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Deckers Outdoor Corp  (NYSE:DECK)
Q2 2019 Earnings Conference Call
Oct. 25, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for standing by. Welcome to the Deckers Brands Second Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a -- 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 would like to remind everyone that this conference call is being recorded. (Operator Instructions).

I'll now turn the call over to Erinn Kohler, Director, Investor Relations and Corporate Planning. Please go ahead.

Erinn Kohler -- Director, Investor Relations and Corporate Planning

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 facts are forward-looking statements and include statements regarding our anticipated financial performance including, but not limited to, our projected revenue, margins, expenses, earnings per share and operating profit improvement, as well as statements regarding our cost savings and restructuring plans and strategies for our products and brands.

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, 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.

With that, I'll now turn it over to Dave.

David Powers -- Chief Executive Officer, President and Director

Thanks Erinn. Good afternoon everyone and thanks for joining us today. I'm pleased to report that our team delivered a very strong second quarter. Each of our key growth drivers HOKA ONE ONE, UGG men's, and UGG women's, spring and summer and transitional product continued to gain positive traction in the marketplace and contributed to our success over the past 3 months.

The organization's continued hard work is evident in our results. Sales in the quarter were $502 million, up 4% to last year and non-GAAP earnings per share was $2.38, up 55% for the same period last year. Our earnings per share beat in the second quarter was significant. And as you have seen in the press release we issued earlier this afternoon, it was fueled by a number of factors including improved gross margins and lower than planned SG&A expenses. Additionally we repurchased $125 million of our stock in the quarter, which also aided in the upside to earnings per share.

Steve will walk you through the details on our results a little later in the call. However I'd like to touch on a few notable item. First, gross margin was up 350 basis points to last year and came in at 50.2%. The increase in gross margin largely came from our domestic wholesale business, driven by tight management of airfreight costs, better full-price selling and favorable mix of products sold in our wholesale channel. Benefits from improved material input costs and improved gross margins and our growing DTC business in which we once again some positive comps in the second quarter.

Second, non-GAAP SG&A expense came in at $161 million, up 2% to last year, which was lower than expected, mainly due to savings in our logistics and warehouse expenses, due to the regional mix of sales shipped in the quarter, timing as we pushed marketing expense into the second half of fiscal 2019, and savings in our shared service function. Our strong performance yeat-to-date, combined with an updated view on our projected gross margin has led us to increase our financial outlook for fiscal 2019, which Steve will outline in a minute.

Before turning to performance by brand and channel, I think it's important to quickly highlight our first half result versus the first half of last year. Sales were $753 million, up 9% and the non-GAAP SG&A as a percent of sales decreased 180 basis points to 41.9%. These results are further demonstration of continued execution of the plan we laid out in May 2017. There is still work ahead of us, but I'm confident that our organization will continue driving the plan and our business forward.

Looking at our performance by brand group, starting with the Fashion Lifestyle Group, UGG sales were $396 million in the second quarter, down 1% to last year. As we outlined in our call in May, UGG is implementing a classic allocation and product segmentation strategy in the US for the fall season. While this impacted a portion of the selling this quarter, we believe this change in distribution strategy has the ability to drive a pull model, leading to better sell through and less promotional activity in the brand's largest market.

For the second quarter, UGG's global wholesale sales were in line with expectations on the strengths of the sales in the US and Asia-Pacific, offset by some weakness in Europe. At the same time, the brand delivered solid DTC performance led by e-commerce with brick and mortar results coming in as expected.

As we continue to refine our product segmentation and go-to-market strategy, UGG is focusing on the initial release of certain new products exclusively in our DTC channel. For example, UGG recently launched the Fluff Yeah Slide into DTC channel, which is the year round transitional product ingrained with UGG DNA. We experienced strong sell through almost immediately with the product quickly becoming the top seller on UGG.com and as demand continued to strengthen, we quickly allocated incremental marketing dollars to fuel the momentum.

The strong launch in our DTC channel, combined with our strategic digital marketing effort led to a strong sell through in reorders with our wholesale partners. The swift action by the UGG team to capitalize on the successful product shop launch shows the changes we are making to the business are allowing us to be more nimble, leverage our omni-channel capabilities and quickly react to consumer interest.

The Fall Winter 2018 season marks the UGG brand's 40th anniversary and the marketing campaign around the anniversary is continuing to drive the momentum in our UGG brands heat. This milestone is a confirmation of the brand's strength in the marketplace and with our consumers. Looking to the future of the brand as we've said previously, our focus is on developing compelling product, leveraging our DTC infrastructure proceed to market, creating and deep relationship with our consumers and bringing in new and younger consumer into the brand.

This fall winter season shows progress on that front, as we have successfully launched new compelling products including the Fluff Yeah Slide and Neutra Sneaker, both non-classified products, which are experiencing strong sell through. Partnering with new retailers to bring a fresh perspective and new consumer to the brand, including Urban Outfitters, SIX:02, JD Sports and Foot Locker and reach new and younger consumers, predominantly through our social media channel, as according to Yuga (ph) brand impression in the US is up 59% with 18 to 34-year-old women in our fiscal 2019 to date. I believe this along with clean channel inventory and the classic allocation and product segmentation strategy, position the brand well for a successful holiday season.

Next within our performance lifestyle group, HOKA sales in the quarter increased 28% to $52 million. The brand once again drove strong year-over-year growth from the successful updates to the Clifton and Bondi franchise. Also on the product side, the Hupana which has been out for few season, achieved triple digit growth over last year. The shoe has performed well since its launch, but this is the first time it has cracked the Top 10 styles. The success of the Hupana is a great example of the brands depth and further demonstrates that HOKA can continue to grow through category expansion and product innovation.

On that front, I think it's important to stress the fact that we are growing the HOKA brand through a strategy centered on focused and disciplined growth. All the product and distribution decisions are being made to increase brand awareness, drive brand heat, and create long lasting relationships with our consumers, all with an eye on product quality and performance. This is driving strong full price selling and increased e-commerce penetration as well as providing the brand a long runway for future growth.

Turning to Teva, sales were $22 million in the quarter, up approximately 1% in the same period last year. Results were driven by domestic DTC and international wholesale as favorable summer weather prominently in Europe and Japan aided performance. These are partially offset by the reduction in legacy on US wholesale sales, as we rolled the Ahnu brand into Teva at the beginning of calendar 2017. Core Teva US wholesale sales are up mid-single digit year-over-year.

