Earnings Call Transcript
DECKERS OUTDOOR CORP (DECK)
Earnings Call Transcript - DECK Q2 2021
Operator, Operator
Good afternoon and thank you for standing by. Welcome to the Deckers Brands Second 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 like to remind everyone that this conference call is being recorded. I would now like to turn the conference over to Erinn Kohler, VP of Investor Relations & Corporate Planning. Ms. Kohler, 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, our anticipated revenues, brand performance, product mix, gross margins, expenses, and liquidity position, and our potential repurchase of shares. Forward-looking statements made on this call represent management’s current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks and 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 and Chief Executive Officer
Thanks, Erinn. Good afternoon, everyone, and thank you for joining the call. On behalf of Deckers, I hope everyone is doing well and staying safe in this unprecedented time. Today we will walk through an exceptional second quarter performance for the Deckers organization and highlight continued considerations related to the uncertain environment created by the COVID-19 pandemic. Amid rapidly evolving marketplace conditions, Deckers delivered a record second quarter as revenue increased by 15% versus last year to $624 million. Gross margin increased by 80 basis points to 51.2% and we delivered earnings per share of $3.58. Success in the quarter was driven by compelling and innovative product launches, our powerful e-commerce and digital marketing engines that drove higher awareness and customer acquisition, optimization and redeployment of marketing spend that featured our authentic approach to storytelling, a clean and well-managed marketplace that allowed for strategic account partnerships to amplify special product releases, and the ability of our supply chain to pivot resources and navigate challenges. While the COVID-19 outbreak shone a spotlight on our brands due to their lifestyle resonance, these results more importantly highlight the strength of our brands and the positive impacts we have experienced from the successful execution of our strategy over the past few years. As a reminder, the key elements of our strategy include generating greater awareness in HOKA ONE ONE to accelerate customer adoption globally, which was demonstrated by a 60% increase in brand revenue during the first half, driving DTC customer acquisition across all five of our brands with product and marketing tailored to the 18 to 34-year-old demographic, highlighted by a 182% increase in these customers year-to-date in the U.S., continuing to build UGG brand heat through diversification of products that resonate with target consumers leading to low levels of promotional activity, while selling a more balanced product assortment, and maintaining a disciplined approach to financial management even as we continue to invest in this strategy. The successful implementation of this strategy has led to the strong operating model and powerful brand portfolio we have today. With our brands and products resonating with a larger and more diverse audience, we're experiencing high conversion rates and strong sell-through at full retail price, which will set the stage for future growth. Our in-demand brands, omnichannel capabilities, and strategic expense management, combined with exceptional organizational execution drove another successful quarter for Deckers. I'd like to share my appreciation to our employees for their dedication and consistency in delivering results in these challenging times. I'll now walk through the brand highlights from the quarter starting with the Fashion Lifestyle Group. The Fashion Lifestyle Group consists of the UGG and KOOLABURRA brands. Global outperformance was driven by momentum behind a healthier and more balanced product assortment. Historically, the second quarter had been driven by filling in classic UGG products to wholesale accounts. With the excitement the brand has built around Fluff, Men's, and Kids products, UGG is succeeding beyond core products with both selling and high full-price sell-through at wholesale and DTC. Fluff is the paramount example of the progress UGG is making to attract a diverse set of consumers with a broad array of product options. The Fluff Yeah remained the brand's top-selling style from both the total peers' perspective, as well as in terms of wholesale sell-through. However, the UGG team has also done a fantastic job building complementary products around the Fluff Yeah that are providing incremental growth. New introductions during the quarter included the Disco Slide and Fluffita, which were both among the top-10 styles purchased by customers aged 18 to 34 years old. UGG is having tremendous success attracting new younger consumers. While the Fluff product may have been the primary attraction to the brand for 18 to 34-year-olds, we're excited by how many of these customers who bought Fluff also purchased the recently launched Classic Clear Mini. Since its release, over 60% of the Classic Clear Mini purchases online have been made by 18 to 34-year-olds. This cross-category purchasing activity from younger consumers speaks well to the brand's ability to capture share of closet with fashion-minded consumers. Helping to amplify these new product introductions with their intended audience, the UGG DTC team has collaborated with key wholesale partners to develop strategic launch plans for special products. During the quarter, these included teaming up exclusively with the Victoria's Secret Pink Ambassador program to release the Fluffita and launching the UGG brand's first-ever ready-to-wear apparel collection in partnership with Nordstrom. Ready-to-wear, which we sometimes refer to as RTW, is the UGG brand's first apparel expansion beyond loungewear and into streetwear fashion. The RTW collection features cozy fleece, Sherpa, full fur, and Shearling wardrobe items. Highlighting the strength of our brand, demand for our products, and quality of our partnerships, Nordstrom featured the RTW collection on their website's landing page, marking the first time UGG earned that designation outside of the footwear category. In addition, our ready-to-wear and retail teams have worked closely with Nordstrom to create a specialized shop-in-shop concept to feature the collection at both Nordstrom's New York City flagship in December as well as our own New York City flagship which opens on November 19. While ready-to-wear is not expected to drive significant revenue volume this year, sell-through has been impressive and we're encouraged by the positive response from primarily younger consumers. We feel this speaks well to the long-term lifestyle opportunity for UGG, and our teams are already working to expand ready-to-wear with additional products and partners. Continuing the theme of UGG diversification and cross-category purchasing, I'd highlight that men's and kids' products contributed to the majority of the brand's incremental dollar growth in the quarter. Men's has had a strong start to the fall season. Neumel sell-through is up over 150% versus last year, and heritage slipper styles such as the Ascot, Tasman, and Scuff remained top sellers. With the success of the Fluff and the increased fashionability of the slipper category, UGG will be releasing a men's specific version of Fluff very soon, so be on the lookout for that. As mentioned on our first-quarter call, the UGG kids' business is benefiting from the successful take-down product in both women's and men's. The Neumel Fluff Yeah Slide and the Classic Clear Mini were all part of the top-5 kids' styles in the quarter, and we will look to further capitalize on this trend during the holiday season. From