Earnings Call Transcript
DECKERS OUTDOOR CORP (DECK)
Earnings Call Transcript - DECK Q1 2021
Operator, Operator
Good afternoon and thank you for standing by. Welcome to the Deckers Brands First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue-up for questions. I would now like to remind everyone that this conference call is being recorded. I’ll now turn the conference over to Erinn Kohler, VP of Investor Relations & Corporate Planning. Please go ahead.
Erinn Kohler, VP of Investor Relations & 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 the impact of COVID-19 on our business and operations, business partners and industry, changes in consumer behavior in the retail environment, strength of our brands and demand for our products, changes to our product allocation, distribution, and inventory management strategies, changes to our marketing plans and strategies, investments in our business and our anticipated revenues, product mix, gross margins, expenses, 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 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.
Dave Powers, President & CEO
Thanks, Erinn, and good afternoon, everyone. On behalf of the Deckers organization, I hope everyone is doing well and staying safe. As the COVID-19 pandemic continues to have devastating effects around the world, we remain committed to prioritizing the health and safety of our employees, customers, and the communities where we operate. On our May call, we detailed our strategic approach to managing the business through this pandemic. I believe the work we have done so far this year and over the past few years has created an important foundation. Though we still expect there to be additional hurdles to overcome later this year as we approach the peak season for our largest brand. Before I share our results for the quarter, I’d like to express my sincere gratitude to our employees for their continued commitment to working through these challenging circumstances, helping to deliver a solid first quarter. For the first quarter of fiscal year 2021, revenue was up 2% versus last year to $283 million, gross margin increased over 300 basis points to 50.3%, and we delivered a loss per share of $0.28. Many of the trends we outlined at our May call remained largely consistent through the balance of the first quarter. Our direct-to-consumer business was robust throughout the quarter, driven by triple-digit online growth in both the UGG and HOKA ONE ONE brands. However, this was mostly offset by the headwinds experienced from both owned retail store closures, as well as some wholesale doors remaining closed during a portion of the quarter. Our first-quarter performance benefited greatly from the organizational foundation we've invested in over the past few years. In addition, certain areas of our business benefited from the shift in consumer behavior as a result of the pandemic, with our ongoing key strategies amplified and accelerated by some of those trends. Omnichannel capabilities have been a key area of investment, with a distinct focus on bolstering our e-commerce competencies where we've added new targeting efficiencies, analytical tools, upgraded talent, and enhanced global accessibility with our online platform. Thanks to these investments, our digital marketing and e-commerce teams are able to efficiently and effectively transition content to authentically realign with the new marketplace realities created by the pandemic, including efforts to engage with consumers through virtual events and programs. UGG was able to adjust its plan for Pride to create a virtual prom for all events in partnership with Tommy Dorfman. HOKA had originally planned a series of in-person events surrounding the launch of the Clifton Edge, but the brand transformed those plans into a virtual challenge in partnership with Strava. As our brands adjusted plans for in-person events to virtual, they also shifted their marketing mix towards the top of the funnel in an effort to reach a new and diverse set of consumers. These are just a few examples of how our brands were nimble in optimizing sell-through of the powerful product and narrative by modifying their marketing plans amid changing marketplace conditions. Beyond our investments in digital and PR, another key area of focus has been reducing the company's reliance on core UGG products. UGG has successfully diversified its product mix through investments in innovation and design to build a counter-seasonal assortment that complements the core product offering while continuing to manage the brand's domestic allocation and segmentation strategy. Lastly, we have invested and will continue to invest in the HOKA brand to drive global growth and build on the brand's momentum to increase brand awareness and consideration. The strength of our e-commerce and digital marketing platforms, fueled by adaptive marketing tactics, created demand for counter seasonal UGG products and continued HOKA momentum, driving Deckers' success in the first quarter. Shifting to the brand highlights from the quarter, starting with the Fashion Lifestyle group. Global UGG revenue in the first quarter was down 10% versus the prior year to $125 million, driven by a 49% decline in wholesale, which was primarily caused by COVID-19-related wholesale door closures. Partially offsetting the decline in wholesale, the UGG brand experienced a 53% increase in its direct-to-consumer business as e-commerce was able to more than make up for the lost volume from our owned retail store closures. Online strength was fueled by an accelerated shift to consumer demand for online platforms and supported by the investments we have put behind our e-commerce business, resulting in a triple-digit increase in both acquired and retained consumers as compared to last year. We understand that some of these newly acquired individuals likely previously engaged with the UGG brand through a brick-and-mortar experience. However, we welcome the shift in consumer purchasing to our online platform and will continue investing in the channel. Correlating to the sizable customer acquisition, the brand saw a substantial acceleration of UGG loyalty enrollments in the first quarter as compared to last year. We are especially encouraged by the UGG brand's incremental loyalty additions, as members typically purchase the brand more frequently and are more likely to purchase multiple product categories. For the first quarter, loyalty members accounted for nearly 40% of direct-to-consumer revenue, which compares to 28% for the same period last year. From a regional perspective, the domestic UGG business maintained the momentum experienced throughout fiscal year 2020 with revenue growing in the first quarter of fiscal 2021 as compared to last year. Domestic performance was fueled by 18 to 34-year-old consumers purchasing online as ugg.com saw a significant increase in consumers within this age group, representing over 40% of total online purchases in the quarter. Internationally, UGG declined versus last year primarily related to COVID-19 store closures, the multiyear marketplace reset in Europe, and the brand having a smaller e-commerce presence relative to the U.S. market, making it more challenging to offset the volume loss from retail stores. In terms of product highlights, the UGG brand experienced global success with its slipper business through innovation of emotional and comfortable