Deckers Sees Q3 Upside from Strong UGG Sell-Through; Raises Guidance…

Deckers Outdoor Corporation may not have seen a double-digit increase in its share price last week — it increased 9.2% for the week to close at $53.87 — but almost every other metric exceeded expectations and pushed up growth prospects even higher for the balance of the year. Overall corporate revenues increased 19% for the quarter to $69.2 million, exceeding previous guidance of sales in the $71 million to $74 million range by a double-digit margin. Diluted EPS came in at 83 cents per share, more than 50% ahead of their projections that were in the range of 51 cents to 54 cents per share.

The company pointed to increased sell-through of UGG product as a primary driver to sales and margin growth, and highlighted better inventory controls and cost-containment programs in sourcing, labor, and materials that helped improve gross margins and limit close-out sales during the period.

The strong double-digit decrease in inventories was due in large part to the UGG sell-through as well. Company President and CEO Angel Martinez pointed to Q3 last year when retailers were canceling orders and then chasing product in the fourth quarter. This year, the UGG product moved off the floor early in the quarter and retailers have started chasing product already, a situation that may very well lead to sold-out positions on key product in the current quarter. UGG inventories were down 30.7% to $38.9 million at quarter-end, while Teva inventories increased 15.1% t $8.7 million and Simple inventories expanded by 30% to $3.9 million at the end of the period.

The small increase in Teva sales for the third quarter, which historically is the brand’s smallest quarter, was said to be driven by a “positive reaction to a limited introduction of closed-toe footwear combined with solid sales of the traditional sandal offering.” The UGG gain was “fueled by robust consumer demand for the new Fall styles, including fashion boots, casuals, men's and kids, coupled with a strong reorder business for core styles,” according to the company, and Simple's core sandal and sneaker product lines were called out as the biggest reasons why the brand more than doubled sales in the period. Martinez also highlighted the success of its sustainability story with Simple’s Green Toe collection, which saw “strong retail sell-through across all channels of distribution and in all geographic regions.”

Total company domestic sales increased about 22% to $73.3 million, compared to $60.1 million in the year-ago period, while total international revenues declined 1.7% to $9.0 million. Mr. Martinez said the international decline is due in part to the reorganization of its distributor network, but they are starting to see some solid results coming out of the U.K., where UGG sales have begun to outpace supply, and in Italy, where the brand is now starting to be featured in the windows of key boutiques.

Included in the numbers for all the brands is continued strength in the Consumer Direct business, which increased 72.8% to $5.8 million in Q3, compared to $3.4 million for the year-ago period. The quarter includes contribution from two new retail outlet stores which were not in operation in Q3 last year.

Operating margins improved 90 basis points for the quarter to 21.0% of sales, with the sharp increase in gross margins offset a bit by higher SG&A expenses. The increase in SG&A was attributed to planned growth of the marketing and advertising budgets as well as increase R&D expenses.

Net income profited from a half million dollar gain in interest income.

DECK now expects full year sales and earnings to exceed previous guidance as well, due primarily to the strength of Q3, but is also raising fourth quarter guidance.

For Q4, the company now sees diluted EPS in the range of $1.27 to $1.30 per share on revenues between $107 million and $110 million, compared to previous guidance of diluted EPS in the $1.23 to $1.26 range on sales in the range of $103 million to $106 million.

Full year earnings as now forecast to reach a range of $2.75 to $2.78 per diluted share on revenues between $287 million and $290 million, compared to previous guidance of diluted EPS in the $2.39 to $2.45 per share range on sales in the range of $272 million to $278 million.

Full year UGG sales are expected to be up in low double-digits and Simple sales are forecast to increase in the high double-digits for the year. Teva sales are expected to be “slightly down.”

Mr. Martinez reiterated the company’s goal of reaching $600 million in sales in four to six years, which would entail doubling the UGG and Teva businesses and developing Simple into a $75 million brand.

>>> Based on the product SEW saw on the wall during the last visit to Goleta, and feedback from retailers, Teva is well on its way to shedding its sandals-only pigeon-holed positioning…