a regional standpoint, we continue to see bifurcation between the U.S. and international regions. Within the U.S., UGG brand heat is reaching new highs as the brand has increased customer acquisition by 187% and customer retention by 155% versus last year, with the majority of the growth coming from younger customers. In fact, 18 to 34-year-olds represented 40% of online purchasers in the U.S. during the quarter as compared to under 30% last year. Complementing the UGG brand's direct-to-consumer success, our wholesale partners are also experiencing record levels of demand and product sell-through rates, which may lead to some scarcity in the third quarter as reduced inventory levels are consumed. Internationally, as we have mentioned in previous calls, UGG remains in the midst of a multiyear reset in EMEA, and the brand is also in the early stages of localizing marketing content for the Asia-Pacific region. In Europe, we're seeing positive signs where the brand is beginning to experience adoption of Fluff products along with some small growth within men's and kids' footwear. We are also intentionally reducing the amount of core classic products in the region, which remains a strategic headwind. These are important shifts as we work to rebuild brand heat and diversify the European region away from core products and build a healthier product mix, similar to the successful transition we have made in the U.S. Beyond building a more balanced assortment, UGG is working to amplify the EMEA region's business online. To help drive digital conversion in EMEA, we recently implemented our global E project, which improves customer access and ease of use by offering additional languages, currency, and local payment types. The launch of global E combined with the introduction of UGG rewards in Europe is already attracting new customers as UGG experienced a 135% increase in customer acquisition during the second quarter. In the Asia-Pacific region, we've made strides by partnering with top-tier local celebrity Xiao-Dong Yu, who carries fashion credibility with a fan base primarily aged 20 to 30 years old. We've also developed a market-relevant product collaboration with designer Feng Chen Wang, famous for her deconstructive approach as featured in Vogue and GQ. These initiatives aim to improve brand perception with Chinese consumers and bring attention to new products. We're encouraged by the region's positive reception to new products like the Classic Clear, Fluffita, and Disco Slide, but there is still plenty of work to be done to build brand awareness. We are optimistic about some early indicators in the UGG brand's international business. Revenue declined as expected for the first half of fiscal 2021, primarily due to efforts to reduce core products in the marketplace. While we don't anticipate meaningful improvement during this year of transition, UGG is making important progress in building a new foundation of diversified product acceptance, localized market relevance, and strategic partnerships, all designed to build a healthier brand with the ability to deliver growth over the long term. The UGG brand's domestic success is built on this model of fashion credibility through authentic collaborations, social influencers, and PR seeding, and we believe this approach will translate well to our international markets. First-half performance gives us the confidence that we're on the right path towards exploiting the strategy, building towards next year and beyond. Moving to Koolaburra, performance in the first quarter resulted from increased market share with top wholesale partners as well as improved category diversification through the expansion of men's and kids' products. Last year, Koolaburra established itself as the top brand in the sub-$100 category which competes within the family value channel, and we will look to maintain that position by building incremental market share this holiday season. While footwear remains the primary focus, Koolaburra continues to expand its lifestyle appeal. This fall, the brand has partnered with Kohl's and QVC to develop a licensed loungewear collection, which comes on the heels of last year's successful collection of home licensed product. Both UGG and Koolaburra are well positioned to drive demand with their respective customer bases during this holiday season. However, I would like to remind everyone that we adjusted certain inventory buys at the outset of this year to mitigate the effects of COVID-19 in our business, and this will limit the upside for both UGG and Koolaburra this holiday. However, if either brand fails to capture incremental upside due to these inventory constraints, we expect this will provide a clean marketplace for fiscal 2022. Shifting to the Performance Lifestyle Group, which is comprised of HOKA, Teva, and Sanuk. Starting with HOKA, performance was driven by increased adoption of our products through greater brand and product awareness, combined with compelling product refreshes and a fast replenishment cycle. Among Deckers' investments over the past few years, broadening the HOKA brand's appeal beyond core runners has been a primary focus. Through market-leading innovation, the HOKA team has refined products and expanded categories to attract a larger audience while also maintaining the brand's authentic performance DNA. During the quarter, HOKA launched updates to several key franchises, each infused with both innovation and design upgrades, including the Clifton 7, Clifton Edge, Rincon 2, and the BONDI 7. Regarding the Clifton franchise, these styles have received considerable positive PR, which included features in Vogue, Gear Patrol, GQ, and SELF's 2020 Certified Sneakers Award. For the Rincon, originally introduced in July of 2019, the style has quickly become a top five seller for HOKA. The second edition of the Rincon has been so well received that it recently won Runner's World, Best Value Award in their autumn, winter 2020 shoe guide. Lastly, in terms of notable product refreshes, the BONDI 7 hit shelves in September and features the brand's most inclusive size range, helping to expand the addressable consumer base for HOKA. Since its release online, the BONDI 7 has been HOKA brand's top selling style. Propelled by these product updates and innovations, HOKA's domestic wholesale returned to deliver meaningful second-quarter growth after the first quarter was disrupted by pandemic-induced store closures. As mentioned in our first-quarter call, HOKA delayed certain product launches to allow wholesalers to move existing products, which provided an extra benefit to the brand's second-quarter wholesale revenue growth. According to the NPD Group's retail tracking service, HOKA was able to both grow dollar volume and increase market share from 16.8% in August to 20.5% in August 2020, even though overall dollar sales of adult running shoes in the U.S. run specialty channel declined in August 2020 as compared to last year. The premium service atmosphere of run specialty stores remains an important acquisition vehicle for the HOKA brand, especially when considering the higher conversion rates experienced when customers try on our products. Globally, HOKA's customer acquisition and retention online increased 81% and 92% respectively as compared to last year, even though most of the brand's wholesale doors were open during the quarter. Part of these increases were due to the marketing team's efforts to optimize digital media targeting to acquire 18 to 34-year-old consumers. By strategically prioritizing this audience, HOKA experienced a 124% increase of consumers aged 18 to 34, led by recently released styles such as the Clifton 7, Clifton Edge, and Rincon 2. Importantly, HOKA is driving direct-to-consumer growth across the globe. While still very small compared to