products that resonated with a broad range of consumers. We believe the gains in UGG slippers were due in part to COVID-19 related work-from-home mandates as people sought out casual and comfortable shoes to wear in their homes. Additionally, the Fluff franchise's continued expansion and momentum. The Fluff Yeah style is the brand's top-ranked style in terms of revenue in the first quarter for the second year in a row. Its companion style, Oh Yeah, was number two in its introductory season. Both styles are resonating well in driving meaningful growth in both women's and kids' sizes, suggesting somewhat of a Mommy and Me trend. In fact, the Fluff and Oh Yeah styles drove nearly half of the total purchases by 18 to 34-year-old consumers. We believe that this hybrid slipper/sandal phenomenon that UGG created is here to stay, as the brand continues its cycle of innovation to deliver authentic product updates for new and existing consumers. Beyond the Fluff franchise, many of the heritage slipper styles such as the Scuff, Coquette, and Tasman experienced nice growth, which we believe was both incremental as well as some pull-forward demand from later in the year. We were excited about the UGG brand's recent performance with spring and summer products, especially given the brand has not typically been top of mind for the consumer at this time of year. According to Google Trends, UGG experienced a 76% increase in search interest during the first quarter, underscoring the progress the design team has made developing a product that resonates with consumers during the spring and summer months. The UGG team is targeting the conversion of newly acquired consumers to repeat purchases throughout the balance of fiscal 2021. Turning to the Performance Lifestyle Group, which is comprised of HOKA, Teva, and Sanuk. Beginning with HOKA, global revenue for the first quarter increased 37% versus the prior year to $109 million. HOKA was able to grow both wholesale and direct-to-consumer channels, primarily due to the size and strength of its domestic e-commerce business as well as the rapid expansion of distributor volume internationally. Expansion of the HOKA brand internationally has been a great indicator of the accelerating consumer appetite for HOKA outside of the U.S., specifically within Europe. We feel the brand is resonating due to the frequent introduction of compelling products and powerful storytelling globally. Digital growth and customer acquisition have been a focal point, building the HOKA ecosystem over the past few years. With the accelerated shift to online purchasing, our investments in digital have become even more critical. During the quarter, HOKA direct-to-consumer experienced triple-digit revenue growth, aided by a similar triple-digit increase in customer acquisition as compared to last year. Like UGG, we believe some of the online consumer acquisition may be attributable to consumers who have purchased HOKA before at wholesale, but due to store closures, have now migrated to our website. Given the brand's marketing strategy has traditionally included in-person-based activities, we're thrilled by the HOKA team's ability to accelerate online engagement and further cement the brand's digitally led approach. There have been numerous initiatives to help drive digital engagement with the HOKA brand in the first quarter, including the brand sponsorship of the virtual IRONMAN racing series as well as the HOKA partnership with Strava to create the Ekiden challenge. In continuing its sponsorship at the IRONMAN racing series virtually, HOKA was able to stay connected with its core consumers and potentially reach a new audience who may be following Ironman events while most other sports are on hold. Ekiden is about moving forward together and bringing out the best in each other. It's a relay-style running race that originated in Japan. Over 400,000 people across the globe participated in the Ekiden challenge, which helped create a new method of connection with consumers in the absence of in-person events, and afforded HOKA the opportunity to learn more about its consumers. The challenge was designed to coincide with the launch of the Clifton Edge, which is the latest innovation from HOKA and has seen strong consumer demand since its introduction in early July, particularly in Europe. The HOKA brand proved to be in a position of strength during a period where many brands struggle to grow, proving the brand power it is developing. We'll look to continue fueling the HOKA brand's momentum for the balance of fiscal 2021 and beyond. Moving to Teva. Global revenue in the first quarter was down 8% versus the prior year to $35 million. Teva performance included a notable acceleration of its direct-to-consumer business in the back half of the quarter. For the quarter, DTC represented 39% of the Teva brand's revenue, which was up from 19% in the previous year. And although the overall revenue declined in the quarter, the brand experienced global growth with its universal franchise styles that now feature straps made from recycled plastic. For Sanuk, global revenue in the first quarter declined to $13 million. Similar to Teva, Sanuk is amplifying its focus on sustainability. Subsequently, at the end of our first quarter, Sanuk introduced its new SustainaSole collection. The collection is the brand's most eco-friendly shoe to date, featuring recycled materials throughout the entire construction of the shoe. With respect to channel performance, overall, we saw significant strength with our online channel in the period, while physical retail experienced disruption from the pandemic conditions adversely impacting both owned retail and our wholesale business. Global direct-to-consumer revenue increased 74% versus last year in the quarter. Direct-to-consumer gains in the first quarter were driven by the strong consumer demand of our brands online, in particular with both UGG and HOKA more than doubling e-commerce revenue year-over-year. Again, we believe a portion of this incremental online demand continues to be spurred by consumers actively seeking products that provide comfort for the work-from-home environment, combined with an interest in exercising outdoors. Due to the meaningful disruption of our retail store base throughout the quarter, we are not reporting a comparable direct-to-consumer sales figure. Global wholesale revenue decreased 27% versus last year for the first quarter. We experienced lower wholesale revenue across all brands in our portfolio, except HOKA, which was able to offset a domestic decline with higher international revenue. The pressure experienced in wholesale was primarily the result of pandemic-induced store closures across the globe. However, despite the decline in wholesale revenue, our partners also experienced growth within their e-commerce channels, which suggests our brands are taking market share from the competition. According to NPD's retail tracking service, for the months of April through June, each of our brand growth rates were more favorable than the overall marketplace. Before handing off the call to Steve, I'd like to give an update on the status of our operations and highlight a few dynamics to consider for the balance of fiscal 2021. Our Moreno Valley distribution center continues to operate at a limited capacity due to increased social distancing measures taken as a precaution to maintain employee safety. Our