Over the past few weeks, we’ve gotten Q3 2023 results and commentary from outdoor and athletic footwear brands which point to continued challenges in the U.S., but with a few of the brands outpacing the category. We've taken a closer look some of key trends in this category below.
Deckers and its HOKA brand are ones that continue to outpace, and that UGG has joined the momentum; call it a “Party Wave” which is when multiple surfers surf the same wave. (Deckers is based in Santa Barbara.) For the September-end quarter, HOKA’s direct-to-consumer revenue grew +46% and UGG’s +38%, driven largely by new customer adoption (i.e., into new closets and gym bags). Management noted, that, “market share gains continue to be the primary avenue of wholesale growth for HOKA, which is now the top-selling brand in U.S.-run specialty stores in aggregate.”
Ahead of results, everyone knew that HOKA was killing it. What was new was the positive inflection for UGG with wholesale revenue growth of +20% (which had been declining at a mid-teens clip for the prior three quarters) and DTC growth of +53% (compared to low-single-digit growth in the prior quarters). Management noted strong back-to-school demand--UGG Outlet Stores saw a material increase in visits during September, as shown below--which has signaled to some wholesale customers that the brand’s desirability was up and so they accelerated their orders.
On UGG's success, Deckers CEO Dave Powers said, “The team did a phenomenal job of recognizing the opportunity earlier in the year, capturing demand that we left on the table last year, cleaning up the marketplace, putting some exciting activations in place with Cardi B and other influential partners for that brand. And the buzz is something that, in my experience at the company, I have never witnessed before. It's palpable. The full price sell-through, the health of the marketplace, the teams just collectively have done an amazing job across the globe to set this brand up for success. And we're really excited that we were able to capture some demand early in the season before holiday shopping and before there's potential slowdowns in the marketplace...As we mentioned in the prepared remarks, some of the key styles that we put into the marketplace this year have sold out--or sold very well so far. We are in a bit of a chase mode in some of those styles. But I think across the board, we feel really confident that we have a breadth of products across many silhouettes that are performing well. We have inventory in the right places, a little bit lean in some, but we're going to react and chase those. We've eliminated a lot of noise in the assortment in the marketplace. We have incredibly powerful campaigns and activations across the franchises and the brand...The team has edited the line by about 30% versus prior year. So, you have inventory that we can put--traditionally went into lower selling styles. We put that inventory into the top 5-10 styles this year. With Anne's help on in getting the teams focused and putting more emphasis behind these key styles from a marketing perspective, we've also been able to put more depth in those styles and inventory...We have the ability to chase some inventory, not a tone, but I think going into the back end of December, we'll be in good shape on some of these key styles.”
CFO Steve Fashing said, “One of the things with the strength that we've seen in Q2 2023 on some of the styles that have been very popular and were selling down the inventory, we are looking to expedite some of that back in, but there's a limit, right?”
We would observe that UGG is kind of an iconoclast product, meaning that it doesn’t have a lot of direct competition. As such, UGG is going to riding a very big demand wave, all to itself, for the holiday season.
VF Corp is in a re-building led by its new CEO Bracken Darrell, who came from Logitech. For the September-end quarter, The North Face continues to be an outperforming brand with revenues up +19% (but U.S revenue only increased +3%); and reduced retailer orders will push the brand’s revenue into decline for the December-end quarter. Vans revenue was down -25% in the U.S. and Timberland was down -22%.
Darrell’s transformation strategy, named Reinvent, includes: (1) Establish global commercial organization, inclusive of an Americas region: change the operating model with the establishment of a global commercial structure. This includes the creation of an Americas regional platform, modeled on the company's successful operations in EMEA and APAC; (2) New leadership for Vans; and (3) Take $300M out of fixed costs. With its quarterly update, the company withdrew its guidance for its fiscal year (which ends in March) but noted that free cash flow for the year would be $600M (down from the prior estimate of $900M). As a measure of the severity of the situation, VF cut its dividend payment by 70%. Factors driving the change in outlook include worse results for Vans and a more challenging wholesale environment. On wholesale, see the below comments from Columbia as well as from Kering last week. VF Corp’s specialty retailers and department store customers continue to cut orders.
Columbia Sportswear stated that they expect Q4 2023 revenue to be down -5% to -10%; CEO Tim Boyle shared, “Our fourth quarter net sales outlook incorporates a slow start to the fall selling season we have experienced a more cautious view on sales trends for the balance of the year. As Placer traffic shows below, the outdoor category has meaningfully slowed since the summer. Similarly, Canada Goose also reported soft Q3 2023 results and cut their guidance, with weakness in U.S. wholesale as one of the primary drivers.
Columbia also shared that the spring order book to retail customers is down, and wholesale revenue is expected to be down low-double-digits, with the U.S. showing the deepest decline (Fall 2023 was flat). Part of the decline is due to the brand phasing out the use of forever chemicals (PFAS) from their product. New York and California are requiring the clothing sold the following year (Jan. 2025) to be free of PFAS; given the size of these two states, brands need to make adjustments nationwide. Boyle noted, “In the U.S., we anticipate some retailers will choose to destock the PFAS styles for the first half of the year before loading in the new styles designed with PFAS free chemistry in Fall 2024.” One should expect this restriction to become a bigger topic of discussion during the upcoming retailer earnings cycle. As the issue becomes more pressing, we wouldn’t be surprised to see PFAS inventory pushed into secondary markets, including off-price, which may distort demand and retailer performance in the second half of 2024.