On the product side, Teva saw success with the Ember Moc, which was initially released last year in limited quantities. In the second quarter of this year, the Ember Moc was a Top 5 product for Teva globally, and a great compliment to Teva's standard line and as a natural fit with the core Teva consumer. Ads (ph) performance by channel, wholesale sales were $408 million in the second quarter, up 4% to last year. Results were driven by UGG Asia-Pacific wholesale and distributor and HOKA global wholesale performance, which both saw strong double-digit growth year-over-year.

HOKA international wholesale growth was strong across both Europe and Asia-Pacific. And as I previously mentioned international growth is a major initiative for the brand and the team is making exceptional progress. Also contributing to the wholesale growth in the second quarter was Koolaburra, as the new brand grew sales over 250%. The brand is still in its early days, but it's quickly taking shelf space in the US family value chain. These positive results were partially offset by continued weakness in the UK largely within our wholesale. The UK marketplace remains challenging due to weak consumer demand for apparel and footwear along with macro economic uncertainty due to the upcoming Brexit.

Next, DTC sales in the quarter were $94 million, up 3% to last year. DTC comps increased 4.8% led by the strength of UGG US and HOKA and Teva Global e-commerce. As we continue to allocate marketing dollars toward digital, as well as launch DTC exclusive and early release products, owned e-commerce sales will continue to drive growth. I previously touched on our successful initial DTC exclusive launch of the Fluff Yeah for the UGG brand in the quarter.

For HOKA, we continue to see strong owned online sales growth as consumers become more familiar with the brand and are converted into the brand from its social platforms, digital marketing and storytelling effort. I'm encouraged by the consumer engagement these efforts are producing and I'm confident this trend will continue.

Before handing the call over to Steve, I want to say how encouraged I'm with our year-to-date progress, and I believe the UGG brand is well positioned ahead of its key holiday selling season with clean channel inventory, segmented product and a thoughtful allocation of core classic.

Our organization is executing well on our long-term strategy and I'm proud of the work, the teams have done to elevate our brand, right size our cost structure, and set the organization on the path of profitable mid-single-digit future growth.

With that, I'll pass the call over to path to call over to Steve to provide more details on our second quarter results and our guidance for the third quarter and full fiscal year 2019.

Steven J. Fasching -- Chief Financial Officer

Thanks Dave, and good afternoon to everyone. Before getting into the details, I would like to note that throughout this discussion where I refer to non-GAAP financial measures, I'm referring to results before taking into account non-recurring charges that our management believes are not core to our ongoing operating result. Also note our non-cash results are not adjusted for constant currency, a reconciliation between our reported GAAP results and the non-GAAP results can be found in our earnings release that is posted on our Website under the investors tab.

Now to our results. For the second quarter, as Dave mentioned, revenue was $502 million, up 4% to last year and above the high end of our guidance range. The year-over-year increase was largely due to continued growth in HOKA globally across both wholesale and e-commerce, higher UGG domestic e-commerce sales and Asia-Pacific wholesale sales as well as increased Koolaburra sales. These gains were partially offset by softness in UGG European wholesale sales and lower retail sales due to recent store closures.

Gross margins were 50.2%, up 350 basis points over last year. The year-over-year increase in gross margins were driven by a significant reduction in airfreight usage for inventory brought in during the quarter, better full price selling in our wholesale channel combined with the benefit of a growing DTC sales, lower material costs as we continue to benefit from our supply chain initiatives. In quarter's savings from vendor support marketing that will be shifted from the second quarter into the third quarter to support the UGG brand 40th Anniversary Campaign and a benefit from foreign currency in the quarter.

Non-GAAP SG&A expense were $161 million, up 2% from last year. As a percent of revenue, non-GAAP SG&A expenses were 32.1% down from 32.6% last year. The variance to last year was largely driven by increased variable expenses on higher sales, which were partially offset by a decreased retail store cost as a result of recent store closures, lower depreciation and amortization charges and slightly lower marketing expenses, which are now anticipated to be utilized in the back half of fiscal 2019.

Non-GAAP earnings per share came in at $2.38 compared to $1.54, last year, and well above our guidance range of $1.60 to $1.70. The majority of the year-over-year increase in earnings per share was from $0.37 cents from higher gross margins including the impact of reduced airfreight usage, $0.17 cents from our share buyback activity over the last 12 months, $0.13 cents from a lower expected full year tax rate of 21%, and $0.12 cents from higher sales. Non-GAAP adjustments in the quarter were approximately $0.7 million and were primarily related to restructuring cost, organizational changes and charges incurred in connection with the refinancing of our prior credit facility.

Also a note on our tax rate, in the second quarter, our GAAP tax rate was 17.2%. This effective tax rate for the quarter is much lower than our expected full year non-GAAP tax rate of approximately 21% due to several discrete tax credits, which impacted the second quarter's reported results.

Turning to our balance sheet at September 30, cash and equivalents were $182 million, down from $231 million at September 30th of last year. Inventory was down 7% to $515 million from $556 million at the same time last year, and we had $71 million in short-term borrowings under our credit line compared to $133 million last year.

We remain committed to delivering on our share repurchase plan. In the second quarter we repurchased 1.1 million shares of our common stock at an average price of $117.7 for a total of $125 million. Off the $400 million that was authorized by our Board last year, $116 million remained available as of September 30, 2018.

Now moving onto our financial outlook. For the third quarter of fiscal 2019, we expect revenue to be in the range of $805 million to $825 million as we are seeing more orders shift into the third quarter from the fourth quarter, as our wholesalers want to take spring product earlier and we expect non-GAAP earnings per share to be in the range of $5.10 to $5.25. I think it's important to touch on a few assumptions inherent in our third quarter guidance, that we previously mentioned. But we're seeing upside in gross margins as a result of our cost improvement efforts.

Last year's third quarter gross margins had the benefit of a strong wholesale reorder and incremental DTC sales due to favorable weather that drove upside. Last year's favorable conditions are not anticipated to occur this year at the same magnitude, which is a potential offsetting headwind to gross margin. Also the savings in marketing spend reoccurred in the first half of fiscal 2019 have been shifted into the back half of the year and is expected to be utilized in both the third and fourth quarters.