Moreno Valley DC team and third-party logistics partners continued to work through the challenges associated with shipping higher levels of product sold through our e-commerce channel, in addition to the increasing volume of wholesale shipments, as we head into peak season. As a result of these conditions, we anticipate higher costs associated with employee safety and increased payroll costs related to DC employees. We continue to adjust our retail store fleet operations in compliance with updated and ever-changing health and safety standards. To provide some context for our retail store operations during the first quarter, approximately 20% of our stores were open for the entire 90-day period. The average store was open for roughly half the quarter. As of this week, approximately 95% of our global stores are open, but in most cases operating at a limited capacity. Given the ongoing and uncertain pandemic conditions, which include meaningful local and regional differences and restrictions imposed on retail store operations, we foresee potential risks of additional store closures or limitations during peak periods. Similar to our owned retail stores, many of our wholesale partner stores were closed for much of our first quarter but have since reopened with limited operations. We have continued to work closely with our wholesale partners to identify areas of risk and make the relevant adjustments to our order book. Given the significant portion of business remaining in this fiscal year, as well as the uncertainty around economic conditions and consumer sentiments, we still anticipate cancellations to outweigh the orders. In terms of our sourcing, during the first quarter, we operated with reduced capacity due to the implementation of social distancing measures and we continue to experience travel restrictions between country borders and production facilities. However, these disruptions have been mitigated thus far, and at this time, we are not experiencing any major sourcing disruptions. Given the first quarter is historically very different from our other three quarters in terms of channel and brand mix, and the first quarter was especially unique this year due to the marketplace conditions resulting from the COVID-19 pandemic, we know that this will not be a typical year. I'd like to take a moment to recognize some of the dynamics we are observing and that should be considered for the balance of fiscal 2021. In the first quarter just completed, approximately 49% of revenue came from direct-to-consumer, heavily weighted towards e-commerce, which is significantly above last year and our typical quarter; 38% of revenue came from HOKA, which is well beyond last year and the average quarter; and less than half of the revenue came from UGG, which typically represents over 70% of total company revenue on a full-year basis. While we expect direct-to-consumer and HOKA revenue to increase as a proportion of our total revenue in fiscal 2021, we do not expect to repeat the levels of penetration experienced in this first quarter. Additionally, though we're optimistic about the UGG brand's start to fiscal 2021, the brand is a long way from its peak holiday time frame, which we are expecting to be highly competitive and feature increased levels of promotional activity across the marketplace. Starting in the second quarter, wholesale is expected to become a more impactful portion of the UGG brand revenue, especially as we move some customer shipments forward to help alleviate potential pressure during the third quarter at our distribution centers. Given the number of unknowns, we continue to approach the UGG brand's peak season with appropriate caution. To summarize, our portfolio of brands delivered an excellent quarter in an exceptionally challenging environment. I'm proud of our teams for their dedication and discipline to achieve our best first quarter result in the past nine years. Despite the first quarter traditionally being our lowest revenue quarter, I'm encouraged by the resiliency of our brand and look forward to building on that momentum for the balance of fiscal year 2021 and beyond. The ongoing pandemic will undoubtedly present adversity throughout the year, but I'm confident in our team's ability to manage the effects on our business. With that, I'll now hand the call over to Steve to provide more details on our first-quarter financial performance and provide some additional color on our strategy to manage the balance of fiscal 2021.
Steve Fasching, CFO
Thanks, Dave, and good afternoon, everyone. As Dave just detailed, we are extremely pleased with the organization's performance amidst tough marketplace conditions. As of June 30th, the organization maintained its strong liquidity position above $1 billion, aided by the performance of our portfolio of brands that drove positive cash flow for the first quarter and is inclusive of untapped credit revolvers totaling $470 million. Our strategic approach to managing through the pandemic and its economic impact served us well in the first quarter. We will stay the course and continue managing our business tightly by leaning on our strong operating model, while also fueling our brands to drive competitive gains in market share. Now for our results. First-quarter revenue was $283 million, up 2% versus last year, and slightly above the trends we outlined for the first half of the quarter on our May earnings call. As compared to last year, revenue growth was driven by HOKA, which increased $29 million over the same period last year. Offsetting the HOKA brand growth was a $14 million decline in UGG, a $5 million decline in Sanuk, and a $3 million decline in Teva as compared to last year. Given the difficult marketplace dynamics during the first quarter, we were pleased to see our online channel's ability to capture consumer demand as physical store locations largely remain closed. In addition, our online results benefited from efforts to drive consumers to our compelling product offering in our historically smallest revenue quarter. Gross margins in the first quarter were up 330 basis points over last year to 50.3%. This result was aligned with our view of the business as a favorable shift in channel mix resulted from reduced wholesale volume, including a reduction of closeouts and an increased penetration of e-commerce. We also benefited from the HOKA brand's growth and its corresponding increased mix of total company revenue. Moving to SG&A, our dollar spend was $150.3 million, down 7% from last year's spend of $161.4 million. The decrease versus last year was driven by variable category reductions with the bulk of the year-over-year savings attributed to reduced travel and shifting a portion of marketing spend to later in the year. The combined effect of these items represents approximately $10 million of reduced operating expense in the quarter. Income tax benefits were lower than last year due to a smaller net loss this year and a discrete tax charge in the current quarter, with last year benefiting from a one-time tax refund. Our first-quarter performance resulted in a loss per share of $0.28 as compared to last year's loss per share of $0.67. The $0.39 improvement versus last year was driven by a higher revenue mix of HOKA, including benefits from a greater portion of DTC sales, higher revenue and profitability from our domestic UGG business as DTC performance was able to offset declines in