Deckers Brands saw revenues increase by 15.8 percent to $721.9 million in its second quarter ended Sept. 30, led by the continued strong performance of its Hoka brand, but delays in deliveries capped top line growth at Ugg. On a constant-currency basis, revenues increased by 14.8 percent, but net earnings inched up by just one percent to $102.0 million.
Hoka’s revenues increased by 47.0 percent to $210.4 million, topping the $200 million mark for the second consecutive quarter. The brand recently opened pop-up retail stores in New York and Los Angeles as well as its first owned and operated stores in China. Deckers said a retail strategy for Hoka is in its infancy, indicating that it plans to open additional stores in China and to begin exploring longer-term opportunities in North America and Europe. A more complete apparel line is under development.
Most of the brand’s growth in the direct-to-consumer channel has come from the 18-to-34-year age group, which has been the main target of Hoka’s digital marketing efforts. In EMEA, the largest market for the brand outside the U.S., sales have been particularly strong in the U.K. and Germany.
The Ugg brand’s sales rose by just 8.0 percent to $448.4 million, with the company pointing to significant delays in containers being processed and released at ports during the quarter, historically its most important of the year. Gains at Ugg were led by the wholesale channel, where revenues rose by 19 percent on the year to about $349 million. Men’s footwear did well, with sales rising by over 20 percent.
Teva’s sales inched up by 4.0 percent to $28.8 million while Sanuk saw a 6.2 percent rise to $10.1 million. Other brands, led by Koolaburra, saw sales decrease by 14.1 percent to $24.2 million.
Deckers’ overall wholesale revenues went up by 20.7 percent to $545.2 million while direct-to-consumer (DTC) revenues rose by 2.8 percent to $176.7 million with comparable DTC sales up by 1.0 percent. DTC revenues were roughly 79 percent higher than two years ago, ahead of the Covid-19 pandemic. Hoka drove most of the DTC growth in the latest second quarter, while Ugg suffered from a negative comparison effect, given “exceptional” online demand last year due to the pandemic.
U.S. sales grew by 20.4 percent to $514.6 million while international sales increased by 5.7 percent to $207.3 million. One notable bright spot for Ugg was China, where other Western brands have suffered a backlash. Deckers said Ugg had made “excellent progress” in the quarter as regional collaborations with the designer Feng Chen Wang helped Ugg “reconnect with the Chinese fashion consumer.”
Deckers said the impact of the recent factory lockdowns in South Vietnam had been minimal in the quarter since it sources less than 10 percent of production in Vietnam from the southern part of the country. On the other hand, the company mentioned extended transit lead time, cost pressures related to container shortages, port congestion and trucking scarcity that have led to shipping delays and an increased use of more expensive air freight.
Inventories increased by 31 percent on the year earlier to $636.3 million. This included about 45 percent of goods in transit, compared to a typical 20 percent at the end of September. With no expectations of a near-term resolution for global supply chain disruptions, Deckers plans to carry more inventory this year and into next year, acting also as a hedge to inflationary pressures expected in the next fiscal year.
The gross margin in the latest quarter narrowed to 50.9 percent from 51.2 percent the year earlier, as Deckers stepped up the use of airfreight for its Ugg and Hoka brands and the proportion of wholesale revenues increased as marketplace inventories were refilled. These factors were offset by positive developments including a more favorable brand mix thanks to Hoka, favorable foreign currency rates and fewer closeouts.
The operating margin narrowed to 17.8 percent from 20.6 percent as operating expenses grew by 25 percent due to higher marketing expenses, higher compensation costs as the company “onboarded new talent” to support growth, and higher expenses for logistics and IT.
Deckers maintained its guidance for revenues for the full year ending in March 2022 of $3,010 million to $3,060 million, but predicted that the gross margin would now come in at approximately 51.5 percent, down from previous guidance of slightly below 53 percent, as a result of higher freight costs, partially offset by targeted price increases for specific Hoka products. The operating margin is now seen in a range of 17.0 to 18.0 percent against 17.5 to 18.0 percent previously.
