Earnings Call Transcript
DECKERS OUTDOOR CORP (DECK)
Earnings Call Transcript - DECK Q3 2022
Operator, Operator
Good afternoon, and thank you for standing by. Welcome to the Deckers Brands Third Quarter Fiscal 2022 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 everybody that this conference call is being recorded. I'll now turn the call over to Erinn Kohler, VP, Investor Relations and Corporate Planning. Please go ahead.
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 facts are forward-looking statements, and include statements regarding changes in consumer behavior, strength of our brands and demand for our products; changes to our product allocation, segmentation and distribution strategies; changes to our marketing plans and strategies; changes to our capital allocation strategy, the impact of the COVID-19 pandemic on our business and supply chain, 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, 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. With that, I'll now turn it over to Dave.
Dave Powers, President and CEO
Thanks, Erinn. Good afternoon, everyone, and thank you for joining today's call. I'm excited to review our third quarter results that underscore the momentum of our brands and their continued execution of key strategy as we build the future of Deckers brand. As we continue to navigate a challenging logistics environment, I reflect on both the exceptional demand for the UGG and HOKA brands and the added pressure we face to keep pace with their growth in a constrained environment. While we don't currently see signs that elevated logistics costs or supply chain bottlenecks will subside anytime soon, we do see value in supporting our strong brands through expediting key product inventory, giving our brands the opportunity to gain market share. Steve will provide a more detailed update on the status of our supply chain network and the actions we're implementing to provide our brands with the best opportunity to thrive in this challenging marketplace now and into the future. With that said, Decker's third quarter revenue increased 10% over the prior year to $1.188 billion, representing our largest quarter in history. We saw balanced growth across our entire brand portfolio as direct-to-consumer, wholesale and multiple geographies drove impressive results. Performance in the quarter and throughout the year has been the result of our execution on our long-term strategy, including driving HOKA, diversifying UGG, building DTC and developing our international market. More specifically, we have made progress across these key areas as HOKA grew 30% in the quarter despite port congestion and inventory constraints and has grown 54% year-to-date over prior year, contributing half of our total portfolio's incremental revenue. UGG increased 8% over last year in Q3 and has driven double-digit growth year-to-date, propelled by global adoption of the brand's diverse product assortment. Direct-to-consumer growth outpaced wholesale growth, improving DTC mix to 50% of third quarter revenue, up from 48% last year and 44% two years ago. And our international regions contributed a significant portion of global growth year-to-date, increasing 27% over the prior year and outpacing the US increase of 19%. For UGG, our international regions have sold their most diverse offering of UGG products ever, which helped the brand deliver impressive global growth fiscal year-to-date. In addition, with HOKA continuing to expand its share of the global performance market, we believe our portfolio contains two of the strongest brands in the footwear industry with much more promising growth ahead. Now let's get into some of the brand highlights, starting with UGG. Global UGG third quarter revenue was $946 million, reflecting an 8% increase versus last year and a 21% increase versus two years ago in the brand's largest quarter. These results, when combined with the UGG brand's outstanding first half, equate to fiscal year global revenue growth of 13% above last year and 21% above two years ago, reflecting the continued steady growth in the US, which is up high-single-digits on top of last year's mid-teens increase and a strong return to growth within the brand's international region, which have increased north of 20% versus last year and double-digits versus two years ago, all of which has been fueled by a diverse assortment of compelling UGG products across gender and categories that are being embraced by a broader and younger consumer base. In terms of the UGG brand success, year-to-date, the majority of growth has come from categories outside of women's classic footwear. This includes continued gains across men's and kids footwear, women's slippers and fluff as well as apparel and accessories. While these categories are driving the bulk of growth, it is important to note that women's Classics have also performed very well this year. Fiscal year-to-date, women's Classic boots have driven year-over-year revenue growth, represent a smaller percentage of total brand revenue, and reflect greater style diversity within the category as items outside of the core, such as the Ultra Mini Classic Clear and Neumel have been key drivers of consumer acquisition this year. The Neumel with its broad consumer appeal is this year's largest dollar volume style across the entire UGG assortment. The UGG product and design teams have done a great job developing companion versions to build a franchise which continues to be a large driver of men's growth. Additionally, our consumer data has shown that the adoption of UGG Men’s product skews younger, as the 18 to 34-year age group represents a larger portion as compared to the brand average. And the Neumel remains a top acquisition style amongst these consumers. Our product teams are actively utilizing these insights to design new styles that will allow us to build upon momentum with these target consumers. Turning to kids footwear. UGG has driven impressive gains in kids categories over the past few years. We believe this is a strong indicator of brand health as purchasing patterns reflect consumers buying UGG for the family with the majority of top styles representing popular items from the men's and women's product range. These bundled purchases are obviously great for increasing current values and wholesale open to buy but also act as a great avenue to introduce UGG to the next generation of consumers. Beyond footwear, UGG has been focused on acquiring new consumers through a compelling apparel assortment. To build awareness in the category, UGG developed its first-ever apparel dedicated marketing campaign, which helped drive a 40% increase in apparel consumer acquisition year-to-date. Our consumers have responded particularly well to ready-to-wear sportswear and outerwear items that contain visual UGG DNA, logo treatment and deliver on the expected feeling of UGG. This was the first season for a number of retailers carrying UGG apparel, many of whom are concentrated in the youth and sports lifestyle channels. These channels have been driving strong performance with UGG footwear for some time now, and we're excited that they are on board to expand into a head-to-toe UGG offering. On