Earnings Call Transcript - DECK Q1 2026

Operator, Operator

Good afternoon, and thank you for joining us. Welcome to the Deckers Brands First Quarter Fiscal 2026 Earnings Conference Call. I want to remind everyone that this call is being recorded. Now, I will hand it over to Erinn Kohler, VP of Investor Relations and Corporate Planning.

Erinn Kohler, VP, Investor Relations and Corporate Planning

Hello, and thank you, everyone, for joining us today. On the call is Stefano Caroti, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the federal securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our ability to respond to the macroeconomic environment and the impacts on our business and operating results, including as a result of changes to global trade policy and fluctuations in foreign currency exchange rates, our current and long-term strategic objectives, the performance of our brands and demand for our products; anticipated impacts from our brand, product, marketing, marketplace and distribution strategies, product development plans and the timing of product launches, changes in consumer behavior, including in response to price increases, our ability to respond to the dynamic consumer environment, our ability to achieve our financial outlook, including anticipated revenues, product mix, margins, expenses, inventory levels, promotional activity, anticipated rate of full price selling and earnings per share and our capital allocation strategy, including the 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. Please note, as previously disclosed, the company effected a six-for-one forward stock split during the second quarter of fiscal year 2025. The share per share and resulting financial amounts mentioned on this call have been adjusted to reflect the effectiveness of the stock split. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. For example, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. Please review our earnings release published today for additional information regarding our non-GAAP financial measures. With that, I'll now turn it over to Stefano.