the U.S., international HOKA DTC has increased more than 150% in the first half of this year. Growing the brand's global online business is especially important as the inability to hold in-person events persists. We're dedicating marketing spend to build a HOKA audience online and stay relevant with existing consumers through compelling product innovation. As we said in our first-quarter earnings call, the $500 million milestone for HOKA is much closer than we previously anticipated. With the brand heat and demand we're experiencing right now, HOKA has the potential to reach $500 million by the fiscal year-end. The rapid acceleration of HOKA reaffirms our confidence in the brand's aspirations to eclipse the $1 billion mark over the longer term. Turning to Teva, growth in the brand was fueled by a 78% increase in acquired customers online. Teva is turning out to be the go-to brand for the modern outdoor consumer, highlighted by the brand's founding roots in the Grand Canyon. Year-to-date through September, Teva maintained its position as the top outdoor water sandal brand in the U.S. in terms of market share, increasing market share over the last year in each of the past nine months according to the NPD Group's retail tracking service. Younger consumers have been the driving force behind this growth in Teva, and the brand has experienced a 76% year-over-year increase in purchasers aged 18 to 34 years old, which has already been the brand's highest indexing age bracket. Looking to fall, Teva is focused on capturing continued wallet share from this demographic to the brand's expanded hike and camping collections. Teva is already experiencing a surge in demand for the brand's Ember franchise, both online and with key wholesale partners such as REI, where product will be featured across all doors in their fleet. For Sanuk, brand performance was hurt by a soft department store channel. However, we were encouraged by the recovery within surf specialty as coastal towns saw an increase in outdoor participation. Importantly, Sanuk posted a second consecutive quarter of robust direct-to-consumer growth, which was helped by a 40% increase in customer acquisition online. We are excited to receive feedback from the brand's online audience as Sanuk will be introducing new product innovations in the coming months. With respect to channel performance in the second quarter, all five of our brands experienced exceptional growth online, driving our mix of DTC revenue to increase from 18% last year to 28% this year. This is despite the significant improvements in our wholesale business and inclusive of the recovery efforts within our own retail stores as compared to the disruption experienced in the first quarter. From a comparable sales perspective, direct-to-consumer increased 86% versus last year. Approximately 95% of our own retail stores were open for the entire second quarter, and as of this week, all stores are open. In total, global direct-to-consumer revenue increased 74% versus last year's second quarter. Performance was driven by continued customer acquisition online and a sequential improvement in retail performance as compared to the first quarter. Global wholesale revenue in the second quarter increased 2% as compared to last year. Growth in the quarter was primarily driven by HOKA, but mostly offset by a decline in UGG. The decline in UGG wholesale revenue differs from a regional standpoint; international UGG wholesale revenue declined due to the ongoing marketplace initiatives previously mentioned, while domestic UGG wholesale revenue decreased as both pre-orders were conservatively adjusted at the height of the pandemic and UGG has successfully shifted open a buy with retailers toward lower-priced products such as slippers, Fluffs, and kids' footwear. The UGG wholesale revenue decline in the second quarter was somewhat tempered by our global effort to shift Q3 shipments forward, allowing our distribution center teams to focus on DTC fulfillment. To summarize, we are extremely pleased with our brands' performance and operational execution in the second quarter. Given the demand we're experiencing in our brands, we're anticipating operational challenges related to DC capacity, inventory timing and availability, as well as third-party shipping logistics that will limit the upside of our brands in the third quarter. Though less than ideal circumstances, I'm confident in our team's resilience and ability to manage the effects in our business while protecting the sanctity of our strong brands. I'll now hand the call over to Steve to provide more details on our second-quarter financial performance, as well as some additional thoughts on managing the balance of fiscal 2021.
Steven Fasching, Chief Financial Officer
Thanks, Dave, and good afternoon, everyone. Looking back at the past six months, we are proud of how our business has performed over the opening half of our fiscal year. In the midst of a global pandemic, while consumer behaviors are rapidly shifting with changing lifestyles, our brands and product offerings have been placed in a unique position. As demonstrated by our results, our product proposition is resonating with consumers, helping to drive an exceptional quarter. In particular, UGG has benefited from consumers working and learning from home as the brand has been known to provide consumers with a feeling of comfort and security, and at the same time, HOKA benefited from its increasing awareness and positioning within the expanding active category. These trends helped drive attention to the work our brands are doing and created awareness of our innovative line of products. While much of the current environment remains uncertain, we continue to focus on delivering great products that amplify our brands and meet consumer demands. Now for more detail on our second-quarter results, revenue in the second quarter was $623.5 million, up 15% versus the prior year. Performance compared to last year was primarily driven by global HOKA growth of 83%, which experienced balanced gains across all regions and channels, but also benefited from first-quarter product launches that were delayed to the second quarter and global UGG growth, which was up 3% versus the prior year to $415 million. This increase for the quarter was driven by robust global direct-to-consumer growth of 69% as well as approximately $25 to $30 million of earlier global shipment of products to wholesale and distributor accounts as we worked to decrease some of the logistical load on Q3. Although as expected, the overall wholesale UGG business experienced lower revenue for the quarter compared to last year, as many wholesale partners planned more cautiously this year due to uncertainty at the onset of the pandemic, as well as the impact of our international reset. Gross margins in the second quarter were up 80 basis points over last year to 51.2%. Gross margins increased due to favorable channel mixes, DTC increased as a proportion to the total business, favorable brand mix with the sizable increase in HOKA volume, and benefits from favorable exchange rates. SG&A dollar spend was $190.4 million, up 8% from last year's $175.9 million. The increase was primarily driven by higher marketing and warehouse costs that were partially offset by savings from travel and retail expenses. This all resulted in an earnings per share of $3.58, which compares to $2.71 in last year's second quarter. The $0.87 improvement versus last year was primarily driven by a higher proportion of DTC and HOKA business with offsets from lower UGG wholesale revenue and greater marketing spend and warehouse costs. Our balance sheet remained strong, and as of September 30, cash and equivalents were $626 million, up from $178 million at September 30 of last year. Inventory was down 13% to $484 