Good afternoon and thank you for standing by. Welcome to the Deckers Brands First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I'd like to remind everyone that this conference call is being recorded. I will now turn the call over to Erinn Kohler, Vice President, Investor Relations and Corporate Planning. Please go ahead.

Hello, and thank you everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's Safe Harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the Federal Securities Laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements, and include statements regarding our current and long-term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, our anticipated revenues, brand performance, product mix, margins, expenses, inventory levels, and promotional activity, and the impact of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. Forward-looking statements made on this call represent management's current expectations, and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. In addition, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open throughout the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. With that, I will now turn it over to Dave.

Thanks, Erinn. Good afternoon, everyone, and thank you for joining us. I'm pleased to be here today to discuss another strong quarter for Deckers, starting off fiscal 2024 on the right path as we build towards delivering another year of great results. Our results give us increased confidence to achieve our updated outlook for full fiscal year 2024, which includes a raise to our prior expectations. For the first quarter, our performance slightly outpaced our expectations, with revenue increasing 10% versus last year, to $676 million, gross margin improving more than 300 basis points including beneficial brand and channel mix dynamics, and diluted earnings per share growing 45% to $2.41. Revenue growth versus last year was driven by our key areas of focus, with global HOKA expanding 27% to deliver $420 million, global DTC increasing 35% to represent 37% of portfolio revenue, up from 30% last year, and international UGG delivering strong growth. As anticipated, we had some offsets to the growth in the quarter due to timing dynamics in UGG U.S. wholesale, with accounts choosing to receive products for it later into the year as opposed to a frontloaded preference we saw in the last couple of years. As we look to best manage our wholesale account product flow, we also continue to monitor marketplace inventory levels to maintain a healthy omnichannel presence that services our end consumer in the best way possible, and preserves the premium nature of our brands. Our ability to propel the targeted opportunities of global HOKA, global DTC, and international UGG further demonstrates the success of our omnichannel marketplace management and strategic investments. We will continue to remain nimble in execution, as we always have, to deliver strong results on both the top and bottom line. With the continued execution of our long-term vision,…

Thanks, Dave, and good afternoon everyone. As Dave just covered, Deckers delivered strong results in the first quarter and demonstrated great progress toward our full fiscal year and raised outlook. HOKA was the driver of growth in the quarter, lead by strong performance in the DTC channel, and UGG continues to elevate its presence globally, as represented by international growth. As anticipated, UGG's global revenue was lower than last year, primarily due to lapping earlier selling during the prior year. But the brand maintains high levels of consumer interest, capturing increased demand through our DTC in the quarter. As we continue to operate in a very dynamic consumer environment, we remain committed to executing against our strategic priorities, and maintaining our disciplined approach to managing our business. We are encouraged by the demand signals we are seeing, and believe our portfolio of leading brands continues to resonate with consumers globally. With that, let's get into the details of our first quarter fiscal year 2024 results. Revenue was $676 million, up 10% versus prior year. HOKA revenue increased 27% versus last year, due to the exceptional demand experienced across the brand's DTC channel and global ecosystem of access points. Gross margins for the quarter were 51.3%, which is up 330 basis points from last year's 48%. First quarter gross margin benefited from lower freight costs, a greater mix of HOKA brand revenue, and an increased mix of DTC business with slight offsets from unfavorable foreign currency exchange rates compared to the same period last year, and select closeouts of seasonal inventory. SG&A dollar spent in the first quarter was $276 million, which is up 16% from last year's $238 million. SG&A growth was driven by reinvestment in key areas of the business in support of our growth targets, which includes strategic…

Thanks, Steve. Fiscal year 2024 is off to a nice start, with HOKA continuing its strong momentum, and the balance of our brand portfolio on track to our full-year expectations. While keeping our long-term strategies top of mind, we are operating fiscal year 2024 with a sharp focus to prioritize DTC growth across all of our brands, while managing wholesale marketplace inventory to drive online acquisition in a high level of full price selling, expand HOKA brand awareness globally, lead with UGG products that are proven to resonate with global consumers, thoughtfully manage inventory to align with consumer demand, and invest in enterprise infrastructure in key strategic growth areas. We believe Deckers' unique ability to introduce exciting innovation into both fashion and performance products, is why our differentiated brands are able to create lasting consumer connections. This along with our financial discipline, agile operating platform, exceptional marketplace management and purpose-led culture allow us to continue to deliver best-in-class results, and exceptional shareholder value. On behalf of our management team, I would like to thank our employees for their continued dedication to delivering results and making Deckers a great place to work. And I would also like to thank all of our stakeholders for their continued support. With that, I will turn the call over to the operator for Q&A. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jay Sole with UBS. Please go ahead.