the domestic front, this is the fourth consecutive year UGG has delivered strong year-to-date growth in the U.S. where brand consideration remains at an all-time high among 18-to-34-year-olds according to our data. The brand's development of a more youthful and diverse product assortment as well as the ongoing U.S. wholesale marketplace management strategy has helped us strategically expand within youth and sports lifestyle accounts. While UGG has built market share across its account base, the youth and sports lifestyle accounts have significantly outpaced growth with department stores. Additionally, UGG has driven significant gains in DTC acquisition with 18-to-34-year-olds over the past two years, as this age group has grown at a 25% CAGR year-to-date over the same period of fiscal 2020. Critical to this success has been the product adoption among those younger consumers who are purchasing both heritage products like the classic short and mini, but also new franchises like the Neumel, Fluff, Tasman and Classic Clear. From an international standpoint, regions outside of the U.S. have accounted for approximately half of UGG's growth this year, with EMEA and China driving the majority of gains over last year. Approximately three years ago, UGG implemented a marketplace reset strategy in the EMEA region based on the successful strategy that reignited the brand in the U.S. This involved a reduction of wholesale accounts to the tune of approximately 35% over the last three years, allocating and segmenting core product and elevating brand positioning while also working to create demand for complementary UGG products in new categories. Beyond the marketplace activities in EMEA, the UGG marketing team began localizing global content to more effectively connect with consumers living in European and Asian countries. More recently, UGG developed market-specific collaborations and brought on local influencers to help highlight the brand's compelling product. These actions have helped drive the international turnaround of UGG which is now delivering growth in high full-price sell-through with the brand's most diverse product assortment effort. Importantly, the return to growth of international UGG regions aligns with our global category growth initiatives, further aiding the brand's diversification into categories outside of women's classic. Fiscal year-to-date, women's core classics and derivatives have moderated to below 40% of international revenue. This is more in line with the U.S. and compares to north of 50% just three years ago. With a tightened supply of core products, international regions are driving healthy growth with popular global styles such as the Fluff franchise, Ultra Mini, Classic Clear and the Neumel. By highlighting new categories, reducing the supply of core product and tailoring marketing campaigns to local consumers, UGG has begun to expand its audience to younger consumers in both Europe and China. In Europe, this has led to new strategic points of distribution in the youth and sports lifestyle channel. The volume generated with these retail partners is still relatively small but growing significantly faster than average. And if the U.S. is any indication, these emerging segments can be a big driver of growth and volume in the future. Similar to the U.S., we believe younger consumers are leading UGG brand's increased popularity among international markets. The brand has worked hard to create localized content that resonates with sub-35 age consumers in their respective markets. In Germany, France and the U.K., this age group is driving over 40% of traffic conversion from paid social. In China, this age group is driving DTC growth in key franchises including global styles such as the Classic Clear. The UGG team has a lot to be proud of with the progress it has made as the brand continues to drive global growth with a diverse assortment of in-demand product. Looking ahead, we are excited for us to build upon this year's head-to-toe demand with a compelling new rainwear proposition that features two new styles, the Aqua and the Tasman, which we believe will help the brand further expand its year-round appeal to consumers around the world. We are already receiving great feedback on the sell-through of this collection of rainwear products and are excited to share more on our year-end call. Congratulations to the team on a great fall season, and we look forward to continued success this spring. Shifting to HOKA, global revenue in the third quarter was $185 million, reflecting a 30% increase versus last year and nearly double the volume of two years ago. Despite dealing with stockouts and delayed inventory, HOKA performed well in the quarter, driven by global strength in the direct-to-consumer channel, which increased 52% over last year, and continued global wholesale market share gains, particularly among international regions as unit growth outpaced domestic. Fiscal year-to-date, global HOKA revenue has increased 54% versus last year, reflecting strength across the brand's ecosystem of Access Points as domestic, international, wholesale and direct-to-consumer continue to drive impressive growth. From a direct-to-consumer standpoint, we have seen strong global demand for HOKA year-to-date as U.S. search interest increased 74% over the prior year, according to Google trends. New consumers visiting the European HOKA website during Q3 increased 88% over last year helping the region maintain the highest CDC growth rate thus far in fiscal 2022 and drove a more than 30% increase in conversion rate during China's Double 11 event, demonstrating improved awareness in the region. DTC continues to be a great avenue for HOKA to make connections with consumers, drive replenishment and increased category adoption as it more effectively displays the breadth of the brand's product assortment. We are actively testing and developing the HOKA consumer experience at pop-ups in the U.S. and owned locations in China. In China, we plan to utilize strategic retail locations to continue building HOKA brand awareness as we develop the marketplace further and create a model for future wholesale partners to leverage. In the U.S., we have seen great engagement from consumers at pop-up locations and are exploring other select cities to test the HOKA experience. At the same time, HOKA is building the experience at DTC, the brand continues to build credibility and awareness with consumers through partnerships with strategic retailers. This spring, HOKA will be strategically expanding with key partners to satisfy incremental demand and further augment the brand's market share. We are pleased that our partners have continued to express excitement about the HOKA brand and their desire to expand further, and we look forward to continuing to grow those relationships. At the same time, we remain disciplined in our approach to steadily and sustainably building HOKA to a multibillion-dollar brand over time. Shifting to product highlights for the third quarter. We launched the Bondi X at the beginning of October. This innovative style combines the signature cushion of a traditional Bondi with a carbon fiber plate to give athletes a