Deckers Misses, Lowers Forecast - Analyst Blog

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The shares of Deckers Outdoor Corporation (DECK) plunged approximately 18.7% or $12.96 to $56.50 during after-market hours trading on Thursday, when the news of its dismal first-quarter 2012 results hit the market.

The company posted lower-than-expected first-quarter results as the unfavorable weather conditions adversely impacted the sales of UGG boots. Rise in sheepskin prices, which were up 40% from the 2011 level, and increased operating expenses also hurt the bottom line. Consequently, management lowered its fiscal 2012 outlook.

The first quarter earnings of 20 cents a share missed the Zacks Consensus Estimate of 25 cents, and dropped more than 50% from 49 cents earned in the prior-year quarter.

However, Deckers' total net sales of $246.3 million came almost in line with the Zacks Consensus Estimate, and jumped 20.2% from the prior-year quarter, reflecting strength across the Sanuk brand coupled with healthy demand for the UGG brand's spring collection. However, these were partially offset by sluggishness experienced in UGG boots sales due to unusually warm weather conditions.

Segment Discussion

Domestic sales for the quarter grew 15.1% to $170.6 million, whereas international sales soared 33.5% to $75.7 million. Management remained focused on product introductions, store augmentation, along with geographic expansion.

UGG brand net sales rose 6.5% to $158.1 million, reflecting sales growth across company-operated retail outlets. In Europe, sales were below expectations, as the economic climate was not conducive.

Teva brand net sales slid 1.1% to $49.8 million due to a fall witnessed in international wholesale 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 $32.4 million.

Combined net sales of Deckers' other brands for the quarter were $6 million.

Sales for the retail store business surged 30.6% to $46.2 million, propelled by the opening of 19 new stores. The company plans to have a store base of approximately 200 by the end of fiscal 2015.

Company-wide comparable-store sales remained flat with the prior-year quarter. Domestic comparable-store sales jumped in the high single digits, whereas comparable sales declined in Asia and U.K., on account of unusual weather conditions and an unfavorable macroeconomic environment in the U.K.

Sales for the company's eCommerce business dipped 7.5% to $21.7 million, attributable to lower sales of the UGG brand boot, partly offset by increased sales registered across the UGG brand spring line and Teva brand.

Margin Discussion

Despite a 29.9% increase in cost of goods sold, gross profit rose 10.5% to $113.3 million from the prior-year quarter. However, gross profit margin contracted 400 basis points to 46% in the quarter due to higher product costs and rise in closeout sales.

Operating income during the quarter fell more than 50% to $11.9 million, whereas operating margin shriveled 900 basis points to 4.8% on account of lower gross margin and higher SG&A expenses.

Other Financial Aspects

Deckers portrayed a debt-free balance sheet with cash and cash equivalents of $228.6 million and shareholders' equity of $827.5 million, excluding a non-controlling interest of $5.6 million at the end of the first quarter.

Cash and cash equivalents fell significantly from a balance of $437.9 million as of March 31, 2011, on account of cash payment of $153.5 million related to the acquisition of Sanuk brand, $39.9 million related to share buyback and $21.6 million related to the new headquarters facility. Inventories surged 94.6% to $208.5 million.

Management now expects fiscal 2012 capital expenditures to be approximately $80 million, down from $90 million forecast earlier.

During the quarter, the company bought back approximately 274,000 shares, aggregating $20 million. As of March 31, 2012, the company still had $80 million at its disposal under its $100 million share repurchase authorization announced in February 2012.

Strolling Through Guidance

Management lowered the fiscal 2012 guidance following the company's disappointed first quarter results with dismal international wholesale forecast.

Management now projects total revenue growth of 14% for fiscal 2012. Deckers anticipates its UGG brand sales to rise approximately 10% and Teva brand sales to increase in the low to mid single-digit range, whereas other brand sales are expected to decline by approximately 15%. The company continues to anticipate sales to be approximately $90 million from the Sanuk brand.

Earlier, the company had forecast a total revenue growth of 15% for fiscal 2012 on the back of 11% growth in UGG brand and 10% increase in Teva brand sales. Management had predicted sales to remain flat at other brand.

Management now projects fiscal 2012 earnings to 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 levels, partly offset by calculative price rises and higher contribution from retail sales and the Sanuk brand. SG&A expense as a percentage of sales is expected to be roughly 30%.

Earlier, the company had projected fiscal 2012 earnings to remain flat with the prior year. Management also predicted a gross profit margin contraction of 200 basis points, and SG&A expense as a percentage of sales of about 29%.

Management forecast an 8% growth in total revenue for the second quarter of 2012 but anticipates a loss per share of 60 cents. Gross margin is expected to be about 43%, whereas SG&A expense as a percentage of sales is anticipated to be around 63% due to increased fixed overhead for new retail outlets.

Currently, we have a long-term Neutral recommendation on the stock. However, Deckers, which competes with Nike Inc. (NKE), Wolverine World Wide Inc. (WWW) and Timberland Co. (TBL), holds a Zacks #3 Rank that translates into a short-term Hold rating.




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