While its outlook disappointed Wall Street, Deckers Outdoor Corp. delivered a robust fourth-quarter, with earnings ahead 43.7 percent on higher gross margins and double-digit top-line growth. Among its larger brands, sales grew 18.1 percent at Ugg, 45.2 percent at Sanuk, and 13.6 percent at Teva.
On a conference call with analysts, Angel Martinez, president and CEO, said the quarter and year’s bounceback performance was due to the “enduring strength of our Ugg brand,” strategic marketing and infrastructure investments, and its successful direct-to-consumer business. For the year, almost two-thirds of Deckers’ operating income was generated by its DTC at an operating margin rate of 27 percent.
Like others, Martinez said the company benefited from improved selling conditions given the cold weather compared to a year ago.
Asked about the weather, Martinez said ”the changeability of weather seems to now be a constant.” As such, it’s become even more essential to not only diversify product offerings and offer unique innovation but also to merchandise on a regional basis. While North America had a cold winter, Europe was seasonably warm for the most part.
“We've never been a cold weather brand,” said Martinez. “But we don't need really cold weather. We need cool weather. And so it just seems that we've learned so much about how to build around that idea and offer up the products that balance out the vagaries of weather for us.”
Unfortunately, the weather was to blame for the disappointing first-quarter forecast. First quarter revenues are expected to rise approximate 6 percent, well below the 19 percent Q4 gain and Wall Street’s expectation of a 12 percent increase. The company expects a loss of 16 cents a share in the period while Wall Street on average was expecting a profit of 9 cents.
Tom George, Deckers’ CFO, remarked that the first quarter is generally a slower quarter versus the fourth but also said last year’s late arrival of winter led to a “pretty robust January last year.” The longer winter this year also made Deckers is “a little bit more cautious” around reorders for sandals this year.
With backlogs up 24 percent as of Dec. 31, Deckers expects full calendar year revenues to increase approximately 10 percent over 2013 levels with EPS ahead 8 percent. Wall Street had been projecting a 12-percent EPS percent increase for 2014 on roughly 8.7 percent top line growth.
In the fourth quarter, earnings reached $140.0 million, or $4.04 a share, easily above Wall Street’s consensus estimate of $3.78. Revenues rose 19.2 percent to $736.0 million.
For the year, earnings advanced 11.6 percent to $144.4 million, or $4.18 a share. Sales improved 10.1 percent to $1.56 billion.
At Ugg, net sales for the fourth quarter increased 18.1 percent to $690.9 million, driven by sales gains across all primary channels, including the sales contribution from new retail store openings and an increase in same store sales, an increase in global e-commerce sales, and higher domestic and international wholesale sales. For the full year, Ugg’s sales increased 9.7 percent to $1.3 billion.
Martinez said Ugg benefited in the year from the ongoing development from the ongoing development of more compelling spring and non-seasonal footwear. Its core Classics line represented just one-third of the brand’s business in 2013 compared to approximately half five years ago.
The lower-priced Ugg Pure line, using of a lower cost sheepskin substitute, was also successfully launched and helped the brand extend the Ugg into new categories.
Ugg’s U.S. business “showed resiliency in the fourth quarter, driven by a more diverse and accessible product offering, enhanced marketing efforts, and improved selling conditions compared with a year ago,” said Martinez.
Sell-throughs of Classics were better-than-expected in the U.S., with specialty classics such as the Josette and the Bailey Bow, and the knits standing out. Slippers were “very strong” throughout 2013 while its cold-weather collection in the U.S. was up “up meaningfully,” led by the Adirondack and the Butte collections.
Casual and fashion boots also sold well during the holidays, led by the Boulevard and Coastal collections. Its loungewear collection is gaining traction at Nordstrom, at Neiman Marcus and Dillard's. Ugg’s DTC comp in the U.S. grew 14 percent, including a 1 percent same-store sales increase.
In Europe, Ugg was “up meaningfully” in each of the brand’s three direct markets – the UK, Benelux, and France, but also showed gains across all regions. Martinez said his European team continually heard that Ugg was one of the “standout exceptions” to an overall soft holiday season across Europe, much like the U.S. DTC comparable sales in Europe were up 21 percent, with comparable store sales up 2 percent.
In the Asia-Pacific region, Ugg’s strong sales were led by a 6 percent retail comp gain in China and a 49 percent DTC gain in Japan, including a 27 percent retail comp gain.
For fall 2014, I Heart Ugg, a premium sub-brand developed specifically for the 9- to 12-year-old tween customer, is being launched. Ugg is also offering an expanded selection of new specialty classics and casual boots at sharper price points, and is overall seeing a good retailer response to fall offerings. Said Martinez, “The pre-book process is going well, driven by the strength of the product line and the accelerated sell through of our customer's experience this past season.”