Next, for fiscal year 2019 we are updating the financial guidance that we provided on the July call. We now expect sales to be in the range of $1.935 billion to $1.96 billion. Our outlook at the brand level has been updated to include UGG sales still expected to be down low single digits, HOKA is now expected to be up in the mid-to-high-30% range. Teva is now expected to be down low-single-digit and Sanuk is now expected to be down mid-single digit.

Turning to the remainder of the P&L. Gross margins are now expected to be approximately 50% for this year, which includes certain one-time benefits achieved this year. SG&A as a percent of sales are now expected to be slightly better than 37%. Operating margins are now expected to be in the range of 13% to 13.2%. And we are raising our non-GAAP earnings per share, which are now expected to be in the range of $6.65 to $6.85 on a share count of approximately 30 million shares.

Our guidance for the third quarter and fiscal year 2019 excludes any potential non-GAAP charges as well as the effect of any future share repurchases. Also we had a tax adjustment in the second quarter, which is reducing our expected tax rate for the year. And our guidance for fiscal 2019 now assumes an expected tax rate of approximately 21%. Our anticipated SG&A expenses for the remainder of fiscal 2019 have increased and we intend to reinvest a portion of the higher gross profit dollars achieved in the first half of the year into marketing.

The reinvestment will largely be in HOKA and UGG, our key growth drivers in an effort to strengthen our relationship with our consumers and prepare the organization for future growth. Additionally, to remain competitive we have increased our US based distribution center labor cost. During this period we also provide an update on our sheepskin pricing. We continue to see stable prices in sheepskin market and we expect our sheepskin cost for fiscal 2020 to be similar to this year, and not to materially affect our gross margins. This does not constitute our gross margin guidance for the next year, as our sheepskin costs are only one component of our gross margins.

Overall and as demonstrated by these results, we are extremely pleased with the progress we have made on our operating profit improvement plan, and with our updated guidance we are now on track to deliver a 13% operating margin a year ahead of what we initially projected. As we move toward the back half of this plan, we will continue to optimize cost and strategically reinvest in our growth opportunities as we drive the business forward.

With that, I'll now turn it back to Dave for his closing remarks.

David Powers -- Chief Executive Officer, President and Director

Thanks, Steve. I'd like to reiterate how encouraged I am by the organizations continued execution under our long-term plan. Looking ahead, we will drive organic growth for our three growth drivers of HOKA, UGG Men and UGG Women's spring and summer and transitional product. Supporting these growth drivers will be a focus on developing best in class digital marketing capabilities, product innovation and speed to market.

At the same time we remain committed to generating industry leading operating margins in returning value to our shareholders through share repurchases and other accretive reinvestment into the business. I'm confident the team can continue delivering as we have over the past several quarters, and I look forward to updating you on our progress in February. As always I'd like to thank all of Deckers employees around the globe for contributing to our strong performance during the second quarter.

We will now open the call to Q&A. Operator?

Questions and Answers:

Operator

(Operator Instructions). And our first question will come from Dana Telsey of Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon everyone and congratulations on the impressive results. As you think of the UGG business down 1% to last year, how much of that was due to either weather or the new products segmentation strategy? Where do you expect that to be going forward and when is it -- where you wanted to be and how do you think that influences either top line channel with global wholesale sales and also margins? Thank you.

David Powers -- Chief Executive Officer, President and Director

Dana, this is Dave. I'll speak to that from a strategic standpoint and let Steve give a little more color on that. You know as we came out of last winter, it was important for us to take advantage of the fact that we had strong sell through and a pretty clean channel. It's something we've been working on for quite some time and as we went into the quarter coming up this year, we made the decision to take advantage of the inventory opportunity and resetting the marketplace with classics. So the product segmentation has been something in the works for a while, it's making sure that each account had something unique and special and is right for their consumer. And then the allocation strategy is really getting control of the classics business.

The way we're looking at this year is making sure that we have each account holding the right level of inventory. It's something that we think can create a little bit more demand and excitement and pull strategy in the marketplace. And so far that allocation strategy seems to be working well. It is headwinds coming into this year versus last year as you noted, but we think it's the right thing to do for the long-term health of the business and setting up the brand in the marketplace to remain at premium positioning.

Steve, you want to comment on the specifics of it?

Steven J. Fasching -- Chief Financial Officer

Yeah Dave. So, we think the strategic decisions we made which include the allocation, which includes segmentation. We also included some retail store closures. We think that's worth about $15 million of revenue. So by putting that strategic decision in place, the segmentation allocation and reduced retail stores we think we've given up kind of $50 million of revenue in the current year.

David Powers -- Chief Executive Officer, President and Director

And I would also add on to that, we're going to remember there's less point of distribution in the marketplace then there has been in the past and we have some pretty key new strategic accounts in the sports lifestyle and youth sectors that are emerging for us as well.

Dana Telsey -- Telsey Advisory Group -- Analyst

And the new accounts that you talked about, were these Urban Outfitters or Footlocker? What do you see is the potential of those accounts, could they replace any of the other existing accounts?

David Powers -- Chief Executive Officer, President and Director

I think, you know -- right now I think they're mostly incremental to our top five or 10 wholesale retail accounts. You know it's that the younger consumer that we're targeting. We're getting new distinct product specific for those channels into the marketplace. As you heard from the call, the commentary, the styles like the Fluff Yeah and the Neutra Sneaker are resonating well. They're a little bit more accessible price points that still have the UGG DNA. So I think over time they can be meaningful whether some of those are Top 10 or not remains to be seen, but I do think that they're mostly incremental to our core distribution today.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

David Powers -- Chief Executive Officer, President and Director

Thank you.

Steven J. Fasching -- Chief Financial Officer

Thank you.

Operator

And the next question will come from Camilo Lyon of Canaccord Genuity.

Camilo Lyon -- Canaccord Genuity -- Analyst

Thank you. Hi guys. How are you? Great quarter.

Steven J. Fasching -- Chief Financial Officer

Good.

David Powers -- Chief Executive Officer, President and Director

How are you doing?

