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Hoka Running Hot for Deckers

Deckers Brands raised its 2023 guidance after the Ugg and Hoka parent saw third-quarter sales increase 13.3 percent to $1.35 billion, driving net income of $278.6 million.

The company’s full-year revenue guidance is now expected to be between $3.50 billion and $3.53 billion on 11 percent to 12 percent growth—an increase from the previous range of 10 percent to 11 percent.

Diluted earnings per share (EPS) is now projected to be in the range of $18.00 to $18.50, ahead of initial forecasts of $17.50 to $18.35.

In a Nutshell: After news of the earnings report broke, financial institutions including Cowen, Wells Fargo, UBS and Telsey Advisory Group all raised their price targets for the footwear company’s stock.

The Hoka brand remains Deckers’ fastest-growing revenue driver, with net sales skyrocketing 90.8 percent to a record $352.1 million in the period. With another impressive quarter under the running shoe brand’s belt, Deckers has higher expectations for Hoka, now projecting the label to increase revenue in the “low-50 percent” range, implying more than $450 million of incremental revenue versus last year, according to chief financial officer Steve Fasching.

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“The Hoka brand’s increased fiscal year revenue guide now implies a second half growth rate in the high-40 percent to low-50 percent range, with total dollar volume that is slightly greater than the first half, reflecting the brands’ balanced revenue across the year,” said Fasching.

Deckers CEO Dave Powers said that the billion-dollar brand’s growth in the third quarter was primarily driven by share gains with wholesale run specialty accounts as improved product flow this year yielded better sell-throughs.

“According to aggregated U.S. run specialty store data, during December, Hoka increased market share by 5 percentage points versus last year, delivered the highest average product turns and maintained a gross margin well above the channel average,” Powers said.

Ugg, Deckers’ other major brand, increased its mix of business in direct-to-consumer to 60 percent of total sales, up from 54 percent last year as the brand drove an 8 percent increase in the channel. Overall, the brand delivered global gains in DTC across genders and categories, driven by a 21 percent increase in acquired consumers and a 17 percent increase in retained consumers.

Powers said that Deckers pulled back on investments in some of the more popular Ugg styles like the Classic Mini boot and the Tasman slipper due to temporarily elevated inventory levels, not anticipating how strong demand would be.

“The platform styles, the Tas, the Ultra Mini, those styles in many cases sold out to the piece. And so, we missed some opportunity there,” Powers said. “The good news is that wholesalers want more, the consumer wants more. And we’ve realized that these extended Classics, in more iterations of core classics would keep our brand DNA intact, are resonating very, very well with particularly younger consumers.”

Inventories were $723.4 million, up 31.4 percent compared to $550.7 million. The increase was primarily to support Hoka’s sustained growth, as the brand was light on inventory in the prior year due to factory delays.

Fasching also gave an update on logistics, saying that the level of disruption, delays and corresponding freight costs relative to this point last year have continued to improve, although they remain elevated versus pre-pandemic levels.

“While the ongoing outbreak in China is not currently impacting footwear production or transit times in a material way, we are experiencing some minimal operational hurdles, and we’ll continue to watch this situation closely,” Fasching said.

Gross margin was 53 percent, up 70 basis points (0.7 percentage points) from 52.3 percent in the 2022 third quarter. The most material drivers of gross margin in the quarter were a significant benefit from the reduced freight costs, which was partially offset by unfavorable foreign currency exchange rates. Additional gross margin benefits came from a favorable channel mix with DTC growing faster than wholesale, accelerating Hoka sales and last year’s price increases. These were partially offset from more normalized promotions and closeout activity for Ugg relative to minimal discounting last year, Fasching said.

Cash and cash equivalents across Deckers were $1.06 billion, compared to $998.3 million as of Dec. 31, 2021. The company had no outstanding borrowings.

Net Sales: Third-quarter net sales at Deckers Brands increased 13.3 percent to $1.35 billion compared to $1.19 billion in the year-ago quarter. On a constant-currency basis, net sales increased 17.5 percent.

Hoka continues to be the top growth story at Deckers, with net sales soaring 90.8 percent to $352.1 million from $184.6 million in the prior-year third period.

Ugg net sales decreased 1.6 percent to $930.4 million compared to $945.9 million in the 2022 quarter. On a constant-currency basis, the comfort brand is up “low-single digits,” according to Powers.

Teva is showing significant development as well, with net sales rising 48.3 percent to $30.5 million, up from the $20.6 million generated in the previous third quarter.

Sales at Sanuk and Deckers’ other brands, primarily composed of Koolaburra, declined 7.4 percent to $5.6 million and 12.1 percent to $26.9 million, respectively.

By channel, direct-to-consumer (DTC) sales are now taking up a larger chunk of Deckers’ overall business. DTC net sales increased 18.7 percent to $699.3 million compared to $589.4 million. Comparable DTC net sales saw a 22.1 percent improvement.

Wholesale net sales rose 8 percent to $646.3 million, up from $598.4 million in last year’s third quarter.

Domestic net sales at Deckers Brands jumped 13.9 percent to $906.8 million, compared to $796.1 million in the year-ago period. International net sales swelled 12.1 percent to $438.8 million from last year’s $391.6 million.

Net Earnings: Net income was $278.6 million at the end of the third quarter on diluted EPS of $10.48, up from $232.9 million on diluted EPS of $8.42 in the year-ago period.

Operating income was $362.7 million compared to $293.4 million.

CEO’s Take: Powers stressed the importance of balance across wholesale and DTC, even as Hoka continues to see outsized success selling through new retail banners.

“On a global scale, we are very selective of who we sell Hoka to in wholesale. We’re always prioritizing the run specialty channel, that’s our bread and butter and the authenticity of the brand,” Powers said. “But you know, we’re strong in places like REI, we’ve expanded doors in Dick’s in the third quarter, and that’s growing very well. We’re in a handful of Foot Locker doors, but right now we’re not really looking to expand too many more doors in wholesale, we’re focused on healthy sell-through and expanding categories.”