Deckers Beats, Lifts Outlook

Deckers Beats, Lifts Outlook - Analyst Blog

Deckers Outdoor Corporation (DECK) recently delivered better-than-expected third-quarter 2011 results on the heels of healthy demand for the product lines under the UGG and Teva brands, and the recent acquisition of the Sanuk brand. Consequently, the company lifted its full year outlook, but remains cautious about the economic environment in Europe.

The quarterly earnings of $1.59 per share beat the Zacks Consensus Estimate of $1.34, and surged 48.6% from $1.07 earned in the prior-year quarter.

Let’s Dig Deep

Deckers said that total net sales jumped 49.1% to $414.4 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $389 million. The company’s robust growth in all its divisions and sustained focus on new product introductions along with geographic expansion have helped achieve increased growth.

Deckers witnessed increased demand for the UGG brand in the domestic wholesale market buoyed by new assortments and styles as well as large collections of men’s products. International sales registered a twofold jump on the back of an increase in wholesale unit volumes, experienced in the United Kingdom and Benelux, along with the rise in sales due to the transition to a wholesale model.

The company also has a presence in Asia with Japan and China leading the way and providing avenues for UGG brand. Although, the retail market in Japan remains somewhat soft due to the recent catastrophe, but still remains promising.

Domestic sales for the quarter surged 26% to $257.9 million, whereas international sales more than doubled to $156.4 million. International sales now represent 37.8% of total sales up from 26.3% in the year-ago quarter.

With the switch over to a wholesale model, Deckers now manages the distribution of UGG brand in the United Kingdom and Benelux, and Teva brand in the United Kingdom. This will help capture incremental sales by selling directly to wholesale customers.

UGG brand net sales soared 47.3% to $376.7 million and Teva brand net sales grew 7.3% to $14.7 million.

Recently on July 1, Deckers completed the buyout of the Sanuk brand with an initial payment of $120 million in cash. The sales for Sanuk brand, which is known for its exclusive sandals and shoes, were $15.6 million.

Combined net sales of Deckers’ other brands for the quarter dropped 11.7% to $7.4 million during the quarter under review.

Sales for the retail store business jumped 72.1% to $34.7 million, propelled by same-store sales growth of 15.4%, and the opening of 13 new stores. Sales for the company’s eCommerce business climbed 18.3% to $10.3 million, reflecting higher demand for the UGG brand.

Despite a 44% increase in cost of goods sold, gross profit rose 54.9% to $202.9 million from the prior-year quarter. Moreover, gross profit margin expanded 190 basis points to 49% in the quarter.

Other Financial Aspects

Deckers portrays a debt-free balance sheet with a cash and cash equivalents of $90.4 million and shareholders’ equity of $715.3 million, excluding a non-controlling interest of $3 million. Cash and cash equivalents fell significantly from a balance of $250.5 million as on September 30, 2010, on account of cash payment of $126.6 million related to the acquisition of the Sanuk brand.

Management expects fiscal 2011 capital expenditures to be approximately $60 million.

Walking through Guidance

The better-than-expected results prompted management to raise its outlook. Deckers now forecasts a total revenue growth of 33% and earnings per share increase of 22% in fiscal 2011. Earlier, Deckers had projected total revenue to increase by 26% and earnings per share to rise by 17%. Management forecasts gross profit margin of 50% for the year.

We believe that growth of UGG and Teva brands will lead to the increase in sales. Deckers anticipate its UGG brand sales to soar approximately 32% and Teva brand sales to surge by about 20% whereas, other brand sales are expected to fall by approximately 10% in 2011. Besides, the company anticipates sales to be in the high $20 million range from the recently acquired Sanuk brand.

For the fourth quarter of 2011, Deckers projects a growth of 29% in revenue and 33% in earnings, as against the increases of 22% in revenue and 36% in earnings predicted earlier. The rate of growth in the bottom-line decelerated on account of expenses to be incurred in the fourth quarter that were budgeted for the third quarter.

The company plans to open 17 company-operated stores in fiscal 2011 and 25 stores in fiscal 2012.

Deckers, in order to seek better prospects and enhance its earnings potential, has taken initiatives, which include diversification of merchandise offering, resumption of distribution rights in significant geographic areas, rapid retail store openings, acquisition of Sanuk brand, and strengthening of the eCommerce platform.

Currently, we have a long-term Neutral rating on the stock. However, Deckers, which competes with Nike Inc. (NKE) and Timberland Co. (TBL), holds a Zacks #2 Rank that translates into a short-term Buy recommendation.