Deckers Misses Q3 Guidance on Uggs Shortfall

Deckers Brands reported earnings in its third quarter ended Dec. 31 rose
7.5 percent to $149.4 million, or $4.50, but missed its original
guidance. Overall Ugg sales grew 6.5 percent but Ugg Classic styles
declined due to a slow October and November selling
period and tough comparisons, causing overall sales to miss plan. Among
other brands, declines were seen in Teva and Sanuk but Hoka One One saw
significant gains.

Deckers also reduced its fourth-quarter guidance, now expecting a loss in the period.

Third Quarter Fiscal Year 2015 Financial Review

• Net sales increased 6.6 percent to a record $784.7 million compared to $736.0 million for the same period last year.
• Gross margin increased 180 basis points to 52.9 percent compared to 51.1 percent for the same period last year.
• SG&A expenses as a percent of net sales were 25.6 percent compared to 23.7 percent for the same period last year.
• Diluted earnings per share increased 11.4 percent to $4.50 compared to $4.04 for the same period last year.
• UGG® brand sales increased 6.5 percent to $736.0 million compared to $690.9 million for the same period last year.
• Teva® brand sales decreased 12.1 percent to $13.6 million compared to $15.5 million for the same period last year.
• Sanuk® brand sales decreased 7.9 percent to $20.5 million compared to $22.2 million for the same period last year.
• Other Brands sales increased 96.5 percent to $14.6 million compared to $7.4 million for the same period last year.
• Direct-to-Consumer comparable sales, which include worldwide comparable retail store sales and worldwide comparable E-Commerce sales, increased 7.6 percent over the same period last year.
• Retail sales increased 8.3 percent to $192.7 million compared to $178.0 million for the same period last year.
• E-Commerce sales increased 25.2 percent to $146.9 million compared to $117.3 million for the same period last year.
• Domestic sales increased 3.1 percent to $526.3 million compared to $510.7 million for the same period last year.
• International sales increased 14.6 percent to $258.4 million compared to $225.3 million for the same period last year.

In reporting second-quarter results in October, Deckers had projected third-quarter revenues would grow 10 prcent and EPS would reach $4.46.

“Our third quarter performance represents an important inflection point in the evolution of the UGG® brand product  line,” commented Angel Martinez, president, chief executive officer and chair of the board of directors. “Full price selling of casual boots, weather boots, and specialty classics exceeded expectations and in some cases outpaced our inventory investments.  At the same time, demand for core Classic collection accelerated as the quarter progressed but overall sales were down due in part to a slow October and November selling period and tough year-over-year comparisons.  Along with foreign exchange headwinds, this led to the revenue shortfall for the quarter.”

Martinez continued, “Our recent results indicate that our strategic initiatives aimed at diversifying the business are working.  Consumers are adopting our new footwear collections faster than we anticipated while also shifting more of their purchases to our digital channel driven by our successful global Omni-Channel initiatives.  We are making investments to increase our demand planning accuracy, as well as continuing to improve our product lines to ensure that we have a healthy and balanced business across our global network of wholesale partners, retail stores and E-Commerce websites.”

Division Summary

UGG® Brand
UGG® brand net sales for the third quarter increased 6.5 percent to $736.0 million compared to $690.9 million for the same period last year. The increase in sales was driven by higher global E-Commerce sales, sales contributions from new worldwide retail store openings, increased international wholesale and distributor sales, partially offset by a decrease in domestic wholesale sales and same store sales.

Teva® Brand
Teva brand net sales for the third quarter decreased 12.1 percent to $13.6 million compared to $15.5 million for the same period last year. The decrease in sales was driven by lower international wholesale and international distributor sales, partially offset by an increase in domestic wholesale sales and global E-Commerce sales.

Sanuk® Brand
Sanuk brand net sales for the third quarter decreased 7.9 percent to $20.5 million compared to $22.2 million for the same period last year. The decrease in sales was driven by lower global wholesale sales and international distributor sales, partially offset by an increase in domestic E-Commerce sales and sales contributions from new store openings.

Other Brands
Combined net sales of the company's other brands increased 96.5 percent to $14.6 million for the third quarter compared to $7.4 million for the same period last year. The increase was primarily attributable to a $7.2 million increase in sales for the HOKA ONE ONE® brand compared to the same period last year.

