Earnings Call: Q3 2019

Jan 31, 2019

I would like to remind everyone that this conference call is being recorded. And I'd now like to turn the call over to Erin Koehler, Senior Director, Investor Relations and Corporate Planning. Please go ahead. 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 facts are forward looking statements and include statements regarding our anticipated financial performance, including but not limited to our projected revenue, margins, expenses, earnings per share, cost savings and operating profit improvement as well as statements regarding our strategies for our products and brands. 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, 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 report 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, and good afternoon to everyone. Today, we are excited to share the results of our fiscal Q3. Our performance was well ahead of the guidance we provided last quarter and demonstrates the progress we continue to make on the strategies we laid out 2 years ago. We delivered sales of $874,000,000 compared to guidance of $805,000,000 to $825,000,000 and non GAAP earnings per share was $6.59 versus guidance of $5.10 to $5.25 For the past few quarters, we've been talking about the improvements we're making across the business, including bringing compelling product to market, implementing thoughtful and controlled distribution strategies, elevating and segmenting product offerings, growing our non UGG brands and improving gross margins and operating margins. These exceptional results underscore how well our teams have executed on each of these fronts. Importantly, the results go beyond just our UGG brand. While the Q3 has traditionally been viewed as an UGG quarter, we achieved impressive growth with our HOKA ONE, ONE and Koolaburra brand. These two brands significantly contributed to the growth of our business and further emphasized the progress the entire Deckers organization continues to make towards organically growing our brand portfolio. I'm incredibly proud of these accomplishments and very pleased to share our results. Now let's get into some of the details for the quarter. Starting with the results produced by the Fashion Lifestyle Group. UGG sales were $761,000,000 in the 3rd quarter, up 3.6% to last year and driving the majority of our upside to guidance. We communicated a strong global marketing campaign for the brand's 40th anniversary alongside a very compelling product line. Overall, placement of core product in U. S. Wholesale accounts was well received by consumers, and our strategic approach to product allocation and segmentation created high full price sell through rate. Along with the great selling as well as further improvement in our supply chain process, inventory levels significantly improved, and we are very pleased with how we exited the quarter. The revenue beat in the quarter was largely attributed to accelerated growth in our UGG men's business as well as non core styles in UGG women's, better full price selling in domestic wholesale as we control the distribution of our core classic, introduce select new points of distribution and one with consumers, which led to additional reorders, fewer cancellations and less promotional activity than we anticipated in our guidance improved performance in our domestic DTC channel with better than anticipated selling in both retail and e commerce Cold weather in October November aided in creating early demand with strong full price sell in and sell through and some early distributor shipments in Europe, which were originally planned for the Q4. This upside was partially offset by a challenging international environment with lower than anticipated sales in our APAC region, in particular as we saw weakness in the region within our DTC channel, which fell below expectations for the UGG brand and continued weakness in the European marketplace, which we believe is a result of region specific factors, including struggles in the U. K. As Brexit talks continue and recent labor strikes during the quarter. We foresee continued challenges in the economies of these regions, we will take this into account as we look towards next year. However, with the early success we have had with controlling the U. S. Wholesale marketplace through our allocation and segmentation strategy, we are exploring ways to implement this approach in other global markets to improving the selling and heat of the brand internationally. The evolution of our UGG product line is producing growth in key focus areas as planned. Specifically, UGG men's where we experienced significant gains with styles like the new male, which continues to capture market share with a younger consumer and the increasingly popular Tasman slipper, which more than doubled in volume versus prior year quarter. We are also seeing success of men's boots outside of the brand's core styling. We believe there is meaningful opportunity to reach a wider array of male consumers with broader wearing occasions as evidenced by performance of styles such as the Hannan and the Seaton. At the same time, several new women's styles also continued to gain traction with high demand for the Fluffy Ass Slide and the Nutra sneaker. Again, complementing our strong lineup of products during this year's fall season, we successfully executed our domestic wholesale core classic allocation and segmentation strategy. This resulted in an intentional shift of dynamic within the brand's revenue in the quarter. Specifically, the mix of product sales for the brand in the quarter resulted in men's increasing its penetration of brand sales rising to 15%, total women's classics moderating to about 48%, with core classics units sold into the marketplace below last year's level, women's non classics increasing as a percent of total brand sales, driven by success in new styles, including significant growth in the women's shoe category, which nearly doubled in volume versus the prior year. This shift in the UGG brand's revenue composition demonstrates that we are continuing to make progress and becoming less reliant on core classic styles, allowing us to showcase the breadth of what the brand can offer with success. Coming off another strong holiday season, we plan to fuel the UGG brand momentum through new product collaborations, increased