Stefano Caroti, President and CEO

Thank you, Erinn. Good afternoon, and thank you all for joining today's call. Fiscal year 2026 is off to a solid start for Deckers with HOKA and UGG both outperforming the first quarter expectations we set forth on our year-end call. In the first quarter, our brands gained market share while maintaining a high degree of full price integrity. HOKA delivered its largest quarter in its history, driving strong sell-throughs during this period of key model transitions. We continue to make disciplined and strategic investments in our brands, and our teams tightly managed expenses in other areas of the business to provide flexibility. This all led to Deckers delivering a great first quarter result, highlighted by revenue growing 17% versus last year to $965 million and diluted earnings per share increasing 24% to $0.93. The strength of our business continues to be driven by the remarkable growth in our international markets with HOKA and UGG both contributing to Deckers' 50% increase in international revenue, while navigating a choppy U.S. consumer environment. Looking at the global marketplace, our first quarter results demonstrate that HOKA and UGG remain two of the best performing and most consumer-loved brands in our industry. We believe that Deckers key differentiator is our ability to build premium brands focused on authenticity, innovation, and purpose. Our sustained track record of delivering healthy and profitable growth in challenging environments gives us confidence in navigating current uncertainties. And we believe that our brands and teams will continue to achieve long-term success. Our brands continue to be guided by the principles of consumer first, elevating our products to exceed the expectation of consumers in a more competitive environment, brand-led, leveraging our unique brand codes to deliver a consistent brand experience as we target share gains across categories, seasons, and product applications; innovation forward, challenging ourselves to create distinct styles with tangible consumer benefits, and globally driven, balancing our business across regions and channels. As we build for the future, we believe these principles supported by the strength of our fundamentals and operational discipline will help us lead, adapt, and grow in the rapidly evolving consumer landscape. Steve will provide further details on our first quarter financial results and an update on fiscal year '26. First, however, I'll share more details on brand performance and how we plan to execute the remainder of this year. Starting with HOKA. Global revenue in the first quarter increased 20% versus last year to $653 million. HOKA performance came in ahead of our expectations, but the shape of the brand's revenue growth versus last year was aligned with what we had anticipated. As global wholesale increased 30%, driven primarily by the strength of our international regions, with the U.S. also contributing to this growth. DTC increased 3% globally with international regions maintaining their momentum, which was partially offset by ongoing pressure in the U.S. online channel as previously forecasted. As you can see, the HOKA brands international business continues to drive exciting and broad-based growth across all regions in both DTC and wholesale. EMEA contributed the most meaningful incremental dollar growth as Europe reported record quarterly wholesale reorders, and DTC continued to be fueled by gains in consumer acquisition and retention. The APAC region is also delivering impressive growth as HOKA further penetrates the market with mono-brand partner stores as well as owned retail stores in China. In the U.S., HOKA performance was aligned with our expectations. Marketplace dynamics are generally playing out as anticipated amid key franchise upgrades, resulting in the brand experiencing a similar quarter relative to the one prior. From a U.S. wholesale perspective, performance continues to reflect our disciplined approach to marketplace management. HOKA is driving revenue growth from increased sell-in, additional doors with key partners to satisfy greater in-store demand, and reorders as sell-through in the channel continues to outpace revenue growth. The HOKA brand's ongoing success with the wholesale channel highlights a continued shift in U.S. consumer shopping preferences toward in-person retail experiences. Our observations indicate that while consumers often search for deals online, brick-and-mortar stores remain the primary venue for full price sales, aligning with the feedback received from our retail partners. Our continued journey to thoughtfully expand wholesale doors plays well into this marketplace dynamic, providing HOKA the opportunity to build share and strengthen partnerships with key customers. On a much smaller scale, we also continue to selectively expand our owned retail locations in key cities around the world as we seek to build direct relationships with consumers and offer experiences that showcase the full breadth of the HOKA brand product offering. These strategies help HOKA gain visibility and solidify its position as the leading running brand in the U.S., although they create short-term pressure on DTC due to our limited retail presence and reliance on e-commerce. Over time, we expect our DTC business to benefit from the conversion of newly acquired consumers to loyal repeat purchasers. In addition to the channel dynamics affecting HOKA, we have proactively identified opportunities for improved execution in response to evolving U.S. consumer trends. As a relatively young brand, HOKA remains committed to applying insights gained from our experiences to drive future growth and development. Recognizing some of the execution challenges we faced over the last six months, we're implementing changes that include adjusting product life cycles to ensure a steady and balanced introduction of new products across key categories, timing to coincide with major shopping periods while providing greater separation between launch dates for our largest franchises, tightening marketplace inventory targets on outgoing models ahead of product updates, and enhancing our HOKA DTC loyalty program to more effectively differentiate the DTC experience. It will take time for the benefits of these actions to meaningfully impact our business. But we're confident that it will ultimately improve the consumer experience and facilitate more seamless key franchise updates in the future. With respect to our current franchise upgrades, the consumer signals we're seeing for Bondi, Clifton, and Arahi are quite positive. Bondi and Clifton are driving consistent and healthy sell-through in the global marketplace across channels and segments of distribution, evidenced by representing the top two running franchises in the U.S. according to Circana, driving very strong reorders and representing the top sellers among acquired and retained customers in EMEA and doubling