wholesale, variable expense savings primarily related to travel and marketing, with partial offsets coming from lower UGG international wholesale revenue, year-over-year declines in Teva and Sanuk, no tax benefit this year and reduced interest income compared to the same period last year. Our balance sheet continues to remain strong. As of June 30th, cash and equivalents were $662 million, up from $503 million at June 30th last year, and up from $649 million at March 31st of this year, making the first quarter net cash positive. Inventory was down 8% to $435 million as compared to $473 million last year. Inventory levels were down partially as a result of the intentional phasing of later receipts in order to more closely align with the timing of anticipated demand as we move into later quarters. We had no material short-term borrowings under our existing credit lines, which have an available balance of $470 million. We did not repurchase any shares during the first quarter as we paused share repurchase activity, placing an emphasis on liquidity and cash management. Share repurchase activity remains paused for future periods, although we may commence future repurchase activity under our existing Board authorization as management deems appropriate. Finally, given the continued uncertainty caused by the COVID-19 pandemic, we will once again not be providing specific guidance for fiscal year 2021 at this time. However, I will reiterate the major themes of our business and briefly outline our management thinking. We continue to approach fiscal year 2021 with expectations that total company revenue will decline year-over-year, though we believe HOKA will still experience growth, albeit at a lower rate than the brand's 37% increase in the first quarter. The Fashion Lifestyle Group will face headwinds related to further international softness and additional wholesale cancellations. As our wholesale business approaches our peak period and we begin shipping higher volumes of product, it will be increasingly difficult for our e-commerce business to compensate in the same proportion we saw in Q1 with the continued disruption of the retail landscape. Our gross margins, while we saw a meaningful improvement in the first quarter, we don't anticipate these channel and brand mix dynamics to continue for the balance of fiscal 2021 as the wholesale and distributor proportion of the business will increase. We may also see promotional pressure in the marketplace as we move into the peak holiday timeframe. Expenses will continue to be managed tightly as we work to preserve liquidity, but we will use the success we are seeing to dial marketing up as appropriate to continue driving consumer engagement. We will face higher costs related to distribution fulfillment as additional safety measures and higher labor costs will be incurred. As we look at the remainder of the year, we recognize there will be continued challenges ahead resulting from the new realities created by the COVID-19 pandemic. We are managing through these challenges that include social distancing measures in place at our Moreno Valley and third-party logistics distribution centers. Our critical focus is on maintaining employee safety as we are addressing increasing demands on our fulfillment capabilities. This will ultimately result in the organization facing higher expenses to ship less product. To help mitigate some of the workload impacts related to these challenges, we are partnering with wholesalers to potentially ship some products earlier, which could result in the cadence of revenue looking different than previous years. Additionally, given the ongoing economic pressure, we do not yet know how our core product will sell in this environment. Consumer sentiment looms large as a tough variable to predict in this uncertain economic environment. With higher unemployment, uncertain government action and the potential for further shutdowns, we remain cautious in our approach to planning the UGG brand's peak season. I'd also highlight that UGG is still facing brand heat challenges internationally, and our actions to reset the European marketplace will continue to be a drag on fiscal 2021 revenue. With the first quarter now behind us, we are encouraged by our performance and are still in a position to play offense with our healthy and in-demand brands but will remain diligent and course correct where necessary. As we stated on our May earnings call, the strategic approach we have outlined to manage our business through this pandemic is expected to result in short-term pressure on operating margins, but we maintain belief that this strategy will best enable our brands to emerge in a position of strength as we move beyond the pandemic. Thank you. I will now turn the call back to Dave for his closing remarks.
Dave Powers, President & CEO
Thanks, Steve. As I reflect on the quarter's performance, I remain encouraged by the power of our brands and their ability to capture consumer demand online. While the management team and I are aware of the tough road ahead, we believe the foundation of our operating model provides our organization a unique opportunity to build market share as others are forced to take a more defensive approach. We plan to build on the first quarter success of our e-commerce and digital platform to accelerate gains in the channel, continue fueling HOKA brand momentum, and build awareness through digital engagement with consumers, protect the marketplace management progress we've made in UGG by leaning into key styles and converting newly acquired customers to repeat purchases, and stay true to the Deckers organization's values by innovating and developing creative solutions to challenging marketplace conditions. Our company brands and balance sheet are well-positioned to manage through this crisis. We will remain flexible to adapt to changing circumstances and make decisions in the best interest of our brands. I'd also like to take a moment to recognize our longest-tenured Board member, John M. Gibbons, as he plans to retire in the current quarter. I want to thank John for his 20 years of service on our Board of Directors. John's contributions, including his time as our Chairman and his leadership of the Audit Committee, have helped build the successful organization that we have today. John's leadership will be missed, and I'm thankful for his continued friendship. As we make this announcement, John asked me to express his gratitude for the trust and support of Deckers' stakeholders throughout his many years of service to the organization. We wish John the best in his retirement. Before I hand off to the operator for Q&A, I'd like to acknowledge the social movement happening across the United States over the past few months. The foundational belief of the Deckers organization is 'Better Together.' Our core values compel the organization to seek an active stance against racism, discrimination, and intolerance of any form. Deckers is an anti-racist organization, and we are actively taking steps to become better allies through continuous evaluation and improvement of internal practices, investments in education, and continuing to build a more inclusive workplace. Thank you to all of our employees for their exceptional efforts and commitment to our strategies. On behalf of Deckers, I hope everyone stays healthy and safe. With that, I'll turn the call back over to the operator for Q&A.