social media presence and celebrity influencers. According to the NPD Group's retail tracking service, UGG was the number one women's U. S. Fashion footwear brand in the 3 months ending December 31, up 11% from last year and commanding 8% of the market. Additionally, in the same time period, UGG was the number 6 men's U. S. Fashion footwear brand, up 18% from year ago level. Performance in the UGG brand was also aided by favorable weather conditions, in particular in the U. S. With weather turning cold early in the season. These external variables sparked incremental opportunity, allowing us to sell product early in the quarter with high sell through rates at full price experienced in wholesale accounts as well as in our own DTC channel. These conditions improved reorders and minimized in season cancellations resulting in less promotional activity in past years and reducing the amount of inventory being sold through closeout avenues, with the combined impact of these items significantly lifting both our top line results and profitability. Koolaburra also made impressive strides in the quarter, performing above expectations and gaining significant market share in the family value channel. We saw success with the brand in existing accounts as well as new wholesale partners for the season with strong consumer demand and sell through. We are actively building the positioning of the brand in the marketplace for next year, and we are managing strategic placement with a clear vision of the brand's positioning. Now turning to the Performance Lifestyle Group. Within our Performance Lifestyle Group, the HOKA ONE, ONE brand generated standout results and made significant gains versus the prior year, growing nearly 80% in the quarter. While the Q3 has not traditionally been the largest quarter for the brand, HOKA exceeded expectations and delivered its biggest revenue quarter ever with $57,000,000 in sales for the period. This upside is flowing through to our updated full year projections, putting the brand at an estimated $220,000,000 for the full year fiscal 2019, representing over 40% growth versus fiscal year 2018. Not only did the brand surpass revenue expectations in the period, but it did so at a very profitable rate with gross margins coming in above prior forecast. This was mainly driven by strong full price selling at volumes above prior guidance. The Clifton and Bondi franchises continue to sell well in the run specialty channel where the brand once again increased market share, retaining the attention of the loyal runner as well as attracting the attention of new consumers. Product highlights aside from some of the larger volume core styles include the Gaviota, which has experienced fast growth, in particular gaining strength and popularity with our female consumer, focused on stability running and offering premium, support, rebound and durability continued growth with the popular Speedgoat trail running shoe and the Arahi, known for providing dynamic stability while staying true to the brand's offering of maximum cushion with minimal weight. Looking ahead, we are excited about the launch of new offerings in the brand Sky collection, which we're confident will show that HOKA can be relevant in the hiking category. Along with the continued strength of its core run specialty product, the brand has strong momentum to close out another successful year. Now moving to the performance of our DTC channel. Our global DTC business delivered $392,000,000 of revenue in the quarter, representing an increase of 2.6% versus the prior year with DTC comps up 1.4%. We experienced a strong start to the season, mainly in the U. S. With strong full price selling and minimal promotions throughout the holiday season. Additionally, we saw meaningful growth with our non UGG brands, specifically HOKA and Koolaburra. We captured the audience of new consumers in our e commerce channel as we continue to target a younger consumer by offering new ways to connect with our brands and purchase through their online experience. According to YouGov, UGG brand impression among 18 to 34 year old women reached an all time high in Q3. In the calendar year, 1,900,000 new consumers made purchases directly through our DTC channel across all of our brands for the first time. Overall, with these results being well above our prior guidance, I'm excited to see the business achieving some of our long term goals well ahead of schedule. We recognize that certain favorable dynamics that played a part in this past quarter's outcome may not always be attainable in future years. Nevertheless, I am proud of the team's Q3 fiscal 2019 execution as we were able to attack our seasonal strategies and capture excess demand in a controlled marketplace. With that, I'll now turn the call over to Steve to provide more details on the financials. Thanks, Dave, and good afternoon, everyone. As you have heard, our results for the quarter are exceptional. And now I will take you through them in greater detail and provide an updated outlook for the Q4 and our full year fiscal 2019. Please note, throughout this discussion, where I refer to non GAAP financial measures, I'm referring to results before taking into account restructuring charges and other amounts that our management believes are not core to our ongoing operating results. Also note, our non GAAP results are not adjusted for constant currency. A reconciliation between our reported GAAP results and the non GAAP results can be found in our earnings release that is posted on our website under the Investors tab. Now to our results for the Q3. As Dave mentioned, we achieved sales and profitability that was well ahead of our prior guidance, reaching a record Q3 result of $874,000,000 in revenue and $6.59 in non GAAP earnings per share for the period. Revenue was above our prior high guidance by $49,000,000 Contributing to the revenue beat, we saw success in our key areas of focus, including non core classic styles within UGG as well as strength in our HOKA and Koolaburra brand. Specifically, the incremental revenue volume above guidance was primarily driven by approximately $18,000,000 in UGG domestic wholesale with higher than expected sales in UGG men's and women's non core styles, including women's shoes. Dollars 15,000,000 from less promotional activity for the UGG