more propulsive and efficient ride. The Bondi X launch drove significant traffic to hoka.com, 65% of which were first-time visitors. The style was even named one of the best running shoes according to GQ's 2021 Fitness Awards. Beyond the Bondi X, the HOKA brand is expanding consumer awareness with two of its newer franchises, the Rincon and the Mach. Both franchises were designed for an audience of consumers under 35 years old. The HOKA team strategically developed Rincon and Mach social content for platforms, possessing a higher concentration of this key demographic. As a result, the Rincon and Mach have been key catalysts for the HOKA brands accelerated acquisition of younger consumers, and these franchises are driving superb growth. On the collaboration front, HOKA partnered with global luxury brand Moncler to release a limited edition of the HOKA MOKA. This was a great opportunity for HOKA to build global awareness by partnering with a well-known European fashion luxury brand. The collaboration drove significant positive PR for HOKA and sold out in the first hour of availability. Collaborations like this are a great indicator of the brand's growing appeal beyond its traditional performance roots and into the space of fashion. While fashion is not a top priority for HOKA right now, we see this as an opportunity for the brand to capitalize more broadly in the future. To close HOKA, I'd like to congratulate the entire team for the brand being named Footwear News Brand of the Year. This is a fantastic accomplishment and speaks to the incredible momentum of HOKA as the brand marches closer to $1 billion in revenue and beyond. We have enormous confidence in the brand's ability to continue building share in a highly competitive marketplace. While we continue to operate in this constrained environment, we are prioritizing the fulfillment of HOKA demand, though carefully balancing stringent quality standards as the brand's growth has required adding further manufacturing capacity. Ramping production of this highly technical performance product will require some additional time, but our measured approach will ensure HOKA is built to become a long-term major player in the performance space, while delivering the quality product our consumers expect. With respect to channel performance in the third quarter, global direct-to-consumer revenue increased 13% versus the prior year and plus 42% versus two years ago. From a comparable sales perspective, direct-to-consumer increased 11% versus last year, fueled by strength in both retail stores and online. UGG and HOKA drove the majority of the year-over-year dollar volume increases, but DTC demand was robust across the portfolio. Facing bottlenecks during the UGG brand's historical peak period of demand, we took specific actions that benefited UGG DTC, which included encouraging preorders on key styles to help smooth demand, carrying a broader exclusive assortment that provided the option of alternate in-stock products where there were shortages and offering the option to purchase back order products that had incoming inventory. In the constrained supply environment, we have experienced this year, our omnichannel capabilities proved advantageous in reducing the impact on the UGG brand business. From a wholesale perspective, global revenue in the third quarter increased 7% versus last year and 14% versus two years ago. Growth in the quarter was primarily driven by international UGG and global HOKA with slight offset from a reduction in domestic UGG that resulted from earlier shipments of fall products as compared to the prior year. Wholesale comparisons remain unique as macro logistics pressures and bottlenecks continue to alter shipment timing as compared to historical patterns. With that, I'll hand the call over to Steve to provide further details on our third quarter financial results, status of the dynamic supply chain challenges facing our industry and our updated fiscal year 2022 outlook. Steve?
Steve Fasching, Chief Financial Officer
Thanks, Dave, and good afternoon, everyone. I'd like to echo Dave's remarks regarding the success of our key strategies. With three quarters of the year now behind us, including the peak UGG holiday season, we feel great about the strength of our brand portfolio. Throughout the year, UGG has driven global growth with a diverse assortment that is resonating with consumers across multiple categories, including apparel and accessories. At the same time, HOKA continues to build share with compelling performance products across its ecosystem of Access Points. The growth delivered by our two largest brands was achieved despite significant supply chain disruption, that we expect to remain a headwind for the foreseeable future. While this challenge persists, we have a great deal of confidence in the demand for our brands, bolstered by our omni-channel capabilities, flexible operating model and fortified balance sheet. Ultimately, we believe that prioritizing our long-term strategic goals will allow our brands to remain successful and drive continued market share gains. Now for the financial specifics of Q3 results. Third quarter fiscal 2022 revenue was $1.188 billion, representing a 10% increase versus last year and a 27% increase versus two years ago. Q3 growth was driven by our two largest brands, UGG and HOKA, as international UGG increased 29% versus last year, led by a return to growth in our EMEA region and an acceleration in China. And global HOKA increased 30%, aided by a more than 50% increase in DTC. Gross margins for the third quarter were down 470 basis points versus last year to 52.3%. The decrease as compared to last year was due to higher freight costs as ocean container rates have significantly increased. Third-party delivery fees have increased, and we have used a substantial amount of air freight. The increased cost in freight, including all of these components, amounted to approximately $55 million above last year in the quarter. SG&A dollar spend for the quarter was $328 million, up 15% from last year's $285 million. Increased spend was primarily driven by greater marketing expense to increase localized content highlight new categories and fuel brand heat globally as well as higher warehouse expenses as we grow our logistics network and other variable expenses. Our tax rate for the quarter was 20.5%, which compares favorably to the 22.2% last year due to discrete tax benefits and a higher proportion of international revenue. This resulted in a diluted earnings per share of $8.42 for the quarter, which compares to $8.99 in last year's third quarter. The $0.57 decrease versus last year was primarily driven by lower gross margins that resulted from higher freight costs, higher marketing, warehouse and variable expenses with partial offsets from the revenue growth of our two largest brands and benefits from a lower tax rate and share count. Turning to our balance sheet. At December 31, 2021, we ended December with $998 million of cash and equivalents. Inventory, including in transit was $551 million, up 80% from $305 million at the same time last year, with the large majority of that increase still in transit and delayed due to port