year-over-year volumes in China for the spring/summer '25 season. Building off the success of Clifton and Bondi, the Arahi 8 update has also been a success since launching at the beginning of this month. Early feedback in the U.S. has been very positive on the improved fit and feel, with particularly strong initial selling in the run specialty channel and in DTC. EMEA has experienced double-digit weekly sell-throughs since launch, and China has seen significant volume gains on this model versus last year, performing well ahead of plan for the first two weeks of July. While still early, we're very pleased with the initial results. The consumer is showing a strong affinity for the updates to the HOKA brand's three largest franchises. We continue to believe there is more work to be done to build the same heat in other franchises across our compelling product assortment. We believe the HOKA brand's point of differentiation to the consumer is its relentless focus on innovation that delivers transformational experiences. To continue delivering the level of innovation consumers have come to expect from HOKA, we have bolstered capabilities across design, innovation, color, and lifestyle, allowing for greater dedicated resources to enhance a broader range of styles. As a result, we're seeing tangible improvements to the product pipeline, which is reflected in the positive retailer response to our Spring/Summer '26 offering. We also expect to significantly enhance our ability to segment the marketplace with greater product ammunition, allowing us to fuel DTC acquisition through differentiation and expand wholesale doors in a controlled manner, as we continue to build awareness and broaden demand for the HOKA brand. To that end, you may have seen that just a few weeks ago, HOKA launched its 2025 global brand campaign titled Together We Fly Higher. The campaign is centered around the power of community and the idea that individual progress is fueled by the collective. This is the principle HOKA has always embraced, as we believe the HOKA community has truly been the driving force behind building this transformational brand. Together We Fly Higher celebrates the unifying power of running highlighted in the new anthem film and an inspiring series of short films that spotlight real stories of runners. We'll amplify this campaign across retail stores, connected TV, out-of-home, digital, and paid social across HOKA-affiliated social media platforms. Personally, I'm super excited about this campaign. I feel the brand has found its voice, and this is the strongest HOKA campaign to date. Overall, fiscal '26 is off to a very good start for HOKA. Our three largest franchises are performing strongly with consumers, and we're expanding the brand's global reach, introducing HOKA footwear to a broader customer base. Shifting to UGG. Global revenue in the first quarter increased 19% versus last year to $265 million. From a channel perspective, UGG outperformed wholesale as wholesale increased 30% versus last year with consistent growth across the U.S. and international regions. DTC decreased 1% with similar regional dynamics relative to HOKA, where we're seeing pressure in the U.S. related to consumer sentiment and in-store shopping preferences, offset by continued strong international growth momentum. The main drivers of UGG growth this quarter came from our focus areas. International drove the bulk of growth for UGG this quarter with EMEA and China contributing the largest year-over-year gains. Men's footwear grew at nearly twice the overall brand rate, and sandal sneaker styles drove most of the growth, reflecting the success of UGG's 365 initiative. Although Q1 is primarily a selling quarter for the brand, we're encouraged by the robust start in wholesale, a positive early indicator of consumer interest as partners look to accelerate shipments. UGG products continue to gain relevance during transitional periods, reflecting the brand's ongoing success in developing collections that align with consumer preferences. Furthermore, we're particularly optimistic about the consistency of what has been working in key regions around the world. The UGG team has effectively implemented a brand-led global marketplace strategy, delivering elevated experiences through distinctive UGG products around the world. UGG's brand focus on telling fewer, more targeted stories to amplify launches is demonstrating measurable success. The consumer response to the PeakMod style is a perfect example of the team's efforts in driving positive results. The PeakMod is a completely new men's-specific clog that takes design cues from popular UGG styles. It initially soft launched in March on the heels of our first-ever men's-focused spring marketing campaign and was then featured as part of our seasonal Icons Reimagined marketing campaign. This versatile style quickly became a male consumer favorite across the U.S., EMEA, and China, even earning placement in major fashion publications as a go-to style for more and more attire. We believe there are four key reasons for the success: infusing UGG brand codes into a versatile design, leveraging consumer insights early and frequently, continuing to edit the assortment to allow for more focused seasonal stories, and pursuing a long-term strategy to acquire more male consumers. With respect to our 365 initiative, UGG achieved strong global growth within the sandal and sneaker segments through the following: the Golden collection, which generated significant consumer interest, particularly in the new Goldenstar Glide and Villa styles that commanded higher retail prices compared to existing silhouettes and the Lowmel franchise, which effectively blends the distinctive UGG aesthetic and comfort with adaptable wearability. As we move into late summer and early fall, despite ongoing concerns affecting U.S. consumer sentiment, the UGG brand is strategically positioned within the global marketplace to achieve growth in the second half of calendar year '25. To provide more context, we have operated with lean marketplace inventories for the Tasman franchise, maintaining scarcity ahead of its core selling season. In addition, UGG will be launching its iconic design campaign to build heat and generate buzz for versatile footwear in advance for UGG season with activation planned in key cities around the world. UGG begins this transitional period with three key product stories, leveraging its iconic mustard seat colorway on key styles, including the Lowmel Sneaker, UGGbraid clog, and all-new Classic Micro. Early feedback on all three styles is very positive, and we anticipate more exciting UGG launches this fall. The UGG team executed the first quarter very well, reinforcing our confidence in achieving another strong year for this powerful brand. With that, I'll now hand over to Steve to provide further details on our first quarter results as well as our updated thoughts around fiscal year 2026.