million from $559 million at the same time last year. We had $9 million in short-term borrowing under our existing credit line as compared to $13 million last year. Our existing credit lines have an available balance of $463 million, and during the quarter, we did not repurchase any shares. During this period, we historically provide an update on our sheepskin pricing. We continue to see stable prices in the sheepskin market, and we expect no change in our sheepskin costs for fiscal 2022. Please note, this does not constitute gross margin guidance for next year, as our sheepskin costs are only one component of our gross margins. As we've now completed the first half of fiscal 2021, we remain disciplined in our approach to planning the second half of the year as we are aware of the unique circumstances surrounding the upcoming holiday season. We are mindful of shipping constraints during the upcoming peak, including not only our own operations but also the operations of third-party shipping and logistics services that we utilize. The logistics infrastructure, both internal and external, will continue to be tested by current challenges paired with unknown pandemic developments, which could be significantly impacted by a second wave of the disease, or any impacts from government orders or restrictions. While remaining vigilant, we will tightly manage the business and drive opportunities where we see potential for success, all with our primary focus on the long-term health of our business and a continuation of driving success through our strong brands and innovative product offerings. Looking to the back half of fiscal 2021, we're conscious of the historical size and relevance that our third quarter represents to full-year revenue and earnings. In a typical year, the three months representing our third quarter equate to more revenue than we've recognized over the first six months. This dynamic, combined with the extraordinary circumstances of the pandemic, places additional pressure on our third quarter this year, and may lead to reaching capacity thresholds that have yet to be experienced year-to-date. These capacity thresholds will be tested at our retail stores. Given that the October through December in-store purchase volume typically represents two to three times the volume of any other three-month period. Additionally, while we are comfortable with current inventory levels in a year where we tempered inventory buys at the outset to reduce risk, we may see demand outpace supply with certain products. In these cases, we will be challenged with meeting in-season demand, but at the same time, it will continue to drive brand heat, encourage full-price selling, and result in a clean marketplace for the fourth quarter and beyond. With all that said, and 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 update some of the major themes of our business. For context, we observed complex pandemic impacts in the first half of the year, including some tailwinds from the acceleration of e-commerce, brand heat and attention resulting from changing consumer trends, extended consumer adoption of categories providing the unique comfort of UGG and heightened consumer awareness of HOKA. While we anticipate that some of these trends may continue to provide opportunities, they may be dampened by the headwinds yet to be experienced, that are particularly relevant during our peak season in the back half of the year. Specifically, pressure from shipping constraints with third-party providers, higher costs associated with our own warehouse operations in the current environment, product scarcity on key styles that are selling faster than anticipated, and increased marketing costs to capitalize on the momentum of our brands and stay top of mind with consumers. With these considerations in mind, we are approaching the back half of fiscal 2021, with the possibility that UGG revenue may fall below last year levels if the brand is up against potential capacity constraints, some earlier shipments into Q2, retail traffic pressure, and continued work with our international business reset. And as Dave mentioned, we continue to see growth with HOKA, but at a lower rate than experienced in the first half, yet on the path to $500 million. We anticipate higher expenses resulting from marketing spend to keep our brands top of mind, warehouse costs for safety measures and higher wages, and increased IT expenses as we build out appropriate support systems for our accelerating e-commerce platform. Before I hand the call back to Dave, I would like to say how pleased we are with the results of our first half, as they give us confidence that the organization can manage through the current near-term challenges while remaining committed to our long-term vision. Our brands are in a great place. The company is well positioned, and we are excited about the opportunities that lie ahead. Thanks, everyone. Now I'll turn the call back to Dave for his closing remarks.
Dave Powers, President and Chief Executive Officer
Thanks, Steve. As I reflect on the unique first half, I'm proud of our organization's collaborative efforts to prioritize the consumer and deliver results. Our brand teams have done an excellent job delivering compelling and innovative products. Our omnichannel organization has been the engine driving product messaging, executing sales, and providing analytics to inform future brand success. Paramount to the first task success this year has been our operations teams, with heavy lifting being done by our product development teams, distribution center employees, customer service specialists, and all other individuals working throughout our supply chain. A huge thank you to every one of our employees for their continued execution of our strategies during these very challenging times. And along with performance, it is our organization's belief that we have a responsibility to continue to do business in the right way. Deckers continues to drive forward on ESG initiatives. I'm pleased to report that we've recently been recognized by Investor's Business Daily as the 15th ranked company in their top 50 best ESG companies list for 2020. This is an improvement from our number 20 ranking last year, and I note that we are the sole footwear or apparel company included in the top 50. To that end, I'm excited to share that our Creating Change FY '20 annual corporate responsibility report will be released tomorrow, highlighting the tremendous progress made by our global organization in FY '20. The report will be posted on our website, and I encourage you to check it out. On that note, and in the spirit of making a positive impact, earlier this month, Deckers held its first-ever Art of Kindness Week, which was an organized effort to encourage employees across the globe to give back through volunteerism. Collectively, I'm proud to report that our teams contributed more than 2000 hours to assist over 200 organizations, ultimately reaching many individuals who need help in these trying times. To remain focused on these types of efforts in the midst of a pandemic while driving business growth is a testament to Deckers' values and approach. It is these values, exemplified by our dedicated employees and top-performing brands, that just yesterday earned Deckers the honor of being named Footwear News Company of the Year for 2020. I'd like to thank and congratulate our employees on this well-deserved achievement. In closing, I have a high degree of confidence in our strategy, portfolio of brands, and top-tier operating model to navigate through these short-term challenges while also investing in our digital transformation to support growth over the long term. Thank you to our shareholders for your continued support. With that, I'll turn the call back over to the operator for Q&A.
