Deckers Outdoor Corp. saw its top-line and bottom-line get a lift from higher demand for the UGG brand as boot sales jumped throughout the market on an early arrival of winter temperatures and a fashion trend to boots this fall. Third quarter sales increased 15.8% to $228.4 million, slightly ahead of management’s previous guidance.
Domestic sales for all brands increased 10.3% to $179.0 million compared to $162.3 million in Q3 last year, and international sales increased 41.1% to $49.4 million compared to $35.0 million in 2008. Global owned-retail sales for all brands were up 128.3% to $12.3 million from $5.4 million in Q3 last year, driven by two new stores and a 31.1% same-store sales increase. The e-commerce business decreased 21.2% to $8.4 million, compared to $10.6 million in the year-ago period. The decrease in e-commerce sales resulted from higher amounts of UGG year-ago Q2 back orders carried into the third quarter last year, as well as a decline in conversion rates for all brands.
UGG third quarter net sales increased 19.1% to $212.8 million. The UGG brand's fall retail sales were led by the new Bailey Button boot and strong sell-through in the core classic product. Management said that the movement of the calendar in the fall, along with cooler weather, has motivated the consumer and the most “explosive business” is in the mid-Atlantic, Tri-State New England areas. The Midwest, Pacific Northwest, and Rocky Mountains are seeing good growth as well while the South is relatively flat this early in the season.
UGG is also seeing solid growth in foreign markets, led by the U.K., Benelux, and Canada. The reaction to a much broader fall assortment has been “very positive,” according to management. UGG's performance overseas was said to be “somewhat reminiscent” to what the brand experienced in the U.S. a few years ago.
Teva sales decreased 19.5% to $9.0 million, a decline management said was due in part to a lack of lower price-point product this year versus last year when the brand first debuted its Fall line. The brand made a number of adjustments to the collection this year and offered a greater number of technical products, including a collection of light hikers which includes what management said was the brand’s most successful closed-toe shoe to date. Management said that sell-through with key accounts like REI and EMS was much better than sell-in.
Simple net sales decreased 31.4% to $3.5 million for the quarter, due to the launch of planet walkers in 2008. The brand also continues to be impacted by the challenging retail environment, and retailers' reluctance to place any significant future orders. Management said retail sell-through has been “very, very positive,” led by ecoSNEAKS at Nordstrom and Journeys. Simple also saw “meaningful increases” in its e-commerce business, and the brand continues to “perform well” on other Internet sites such as Zappos.com.
Combined net sales for the recently Ahnu and Tsubo, brands, which were acquired in 2009 and 2008, respectively, were $3.1 million for the third quarter of 2009. Management said that it continues to be a “challenging sales environment” for the smaller brands.
Ahnu has seen a significant improvement in product quality, namely consistency and fit, since management transitioned their sourcing and manufacturing to the Deckers platform earlier this year. This improvement has led to improved business at key accounts like REI and Eddie Bauer. It has also provided new distribution opportunities, including a 40-door test with Dillard's and the inclusion of a handful of styles in the Harrington Catalog for the holiday season.
Tsubo was described by management as a “brand in transition and we are not where we had hoped to be at this point.” As a result, Deckers made adjustments to the product line and restructured the sales force to “yield positive benefits starting next year.”
Overall gross margin in Q3 was down slightly to 42.9% compared to 43.3% in the third quarter of last year due to lower margins in the Teva, Simple, and Tsubo brands from higher markdowns and closeouts. Total SG&A expenses as a percentage of sales were 19.6%, compared to 21.4% of net sales a year ago. A planned increase in SG&A in absolute dollars resulted primarily from eight new retail stores that were not open in the third quarter of last year. The lower SG&A expense versus management’s guidance was due to $3 million of permanent savings and $2 million of expenses postponed until the fourth quarter for a total of $5 million in additional savings.
Diluted earnings per share for the quarter rose 32% to $2.59 versus $1.97 a year ago, above our guidance. For the third quarter diluted EPS is up approximately 10% over last year. The earnings upside was driven by the higher sales, as well as roughly $5 million less in operating expense, versus previous guidance; roughly $3 million of permanent realized savings and the remaining of $2 million of marketing programs that were postponed until the fourth quarter.
Based upon the UGG brand's third quarter performance, coupled with increased visibility into the fourth quarter, Deckers management increased the company’s full-year revenue outlook to a 13% increase over 2008, up from previous guidance of approximately 9% to 10% growth.
UGG brand sales are expected to increase approximately 17% for the year, up from the previous estimate of 12% to 13% growth. Teva brand sales are expected to decline 11% and Simple brand sales are expected to decrease approximately 19%, down from previous guidance of approximately 5% to 8%. Other brand sales are seen in the $8 million to $10 million range.
Deckers expects non-GAAP diluted earnings per share to increase approximately 9% over the $7.27 non-GAAP diluted earnings per share in 2008. This is up from previous expectations of remain flat to slightly up diluted earnings per share.