Great, thank you so much. My question is on HOKA. You talked about, obviously, really strong DTC performance for HOKA in the quarter. Can you just talk about a little bit what you say at wholesale, and then talk about what you're seeing for the rest of the year? And really just going back to the quarter for a second, just talk about some of the drivers of the HOKA growth just across channel in terms of product that would be great? Thank you.

Yes, thanks, Jay. So, yes, obviously we are super excited about the continued momentum of HOKA, broad-based, it's just continuing to meet or exceed expectations for us, and we're really optimistic about the rest of the year. DTC growth, as you saw from both brands, was exceptional. Wholesale for HOKA is about where we expected it to be for this quarter; couple puts and takes here and there by channel and region. But generally speaking, right in line with our marketplace management expectations. We love how this flywheel is working for us. We're creating awareness out in the marketplace at a top level of the funnel. The awareness is increasing dramatically for the brand, up 20% over last year. And that's driving all channels, but particularly, as designed, into DTC. So, there's some noise out in the wholesale channel with markdowns and promotions from other brands, a lot of inventory in the channel, so we're managing that tightly by purpose. But again, as I say, raising awareness at a high level and seeing the brand interest coming directly to our DTC business is super exciting for us. Obviously it's our most profitable sale. We gain all the data from that and it creates even a stronger flywheel going forward in the marketplace as we expand globally. Some of the things that are driving HOKA for the quarter, this was a HOKA-driven quarter, as expected, right? So, this isn't a big quarter for UGG. A lot of the top-selling styles for the company overall for the quarter were driven by HOKA. Again, the Clifton and the Bondi continue to be the frontrunners here. The Clifton 9 has been received extremely well globally, and we're looking to get more inventory into that franchise and continuing the upside of that franchise going forward. And then also in the hike side of things, that business is still very strong. In places like REI, we're the number one running brand, and also in hike. And then in the international regions, particularly in China, we have a very strong hike business. So, we're going to continue to go after that. We've got some new innovations launching. We just launched the Mach X, which has been received very well with the PEBA plate, and there's a little more attainable price point, and then continuing to update franchises throughout the year with some very, very exciting launches of existing upgrades, but also some new product coming into Q4.

Got it. Okay, thank you so much.

You bet.

Thank you. And our next question today comes from Laurent Vasilescu with BNP Paribas. Please go ahead.

Good afternoon. Thank you very much for taking my questions. Congrats on such good results. Hey, Steve, I'd love to ask about your HOKA DTC strategy. I think in the 10-K it's noted that you have 18 HOKA stores. I believe those are permanent stores; predominantly located in Asia, correct me if I'm wrong. But can you provide a little bit of color on how these stores are performing and what lessons are you learning from the store opened up in -- permanent store you opened up in New York? And how many stores do you envision for the brand over the next couple of years?

I can speak to that, and then, Steve, you want to get into specifics.

Sure.