Operator, Operator
Thank you. The first question today comes from Camilo Lyon with BTIG. Please go ahead.
Camilo Lyon, Analyst
Thanks. Good afternoon, guys and great job on the execution.
Dave Powers, President and Chief Executive Officer
Thank you, Camilo.
Camilo Lyon, Analyst
I wanted to first ask about your relative inventory position. Steve, you said you feel comfortable with your inventory but demand trends could exceed supply. I’m wondering what category specifically you’re anticipating being under-inventory then? Do you have the ability or have you tried shifting purchasing behavior or intent to comparable categories or SKUs that are in a better stock position?
Steven Fasching, Chief Financial Officer
Sure, Camilo. I'll go first and then maybe Dave can jump in. Absolutely, we are taking a look at this. With inventory down 13%, we are comfortable with where we have inventory. As I said at the onset of the pandemic, we did make some strategic reductions in styles. What we've seen over the course of the last six months is an acceleration on certain styles, specifically in the slipper/sandal categories, which have done very well. As a result of that, we have run short. In the time since then, we have looked to bring more inventory in and we're in the process of doing that. We intend to bring more inventory in this quarter as well as Q4 that will help fill out some of those shortages on styles, colors, and sizes. If there's disruption, that will create some challenges logistically, so we're doing a lot to overcome that. We're bringing things in as quickly as we can with those identified styles, and where we may be short, we are steering customers to styles that we have more in stock. So all of the above, right? We want to take advantage of the brand heat that we have going, the consumer demand that's out there for these styles. We want to use that as an opportunity where we have scarcity to push to other products that we do have.
Dave Powers, President and Chief Executive Officer
Yes, that's exactly right, and we're seeing the consumer shift to other products and other categories. Generally speaking, whether it's slippers, classics, fashion boots, winter boots, we're seeing strong sell-through particularly in DTC but also at wholesale of all the categories, including ready-to-wear. The demand for the brand remains very strong, as you see in the accelerated interest over the quarter. Younger consumers are adopting the brand at new levels. We've increased our rate of 18 to 34-year-olds by over 180% for the quarter, and we're chasing the inventory where we can. If there are no logistics disruptions, we'll be in a good place. I think it's a healthy place for our brand to be in this chase mode. While we're focused on delivering Q3, we're really focused on the long-term health of the brand, and the setup that this demand and healthy marketplace means for us over the long term. We're just seeing a lot of potential right now.
Camilo Lyon, Analyst
That's great. Just a follow-up. Steve, you mentioned last quarter that you were anticipating cancellations to outpace pre-orders; is that still the case? And then on a longer-term basis, Dave, maybe we'd love your insights into this: you are looking to reach at least mid-teens, probably 15, maybe a little bit above 15% EBIT margin this year, with very strong operating metrics there. Clearly, you've taken the brand to the next level with a new demographic coming in. Where do you see the long-term margin opportunity? Can this be a high teens or low 20s business over time?
Steven Fasching, Chief Financial Officer
Really, as we think about where we're at on the inventory and cancellations, it's why we're not giving guidance, right? We don't know what's going to happen at wholesale. If everything holds up, we won't have the cancellation issue. If things get more challenging from a logistics standpoint, with some retail closed, there may be cancellations. So that's really what we want to see over the course of the next couple of weeks. It's too early to tell, which is why we're holding off on guidance. Yes, exactly. To your question on the longer term, we're looking at this right now. We just had a conversation with the Board a few weeks ago. The best way to think about it is we're committed, and we've proven that over the last three-plus years to this mid-teens operating margin. However, there needs to be some investment in the next coming one to two years to take advantage of the opportunities that we're now seeing. Our long-term strategy through COVID has probably been accelerated with the shift to e-commerce, the younger consumers coming in, the increased marketing spend. But we're going to need to invest in further capabilities to optimize that e-commerce engine even more. We need to provide better data and analytics, capabilities, systems improvements, and just continue to fuel the growth of these brands through marketing. Our marketing is paying off tremendously right now, and we increased our marketing spend over the past quarter by 30%. So this is one of those situations where the engine is firing on all cylinders, but we need to keep it going. You can count on us to deliver on mid-tier operating margins, but whether we get up above 16%, 17%, or 18%, the opportunity is there; but it all depends on how fast we're going to have to invest in the mid-short to mid-term to keep the top line going at what we're shooting for: high single digits, double-digit percent growth over the next few years.
Camilo Lyon, Analyst
Got it, sounds good. Good luck in the holiday. Take care.
Steven Fasching, Chief Financial Officer
Thanks, Camilo.
Dave Powers, President and Chief Executive Officer
Thanks, Camilo.
Operator, Operator
The next question comes from Paul Lejuez with Citi Research. Please go ahead.
Paul Lejuez, Analyst
Hey, thanks, guys. I'm curious if you're already seeing some of these constraints happening in your business or have you been able to manage through them this quarter thus far? I guess I'm also curious on the marketing side. Does it make sense to spend as much marketing as you are, given your concern about potentially not being able to meet demand, the risk perhaps disappointing some customers if you can't meet that demand? Thanks.
