Earnings Call Transcript - DECK Q4 2023

Operator, Operator

Good afternoon and thank you for standing by. Welcome to the Deckers Brands Fourth Quarter Fiscal 2023 Earnings Conference Call. I’d like to remind everyone that the conference call is being recorded. And at this time, I’d like to turn the floor over to Erinn Kohler, VP, Investor Relations and Corporate Planning.

Erinn Kohler, VP, Investor Relations and Corporate Planning

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 our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory levels and promotional activity, and the impact of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. 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-K 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. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. In addition, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. With that, I will now turn it over to Dave.

Dave Powers, CEO

Thanks, Erinn. Good afternoon, everyone, and thank you as always for joining us today. I am delighted to be here today to discuss another exceptional year for Deckers, as we delivered record results on both the top and bottom line and continued to progress against our long-term strategic initiatives. For fiscal year 2023, our brands achieved revenue growth of 15% on a reported basis versus the prior year to more than $3.6 billion, which is 42% and $1.1 billion above revenue of 2 years ago. Operating margin in line with the high end of our guidance range at 18%, which is top tier in our industry and a more than $3 increase in earnings per share, representing a 19% increase versus last year. Specifically, our progress in fiscal year 2023 includes HOKA driving global revenue growth of 58% versus last year to eclipse $1.4 billion. UGG revenue holding steady in constant currency, with the brand increasing its mix of both direct-to-consumer and international business; global portfolio DTC adding more than $0.25 billion of incremental revenue, growing at nearly twice the rate of wholesale; and our international markets increasing 20% versus the prior year on a reported basis, which when accounting for an approximate $100 million headwind from currency fluctuations, increased 30% in constant currency. Reflecting on the past few years, our company’s performance is remarkable, particularly given the consumer climate and speed with which we have had to build our infrastructure to support this incredible growth. We still have much more work ahead to build upon the foundation for long-term sustainable growth, but I am truly proud of how far we have come. We believe that the strength of our operations, omnichannel management and brand teams have enabled our organization to improve resilient and capable of achieving the goals we have set forth, including driving significant top line growth, while maintaining an 18% operating margin and reducing inventories to more appropriate levels. I want to thank our employees and our tremendous leaders across the organization for their hard work and collaboration that contributed to Deckers’ outstanding execution. Steve will provide further details on fiscal year 2023 results and what’s ahead for fiscal year 2024. But first, I will share more about our 2023 brand and channel performance. Starting with the brand highlights, global HOKA revenue for fiscal year 2023 increased 58% versus the prior year to $1.4 billion. This is the fourth consecutive year HOKA has delivered revenue growth above 50%. For the year, HOKA growth was driven by a more than 30% increase in global brand awareness in fall 2022; an acceleration of DTC, which grew 85% versus the prior year; broader category adoption; and market share growth with existing points of wholesale distribution. Additionally, we have seen a significant opportunity for growth in each of our markets over the long term as our HOKA marketing team has done a fantastic job developing insights from our initial campaign, allowing us to evolve the next iteration of Fly Human Fly. We continue to focus on building brand awareness and leveraging our successful marketing campaigns to reach consumers across the globe. Moving to UGG, global revenue for fiscal year 2023 was $1.9 billion, which is down 3% versus last year on a reported basis, but up slightly in constant currency. UGG performed in line with expectations as the brand focused on driving growth through direct-to-consumer and international markets. Despite facing tough comparisons from the prior year related to filling domestic wholesale inventories and currency pressures that resulted from exchange rates overseas, UGG maintained high levels of brand heat and demand. Our international markets saw acquisition up 29% and retention increased 37% compared to last year, highlighting our effective strategy. In terms of Teva, global revenue for fiscal year 2023 increased 12% versus last year to a record $183 million. This is the second consecutive year of double-digit growth for Teva as the brand continues to be a leader in the sports sandal category. We are confident about the opportunity ahead for Teva as the brand works toward future growth through additional investments targeted at driving increased closet share over the next 5 years.