congestion. And we had no outstanding borrowings. During the third quarter, we repurchased approximately $131 million worth of shares at an average price of $369.12. Fiscal year-to-date through December, we have repurchased approximately 736,000 shares, spending a total of $267 million. At December 31, 2021, the company still had $544 million remaining under its stock repurchase authorization. Before we move into our final outlook update for fiscal year 2022, I'd like to provide an update on the status of our logistics network and the actions we are taking to mitigate future effects on our business. The most material challenge facing our business continues to be prolonged transit times for items produced overseas to reach our warehouses. This has led to a much higher proportion of inventory classified as in transit. At September quarter end, we noted that approximately 45% of inventory was in transit, which compared to roughly 20% in the prior year at the same point in time. As of December 31, we have not seen improvement as approximately 50% of our inventory remained in transit, which compares to roughly 25% in the prior year at 12/31. We do not expect this issue to be resolved near-term. And as a result, we plan to carry elevated levels of inventory at fiscal 2022 year-end and into fiscal year 2023, placing an emphasis on receiving product into the country of sale at the expense of inventory efficiencies in the short-term. We will continue to utilize airfreight where strategically necessary to import products and leapfrog port congestion to maintain share. More specifically, with the rate of growth our brands are experiencing, particularly HOKA, which has more consistent demand throughout the year as well as a greater percentage of at-once business. Aligning sufficient inventory levels with elevated demand has become increasingly difficult. To help offset this issue, we have stepped up our airfreight usage to supplement ocean and port delays, but shipping by air is causing gross margin compression. Our strategy is to prioritize HOKA market share in the ultra-competitive performance footwear space. And as such, we are willing to maintain higher air freight usage to fulfill this demand. Meanwhile, the HOKA team is actively working through product launch adjustments to best align with the current logistics environment. On pricing, we spoke last quarter about raising prices on select HOKA styles this spring and taking a look at UGG for the fall of 2022 season. Our product teams have completed a thorough review of their respective brand price elasticity and are continuing to adjust prices on target styles accordingly. While these changes can help offset some of the inflationary pressures on materials, we still expect elevated freight expense to be a near-term headwind above these pricing adjustments. Please note this does not constitute gross margin guidance for next year as pricing and freight are only a few of the many variables that factor into our gross margin forecast. From a factory production standpoint, we maintain a network of strategic third-party manufacturers and have been actively seeking additional production lines with existing and potential new partners. Despite ongoing activities, we expect some of our growth in the upcoming fiscal year to be limited by manufacturing capacity constraints to ensure product quality and integrity, particularly with HOKA, given the complex nature of the brand's high-performance products, it will take time to ramp-up additional production. These efforts are made more difficult by the existence of the ongoing pandemic. We will provide a more thorough update on our fiscal year 2023 expectations during our year-end call in May. Now with that context in mind, and moving to guidance for the full fiscal year 2022 and on revenue, we are narrowing our range to reflect a $20 million increase on the low end and maintaining the high end of our prior guidance, now expecting a range of $3.03 billion to $3.06 billion. This represents growth of approximately 19% to 20% over fiscal year 2021. Gross margin is now expected to be at or slightly below 51.5%. Included in this is our annual spend on freight that is now projected to be $100 million over last year. SG&A is still expected to be approximately 34% of revenue, and we expect our operating margin to land within the prior range at approximately 17.5% of revenue. We now expect a tax rate of approximately 21.5% for the year. And taking these into account, we are narrowing our prior earnings per share expectation to a range of $14.50 to $15.15 for full fiscal year 2022. At this point, our full year guidance does not anticipate additional significant supply chain disruption beyond what we have covered here today excluding onetime charges and does not contemplate impact from additional share repurchases. We look forward to providing additional updates on next year during our fourth quarter call in May.
Dave Powers, President and CEO
Thanks, Steve. Our brands have performed exceptionally well this year, notwithstanding logistical challenges facing our industry. Fiscal year-to-date, Deckers has delivered revenue growth of 22% above last year and 37% above two years ago, while maintaining top-tier operating margins among peers. Our impressive margins have been achieved as we continue investing in the long-term future of our organization and prioritize growing the market share of our exceptional brands all while navigating headwinds related to the global pandemic and supply chain disruption. As I said at the opening, our brands are incredibly well positioned across the globe, but demand continues to outpace our current ability to supply it. And we are managing the business to deliver strong results in this uncertain environment. We have continuously evolved our strategies to mitigate the impacts of the dynamic state of the logistics environment. Key actions we are taking include tightening our product assortments to increase SKU efficiency, raising prices selectively based on assessing the competitive landscape of our brands, utilizing the strength of our balance sheet to carry increased levels of inventory in response to supply chain disruption optimizing channel mix to fulfill consumer demand and scaling production to support the growth of our brands. With the realities of the current logistics environment, we recognize that HOKA will remain in chase mode for much of the upcoming year. HOKA has tremendous runway ahead, and we will continue to provide the resources necessary to build HOKA into a major multibillion-dollar player in the performance space. On behalf of the entire leadership team, I'd like to recognize and thank our employees for how well they have managed an intense workload, especially as we all continue to deal with the added stress and struggles caused by the ongoing pandemic. We are doing our best to support our employees and their families through this difficult period of uncertainty. Thank you all for joining us today, and thank you to all of our stakeholders for your continued support. We look forward to sharing more on the bright future of Deckers brand. With that, I'll turn the call back to the operator for Q&A.