Dave Powers, President and Chief Executive Officer
Yes, I would say so far, the teams have done an incredible job, which I referenced in the script on managing our distribution and our logistics to date. We've had to put in place social distancing measures. We've had to pay more to employees for hazard pay, etc., and recruiting has been a challenge. So they've done an incredible job working through this and working with the order book and the sales team to balance deliveries. So far, we haven't seen major disruptions, but the level of throughput that we're going through right now is nothing compared to what's coming in the next couple of months. That's really when the capacity of taking inbound deliveries that are in some cases delayed because of logistics from Asia Pacific into the DC and at the same time turning around and putting products into the marketplace. That's where the pinch could come in the next couple of months, and that's what we're really mindful of and planning for. So haven't seen major disruptions yet within our control. We have seen them in logistics, but we're feeling confident in our ability to manage through it. As Steve said, there's still so much uncertainty ahead of us. Regarding marketing, we are very surgical in our marketing. We have a center of excellence on digital marketing and spend around the world, and we navigate based on return on spend by brand, channel, and region. We're cautious of the fact that where there may be constraints on upsides due to marketing, and we're putting our marketing dollars in places where we know we'll get the payoff, such as HOKA to continue to grow that brand and you saw the 80% plus growth in Q2. In different markets, we're releasing some money to continue to assist international and the transition of the UGG brand. We're testing at the same time. The marketing is paying off. We're adopting younger consumers, and we're getting multiple purchases from a younger consumer within the quarter. Normally, we wouldn't see purchases for UGG products more than once a year, traditionally a classic style. But now we're getting many consumers that bought the Fluff earlier in Q2 and came back and purchased the UGG Clear. The marketing is working; it's driving overall brand awareness and buzz about the brand. I don't have many concerns about missing sales or wasting marketing spend. I think we're very efficient on that, and thus far, it seems to be working really well.
Steven Fasching, Chief Financial Officer
Yes, and I think, Paul, just to add on that, I think the other thing on the constraints is really third-party logistics, so we are hearing from third-party freight companies about logistics constraints. That's going to be universal, which is something we're keeping a close eye on. So, there is constraints within what we control, but also what's outside of our control. We are seeing signals around that, so we'll be watching carefully and looking to find alternatives to work around some of those situations. On marketing, just to add to what Dave said, where we are marketing certain styles that may be low on inventory, there is an opportunity to shift some of that marketing. We can start to shift some of that marketing to product we have in stock. So, we have an opportunity to kind of move that in stock. The other important component is really our international reset, which we can use money. This is not just about domestic; it's about how we can accelerate some of our international reset and deploy some of that marketing money around repositioning our brands and products and awareness in the international markets.
Dave Powers, President and Chief Executive Officer
Yes, and as we said in Q1 call, and we'll continue to stay focused on, we want to take this opportunity to steal market share wherever we can. So, we want to stay aggressive on marketing, continue to drop innovative, exciting products in the marketplace, and bring in younger consumers. We're going to have to continue to spend marketing dollars to do that. It's really now about scaling the global opportunity based on the success that we're seeing in the domestic market.
Paul Lejuez, Analyst
Got you. I'm just like, I just got 4% of the ready to... what percent of the UGG business is ready to wear and same question for HOKA, what percent of that brand?
Dave Powers, President and Chief Executive Officer
Yes, so ready to wear for UGG is less than 10%. It's mostly high single digits right now. It's a small business currently, but this ready to wear launch for us was a proof of concept test and the results have been phenomenal. The price points are perfect. The styling and the detailing resonate with a younger consumer. We launched it primarily in DTC and with Nordstrom, and it was the first time Nordstrom has ever put us on their landing page for apparel. They're incredibly pleased with the sell-through, and we've had a lot of accounts calling trying to get their hands on the product. For us, this means there's a lot of opportunity in this category in the next three to five years. So, it's small but very exciting from a launch perspective. HOKA apparel is even smaller. That's really early stages of development there. We are working with some folks externally to bring in more talent to ramp that up. But the $500 million, the $1 billion numbers that we've put out there, we don't believe those need an apparel business to hit those targets; thus, it would be incremental to that at this point. Early days for HOKA, it's less than probably 3% of total sales.
Paul Lejuez, Analyst
Got it, thank you. Good luck, guys.
Dave Powers, President and Chief Executive Officer
Thank you.
Steven Fasching, Chief Financial Officer
Thanks, Paul.
Operator, Operator
Next question comes from Jonathan Komp with Baird. Please go ahead.
Jonathan Komp, Analyst
Yes, thank you. Just a follow-up on all the commentary you've given on UGG, which is really helpful thinking about the third quarter and really the second half of the year. Are you saying, Steve, when you look at the scenarios and some of the planning, are you saying there's no scenarios where UGG can be flat or up for the period or just trying to gauge the degree of the constraints that are out there relative to potential scenarios? Did you call out any explicit costs that we should be thinking about for some logistic impacts?
Steven Fasching, Chief Financial Officer
Yes, Jon, again, we're not giving guidance. What I wanted to call to attention is we're dealing with the pandemic and constraints, seeing growth in the first half. As I mentioned and on the last call, we successfully moved some product in Q2 that would traditionally go in Q3. It depends on what happens. If it's a clean Q3, we won't have cancellation issues. Given everything we're seeing, it's hard to see no disruption in Q3, that's how we're looking at UGG and planning for it. I just want to provide a bit of caution as we think about it. There's been some shifting in product, and because of the conservative cuts we made in terms of inventory, we're up against some constraints on inventory. We're going to do the best we can, but it is work and we're working against external factors that we're going to have little control over.
Dave Powers, President and Chief Executive Officer
Yes, and the setup for Q4 and spring product looks promising as well. But it all depends on how we're able to get through Q3 before we get to that point.
Jonathan Komp, Analyst
Okay, that's really helpful. And maybe a broader question on HOKA. I know you've talked about this $1 billion-plus aspiration for a while. Just thinking about that incremental $500 million compared to this year, nearly a quarter of your total company sales today. Could you just talk through what are the margin implications of that, given the mix shift that will drive toward HOKA even further over time?
Dave Powers, President and Chief Executive Officer
Yes, I'll go first. What we've historically said is in its channel, HOKA is a little bit better compared to UGG. As the proportion of HOKA increases, gross margin implications are that if we don't get into situations where we have to discount, again we're dealing with a brand that is on fire, growing 80%, which is crazy. We can hold full-price selling. As long as we can do that, margins are by equivalent channel, compared to UGG, slightly better. But at the same time, then we're spending more on marketing. As a brand that is still being discovered by many, we invest considerably more in developing HOKA and brand awareness and consumer awareness. So from a gross margin standpoint, if the brand heats up and continues to grow like it is, and there's little promotion around that brand, it is incrementally positive. But we are also investing more in developing that brand and building it.