Steve Fasching, CFO

Thanks, Dave, and good afternoon, everyone. As Dave just covered, Deckers delivered another outstanding result for fiscal year 2023 with double-digit top line growth, even with substantial foreign currency headwinds. Our omnichannel, brand management and marketing teams have collaborated to create and capitalize on high levels of brand heat and demand for our brands. Deckers’ commitment to long-term strategic priorities, coupled with our execution and financial discipline, are the foundation for success as our portfolio of strong brands continues to drive long-term profitable growth in the years ahead. For the fourth quarter, revenue came in at $792 million, representing an increase of 8% versus the prior year. Performance in the quarter was driven by continued momentum with HOKA, including the brand nearly doubling last year’s DTC revenue as well as strength in Teva as the brand recaptured revenue lost in the previous year due to supply chain disruption. This was partially offset by a reduction in UGG revenue. Looking forward, for fiscal year 2024, we expect top line revenue of approximately $3.95 billion, representing growth of about 9% versus the prior year, with HOKA as our main growth driver, increasing in the range of 20% versus last year.

Dave Powers, CEO

We continue to remain focused on executing against our strategic priorities and driving progress towards our long-term vision, while actively managing the marketplace for our brands. Our results demonstrate the strength of our brands and our commitment to delivering value to all of our stakeholders. We are incredibly proud of our accomplishments across the whole Deckers organization and look forward to building on this success in the years ahead.

Operator, Operator

Our first question today comes from Laurent Vasilescu from Exane BNP Paribas. Please go ahead with your question.

Laurent Vasilescu, Analyst

Thank you very much, and good afternoon, and congrats on really just another great year. Dave, I would love to ask about your HOKA business, the global potential. I know you gave really good details around channel mix dynamics by quarter. But just maybe for the audience, can you maybe just kind of size up where HOKA is in its international journey? How big is it overseas in perspective and dollar perspective? I think you mentioned that the growth for 20% assumption for this year assumes no net new doors. But where are you on your journey for – potentially for China? Would you be open up to working with some local partners there to open up stores? Any color there as we think about focus potential would be great. Thank you.

Dave Powers, CEO

Yes. Thanks, Laurent. Happy to talk about HOKA. The first thing I would say is we’re in this sort of long game, and we feel like we have a very special, very, very strong brand with a lot of runway ahead of it. So in some ways, we’re in no rush. But we don’t want to flood the market ahead of demand. We want to control our product experiences and segment across doors and consumers appropriately. So, as you look at international growth, there is certainly more opportunity, especially in markets like China. Our focus is to build brand awareness and ensure we manage the marketplace correctly.

Jonathon Komp, Analyst

Just wanted to follow-up on the HOKA plans for the year and any more color to get to the 20% growth rate? What DTC growth you need within that? And then could you just remind us, given the comments about wholesale not growing doors, how did the door growth look – looking backwards for fiscal 2023? Just trying to understand how next year – or this year, I should say, looks different than last year?

Steve Fasching, CFO

What we have said is that the DTC growth will be higher than that and wholesale will be lower than that. We are planning for a net neutral year in terms of new doors overall, but we will evaluate opportunities throughout the year to manage our distribution effectively.

Sam Poser, Analyst

I have my normal question that I’m not even going to count as a question, and then we can move on from there.

Dave Powers, CEO

You want to ask it or you want to just tell you.

Steve Fasching, CFO

Significant improvement in the UGG inventory has driven some of our revenue, a little bit of pressure on the margin as we closed that out, but really positioned us much better. HOKA, some growth and as you would expect, with the growing brand that we do have with HOKA.

Abbie Zvejnieks, Analyst

I just have two quick ones. Can you talk about this any impact from more cautious orders from your wholesale partners, just given the pressures consumer discretionary spending?

Dave Powers, CEO

I wouldn’t say there is any cautiousness at all. The order book this year reflects the strong performance of our brands. We are continuing to focus on delivering strong results across all sectors of our business.

Operator, Operator

And with that, we will be ending today’s question-and-answer session. I would like to turn the floor back over to management for any closing remarks.