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Deckers Margins Intact Despite $100 Million Higher Freight Bill

Strength in Ugg and growth at Hoka helped Deckers Brands post a jump in fourth-quarter sales and reach a milestone of $3 billion in annual volume, despite higher freight costs.

In a Nutshell: “Our company’s performance in fiscal year 2022 was outstanding as we drove top line growth above 20 percent and maintained top-tier operating margin in the high teens despite increased costs resulting from global supply chain disruption,” Steve Fasching, chief financial officer, told investors during a conference call on fourth quarter earnings results.

For the full fiscal year, the company incurred “freight costs that were more than $100 million above the prior year, excluding the impact of higher volumes,” he said.

Inventory rose 82 percent to $506.8 million versus $278.2 million a year ago, including amounts in-transit and $50 million of embedded incremental ocean freight.

“Prolonged transit lead times, port bottlenecks related to trucking scarcity and ocean container shortages were the most material impacts to our business in fiscal year 2022, and we expect some of these pressures will continue as we begin fiscal year 2023,” he said.

While delays and port backlogs have improved, Deckers continues to prioritize inventory receipts as a precaution because of potential Covid outbreaks and the potential for West Coast port disruption this year that could have a “domino effect” across the supply chain. That means that inventory will likely remain elevated in the months ahead, Fasching said.

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The footwear company believes prices hikes at Hoka and planned Ugg increases can mitigate ocean freight and materials inflation. Deckers expects to use air freight in Fiscal 2023, but mostly for the Hoka brand to fill production gaps due to factory disruption. While the additional air freight charges for Hoka will not be covered by the increased prices, adjusting orders and timing of receipts are expected to help offset some of those costs, Fasching said.

However, air freight was key to keeping Hoka in where possible in Q4. “We used air to bring in the Hoka product, which really helped drive the top line on the Hoka sales for the quarter,” he said.

CEO Dave Powers added that Hoka is “still in a chase mode” with demand outstripping supply. “Our supply teams have done an incredible job finding more capacity for us in Vietnam and beyond for the Hoka brand,” he said, adding that analysts should “see the effects of that start to kick in probably in the second half of this fiscal year.”

Hoka had another year of “record-breaking results” as global wholesale rose 55 percent from last year, with “plenty of exciting runway ahead,” Powers said. Strategic partners including Foot Locker helped power Hoka’s growth. “We haven’t heard any real major issues from any of our wholesale partners,” he added. “Obviously, they want as much product they can get as fast as they can. So that’s really what the conversations are about. It’s more about how can we get it versus, ‘hey, we want to do cancellations.'”

So far the brand has hosted popups in New York, Chicago and Los Angeles. Its first permanent U.S. store is expected to opened in New York City by the end of Fiscal 2023.

Powers said Deckers views Hoka as a performance brand “across multiple categories.”

“We’re obviously rooted in running, and that’s where our authenticity comes from, but we’re relevant and important in trail and hike and getting into fitness and other categories down the road, head to toe,” he said. “So when you think about the breadth and the shoulders that this brand has, we see a multibillion-dollar opportunity. From a channel perspective, we could light up wholesale today and dramatically increase the results of this business overnight. But we want to make sure it’s sustainable.”

This is where first-party data becomes truly “critical for success,” he continued. “We’re doing everything we can to drive healthy DTC business at the same time. So right now, we’re looking at probably a 50-50 split because internationally, there’s more opportunities in wholesale, and that’s just depending on the market than DTC today,” Powers pointed out. “But we’re very conscious of the fact that we’re leveraging wholesale to introduce the brand and create awareness and have healthy sell-through in the right accounts.”

Eventually, Deckers wants Hoka to take a page from Ugg’s book.

“One other opportunity that we’ve talked about within the Ugg brand is the loyalty program,” Powers said, describing the nearly 6-million-strong members as “our best consumers.”

“They shop most frequently to spend more money than somebody who’s not in loyalty program,” he said of the “emerging opportunity” for Hoka to “kind of further bolster the strength of our DTC channel.”

Deckers is planning on capital expenditures in the range of $100 million to $110 million, mostly to scale infrastructure to align with company growth.

The company implemented “surgical” prices upticks across labels to the tune of a 6 percent to 8 percent increase at the start of Fiscal 2022. “It gives us upside to offset some of the headwinds in margin from freight charges and is in line with expectations in the market and still competitive,” he said. “We’re going to continue to evaluate that and look for opportunities, as we always do.”

Ugg brand “outperformed” company expectations in the fourth quarter as wholesalers accepted later-than-normal deliveries and direct-to-consumer shoppers waited until after holidays for styles that had been out of stock. The brand is attracting a younger, more fashionable and diversified consumer, with growth still ahead in women’s footwear and “double-digit growth opportunities into this year and beyond” for men’s, kids and apparel.

Net Sales: For the three months ended March 31, net sales jumped 31 percent to $736.0 million from $561.2 million.

By brand, Ugg net sales rose 24.7 percent to $374.6 million, while Hoka increased 59.7 percent to $283.5 million. Decker’s Teva brand saw net sales fell 8.8 percent to $54.8 milllion, while Sanuk sales dipped 1.7 percent to $11.9 million. Other brands, primarily Koolaburra, saw net sales increase 2.4 percent to $11.2 million.

For the year, net sales grew 24 percent to $3.15 billion from $2.55 billion.

Earnings: Net income more than doubled to $68.8 million or $2.51 a diluted share, from $33.5 million,

For Fiscal Year 2023, ending March 31, 2023, Deckers guided diluted earnings per share between $17.40 to $18.25, on a net sales range of $3.45 billion to $3.50 billion. The footwear firm expects gross margin to be 51.5 percent.

For the year, net income rose 18 percent to $451.9 million, or $16.26 a diluted share, from $391.4 million, or $13.47, in the year-ago period.

CEO’s Take: “Looking ahead to fiscal year 2023, we are operating from a position of strength and leveraging the lessons learned over the last 18 months. Deckers has incredible growth ahead, and I have the utmost confidence in the consumer demand for our brands and our team’s proven ability to deliver on our goals, even amid a complex macro environment,” Powers said.