At a time when many vendors are complaining a decline in pre-season orders has made projecting income more difficult, Deckers Outdoor Corporation lifted its estimate of revenue growth by 12 percentage points on strong bookings for its UGG brand. Company-wide net sales in the second quarter jumped 72.8% reflecting a triple-digit gain in sales of UGGs Fall 09 product to international distributors. International sales rose 132% while domestic rose 50%, raising the percentage of international sales to the total 950 basis points to 37.3%. A write-down of Teva trademarks, however, caused DECK to report a net loss of $3.8 million after net income of $2.3 million last year. Excluding the write-down, net income would have been $5.2 million.
Gross margin dropped 120 basis points to 39.9%, primarily due to the rising proportion of international sales, which generate a lower gross margin. Excluding the impairment charge, SG&A declined 450 basis points to 31.2% of gross sales.
At UGG, sales exceeded those in the first quarter, as retailers demanded product a month earlier than last year. UGG is offering 140 styles in fall, up from 125 last year, but CEO Angle Martinez said the surge also reflected the belief that UGGs new spring/summer collection is gaining traction.
“There is still much more demand for the product than we are capable of fulfilling,” said Martinez, adding that UGGs slippers, twin-face, metropolitan, surf and Cardy boots were leading the way.
Deckers is predicating its bullish forecast in part on much greater UGG retail presence both domestically and abroad. This fall there will be more than 40 shop-in-shops in the United States, up from none in the second quarter of last year and only 10 in the second half of last year. Another 30 will be open overseas this fall compared to only seven last year. These displays typically carry more than 80 different SKUs and mimic the look and feel of UGG concept stores.
At Teva, a solid fill-in business for key spring styles helped offset lower pre-season orders. Deckers is currently repositioning the brand to target a younger, more active consumer.
“Retailers across the board remain very cautious with future orders, choosing to chase business as it materialized,” Martinez said. “Retailers are pulling in their horns and focusing on those brands that in the last several years have generated the revenue and created the bulk of the sell through.”
Martinez singled out the West Water, Calienta, Fossil Canyon and Omni as most successful new Teva styles and said the company experienced better than expected sell-through during a two-week event at REI. Still, he said slow sales caused Teva inventory to back up and forced DECK to lower its revenue projections for 2012 by 20% to $140 million. This, in turn, required writing down the value of the Teva trademark and recording a non-cash, pre-tax charge.
Sales of Simple nearly doubled on strength of the ecoSNEAKS line across department, specialty, internet and independent channels. The line began selling at 90 REI stores in June. The brand is backed by advertising in such magazines as Lucky, Teen Vogue, Details and Wired and an aggressive on-line campaign emphasizing its position as “the world leader in sustainable footwear and accessories.” The flagship Green Toe line had “solid growth” thanks to the introduction of a new summer silhouette for women and Martinez sees opportunities in the infant and kids market, where “there is a void of sustainable footwear.”
Martinez estimated Deckers wholesale pricing will rise 5% in the aggregate this year.
Sales for the eCommerce business, included in the brand sales numbers above, increased 31.7% to $6.4 million for the second quarter compared to $4.9 million for the same period a year ago.
Sales for the retail store business, also included above, increased 143.2% to $3.1 million for the second quarter compared to $1.3 million for the same period a year ago. Same-store sales grew 59.4% thanks to strong demand for UGG.
At quarters end, inventories were up 70% to $112.8 million, versus $66.3 million a year ago. By brand, UGG increased $38.6 million to $90.6 million, the bulk of which is already sold. Teva increased $2.9 million to $14.0 million and Simple increased $3.7 million to $6.9 million. The addition of the TSUBO brand in the second quarter added $1.1 million in inventory.
The company currently expects its full year revenue to increase approximately 43% over 2007, up from previous guidance of approximately 31%. Excluding the impact of the non-cash charge related to the write-down of the Teva trademarks, diluted earnings per share should increase approximately 34% over 2007, up from previous guidance of approximately 27%. The guidance assumes a gross margin of approximately 45% and SG&A as a percentage of sales of approximately 23%.