Deckers’ acquisition of the Teva brand looks like it will provide even more upside than first thought, with opportunities now apparent in the Simple line as well as the expected upside in the Teva range. The company is also pointing to the expansion of a real year-round business as sandals get more back half play, Teva expands into more closed-toe product and Ugg starts to tap opportunities outside California.

DECK will ride these new opportunities – and some upside due to debt reconstruction and other activities — to improved sales and EPS results for fourth quarter, full year 2003 and fiscal 2004.

The company now sees full year 2003 diluted EPS in the 62 cents to 64 cents range on sales between $113 million and $115 million, a 14% to 16 % increase, respectively. Teva sales are expected to increase 13.7% to 15.2% to finish in the $74 – $75 million range, Ugg should gain 30% to 34% for the year to $31 million to $32 million, while Simple will decline again for the year, down approximately 21.5% to around $8 million.

For fiscal 2004, Deckers expects diluted EPS in the 92 cents to 96 cents range on sales of $126 million to $132 million. Teva is estimated to reach as high as $84 million, Ugg is seen in the $35 to $37 million range and Simple may surpass 2002 numbers if it hits the higher end of the estimated $9 to $11 million range.

Third quarter sales increased 40.4% to $24.9 million, with the U.S. business jumping 44.7% to $22.0 million and International sales gaining 16% to $2.9 million. Teva sales were up 59% for the quarter, and more than doubled from the 2001 third quarter.

Doug Otto, chairman & CEO of Deckers, said that the back half of the year is “becoming a more meaningful contributor to our yearly results. Ugg continues to grow and is becoming a major portion” of both the Q3 and Q4 business. Otto pointed to Teva’s fall closed-toe business and the move by more retailers to carry sandals “year-round”.

The shift has seen the company increase inventories in the quarter, bringing goods in earlier this year. The company expects Teva’s year-end inventory to be up, Ugg’s to be “flat to down” and Simple’s inventory to be lower. The shift has also impacted margins and Average Selling Price a bit, with Ugg and the closed-toe product providing narrower margins, while stronger Teva sales in the quarter impacted Average Selling Price. Otto also said they are getting better pricing for Teva closeout product.

Deckers intends to make a more concerted effort in the traditional second half footwear silhouettes such as light weight hikers, trail runners and other products in the rugged outdoor category, a market Otto said is “six times the size of the sport sandal market”.

DECK is now also able to extend the Sandal silhouette into its struggling Simple brand, with lower tier distribution targeted to pump up sales while not cannibalizing any of the current Teva base. Simple will also be used in sheepskin SMU programs for next fall for those channels that can’t buy Ugg.

The company also sees broader international appeal for Ugg, primarily in Europe and Canada.

Investors should see some dilution relief soon as DECK moves in Q4 to repurchase $5.5 million of preferred stock previously issued to Teva brand owner Mark Thatcher. The purchase will keep the preferred shares, which will be purchased at a $425,000 premium to their original price, from converting into common shares. The deal will eliminate about 13% of the calculated dilutive effect of the shares going forward.

The company is also cleaning up some short-term debt in Q4, making a $2 million early repayment of a portion of its outstanding subordinated debt due in 2008. The expected $100,000 pre-payment penalty is a nice trade-off to the $200,000 to $250,000 in anticipated annual interest costs over the next five years.

Deck will borrow from its line of credit and increase its senior term debt by $3.5 million to pay for the two initiatives. The transactions will impact Q4 2003 EPS by about 4 cents, but will be 12 cents positive in 2004 and each subsequent year.


KEY METRICS:

  • ASP in Q3 was $30.42 vs. $31.46
  • Shipped 756k pairs in Q3 vs. 563k LY Q3
  • Sold 26k pairs through Internet at $59.63 ASP


>>> These guys sound like the weight of the world has been lifted from their shoulders…