Operator, Operator
We will begin the question-and-answer session. Our first question is from Camilo Lyon from BTIG. Please go ahead.
Camilo Lyon, Analyst
Thank you. Good morning, good afternoon everyone. How are you?
Dave Powers, President & CEO
Good.
Camilo Lyon, Analyst
Doing well. So, thank you for all the details, and nice job on the quarter in a tough environment. I guess I wanted to first focus on last call, you talked about the mid-quarter performance. I believe it was down mid-single-digits. You ended the quarter down 10. And then you also talked about some forward shipments that were moved into this quarter. It sounded like as you're trying to alleviate some of the burden in your DC. Could you just articulate a little bit more around what happened in the quarter? And if at all, that's influencing how retailers are viewing their fall/winter orders with you, particularly domestically in light of the backlog, I think last time being flat.
Dave Powers, President & CEO
Sure. Camilo, I'll address that. Looking back at Q1, our UGG business experienced a decline, primarily because most of our wholesale channels were closed for a significant part of the quarter. As things started to pick up again, we managed to perform slightly better than we anticipated around mid-May. The latter half of the quarter showed stronger results. Regarding Q2, which is usually a peak period for wholesale sales, we expect most orders to come in during the latter part of the quarter. We're collaborating with our wholesale partners to encourage them to place their orders earlier this year, considering the social distancing measures and capacity limitations at our distribution centers. We have begun to see some wholesalers responding by taking products sooner. We anticipate this trend will continue throughout the quarter, which may shift how our results look. This strategy aims to ease the pressure during the peak period and allow us to concentrate more on fulfilling our direct-to-consumer channel, as well as potentially securing additional orders from wholesale. It's still a work in progress, but we are off to a strong start in Q2. We understand this year's dynamics will differ from last year, and we're working to distribute the workload more evenly across the quarter, rather than facing intense pressure during the latter half.
Camilo Lyon, Analyst
Got it. That's really helpful. Thank you. The second question is about expense management and the changes in marketing. Can you highlight how much of that was marketing pushed out? I suspect it will be concentrated in the second quarter or possibly early in the third quarter. Also, at a higher level, is the ability to reduce expenses something you’ve found you can sustain going forward, creating greater leverage in the business model as we progress through this year, next year, and beyond?
Steve Fasching, CFO
Sure, I'll address that. We found the demand for our brands, especially UGG and HOKA, to be very strong. This allowed us to reduce some of our marketing spending since the online demand was already present. Additionally, due to social distancing measures, we had to adjust our typical Q1 marketing activities. We redirected many of our marketing resources toward top-of-the-funnel initiatives, public relations, and user-generated content. The team has shown remarkable flexibility and agility in managing our marketing efficiency and effectiveness. This was evident in Q1, where they quickly adapted our marketing strategies based on consumer conversations, adjusting our spending on a daily, and sometimes hourly, basis to ensure maximum return on investment. We identified opportunities to conserve our resources for later in the year, particularly in Q2 and Q3, capitalizing on the strong demand for our brands. Moving forward, we plan to leverage this strategy to adjust our spending and profitability accordingly. We remain committed to investing in our brands to enhance their strength and foster growth, with an emphasis on increasing awareness, consideration, acquisition, and market share.
Dave Powers, President & CEO
Also, Camilo, on that point aside from the market, and we indicated that a large portion of the savings in the quarter was related to travel. We'll be able to continue to save that in the current environment, but it will be offset, as we talked about in the prepared remarks with increased costs related to our fulfillment and DC costs. So you're going to see, as Dave said, increases in Q2 and Q3 related to marketing as we invest in that and redeploy some of those Q1 dollars. We'll see higher costs related to fulfillment and distribution center costs.
Camilo Lyon, Analyst
Okay. So overall, we should expect to continue to see SG&A dollar growth for the balance of the year?
Steve Fasching, CFO
I think that's a fair way to probably look at it.
Dave Powers, President & CEO
Yes, in line with business trends, but we do have the ability in certain areas to flex depending on the business trend. But the one thing we do need to make sure we spend is on DC to be able to deliver product to our customers and to our accounts.
Camilo Lyon, Analyst
Got it. And then just a follow-up on my first question, I don't know if it was addressed. Just was there any change to the order book as time unfolded since the last call and stores reopened and your wholesale partners got a little bit better sense of demand, not only in their own stores or their online channels, but demand for your brand?
Steve Fasching, CFO
Yes. So I would say, Camilo, first, the demand for the brand still remains very strong. We have seen some cancellations as people are getting back to business and seeing selling conditions. We indicated that we expected to see some and we have seen that. So no surprises. The brands are still strong. We have seen some cancellations, which we expected.
Dave Powers, President & CEO
Yes. And just one other thing to be aware of, a lot of our partners sold through a lot of inventory in their stores. So folks that had omnichannel capabilities where they could ship from store. They depleted those store inventories. But since then, they've been slow to reopen those stores and some of them not opened at all yet. They haven't had to refill the inventory at a store level. They're maintaining, obviously their e-commerce business. But that's another dynamic that we're going to have to keep a close eye on as we move through the quarter.
Camilo Lyon, Analyst
Got it Thanks so much guys. Good luck.
Steve Fasching, CFO
Thanks, Camilo.