Retail Stores
Sales for the global retail store business, which are included in the brand sales numbers above, increased 8.3 percent to $192.7 million compared to $178.0 million for the same period last year. The increase was driven by 29 new stores opened after December 31, 2013, partially offset by a same store sales decrease of 7.2 percent for the thirteen weeks ended December 28, 2014 compared to the thirteen weeks ended December 29, 2013.

E-Commerce
Sales for the global E-Commerce business, which are included in the brand sales numbers above, increased 25.2 percent to $146.9 million compared to $117.3 million for the same period last year. The increase was driven primarily by an increase in global UGG® brand sales.

Stock Repurchase Program
During the third quarter of fiscal year 2015, the company repurchased approximately 157,000 shares of its common stock, at an average price of $84.69, for a total of $13.3 million under its stock repurchase program. As of December 31, 2014, the company had $66.0 million authorized repurchase funds remaining under its $200.0 million stock repurchase program announced in July 2012. Depending on market conditions and other factors, such repurchases may be commenced or suspended at any time without prior notice.

The company also announced the Board of Directors' approval to repurchase up to an additional $200 million of the company's common stock in the open market or in privately negotiated transactions, from time to time, subject to market conditions, applicable legal requirements and other factors.  The stock repurchase program does not obligate the company to acquire any particular amount of common stock and the program may be suspended at any time at the company's discretion.  The purchases may be funded from available cash and cash equivalents and borrowings under the company's credit facility.

Balance Sheet
At December 31, 2014, cash and cash equivalents were $369.4 million compared to $237.1 million at December 31, 2013. The company had $5.4 million in outstanding borrowings under its credit facility at December 31, 2014 compared to $9.7 million at December 31, 2013. The increase in cash and cash equivalents and the decrease in outstanding borrowings are primarily attributable to cash provided by operations and proceeds from the loan on the corporate headquarters, partially offset by cash payments primarily attributable to increasing inventory levels, capital expenditures and share repurchases.

Inventories at December 31, 2014 increased 12.7 percent to $293.9 million from $260.8 million at December 31, 2013. By brand, UGG inventory increased 6.5 percent to $217.9 million at December 31, 2014, Teva inventory decreased 25.0 percent to $21.2 million at December 31, 2014, Sanuk inventory increased 83.0 percent to $24.5 million at December 31, 2014, and the other brands' inventory increased 110.1 percent to $30.3 million at December 31, 2014.

Full Fiscal Year 2015 Outlook for the Twelve Month Period Ending March 31, 2015

• The company now expects fiscal year 2015 revenues to be approximately $1.8 billion or 13.5 percent over the twelve month period ended March 31, 2014, down from the previous guidance of approximately $1.825 billion or 15 percent.
• The company now expects fiscal year 2015 diluted earnings per share to be approximately $4.58 or an increase of 12.6 percent over the twelve month period ended March 31, 2014, compared to the previous guidance for growth of approximately 15.8 percent. This guidance assumes a gross profit margin of approximately 49 percent and an operating margin of approximately 12.5 percent compared to previous guidance of approximately 13 percent.
• The company expects fiscal year 2015 SG&A expenses as a percentage of sales to be approximately 36 percent. Among other items, these expenses include increased marketing and supply chain costs, investments in IT infrastructure, expenses related to management reorganization, and operating costs associated with opening new stores in 2013 and 2014.
• The company now expects fiscal year 2015 UGG® brand revenues to increase approximately 11 percent over the twelve month period ended March 31, 2014, down from the previous guidance of approximately 14 percent.
• The company expects fiscal year 2015 Teva brand revenues to increase low double digits over the twelve month period ended March 31, 2014.
• The company expects fiscal year 2015 Sanuk brand revenues to increase low double digits over the twelve month period ended March 31, 2014.
• Combined fiscal year 2015 net sales of the company's other brands are now expected to be approximately $83.0 million compared to $48.6 million for the twelve month period ended March 31, 2014, up from previous guidance of approximately $82.0 million.
• Fiscal year 2015 guidance now assumes that the company's effective tax rate will be approximately 27 percent, down from previous guidance of 29 percent due to a change in jurisdictional mix.

Fourth Quarter Fiscal Year 2015 Outlook for the Three Month Period Ending March 31, 2015

• The company still expects fourth quarter fiscal year 2015 revenues to increase approximately 10 percent over the three month period ended March 31, 2014.
• The company now expects to break even for fourth quarter fiscal year 2015, compared to a diluted loss per share of $(0.08) reported for the three months period ended March 31, 2014, down from previous diluted earnings per share guidance of $0.15, driven mostly by gross margin pressure from foreign currency exchange rates.