Yes, this is -- like we're doing with everything else in our marketplace, we like to test and learn. And when we see positive signs we like to go fast and capture opportunities, and so far, very good on retail. Fortunately for us, we know how to run retail stores based on our legacy of UGG retail stores over the last 20 years, we have the operations globally to do it, and we're leveraging that platform exceptionally well. The stores that we have opened, both pop-ups and permanent, are exceeding or on plan, no concerns as of this point. But we do want to take it slow. We want to make sure we're not overextending ourselves; we're going into markets that are accretive to the overall marketplace strategy, but are also creating awareness to important consumers in key locations around the globe. We need retail to work in China. We can't have a distributor business with partners if we don't know how to do retail very well, so we're fine-tuning that. But, so far, the partners are pleased. We're very positive and optimistic about our own retail stores there as well. Excited to open our first permanent store in New York City, feedback from that has been exceptional. And I think for us, now, it's really about fine-tuning the experience for the consumer in the stores. So, the operations and the behind the scenes, we have dialed, but we want to make sure this is an exceptional experience for the consumer beyond just the product. We're looking at holding events and run clubs, and making sure that there is engagement with the community in these stores as well to drive renewed interest or renewed -- sorry, I should say repeat visits from existing customers, but also creating awareness and showing the full breadth of the line for new customers to the brand. So, off to a good start. Small in the scheme of things at this point, but we see upside here. And as far as size of stores and how many, we don't have a number put on that yet. It all depends on how the marketplace evolves. But DTC is our primary objective here. And using our stores to grow online, and vice versa. But you'll see a handful of key stores being opened in key cities and locations as we go, and continuing to leverage our popup and test model before we make long-term commitments.

Yes, Laurent, this is Steve. Just on the number, you're right, 16 are the company-owned stores, so that does not include retail partners that we have in Asia or with some of our distributors. So, those are not included in the store count. So, the 16 -- sorry, 18 are included are company-owned, not inclusive of some of our retail partners as well. And then just as Dave said, I think the performance of those has exceeded our expectations, both from a revenue and a profit standpoint. And we use the pop-ups to inform us on locations. So, as we see pop-ups perform very well, it gives us a good indication of store location and opportunity for a permanent location. And we'll continue to operate in that manner. And we continue to look at area where we can continue to expand the HOKA retail store presence.

Very helpful, thank you for all that color. And then just as a follow-up, I think Stefano was elevated to Chief Commercial Officer, in April.

Yes.

Just curious to know if you have any update with regarding a permanent find for the brand president for HOKA. And then just another -- sneaking in one more question. You've got $1 billion of cash on the balance sheet. Can you just remind us your capital allocation [technical difficulty] audience?

Yes, so just on -- with Stefano, super excited to elevate him to that role, well-deserved. And we spoke on the last call, I believe, the HOKA business is in excellent shape under Stefano's leadership. He knows this space incredibly well, and we're excited about the fast-tracking of innovation and marketplace management that's happening there. No news to report yet on the HOKA full-time president replacement. But I would say, trust that we're confident in the business until we do, and we'll be excited to announce that when the time comes.

And then just on the capital allocation question, no change in terms of how we're thinking about it. Clearly, like to operate from a position of strength, so have an incredibly strong balance sheet, especially in current times, I think that serves us well, constant conversation with our Board in terms of how we're looking at capital allocation. But as we've indicated over prior quarters, we have been and look at share repurchase as a great way to return value to our shareholder base. So, we'll continue to look at that and evaluate that. But yes, in terms of how we're thinking about it, no change. And we'll continue to have conversations with our Board.

Very helpful. Thank you very much, and best of luck.

Thank you.

Thank you. And our next today comes from Sam Poser with Williams Trading. Please go ahead.

Good afternoon. Thanks for taking my questions. Erinn, I think two of the five have been answered. So, can you give me -- well, can you give me wholesale for every brand, please?

Sure. So, wholesale for each of the brands, including distributor at a global scale, so for UGG, that's $121.5 million; for HOKA, $260.8 million; Teva, $35.1 million; Sanuk, $6.5 million. And then you have some other.

Okay, thank you. So, either Dave or Steve, on HOKA DTC, can you give us some idea of what you're looking at for the full-year there, given that's going to be the big driver of this? Are we going to have -- I mean, is there going to a 4 handle on it, a 5 handle on it, the growth?

Yes, I think -- that's a good question. Right, clearly we've seen DTC perform slightly above our expectation in Q1. We've reflected that in the raised guidance for the year. And we're continuing to watch that. As part of -- and Dave articulated this a little bit, part of our strategy is to manage the wholesale marketplace tightly. And we'll let some of that excess demand come over into our DTC channel, and we'll fulfill there. But a little bit harder to gauge how that consumer shows up, but we're confident in our ability to grow DTC, and with HOKA specifically. And we'll see how the year plays out. But what we're encouraged by is a strong start to the year, continue to see growth in our DTC business, and growth with our HOKA DTC business. And then we'll see how the year continues to play out.

