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Millennials and Gen Z Gave Deckers a Q3 Win

Deckers Brands saw record third-quarter net sales and earnings per share in its holiday season, surpassing $1 billion in quarterly revenue for the first time ever. Even as the performance and lifestyle footwear company only had 75 percent of its global stores open for the entire quarter, Deckers was able to thrive on the backs of the strength of the Ugg brand and the rapid growth of Hoka One One.

In a Nutshell: In a third-quarter earnings call, Dave Powers, president and CEO of Deckers Brands, highlighted the expansion of Ugg’s product assortment, the prioritization of 18-to-34-year-old consumers and the globalization of Hoka One One as key drivers for the holiday success.

Year-to-date, Deckers accelerated consumer acquisition online 87 percent across its brand portfolio, which also includes Koolaburra, Teva and Sanuk. Ugg alone gained 2 million new shoppers in the first nine months of the 2021 fiscal year, and is driving not just acquisition, but retention—the brand has seen an 89 percent increase in repeat purchases over that time span versus the same period last year.

In the third quarter alone, Ugg saw a 44 percent increase in U.S. customers aged 18-to-34 years old, which was the largest increase of any demographic and represented the largest percentage of total customers. This helped the Ugg brand grow net sales in the quarter 12.2 percent to $876.8 million.

“As Ugg continues to expand its audience with younger consumers, it has been critical to enhance the brand’s e-commerce engine and digital marketing expertise,” Powers said. “The Ugg e-commerce platform has continued to evolve as part of Deckers’ overall digital transformation, but it has also become a strategic driver of the product development process through exclusive products. By creating products exclusive to DTC, the Ugg team is able to both develop special events that drive traffic as well as create a faster feedback loop to enhance future product success with targeted consumers.”

Sales at the running-focused Hoka One One brand jumped a whopping 52.1 percent to $141.6 million in the quarter, with direct-to-consumer revenue now representing 30 percent of the brand’s total sales—up from 21 percent last year.

But the tale of Hoka’s growth has been ongoing throughout the year, with the brand increasing consumer acquisition online by 117 percent in the fiscal year-to-date, while also doubling consumer retention year-over-year. Like Ugg, U.S. consumers aged 18 to 34 drove the acquisition momentum, with this demographic increasing 167 percent year-to-date.

With a growing audience online and dedicated consumer replenishment trends, Hoka has been able to cross the $100 million DTC revenue mark in just the first nine months of fiscal year.

Yet even with the DTC success, Hoka One One is growing within wholesale channels, too. For the 2020 calendar year, the brand’s top three strategic wholesale accounts sold more than $100 million of Hoka product at retail value, and the brand plans to expand the number of Dick’s Sporting Goods stores it sells in by spring 2021.

While revenue dynamics remain in favor of domestic channels due to the differences in distribution models, 54 percent of units in the third quarter were actually sold internationally, illustrating Hoka’s growth outside the U.S.

Across all Deckers brands, total inventories were $305.3 million in the quarter, representing a nearly 17 percent drop compared to $365.9 million carried in the year-ago period.

On the supply chain side, Deckers confirmed that its distribution center in Moreno Valley, Calif., and its other third-party distribution facilities in use are currently operating and supporting ongoing logistics.

However, these facilities may continue to operate at limited capacity due to the enhanced health and safety measures now in place. Deckers anticipates operational challenges related to capacity constraints as well as increased costs associated with warehouse employee safety and payroll expense.

Deckers says that its third-party logistics providers are also experiencing capacity constraints, which are having an adverse effect on the company’s operations.

The company said it continued to experience certain capacity constraints within its sourcing network during the third quarter, in addition to disruptions related to travel restrictions between country borders and production facilities. While the effects of these disruptions have been mitigated thus far, it is possible that there will be disruptions in the future.

Cash and cash equivalents were $1.2 billion at the end of the quarter compared to $616.9 million the year prior. Outstanding borrowings were $30.4 million, compared to $37.1 million.

Given the ongoing and fluid economic environment related to the Covid-19 pandemic, Deckers Brands did not provide full-year guidance for fiscal year 2021.

Going forward, Deckers anticipates that temporary retail store closures in certain geographies will continue for at least a portion of the fourth fiscal quarter, and that there is a risk of ongoing or additional retail store closures and operating limitations based on expert agency guidance and local authority mandates.

Net Sales: Net sales increased 14.8 percent to $1.1 billion compared to $938.7 million for the same period last year. On a constant currency basis, net sales increased 13.8 percent.

Direct-to-consumer drove the majority of sales growth and is getting closer to evening up with Deckers’ wholesale channels. DTC net sales for the third quarter increased 25.7 percent to $519.9 million compared to $413.7 million for the same period last year.

DTC comparable sales, which account for DTC operations that were open throughout the current and prior reporting periods, increased 33.8 percent over the same period last year. On the other hand, wholesale net sales had a much more reserved growth at 6.2 percent to $557.9 million, compared to $525.1 million for the same period last year.

When splitting total sales by brands, Ugg net sales increased 12.2 percent to $876.8 million, compared to $781.1 million for the same period last year.

The Hoka One One brand saw by far the biggest sales jump in the quarter, increasing 52.1 percent to $141.6 million from $93.1 million a year ago.

The two other major Deckers brands, Teva and Sanuk, saw sales dips of 8.7 percent to $15.7 million and 17.3 percent to $7 million, respectively. The “other” category, which is largely composed of Koolaburra products, declined 5.5 percent to $36.7 million in the period.

What’s more, domestic revenues advanced 19.3 percent to $770.5 million, and the international business noted a 4.8 percent increase to $307.2 million.

Net Earnings: Net income increased 26.8 percent to $255.5 million from $201.6 million in the third quarter last year. Diluted earnings increased 26 percent to $8.99 per share, compared to $7.14 per share in the year-ago period.

Income from operations, which excludes $73 million in tax expenses, was $328.7 million in the quarter compared to $255.8 million for the same period last year.

CEO’s Take: Powers noted that while the lowering of inventories was planned internationally, it was lower than expected in the U.S. due to high demand. When taking the supply chain disruptions into account, the company acknowledged that it must keep working closely with suppliers to continue replenishing inventory in line with demand.

“I think it gives us a great opportunity to kind of reset in the channel, and I know the teams are working on that. It also allows us to get orders in earlier, which will help with our supply chain and our production going into this year, which we know will be challenging,” Powers said in the call. “But we’re getting ahead of that because of the current situation. But it allows us to really set the channel the way we want it to be and to maintain the strength and the positioning of the brand and control it better by distribution type, whether it’s DTC or wholesale or depending on the account in wholesale. So it’s an enviable position for us to be in, and we’re going to take advantage of it as best we can.”

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