Steven J. Fasching, CFO

Thanks, Stefano, and good afternoon, everyone. Deckers again delivered another quarter of strong results that came in above our expectations for the first quarter. As Stefano outlined, both HOKA and UGG experienced significant growth in the quarter with the wholesale channel being the primary driver. For HOKA, sell-in was strong as sell-through in the wholesale channel was very healthy. In addition, international DTC delivered robust growth as we continue to build brand awareness and grow market share. For UGG, growth was also driven by the wholesale channel as the brand experienced success with versatile year-round styles, refilled depleted inventory levels, and started fulfilling fall order books. While macroeconomic uncertainty continues, our teams are directly engaged to drive improvements across our business, identifying and implementing actions that are aligned with and have the ability to bolster our long-term strategic opportunities. We believe our disciplined operating model and strong financial framework positions us well to remain nimble and react appropriately to further changes in the dynamic consumer environment. We are excited about the tremendous growth opportunity ahead for both HOKA and UGG, and we'll continue to build upon the rock-solid foundation we have set over the last few years. With that, let's get into the details of our first quarter fiscal year 2026 results. Total company revenue was $965 million, up 17% versus the prior year. HOKA drove the majority of incremental dollar volume, adding $108 million of revenue versus last year to deliver record quarterly revenue of $653 million. UGG drove its largest June-ended quarter in history, contributing an incremental $42 million to deliver $265 million of first-quarter revenue. Gross margin for the quarter was 55.8%, which is down 110 basis points from last year's 56.9% as compared to last year. First quarter gross margin was impacted by unfavorable channel mix, with wholesale growing faster than DTC, increased promotion across UGG and HOKA as we anticipated, and higher freight rates, with partial offsets from favorable product mix and favorable foreign currency exchange rates. SG&A dollar spend in the first quarter was $373 million, which is up 11% from last year's $337 million. As a percentage of revenue, SG&A was 38.6% versus 40.9% in the prior year, with leverage driven by favorable timing of certain expenses and one-time benefits in the quarter. SG&A dollar growth compared to last year was driven by investment in key areas of the business in support of our growth initiatives, which includes higher marketing spend for HOKA and UGG, increased warehouse costs as we transition our EMEA third-party logistics provider and greater rent expense resulting from select retail store expansion. Our tax rate was 24%, which was slightly higher than last year's 22.5% due to one-time discrete tax items. These results, coupled with a lower share count as a result of our share repurchase program and higher interest income, net of a higher tax rate, drove diluted earnings per share of $0.93 for the quarter, which compares to $0.75 in the prior year period, representing growth of 24%. In terms of our first quarter performance, relative to the high end of our guidance provided in May, revenue came in approximately $55 million above expectations, driven by approximately $25 million of earlier HOKA wholesale shipments largely related to our international business as we transitioned certain warehousing operations for the EMEA region, approximately $15 million of incremental wholesale reorders for HOKA related to strong sell-through, and approximately $15 million of UGG wholesale shipments from an earlier shift into Q1 from planned in Q2. Gross margin came in approximately 130 basis points better than expected, primarily due to product mix benefits and favorable foreign currency exchange rates. SG&A grew slower than we anticipated, primarily due to favorable timing of certain expenses and one-time items, including a larger benefit from FX remeasurement, all resulting in diluted earnings per share coming in approximately $0.26 above guidance with better performance contributing approximately $0.15 of favorability and timing contributing approximately $0.11 of favorability. We did not experience a material impact from tariffs in the first quarter because the majority of products sold was either already in inventory or shipped prior to tariffs taking effect. In addition, we implemented selective initial price increases, which went into effect on July 1 and provided no meaningful benefit in the quarter. As a reminder, we plan to phase in product price increases over the course of fiscal year 2026. So the associated margin benefit intended to partially offset tariff headwinds would not align precisely with the timing of tariff-driven increases in the cost of goods sold. Turning to our balance sheet. At June 30, 2025, we ended June with $1.7 billion of cash and equivalents. Inventory was $849 million, up 13% versus the same point in time last year, and we had no outstanding borrowings. During the first quarter, we repurchased approximately $183 million worth of shares at an average price per share of $109.84. As of June 30, 2025, the company had approximately $2.4 billion remaining under its stock repurchase authorization. Now moving into our forward-looking update. Given the continued macroeconomic uncertainty related to the global trade policy and difficulty predicting impact on the consumer environment and purchasing behavior, we are not providing a formal outlook for fiscal year 2026. However, I want to reiterate the key themes of our business and framework for fiscal year 2026. As a reminder, our fiscal year 2026 framework includes the following: from a revenue perspective, we expect HOKA to continue as our fastest-growing brand, UGG continuing to grow, international to outpace U.S. growth, and wholesale to outpace DTC in the near term. From a gross margin perspective, we expect a year-over-year decline from headwinds that include increased tariffs, higher levels of promotion, upgraded materials on key styles, and higher ocean freight rates in the first half. We believe these headwinds can be partially offset by selective and staggered price increases in the U.S. and partial cost sharing with factory partners. On the SG&A front, we will continue to tightly manage our expenses and drive efficiencies, but we may deliver a short-term increase in our SG&A expense ratio to revenue as we take advantage of our unique ability to invest in our brands for the longer term. Overall, this should lead us to a lower operating margin relative to our record 23.6% delivered in fiscal year 2025. With a normalized consumer environment, we believe we have the ability to deliver leverage in the coming years. On tariffs, we are still awaiting final details. But based on the recent updates, assuming Vietnam increases from 10% to 20%, we would expect to face a total of $185 million of unmitigated impact to our cost of goods sold in fiscal year 2026, up from our previously provided estimate of up to $150 million. As we said last quarter, we have put in measures to recapture up to approximately $75 million, and we'll continue to evaluate additional levers for potential further mitigation. One of our mitigating levers is price adjustments. Since our last call, the majority of these have been communicated, and I would note that we have not seen any material changes to our order book resulting from these increases. Similar to our approach last quarter, as we continue to operate in a period of elevated macro uncertainty, we will be providing an outlook for the quarter ending September 30. For the second quarter of our fiscal year 2026, we expect revenue in the range of $1.38 billion to $1.42 billion, with HOKA increasing approximately 10%, reflecting our earlier Q1 wholesale shipments, and UGG increasing at least mid-single digits. Gross margin is expected to be in the range of 53.5% to 54%, which is down versus the prior year, primarily due to increased tariffs for goods shipped into the U.S., increased promotional activity as we lap exceptionally low levels in the prior year, and higher freight costs expensed relative to last year's low levels that we signaled would not be sustainable, with partial offsets from our initial price increases that went into effect on July 1. SG&A is expected to be approximately 33.5% of revenue as we continue investing in brand-building marketing, and diluted earnings per share are expected to be in the range of $1.50 to $1.55 as compared to last year's $1.59. Overall, the performance of our brands in the first quarter gives us further confidence in our ability to continue to grow these brands. We are operating from a position of strength as our in-demand brands resonate with consumers worldwide, and we remain driven by our long-term focus. Our top-tier levels of profitability, free cash flow, and debt-free balance sheet allow us to continue fueling the long-term opportunities ahead while maintaining an ability to adapt to evolving dynamics. Thanks, everyone. I'll now hand the call back to Stefano for his final remarks.