Camilo Lyon -- Canaccord Genuity -- Analyst

Doing great, thanks you. Wanted to understand a little bit deeper, the outlook that you provided specifically as it relates to be implied fourth quarter guidance, I think you said something around retailers wanting to shift spring receipts into the third quarter, probably the first time I've heard that given how weather is now starting to extend longer into the season. So I'm just trying to understand that dynamic a little bit more and how that's influencing the guidance?

David Powers -- Chief Executive Officer, President and Director

Yeah, one of the things that we've been working on for a little while, Camilo is setting up, what we used to be called the resort collection drop in the last couple of weeks of December, traditionally there'd be a kind of a drop between holiday and then spring and we've been working closely with our key accounts and also DTC to develop product that we think can sell in that two to three weeks of Christmas heading into the new year. So some of that shift is, account saying yes they want to sign up for some of that additional sales. We're also fast tracking opportunity based on early success with the Fluff Yeah and that business that we're chasing into Q3, so that's really the main driver. It's not hugely significant to the total quarter, but it is a good indication that there is additional opportunity there.

Steven J. Fasching -- Chief Financial Officer

Yeah, I think also Camilo as you look at the revenue number, so you'll see with the range that we guided revenue $805 million to $825 million, which is above last year's $810 million, that's where you know kind of underlying to that, we've got a decreased low-single-digits in UGG with the strategic decisions that we were kind of just talking about. So that is actually -- we're assuming slightly lower year-on-year UGG revenue and then that's getting offset with increases in HOKA and Koolaburra. So that's kind of how you get to that range with a little bit of that UGG go forward into Q3.

David Powers -- Chief Executive Officer, President and Director

Yes. And then fewer retail stores in the quarter than last year or two.

Camilo Lyon -- Canaccord Genuity -- Analyst

And so with that Q3 expectation for UGG to be down low-single-digit, is that -- does that incorporate a reorder expectation that is below your cancellations or greater cancellations versus reorders. I think that's what you've anticipated early for the (inaudible) clearance?

David Powers -- Chief Executive Officer, President and Director

Yeah. So that's still the assumption for Q3, so net cancellations. So again just to kind of talk about that, you know we said, we're taking a more conservative approach this year given the impact that weather had last year, both on kind of a promotional cadence as well as revenue. So, and as we talked about last year, we thought the weather contributed about $30 million of wholesale additional reorders and about $10 million in DTC, so we're not picking that same level up again kind of this year as we're a little more conservative around weather until we see how it plays out.

Steven J. Fasching -- Chief Financial Officer

And then the DTC comp within that is, at this point low-single-digit, again contemplating the increased demand we had last year due to weather in the last few weeks of the quarter.

Camilo Lyon -- Canaccord Genuity -- Analyst

Got it. Okay, so great to be conservative from this standpoint early in the season. My second question is on -- just more of a fine tuning question. You talked about shifts in non-recurring items both in gross margin and marketing. Did you quantify what those words, so we understand what the underlying rates are for the biz and how the shifting marketing expenses are going to play out and if that's roughly 50-50 split between Q3 and Q4?

David Powers -- Chief Executive Officer, President and Director

Yeah. So I think maybe if we kind of take a step back in terms of what happened in Q2 and how we're flowing that through that. I think that kind of help set up how we're looking at the year. So with the strong beat, which was largely driven by gross profit dollars, which are a little less than half of that was the airfreight and that was just kind of strategic planning that helped really drive that improvement. So not always to say that we can achieve that same level, but we've slowed that through in terms of gross profit lift.

We're on the full-year, so the 49% moving to 50% that's basically the flow through of the $20 million that we're seeing in gross profit. What we're then doing is taking a portion of that to reinvest in marketing. So that's what you're seeing kind of the lift in the SG&A in the back half which is with 30% we guided to. And then some of the timing for Q2 is being put into the back half.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay. So it was like $10 million for SG&A in Q3 and Q4 of that $20 million that you're taking from gross margin?

David Powers -- Chief Executive Officer, President and Director

Correct.

Camilo Lyon -- Canaccord Genuity -- Analyst

Okay.

David Powers -- Chief Executive Officer, President and Director

Yeah. And on other thing -- OK, Camilo sorry.

Camilo Lyon -- Canaccord Genuity -- Analyst

I was just going to clarify and that also separate SG&A shift in addition to that?

David Powers -- Chief Executive Officer, President and Director

Right. So the SG&A savings that you're seeing in Q2 is largely timing and that's moving to back half.

Camilo Lyon -- Canaccord Genuity -- Analyst

Got it. And then, just lastly on the ability to have -- the reality of achieving your 13% EBIT margin a year ahead of plan. Can you give us kind of a framework to think about -- now that you've got the business really take down on all -- hitting on all cylinders? What's the outlook or what's the potential, or what's the possibility of this business and the EBIT margins that you can generate? Is this continuing to grow at this rate, holding steady on the EBIT margin rate, or is there further opportunities to raise that EBIT margin profile?

David Powers -- Chief Executive Officer, President and Director

Yeah. This is Dave. I think in a longer term, we're not prepared to kind of put those kind of targets out there yet, but we do think there is a little bit more opportunity. Safe to say, I think it's also important though, and this is one of the reasons that we are reinvesting some of the operating profit dollars now since we are ahead of plan is we do have growth driver that we have been incubating that are showing signs of promise. And so, I think it's very important that we take the opportunity to invest in marketing, particularly in the UGG men's business and the UGG women's, spring and summer, and transitional business, and then particularly in HOKA. HOKA, as you can see, similar from the results, is still continuing to take off. We think this has tremendous upside, but a still relatively low awareness. And so, we want to take the opportunity now to invest in that business to create the awareness that will help fuel growth for the company back up to mid-single-digit, starting in FY '20.

Steven J. Fasching -- Chief Financial Officer

And I think the other thing is, as we look at that strategic reinvestment, it's invariable expenses. So, everything we've talked about, the shift of moving fixed expense to variable is playing out and it's playing out kind of ahead of schedule. So, we have levers in place to protect the profitability of the business. So, that's what gives us comfort around that 13% this year.

Camilo Lyon -- Canaccord Genuity -- Analyst

Fantastic. Excellent. Good luck guys in the holiday season.

Steven J. Fasching -- Chief Financial Officer

Okay.

David Powers -- Chief Executive Officer, President and Director

That's great. Thanks.