brand, driving increased full price selling seen in the top line results as well as improved gross margin. Dollars 8,000,000 from HOKA as the brand continued to see rapid expansion of market share in the run specialty channel. Dollars 2,000,000 from Koolaburra as in season reorders were strong as well as some early European wholesale and distributor shipments originally planned for the Q4. These highlights of accelerated sales were partially offset by some weakness seen internationally within our DTC channel, as the regional economies within Europe and Asia continue to face macro headwinds. Revenue compared to last year was higher by $63,000,000 The increase to last year was driven by UGG up $26,000,000 from approximately $10,000,000 of planned wholesale orders that shifted out of Q4 and into Q3 related to earlier introduction dates of product this year, dollars 6,000,000 of earlier European wholesale and distributor orders as compared to a year ago and our expectation for the quarter and due to a change in online revenue recognition this year, dollars 12,000,000 that last year was deferred to Q4. HOKA was up $25,000,000 globally and higher domestic sales also contributed from our Koolaburra brand. Gross margins for the quarter was 53.8%, also significantly better than expected and up 160 basis points versus last year. The majority of this improved result was driven by a less promotional environment and fewer closeout sales, which in turn helped drive higher full price selling. In addition, we also benefited from our supply chain initiatives as we continue to implement improvements on our processes and deliver efficiencies. On expenses, our non GAAP SG and A was $228,000,000 up 3.4% to last year, but below implied guidance. The increase to last year was driven by an increase in variable sales expense related to the higher revenue in the quarter as well as the planned increase in marketing spend as compared to last year. And as we continue to deliver on our operating profit improvement plan, we achieved improvements in our SG and A profile. The combined impact of these results drove net income above guidance by $40,000,000 with major contributions coming from $12,000,000 from a less promotional environment than previously anticipated, dollars 8,000,000 from improved gross margins from continued supply chain improvement, dollars 7,000,000 of profit from higher sales driven by strong full price selling, increased reorders and fewer cancellations, dollars 3,000,000 from an improved tax rate, dollars 2,000,000 from earlier European shipment and the majority of the balance coming from operating expense efficiencies driven by overhead and back office support leverage. Non GAAP diluted earnings per share was $6.59 compared to $4.97 last year in our guidance range of $5.10 to $5.25 The beat to our high end guidance was driven by approximately $0.40 due to a less promotional environment, dollars 0.25 from additional supply chain improvements and higher margin, dollars 0.25 from incremental sales from higher reorders and fewer cancellations, dollars 0.25 driven by operating expense efficiencies in the quarter, dollars 0.14 from a favorable tax rate and reduced share count and $0.05 from early European wholesale and distributor shipment. The non GAAP adjustment in the quarter of $2,400,000 in operating expense was primarily due to the net impact of a one time legal credit. For the quarter, our tax rate was 20%. Now on to our balance sheet, which continues to remain strong at December 31. Cash and equivalents were $516,000,000 compared to $493,000,000 this time last year. This increase includes using $286,000,000 to repurchase shares over the past 12 months. Inventory was $342,000,000 down 14% compared to last year and short term borrowings of $600,000 was flat to last year. During the quarter, the company repurchased 249,000 shares of our common stock for a total of $27,000,000 As of December 31, 2018, the company had $89,000,000 remaining under its 400,000,000 share repurchase authorization. In light of our results and the confidence in our strategies to produce strong cash flow over time, the Board of Directors approved an increase of $261,000,000 to the company's stock repurchase authorization as of January 29, 2019. Combined with the previous outstanding amount of $89,000,000 this brings the company's total stock repurchase authorization up to $350,000,000 Now moving on to our outlook. For the Q4, we expect sales to be in the range of $360,000,000 to $374,000,000 and non GAAP EPS between breakeven to 0 point 1 $0 $0 The expected revenue range for the Q4 includes year over year impact, as we previously mentioned, related to the planned $10,000,000 of wholesale orders that shifted out of Q4 and into Q3, the $6,000,000 of early European wholesale and distributor orders that shipped in Q3 this year and the change in online revenue recognition this year. Hence, the expected reduction for the quarter compared to last year. In addition, we have planned for some incremental strategic marketing spend in the Q4 and see this as an opportunity to continue to build momentum and drive brand heat that supports our growth initiative. For fiscal year 2019, we are updating the financial guidance that we provided on the October call. We now expect sales to be in the range of $1,986,000,000 to $2,000,000,000 Our outlook at the brand level has been updated to include UGG sales are now expected to be roughly flat to last year, HOKA is now expected to be up in mid-forty percent range, Teva is now expected to be up low single digit and Sanuk is expected to be down mid single digit. Turning to the remainder of the P and L, gross margins are now expected to be above 50.5%, which includes certain one time benefits achieved this year. SG and A as a percent of sales are now anticipated to be below 36.5%, and operating margins are now expected to be in the range of 14.5% to 14.7%. And we are raising our non GAAP diluted earnings per share, which are now expected to be in the range of $7.85 to $7.95 on a share count of approximately 29,900,000. Our guidance for the Q4 and fiscal 2019 excludes any potential non GAAP charges as well as the effect of any future share repurchases. Also, we had a tax adjustment in the Q3, which reduces our expected tax rate for the year and our guidance for fiscal 2019 now