with the results of our first half as it gives us confidence that the organization can manage through the current near term challenges while remaining committed to our long term vision. Our brands are in a great place, the company is well positioned, and we are excited about the opportunities that lie ahead. Thanks, everyone. And now I'll turn the call back to Dave for his closing remarks. Thanks, Steve. As I reflect on a unique first half, I'm proud of our organization's collaborative efforts to prioritize the consumer and deliver results. Our brand teams have done an excellent job delivering compelling and innovative product. Our omni channel organization has been the engine driving product messaging, executing sales and providing analytics to inform future brand success. But paramount to the first half success this year has been our operations teams with heavy lifting being done by our product development teams, distribution center employees, customer service specialists and all other individuals working throughout our supply chain. A huge thank you to every one of our employees for their continued execution of our strategies during these very challenging times. And along with performance, it is our organization's belief that we have a responsibility to continue to do business in the right way and Deckers continues to drive forward on ESG initiatives. I'm pleased to report that we've recently been recognized by Investors Business Daily as the 15th ranked company in their top 50 best ESG Companies list for 2020. This is an improvement from our number 20 ranking last year and I note that we are the sole footwear or apparel company included in the top 50. To that end, I'm excited to share that our Creating Change FY 2020 Annual Corporate Responsibility Report will be released tomorrow highlighting the tremendous progress made by our global organization in FY 2020. The report will be posted on our website and I encourage you to check it out. On that note and in the spirit of making a positive impact, earlier this month Deckers held its first ever Art of Kindness Week, which was an organized effort to encourage employees across the globe to give back through volunteerism. Collectively, I'm proud to report that our teams contributed more than 2,000 hours to assist over 200 organizations, ultimately reaching many individuals who need help in these trying times. To remain focused on these types of efforts in the midst of a pandemic while driving business growth is a testament to Deckers' values and approach. It is these values exemplified by our dedicated employees and top performing brands that just yesterday earned Deckers the honor of being named Footwear News Company of the Year for 2020. I'd like to thank and congratulate our employees on this well deserved achievement. In closing, I have a high degree of confidence in our strategy, portfolio of brands and top tier operating model to navigate through these short term challenges while also investing in our digital transformation to support growth over the long term. Thank you to our shareholders for your continued support. With that, I'll turn the call back over to the operator for Q and A. Operator? Thank you. We will now begin the question and answer session. The first question today comes from Camilo Lyon with BTIG. Please go ahead. Thanks. Good afternoon, guys, and great job on the execution. Good morning, Camilo. I wanted to first ask about your relative inventory position. I think Steve you said you feel comfortable with your inventory, but demand trends are could exceed supply. And you're noting that as a cautionary point to watch out for. I'm wondering, what category specifically you're anticipating being under inventoried in? And do you have the ability or have you tried shifting purchasing behavior or intent to comparable categories or SKUs that are in better stock are in a better stock position? Sure, Camilo. I'll go first and then maybe Dave can jump in. Absolutely, kind of what you said, we are taking a look at. So with inventory down 13%, we are comfortable with where we have inventory. As I said, at the onset of the pandemic, we did make some strategic reductions in styles. What we've seen really over the course of the last 6 months is an acceleration on certain styles, specifically kind of slipper sandal categories. We've done very well. And as a result of that, we have run short. Now in the time since then, we have looked to bring more inventory in, and we're in the process of doing that. So we intend to bring more inventory in this quarter as well as Q4 that will help kind of fill out some of those shortages on styles, colors, sizes. But if there's disruption that will create some challenges logistically. So we're doing a lot to overcome that. We're bringing things in kind of as quickly as we can with those identified styles. And where we may be short, we are steering customers to styles that we have more in stock on. So all of the above, right? We want to take advantage of the brand heat that we have going, the consumer demand that's out there for these styles. We want to use that then as an opportunity where we have scarcity to push them into other products that we do have in style. Yes, that's exactly right. And we're seeing the consumer shift to other products in other categories. But generally speaking, whether it's slippers, classics, fashion boots, winter boots, we're seeing strong sell through, particularly in DTC, but also at wholesale of all the categories, including ready to wear. So the demand for the brand at a high level remains very strong, as you've seen the accelerated interest over the quarter. Younger consumers are adopting the brand at new levels. We've increased our rate of 30 18 to 34 year olds way