Deckers Beats, Lifts Outlook - Analyst Blog

Deckers Outdoor Corporation (DECK), the maker of a variety of footwear, recently delivered better-than-expected third-quarter 2010 results on the heels of strong demand for the product lines under the UGG and Teva brands, prompting management to lift its fiscal 2010 outlook.

The quarterly earnings of $1.07 per share outdid the Zacks Consensus Estimate of 93 cents, and rose 24.4% from 86 cents earned in the prior-year quarter.

Behind the Headline

Deckers said that total net sales jumped to $277.9 million, up 21.7% from the prior-year quarter, comfortably surpassing the Zacks Consensus Revenue Estimate of $266 million. The company's sustained focus on new product introductions and geographic expansion have helped achieved robust growth.

Domestic sales for the quarter rose 14.3% to $204.7 million, whereas international sales soared 48.2% to $73.2 million. International sales now represent 26.3% of total sales up from 21.6% 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 20.2% to $255.8 million and Teva brand net sales surged 51.7% to $13.7 million. Combined net sales of Deckers' other brands for the quarter soared 26.5% to $8.4 million.

Sales for the retail store business surged 63.3% to $20.2 million, propelled by the rise in same-store sales by 17.9%, and the opening of 8 new stores since the prior-year quarter. The company increased its domestic in-store shops to about 100. In China, the company opened 3 new UGG retail stores. Sales for the company's eCommerce business climbed 3.8% to $8.7 million.

Despite a 12.6% increase in cost of goods sold, gross profit jumped 33.7% to $131 million during the quarter, whereas gross profit margin expanded 420 basis points to 47.1%, reflecting better sales mix, direct distribution for the Teva brand in the Benelux region, refunds of duty, and margin improvement across all brands.

Management now expects the rise in manufacturing and materials costs to touch the high-end of the previously provided guidance range of 5% to 10% in fiscal 2011 due to increase in commodity prices, which may dent gross margin.

However, following the expiration of existing distribution agreements, the company with effect from January 2011, will manage the distribution of UGG, Teva and Simple brands in the U.K. and the UGG and Simple brands in the Benelux region and France. This will help capture incremental sales and margins by selling directly to wholesale customers.

Financial Aspects

Deckers also portrays a healthy balance sheet with a significant cash and cash equivalents balance of $250.5 million and shareholders' equity of $562.3 million without any debt at the end of the quarter, which provides it with ample liquidity to capitalize on future growth opportunities.

During the quarter, Deckers bought back approximately 170,000 shares aggregating $7.4 million. As of September 30, 2010, the company had approximately $20 million at its disposal under its $50 million share repurchase authorization announced in June 2009.

Guidance

Riding on the back of robust results, Deckers raised its fiscal 2010 outlook. Management now expects total revenues to increase by 16% compared to 14% predicted earlier. Earnings per share are expected to rise by 22% versus 16% previously forecasted, on a gross profit margin of 49% and SG&A of 25% based on sales. Management expects capital expenditure of approximately $25 million for fiscal 2010.

For fourth-quarter 2010, Deckers reaffirmed its outlook, forecasting an 8% growth in both revenue and earnings per share, on a gross profit margin of 52% and SG&A of 21% based on sales.

We believe that given stronger-than-expected results and increased fiscal 2010 guidance, a positive sentiment may be palpable among the analysts covering the stock, and we could witness a rise in the Zacks Consensus Estimates in the coming days. However, what may surprise the analysts is that Deckers has kept its fourth-quarter outlook unchanged.

Currently, we have a Neutral rating on the stock. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold' rating, correlates with our long-term recommendation.

Competitor Position

Skechers USA Inc. (SKX), another designer, marketer and distributor of footwear, recently delivered third-quarter 2010 results. The quarterly earnings of 74 cents a share jumped 42.3% from 52 cents delivered in the prior-year quarter but missed the Zacks Consensus Estimate of $1.00.

Skechers said that total net sales for the quarter soared 36.8% year-over-year to $554.6 million but fell short of the Zacks Consensus Revenue Estimate of $566 million. Skechers, which holds a 55% market share of the toning shoe category in the U.S., indicated that it has witnessed order cancellations.

We believe that given lower-than-expected results and order cancellations, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimates in the coming days. Currently, we have a Neutral rating on the stock. However, Skechers holds a Zacks #5 Rank, which translates into a short-term Strong Sell recommendation.

 
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