[Multiple speakers]

Yes, I think one thing to note is we -- sorry, Sam. We do have hard comps coming forward in the next three quarters, just something to be aware of. But I think we're learning what's possible with our DTC engine here. And so, this is very encouraging signs for us. The thing to keep in mind also is wholesale is a bit of a uncertain entity right now with inventory in the channel, there's a lot of estimates it's going to be a promotional back-half for the year. So, the way we're looking at this is we're trying to focus on the total consumer opportunity regardless of channel, and have the inventory available for our DTC business if whole continues to be a little bit more challenging or promotional, we're confident that they'll come to us, and with our marketing campaigns at the top of the funnel we can drive more direct -- target traffic directly to our channels and DTC channels. But this is certainly very encouraging, it's right in line with our strategy to get the whole company at 50% DTC down the road. And we're going to continue the hammer away at it.

Thanks. And then lastly, you're investing a lot in the SG&A, but you tend to roll it forward. Is this going to be another year like normal, where you don't really see that leverage on all that SG&A until we come out of the -- you can't really roll it out of the fourth quarter again? Are we looking at it the same way?

Yes, I think the way we're looking at it, Sam, is we're coming out of a year, last year, our FY '23, where we held back on some of those SG&A investments, and that was to offset some of the headwinds that we were experiencing on the gross margin. So, that was an intentional holdback to really deliver on our commitment to get to 18% operating margin. So, this year, as we're seeing some of that gross margin expansion, it is affording us that opportunity to invest. So, we are looking at it, that's embedded in our guidance for the year, of the approximate 18% operating margin, so again, with that gross margin expansion, taking that opportunity to invest in some of those things that we held back on last year. And we'll see how we're doing. I think Q1 is a demonstration where we have invested a little bit more, so you're seeing a little bit of an increase on that SG&A as a percentage of revenue in the quarter. So, we'll continue to see. But I think it's important that we continue to invest in these brands, part of that, as I mentioned, strategic investment in HOKA marketing. We know that there is an incredible opportunity out there, and this is an opportunity for us to continue to build international brand awareness. And then just on kind of the infrastructure in town, we're in the competitive space. And with how well we're doing, it's important for us to remain competitive in that space as well. So, those are all things that we're considering. But again, we're delivering, in my mind, exceptional operating profit levels, and so it affords us the opportunity with this gross margin expansion to make those investments.

Yes, and I think, this is from my perspective, I want to make sure that we have the operations at Deckers to take this business to $5 billion, $6 billion over the coming years. And so, we want to make sure, and I've said to my leadership team that we need to focus on infrastructure investment, innovation, the systems, data accessibility, global supply chain investments, DCs, that so we are ready for the growth when it continues to come. And in the past, some quarters we've pushed out marketing spend because we didn't need it to hit our numbers, but we're rethinking this. We're much more strategic now. We want to make sure we're doing more activity at the top of the funnel, connected TV, et cetera. And we have some great created from both HOKA and UGG that you'll on connected TV this coming season, in fall. And the ELT is completely aligned on where additional SG&A opportunities are going to go and how we prioritize them. So, if we see signs that there is opportunity to free up some more spend for some of these strategic initiatives, Steve and I are looking at it quick, we're allocating the money fast so that teams can get on with it and create more upside. But I am excited about the opportunities of marketing for HOKA specifically, but also UGG, and UGG men's, and some new exciting product launches coming this fall for both of them, and on the marketing side too.

Thank you. Continued success.

Thanks, Sam.

Thank you. And our next question today comes from Janine Stichter with BTIG. Please go ahead.

Hi, good afternoon, everyone, and congrats on the great quarter, and thank you for taking my question. I wanted to ask about the wholesale environment in the U.S. really for the UGG brand. Understanding the tough multiyear comparisons you have there, I'm just wondering what you're hearing from your wholesale partners, both on their broader ordering patterns, and then specifically on sell-through for UGG? Certainly hearing it's tough out there. And then also wanted to hear more about the UGG transitional franchises, sounds like they're working really well on DTC, but wondering what the appetite is for that product at wholesale? Thank you.