over 180% for the quarter. And we're chasing the inventory where we can. So we feel confident that if there's no logistics disruptions, we'll be in good place. I think it's a healthy place for our brand to be in this chase mode. And while we're focused on delivering Q3, we're really focused on the long term health of the brand and the setup that this demand and healthy marketplace means for us over the long term. We're just seeing a lot of potential right now. That's great. Just two more follow ups, please. Steve, you mentioned last quarter that you were anticipating cancellation to outpace reorders. Is that still the case? And then on a longer term basis, Dave, maybe would love your insights into this. You're looking to reach at least mid teens, probably 15%, maybe a little bit above 15% EBIT margin this year, very strong operating metrics there. Clearly, you've taken the brand to the next level with a new demographic coming in. Where do you see the long term margin opportunity? Can this be a high teens or low 20s business over time? I'll go so this is Steve. I'll go first. Really kind of as we think about where we're at on the inventory and cancellations, it's why we're not giving guidance, right? We don't know what's going to happen kind of at wholesale. If everything holds up, we won't have the cancellation issue. If things get more challenging from a logistics standpoint, some retail is closed, there may be cancellation. So that's really what we want to see kind of over the course of the next couple of weeks. I think it's too early to tell and kind of why we're holding off on guidance. Yes, yes, exactly. To your question on kind of longer term, we're looking at this right now. We just had a conversation with the Board a few weeks ago. I guess the best way to think about it is we're committed and we've proven that over the last 3 plus years to this mid teens operating margin. But there is going to have to be some investment in the next coming 1 to 2 years to be able to take advantage of the opportunities that we're now seeing. Our long term strategy through COVID has actually probably been accelerated with the shift to e commerce, younger consumers coming in, the increased marketing spend. But we're going to need to invest in further capabilities to optimize that e commerce engine even more than we already have, to provide better data and analytics capabilities, systems improvements, and just continuing to fuel the growth of these brands through marketing. Our marketing is paying off tremendously right now and we increased our marketing spend over the past quarter by 30%. So this is one of those situations where the engine is firing on all cylinders, but we need to keep it going. So, I would say you can count on us to deliver on mid tier operating margins, whether we get up above 16%, 17%, 18%. The opportunity is there, but it all depends on how fast we're going to have to invest in the mid short to mid turn to be able to keep the top line going at what we're shooting for is high single digits, double digit percent growth over the next few years. Got it. Sounds good. Good luck in the holiday. Take care. Thanks, Camille. Thanks, Camille. The next question comes from Paul Lejuez with Citi Research. Please go ahead. Hey, thanks, guys. Curious if you're already seeing some of these constraints happening in your business or have you been able to manage through them this quarter thus far? And then I guess I'm kind of also curious on the marketing side, does it make sense to spend as much marketing as you are given your concerns about potentially not being able to meet demand? Do you risk perhaps disappointing some customers if you can in fact meet that demand? Thanks. Yes. I would say so far, the teams have done an incredible job, which I referenced in the script on managing our distribution and our logistics to date. We've had to put in place social distancing measures. We've had to pay more to employees for hazard pay, etcetera. And the recruiting has been a challenge. So they've done an incredible job working through this and working with the order book and the sales team to balance deliveries. So far we haven't seen major disruptions, but the level of put through that we're going through right now is nothing compared to what's coming in the next couple of months. And so that's really when the capacity of taking inbound deliveries that are in some cases delayed because of logistics from Asia Pacific into the DC and at the same time turning around and putting product into the marketplace. That's where the pinch could come in the next couple of months and that's what we're really mindful of and planning for. So haven't seen major disruptions yet within our control. We have seen them in logistics, but we're feeling confident in our viability to manage through it. But as Steve said, there's still so much uncertainty coming up ahead of us. With regards to kind of marketing, we are very surgical in our marketing now. We have our center of excellence on digital marketing and spend around the world, and we navigate based off return on spend by brand channel and region. And so we're cautious of the fact that where there may be constraints on upside due to marketing and we're putting our marketing dollars in places where we know we'll get the payoffs such as HOKA to continue to that grow that brand and you saw the 80 plus percent growth in Q2. Different markets, we're releasing some money to continue to assist international in the transition of the UGG brand And just we're testing at the same time. So the marketing is paying off. We're adapting a younger consumer. We're getting multiple purchases from a younger consumer within the quarter. Normally, we wouldn't see purchases for UGG products more