Jonathan Komp, Analyst
Okay, that's really helpful. Thank you, and good luck for the holiday.
Dave Powers, President and Chief Executive Officer
All right.
Steven Fasching, Chief Financial Officer
Thanks, John.
Operator, Operator
Next question comes from Tom Nikic with Wells Fargo. Please go ahead.
Tom Nikic, Analyst
Hey, guys, thanks for taking my question. You spoke a lot about capacity constraints, both internal and external, and it kind of seemed like, for the most part, you were speaking in reference to UGG. Do these same constraints apply to HOKA? It would seem you have to get the $500 million this year; you don't need the growth in the back half of the year for HOKA would be much slower than it was in the first half. Is there anything preventing you from far exceeding that? I know $500 million is a big number, but it kind of seems that with the momentum and the brand and the growth rates that you've been seeing, even in the midst of the pandemic, it could be better than that.
Dave Powers, President and Chief Executive Officer
Yes, I think I'll jump in on that. Keep in mind that some of the deliveries and the business we had intended to do in Q1 for HOKA ended up happening in Q2 because wholesale was closed for most of Q1, hence the 80-plus percent growth. From an internal perspective, we don't have a lot of constraints on HOKA, and the inventory, we're chasing the inventory as fast as we can. We're in pretty good shape heading into the back half of the year in inventory for HOKA. The demand is still there; it's really relying more on macro environment and external factors for us. Sorry, just the biggest challenge we face is just the last seven to eight weeks of the quarter on UGG where DTC ramps up dramatically. And at the same time, we are bringing in product and shipping out to wholesalers. It's that timeframe where the pinch could come in over the next couple of months, which is what we're really cautious about because there are so many factors that could get in the way of that being successful. But that's an UGG dynamic, less so on HOKA.
Tom Nikic, Analyst
Understood, that's helpful. On UGG, I know, maybe this is a tough question to answer at the moment, but obviously, there's been a lot of noise lately, even pre-COVID, with the brand reset in Europe and stuff like that. When sort of everything is normal, when we're past COVID, when the international reset is done, what kind of growth should UGG be generating? Is this a mid-single-digit grower or is it something better than that? Something worse than that? I mean, how should we think about UGG over the long term in a normal environment?
Dave Powers, President and Chief Executive Officer
Yes, that's a good question. I would estimate it to be in the low single digits, under 5%, but with healthy, sustainable growth in full-price sales. What is encouraging is the number of new young consumers adopting UGG, visiting our website, and exploring new products. They are making multiple purchases from our sites across different categories. We are also seeing a healthy mix of consumers buying both footwear and ready-to-wear items. The success of the Fluff franchise, particularly with our slipper or sandal hybrids, indicates that this trend has longevity. It's shifting from being about indoor slippers to becoming more of a fashion statement. We have a growing number of new consumers in our database, allowing us to optimize their lifetime value. There's also excitement in men's fashion, as we are launching Fluff products for men soon with a notable ambassador. If we can successfully navigate the international transformation, we could achieve healthy, sustainable long-term growth. We are optimistic about the brand's future; it is the healthiest and most exciting it has been in the past eight years, and we feel positive about our potential moving forward.
Tom Nikic, Analyst
Right, yes. Thanks very much. And best of luck this holiday season.
Dave Powers, President and Chief Executive Officer
Thank you.
Steven Fasching, Chief Financial Officer
Thanks, Tom.
Operator, Operator
The last question today will come from John Kernan with Cowen. Please go ahead.
John Kernan, Analyst
Yes, excellent. Thanks for taking my question and congrats on all the momentum.
Dave Powers, President and Chief Executive Officer
Thanks.
Steven Fasching, Chief Financial Officer
Thanks, John.
John Kernan, Analyst
I wanted to ask you on the mix shift to DTC and HOKA. Obviously, they drove tremendous gross margin expansion in the first half of the year, and also drove a lot of SG&A leverage. The DTC and HOKA shift seemingly should continue into the back half of the year. How should we think about your margin structure in the back half relative to the performance you had in the first half, both on the gross margin and SG&A line?
Dave Powers, President and Chief Executive Officer
Yes, I'll take that one. Again, we haven't given guidance. The way to think about the back half is you start getting up against bigger numbers. Q1 and Q2 are huge in percentage because they tend to be smaller quarters. As you get into the back half, you're up against bigger numbers. The expansion you saw in the first half is not necessarily indicative of what you'll see in the second half. We will have similar impacts from the changing dynamics. The impact will not be as much as what you saw in the first half.
Steven Fasching, Chief Financial Officer
Strength of DTC upside from a percent growth perspective is more dramatic in UGG; HOKA is more just kind of holding steady as the trends that they've been on; but UGG's DTC is super strong.
John Kernan, Analyst
Got it. Certainly, a lot of momentum. Maybe just one more follow-up would be when you think about that $1 billion run rate of sales for HOKA, what are you most excited about in terms of category level and geographic level to give you that confidence in doubling that business?
Dave Powers, President and Chief Executive Officer
Well, I think, you know, it's obviously still founded in core authentic running and continuing to be a leader in that category. In some cases, we are seeing we're number two; in some cases, number one market share already. The difference between us and the number one market share holder, which tends to be Brooks, is that we could almost double our market share and still be neck and neck with Brooks. There’s still a lot of opportunity in core run specialty channel. The two things that excite me most are the expansion to a broader set of consumers. It's more consumers not buying it just for running; it's everyday athletics or lifestyle. We're starting to see that broad base of consumers being attracted to the brand for the performance attributes that it provides. We still want to keep distribution tight and are focusing on our ecosystem of selected wholesale partners, key accounts, and driving e-commerce to optimize that business for the long term. I think the real unlock to the $1 billion is continued acceleration of our EMEA business, particularly online. We've made quite a few investments over the last year to allow the e-commerce business there to flourish, and we’re seeing positive results with that, but it’s still small compared to the U.S. Then beyond that is Asia Pacific, and we’re just getting started in China. Obviously, that's a massive opportunity for us. We think we can get to that $1 billion mark with real strong growth continuing in the U.S. and accelerated growth in EMEA; then beyond that is even more upside once we get into those territories in Asia Pacific and newer categories.