Stefano Caroti, President and CEO

Thank you, Steve. As we've just covered, our brands are off to a solid start in fiscal '26. Both HOKA and UGG delivered growth above expectations for Q1 and above the full-year growth rates we are targeting prior to tariff uncertainty. Of course, we're mindful that consumers are just beginning to feel the impact of higher prices, and we will remain nimble to react to changes in the consumer environment, but we're encouraged by the current momentum of our brands. Though the vast majority of our year is still to come, our confidence in these brands remains high given the performance and the momentum of the business as we see it today. The opportunities ahead are immense. HOKA and UGG continue to create distinctive products that uniquely resonate with consumers, and both have significant potential to gain market share in growing global segments. We continue to challenge ourselves to compete with our own success, building our innovation pipeline to fuel our powerful brands and stay ahead of the competition. As we continue navigating this period of uncertainty, we'll lean on our strong fundamentals to position our brands for long-term success. I want to thank our dedicated global team for their continued efforts to execute our strategy as we create the future for Deckers. Thank you all for joining us today, and thank you to our shareholders for your continued support. With that, I'll turn the call over to the operator for Q&A.

Operator, Operator

Your first question comes from the line of Jay Sole with UBS.

Jay Sole, Analyst

I want to ask about HOKA. Maybe to start off, Steve, if you could talk about the second quarter guidance you gave for the company overall, and you gave HOKA up 10%. Can you just talk about how you feel about the wholesale channel versus DTC channel? And then on the inventory, can you just tell us where it stands with the Bondi 8 and the Clifton 9, some of those previous styles? Do you think it's completely out of the channels for the most part at this point? And then, Stefano, just on the innovation you mentioned, can you just talk about the pipeline a little bit, talk about some of the stuff that's coming later this year like the Mach and maybe what has you really excited about next year, calendar '26 that investors should be focused on?

Steven J. Fasching, CFO

Got it. Thanks, Jay. Regarding the 10% growth, we're considering the timing of international wholesale distributor orders that we fulfilled in Q1, which we initially expected to fulfill in Q2. After adjusting for that, we still anticipate mid-teens growth for the HOKA brand in the first half of the year. In Q2, we expect more balanced growth between the two channels, with wholesale continuing to grow slightly faster, but an improvement in DTC performance as well. We've seen consistent improvement from April to May to June in our DTC performance as we work through our inventory. This gives us confidence moving forward. We’re managing wholesale growth in Q2 and enhancing our DTC performance.

Jay Sole, Analyst

Regarding the inventory issues, the market now has very few Bondi 8s and Clifton 9s left. We do have some Arahi 7 inventory, but it's selling quickly and not affecting the strong performance of Arahi 8, which launched on July 1. The feedback from specialty retailers, better sporting goods stores, and direct-to-consumer sales on Arahi 8 is very positive. Arahi 8 is now our third-largest franchise. I'm optimistic about our product pipeline, particularly for next spring and this fiscal year. We've recently launched a couple of products priced above $200, Mafate X and Rocket X 3, both of which are doing well. Our second-largest trail franchise, Mafate 5, will be available in August and has strong bookings. Mach 3 will launch later this year alongside Skyward, which is lace-less, and Transport hike GTX Gore-Tex. Early next spring, we'll upgrade our fourth, fifth, and sixth franchises—Mach 7, Gaviota, and Speedgoat—with very strong bookings for these styles. I'm very encouraged by the upcoming products.

Steven J. Fasching, CFO

Yes, I believe we are mindful of our total inventory position and its status in the channel. This is reflected in the improvements we achieved throughout the quarter, particularly in reducing some older inventory, which has better positioned us to introduce newer inventory. We are very excited about the upcoming models. Although we haven't provided a specific outlook for this year, we are encouraged by the strong start we have seen. We acknowledge that our results haven't been significantly affected by the tariffs yet, but the initial performance is better than expected, indicating that consumers are highly engaged. Additionally, surveys show that our new models, especially within HOKA, are performing well, which boosts our confidence for the year ahead. The uncertainty remains regarding the details and impact of the tariffs on consumers. However, Q1 demonstrated that consumers are engaging with our brands, and we are experiencing strong performance worldwide.