Yes, good questions. This is a -- it's always a funny quarter for UGG because we're dealing with deliveries into wholesale, getting ready for fall, we have some leftover from spring, and we're comping -- particularly this quarter, for UGG, we're coming a lot of fluff business from last year. So, it is a little bit noisy. But the good news that we're seeing in here is how the consumers are reacting. Brand interest is up dramatically, especially in 18 to 34-year-olds. The styles that we have invested in with heavy inventory, this coming fall, the Tasman and the Ultra Mini and platform styles. We sold out of those styles last year. We're getting back in inventory now. They're already selling through very well despite the heat waves that are going around across the country. So, the indicators that we are seeing for the UGG brand, consumer interest, consumer buzz, excitement around these franchise styles, and even a couple of new styles that we just launched early, a sneaker and then a -- it's more -- I forget the name of it, but it's an UGG style that has a knit upper on it. Those are in the top 10 of UGG.com, so, a lot of reasons to be excited. Wholesale partners, they know they need UGG to be successful this season. They know that there is opportunity in these key styles that we're getting after, and those are the things that we have focused our buys on for them. The other key thing to keep in mind is we have reduced our SKU count dramatically in UGG. So, last year at this time, we were over 600 SKUs heading into fall. This year, we're just over 400. And so, we've cleaned up the assortment. We've funneled our inventory into these key styles that we know there is high demand for. And we're getting the marketing behind those styles to really drive high level of interest and sell-through. On the traditional styles, one of the top selling styles globally is the Scuffette. And so, we're still seeing a lot of interest and renewed interest with younger consumers in some of our core classics. But what's really encouraging is the iterations with the platform style really leveraging the Tasman, the Neumel, these Ultra Mini styles, and then new iterations that we're going to be launching in the fall and holiday. We've just been through a great deal of work under Anne and the marketing team's leadership on resetting our brand positioning and defining our brand codes and design, and applying those to our core classics, and iterating off of those with new materials, and new outsoles, and different shapes is bringing some really exciting product to market. And I think you're going to see some of that start to happen this fall, and continue through spring, and next fall as well.

Great. And on the SKU count reductions, are there any potential gross margin savings that might go along with that?

Yes, short and long-term, right? And so, I just reviewed with the leadership team yesterday, the fall '24 line. And the teams all said to us, "Listen, this is -- we're doing less work, and the styles that we're spending more time on are getting better and better, and more exciting." And so, I think you're going to see both in focused, you're going to see it in quality in aesthetic and design, and you're ultimately going to see a margin opportunity a little bit as well. We haven't flushed that out yet, and we don't have it in any of the guidance or anything, but certainly when brands go through this work there is certainly opportunity for margin savings.

Great, thanks so much.

Thank you.

Thank you. And our next question comes from Paul Lejuez with Citi. Please go ahead.

Hi, guys. This is Kelly on for Paul. Got a couple questions for you, first on the gross margin in the first quarter, looks like it came in a little bit light of expectations, and that's despite HOKA DTC driving upbeat. So, just curious what the driver of that was? I think you've mentioned some select closeouts of seasonal inventory. Curious if that was not planned going into the quarter. Any color there would be great. Thanks.

Kelly, this is Steve. I think on the quarter, we pretty much delivered kind of to our expectation. I know some of the models may have been a little bit higher than we were. My guess is where you may have been a little bit higher was around a promotion assumption and potentially a foreign currency assumption. When we look at the 330 beat, that's a pretty substantial beat, in line with what were thinking. Just to give you some sense of how that broke down, the freight channel mix in brand was around 450 basis points of it, and that was offset by about 100 basis points which was a mix of promo and foreign currency. So, just depending on how you factored that into your model, but generally speaking, in line, but yes, as we mentioned we did do some closed out to seasonal items in Q1, which is impacting that gross margin.

Was that across both UGG and HOKA?

Yes, it was sum of both in the quarter.

