Deckers Sees All Three Brands Contribute in 2006 Fourth Quarter…

With just over one year as CEO of Deckers, Angel Martinez has managed to turn the company from a holding company with only true one growth brand (UGG) into a multi-brand platform that is driving double-digit growth in all segments. At the same time, the company has managed to build a $100 million war-chest for investments in owned-retail expansion and/or acquisitions. Deckers is also actively balancing the seasonality of both UGG and Teva while Simple is quickly becoming a top brand in sustainable footwear.

For the fourth quarter of 2006, Deckers’ net sales increased 36.7% to $124.4 million from $91.0 million in Q4 last year. Consumer Direct sales for all three brands were $19.5 million in Q4, up 28.4% from $15.2 million in the year-ago period. U.S. sales increased 35.9% to $114.7 million for the quarter, compared to $84.4 million in 2005. International sales for all three brands increased 47.3% to $9.7 million, compared to $6.6 million in the fourth quarter of last year. Following the restructuring of Deckers’ International sales structure, the company ended the year selling in 30 countries around the world with 34 distributors. Management anticipates improved results in several markets in 2007 as the new distributors get up to speed.

Teva sales increased 15.5% to $13.0 million in the fourth quarter, compared to $11.3 million in the corresponding period of 2005. Sales were driven by “solid” sell-through of the brand’s limited introduction of Fall ‘06 styles, as well as pull-forward sales of some Spring ‘07 product due to the warm start to winter. There was an increase in Teva inventories of 35.3% to $15.3 million at year-end, due to the early deliveries of Spring styles.

Deckers began 2006 with a strategy to transform Teva from a sandal brand into an outdoor performance-oriented brand across all seasons. This plan started with upgrading Teva’s advertising and marketing plan, primarily with significant investments in re-merchandising more than 150 retail accounts, totaling more than 700 doors, including REI, The Sports Authority, Nordstrom and EMS. The second component to this plan was increasing the R&D budget to develop a complete line of closed-toe, non-weather-dependent footwear. While some of this effort is reflected in Q4, the majority will be seen in Spring ‘07. Pre-season orders were up approximately 15% compared with a year ago.

UGG net sales increased 40.1%, to $109.9 million from $78.5 million in Q4 last year. Management said that the top-line growth was driven by “strong full-price selling of our entire UGG product line, coupled with a meaningful reorder business.” Deckers’ increased UGG’s marking and advertising spend in 2006. In all, UGG ran approximately 47 print ad pages, more than double the amount of the previous year.

Internationally, UGG saw higher demand in the U.K. and Canada during the holiday season, which led to a shortage of product at retail. This spilled over and created a similar situation in the U.S. Domestically, the brand continues to grow outside of California, particularly in the Northeast, Midwest, Southeast, and Northwest, which when combined now account for approximately 65% of sales, versus just 17% six years ago. UGG inventories were down 21.6% to $13.9 million.

Simple brand net sales increased 18.8%, to $1.5 million for the quarter, versus $1.2 million in the same period last year. For the full year, Simple recorded its largest sales volume in the past six years. The expanded Green Toe category was one of the main drivers. Initial distribution of the line at Whole Foods Market opened up the health and wellness retail channel for the brand.

Deckers has now increased the SKU count and added more traditional footwear retailers such as, Nordstrom, Dillards, EMS and Journeys. Simple inventory decreased to $3.2 million compared to $4.4 million at year-end 2005.

Overall gross margin in Q4 increased 790 basis points to 48.5% compared to 40.6% last year. This increase was due to better than average costs of sheep skin, labor in China and fewer close-outs. Management expects margins to return to more normal levels next year. SG&A expenses for the quarter were 18.7% of net sales, compared to 19.5% of net sales a year ago. This combination brought net earnings to $23.5 million, or $1.82 per diluted share, compared to $12.1 million, or 94 cents per diluted share last year.

Looking ahead, for the first quarter of 2007, Deckers expects revenue and diluted earnings per share to both increase approximately 15% over the first quarter of 2006. Fiscal year 2007 diluted earnings per share growth should be roughly 5% to $3.46 per share before the impairment charge. This estimate is based on the company realizing a more normalized gross margin, of approximately 44%, versus the 46.4% posted in 2006, and SG&A as a percentage of sales in the mid-20% range. UGG and Teva sales should grow in the mid-teens with Simple expecting to report growth of approximately 30% for the full fiscal year.