Jonathan Komp, Analyst
Yes. Hi, thank you. I wanted to start there first on inventory just to follow-up. I want to ask about how you're feeling about the inventory levels across the product lines for UGG and HOKA. UGG maybe looks like a few areas online that are alight today. And just as a follow-up to the order dynamic, are you seeing retailers trying to shift some of the risk back to you in terms of hoping to chase business later in the year? Just any color there would be helpful.
Dave Powers, President & CEO
Yes. Sure, John. As we look at inventory, clearly we're pleased with an 8% kind of reduction coming from UGG, and that's really, as you said, kind of driven by the strong performance that we've seen online. So product is resonating with consumers and selling through very well online. We have increases in HOKA as that brand continues to grow very rapidly. We want to make sure we have inventory to support the growing level of sales. So we've seen an increase in inventory related to the HOKA brand. With UGG, kind of in reference to where you're seeing some products in, this year, what we have done is intentionally shift more products to later. Last year, we were receiving products earlier. So from a timing perspective, we're going to see inventory coming in a little bit later this year versus last year. That's contributing to the improvement in lower inventory that we're seeing this year. So from an overall inventory position, we're comfortable with where we're at. We've got inventory to support the level of sales that we're delivering. And it's making sure we're bringing in where we see that pickup in sales. So feel good about where we're at and we're continuing to manage it very closely.
Steve Fasching, CFO
Yes. And then just to add in on the wholesale shifting risk to us. I mean we are seeing a bigger demand and drop ship, and that's something we're evaluating closely from a cost and effectiveness perspective. Our wholesalers are also cautious, so they're making sure that they're only bringing in inventory if and when they need it. Certainly, UGG and HOKA and even Teva are strong brands in their portfolios, and there's still a lot of demand. But they are being more cautious overall in managing their inventory levels between stores and warehouses for e-commerce.
Dave Powers, President & CEO
Yes. And related to that, John, just on that too, as we talked about in the prepared remarks, we're working with wholesale accounts. So to your point, yes, some would like to defer. Given the current environment that we're operating and limited capabilities that we potentially have at DCs, we are encouraging wholesalers to take that product earlier because it will be hard. If they try to push it off to our peak period and we're fulfilling direct-to-consumer sales at the same time, it's going to be hard to do that. So we're working with them. We're getting positive, I would say, response in terms of a willingness to actually take some product earlier this year.
Jonathan Komp, Analyst
Okay, great. And then maybe more of a product focus for the second half of the calendar year here, just curious first on the core book business. Dave, if you have any thoughts to share on headwinds or tailwinds that you see as you look at the business, and then more broadly for UGG and HOKA, just some of the extensions more important lifestyle that you've talked about in the past on the apparel side. Could you just give an update on plans for both of those and what you're expecting?
Dave Powers, President & CEO
Yes, I’m happy to share. It’s fascinating to observe the changes in categories within the UGG brand. Traditionally, we’ve relied heavily on our core products, especially during this time of year when the business tends to be smaller and driven mainly by those core items. However, we’ve noticed a significant shift with the emergence of the Fluff franchise. UGG has effectively created a slipper/sandal hybrid category, which is experiencing tremendous success. We plan to keep pushing in that direction. We are actively managing inventory in various colors, with numerous new product iterations continuing to be released throughout the quarter. We’re also expanding this into the spring and summer of next year. This will be a key focus for us, as we aim to dominate in this category. Encouragingly, we’re seeing younger, more diverse consumers embrace this category, especially online. We've been working on our spring and summer offerings for quite some time and now have a distinctive position that resonates particularly in the U.S., with early traction internationally. The classics business remains important. In the latter half of the year, we've reduced inventory on items like fashion boots, as we anticipate ongoing remote work and reduced outings, leading to a greater preference for comfort at home. We believe work from home might positively impact the classics business. However, people are leaning towards casual styles and simply wanting to get outdoors. We are continuing to manage our category mix and inventory effectively, and we feel optimistic about the trends emerging within these new developing categories. Regarding lifestyle, both HOKA and UGG saw good sell-through of their lifestyle products this quarter, even though they are relatively small for us at this time of year. We were encouraged by HOKA’s catalog launch and consumer response to some online products, indicating good growth potential for the HOKA brand. This fall, UGG has a significant product launch that we believe will be exciting and appealing. You’ll see these launches in partnership with Nordstrom and select locations in our flagship store on Fifth Avenue, as well as on our e-commerce site. This year is primarily about testing the waters and observing how consumers respond to new lifestyle products from both HOKA and UGG, with plans to increase our growth from there. So far, we are optimistic about the potential and the consumer reactions we have been seeing.
Jonathan Komp, Analyst
Okay. That's really helpful. Thank you.
Dave Powers, President & CEO
You bet.
Tom Nikic, Analyst
Hey. Good afternoon, guys. Thanks for taking my question.
Dave Powers, President & CEO
Hi, Tom.
Tom Nikic, Analyst
I want to ask about HOKA. You said that you would expect the growth for the balance of the year to be slower than what you saw in Q1, which sounds a little counterintuitive, given the pandemic impact in Q1. I would think that in a more normal wholesale environment, you'd be able to do better with wholesale for the balance of the year. So, is there any particular reason why you would think that HOKA would slow? And then also, just I want to ask about the test with DICK'S and how that's going so far?