than once a year, traditionally a classic style. But now we're getting people many consumers that bought the fluff earlier in Q2 came back and purchased the UGG Clear. So the marketing is paying off. It's driving overall brand and awareness and buzz about the brand. I don't have a lot of concerns about missing sales and wasting marketing spend. I think we're very efficient on that and very targeted. And so far, it seems to be working really well. Yes. And I think Paul just to add on that. I think the other thing on the constraints is really 3rd party logistics. So we are hearing from 3rd party freight companies logistics constraints and that's going to be really universal. So that is one thing we're keeping a close eye on. So one is kind of constraints within really what we control, but also what's outside of our control, and we are seeing signals around that. So that's something that we're going to watch carefully and look to find alternatives to work around some of those situations. Kind of on the marketing, just to add to what Dave said, where we are marketing to certain styles that may be low on inventory, there is an opportunity to shift some of that marketing. So to the first question to Camilo, I said, we can start to shift some of that marketing to product that we have in stock. So we have an opportunity to kind of move that in stock. And then I think the other important component is really our international reset. We can use money. So this is not just about domestic. It's about how we can accelerate some of our international reset and deploying some of that marketing money around kind of repositioning our brands and products and awareness in the international markets. Yes. And as we said in Q1 call and we'll continue to stay focused on, we want to take this opportunity to steal market share wherever we can. So we want to stay aggressive on marketing, continuing to drop innovative exciting products in the marketplace, bring in younger consumers, and we're going to have to continue to spend marketing dollars to do that. But it's really now about scaling the global opportunity based on the success that we're seeing in the domestic market. Got you. Understood. Can I just ask what percent of the ready to what percent of the UGG business is ready to wear? And same question for HOKA, what percent of the apparel? Yes. So ready to wear for UGG is less than 10%. It's probably high single digits right now. It's a small business right now, but this ready to wear launch for us was really a test, a proof of concept test, and the results have been phenomenal. The price points are perfect. The styling and the detailing is resonating with a younger consumer. And we launched it primarily, as you know, in DTC and with Nordstrom's and it was the first time Nordstrom's ever put us on their landing page for apparel. They're incredibly pleased with the sell through. We've had a lot of accounts calling, trying to get their hands on the product. So for us, what this means is there's just a lot of opportunity on this category the next 3 to 5 years. So now we're just another opportunity for us to invest in design and creative talent and go to market talent for that category. So small, but very exciting from a launch perspective. HOKA apparel is even smaller. That's really early stages of development there. We are working with some folks externally to bring in some more talent to ramp that up. But the $500,000,000 to $1,000,000,000 numbers that we have put out there, we don't believe those need an apparel business to hit those targets. So it would be incremental to that those kinds of numbers at this point. But early days of HOKA, it's less than probably 3% of total sales. Got it. Thank you. Good luck, guys. Great. Thank you. Thanks, Paul. The next question comes from Jonathan Komp with Baird. Please go ahead. Yes. Thank you. Just a follow-up on the all the commentary you've given on UGG, which is really helpful thinking about the Q3 and really the second half here. Are you saying, Steve, when you look at the scenarios and some of the planning, are you saying there's no scenarios where we're on completely flat or up for the period? Or just trying to gauge the degree of the constraints that are out there relative to potential scenarios? And did you call out any explicit costs that we should be thinking about for some of the logistic impacts? Yes. So John, again, we're not giving guidance. What I wanted to call really to attention is we're dealing we're kind of in the middle of a pandemic. We're dealing with constraints. And so we have seen growth in the first half. As I mentioned and mentioned on last call, we're looking and did successfully move some product in Q2 that would traditionally go in Q3. And so it really depends and again, this is again why we're not giving guidance is it depends on what happens. If it's a clean Q3, but given everything we're seeing, it's hard to see no disruption in Q3. That's how we're kind of looking at UGG and planning for it. So I just want to provide a little bit of caution as we think about it. There's been some shifting in product. We have because of the onset conservative cuts that we made in terms of inventory, we're up against some constraints on inventory. So we're going to do the best that we can, but it's going to be work and we're working against some external factors that we're going to have little control over. Yes. And the setup for Q4 and spring product looks promising as well, but it all depends on how we're able to get through Q3 before we get to that point. Okay. That's really helpful. And then maybe a broader question on HOKA. I know you've talked about this $1,000,000,000 plus aspiration for a while. Just thinking about at least that incremental $500,000,000 compared to this year, It's nearly a quarter of your total company sales today. Could you just talk through what are the margin implications of that given the mix shift that will drive towards HOKA even further over time? Yes, I'll go first. Yes. The what we've said historically in its channel compared to UGG, it is a little bit better. And so as the proportion of HOKA, the gross margin implications are that if we don't get into situations where we're having to discount again, we're dealing with a brand that is on fire, growing 80% a quarter, which is crazy, we can hold full price selling. So as long as we can do that, margins are by equivalent channel compared to UGGs slightly better. But at the same time then, we're also spending more on marketing. So as a brand that is still being discovered by many, we spend considerably more on developing HOKA and brand awareness and consumer awareness with that brand. So from a gross margin standpoint, as long as the brand is hot and continues to grow like it is and there is little promotion around that brand, it is incrementally positive. But at the same time, we're also investing considerably more in developing that brand and building that brand. Okay. That's really helpful. Thank you and good luck for holidays. All right. Thanks, John. The next question comes from Tom Nikic with Wells Fargo. Please go ahead. Hey, guys. Thanks for taking my question. You spoke a lot about capacity constraints, both internal and external. And it kind of seemed like for the most part, you were speaking in reference to UGG. Do these same constraints or anything like that apply to HOKA? And it would seem to get to $500,000,000 this year, you don't need the growth in the back half of the year for HOKA would be much slower than it was in the first half. So is there anything preventing you from far exceeding I know $500,000,000 is a big number. It's a big growth number. But I mean, it kind of seems like with the momentum in the brand and the growth rates that you've been seeing even in the midst of the pandemic that it could even be better than that? Yes, I think I'll jump in on that. Keep in mind that some of the deliveries in the business that we're intended to do in Q1 for HOKA ended up happening in Q2 because the wholesale being closed for most of the Q1, so hence the 80 plus percent growth. But from an internal perspective, we don't have a lot of constraints on HOKA. The inventory, we're chasing the inventory as fast as we can. We're in pretty good shape heading into the back half of the year in inventory in HOKA. And the demand is still there. It's really reliant more on kind of the macro environment and external factors for us. Got it. And just the Sorry, just the biggest challenge that we're facing is just the it's really the last 7 to 8 weeks of the quarter on UGG where DDC ramps up dramatically. And at the same time, we're inbounding product and shipping out to wholesalers. It's that period of time where that's where we're exercising caution here because there's so many different factors that could implement get in the way of that being successful. But that's an UGG dynamic, less so on HOKA. Understood. That's helpful. And on UGG, I know maybe this is a tough question to answer at the moment, but obviously there's been a lot of noise lately even pre COVID with the brand reset in Europe and stuff like that. When sort of everything's normal, when we're past COVID, when the international reset is done, like what kind of growth should UGG be generating? I mean, is this a mid single digit grower? Is it something better than that, something worse than that? I mean, I'm just kind of wondering like in a normal environment, like how should we think about UGG over the long term? Yes. It's a good question. I would say it's probably low single digits, under 5%, but healthy, sustainable, full price sales growth. And what's encouraging for me right now is to see, again, how many new young consumers have now adopted UGG into their consideration set and they're choosing to come to our website, they're looking for new product, they're buying from our websites more than once in a quarter across categories. We've even seen a healthy mix of consumers who bought footwear and ready to wear. We haven't seen that before. And so I think if you look at the success of the fluff franchise and the slippersandle hybrid phenomenon that we've created, there's still a lot of longevity in that trend. It's less about being inside and slippers and it's more about fashion. The amount of new consumers we have in our database and our ecosystem that we can now manage for and optimize the lifetime value of those consumers. The excitement that's happening in men's, we're launching fluff product for men's in the next couple of weeks with an exciting ambassador that you'll see shortly, the ready to wear opportunity. And if we can get international through their transformation and heading to positive territory again, you could see this as pretty healthy, sustainable long term growth. And we're optimistic about where the brand is. It's the healthiest and most exciting I've seen it since I've been here over 8 years. And so we feel good about the potential going forward. Great to hear. Thanks very much and best of luck this holiday season. Thank you. The next question comes from Jon Tanen with Cowen. Please go ahead. Yes, excellent. Thanks for taking my question and congrats on all the momentum. Thanks. Thanks, Jon. I wanted to ask you on the mix shift to DTC and HOKA, obviously drove tremendous gross margin expansion in the first half of the year and also drove a lot of SG and A leverage. The DTC and HOKA shift seemingly should continue into the back half of the year. How should we think about your