assumes an expected tax rate of approximately 20%. Additionally, we do not currently expect any impact to our business from the currently imposed tariff, but we will continue to monitor tariff decisions and work closely with our supply chain operations to identify risk mitigation strategies should future tariffs begin to impact us. As we have previously mentioned, we have been actively shifting our production outside of China and we currently have less than a quarter of our production being done there. The full year outlook for fiscal 2019 includes flowing through approximately $1.10 of our earnings per share improvement from the 3rd quarter results, driven by $0.40 of an improved promotional environment, dollars 0.25 of higher revenue due to beneficial marketplace management aided in part by favorable weather conditions, dollars 0.25 from additional supply chain improvements and higher margins, $0.14 from the updated tax rate as well as reduced share count and $0.05 of the operating expense savings achieved in the Q3. While we are not providing fiscal year 2020 guidance at this point in time, I think it is important to outline several items that should be considered one time occurrences in fiscal 2019 and will not necessarily be anticipated to repeat in future periods. These items year to date include the benefit from high full price selling with reduced promotions and closeouts in our peak selling season, significantly driving higher profit margin reduced usage of air freight during the year, which may be needed in future periods and increased profits from higher sales achieved in the fall season from strong reorders and fewer cancellations in part aided by beneficial weather conditions. Therefore, in a normalized year, we anticipate that future results may include lower operating margin levels as compared to this year. In addition, future margins may also be impacted as we invest in our growth initiatives, including UGG Men's, UGG Women's Spring and Summer and the HOKA brand and supporting them with best in class digital marketing capabilities, product innovation and improved speed to market. We remain committed to staying on the course and executing on our underlying strategic initiatives as we continue to build our brands and grow the business. Before handing the call back to Dave, I'd like to say how pleased I am with the results our team has been able to deliver this year to date, while demonstrating disciplined management of our brands and operations. We still have work to do before stepping into the next phase of our long term plan, but I am confident that we are well positioned and on track to do so. Again, we will not be providing an updated fiscal year 2020 outlook on this call, but I look forward to providing you with an update on our year end call in May. With that, I'll now turn it back to Dave for his closing remarks. Thanks, Keith. I think it is important to acknowledge that this quarter marks a significant point in our progression against our long term target as we have raised our guidance for the full fiscal year 2019 to include achieving up to $2,000,000,000 in revenue with operating margins significantly exceeding the target of 13% as well as fulfilling the commitment to deliver $100,000,000 of operating profit improvement. And we are now on pace to deliver a year ahead of plan. In summary, our success for the Q3 was highlighted by a strong product offering, rich with brand DNA and relevant to a younger consumer base through new and existing wholesale account, thoughtful and controlled distribution to our UGG core classic allocation and segmentation strategy in the U. S. Wholesale marketplace and favorable weather conditions for which we remained appropriately positioned to capture increased in season demand, all leading to accelerated revenue growth in UGG non core styles as well as impressive results in our HOKA and Koolaburra brands, much less promotional activity than prior years, driving significant gross margin profitability above expectations and exiting the season with very low inventory in the wholesale channel as well as reduced owned inventory versus prior year. In closing, I would like to congratulate the entire Deckers organization for executing an incredibly strong Q3 and for their commitment to our brands as we step into the next stage of our evolution. Thank you to all of our stakeholders for their continued support and to employees for their focus and passion for the business. I am very excited about our results, but even more excited for what lies ahead. With that, we are now ready for Q and A. Thank you. And we will now begin the question and answer session. And our first questioner today will be Camilo Lyon with Canaccord. Please go ahead. Hi, thanks for taking the question and congrats on a fantastic quarter. Dave, I wanted to get your thoughts on how the conversations have unfolded with your hotel partners with respect to the repositioning of the assortment and how you started out the season with more of the fashion based products and how they've responded and they've become the leaders in how you're now trying to reposition the plastics business and how that should influence and impact go forward period? Yes, great question. We've been working for quite some time to get our wholesale partners to adopt more of the line beyond just the core classics because we believe there's real strength in that assortment especially now that we're reaching a younger consumer and it's just a much healthier sustainable business over time. So I'm super excited about how the allocation strategy worked in core classics. We contained the amount of inventory that was in the channel. We were very thoughtful on which accounts we gave core classics to and what quantities they had. And then we supplemented that with a segmented approach of non classic styling across shoes, slippers, boots, etcetera. And I think what you're seeing in this quarter is the results of that work playing out, aided a little bit by some really cold weather to bring traffic and excitement to the brand. But the sell through rates on core classics and in non core classics inventory were exceptional. And so the accounts are very pleased with how we've been controlling the brand in the marketplace, how we've been positioning new accounts with segmented product offerings, so