Got it. And then, on the -- so, HOKA wholesale grew in low-double in the first quarter, I think the distributor transition was impacting that. Is there any way to quantify, so we could kind of understand that underlying wholesale growth and how that should trend for the rest of the year? Is the accounting distributor transition 1Q-specific, or does it carry forward? Any color domestically versus international on the wholesale growth side in HOKA? And then, lastly on that determined door perspective, your sort of gross door, new door opening for HOKA, and then, sort of on that basis as well? Thank you.

Sure, Kelly. There is a lot in there. Let me try to thrive some of that. So, you are right, we did do, and Italian distributor conversion, so that is impacting. A year ago Q1 would have picked up the distributor order, which would have covered multiple quarters in the wholesale model. So, you are seeing some kind of delay of those sales in the Italy market. We have not talked about how much that is, but not a huge number and a Q1 impact, but safe to say, within millions of dollars in terms of what the impact was. But you will see pick up in the wholesale business later. So, that was impacting some of the wholesale distributor growth in Q1. Then the other parts of your question were…

HOKA wholesale in general and door account.

Yes…

Yes. So, what we are looking at just in terms of with specific to HOKA door account, wholesale, is what your question was?

Yes, pretty much.

Yes, I think the way we are looking at it is, on our prior call we talked about kind of no global net new doors. We are going to continue to evaluate and see what that looks like. We are probably seeing some growth in North America, and some declines on the international business as we are cleaning up some of that distribution. And then we will continue to monitor. So, that was kind of point in time as we see demand and performance with these doors within accounts will continue to evaluate that.

But no real change in strategy.

But no change in strategy. Yes.

Got it. Thank you.

Thank you.

Thank you. And our next question today comes from Jonathan Komp with Baird. Please go ahead.

Yes, thank you. Dave, I want to follow-up on a comment you made, I think you said you are building the infrastructure to be $5 billion to $6 billion consolidated revenue company, would that be on sort of three to five-year horizon, I don't know any thoughts on that. And I guess thinking about the next couple of billion of revenue, how would you see that split across the brands? I'm just curious if you had any more color on those comments.

Yes, let me grab my LRP necessarily. That's just generally speaking, like, my job as CEO I need to be looking three to five years out, you know, and based off where we are today and on the cash flow hitting $4 billion mark, my head is like, "Okay, so do we get to $5 billion and $6 billion, what it's going to take from the team perspective and infrastructure perspective, category expansion, all those things." So, when I put out, say, $5 billion or $6 billion, that's just generally thinking, "Hey, down the road, we are going to get to these numbers. I don't have anything to share with how that is." But certainly if you put the pieces together you could see it happening as well, with the current growth we are seeing. In HOKA, I think you're going to see a resurgence of UGG over the coming years in Anne's leadership, and hopefully we get Teva to be a meaningful number in the coming years as well. So, it's within line of sight for sure, but I don't want to put a timeline or brand mix or any of that yet, it's early days, but the opportunity we see is this company to be a $5 billion-$6 billion business over time for sure.

Got it, I appreciate that color. Thank you. And maybe related, a bigger picture question on HOKA and category expansion, how are you thinking about lifestyle, fitness, other categories, especially it looks like there are some very favorable reviews of -- the transport access in new category, it looks like a hard shoot to get a hold of, so just curious how you're thinking about a broader category expansion potential for HOKA?

Yes, we are in the transform; myself right now have trouble finding it honestly. So, that one surprised us. I was actually little bit skeptical about how that was going to received in the marketplace. It's not necessarily positioned as a performance shoe, although I do running it and work out in it, and so, it's very versatile. But I think it's showing us that there is more aperture and appetite for HOKA to being meaningful in the lifestyle space, whether that is color ups or fabric changes or design details and some of our franchise styles. We pull things out of the vault. I mean we're 10-year-old now, we have things actually in the vault that customers ask for. But there is opportunity for new styles like the Transport and the TransportX that we tested this year. And we think that there is emerging opportunity in lifestyle, it's not just people wearing a running shoe anymore, they want shoes made for all day wear, that feel like running shoes, but have a little bit of a different aesthetic, and we see a massive opportunity there not only within the HOKA brand, but we are working on launching a new brand actually in Spring's timeframe, to go after some of that opportunity as well. So, as far as category growth, right now if you ask Stefano and the team, we are focused on being to maintaining our dominant position in run, we want to be number one in hike and trail over the coming years. We think that's a tremendous opportunity, and that's an important category that's growing within the category, but also has lifestyle implications as well, and then really cultivating the lifestyle, distribution and consumer with performance product that has a little bit of a different aesthetic. If you think about down the road, different categories, we are exploring other categories as well, and those things take time to develop. So, we are having the teams on the sidelines looking at different opportunities, like different categories, whether it's court shoes or whatever that maybe. But we are thinking that way for the long-term, but right now we are really focused on run, hike and the lifestyle opportunity.

