Deckers Outdoor Corp. managed to bring in yet another 
surprising quarter, exceeding both internal projections and analysts consensus estimates for top-line and bottom line growth. With overall sales up over 57% and net income increasing over 86%, the company continues to see growth in its two largest brands, UGG and Teva. The only development that gave management some cause for concern was Simple with flat sales to last year.
UGG sales increased due to more non-core styles. Management has been trying to aggressively diversify away from the traditional twin-faced boot and turn UGG into a year-round, multi-product brand. Looking ahead, DECK management sees a big opportunity to evolve the UGG men's business in a similar fashion to their women's line. They will be increasing the R&D budget and bringing on another men's designer in order to expand the surf, boot and casual collections.
The second key to achieving UGGs three-to-five-year growth objective is increasing the brands international presence. During the quarter, UGG added new retailers in the UK and Benelux, while entering new regions such as Scandinavia, where early results have been “very promising.”
Company CEO Angel Martinez said UGG is about to ink a deal with a German distributor, which will open more international doors. In addition, he sees opportunities in France, where the brand does not have a distributor.
Martinez is “holding out” for someone who has resources “to drive the brand to where it needs to go in their market.” UGG brand inventories increased to $72.4 million compared to $38.9 million last year due to the early arrival of fall '07 inventory.
Teva sales increased 12.1% due to new closed-toe footwear styles.
DECK said the new fall line is accomplishing several key goals for Teva. First, it is reducing the brands dependency on weather. Second, it is allowing Teva to further migrate away from lower price points. And third, it is extending the brands selling season into the second half of the year. Management is also happy with sales of the Curbside collection.
While closed-toe products still represented the minority of Tevas fall styles, the category is growing its share. Martinez also pointed out that despite the difficult retail environment for sandals created by the cold, wet weather in April and May, Teva did see a “nice pick-up” in open-toed merchandise throughout the third quarter due to the warmer than normal temperatures throughout most of the country. Current distribution was described as “broad and healthy.”
Management said the only challenges with distribution were a lack of new styles to fill the pipelines. For Spring 2008, management expects Tevas SKU count to be up an additional 20%.
Internationally, Teva saw “solid gains” in Switzerland, the U.K. and Benelux, while newer territories such as China and Latin America are “off to a good start.”
Martinez said that Teva has “not even begun to scratch the surface” in terms of international potential, highlighted by China, where he thinks the business can grow to be a major part of international revenue. Teva inventories increased to $11.7 million compared to $8.7 million a year ago, due to the lower Spring sales.
Simple net sales were flat and below forecasts due to production delays with styles in the ecoSNEAKS collection. Due to these 30- to 45-day delays related to new eco-sensitive material supply, Simple was unable to meet the consumer demand. Management said that these production issues have been resolved and ecoSNEAKS had a “very solid” debut over the past several weeks with retail sales picking up in all channels of distribution. Sales through Simples website were reported as experiencing high double-digit sell-through rates.
In addition, the Green Toe collection continues to grow as a percentage of Simple's overall sales.
Included in the numbers for all of Deckers brands are consumer direct sales of $10.6 million. This is an increase of 82.3% from $5.8 million in the third quarter last year. Sales were up in both the Internet business and the retail stores. Unique visits to the UGG, Teva and Simple websites were up 70%, 22% and 108%, respectively.
International sales for all three brands increased 58% to $14.2 million compared to $9 million in the third quarter of last year. As a percentage of international sales, UGG is catching up, but Teva is still DECKs strongest business.
Gross margin for the third quarter remained consistent, while SG&A expenses for the quarter were down slightly as a percentage of sales. Marketing spend this year will be comparable to 2006.
For the fourth quarter, DECK expects revenues to increase approximately 35%, up from previous guidance of approximately 30% growth. Fourth quarter diluted earnings per share should increase 15%, up from previous guidance of 10% growth. Full year revenues should increase approximately 39%, up from previous revised guidance of 35% growth. Diluted EPS should increase approximately 35% over 2006, up from previous guidance of approximately 25% growth.