everybody has something different and unique. And I think that that is a strategy that played out extremely well for us in Q3 and one that we're looking to employ in the international market starting in fall 2019. So I guess to answer your question, the feedback from the accounts has been very positive. They all had a good season. As you saw, we had high full price sell through. We didn't have to discount to drive sales even though we were in December up against tough comps last year and exited the quarter extremely strong. That's great. So it would be fair to say that, clearly the weather was a benefit to the business and the benefit to all outerwear businesses this holiday season. But if it weren't for this very favorable weather pattern, the positioning was such that it was still within an advantageous season figures that really the learnings and the takeaway from this strategic shift that we should embrace? Yes, I think like I said, the weather early on was a catalyst to kind of spur the excitement in UGG and the product there. But if it wasn't for the compelling product across the board that we've been working on for quite some time and this is really 1st year you're seeing the full assortment and a segmented approach hit the market with some new distribution, we wouldn't have done as well as we did. And I think if you look at a high level, like we said on the call in the script, this wasn't just an UGG story this quarter. HOKA did tremendously well, their best quarter ever, which traditionally Q3 isn't their largest quarter of the year. And I think you're starting to see the impact of HOKA and also Koolaburra and the portfolio approach to this business have a bigger impact. And we all feel great about the fact that we're less reliant on core classics and weather dependent in Q3. Great. And then just squeeze into my last question. So last conference call, you alluded to getting close to committing to a mid single digit sort of long term revenue growth target. Could you just help us explain what that what the components of that would be clearly to focus on this tremendous growth path? You mentioned future investments, continued investments in HOKA, in the women's spring line, in men's. Maybe if you could contextualize how would you think about those components of the business in context to the core classics business and how we should think about the different growth rates for you to achieve that in the single digit? Yes. I mean, we're not giving obviously long term guidance at this point, but I still firmly believe that mid single digits is achievable in the long term over the next 3 to 5 years. We do have significant growth drivers that we've talked about. First and foremost, we're going to maintain the strength of the core classics business. We don't see that as a major growth driver, but more of just a healthy annual business that we can continue to build on. But UGG men's will continue to be a growth driver. New categories outside of core classics in women's and also in spring and summer. HOKA will be significant. As we said before, we see that brand getting to $300,000,000 to $500,000,000 in the next 3 to 5 years. And I think when you add up all those components, you get to a mid single digit growth level that we think is sustainable over the next 3 to 5 years. Fantastic. Great job on the quarter again. Good luck. Thanks, Camilo. Thanks. And our next questioner today will be Jonathan Komp with Baird. Please go ahead. Yes. Hi. Thank you. I wanted to start just following up on UGG and some of the upside. And David, you could maybe talk a little bit more or give more detail on the shape of the quarter. You alluded to it a little bit, but just more color on how things played out. And then, also coming into this year and the start we've had, how things have trended and what that means for current inventory availability and kind of early order trend, if you would? Yes, I think I covered a lot of it. I think one thing is important to note is, again, we started off strong in October November. If you remember last year, we had extremely strong December and we plan that business conservatively going into this quarter this year. Fortunately, we started out the gates very strong with some of the new product that was hitting the marketplace as well as some cold weather early in October, which proved to be more of a catalyst to getting the business jump started. But again, I think it was the strength of the men's offering across the board driven by the new male and Tasman styles and some of the fashion boots. The Adirondack style in women's was a top seller for us again even though we raised the price that we still saw double digit growth in that style alone versus last year. Shoes and sneakers in women's led by the Nutrisneakers and slippers led by the Fluffy Out franchise. Those are normally not big drivers in the business, but we saw those really kicking in October, November through existing and new wholesale distribution as well as online that created excitement for the brand. And I think had a halo effect on the classic, but I think what the difference is, is this wasn't a classics led business this year. I think it was across the board strength and we maintained control of the marketplace through pricing. So there was very little of any discounting going on. We entered the season very healthy and clean from an inventory perspective. We maintain that through strong full price sell throughs and tightly managed reorders going in through December. And even though December was a little bit challenging, we had enough momentum in the business to finish the quarter strong and made some decisions that actually we decided not to promote or drive closeout sales even though we could have in some cases. And we felt it's better to maintain a healthy positioning in the marketplace, strong full price selling for our consumers and our accounts. And then exit the quarter with healthy inventory levels going into the first or going into Q4 and next year selling. So it played out nicely. And again, we've been working on this for a couple of years. As you know, the segmentation and allocation and product assortment coupled with a new brand positioning. And we're still feeling good about that positioning going forward. As far as Q4 goes, the weather has been up and down playing a little