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Deckers (DECK) Crashes on Q3 Earnings Miss and Bleak View

After witnessing six straight quarters of earnings beat, Deckers Outdoor CorporationDECK succumbed to a negative earnings surprise in third-quarter fiscal 2017. Top line also struggled and fell short of the estimate for the second quarter in row. The dismal performance compelled this footwear and apparel company to provide a bleak outlook. Analysts pointed that tough retail landscape, soft start to holiday season, and sluggish sale of UGG boots and shoes hurt the company's results.

All these factors have made investors apprehensive. Consequently, shares of this Goleta, CA-based company nosedived roughly 23% during after-market trading hours yesterday. We noted that Deckers' shares have plunged about 29.7% in the past six months compared with the Zacks categorized Shoes & Retail Apparel industry that declined only 3.3%.

Deckers posted adjusted earnings of $4.11 per share that missed the Zacks Consensus Estimate of $4.24 and also management's earlier projection of $4.16-$4.28 per share for the quarter. The quarterly earnings dropped 14% year over year.

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Net sales came in at $760.3 million, down 4.5% year over year, and also came below the Zacks Consensus Estimate of $786.8 million. The company had earlier anticipated net sales to be flat to down 2% for the quarter under review. On a constant currency basis, net sales declined 3.7%.

Further, the company's domestic net sales declined 9.9% to $489.5 million in the reported quarter. On the contrary, international net sales jumped 7.2% to $270.8 million, while on a constant currency basis, the same climbed 11.7%.

Direct-to-consumer (DTC) net sales advanced 5.8% to $371.7 million, while on a constant currency basis, sales increased 7.4%. DTC comparable sales grew 4.7% year over year. Wholesale and distributor net sales in the reported quarter decreased 12.6% to $388.6 million, while on a constant currency basis, sales plunged 12.5%.

Gross margin expanded 140 basis points to 50.5% due to improved input costs and increase in proportion of DTC sales.

Deckers is focused on expanding its brand assortments, introducing a more innovative line of products, targeting consumers digitally via marketing and sturdy eCommerce along with optimizing omnichannel distribution. The company's omnichannel endeavors include Click & Collect, Infinite UGG and new UGG Rewards loyalty program.

Moreover, management expects cost savings of about $150 million by the end of fiscal 2019 on the back of SG&A savings, including headcount reduction; improvement in cost of goods sold; and closure of retail outlets that will lower operating expenses.

Management hinted that the company's outlets are witnessing lower traffic. With respect to the store fleet optimization plan that focuses on striking the right balance between digital and physical stores, Deckers plans to close approximately 24 outlets.

Brand-wise Discussion

UGG brand net sales went down 5.3% to $704 million in the reported quarter. On a constant currency basis, sales declined 4.4%. Sales fell owing to lower domestic wholesale sales on account of sluggish start to the quarter, partly offset by sturdy DTC comparable sales.

Teva brand net sales grew 3.9% to $14.6 million, while on a constant currency basis, the same inched up 2%. Sales increased due to higher global DTC sales.

Net sales for the Sanuk brand, known for its exclusive sandals and shoes, plummeted 18.4% year over year to $13.9 million on both a reported and constant currency basis. The decline in sales came on account of lower global wholesale and distributor sales.

Combined net sales of Deckers' Other brands came in at $27.8 million in the quarter, surging 28.6% year over year. On a constant currency basis, sales were up 27.9%. The increase in net sales was principally attributable to higher HOKA ONE ONE brand net sales that advanced 18.3% and increase in Koolaburra brand sales.

Other Financial Aspects

At the end of the quarter, Deckers had cash and cash equivalents of $296.4 million, short-term borrowings of $30.2 million and shareholders' equity of $970.5 million. Inventories inched up 0.8% year over year to $373.5 million.

During the quarter, the company bought back approximately 222,500 shares for $12.6 million at an average price of $56.51. As of Dec 31, 2016, the company had $65.3 million remaining at its disposal under its $200 million stock buyback program.

Guidance

Management trimmed its fiscal 2017 outlook following a disappointing performance. Deckers now expects net sales to decline 5% and projects earnings between $3.45 and $3.55 per share. The company had earlier forecast net sales to decline in the band of 1.5-3% and earnings in the range of $4.05−$4.25 for fiscal 2017.

Gross margin for the fiscal year is anticipated to be 47%. Further, SG&A expense as a percentage of sales is expected to be nearly 38%.

In the fourth quarter, net sales are estimated to decline by 5-6%. Management envisions bottom line in the band of break-even to a loss of 10 cents a share compared with the adjusted earnings 11 cents reported in the year-ago period.

The current Zacks Consensus Estimate for the fourth quarter and fiscal 2017 stands at 43 cents and $4.15, respectively, which could witness a downward revision in the coming days.

Zacks Rank

Deckers carries a Zacks Rank #3 (Hold). Investors interested in the retail space may consider some better-ranked stocks such as Big 5 Sporting Goods Corporation BGFV , The Children's Place, Inc. PLCE and Tailored Brands, Inc. TLRD , all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Big 5 Sporting Goods delivered an average positive earnings surprise of 4.8% in the trailing four quarters and has a long-term earnings growth rate of 12%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Tailored Brands delivered an average positive earnings surprise of 8.4% in the trailing four quarters and has a long-term earnings growth rate of 17.5%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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