Deckers Offers Conservative Outlook for 2005 and 2006; Shares Take a Hit…

Deckers Outdoor Corp. was able to capitalize on its early ramp up of inventories of UGG product for the fall season, posting strong growth in earnings and sales for the third quarter, but a more conservative outlook for the fourth quarter, full year 2005 and 2006 sent DECK shares down 15.6% for the week to close at $17.87 on Friday.

The double-digit decline in Teva sales in the period was attributed to lower domestic closeout sales and lower international sales versus the year-ago period. The sales decline at Simple was due entirely to the discontinued Simple sheep program from last year, which accounted for roughly $2.7 million in sales in the 2004 third quarter. Excluding that program, sales for the Simple brand would have been up approximately 4.0% for the period.

International sales for all brands decreased approximately 15% to $9.1 million in the third quarter, compared to $10.7 million in the year-ago period. Domestic sales increased 33% to $60.1 million from $45.1 million in Q3 last year. Sales generated through Deckers’ Internet and catalog business fell about 37% in the quarter to $3.4 million from $5.4 million in Q3 last year, a decline DECK attributed to “greater availability of UGG product” at retail this year.

The broader availability of the UGG product in the period was both a positive and a negative for the company as increased inventories in the early part of the fall season are expected to lead to less pent up demand and fewer UGG shipments in Q4 this year and Q1 next year. The company said that a new spring program for UGG is not expected to make up the difference in the first quarter numbers.

The 220 basis point improvement in gross margin was due primarily to the reduction of closeout sales, fewer inventory write-downs, lower production overhead, and reduced air freight costs this year. DECK had to air in a great deal of UGG inventory last year to address demand.

The increase in the inventory line was almost entirely due to the UGG ramp up, with inventories for the brand accounting for $56.2 million, or 84%, of the inventory at quarter –end this year, compared to $14.9 million, or 55%, of the inventory level at the comparable time last year. Management said they expect to “substantially” reduce UGG inventories by year-end. Teva inventories decreased 15.5% to $7.6 million at quarter-end and Simple inventories were off 6.3% to $3.0 million at the end of the period.

Looking ahead, DECK is now estimating fourth quarter EPS in the range of 60 cents to 64 cents per diluted share on sales between $72 million and $75 million. For the year, the company sees diluted EPS in the $2.13 to $2.17 range on sales between $246 million and $249 million, which includes $85 million to $86 million for Teva, approximately $8 million for the Simple brand, and $153 million to $155 million for UGG.

The reduction in expectations for the Teva and Simple business was due in part to a reduced reliance on the pull forward of sales from 2006. The UGG forecast is at the lower end of previous guidance due to expectations of lower Internet sales of the brand, which is also expected to affect earnings for Q4 and the year. Fourth quarter EPS may also be impacted by the rolling of some Q3 closeout sales into Q4 and the increased investment in product development, marketing, and the infrastructure to support the International and consumer direct businesses.

Analysts were apparently expecting EPS of 83 cents per share in Q4 on revenue of approximately $81 million and EPS of $2.33 per share for 2005 on sales of approximately $255 million.

For 2006, Deckers is forecasting earnings of $2.00 to $2.15 per share on sales of $255 million to $265 million. UGG sales are expected to be “flat to slightly up”, while Teva sales are forecast to be “flat to slightly down” for the year, with increases in the back half offsetting decreases in the back half for both brands. DECK sees double-digit growth for Simple in 2006. Wall Street was looking for EPS of $2.58 per share on sales of $274 million.

Company chairman Doug Otto said that retail open-to-buy for open-toe sandals has been reduced for spring 2006, which has affected the Teva order book. UGG sales are also expected to be impacted in the first half of 2006 as Otto pointed to the difficulty to anniversary the $30 million in H1 2005 sales for UGG, which was comprised of about $10 million of Q4 2004 sales that fell into Q1 2005 and about $5 million in Internet sales from “pent-up demand” for the Original boot. Earnings next year are also expected to be impacted by about $9 million in investment in product marketing and infrastructure.

>>> Not sure why the surprise on UGG issue for next year. Deckers (and SEW) raised the issue six months ago after reporting Q1 results…