Operator, Operator
The first question comes from Camilo Lyon with BTIG. Please go ahead.
Camilo Lyon, Analyst
Thank you. Good afternoon, everyone. And very nice job in a very tough environment.
Dave Powers, President and CEO
Hey, Camilo.
Camilo Lyon, Analyst
I wanted to start off the conversation on where you left off on HOKA. If we could. You talked, Dave, you just said that it's going to remain in chase mode. Up 30% is certainly nothing to sneeze at for sure. It's a fantastic growth rate. But clearly, it seems like you could have done more if you had more product. Can you help us think about what the right run rate is going forward, given everything you said about the lack of inventory availability and the slow build that you expect to see on alternative factory and manufacturing partners to ramp up that production?
Dave Powers, President and CEO
I appreciate the question. It's a dynamic environment. We're proud of achieving a 30% growth rate, especially given the challenges we faced in getting inventory past the bottlenecks. We had to spend a bit more on air freight to address these issues. In the past six months, we've seen a stronger demand for our brand than we anticipated. We're currently in a position where we need to chase that demand. Despite the challenges, we believe we could be closer to a 50% growth rate annually, potentially higher depending on our inventory availability and market distribution. Overall, we're satisfied with how the HOKA business is performing globally, with strong traction in international markets and North America. However, the increased demand has put additional pressure on our supply chain, prompting us to secure more sourcing partners in the Far East, which is a process that takes time. The slowdown in inbound shipments to our distribution center is ongoing, and we're working to add new factories to keep pace with the expected demand over the coming year and beyond. The demand is exceptional, and our teams are committed to maintaining brand visibility and market share. As noted in our quarterly results, we're investing to sustain sales even at a 30% growth rate, which includes significant air freight costs. We've managed this headwind while still projecting a healthy operating margin for the year, which we will keep assessing. We're taking a cautious yet aggressive approach to the HOKA brand and all our brands, aiming to drive revenue and capture market share where possible, even if it means incurring higher air freight expenses. We're comfortable with this strategy and are working on ways to balance these costs while delivering strong results, confident in our ability to navigate the challenges ahead.
Camilo Lyon, Analyst
Great. Thanks for that, Dave. Certainly a great position to be in. I guess, on that same sort of broader topic in terms of gross margin and pricing actions that you're taking and layering that into how you're diverting products from wholesale to DTC. How do you think about the balance of those inputs to protect the share that you have but also continue to deliver the growth that you have been experiencing? Is there an added intention to raise prices to mitigate what seems to be the long duration of air freight expenses into next year? And do you expect to favor or prioritize your DTC channel more than you have been, again, to serve that direct customer more so?
Dave Powers, President and CEO
Yes. What you're describing encompasses all the options we can utilize in this environment. The positive aspect is that our brand strength allows us to raise prices when feasible. For example, HOKA began increasing prices in December for our Spring products, specifically on some Bondi, Clifton, and Rincon models. This price increase, which is around 6% to 8% across the board, is primarily affecting this quarter, Q1. HOKA is also exploring further price increases for fall and next spring to counteract rising supply costs. From the UGG side, we have been making targeted price increases over the past couple of years. However, we're taking a broader look at our offerings for this upcoming fall, which will include price hikes on some of our key styles, excluding the classic short. You will notice increases on Neumel, Classic Mini, and a few other styles. We are also expecting a significant amount of inventory for UGG at older price points, which is beneficial for us. This situation assists with the logistics issues, and the anticipated price increases will also support margins in the future. However, I want to emphasize that we do not expect the supply chain challenges or port bottlenecks to improve anytime soon. Therefore, we are preparing for the ongoing conditions we are currently facing as we plan our business moving forward.
Steve Fasching, Chief Financial Officer
Yes. Camilo, this is Steve. Just to add to that. You mentioned increasing price to offset. On air, we're not necessarily seeing or looking to offset the air in.
Dave Powers, President and CEO
Correct? Yes.
Steve Fasching, Chief Financial Officer
The increases we are experiencing are helping to counterbalance significant inflation and ocean freight costs, but we view the rise in air freight as more temporary. We aren't sure when that situation will improve, but we know we won't be able to fully counteract the air freight increase.
Laurent Vasilescu, Analyst
Good afternoon. Thank you very much for taking my question. UGG growth 8% in the quarter, I'd just say that's pretty impressive considering there was a lot of concerns out there. Dave, Steve, could you maybe quantify if there was a material shift into 4Q fiscal? Because I think you talked about 50% of the inventory was in transit.
Dave Powers, President and CEO
Yes. I think you're asking about whether there's a shift between quarters. Keep in mind that we haven't discussed the quarter cadence much. We're actually evaluating this on a full-year basis. I know different models have projected various outcomes for UGG. As we've mentioned, the year is unfolding as we anticipated from an UGG standpoint. At the start of the year, we indicated there would be shipment timing issues between quarters.
Steve Fasching, Chief Financial Officer
Yes. I would add that we do not see inventory delivery shifting from Q4 to Q3, as we were primarily focused on increasing our inventory throughout the majority of the quarter. There was a slight shift from Q3 to Q2 that we considered in our year-to-date results. It's important to note that the growth for UGG this quarter came largely from international regions. We have been working to transform these markets to appeal to a younger, more diverse audience with varied product offerings, consolidating wholesale accounts in Europe, and successfully attracting younger consumers with new product lines such as the Fluff, the Classic Clear, and the Tasman.
