Deckers Brands Q3 Falls Well Short Of Guidance

Deckers Brands’ earnings in its third quarter fell short of guidance, impacted by a charge of $118 million for write-downs at Sanuk, as well as other restructuring charges and a slow start to the holiday season.

“While the slow start to the holiday season limited our reorder opportunities and led to a shortfall in third quarter sales and earnings, sell-through of the Ugg brand accelerated sharply late in the quarter. Our December performance helped drive a positive 4.7 percent Direct-to-Consumer (DTC) comparable sales increase and also ensured that our wholesale partners ended the calendar year with cleaner inventory levels compared with a year ago. While we are disappointed that our overall results fell short of projections, we are confident that our product, pricing and distribution strategies will benefit the long-term health of the Ugg brand,” said Dave Powers, president and CEO.

“With the accelerated change that we are seeing in the marketplace, we plan to further transform our operating structure in order to grow profitably and become more nimble. On top of approximately $60 million in previously announced SG&A and gross margin improvements, we have identified approximately $90 million of additional savings that we plan to implement over the course of the next two fiscal years, which we anticipate will ultimately more than offset future investments aimed at growing the business. These new initiatives will better position the company to succeed in a more competitive and faster paced environment, drive improved profitability, and deliver greater shareholder value,” said Powers.

Third-quarter results included charges of $128.9 million related to the write-down of Sanuk brand goodwill and intangible assets, retail impairments and other restructuring related charges. The Sanuk brand impairment charge was $118 million, retail-related charges were $9 million and other restructuring charges totaled $1.9 million. While Sanuk continues to be an important brand in the casual canvas and sandal categories, current expectations for future international and domestic expansion are more limited than initial estimates.

Third Quarter Fiscal 2017 Financial Review

• Net sales decreased (4.5) percent to $760.3 million compared to $795.9 million for the same period last year. On a constant currency basis, net sales decreased (3.7) percent.
• Gross margin was 50.5 percent compared to 49.1 percent for the same period last year.
• SG&A expenses as a percentage of sales were 43.5 percent compared to 23.7 percent for the same period last year. Non-GAAP SG&A expenses as a percentage of sales were 26.5 percent.
• Operating income was $53.3 million compared to $202.5 million for the same period last year. Non-GAAP operating income was $182.2 million.
• Diluted earnings per share were $1.27 compared to $4.78 for the same period last year. Non-GAAP diluted earnings per share was $4.11.

In the quarter, the company recorded impairment charges related to the Sanuk brand, retail restructuring and other charges of $128.9 million.

Previously, it expected third-quarter fiscal 2017 net sales to be in the range of down approximately (2) percent to flat versus the same period last year. The company expected diluted earnings per share in the range of $4.16 to $4.28 compared to $4.78 for the same period last year.

Brand Summary

• Ugg brand net sales for the third quarter decreased (5.3) percent to $704 million compared to $743.2 million for the same period last year. On a constant currency basis, sales decreased (4.4) percent. The year-over-year decrease was driven by lower domestic wholesale sales, primarily due to a slower-than-expected start to the quarter, partially offset by stronger-than-expected DTC comparable sales.
• Teva brand net sales for the third quarter increased 3.9 percent to $14.6 million compared to $14.1 million for the same period last year. On a constant currency basis, sales increased 2 percent. The increase in sales was driven by an increase in global DTC sales.
• Sanuk brand net sales for the third quarter decreased (18.4) percent to $13.9 million compared to $17 million for the same period last year on both a reported and constant currency basis. The decrease in sales was driven by a decrease in global wholesale and distributor sales.
• Combined net sales for the third quarter of the company’s other brands increased 28.6 percent to $27.8 million compared to $21.6 million for the same period last year. On a constant currency basis, sales increased 27.9 percent. The increase was primarily attributable to increased Hoka One One sales and Koolaburra by Ugg sales. Hoka One One brand net sales, which are included as part of the company’s other brand sales, increased 18.3 percent compared to the same period last year.

Channel Summary (Included In The Brand Sales Numbers Above)

• Wholesale and distributor net sales for the third quarter decreased (12.6) percent to $388.6 million compared to $444.6 million for the same period last year. On a constant currency basis, sales decreased (12.5) percent.
• DTC net sales for the third quarter increased 5.8 percent to $371.7 million compared to $351.3 million for the same period last year. On a constant currency basis, sales increased 7.4 percent. DTC comparable sales for the third quarter increased 4.7 percent over the same period last year.

Geographic Summary (Included In The Brand And Channel Sales Numbers Above)

• Domestic net sales for the third quarter decreased (9.9) percent to $489.5 million compared to $543.3 million for the same period last year.
• International net sales for the third quarter increased 7.2 percent to $270.8 million compared to $252.6 million for the same period last year. On a constant currency basis, sales increased 11.7 percent.

Balance Sheet
At December 31, 2016, cash and cash equivalents were $296.4 million compared to $263 million at December 31, 2015. The company had $62.4 million in outstanding borrowings at December 31, 2016 compared to $56.3 million at December 31, 2015.

Companywide inventories at December 31, 2016 increased 0.8 percent to $373.5 million from $370.6 million at December 31, 2015. By brand, Ugg inventory decreased (0.1) percent to $287.2 million at December 31, 2016, Teva inventory increased 7.1 percent to $31.1 million at December 31, 2016, Sanuk inventory decreased (3.9) percent to $22.3 million at December 31, 2016 and the other brands inventory increased 6.1 percent to $32.9 million at December 31, 2016.

Full Year Fiscal 2017 Outlook For The 12 Month Period Ending March 31, 2017

• The company now expects fiscal year 2017 net sales to be down approximately (5) percent.
• Gross margin for fiscal 2017 is expected to be approximately 47 percent.
• SG&A expenses as a percentage of sales are expected to be approximately 38 percent on a non-GAAP basis.
• The company expects fiscal 2017 non-GAAP diluted earnings per share to be in the range of $3.45 to $3.55. This excludes any pretax charges that may occur from any further restructuring charges.
• The effective tax rate is expected to be approximately 27 percent on a non-GAAP basis.
• The company expects total impairment, restructuring and other charges for fiscal year 2017 to be approximately $150 million.

Fourth Quarter Fiscal 2017 Outlook For The Three Month Period Ending March 31, 2017

• The company expects fourth-quarter fiscal year 2017 net sales to be in the range of down approximately (6) percent to (5) percent versus the same period last year.
• The company expects non-GAAP diluted earnings per share to be in the range of a loss of (10 cents) to break even compared to non-GAAP diluted earnings per share of 11 cents for the same period last year. This excludes any pretax charges that may occur from any further restructuring charges.
• The company expects restructuring charges for fourth quarter fiscal year 2017 to be approximately $20 million.

Photo courtesy Hoka One One