Dave Powers, President & CEO
Yes. So, I think, at this point, we're very pleased with the results of HOKA. This quarter performed better than we expected back in May when we were talking about it. The success of the HOKA ecosystem, which we call it, is really about balancing strategic access points for our consumer with key accounts and staying focused on a reduced tight distribution at wholesale while leveraging that to create awareness and excitement, but ultimately driving consumers to our website that we can cultivate for the long term. We're going to continue on that trend. What you see in the rest of the year is reflected in how we've talked about it, is just the uncertainty that we see out in the environment with regards to wholesale. I still think we can drive excitement and revenue in e-commerce, but on a global scale, wholesale is still the area that we're still cautious about. The brand has also delayed a couple of product launches to make sure that we can execute and keep the marketplace clean due to some of the store closures and wholesale. That's serving us well. We're still optimistic. We're still planning on having a growth year, but we're just being a little bit cautious with the uncertainty on how things are going to pan out in the back half of the year for that brand. Still, a strong important brand for our wholesalers, those that can open stores and have an online business, but continuing to drive the e-commerce business as a priority. With regards to DICK’S, it's going very well. It's in about 11 stores right now. That's one we're taking a slow cautious approach with. We want to focus on high sell-throughs, quality sales with that partner. Again, it's something where you can continue to evaluate, but it’s off to a good start. DICK’S is happy, we're happy, and we'll evaluate that within the mix of the ecosystem going forward.
Tom Nikic, Analyst
Sounds good. Thanks very much and best of luck for the rest of the year.
Dave Powers, President & CEO
You bet. Thanks, Tom.
Sam Poser, Analyst
Good afternoon. Thank you for taking my questions. I hope everyone is doing well. Could you provide the wholesale for the direct-to-consumer year-over-year increase by brand for UGG for the quarter? I have a couple more questions after that.
Dave Powers, President & CEO
The wholesale, you mentioned the UGG brand...
Sam Poser, Analyst
You gave us the UGG wholesale, you gave us the wholesale increase in your prepared remarks. Could you give us the wholesale revenue increase for the balance of the brand?
Dave Powers, President & CEO
Yes, sure. So HOKA was up 10% on the wholesale. Teva on wholesale was down 30%, right. Sanuk was down wholesale 50%. And other brands were small, I mean, nothing, small dollars.
Sam Poser, Analyst
Okay. Thank you. Can you provide more details on the UGG shipping shift? Are you having retailers take goods earlier in the quarter and trying to move some receipts from Q3 to Q2 as well? Are you working with them by offering extended dating on that product to encourage this?
Dave Powers, President & CEO
Yes. Yes. So what we're kind of yes to all of the above. What we're doing is within the quarter, we're trying to move things earlier, right, which we're working on and seeing some progress on that front. Additionally, as we get into Q3, we're encouraging them to look at taking deliveries in Q2. That's still a work in progress. We're continuing to work on that. Where we're seeing a willingness to take product earlier, we're working with them to help facilitate that. It really kind of depends on the circumstances of the customers, but where we can get them to take it earlier, we're definitely willing to provide and work with them to accommodate that.
Sam Poser, Analyst
If we consider UGG wholesale for the two quarters on a year-over-year basis, do you anticipate Q3 will be worse, perhaps due to shipping being down, or is Q2 expected to see less of a decrease than Q3? How should we view the relationship between the two quarters without seeking specific guidance? Should we expect Q2 to perform better year-over-year compared to Q3, or the other way around?
Dave Powers, President & CEO
Yes. So, again, looking at the quarter I think without giving guidance, just how we're looking at it because we don't yet know how much traction we're going to get in terms of how much of that product may shift out of Q3 into Q2. Ideally, what we would like to see is more product than say what you saw a year ago, kind of coming into Q2, which would be then lower for that business Q3. So that October through December quarter, the more we could get moved into Q2, our September ending quarter, we would like to do. We don't know how successful we're going to be at that. Clearly, wholesale customers want their product. We would like them to get it and make sure that they have it and they're ready for the selling season. So, I can't answer that question. That's why we're part of the reason we're not giving guidance, but we are trying to move more of that Q3 wholesale into Q2 where we can.
Sam Poser, Analyst
And two more things, first, you want to ensure you can manage direct-to-consumer during the holiday season. Secondly, where do you stand on pursuing the strong slipper and slide business with UGGs? I’ve heard the demand is very good there.
Dave Powers, President & CEO
Yes. So just a couple of things on that, Sam. I can't underscore enough the importance of us focusing our Q3 DC efforts on our e-commerce business, despite that we expect to get an e-commerce in a short period of time, the last call it, six to eight weeks of the calendar year is going to be intense. With social distancing challenges in our DCs, we really needed as many wholesale out quarters out as soon as we can. We're hopeful that our partners will be supportive of that, and we're seeing some success there. This is such a hard year to call with regards to timing and what's going to happen in the quarter. We're doing everything we can to make sure that happens. But we're really trying to make sure that we're ready and able to service the e-commerce business in that peak period because it's so critical and a lot of handling on the individual orders. With regards to the Fluff franchise, I'd say we're in pretty good shape. We were bullish on this from an order perspective. We've been supporting this category, seeing inventory going to buys from our categories into this as well as I said, there’s a lot of newness coming in drops that will help fuel the excitement in demand. We do feel good about our position on that. Certainly, the demand is very high, and that's super exciting, and we see that continuing not just in Q2 and Q3, but also into Q4 as well.
Sam Poser, Analyst
Thank you very much. Continue to success.
Dave Powers, President & CEO
Thanks, Sam.
Steve Fasching, CFO
Thanks, Sam.
Jay Sole, Analyst
Great. Thank you so much. Dave, I wanted to ask you about HOKA. You mentioned you were pleased with some of the growth you saw in Europe. Some of the storytelling there was a factor in that. Can you just tell us a little bit about those stores you're telling and given the size of HOKA in Europe now? What you see the prospects are for future growth going forward?