That makes sense. Just last one, Steve, if I could, your gross margin this year you're still guiding in a couple of hundred basis points below your peak, and if I compare to back then your HOKA revenue contribution has doubled in mix. So, just how should we think about that opportunity to get back to 53% or 54% gross margin over time?

Yes, I think if you are looking back kind of two years ago, the big difference will be around just the promotion assumption. So, that was pretty clean, I would say, very clean selling in terms of hardly any promotion. You are right; as we are looking at the HOKA contribution increasing we are going to continue to see an increase. As we see a higher proportion of DTC increase, we will also see gross margin expansion. So, what you are seeing, I think this year from where we were a couple of years ago, similar assumption around promotion and we will see how that plays out this year, and then going forward beyond that is higher proportion of HOKA should continue to give us some gross margin expansion opportunities as well as the higher proportion of DTC business.

That's great. Thank you.

Thank you. And our final question today comes from Dana Telsey with Telsey Group. Please go ahead.

Hi, good afternoon, everyone. Dave, you had mentioned Teva and Sanuk, what is happening with those two brands now? How do you see their progress this year? And then, if you think about inventory levels, it certainly seems very clean, how you're looking for the progress of inventory going forward? Thank you.

Yes, thanks, Dana, good question. We don't talk very often about Teva and Sanuk, and from the quarter results it makes sense there is questions about them. We recently have reorganized our smaller brands, Teva, Sanuk, and some incubation work that we're doing, and emerging brands for leveraging resources, and we are resetting those brands. So, we have a new leader there, Lee Cox, who spent a lot of time in the HOKA brand early days, he is appointed to get a long-term strategy for both of those brands, and right now they're doing brand works, so, resetting their positioning, tightening their positioning and proposition, understanding who their consumers are deeply, and elevating their innovation pipeline. So, I would say the biggest opportunity right now that we see down the road in the short and long-term is Teva. We have looked at a number of brands externally that we could acquire, and quite honestly, none of them look as good as Teva does. It's a beloved brand. It's got a great 30-plus year history, and a lot of heritage product. And it's healthy in the marketplace. It's got great margins, and we think that is a brand that we invest in for the long-term. So, right now it's just about resetting the marketplace. That's where you're seeing some degradation in the top line, and both Teva and Sanuk were cleaning things up, and we basically getting -- gearing those up to go back at it with a new and improved version of both brands. But the Teva opportunity is continued within sports sandal, and we are working on trail sandals for that brand, we are going to be launching early next year, which we think will be clearly exciting, trail running sandals, and then, also expanding into closed toe and year-around business through our innovation engine. So, we won't see dramatic changes in this year in the P&L for any perspective, but you will start to see improvement going into FY'25, both on the top line and bottom line, particularly for the Teva brand that's a bigger opportunity. And then, we have some ideas of what Sanuk could be, and we will see if those play out over the next coming years as well.

And then, Dana, just on the inventory, the way we are thinking about, so to your point, we have made significant improvements from our year-ago period, which we had more elevated inventory, a lot more in transit inventory. So, that has resolved and improved -- we are in a much better position this year. You will continue to see that improvement continue in the quarters of this year, won't necessarily be to the same percentage extent, but we were making improvements kind of all of last year. And so, you will continue to see us make improvements, not necessarily to the same level that you saw in Q1.

Got it. Thank you.

Okay.

Thanks, Dana.

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session, and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.