margin structure in the back half relative to the performance you had in the first half, both on the gross margin and SG and A line? Yes, I'll take that one. Again, haven't given guidance, but I think the way to think about really kind of the back half is you start getting up against kind of bigger numbers. So Q1, Q2 are huge on a percentage basis because those tend to be kind of smaller quarters. And now as you get into really the back half, you're up against kind of bigger numbers. So the expansion that you saw in the first half is not necessarily indicative of what you'll see in the second half. Clearly, we're going to have similar impacts from the changing dynamic. The impact will not be as much as what you saw really in the first half. Yes. Makes sense. The strength of DTC upside from a percent growth perspective is more dramatic in UGG. HOKA is more just kind of holding steady as the trend that they've been on, but the UGG business from a DTC perspective is super, super strong. Got it. Certainly a lot of momentum. Maybe just one more follow-up would be when you think about that $1,000,000,000 run rate of sales for HOKA, what are you most excited about from a category level and geographic level to get you to give you that confidence in doubling that business? Well, I think it's obviously still founded in core authentic running and continuing to be a leader in that category. In some cases, we're seeing we're number 2, in some cases number 1 market share already. But the difference between us and the number 1 market shareholder, which tends to be Brooks, generally speaking, we could almost double our market share and still be neck and neck with Brooks. So there's still a lot of opportunity in the core run specialty channel. The two things that get me most excited are just the expansion to a broader set of consumers. So it's more consumers that aren't just buying it just for running, it's everyday athletics or lifestyle. And we're starting to see that broad base of consumers being attracted to the brand for the performance attributes that it provides. We still want to keep our distribution tight. We're focusing on our tight ecosystem of very selected wholesale partners, key accounts and then driving e commerce, so we can optimize that business for the long term. But I think the real unlock to the billion is continued acceleration of our EMEA business, particularly online. We've made quite a few investments over the last year to allow the e commerce business there to flourish and we're seeing positive results on that, but it's still small compared to the U. S. And then I think when you think beyond $1,000,000,000 it's really Asia Pacific and we're just getting started in China. Obviously, that's a massive opportunity for us, but we think we can get to that $1,000,000,000 with real strong growth continuing in the U. S. And accelerated growth in EMEA. And then beyond that is just even more upside once we get into those territories in Asia Pacific and newer categories. That's excellent. Congrats on all success. All right. Thanks, John. The last question today will come from Sam Poser with Susquehanna. Please go ahead. Thank you. I'm honored to be last. Guys, can you just some housekeeping and then I have some more detailed questions. Could you give us either the revenue or the revenue growth for wholesale by brand for DTC by brand for each brand. You gave UGG of whatever it was and but could you give the rest of them for modeling purposes please for the quarter? Yes, sure, Sam. So UGG wholesale for the quarter was $292,000,000 so $292,000,000 HOKA was $108,000,000 Teva was call it 18,000,000 Sanuk was 6, all else was, call it, 28, and then our DTC was 172. Okay, great. So I got a couple of questions other than that. I guess you've talked a lot about the transformation going on in EMEA and APAC. What I mean, as you see it today, what's the timetable for being sort of for being at a let's say, the beginning stage of how the U. S. Turn, when the U. S. Turn really kicked in, which would be a few year a couple of years ago? Yes, my sense, it's been obviously challenged because of the COVID situation, both in Europe and Asia Pacific, particularly China. That being said, we have seen some signs of promise with category adoption. So the phenomenon of the fluff franchise in the U. S. Hasn't really hit Europe or China yet, but in the last weeks of the quarter, we're starting to see some excitement around those categories, younger consumers, positive strong sell through of those categories, but also the brand. So the increased marketing, the focus on PR and collaborations, the new ambassador that we signed in China, those are all so far showing positive results. Not big enough to move the total country needle because we still have some scarcity work to do as far as resetting the Classics business. But people are starting to see the UGG brand as more fashion relevant brand than they have in the past. So I would say you'll start to see return to growth probably next fall in those markets, and give us an indication of where we can go from there. But I think the work that the teams are doing right now and the way we're shifting investments in our approach to be tailored to each of those markets is working well. The teams are doing a great job. And I think you'll start to see, like I said, that return to growth probably next fall into FY 2022 and beyond. Thanks. And then, you had talked earlier on previous calls about the test with HOKA you were doing with Dick's. Could you give us an update there and how they're managing it and what the plans may be? And then lastly and I've got others, but lastly, you talked about the New Flagship, I saw 58 Street close, where is this store going to be? Yes, I'm trying