Laurent Vasilescu, Analyst
That's great to hear. I would love to learn more about HOKA, specifically regarding the product launches like the Kawana. I understand it's early since you just launched it on the website, but I would appreciate insights on that assortment. A few quarters ago, you mentioned aiming for DTC to account for 50% of the company. Can you provide an update on how the HOKA stores and the pop-up in North America are performing? Additionally, what are the early impressions of the HOKA store in Shanghai as we consider future store expansions for the brand?
Dave Powers, President and CEO
Yes. So just on the product launches, obviously, with the supply chain challenges, the brand team has had to adjust on the fly the timing of different launches based on where they can get all the inventory here and time, et cetera. It's early days in the Kawana. We're excited about what that could do from a cross-training perspective and bringing that type of running product to a unique consumer that's looking for that from us. But we'll continue to innovate and expand into different categories as we go forward, but it's early days on that style. I think from a store perspective, we're very pleased with how things have gone so far. The store in New York is far exceeding expectations, and I think that is a good signal when you have awareness of a brand that you can see strong growth. The experience that we're seeing in China is good from a traffic perspective, but conversion isn't quite as high as we'd like it to be yet. And so that just speaks to people getting familiar with the brand over time. It's early days in China. People are still relatively unfamiliar with the brand. But the experience that our stores are providing for the consumer there and giving confidence to our partners in the marketplace is very strong. And so we're pleased with how things are going. But a heavy lift over time to get China to where it needs to be, but we're off to a good start. And then real optimism around what a store concept could do as we expand into the US and Europe over time as well.
Steve Fasching, Chief Financial Officer
Yes. This is Steve, Laurent. Regarding the direct-to-consumer mix, I believe what you will observe in the quarter is that our direct-to-consumer performance was strong, particularly in December. We benefitted from limited supply in the wholesale channel, leading consumers to come directly to us. This highlights the strength of our direct-to-consumer and omnichannel capabilities. While this may not fully represent the yearly mix as it is stronger this quarter, it does show the progress we are making in that area.
Laurent Vasilescu, Analyst
Great. Thank you very much for the color.
Dave Powers, President and CEO
Thanks, Laurent.
Jonathan Komp, Analyst
Yes, hi. Thank you. Good afternoon. I wanted to ask about the UGG business, the performance. Could you maybe share a little more color on the third quarter DTC performance there? And if you could give some color on US versus international and just how we should think about the fourth quarter would be helpful?
Dave Powers, President and CEO
The DTC business for UGG was very strong, especially in the latter half of December. We experienced a significant increase in that sector, and it continues to be a key driver for us, reflecting consumer demand for the product. If customers can't find it in wholesale, where they prefer to shop, they're turning to our website, and we're working hard to meet their needs. Overall, I'm very satisfied with how the UGG brand has evolved beyond the core Classics line. We still maintain a robust business there, but we've diversified with Tazz, Ascot, Mini, Tasman, Neumel, and others. The Neumel style is currently a standout, ranking as the top style for both men and women, performing exceptionally well, and gaining traction globally, particularly in the sports lifestyle segment, which is contributing significantly to our business. The men's category is showing positive trends, as is the kids' segment. Additionally, our apparel business has increased by 50% year-to-date, with further growth potential in that area. When we compare the brand’s position today to a few years ago, it has diversified across genders and categories, becoming strong in head-to-toe offerings. I'm also pleased with the growth we're seeing in international markets, both in wholesale and e-commerce. We could have achieved even more in the last quarter if we had access to more inventory, which is gradually arriving in Q4. Nevertheless, the brand is in a very good position, with tight management of our assortment and strong SKU performance in the marketplace, healthy full-price sell-through, and good margins. There are many reasons to be optimistic for a brand of this size. While the annual growth potential is not as significant as HOKA, it remains strong within the footwear industry context.
Jonathan Komp, Analyst
Yes. That's really helpful. And then maybe one follow-up on the freight picture. The $100 million that you called out, Steve, this year, just any thoughts directionally how that could look going forward? And then in the broader context, is the right way to think about it? I mean without that $100 million this year, you'd be north of 20% operating margin. So is that still eventually a level you think you can get to once everything normalizes, understanding there's a lot of uncertainty of when that happens? Thank you.
Steve Fasching, Chief Financial Officer
Yes. Thanks, Jon. It's a good question. And clearly, it's something that we're looking at. We, again, haven't given guidance, but I think the way you're looking at it is right in terms of what the impact is. Now we did in the current year, cut back in other areas. So those are probably things we wouldn't necessarily cut back in a normal year. So you're right in terms of the $100 million, if you add that back, you get to kind of a 20%. But we have course-corrected during the year and not spent as much on some other areas of the business that we typically would. So I would say stay tuned, we'll be able to give you a better picture of what that looks like. And then the other thing is it's just trying to determine when all this begins to normalize. I think a big component of the $100 million, it's clearly air freight. We're hopeful that things begin to normalize, and so we wouldn't have to use as much air freight in the future. But still, there's factory disruption, there's still port congestion. And with a brand like HOKA, we're having to use more air than what we even anticipated kind of three months ago. So that's something that we're still watching. I think the other thing just to be aware of is the increase in ocean freight. And so I think that's going to take a lot longer than the air to begin to normalize. So we'll see how all that shakes out. I think we're going to learn more in the next three months, and we'll be able to give you a better perspective of what that looks like in a couple of months on the year-end call.