Operator, Operator

Your next question comes from the line of Laurent Vasilescu with BNP Paribas.

Laurent Vasilescu, Analyst

I wanted to follow up on Jay's question. I think, Steve, you mentioned that we should see balanced growth between wholesale and DTC for HOKA. So I just want to be sure to understand that correctly. And within that, let's say, it's 10% for DTC, would you assume that there's a reacceleration in the U.S. DTC business? And then longer term, on this DTC narrative, I think you ended last year, the fiscal year with 42 stores for HOKA, of which I think only five were in the U.S. So how do we think about longer term, Stefano, where you want this business to be on the DTC front in terms of store penetration globally?

Steven J. Fasching, CFO

Yes. I will begin with the first part, Laurent. Regarding our perspective on COVID growth in the U.S., we faced some challenges, which we discussed in our prepared remarks, along with potential improvements we can implement. We noticed a low point in April. However, we experienced sequential improvement throughout Q1, which is promising as we enter Q2. This aligns with our expectations, and it is encouraging to observe this level of progress. From a geographic perspective, we anticipate that most growth will continue to come from international markets, where we still have significant growth opportunities. Although it is a smaller market, our brand awareness is increasing, which is positively affecting our international sales. Nevertheless, we also expect to see improvements in the domestic market. After the lows in April, we foresee continued growth moving forward, as we witnessed in May and June, and we aim to maintain that trend through Q2.

Stefano Caroti, President and CEO

Regarding retail, Laurent, we continue to be excited about the retail opportunity. We have a very small footprint, as you outlined; we have 48 stores now owned and operated, and we have approximately twice as many partner stores across the globe. And they're all performing well; they are all performing well. We have stores coming in Germany in Berlin, and thereafter, we're probably opening a store in Milan. We also have a new Global Head of Retail, Jessica Boer, just joined us, and she'll help lead the charge in retail.

Laurent Vasilescu, Analyst

That's great to hear, Stefano. And then I think, Steve, you mentioned as a follow-up question here. You mentioned that your order books haven't really changed since the April 2 tariff announcement. I think last call, you mentioned that pre-April 2, the framework that you were thinking through was that there would be at least mid-teens growth for HOKA and at least mid-single growth for UGG. Since the fact that order books haven't really changed, is that still the right framework to think about? And then what would you need to see to potentially reinstate guidance or at least provide formal guidance for this fiscal year?

Steven J. Fasching, CFO

Yes. Good question. I appreciate that, Laurent. I think the framework still holds. I think coming out of the performance of Q1, more confidence in the framework as we navigate kind of the uncertainty around tariffs. So I think, yes, largely what we laid out at the beginning of the year in terms of how we're thinking about fiscal year '26 is still intact with more confidence. I think in terms of how we're looking at reinstating full year guidance, our intention is to get there. I think right now with uncertainty around the details of the tariffs. So we're still looking for a greater level of clarity around those percentages applied to various countries. And then also, I think what we're also looking at is as consumers begin to react to some of the tariffs that they will likely start to see in the second half, what consumer reaction is to that. So those are a couple of the elements that we're looking for. But again, encouraged by our Q1 performance, which is giving us increased confidence around our framework.

Operator, Operator

Your next question comes from the line of Adrienne Yih with Barclays.

Adrienne Yih, Analyst

What a great start to the year. Congrats. Stefano, I wanted to talk a little bit more about the price increase strategy. It sounds like you are originally taking them on selective, but what percent of product kind of do you have expectations to increase prices in the fall season? Is it only on new launches? Is it also on some like-for-like product? And as we kind of go through the year, how are you thinking about broadly how much of the assortment you would put price increases on?

Stefano Caroti, President and CEO

As we mentioned earlier, we've been careful and phased in our approach. We implemented some price increases in July, and more are planned for the spring, with a strategic focus. There are specific price points and franchises where we can adjust prices, particularly in the kids' segment that we aim to protect. This varies across our brands and different areas of the business. It's challenging to specify the exact percentage of the increases we've made.

Steven J. Fasching, CFO

Yes, I'll just add a little bit on to that. So we looked at it and we've kind of broke up the two seasons. So initially, when we were looking at the tariff of around $150 million, the $75 million was kind of based on a little getting a little bit from our suppliers, and then staggering, as Stefano said, some of those price increases. So looking at not all products, but certain products within the fall across all of our brands. You've seen some of those around $5 increases on some of that product. Then we've also looked at spring of next year. So looking at some price increases equivalent back on some existing as well as some new models that will come in. We left room that we can continue to evaluate that. So in light of how tariffs land and where they're landing, we can revisit that as well. So it's still ongoing, but we're fairly set at this point, and we'll see where tariffs land and then our ability to adjust any further.