to remember what your first question was. Dick's, I'm sorry about that. Sorry about that. Yes, Dick's. Yes. So yes, the 11 store test has been going very well. They're very pleased. The sell through has been strong. We tested with them, I think it was like 3 or 4 years ago, a small test and the results were not good. It's a whole different ballgame now. So again, we're managing that relationship closely, pleased with the results and what they're selling. We're not looking to expand dramatically with those with that account just yet. Again, it's a very strategical and methodical approach as to how and if we go much bigger in Dick's, but so far the results are very promising. And down the road, we're also exploring opportunities with the Foot Locker banner as well, early and ongoing conversations there yet, but still really cautious about the timing of when we go into those new accounts. And then the New York store? Yes. So it's on Fifth Avenue. I don't have yes, we don't have the exact It's right across from the NBA store on Fifth Avenue. Tremendous location, highly visible, 2 floors, lots of windows, great foot traffic, both local and tourists going by there. It's our largest store ever, 2 floors and it's going to showcase all the ready to wear a new store design, be much more fashion focused than we have been in the past, lots of color and excitement. And then some great storytelling and experience for the brand with an elevated service model for omnichannel capabilities. We're testing a lot there. And then a new mobile POS system to go along with that. So there's a lot to be excited about. Obviously, the timing, we wish was better, but this will be a catalyst for the brand globally and we'll be looking to roll out the new store concept to key partners and other flagship locations as time permits over or the time is right over the next coming years. But there's great storytelling that we're going to be able to do and I'm excited for everybody listening and the consumer to go in and experience the ready to wear collection and a new look for the face of UGG. Thanks. Can I have one more? Yes. The opening date on that is November 19, Sam. Yes. Sorry. Yes. Thank you. Just to confirm, so your DTC UGG DTC business in Q4 is going to be hampered by is it hampered by store traffic or is it going to be hampered by product availability and the amount you can ship because of will it be capacity constraints in stores that can't be overcome by e commerce or is it what's going on in the distribution center or both? So when yes, just so I'm clear on that, Sam, when you said Q4, you mean our Q3 Q3, I'm sorry, Q3, Q3, Q4 than the December quarter. Yes. So it is yes, it is really more just about constraints. So one will be from a retail, how much traffic is allowed in stores, some of the mall based stores, what do the malls look like, can people get in. So that's going to be kind of the one constraint. And then I would say, as I mentioned before, just externally, it will be what shipping capacity looks like. So the more we can direct e commerce and the more we can capture early is beneficial, right? It helps us navigate, I think, some of the, what I'll say, our macro level constraints that are more out of our control. We're doing the best that we can kind of that's under our control, which is really about inventory management, bringing more product in this year than we did a year ago in a quarter where we have constraints as we have lower inventory going into Q3. So those are all the things that we're working with and trying to get to the consumer. The demand is there. They're showing up online. We're confident in our ability to kind of fulfill that if there are not constraints in place. But we know there's going to be some. So Yes. And I would say Go ahead, Pam. Go ahead. Do you think you can be up I mean, do you when you said UGG overall is unlikely to be up in the quarter, is that more of a wholesale issue or more of a direct to consumer issue? Or do you expect direct to be up just it can't be up as much as Q2 nearly as much as Q2 because of the low of those numbers? Yes. So it's more wholesale focused, just being able to get inventory through the pipeline and chasing inventory. DTC, we still think we'll be able to have show some growth there. We're up against big numbers last year. If you remember last year was a very strong quarter for us, particularly in DTC and stores. So that velocity is going to be hard to comp, but we're confident that DTC can continue to be strong. And the last thing I'll say before we end the call and all this is 15% growth in this environment is exceptional, but I can't stress how enough how hard it is and how hard people are working to shift. To be able to cover this kind of increased demand in our distribution centers and our online businesses and chase this inventory is really hard to do. And I give our teams a ton of credit to be able to do that. And we're heading into the biggest in some ways, the demand for our brands has never been stronger, but we're heading into the most uncertainty we've ever faced. And we have more demand on our website and are straining our systems than we've ever seen before. We're handling it extremely well so far. But like I said, when we get into these last few weeks of November into December and that pinch point for getting product to consumers, that's the area that we're really cautious about, because this is hard work and being able to shift this quickly with those kinds of shifts in consumer demand is a strain and we're handling it well, but that's where we're focusing on providing some cautions to. Thanks so much and continued success. Thanks, Sam. This concludes our question and answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.