Dave Powers, President & CEO
Yes. Essentially, what we're seeing in Europe is a few things. One is we do have an emerging and strong e-commerce business there, but it's still small. In comparison to the U.S., e-commerce internationally is something that we're focusing on and really trying to build. The growth percentages there are very strong, but it's still smaller as the total business. We did mention distributors in the script. We have a very strong distributor in the northern part of Europe, and they've been less affected by the COVID situation, so their orders are still strong and helping in the quarter. The brand is certainly resonating. We launched the Clifton Edge last month. Europe was very successful with that launch, and there was great demand for that product over there. What you’re seeing globally, really, not just Europe, is us executing on a playbook that the brand has put together. What that really is, is reaching a diverse consumer through real-life stories of our users. We’re championing individual athletes who are making bold statements in the world and in their lives and using HOKA to improve and change their lives. We're letting them tell their stories, and we're partnering with people who do that for us. That’s creating a great level of awareness across a broad range of consumers and tapping into an emotional connection that is really powerful. We’ve said from day one, we’ll let the consumers speak about the product and let them talk about how it’s affecting their lives and the performance of it. That’s the formula that is resonating. We’re continuing to do that with Humans of HOKA, storytelling and tapping into the virtual Ironman and some of our athletes, and leveraging even some of the smaller running groups on a local basis to use their content and their storytelling to really spread the word of the brand and create the authentic and meaningful connection with the consumer that we’re seeing.
Jay Sole, Analyst
Got it. Thank you so much.
Dave Powers, President & CEO
You bet.
Paul Lejuez, Analyst
Hey, guys, Paul Lejuez. Two questions, one, I guess can you talk a little bit about the state of HOKA inventory within the specialty channel and how your retail partners have been able to sell-through product as their stores have reopened? And then second, you did mention you expect further challenges as a result of COVID. Are there any that did not show up in 1Q that you're already seeing in 2Q in terms of challenges? Or was that more of a general statement being cautious? Thanks.
Dave Powers, President & CEO
I'll address the second question first. Some challenges we anticipated didn’t materialize as expected. Instead, we've observed a notable acceleration in the Fluff franchise as well as in HOKA and Teva, largely driven by the work-from-home environment. Consumers, particularly from the UGG perspective, are seeking comfortable yet stylish footwear. Additionally, there’s a renewed interest in outdoor activities such as running, hiking, camping, and family trips to national parks. This trend has significantly boosted HOKA and Teva alongside UGG. While we recognized this dynamic emerging, its impact has surpassed our expectations. We’re taking full advantage of this situation thanks to the innovative products our brands have introduced, and the emotional connections made through marketing. Our brands have excelled in responding sensitively to the current environment, authentically engaging with consumers and enhancing brand health.
Steve Fasching, CFO
As far as HOKA inventory in the channel, early on the HOKA team did a great job of pushing out deliveries, so that the wholesale partners could sell-through existing inventories. They wouldn’t get stuck with it. They have been very focused on executing a clean marketplace, high full-price sell-through, very little liquidation in the marketplace. That is continuing. The wholesale inventory situation for HOKA, as well as our other brands as well are very strong, very healthy and not a lot of markdowns. But again, we're cautious going forward because we think the environment is still going to be very uncertain. But right now as it stands, the marketplace wholesale inventory is healthy and strong. Our biggest challenge, for sure. It's important for everyone to understand that this quarter will have a different mix compared to the rest of the year. Not only is this quarter different, but the entire year and the business mix, including its cadence and flow, will be something we haven't experienced before. However, we are optimistic about our ability to navigate through these changes.
Jim Duffy, Analyst
Thank you. A few questions for me. First, on the topic of e-commerce business and the social distancing protocols start hitting operations, what are some of the other things you guys are doing to help through core capacity as you get into that peak season? I'm curious does it make sense to incentivize consumers to purchase earlier as well?
Dave Powers, President & CEO
Yes. The supply chain teams have been exceptional at managing not only the flow of product from a production standpoint but also working with our partners and the sales teams on D.C. bypass. The increase that we're seeing in D.C. bypass versus last year has been significant and meaningful, so that's been super helpful. Partners are willing, in some cases, have shown to be able to take some inventory earlier. Those are the tactics that we're using. As far as incentivizing consumers to shop earlier, I think with new introductions to product, they’re doing that. When we get into core classics business that is a real business driver in Q2 and Q3, we can look at that, but we certainly don't want to get promotional or do incentives that are going to damage the brand or margins at the sake of getting people to shop earlier.
Jim Duffy, Analyst
And then I also wanted to ask a question on HOKA global reach. It sounds like growth has been very strong with international distributors. Historically, international has been about half the global pairs. Are the international pairs now higher than the U.S.? How do you split the mix for HOKA brands of international between Europe and other regions?
Dave Powers, President & CEO
Yes. From a unit perspective, I think where you're trying to go, Jim, is we’re probably looking at equivalent units, right, with higher dollar revenue in the U.S. because of the distribution channels that we’re using versus distributors internationally. We are seeing growth in both, so the international growth is coming on strong as units are catching up to what we’re doing in the U.S. The second part of your question again was?
Jim Duffy, Analyst
The mix of the international business that's from Europe versus other regions.
Dave Powers, President & CEO
Yes. Europe is definitely our strongest international region for HOKA. Japan, smaller market, doing very well, and really just starting to get into China. So Europe, by far, on the international front, biggest and most mature, but still growing very rapidly.
Jim Duffy, Analyst
Thank you.
Operator, Operator
This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.