Operator

The next question will come from Jim Duffy of Stiefel.

Jim Duffy -- Stifel -- Analyst

Thanks. Good afternoon, guys.

David Powers -- Chief Executive Officer, President and Director

Hey, Jim.

Jim Duffy -- Stifel -- Analyst

I know a lot of hard work went into the margin progress, so congratulations to the team.

Steven J. Fasching -- Chief Financial Officer

Thank you.

Jim Duffy -- Stifel -- Analyst

It does seem like the gross margin has been a nice source of upside within that. Last quarter, for instance, I think you said 90% of the cost of goods opportunities, you identified $150 million in savings had been realized. Do you see a good further opportunity in the gross margins?

Steven J. Fasching -- Chief Financial Officer

Yes, I think, from my standpoint, as I look at -- we've got most of it now kind of under our belt. So, there's not too much more. You're not going to see a similar cadence of improvement on the gross profit. Kind of when we laid out our plan, we said that the gross profit improvement was largely going to be what comes first. Kind of from an upside, where it would come from would be depending on the promotional environment. So, this year we've assumed a higher level of promotion this year versus last year. If that plays out, where we are less promotional, there's probably a little bit upside on the gross profit. But in terms of the work around the plan that we have in place, in terms of material optimization, moving production outside of China, a lot of that heavy lifting, and then this quarter benefiting probably a little more than we will usually from airfreight, is really what's driving that improvement in the quarter that we're able to flow through to the full year then.

David Powers -- Chief Executive Officer, President and Director

Yes. And I also think on top of that, just a better handle on inventory control, managing (ph) the inventory through the pipeline into the marketplace, and you should see a less volatility in the margin, going forward. We've a pretty firm handle on the cost savings, going forward. We're been migrating production out of China into Vietnam, and that is going well. So, we feel pretty good about -- really good about the progress, and then, good about how things play out going forward.

Jim Duffy -- Stifel -- Analyst

Well that's a great segue. My next question, I wanted to ask what you're doing so much better and different from an inventory management standpoint, that had always been a little bit of a wild ride with you guys. It seems like you've really tightened things up. Can you speak through some of the operational factors behind that?

David Powers -- Chief Executive Officer, President and Director

Yeah, I think the first thing that we've been focused on the last couple of years is just better visibility across the organization, and holding many other teams and ourselves accountable for top and bottom line. We've also spent a lot of time on the supply chain process in pre-season planning, so that we are efficient in how we bring and when we bring product into the DTC and to the consumer. So, that's going to play out in better turns as you start seeing the business. But I really think the planning teams and the work the work at (inaudible) factories and flowing product differently has and will have a big impact on that going forward. Continuity planning, level loading of the factories in in time inventory into the DTC.

Jim Duffy -- Stifel -- Analyst

And then any more of those nice one-time upside opportunities in the (inaudible)?

Steven J. Fasching -- Chief Financial Officer

(Multiple speakers), well I think we do it for --

David Powers -- Chief Executive Officer, President and Director

Yeah, we pulled that lever this quarter. I mean, the air was a big piece and again not to say that we can do that every quarter. It was again to your point much better planning on our part to be able to flow product in and get it out. But you always have to airfreight some product in. So --

Steven J. Fasching -- Chief Financial Officer

And that was just a strategic decision we made through the tail end of the quarter to not spend that money on airfreight, knowing that we were still able to deliver the sales for the quarter and then create an opportunity to reinvest some of that back into the business, which you're seeing.

Jim Duffy -- Stifel -- Analyst

Very good. Thank you, guys.

David Powers -- Chief Executive Officer, President and Director

Thanks Jim.

Steven J. Fasching -- Chief Financial Officer

Thanks Jim.

Operator

The next question comes from Chris Svezia of Wedbush.

Christopher Svezia -- Wedbush Equity Research -- Analyst

Thank you very much and congrats on the quarter.

David Powers -- Chief Executive Officer, President and Director

Thanks Chris.

Steven J. Fasching -- Chief Financial Officer

Thanks Chris.

Christopher Svezia -- Wedbush Equity Research -- Analyst

So I'm just curious, just to go on the deepest depth, which is on the gross margin, I know you called out, there's roughly, I think you said 150 basis points or so related to freight, but there's also a lot of other structural things to talk about that were driving the business, product DTC et cetera. As we sort of move forward, what should stay within the model? What's sustainable as you go into the back half, and what goes away or what offsets that to get to what is implied, sort of a flat gross margin? I would assume Q4 gross margin is going to be down, or is implied in the guidance. Maybe just talk a little about that -- what goes away or what are we missing here as we move sort of forward into the back half of the year?

Steven J. Fasching -- Chief Financial Officer

Yeah. So, I think one of the things that we benefited from, and I can walk through it. So, clearly airfreight was the big one. Some of our vendor support marketing that we typically have in Q2 moved into Q3. So that's a bit of a headwind in Q3, and that's largely around our UGG 40th Anniversary event. So to put more marketing dollars that flow through our gross margin into Q3 versus Q4, so that's a switch. So you're seeing a benefit in Q2 as we move some of those dollars in this year into Q3 as we support that 40th Anniversary.

Some of the other things that you saw, DTC mix helped us in Q2. We did get a little bit of benefit from favorable foreign currency, so that came in a little bit better than what we were planning. And then our product cost came in and while we have that factored into our guidance, we did see a little bit more of that in Q2 than what we anticipated. So that gave us kind of a bit of a lift. I think as you begin to look at the back half, a lot of that is baked into our guidance. So when you think about Q3, and you think about rates and kind of our ability of kind of where the guidance is versus where we can go.

Last year we benefited largely from very favorable weather conditions that helped drive a strong wholesale reorder, which helped full price margins in place. It also benefited from stronger DTC sales as wholesale ran out of products, they came to DTC. So with a more conservative approach this year around Q3, we're seeing kind of headwinds that we're facing in that respect. That's partially being offset by continued improvements in our supply chain that we have factored in, and so that's kind of how we get to what's in the guidance for the margin.

Christopher Svezia -- Wedbush Equity Research -- Analyst

Okay. And just to be clear, it looks like putting all of words in your mouth, but Q3 would be more of a flattish up slightly than Q4 would be down somewhere in that 100 basis points trying to get you or view, just given that comparison for Q4 is pretty significant. Am I thinking about that right?