Adrienne Yih, Analyst

Okay. Great. And then my follow-up is on the 2Q guidance or on the inventory ending inventory, what percent of that growth is actually tariff-related cost increases? And I would assume that Q2 still has the pressure year-on-year from pushing through the price increases, but not at a commensurate rate with the inventory that's coming through at higher cost. Is there a potentiality that in the back half of the year, you could see a gross margin return to expansion, so a flip of kind of those dynamics as you put more pricing through?

Steven J. Fasching, CFO

Yes. I think the answer is no. We'll see more pressure in the back half on the margin, and that's going to largely be driven by the tariffs coming into effect. So as you recall, we started out the year where we said we are seeing some inflation on input costs. We're also using upgraded material costs. Overall, without tariffs, that was going to put pressure on our full-year margin. Then with the tariffs, we're seeing further pressure. And again, in FY '26, there's a dynamic where the tariffs are coming in before our price increases on a full-year basis are able to offset that. So with some of the inflation that we're seeing and not fully adjusting prices to offset that again with upgraded materials and the tariff impact, that is where we're looking at lower year-on-year gross margins. Some of what you're seeing in the first half are related to that higher freight, higher upgraded material input costs. What you're going to see in the second half, a little bit in Q2 will then also be the differential of the tariffs. So the unmitigated offset a little bit by mitigation, but still unfavorable for fiscal year 2026.

Operator, Operator

Your next question comes from the line of Jonathan Komp with Baird.

Jonathan Komp, Analyst

I want to follow up on HOKA. The discussion about bolstering some of the capabilities, driving better heat for other franchises and really making some of the launches more spread out and more seamless. Could you maybe just talk a little bit more about the insights in the business currently that are driving you to focus on those areas, especially in a fairly competitive running market?

Stefano Caroti, President and CEO

Yes. To the capabilities, Jon, yes, we're adding capabilities in innovation, in design, in color, and engineering. This is a very competitive landscape, especially with other players coming in. So we need to continue to lead. And to your point about a few learnings that there were a few learnings recently. We'll be spacing out key style launches further apart from each other will be better aligning flow with key commercial moments. We're tightening inventory of outgoing styles. And as the offer expands, we'll be able to create more segmentation for all channels and more differentiation for DTC.

Jonathan Komp, Analyst

Okay. That's helpful. And Steve, one separate question, if I could, just thinking about the business ongoing. Is there a way to think about the minimum cash that you think you need to run the business? And just any insights on how the Board is viewing the buyback given the big authorization and just how far your valuation has come in here?

Steven J. Fasching, CFO

Yes. Clearly, we're sitting on a very healthy cash position. And that has helped us and the Board consider kind of share repurchase opportunities, especially where we feel we're underappreciated for what we're delivering. And so I think what you've seen the past couple of quarters is we have stepped up. Now with the increased authorization, we'll continue to look at that. But yes, again, where we feel we're putting up exceptional results and it's not reflected in our stock price, we will take advantage of those opportunities.

Operator, Operator

Your next question comes from the line of Rick Patel with Raymond James.

Rick Patel, Analyst

Question on HOKA's international performance. Can you unpack the building blocks of growth that you saw in Q1 as we think about what was organic, what you might consider productivity versus new distribution? And how are you thinking about these growth drivers as fiscal '26 moves forward?

Stefano Caroti, President and CEO

Rick, this is Stefano. We are experiencing strong revenue growth both internationally and domestically, outpacing our door expansion and seeing sell-through surpass sell-in. We are continuing to open new doors with partners like INTERSPORT, Sport 2000, the JD Group, and Sport Chek internationally. Our products are performing well, and we've received record reorders in Europe. Our business in China is exceptionally strong, leading to healthy order books for the latter half of this year and into spring/summer '26.

Rick Patel, Analyst

And secondly, can you talk about the outlook for SG&A? I think you touched on timing having an impact on Q1 and seeing a short-term increase in the ratio. Just some additional details there would be great. And if you're not guiding for the year, perhaps touch on the areas of spending that you have the most confidence in being able to control.

Steven J. Fasching, CFO

Yes, I believe that as we consider our selling, general and administrative expenses and the margins we're achieving, it's important to recognize the increased competition. We have the advantage of a solid balance sheet and strong profitability, which allows us to keep investing in our brands in a responsible manner. We have shown this capability in the past. As previously mentioned, we will continue to focus on enhancing brand awareness globally. This will involve increasing our marketing investments to promote our brands on a global scale. While we're committing more to global campaigns, we're also focusing more on localizing content to connect with communities worldwide. These increases are significant for us. Additionally, as we expand our offerings, particularly with the HOKA brand, you'll see ongoing investments in both brand capabilities and commercialization worldwide. We're committed to maintaining efficiency across the enterprise and will continue investing in improvements to distribution and warehousing, which includes changes happening in Europe this year. We're also dedicated to investing in our IT initiatives, with all these efforts aligned to support our business growth. Expect to see substantial investments in brand development and infrastructure that support that growth, all managed carefully.

