Deckers Posts Narrower Loss - Analyst Blog

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Deckers Outdoor Corporation ( DECK ) posted second-quarter 2012 loss of 53 cents a share that fared better than the Zacks Consensus Estimate of 59 cents and its own guidance of a loss of 60 cents on the back of higher domestic wholesale and e-commerce sales. However, the quarterly loss widened from a loss of 19 cents delivered in the year-ago quarter.

Deckers' total net sales of $174.4 million came ahead of the Zacks Consensus Estimate of $166 million, and jumped 13.1% from the prior-year quarter, reflecting healthy domestic wholesale sales for UGG and Teva brands coupled with strength across the Sanuk brand. These helped mitigate sluggishness in Europe. The company had earlier forecasted top line growth of 8%.

The company is struggling with sales in Europe due to the ongoing crisis, and is eyeing other profitable markets. Deckers remained focused on product introductions, store augmentation, along with geographic expansion.

Asian markets seem promising with increasing demand for its flagship UGG brand. Distributor sales in Asia surged 70% for the UGG brand. Management intends to focus on China, where the company has increased its store count more than two fold to 13 within a span of one year.

In the year-ago quarter, Deckers had 5 outlets. Sales in Japan, which comprises wholesale, retail and e-commerce, have also been encouraging zooming over 80%. The company operated 12 retail stores in Japan at the end of the quarter.

Segment Discussion

Domestic sales for the quarter grew 37.1% to $113.5 million, whereas international sales dropped 14.7% to $61 million.

UGG brand net sales fell marginally by 0.3% to $107.9 million primarily due to fall in international wholesale and distributor sales. In Europe, sales for the brand declined as the economic climate was not conducive. However, these were to some extent mitigated by growth in domestic wholesale sales and direct-to-consumer sales.

Teva brand net sales tumbled 15.4% to $34.1 million due to a fall witnessed in international wholesale and distributor sales, offset by growth in domestic wholesale and eCommerce sales.

On July 1, 2011, Deckers completed the buyout of the Sanuk brand with an initial payment of $120 million in cash. The sales for the Sanuk brand, known for exclusive sandals and shoes, were $28 million.

Combined net sales of Deckers' other brands for the quarter were $4.5 million, down 21.2% year-over-year.

Retail store sales surged 25% to $25.2 million, propelled by the opening of 21 new stores. The company plans to have a store base of approximately 200 by the end of fiscal 2015. Company-wide comparable-store sales jumped 6.8%. The company intends to enhance its reach in the U.K., as well as France and the Benelux for its signature UGG brand.

Sales for the company's eCommerce business shot up 40.1% to $8 million, attributable to increase sales registered across the UGG brand spring line and Sanuk brand.

Margin Discussion

Despite a 14.2% increase in cost of goods sold, gross profit rose 11.6% to $73.6 million from the prior-year quarter. However, gross profit margin contracted 50 basis points to 42.2% in the quarter due to higher product costs, adverse impact of fall in Europe wholesale sales, and unfavorable foreign exchange, partly mitigated by the addition of Sanuk brand and higher pricing.

Other Financial Aspects

Deckers portrayed a debt-free balance sheet with cash and cash equivalents of $114.4 million and shareholders' equity of $720.1 million at the end of the quarter. Cash and cash equivalents fell significantly from a balance of $325.2 million as of June 30, 2011, on account of cash payment of $153.5 million related to the acquisition of Sanuk brand and $100 million related to share buyback. Inventories surged 64.8% to $346.3 million.

Management continues to expect fiscal 2012 capital expenditures to be approximately $80 million.

During the quarter, Deckers bought back approximately 1,475,000 shares, aggregating $80 million, thereby completely exhausting the $100 million share repurchase authorization, announced in February 2012. The Board of Directors approved another $200 million share repurchase authorization.

Strolling through Guidance

Management continues to project total revenue growth of 14% for fiscal 2012. Deckers anticipates its UGG brand sales to rise approximately 10% and Teva brand sales to be flat to marginally down, whereas other brand sales are expected to decline by approximately 15% to $21 million.

Management had earlier projected Teva brand sales to increase in the low to mid-single-digit range. The company now anticipates sales to be approximately $95 million from the Sanuk brand, up from $90 million previously guided.

Management reiterated that fiscal 2012 earnings will decline between 9% and 10%. Deckers also forecasts a gross profit margin contraction of 250 basis points due to increases in costs of goods sold and closeout sales level, partly offset by calculative price rise, and higher contribution from retail sales and the Sanuk brand. SG&A expense as a percentage of sales is expected to be roughly 30%.

Management forecast a 1% growth in total revenue for the third quarter of 2012 and anticipates 31% decline in earnings per share. Gross margin is expected to be about 43%, whereas SG&A expense as a percentage of sales is anticipated to be around 28%.

The company now foresees a 19% jump in total revenue for the fourth quarter and projects 22% increase in earnings per share. Gross margin is forecasted to be about 50%, and SG&A expense as a percentage of sales is anticipated to be around 21%.

Currently, we have a long-term Underperform recommendation on the stock. Moreover, Deckers, which competes with Nike Inc. ( NKE ) and Wolverine World Wide Inc. ( WWW ), holds a Zacks #4 Rank that translates into a short-term Sell rating.

DECKERS OUTDOOR (DECK): Free Stock Analysis Report

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WOLVERINE WORLD (WWW): Free Stock Analysis Report

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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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