Steven J. Fasching -- Chief Financial Officer

More flattish on Q3, so much upside because of the favorability that we experienced last year, so that would give you a little more room on Q4.

Christopher Svezia -- Wedbush Equity Research -- Analyst

Okay got it. And the marketing has more shifted to Q -- I'm just -- Q4.

Steven J. Fasching -- Chief Financial Officer

Yeah, so that's more of a Q4 event because as Dave said, that's more around strategic initiatives to drive long-term health. So we're not necessarily seeing that driving kind of near-term sales.

Christopher Svezia -- Wedbush Equity Research -- Analyst

Got it. Okay. And Dave, just a general question for you. Just as you think about your picture profitability target 30% plus already and I'm just curious, when you talk about mid single-digit topline growth, you're sort of just a breath away from that this year. Just sort of maybe help us along where -- when you can potentially hit that level of growth, just sort of your thoughts about hitting the single-digits on a more consistent basis?

David Powers -- Chief Executive Officer, President and Director

Yes, I think we're pleased with the progress we've made obviously in the first half of this year, ahead of expectations and trending well. When you lay that into a full-year makes a business is not insignificant, but we do think there's continued upside in Q1 and Q2 going forward with the success of HOKA, spring and summer product. We're shooting to get to that mid-single-digit growth rate starting in FY '20. We're not putting any of that out there yet, but we're -- that's where our sights are set, that's where we're making some of the reinvestment here now into the business. And so I'd say you can start to see that in the early days of 2021.

Christopher Svezia -- Wedbush Equity Research -- Analyst

Okay. Thank you and all the best. Appreciate it.

David Powers -- Chief Executive Officer, President and Director

Thank you.

Steven J. Fasching -- Chief Financial Officer

Thanks Chris.

Operator

The next question comes from Omar Saad of Evercore ISI.

Omar Saad -- Evercore ISI -- Analyst

Thanks for taking my question. Great quarter. Thanks for all the information.

David Powers -- Chief Executive Officer, President and Director

Thanks Omar.

Omar Saad -- Evercore ISI -- Analyst

I just wanted to ask questions about weather, sorry -- but it's been a pretty warm fall, obviously you guys have product that is seasonally -- seasonally affected of course. You know as weather is churning, we're hearing from the data points around acceleration happening at retail and it feels like there could be some pent up demand effect back on the heels of cooler weather. Just wondering if you have any thoughts on that topic? Thanks.

David Powers -- Chief Executive Officer, President and Director

Yeah. I think we're pleased with how the quarter has started off. We have -- like I said we have clean inventory in the channel. We got great segmentation out there, and where there is some colder weather, we are seeing a little bit of impact on the sales, which is great to see, which means the product is right and it's resonating to the consumer. We are always cautious to comment on weather expectations. We do know that last year it was kind of a perfect storm so to speak in terms of weather and timing particularly in the back half of December going into January. So I guess best to say that we feel good about how we're positioned with the clean inventory channel, the allocation, segmentation, new accounts, product resonating and if the cold weather comes I think we're in a really good shape for that.

Steven J. Fasching -- Chief Financial Officer

Yeah. And I think again just to be clear on that. Our expectation on weather is more conservative than what we saw last year. So we're not expecting a repeat of last year.

Omar Saad -- Evercore ISI -- Analyst

Got it. That's really helpful guys. Hey, can I also ask you about Amazon, and the stocks were under pressure this afternoon, that might have been a little bit of sales, I'm not sure. But relatively new business for you guys. How do you see the role of that channel, is it offensive or is it defensive, is there any impact on other channels or overlapping. And how you think about segmenting the products there? Thanks.

David Powers -- Chief Executive Officer, President and Director

Yeah. So I have to give the teams a lot of credit for the way they are managing that account. That was a major decision that we made a couple years ago to sell directly through Amazon channel. And so far it's been working very. They've been very straight forward with the rest of our accounts and the expectations for Amazon. We've identified them as, I believe the core account versus premium. So they're not getting the full bread of the line or worth saving that for DTC in some of our premium account. And we're controlling the inventory there in a really positive way I would say. I think it's interesting to see that despite opening up Amazon, we're still seeing healthy business in some of the -- some of our key accounts e-commerce business at the same time. So I think there's a channel opportunity there, but it's not massive. We want to make sure that we monitor that within the mix of our key partners, and we're servicing that consumer correctly for their consumer. But so far I would say we're pleased with how it's managed. We're tightly monitoring that. We have teams on it every day as we are with our top strategic accounts across the board. So far so good, but it's -- where the sanctity and the premium of the brand is first and foremost for us is driving massive upside growth within the Amazon channel.

Omar Saad -- Evercore ISI -- Analyst

Thank you. Best wishes for holiday.

David Powers -- Chief Executive Officer, President and Director

Thank you.

Operator

The next question comes from Mitch Kummetz of Pivotal Research.

Mitch Kummetz -- Pivotal Research -- Analyst

Yeah, thanks for taking my questions. Just wanted to drill down some of these puts and takes a little bit more. So starting with the gross margin, is there anyway to kind of normalize what that was for the quarter. It sounds like there is clearly some benefits that were a little bit more one-time in nature. So is there anyway you are going to address that?

Steven J. Fasching -- Chief Financial Officer

Yeah. So what I would say Mitch, if you kind of look at the $20 million, right, roughly about $3 million to $4 million of -- kind of the lift or -- it's kind of $19 million to $20 million. $3 million to $4 million of that is really volume, so that's kind of higher sales that we expected, so when you get kind of beyond volume, then your rate of call is kind of $15 million to $16 million. We're seeing a little less than half of that is really kind of related to that not using airfreight this year, compared to say what we used last year or anticipated for this year. And then you get into kind of a couple of the other items that I talked about. So we have no vendor support marketing which is a part of gross margin, that's a couple of million dollars that moves into Q3 out of Q2 and again that's really related to the 40th Anniversary. And then similar amounts with DTC mix product cost beneficial in Q2, and then some of the FX upside that we saw in Q2, but didn't play (ph).