At Teva, sales in the quarter increased 13.6 percent to $15.5 million, driven primarily by higher domestic and international wholesale sales and higher international distributor sales. For the year, Teva’s sales inched ahead 0.8 percent to $116.4 million.
Martinez said Teva in 2014 benefited from a “renewed focus” on the sandal brand’s heritage with a new Original sandals line helping the brand extend to family footwear, specialty and department stores. Nordstrom and Dillard's both went all doors with Teva this spring while DSW, Famous Footwear, and Journeys are also now carrying the brand.
Its core accounts headlined by REI “have embraced the return to our roots and increased the brand's shelf space.” Teva was featured in Vogue as one of the brands to watch in 2014. The brand also will collaborate with Glamour on an exclusive sandal to be carried at Nordstrom, and was just named official sandal sponsor for the Bonnaroo Music and Arts Festival in Atlanta.
“We're excited about this refocused effort and broader distribution strategy, as well as the renewed energy that is coming from the Teva team,” said Martinez. “And we're looking forward to capitalizing on the spring fever that's bound to come following this long and difficult winter.”
Sanuk’s sales jumped 45.2 percent in the quarter to $22.2 million, primarily attributable to an increase in international distributor sales as well as higher domestic wholesale sales. Sales for the year grew 8.2 percent to $101.7 million.
Martinez said Sanuk saw a “great response” to its spring collection across sandals and casual canvas styles, and he expects to color-and-trend right offerings will resonate with “more style-conscious consumers who are in the early stages of discovering the Sanuk brand.”
Sanuk’s men's casual canvas has particularly been “very strong,” leading to increased shelf space with existing accounts, as well as new distribution in the action sports lifestyle channel. In women's, its yoga series “continues to be the standout,” led by the Yoga Joy and Yoga Sling.
To support growth, Sanuk just hired Ethan Anderson, formerly from Volcom, to lead marketing.
Said Martinez, “Overall we feel very good about the direction of Sanuk and the smart steps our design, marketing and merchandising teams are taking to carefully leverage the strength of the brand to expand distribution and build exposure to new consumer segments, while continuing to appeal to its core audience.”
Combined sales of the company's Other Brands segment Hoka One One, Ahnu, and Tsubo catapulted 110.1 percent to $7.4 million. The gains were supported by the acquisition of Hoka and a 100.0 percent increase in sales for Ahnu. Full-year revenues jumped 85.8 percent to $39.7 million.
Martinez noted that Hoka is “positioned to shake up the specialty running category.” Its latest shoe, The Conquest, with a new midsole material and much improved styling, won numerous industry awards and is “currently one of the hottest selling shoes in the specialty running category.” Two lightweight trainers, the Clifton and the Huaka, and an extended range of price points are also expected to support growth . Said Martinez, “These moves are allowing us to open up new distribution within running specialty and select outdoor specialty stores, as well as leading to excellence sell-through on Hoka’s recently launched e-commerce site.”
Sales for Deckers’ global retail store business, which are included in the brand sales numbers, advanced 31.4 percent to $178.0 million, driven by 40 new stores opened after the fourth quarter of 2012 and by a same store sales increase of 6.1 percent. For the full year, retail sales increased 32.8 percent to $326.7 million.
Global e-commerce business jumped 33.9 percent to $117.3 million, driven primarily by strong domestic and international sales for the Ugg brand, increased domestic sales of the Sanuk brand, plus the addition of new international e-commerce websites. For the full year, e-commerce sales climbed 29.8 percent to $169.5 million.
Regarding its 2014 outlook, sales are expected to increase approximately 9 percent for Ugg, 5 percent for Teva, and 10 percent for Sanuk. Other Brand revenues are expected to reach $65 million, up from $39.7 million.
The earnings guidance assumes a gross profit margin of approximately 49 percent, representing gross margin expansion of approximately 200 basis point due to lower input costs and an increased contribution from its DTC businesses.
SG&A as a percent of sales is forecasted to be approximately 36 percent in 2014, up from 34.0 percent in 2013. Its marketing spend is expected to grow to 6 percent from a little over 5 percent in 2013, with a significant portion of the marketing increase to go towards Ugg. It will also incur non-recurring costs tied to recently announced management reorganization that led to the creation of two newly-created position, a president of omni-channel and president of brands; as well as investments for international expansion and supply chain.
Deckers also announced that it planned a change in its fiscal year end to Mar. 31 from Dec. 31 to reflect the seasonality of the business and the timing of the fall pre-book process.
