TBL Timberland Co. (The)

Deckers Outdoor Corporation (DECK) recently delivered a record fourth-quarter 2011 results on the back of strong demand for the product lines under the UGG brand during holiday season. The Teva brand and the recent acquisition of the Sanuk also were significant contributors. However, Deckers’ warned that rise in sheepskin prices and other costs would hurt the bottom lines of the first quarter and full year 2012.

The fourth quarter earnings of $3.18 per share beat the Zacks Consensus Estimate of $3.13, and surged 40.1% from $2.27 earned in the prior-year quarter.

Deckers said that total net sales jumped 40.4% to $603.9 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $563 million, reflecting sustained focus on new product introductions, store augmentation, along with geographic expansion.

Deckers witnessed increased demand for the UGG brand principally in the domestic wholesale market buoyed by new assortments and styles as well large collections of men’s and women’s products. The company also has a presence in Asia, with Japan and China leading the way and providing avenues for UGG brand.

Segment Discussion

Domestic sales for the quarter surged 21% to $456.3 million, whereas international sales more than doubled to $147.6 million.

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 drive incremental sales by selling directly to wholesale customers.

UGG brand net sales soared 37.7% to $568.5 million and Teva brand net sales grew 45.9% to $19.4 million.

Recently on July 1, 2011, Deckers completed the buyout of the Sanuk brand with an initial payment of $120 million in cash. The sales for Sanuk, which is known for its exclusive sandals and shoes, were $11 million.

Combined net sales of Deckers’ other brands for the quarter jumped 23.1% to $5 million during the quarter under review.

Sales for the retail store business increased 36.5% to $98.8 million, propelled by the opening of 18 new stores, primarily in Japan and China. Sales for the company’s eCommerce business climbed 12.6% to $67.1 million, reflecting higher demand for the UGG brand.

Margin Discussion

Despite a 50.5% increase in cost of goods sold, gross profit rose 31.9% to $307.8 million from the prior-year quarter. However, gross profit margin contracted 320 basis points to 51% in the quarter due to higher product costs and rise in closeout sales. These were partly offset by increased margins at the international business. Operating income during the quarter rose 25.6% to $176.8 million, whereas operating margin shriveled 340 basis points to 29.3% on account lower gross margin.

Other Financial Aspects

Deckers portrays a debt-free balance sheet with a cash and cash equivalents of $263.6 million and shareholders’ equity of $835.9 million, excluding a non-controlling interest of $5.5 million at the end of fiscal 2011. Cash and cash equivalents fell significantly from a balance of $445.2 million as on December 31, 2010, on account of cash payment of $125.2 million related to the acquisition of Sanuk and $20 million related to land for new headquarters facility. Inventories surged 102.6% to $253.3 million.

Capital expenditures incurred during fiscal 2011 were $55.8 million. Management now expects fiscal 2012 capital expenditures to be approximately $90 million.

The company’s board of directors also announced a $100 million share repurchase program.

Strolling through Guidance

Deckers now forecasts a total revenue growth of 15% for fiscal 2012. We believe that growth of UGG and Teva brands will lead to the increase in sales. Deckers anticipate its UGG brand sales to rise approximately 11% and Teva brand sales to increase by about 10%, whereas other brand sales are expected to remain flat in 2012. The company anticipates sales to be approximately $90 million from the Sanuk brand.

Despite an expected mid-teens growth in the top line, management projects fiscal 2012 earnings to remain flat compared with the prior year due to rise in sheepskin costs (up 40% from 2011 level), which could hurt the bottom line by $1.40 per share.

Management also forecasts a gross profit margin contraction of 200 basis points due to increase in costs of goods sold, 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 29%.

However, in order to mitigate rising sheepskin costs and other raw materials, Deckers has undertaken certain long-term programs, which includes increasing the mix of non sheepskin merchandises, new footwear materials and innovative production technologies.

Backlog is up 15.1% for fiscal 2012.  Deckers now expects domestic and international businesses to grow approximately 12% and 20%, respectively for the year. International sales are now projected to represent 33% of total sales in 2012, up from 31% in 2011.

Retail sales are projected to increase approximately 49% during fiscal 2012 on the back of mid-single digit growth in comparable-store sales and the opening of 25 new stores. Sales for the company’s eCommerce business is expected to be up approximately 21%.

Management forecasted a 19% growth in total revenue for the first quarter of 2012 but anticipates a 50% decline in earnings per share. Gross margin is expected to be about 48%. The quarter also includes increased fixed overhead for new retail stores, international infrastructure, and general and administrative expenses. SG&A expense as a percentage of sales is anticipated to be around 43%.

Deckers long-term target is to achieve $2.4 billion in sales by 2015, including UGG sales of $1.85 billion, Teva sales of $250 million and sales from Sanuk brands of $200 million, and reflects a compound annual growth rate of about 15% from 2011.

Currently, we have a long-term Neutral recommendation on the stock. However, Deckers, which competes with Nike Inc. (NKE) and Timberland Co. (TBL), holds a Zacks #4 Rank that translates into a short-term Sell rating.

 
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