John Kernan, Analyst
That's excellent; congrats on all the success.
Dave Powers, President and Chief Executive Officer
All right.
Steven Fasching, Chief Financial Officer
Thanks, John.
Operator, Operator
The last question today will come from Sam Poser with Susquehanna. Please go ahead.
Sam Poser, Analyst
Thank you. I'm honored to be last. Guys, can you adjust some housekeeping and then I have some more detailed questions. Could you give us either the revenue or the revenue growth for wholesale by brand for DTC by brand for each brand; you gave UGG? Whatever it was. Can you give the rest of them for modeling purposes, please for the quarter?
Dave Powers, President and Chief Executive Officer
Yep, sure, Sam. So UGG wholesale for the quarter was $292 million; HOKA was $108 million; Teva was $18 million; Sanuk was $6 million; all else was around $28 million; and then our DTC was $172 million.
Sam Poser, Analyst
Okay, great. I got a couple of questions. Other than that, I guess you've talked a lot about the transformation going on in EMEA and APAC. What, as you see it today, what's the timetable for being at a, let's say, the beginning stage of how the U.S. turn — when the U.S. turn really kicked in, which would be a few years, a couple of years ago?
Dave Powers, President and Chief Executive Officer
Yes, in my sense, it's been challenged due to the COVID situation, both in Europe and Asia Pacific, particularly China. That being said, we have seen some signs of promise with category adoption. The phenomenon of the Fluff franchise in the U.S. hasn't really hit Europe or China yet. In the last weeks of the quarter, we're starting to see some excitement around those categories, younger consumers, and strong sell-through of those categories. But also the brand increased marketing, focus on PR, and collaborations; the new ambassador we signed in China — these have all shown positive results, not big enough to move the total country needle because we still have some scarcity work to do as far as resetting the classics business. But people are starting to see the UGG brand as a more fashion-relevant brand than they have in the past. I would suggest you'll start to see a return to growth probably next fall in those markets as an indication of where we can go from there. The teams are doing a great job, and I think you'll start to see that return to growth probably next fall into FY '22 and beyond.
Sam Poser, Analyst
Thanks. And then you had talked earlier or on previous calls about the test with HOKA you were doing with DICK's; could you give us an update there and how they're managing it and what the plans may be? And then lastly, and I've got others, but lastly, you're talking about the New York flagship. I saw 58th Street close. Where is this store going to be?
Steven Fasching, Chief Financial Officer
Yes, I'm trying to remember what your first question was.
Sam Poser, Analyst
DICK's.
Steven Fasching, Chief Financial Officer
Yes, so the 11-store test has been going very well. They're very pleased. The sell-through has been strong. We tested with them three or four years ago with a small test, and the results were not good. It's a whole different ballgame now. So again, we're managing that relationship closely. We're pleased with the results as to what they're selling. We're not looking to expand dramatically with that account just yet. We're taking a very strategic and methodical approach as to how and if we go much bigger with DICK's, but so far, the results are very promising. Down the road, we're exploring opportunities with the Foot Locker banner as well, with early ongoing conversations there, but still cautious about the timing of when we go into those new accounts.
Sam Poser, Analyst
And then the New York store?
Steven Fasching, Chief Financial Officer
Yes. So it's on Fifth Avenue.
Dave Powers, President and Chief Executive Officer
I don't have the exact...
Steven Fasching, Chief Financial Officer
It's right across from the NBA store on Fifth Avenue. Tremendous location, highly visible, two floors, lots of windows, great foot traffic, both local and tourists going by there. It's our largest store ever, two floors, and it's going to showcase all the ready-to-wear collection with a new store design. It will be much more fashion-focused than we have been in the past, with lots of color and excitement. There’s also great storytelling and experience for the brand with elevated service models for omnichannel capabilities and testing a lot there, along with a new mobile POS system to go along with that. So, there's a lot to be excited about. Obviously, the timing, we wish was better, but this will be a catalyst for the brand globally. We'll be looking to roll out the new store concept to key partners and other flagship locations as time permits over the next few years. Great storytelling is an exciting aspect for consumers to come in and experience the ready-to-wear collection and a new look for the face of UGG.
Sam Poser, Analyst
Thanks, can I have one more?
Dave Powers, President and Chief Executive Officer
Yes, the opening date on that is November 19, Sam.
Sam Poser, Analyst
Thank you. Just to confirm, your DTC, UGG DTC business in Q4 is going to be hampered by... is it hampered by store traffic or is it going to be hampered by product availability and the amount you can ship because of it? Will it be capacity constraints in stores that can't be overcome by e-commerce or what's going on in the distribution center or both?
Dave Powers, President and Chief Executive Officer
Yes, it is really more just about constraints. One will be from retail as to how much traffic is allowed in stores; some of the mall-based stores? What will the malls look like? Can people get in? That's going to be one constraint. Then I would say, as I mentioned before, just externally, it will be what shipping capacity looks like. The more we can direct e-commerce and the more we can capture early, the better; right? It helps us navigate, I think, some of the macro-level constraints that are more out of our control. We're doing the best that we can with what's under our control, which is mostly about inventory management and bringing in more product this year than we did a year ago, and a quarter where we have constraints as we have lower inventory going into Q3. We are working with all these items and trying to get to the consumer. The demand is there, and they're showing up online. We're confident in our ability to fulfill that if there are no constraints in place, but we know there will be some.
Steven Fasching, Chief Financial Officer
Yes, and we are confident we can navigate the logistics constraints whether they're operational on our end or with third-party operations. We're doing a lot to mitigate any issues.
Sam Poser, Analyst
Thanks so much and continued success.
Dave Powers, President and Chief Executive Officer
Thank you.
Steven Fasching, Chief Financial Officer
Thank you, Sam.
Operator, Operator
This concludes our question-and-answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.