bit of having an impact in the business. In some cases, we still have some challenges internationally. Some of the shifts of deliveries and accounting principles that went into Q3 make this quarter look a little bit lower than we anticipated originally. But still strong sell through still good handle on the inventory in the marketplace. We're not doing a lot of close out and then being bolstered by the strength of HOKA. Yes, Jen, this is Steve. Just to kind of add on to what Dave is saying. I think in terms of how we looked at the quarter for the way it played out, it pretty much played out the way we thought. And then with less promotion, we saw some lift in revenue and then we saw some timing impact. So the timing impact that we picked up in Q3 is really what's impacting Q4. Q4 hasn't changed, from the way we looked at it other than we shipped some product earlier in Q3. So exactly kind of to what Dave said, with an allocation strategy in place, we sold to that, we sold above that in additional categories that gave us really the upside kind of in Q3 and Q4. While it's a take back from last year, when you take into account the timing that went into Q3, it's still pretty much what we planned. And then flowing through that full beat, or at least about $1.05 of the beat from Q3 for the full year has just been kind of a reflection of how well our setup was for Q3 and the execution on our Q3. Understood. And maybe just a follow-up on the callouts around the Asia Pacific business. I don't know if you can contextualize what you saw a little bit better there. And any more commentary on what actions you might take to try to address whatever it is you're seeing? Yes. I think our goal is to always control what we can control. And I think I always look at kind of our international markets in the last couple of years as probably a year behind our strategies that we're executing for us in North America. So the marketplace management tactics that we just saw play out in Q3 in North America, we'll be rolling those out to the international markets starting in fall 2019. So with regards to Asia Pacific and the China business, there's some macro challenges in that marketplace with consumer sentiment. We had some weather challenges in the marketplace, particularly in Southern China. And those are the major factors outside of the brand itself. Understood. Thank you. Okay. Thank you. And today's next questioner will be Sam Poser with Susquehanna Financial Group. Please go ahead. Thank you for taking my questions. I just want to go back into the like how would you weight it? Would you weight the success you had with UGG in the quarter as more weather related or more of the segmentation brand control weighted? Yes, it's a great question and there's no exact number or breakdown to that. But from our where we stand, it's more weighted towards the marketplace management of the brand and the focus on brand positioning and product. So certainly, as you know Sam, managing the inventory in the channel, the allocation of classics is a big component of that and creating demand in the consumer and for the accounts. And then bolstering that with an exciting product offering that is segmented by consumer and channel and account. I believe it's the majority of the upside is from that. And we're looking at it as aided by the success aided by weather, but not driven by weather. Yes. And I think the other thing Sam too, talking just about the strategy of how well HOKA did. I think that further shows kind of how the strategy and the marketplace approach, not only with UGG, but HOKA is working too. Correct. Yes. Thank you. I have 2 more. Can you give us some idea of the year over year DTC versus in the total wholesale EBIT? And I assume that they both were good, but probably it was a big beat on the wholesale line I would get. Yes. It's a bigger beat on wholesale, right? So we saw a stronger wholesale outperformance than we did in DTC. You're right both did perform well. But also DTC was impacted by I think it's 11 stores closed this year versus last. So on a year on year, we had headwinds with store closures related to retail. But again, strong performance in DTC, kind of stronger performance in wholesale. So the proportion of our wholesale beat is bigger than the DTC. Yes. And the other piece to remember on that is December last year, DTC had an exceptional last couple of weeks in the quarter driven by the cold weather that came late. We were unable to capitalize on that in wholesale, but we were able to capitalize it on in DTC and we didn't have that same dynamic this year and we made the decision to not be as promotional in DTC this quarter. And then lastly, inventory levels. Can you give us the year over year percent increase or dollars, however you want to do it, for UGG and for HOKA, just so we can understand sort of where this inventory is? Yes. We don't normally break that out, but I can kind of directionally tell you. So total company was down 14%, so ended the quarter at 342 that compared to 396 a year ago. The UGG inventory was down more than the company average. So UGG inventory down more than the 14%. And HOKA, as we gear up spring summer and we have some new category introductions coming, we brought inventory in earlier, that was actually up year on year. Okay. Thank you so much and continued success. Okay. Thanks, Sam. And our next questioner today will be Dana Telsey with Telsey Advisory Group. Please go ahead. Good afternoon and congratulations on the very impressive results. As you think about the less promotional environment, how did pricing change? Did pricing change on any of the categories? And what are you planning for pricing going forward? And did you get gross margin improvement from all brands? So I'll handle the first one and Steve can handle the second one. We actually have been working on pricing for quite some time and particularly in North America to make sure that we're competitive against the competitive mind. There are competition out there and also by account with some of the new segmentation. So we feel that we actually had pricing set correctly. There are a couple of styles that we made decisions to change to be a little bit more competitive, bringing those down. But we maintain healthy margins across the board regardless of category. We don't see any significant