Deckers Outdoor Corporation (DECK), the maker of sheepskin boots and slippers, recently delivered better-than-expected fourth-quarter 2010 results on the heels of strong demand for the product lines under the UGG and Teva brands.
The quarterly earnings of $2.27 per share outstripped the Zacks Consensus Estimate of $1.99, and rose 30.5% from $1.74 earned in the prior-year quarter.
The Zacks Consensus Estimate rose by 2 cents prior to the earnings release with 5 out of 13 analysts covering the stock having revised their estimates upwards and one analyst lowering the projection in the last 30 days.
Let’s Dig Deep
Deckers said that total net sales jumped to $430.1 million, up 23.6% from the prior-year quarter, comfortably surpassing the Zacks Consensus Estimate of $393 million. The company’s sustained focus on new product introductions and geographic expansion have helped achieved robust growth.
Domestic sales for the quarter rose 22.2% to $377.1 million, whereas international sales soared 34.6% to $53 million. International sales now represent 12.3% of total sales up from 11.3% in the year-ago quarter.
The international markets provide a significant growth opportunity, and we remain optimistic about the company’s incremental sales and earnings potential. Internationally, the company distributes its products throughout Europe, Asia Pacific, Canada and Latin America.
UGG brand net sales grew 23.8% to $412.8 million and Teva brand net sales surged 26.2% to $13.3 million. Combined net sales of Deckers’ other brands for the quarter dropped 2.3% to $4.1 million.
Sales for the retail store business surged 55.4% to $72.4 million, propelled by same-store sales growth of 11.6%, and the opening of 9 new stores. Deckers now plans to open 15 new full-priced stores in fiscal 2011 with the majority to be opened in China and the remaining in Japan, Europe, Canada, and the U.S.
Sales for the company’s eCommerce business climbed 29.8% to $59.5 million, reflecting a rise in demand for the fall line of the UGG brand.
Despite a 12.7% increase in cost of goods sold, gross profit jumped 34.5% to $233.3 million during the quarter, whereas gross profit margin expanded 440 basis points to 54.2%, reflecting a rise in sales from retail and e-commerce businesses, carrying increased gross margins and higher UGG wholesale margins.
Growth Stories
Deckers’ long-term target is to achieve $2 billion in sales by 2015, including UGG sales of $1.65 billion, Teva sales of $200 million and sales from other brands of $150 million. Management hinted that the company has the potential to operate approximately 150 retail stores by 2015.
With the expiration of existing distribution agreements, Deckers will manage the distribution of UGG, Teva and Simple brands in the U.K. and the UGG and Simple brands in the Benelux region. This will help capture incremental sales of $50 million in 2011 by selling directly to wholesale customers.
Deckers is already operating a wholesale model for the UGG brand in Japan, and is in its third year. In fiscal 2010, the company established a direct subsidiary for the Teva brand in Benelux, and indicated that it will seek similar prospects for the brand in the U.K. and Ireland in 2011.
Other Financial Aspects
Deckers also portrays a healthy debt-free balance sheet with a significant cash and cash equivalents balance of $445.2 million and shareholders’ equity of $653 million, excluding non-controlling interest of $2.7 million. This provides it with ample liquidity to capitalize on future growth opportunities.
During the quarter, Deckers did not buy back any shares. The company still has approximately $20 million at its disposal under its $50 million share repurchase authorization announced in June 2009. Capital expenditures for fiscal 2010 were $23 million.
Walking Through Guidance
Riding on the back of stronger-than-expected results, Deckers remained optimistic about posting robust sales growth, higher margins and attaining cost leverage in the coming years.
Management now forecasts total revenue growth of 20% and earnings per share increase of 10% in fiscal 2011 on a gross profit margin of 51% and SG&A of 29% based on sales. The guidance includes anticipated incremental investments and expenses of $29 million (or 49 cents a share). Excluding this, management expects earnings to rise by 21%.
For fiscal 2011, Deckers has projected a sales increase of approximately 19% for UGG brand, in the low 20s for Teva brand, and about 20% for other brands combined. Management predicts capital expenditures between $55 million and $60 million for the year.
For first-quarter 2011, Deckers projected revenue growth of 29% but expects earnings per share to drop by 5%, on a gross profit margin of 51% and SG&A of 38% based on sales. The guidance includes anticipated investments and expenses of $11 million (or 19 cents a share). Excluding this, management expects earnings to rise by 36%.
Currently, we have a long-term Outperform rating on the stock. Moreover, Deckers, which competes with Nike Inc. (NKE) and Timberland Co. (TBL), holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation, and correlates with our long-term view.
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