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. Alright, I appreciate that color. And then on the Q3 gross margin outlook, Steve I think you said kind of flattish. You talked about the benefit that you saw last year from the strong full price selling, sounds like you expect to be -- you would end up being a little bit more promotional this year, at least that's kind of in the guide. So, I know gross margin was up 170 bps for last year. Can you remind us how much of that was weather-related, how much of that is -- do you seem to give back. And like how much is the supply chain benefit continued into Q3. Does that all make sense -- those questions?

Steven J. Fasching -- Chief Financial Officer

Yes, it does. So basically I think what we're seeing, last year we kind of -- or the difference I would say that we're looking at, say this year versus last year is probably around the 50 bps hit as being more conservative around weather. Probably a know similar type offset with the continued improvements and supply chain initiatives, so those are two kind of offsets.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. Okay great. And then lastly just thinking about the sales and tax, kind of last year to this year in the third quarter. I think you mentioned, you picked up $30 million on reorders relative to -- I think where the guide was $10 billion on DTC plus this year, you got the store closures and the segmentation strategy, which on an annual basis is like $50 million, I would guess. Probably, half of that since in Q3, just kind of sizing up, I guess how much impact UGG has on the third quarter. So -- I mean my math is that, that gets you like down $60 million, $65 million, is that how you're thinking about UGG for the quarter. I know you have not given specific UGG guidance on the quarter, but is there some offset to that or just -- help me understand it?

Steven J. Fasching -- Chief Financial Officer

Yes, I think you're a little too high on kind of the hit.

Mitch Kummetz -- Pivotal Research -- Analyst

Yes.

Steven J. Fasching -- Chief Financial Officer

So, more UGG kind of down low-single digits year-on-year is kind of how we're looking at Q3.

Mitch Kummetz -- Pivotal Research -- Analyst

It is that all segmentation of the stores or is that also fewer reorders and less (multiple speakers).

Steven J. Fasching -- Chief Financial Officer

Yes, it will be probably about $30-ish million of last three orders, little more conservative stance in terms of retail and e-commerce with a combination of fewer retail stores.

Mitch Kummetz -- Pivotal Research -- Analyst

Yes. Okay that's good. Thanks guys.

Steven J. Fasching -- Chief Financial Officer

Okay. Thanks.

Operator

(Operator Instructions). Our next question will come from Rafe Jadrosich of Bank of America Merrill Lynch.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Hi, good afternoon. Thanks for taking my question.

David Powers -- Chief Executive Officer, President and Director

Hi Rafe.

Steven J. Fasching -- Chief Financial Officer

Hi Rafe.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Just wanted to follow up on your comments on achieving the 13% operating margin, yearly. I think savings from store closures was a big portion of the SG&A savings in that. Can you talk about where you are in that process and how many stores you have, how many you plan to close and where you could see additional savings there?

David Powers -- Chief Executive Officer, President and Director

Yes. good question. Since we've been on this path, we've spent a lot of time with the retail teams, optimizing profitability on a store level across the fleet. And I'm pleased to say they made great progress on that front. The original target of $125 million, we put out there, a little over 18 months ago with a target to kind of wind down to. As we're getting further along in the process and of the cost savings initiatives, we're finding that there is some improvement in some of these stores and we're basically looking at store level evaluating them. If they can get above the internal threshold for pull our profitability, which we set at about 20%, we're going to put those on a reevaluation list versus closure list. So we continue to drive improvements into the fleet. We're continuing to evaluate to see what we think from a long-term perspective, some of these growth drivers in men's, and spring and summer can do to the profitability to the stores. But suffice to say, we will be closing more stores than we will be opening over the next foreseeable future.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Thank you. And then, can you comment a little bit about what you're seeing in Europe right now?

David Powers -- Chief Executive Officer, President and Director

Europe is -- it is obviously macroeconomic challenges over there. The brand remains strong. (technical difficulty) that we're seeing particularly in the UK, the macro level issue. So, we're remaining a little bit conservative there. We do feel good about similar setups that we have in North America with regards to segmentation and some of the new accounts that we've been fostering over there, but the softness is really a macro-level issue. So, we're just taking a conservative look at Europe right now.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Thank you. And then, just a --

David Powers -- Chief Executive Officer, President and Director

That's really related to UGG. The HOKA brand is still seeing strength and growth opportunity at this point. So, it's really an UGG issue with mature business, particularly in the UK.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Can you just talk about what FX assumption is when you see (ph) into the guidance and remind us about how you hedge or like how far you're hedged right now?

Steven J. Fasching -- Chief Financial Officer

Right. So basically -- so, the guidance assumes current rates. We do put hedging in place at the beginning of the year. We don't hedge 100%, but we do hedge a large majority of our FX exposure. So, we will have -- always have a little bit of FX exposure. But we hedge kind of the -- for the year, at the beginning of the year.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

The calendar year?

Steven J. Fasching -- Chief Financial Officer

Our fiscal year. So, going into our fiscal year, we have our budget. We're basically hedging large majority of our exposure, but again not a 100%. So, we get some fluctuation. And then, every quarter we'll be updating to current rates. But that will also take into account some of the hedge exposure too.

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

The next question will come from Erinn Murphy of Piper Jaffray.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks. Good afternoon. I was hoping you guys could talk a little bit more about what you saw from the Chinese consumer during the quarter? And maybe, just kind of split it between what you're seeing in terms of the mainland trend versus what you're seeing with the Chinese cluster overall, inclusive of those traveling to Japan or Europe or elsewhere?

David Powers -- Chief Executive Officer, President and Director

Yes. So, the China market, for us had a good quarter. I think it's again similar to what's happening in the US to some of the new products, that's more seasonally relevant. Again, like the Fluff Yeah and the Neutra Sneaker, seasonal slippers are trending and performing well, which is a good sign that they're resonating on a global level. We are seeing a little bit of impact from the Chinese consumer on the other markets, particularly in Japan. There's a lot of Chinese tourism happening in Japan right now. And the Japan business seems to be turning around versus last year. So, it's something that's for the UGG brand, things are still trending well with that consumer. I do know at a macro level, there is potential concerns about what the trade wars are going to have for an impact on the Chinese consumer globally. But I think, for us, within the UGG brand, we're still seeing the brand resonating and the new product working at a global level.

Steven J. Fasching -- Chief Financial Officer

Yes, it's great to see you as we continued to develop that market.

