Deckers CEO on Supply Chain Turmoil: ‘This is Here to Stay’

Date: Tuesday, November 2, 2021
Source: Sourcing Journal

Deckers Brands, the footwear manufacturer, distributor and seller of brands including Ugg, Hoka One One and Teva among others, saw net sales in its second quarter jump 15.8 percent to $721.9 million, with the company taking in net income of $102.1 million.

In a Nutshell: Chief financial officer Steven Fasching said in an earnings call that the footwear manufacturer has been able to mitigate any material production disruption, and the second quarter factory shutdowns in Vietnam won’t have a material top line effect on the company’s full-year guidance.

Less than 10 percent of Deckers’ Vietnam production is based in the southern region, where the shutdowns occurred. Furthermore, the company’s dual sourcing capabilities have enabled production shifts to alternate locations, and enables Deckers to manufacture the same styles in multiple factories, according to Fasching.

“We have secured additional production lines in new geographic locations with our existing partners and have also onboarded new long-term strategic factory partners,” Fasching said. “In addition, we plan to carry more inventory this year and into next year as we do not anticipate any near-term resolution to the global supply chain disruption, and it will also act as a hedge to inflationary pressures expected in the next fiscal year.”

Inventory, including units in transit, was $636 million, up 31 percent from $484 million at the same time last year.

In a typical year, roughly 20 percent of inventory is in transit at the end of September. But this year, with the bottlenecks related to port congestion and shipping delays, approximately 45 percent of Deckers’ inventory was in transit. Roughly the same amount of inventory remains in the warehouses, according to Fasching.

“We will continue to utilize elevated levels of air freight, which is considerably more expensive whenever it is needed to maintain strategic product launches,” Fasching said, adding, “the Hoka brand is implementing targeted price increases for specific products which will help partially offset higher air freight costs, but we will still expect there will be some level of gross margin compression.”

Gross margin was 50.9 percent in the quarter, down from 51.2 percent for the second quarter of 2020 due to the pressures from the ocean freight cost increases and added air freight.

Cash and cash equivalents as of Sept. 30, 2021 totaled $746.2 million, compared to $626.4 million in the year-ago period. The Hoka and Ugg owner had no outstanding borrowings.

For the full fiscal year 2022, Deckers is reiterating its expected top line revenue growth of 18 percent to 20 percent, which equates to revenue in the range of $3.01 billion to $3.06 billion.

This guidance includes expectations of Hoka growing 50-plus percent over last year with confidence that the brand can eclipse $875 million of revenue; with UGG growing high single digits, reflecting pressure on the prior high end of the range due to shipment disruption, according to Fasching. Teva is expected to grow in the high teens range, while Koolaburra and Sanuk are expected to be approximately flat to last year.

Diluted earnings per share is now expected to be in the range of $14.15 to $15.15, a wider range from the $14.45 to $15.10 guidance previously given in July.

Gross margin is now expected to be approximately 51.5 percent, down from the previous guidance of 53.5 percent due to further pressures from increasing ocean freight costs and air freight.

Net Sales: Net sales increased 15.8 percent to $721.9 million, compared to $623.5 million for the same period last year. On a constant currency basis, net sales increased 14.8 percent.

The Hoka brand continues to be the rising star, increasing sales 47 percent to $210.4 million, well above the $143.1 million for the same period last year.

Ugg brand sales increased 8 percent in the second quarter to $448.4 million compared to $415.1 million for the 2020 period. Teva saw sales grow 4 percent to 28 million, up from $27.7 million for the year-ago period. Sanuk sales grew 6.2 percent to $10.1 million, ahead of the 2020 second quarter’s $9.5 million.

Deckers’ other brands, primarily composed of Koolaburra, saw net sales dip 14.1 percent to $24.2 million from $28.2 million in the year before.

Wholesale net sales for the second quarter jumped 20.7 percent to $545.2 million compared to $451.6 million for the same period last year. Direct-to-consumer (DTC) net sales increased 2.8 percent to $176.7 million compared to $171.9 million in the second quarter of 2020, while comparable DTC net sales increased 1.0 percent.

Domestic net sales soared 20.4 percent to $514.6 million, up from $427.4 million for the same period last year. International net sales increased 5.7 percent to $207.3 million in the quarter, compared to the 2020 period’s $196.1 million.

Net Earnings: Net income at Deckers totaled $102.1 million on diluted earnings per share of $3.66, up slightly from the $101.6 million generated in the year-ago second quarter on dilute earnings per share of $3.58.

Operating income was $128.2 million compared to $128.6 million for the same period last year. 

CEO’s Take: Deckers CEO and president Dave Powers said he has already told his team not to think of the currently supply chain issues and increased costs as short-term headwinds.

“This is here to stay,” Powers said. “I think it’s going to be with us for at least one year or two. It may never go back to normal levels due to wage increases, material increases, shipping costs. So we are planning our business as though those new levels are going to remain. The good news is if that things improve next year, then we have opportunity and we’re taking price increases to give us the margins that we need going forward despite the cost increase. So that’s how we’re thinking about it.”


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