Operator, Operator

Your next question comes from the line of Samuel Poser with Williams Trading.

Samuel Poser, Analyst

Can you provide insights on the performance of both HOKA and UGG stores? It might be more challenging for HOKA since there are fewer stores for comparison, but could you share details on their performance against plans and e-commerce business comparisons? This would help us understand how consumer preferences for shopping in stores are affecting your results.

Steven J. Fasching, CFO

I think yes, Sam, just to kind of give general context because we've made reference, and I think you've heard others probably make some reference where they've seen consumers kind of in the past few months prefer an in-store experience. I think that's consistent with some of the trends that we've seen with some of our retail stores. Again, comparatively speaking to others, we have a much smaller retail footprint. So it doesn't necessarily move the needle as much for us as it does for others. But I think that is definitely a trend that we have seen, which also confirms a lot of the success that we've seen with our wholesale channel and what they've reported with kind of consumer in-store shopping experiences. So yes, it is definitely something we've seen. But again, we have a smaller retail footprint. So it doesn't move our DTC needle as much, but it is definitely a trend.

Samuel Poser, Analyst

I understand it doesn't move the needle. I'm not asking if it does. I'm trying to get a number. So the question I have is your stores, let's say with UGG versus your total DTC was down 7%. What were the stores versus the total? And I know it's harder with HOKA because there are less stores, but I'd like to get some form of clarification on what that is, understanding that it's not material, but at least it is factual and would put more meat on the bone of the comments you've made as well as the others, understanding it is not necessarily material.

Steven J. Fasching, CFO

Yes. Clearly, the performance in our retail store was better than what we observed online, and we haven't separated those figures. However, I think if you consider your point...

Stefano Caroti, President and CEO

But retail performed better than e-commerce significantly.

Samuel Poser, Analyst

In relation to your concerns about the gross margin, you mentioned the challenges posed by tariffs. I have two questions. First, regarding the Clifton and the Bondi, where prices were increased on July 1, have you noticed any changes in the sales rate of the Bondi 9 and Clifton 10 since that price increase? Second, as you discuss gross margin moving forward, what are your expectations for promotional activity? You had promotional efforts for the Bondi 8 at the end of last year, which should theoretically offset this year.

Stefano Caroti, President and CEO

Let me answer the first part of the question. Since we increased prices on July 1, we haven't seen any material decline in performance for the products that we have raised price on.

Steven J. Fasching, CFO

Regarding promotions, we consider a typical level of promotional activity. This year, we've noticed an uptick in promotions compared to last year due to some improvements in the first quarter. For the remainder of this year, we expect to see higher levels of promotion compared to last year. Although we are not providing full year guidance, our outlook reflects this expectation. Our guidance for the second quarter includes an increased level of promotional activity. We will monitor how this develops and maintain our assumption of more normalized promotions, which may result in additional benefits if trends continue as they did in the first quarter.

Operator, Operator

Your final question comes from the line of John Kernan with TD Cowen.

John Kernan, Analyst

Steve, maybe just within the framework of U.S. and international. U.S. was down 3%, international up 50% in Q1. How should we be thinking about that within Q2? I understand you don't give specific guidance, but just some guardrails on that. And then follow-up is just HOKA DTC within your forecasting, how should we think about the reinflection of HOKA within the direct-to-consumer channel globally?

Steven J. Fasching, CFO

Yes, certainly. Regarding the comparison between international and U.S. performance, we anticipate some improvement in Q2 compared to Q1. However, the growth in international markets is expected to be less strong than in Q1 due to previous timing factors related to warehouse moves and a slight improvement in the domestic market. We are expecting incremental growth in Q2, but the primary growth will still come from international markets. As for your question about DTC growth, could you please repeat that?

John Kernan, Analyst

Yes, sure. Within HOKA DTC, how should we be thinking about the inflection, particularly in U.S. for HOKA DTC? It sounds like you exited the quarter at a stronger rate. Some of the data we've seen shows improved traffic trends. So just curious how you're thinking about HOKA DTC specifically within the U.S.

Steven J. Fasching, CFO

Yes, I believe we observed a slight improvement at the end of Q1, which is encouraging. It's incremental as we look ahead to Q2. We noticed that May built on April, and June continued that trend from May. Our expectations for Q2 involve building on Q1 without anticipating any dramatic changes. We are expecting continued incremental improvement, while also managing some wholesale expansion, which may cause some near-term pressure. The focus remains on that incremental improvement.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.