Dave Powers, President and CEO
Yes. At that point, we will be able to share more details. We still need to invest in the business to sustain and grow. With the expected demand and growth, we will need to make additional investments in logistics, distribution centers, infrastructure, and talent. It is encouraging to know that we could have achieved a 20% increase this year without the air freight costs, and I am proud of our team's adaptability in delivering on our operating margin guidance despite having to manage a $100 million challenge this year. This demonstrates the flexibility of our model and the capabilities of our leadership team.
Sam Poser, Analyst
Good afternoon. Thanks for taking my question. I have a few, and I'm going to read them all. One, I would love for you to give us the sales by wholesale or DTC, whatever you prefer by brand and update full year guidance by brand, HOKA is expected to hit up 50% plus on the prior guidance, up high single-digit and so on. If you could update that. And I also wanted to know about what the merchandise margin improvements are excluding all the other stuff and inventory by brand and then transit by brand. Thank you very much.
Erinn Kohler, VP, Investor Relations and Corporate Planning
Hi Sam, it's Erinn. I'll provide you with the global wholesale and distributor sales for the third quarter just completed. For UGG, that was $432.1 million, for HOKA $122.6 million, for Teva $16.3 million, for Sanuk $3.1 million, and for other brands, largely Koolaburra, $24.2 million.
Steve Fasching, Chief Financial Officer
Yes. As for the brand guidance, there isn’t a significant change. We've maintained the upper end of the range and are comfortable with what we've previously provided. We’ve raised the lower end of the range, primarily due to some improvement in UGG's Q3 performance. Overall, the ranges are consistent with our earlier guidance and align closely with our previous statements as well.
Sam Poser, Analyst
And then quickly follow-up on that one. Does that mean that we'd expect a sort of a much larger sales in Q4 for HOKA to get it up to around that 70% number that you inferred on the last call, that number is going up and going to accelerate in Q4?
Dave Powers, President and CEO
That's how we're looking at it. Yes. Based on inventory.
Steve Fasching, Chief Financial Officer
Yes. Regarding merchandise margins, the teams are working to absorb rising costs related to materials and labor included in product pricing. Any potential margin improvement will likely come from price increases. Our current efforts on merchandise margins are focused on maintaining our existing margins rather than seeking efficiencies to improve them in this challenging environment. We are adopting a long-term approach by reducing SKU counts, concentrating our efforts, and eliminating unnecessary products to enhance efficiency. At this time, we are primarily maintaining margins rather than pursuing upside opportunities. Yes. I can give you inventory by brand. I don't have the in-transit rating in front of me, but roughly speaking, yes. So as I said, in total, the in-transit is just above 50%. So 50% of the $551 million is in transit. The $551 million, as it roughly breaks out by brand is about $350 million on UGG, $130 million on HOKA, $27 million on Teva, $10 million on Sanuk and a little over $26 million on Koolaburra.
Paul Lejuez, Analyst
Hey, thanks guys. A couple of questions. Curious when this product comes in, when it does come in late, what sort of cancellation rates you're seeing for each of the brands? And also curious have to offer discounts when the product has come in late? Or is it more an environment where your wholesale partners are just taking whatever you've got whenever you get it? That's the first question. Second, you mentioned something earlier, I think, about HOKA new partners. So I just wanted to hear a little bit more detail what's going on there. And on the HOKA wholesale business, curious if you can talk about sales to same customers versus new customers that they've seen in terms of the growth of that business this year? Thanks.
Steve Fasching, Chief Financial Officer
Sure. What was... Cancellation.
Dave Powers, President and CEO
Cancellation rates are not significant. We're actually seeing lower cancellation rates than we expected. The brands continue to be in demand, and customers are happy to receive products. Overall, our cancellation perspective aligns with our expectations. The second question was… So new partners in Asia. So I think you might be referring to what I said earlier about HOKA retail stores. But the best way to think about that is partners that we have on the distributor model over in Asia. We're seeing very strong demand in those partners outside of China and Japan, we get Australia and some of the Southeast Asia countries. And then in China, what I really meant there is, over time, we will mirror the model that we've established for UGG with a handful of healthy owned retail stores and then third-party wholesale partners in region who can run stores for us. So in China, what I was speaking to is having a retail presence and showing that we are investing in the brand and creating a compelling experience for the consumer, that's all good for the distributors, potential partners that we're evaluating at the moment to see how Deckers is getting behind HOKA and gives them a lot of confidence for this brand going forward.
Paul Lejuez, Analyst
Got it. The other piece is just the back of the HOKA growth this year, how did it look in terms of sales to existing customers or new doors, new partners? How does that break down?
Dave Powers, President and CEO
Yes. I mean, where we're able to get inventory to our partners, again, sell-through is exceptional, both existing partners, primarily in the run specialty arena. But as we talked about before, DICK'S is continuing to see very strong success. We're continuing to slowly and strategically expand with them as a partner. And so the results and the feedback from all of our wholesale partners, aside from frustration on delivery and timing that the teams had to deal with is very strong, speaking to the product and the demand for the brand and how awareness is increasing. So all good signs there, and that's on a global level. It's just really truly a matter of keeping up the demand right now, which we see accelerating on a regular basis.
Jim Duffy, Analyst
Thank you. Good afternoon.
Dave Powers, President and CEO
Yes.