price changes going to next year. We're trying to do going to next year in FY 2020 is to add more value into some of the product at the prices we have, more functional capabilities such as waterproof capabilities in some of the fashion boots and women's. The pricing overall, we felt we were set correctly, we were competitive, a lot of value in the pricing for the consumer and I think that played through in the full price sell through. Yes. And then just kind of on the amount, Dana, what we said in the prepared remarks was we think the less promotional activity contributed about $15,000,000 We think in the quarter that's a little below kind of 200 basis points of improvement on the gross margin. As we kind of then extrapolate that out, that's not something we would necessarily plan kind of for next year. So when I talked about my one time adjustment, we think for the year, it's probably worth 100 to 150 basis points that we picked up, which is really a combination of better full price sell through as well as some of the airfreight benefits that we received last quarter. So as we're looking out forward, again, we haven't given guidance, but we think we benefited in the current year probably around 100 basis points to 150 basis points that we wouldn't necessarily figure into next year. It doesn't mean it couldn't repeat, but we wouldn't figure it into next year. Yes. And then just one last follow-up. How is the new distribution performed, whether it's ASOS, Urban Outfitters? And how do you see your goals for that going forward? Yes. All well. Across the board, generally speaking, those have all performed well for us. We have some assortment opportunities in places like Foot Locker where the core new mill has sold well to that consumer, but we see opportunities for evolving that specifically for their consumer. But generally speaking, inventory levels in sell through have been healthy and the accounts are pleased. Thank you. Thank you. And our next questioner today will be Jim Duffy with Stifel. Please go ahead. Thanks. Good afternoon, guys. Terrific quarter. Hey, Jim. Steve, a question for you. The objective EBIT margin, you were talking about 13%. You're now looking at high 14s for the fiscal 2019. If I heard you correctly in response to Dana's question, you're thinking there's maybe 100, 150 bps of give back in the gross margin. Are there organic areas of improvement in the gross margin that are going to be an offset to that? Yes. So again, we are as we indicated, we're not completely through all of the COGS savings in our original plan that we articulated kind of 2 years ago. So we do think there is some smaller incremental improvement that's still to come next year. So while there will be kind of we wouldn't factor in these one time benefits that we saw this year, There will be a bit of a setback, but there will be smaller, not like what you've seen kind of in the last 2 years in terms of gross margin improvements, but there is still some opportunity for a little bit more improvement. Good. And then you've been tightening the belt for some time now. It sounds like some planned areas of reinvestment and you spoke to some of those. Is there additional savings, wraparound savings into fiscal 2020 that can be an offset some of that reinvestment? The way we're again, the way we're looking at it and we haven't given guidance, but we think, as Dave mentioned, there's more top line growth. We think through kind of disciplined management of SG and A that we can achieve leverage. It doesn't necessarily mean it's going down, but there can be some offsetting savings as we look out to next year. Okay, great. And then last one for me, just updated thoughts on objective retail footprint given what you saw coming out of the key selling season? Yes. We're continuing to make progress on operationalizing our fleet and improving store performance, both on more so on improving the operating contribution of that fleet and the teams have made great progress there. We've been doing a lot of renegotiating of leases when leases come up and that has allowed us to keep some stores open when we may have had them on the closure list. So it's one of the things we're continuing to evaluate. Part of that optimization is continuing to optimize labor, elevating the presentation and storytelling in store, getting new core categories to activate such as men's and lifestyle, improving merchandising and renegotiating leases. So we're moving away from setting a target. And the teams are making The teams are making good progress on that and it's something we're going to continue to evaluate as part of our overall strategy. Very good. Thank you guys. Thanks, Jim. And our next questioner today will be Chris Svezia with Wedbush. Please go ahead. Good afternoon, gentlemen, and congratulations as well on a really great quarter. Thanks, Chris. I just want to just on the UGG brand, if I have this correct. So flat for this year, right now is the outlook. But I recall because of the segmentation and some of the strategic alignment and some retail store closings, there was $50,000,000 in sales that kind of came out of that brand. So if we kind of back into it, maybe we'll be up low single without some of those changes. Is that sort of how we should think about the UGG brand as we sort of move forward or the ability to generate low single digit growth? Or any color about any changes to segmentation strategies as we go into next fiscal year that we should be mindful about? Well, I think I'll speak to the changes in strategy. I would say no. I think we're going to continue to build on those strategies. I think the allocation and the holdback of classics in the channel has proved to be healthy and created some demand across the brand in the marketplace. I think the segmentation, this is really the 1st full year where we've seen true product created specifically for accounts and a younger consumer. That's played out really well. So we're going to continue to build on that. And I think some of those new categories will start to be meaningful and help us get to that low single digit growth over time while still maintaining a tight control of the core classics business. Yes. And I think, Chris, just to add on that, what we've talked about, it really is kind of execution on everything we've been talking about kind of