David Powers -- Chief Executive Officer, President and Director

In Asia-Pacific, the region was a good performer for us in the quarter. So, we're continuing to see growth in those areas.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay, and then, maybe just kind of sticking with the trade war piece, what percent of your business today is impacted by that $200 billion tariff that was put in place on September 17? And then, I guess have you seen as you kind of talked to other people in the industry, any retailers trying to kind of front run shipments before the end of the year before we move up to the (inaudible) tariff in some of the categories? And I know you don't have a ton of exposure in those, but just curious?

David Powers -- Chief Executive Officer, President and Director

Yes. So, we don't have a ton of exposure. Some of those new categories are tiny businesses for us in the scheme of things. And as I said earlier, the teams have done a tremendous job of migrating our production to other places beyond China to the point now where we're over 70% outside of China. And for us, deliveries for FY '19 are pretty much, already on the water and on their way, if they are not already here, going into Q3. So, we've been planning for that. The exposure going forward, we feel is pretty minimal and that we do know there's others talking to our suppliers. In China and Vietnam, where we were just there couple of weeks ago and just from the marketplace people are scrambling a bit, but as far as Deckers goes, we feel good about liabilities being reduced from a China production standpoint and our ability to ship products in a timely manner to avoid any issues this year.

Steven J. Fasching -- Chief Financial Officer

And then just on the tariffs Erinn, so right now anything that's been imposed, we have not been impacted by and then just to give you a rough idea of where we're at, by end of this calendar year about 20% of the products -- product that we have will come out of China, and we expect to continue to reduce that going forward. So you know we feel good about kind of our current level of exposure and it's improving.

Erinn Murphy -- Piper Jaffray -- Analyst

And that 20% out of China, is that all being shipped to the US, or is that (inaudible) so it's even a (multiple speakers) that's coming to US?

David Powers -- Chief Executive Officer, President and Director

Yes, it's 20% global, even less to the US.

Erinn Murphy -- Piper Jaffray -- Analyst

Got it. Thank you guys very much.

David Powers -- Chief Executive Officer, President and Director

Thanks Erinn.

Operator

And next we have a question from Sam Poser of Susquehanna.

Sam Poser -- Susquehanna International Group -- Analyst

Good afternoon and thanks for taking my question. A couple of things. The gross margin guidance that you provided, given that your inventory arguably is significantly cleaner than it has been from a dollar perspective in quite some time. Doesn't that help to offset some of the potential pressures because of the full model that you're beginning to develop?

David Powers -- Chief Executive Officer, President and Director

Yeah. I think we will leave that into the guidance. And as we said for the quarter total inventory down 7%, obviously with the growth of UGG and Koolaburra, UGG is down even more than that. And so we do feel good about that. I think the margin upside that we saw in Q2 from deliveries in shipments in the quarter is indicative of the kind of go forward margin. But I think with the mix of DTC and fewer stores versus wholesale, this year versus last year and also some of the assumptions around a little bit more promotional marketplace offset the upside that we're seeing. And I think it's all embedded into the guidance.

Sam Poser -- Susquehanna International Group -- Analyst

And then I have two more things. One, you mentioned some of those fashion athletic at (inaudible) Locker and others. What kind of response are you getting there and what kind of an opportunity do you think it is, and I've got one more quick on, if you can?

David Powers -- Chief Executive Officer, President and Director

Yes, as we've been cultivating accounts such as Foot Locker, Footaction, SIX:02 for a couple of years, working closely with those teams, we're doing it in a thoughtful and strategic way starting with the Footaction doors. This is the first time ever that we sold into Foot Locker. We're doing it in a very thoughtful way similar to what we did with Macy's a couple of years ago with a small amount of doors as a test, test and learn. We'll take those learnings and embed them into product and marketing in the partnership. And we're pleased with how things are performing and the response of both Foot Locker, Inc. and their consumers so far. So, I think this is a meaningful opportunity. If we can really resonate particularly in men's with that sports lifestyle consumer and that distribution over time, and as I said earlier in the call, I do think it's incremental to places like Nordstrom and Dillard's. I think it could be meaningful for UGG, particularly in men, but also in UGG women's as well. And what's great about it, is it gives us exposure and an opportunity to connect with our younger consumer, which we don't necessarily do in Nordstrom's and Dillard's and traditional accounts. So I'm pretty excited about it, and then when we also think about the opportunity for Foot Locker in Canada and Europe, and then kind of like JD Sports or JD over in the UK as well.

Sam Poser -- Susquehanna International Group -- Analyst

Thank you. And then lastly back to the inventory for one sec. Given the way the inventory is tracking, could you give us some idea of how -- Steve, maybe, how you're thinking about the inventory at the end of this quarter and at the end of the year, also especially, what are you doing to maybe offset that potential for the -- for them think of the other tranche for $267 billion, even though it is a small part of your business that is impacted by the tariffs.

Steven J. Fasching -- Chief Financial Officer

Yeah, I think, as we look at it -- kind of answer the question in context with Q2. We feel we've made some pretty significant improvement in Q2. So inventory is down 7% year-over-year. When you lay that into the context of the brand with the growth of HOKA and Koolaburra, we've got inventory increasing there. So the improvement within the UGG brand is even more impressive than the 7%. So, we think we've made good progress with inventory. I wouldn't factor this same level of improvement kind of in the next two quarters, something we were going to continue to work on, but with a big inventory being brought in and movement in this quarter and next quarter, we're pretty pleased with this result. I wouldn't kind of extrapolate this result yet onto the next two quarters.

Sam Poser -- Susquehanna International Group -- Analyst

Alright. Thanks very much. Good luck.

Steven J. Fasching -- Chief Financial Officer

Okay. Thanks Sam.

Operator

And this concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 71 minutes

Call participants:

Erinn Kohler -- Director, Investor Relations and Corporate Planning

David Powers -- Chief Executive Officer, President and Director

Steven J. Fasching -- Chief Financial Officer

Dana Telsey -- Telsey Advisory Group -- Analyst

Camilo Lyon -- Canaccord Genuity -- Analyst

Jim Duffy -- Stifel -- Analyst

Christopher Svezia -- Wedbush Equity Research -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Sam Poser -- Susquehanna International Group -- Analyst

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