Jim Duffy, Analyst
I wanted to start asking a question about the UGG brand and whether North America weather wasn't super cooperative through the selling season. Has the brand been diversified to the point where the weather just isn't a consideration that it used to be? Or are there other changes to the brand and composition? Is it making more insulated to weather impacts?
Dave Powers, President and CEO
Yes, that’s a great question. Weather used to significantly impact the UGG brand because we relied heavily on core products and had limited options that weren't weather-dependent or fashionable. That has changed considerably. Now, weather is only a minor factor, with shifts of a few percentage points either way. December was warmer than we anticipated, but the strength of the brand and fashion products really shone through, despite the classic styles still performing well. In particular, Neumel, Tasman, and the fluff franchise were key contributors to our success. These styles are less affected by weather conditions. As for January, even when it's cold in the Northeast, we still see strong demand for the brand. We're pleased that we've reduced the influence of weather on our success by expanding our diverse and appealing product assortment that isn't solely dependent on weather. We plan to continue this growth. Additionally, our rain product presents a significant opportunity, and we have finally launched a compelling assortment in that category, which we expect will drive further growth across men's, women's, and kids' lines.
Jim Duffy, Analyst
Understood. Good progress. Steve, a couple of clarifications on your margin commentary. First, the $100 million in freight that you mentioned, is the convention for that comparable to the $40 million that you mentioned with the September quarter report? So effectively, you're planning $60 million incremental. Is that the right way to think about it?
Steve Fasching, Chief Financial Officer
Yes, you are correct. We have increased the incremental amount, with the full year projection for freight set at $100 million. This figure includes both the additional air freight and the higher rates associated with ocean freight.
Jim Duffy, Analyst
Got it. Okay. And then you made a comment in the prepared remarks, you talked about pricing actions and looking out to fiscal 2023. We should not consider this gross margin guidance, but you talked about pricing not being able to fully offset the freight expense. What other variables should we be considering as we think out with that? And as part of the uncertainty and the reason you stop short of providing gross margin guidance is you don't know what type of relief you might get on the freight in fiscal 2023?
Dave Powers, President and CEO
Yes, that's a good question, and I appreciate you asking for clarification because the current environment is challenging, which is why we're proceeding with caution. We are using more airfreight than we had initially expected, primarily due to ongoing port congestion and heightened demand for certain brands, particularly HOKA. This situation is likely to continue as we haven't seen any signs of improvement in port congestion yet, making it uncertain how long this will persist. Ideally, in about three months, we hope to see some progress, allowing us to provide a more accurate update, but at this moment, the outlook remains unclear. Another challenge we're facing is the pressure from the inventory we've brought in this year, which has affected our ocean freight costs significantly, impacting Q3 and subsequent quarters. The first half of the year had lower freight costs, but this increased expense will continue as we move into fiscal year 2023. We plan to offer more clarity on fiscal 2023 in approximately three months. Currently, we are experiencing a high level of in-transit inventory, nearly double what it was a year ago, and with air freight costs still elevated, it’s difficult to offer clear guidance on the implications for gross margin. Although we anticipate that air freight costs will eventually decrease, we do not know when that might happen. For now, we are increasing prices to offset material cost increases and the anticipated continued ocean freight costs, but we are not trying to offset airfreight costs through pricing adjustments. Our decision to bring products into the market to meet demand is strategic, aimed at maintaining and growing our market share, even if it results in some compression of our gross margin. We are prepared to accept this short-term trade-off. As conditions improve, we expect to be in a better position, leading to potential gross margin expansion.
Jim Duffy, Analyst
Understood. Thank you for that clarification. And like part of the point is you'll be consuming inventories brought in at those higher freight rates into fiscal 2023?
Steve Fasching, Chief Financial Officer
That's correct. Correct. Yes.
Jay Sole, Analyst
Great. Thank you so much. And Dave, I just wanted to ask about HOKA. You mentioned brand awareness is rising, I believe. Can you just talk about from a marketing standpoint as you look into the fourth quarter and a little bit into next fiscal year? What are some of the strategies you have to continue to raise awareness for HOKA, maybe some of the events or some of the opportunities to continue to elevate the brand and raise awareness not just in the US but globally?
Dave Powers, President and CEO
Yes, that's a great question, Jay. The need to continue promoting this brand is significant. It's not just about the financial investment; partnerships play a vital role. We're very proud of our Global IRONMAN partnership, which is making a difference in international markets as well. We aim to expand that into other opportunities by collaborating with our athletes to gain insights on our products while also increasing brand awareness and supporting our global community. These efforts are part of our regular activities and are essential for our brand's ongoing success. Over the past year, we have brought on a new Head of Marketing, Norman Delaney, who is doing an excellent job. She has initiated a project to engage a global agency of record that will elevate our marketing efforts. While we have excelled at hosting events and launching products independently, our new strategy aims for a more consistent voice, message, and overall aesthetic for the brand on a global scale. You will see this begin to unfold in the first and second quarters. We will be launching an updated website featuring new creative elements over the summer and will continue to build on that. The regional and global teams are very enthusiastic about our new marketing partner, which we believe will enhance our brand with a cohesive global marketing narrative, providing more consistency across all product launches and markets. Additionally, we've signed on as the primary sponsor of the UTMB series, alongside our IRONMAN sponsorship. These races hold significant importance in the industry, have a global presence, and are top-tier events for both serious runners and casual fitness enthusiasts.
Operator, Operator
This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.