especially the last year and kind of 2 years bigger. What we intended and I think what we successfully executed executed was really a strong allocation and segmentation strategy this year. And the idea was it was going to put some pressure on growth for UGG. We knew that. That's kind of the way we laid it out. The quarter played out a little bit better. But with that strategy in place, what it did do was build sales in other categories, as Dave mentioned. And so now going forward, we are building off that base. So you're going to start to see that growth kind of coming next year. Yes. And I also think that the success of UGG Men's in the quarter is a great indicator of some of the opportunity going forward as well. That has reached contribution of 15% of the total brand sales now, up from 13% last year. We still think there is significant opportunity in men's with new consumer and in global distribution. And that's when we're going to continue to focus on to bolster the total line of the UGG brand as well. Okay. That's helpful. Thanks. And then just, Steve, I want to go back to your comment about some of these one time benefit this year, breaking from sort of the full price sales, reduced uses of airfreight, etcetera. And just a comment about potentially lower operating margin. Is it fair to say that you would potentially consider reinvesting some of the operating margin benefit that you've seen, which has outperformed back into the business, whether it's marketing, things of that nature? Or how should we interpret that comment, if you can add any color? Absolutely. That's exactly the way we're looking at it. And I think, again, this quarter somewhat demonstrates the opportunity that we have, not only with UGG and kind of the success that we saw in those areas, but again with HOKA and Koolaburra. And so we do intend to use some of those dollars of over performance to reinvest in the business to drive some of these growth drivers that we have. Yes, I think it's our responsibility to do that going forward for the long term health of the brand and the business with sustainable healthy growth. We've proven that we have growth drivers and opportunities in HOKA, in UGG men's, in non core category product in women's, spring and summer continues to be an opportunity for us. We had a great meeting earlier this week about segmenting our marketing spend going forward differently by quarter and allocating against different categories globally. And I think with additional marketing efforts targeted against the right consumer, that we can continue to drive growth in the UGG brand. And in addition to that, I think we have some investments to make in IT and digital marketing. And so we're going to balance the spend and the operating margin improvements over the next 3 to 5 years to be focused on healthy sustainable growth by returning good value back to shareholders and we think we're in a great position to start doing that. Okay, sounds good. I appreciate it and all the best. Okay. Thanks, guys. Thank you. And the next questioner today will be Mitch Kummetz with Pivotal Research. Please go ahead. I apologize. It is Laurent Vasilescu with Macquarie. Please go ahead. Good afternoon. Thanks for taking my questions. Thank you for all the color on the revenue shift between 4Q and 3Q. I'm just curious, any thoughts on how should we think about the international versus U. S. Revenue change for the Q4? We assume the international is down mid teens while the U. S. Is flattish? Yes. I think the when you say DAT, you're saying compared to last year, right? Correct. Yes. So I think that's a fair way to kind of look at it. Okay, okay, very helpful. And then on gross margins for the Q4, it's implied to be slightly down if we take the annual guidance. Can you is that the right way to think about in terms of maybe down 50 bps? And can you maybe talk about the headwinds and tailwinds for the implied Q4? Yes. It's kind of more flattish to last year. And I think the way to look at that was as we looked at the quarter, we saw a very strong January last year. This year, January started out not as strong as a year ago. So as you recall, there was a little bit of a different weather pattern last year versus this year. Last year, cold late December carried through January. This year, we had a good colder kind of October, November, but warm December that carried through the beginning of January. And there's a lot of selling in January. So we've included that really in our guidance of how we're looking at Q4. So it's not down as much as you said, more flattish to down a little bit, really taking that into consideration. Okay, that's very helpful. And then I want to follow-up on airfreight initiatives. I think last obviously last quarter there was a benefit. Was there a benefit this quarter? And then ask a different way, how much do you airfreight as a percentage of your overall business? And where do you think that goes over the next year? Yes. We haven't necessarily kind of given that. What we said last quarter, as you recall, we said there was about $6,000,000 of airfreight that we had planned that we didn't use. And so we think going forward that won't necessarily always be the case. It's going to kind of depend on how we're bringing product to market, where the orders are, how quickly we need to bring product in. Clearly, we have gotten better, and we think there will be improvements from where we were a year ago. We think this year was an extremely clean year, and we'll be a little bit conservative because there's going to be certain styles, especially as we move beyond, kind of the core classics that there's going to be a need to bring product in quickly to the market. So we'll be anticipating some of that. Yes, I think that's the right way to think about it. In the past, we've had to use, airfreight to compensate for poor planning or inventory management. I think we've addressed all that. And going forward, we're going to use it more strategically to chase business with the fast tracking product and getting after opportunities that arise in the quarter. Okay. Very helpful. Thank you very much and best of luck. Thank you. And this will conclude our question and answer session as well as today's conference call. Thank you all for attending today's presentation and you may now disconnect your lines.