Deckers Outdoor Slips To Second Quarter Loss But Boosts Full Year Outlook

The net loss for the quarter came in at $7.3 million, or a loss of 19 cents per share, compared with earnings of $9.0 million, or 23 cents a share, in the 2010 second quarter. On a conference call with analysts, company President and CEO Angel Martinez said that, besides costs tied to its U.K. and Benelux transition, the cost of opening and operating 11 more company-owned stores also weighed on the bottom line in what has historically been Deckers lowest volume sales quarter.  Also adding in higher marketing and legal investments, SG&A expense mushroomed to 49.7 percent of sales from 34.7 percent in Q2 2010.

Revenues increased 12.5 percent in the quarter to $154.2 million. The overall gains reflects the shift of approximately $30 million in Ugg brand sales to U.K. and Benelux distributors last year. Martinez said second quarter sales overall were approximately $11 million above plan. helping to offset some of the additional expenses and reported loss per share that was better than projected.

Teva brand sales increased 29.1 percent to $40.3 million in Q2, driven by higher sales of closed-toe footwear and an increase in the average wholesale price per pair, partially offset by lower reorders of sandals in the U.S.  The quarter also benefited from the conversion to a wholesale business model in the United Kingdom.

Martinez noted that closed-toe footwear made up made up 12 percent of Teva’s spring’s sales versus 6 percent for the same period in 2010 and its acceptance is helping reduce the brand’s dependence on weather. Indeed, wet and cold conditions across much of the U.S. during April and May delayed the start of sandal season and significantly impacted reorders. Outside the U.S., distributers likewise purchased a greater percentage of new closed-toe styles than a year ago and retailers in the UK, Benelux, and France — in which Teva is now selling directly — are dedicating more shelf space to the brand.

“Overall were very pleased with the Teva brand’s first half performance,” said Martinez. “The business is now more balanced from a product standpoint and we anticipate that the geographic mix will also become more balanced over the next few years as we further benefit from our new international wholesale operations, see growth through our current distributers, and open new markets in Europe, Asia, South and Central America.”

Ugg brand sales increased 8.0 percent to $108.3 million in Q2, driven by a 29.4 percent increase in the domestic wholesale business, increased shipments of Fall ‘11 product to international distributers, and a same-store sales increase of 23.6 percent in the retail division along with the addition of eleven stores since Q2 last year. Martinez noted that this marked the sixth season Ugg has been selling a “true spring line” featuring sandals, clogs, and sneakers and those styles are now “representing a meaningful portion of spring sales.”

Combined sales in Deckers Other Brands (Simple, Tsubo, Ahnu) were $5.7 million for the quarter compared to $5.6 million for the same period last year. As reported, the Simple brand is being discontinued, partly due to some cannibalization with Sanuk, the surf brand acquired on July 5.  Martinez noted that Sanuk brand sales for the first half were approximately $43 million, a 57 percent increase over 2010.

Sales for the retail business, included in brand numbers, surged 102 percent to $20.1 million, driven by eleven new stores and the Ugg comp increase. Sales for e-commerce, also included in brand numbers, increased 10.3 percent to $5.7 million due to higher demand for Ugg combined with the launch of the Ugg brands United Kingdom website.
Domestic sales for all brands increased 26.9 percent to $82.8 million while International sales were $71.5 million, flat due to the shift in the U.K./Benelux region.

Gross margin eroded to 42.7 percent from 44.3 percent last year reflecting large duty refunds in the second quarter of 2010 as well as the approximate 10 percent increase in product costs and increased close outs at Simple.

Looking ahead, Deckers now expects full-year revenue to increase 26 percent over 2010 levels, versus previous guidance of 21 percent.  Ugg brand sales are expected to increase 25 percent (vs. 21 percent previously). Martinez said Ugg’s Fall ‘11 line “pre-booked very well,” led by several non-traditional collections, including equestrian, wood bottom, cold weather, and sneakers. An expanded Ugg men’s line will be supported by a broad marketing campaign fronted by the New England Patriot’s Tom Brady launching on Sept. 1.

Teva brand sales are expected to increase in the low-20 percent range for the year, while Other Brand sales are expected to remain flat. The newly acquired Sanuk brand is expected to generate sales in the low $20 million range in the second half of the year. EPS is projected to increase approximately 17 percent (vs. previous guidance of 13 percent.) The guidance assumes a gross profit margin between 50 percent and 51 percent and SG&A as a percentage of sales of approximately 29 percent.

Fiscal 2011 guidance includes estimates of approximately $34.5 million, or 60 cents per share, pertaining to incremental investments and expenses in 2011 associated with new marketing and advertising programs, increased legal spend related to intellectual property rights protection, expenses related to the transition to a wholesale business model in Europe, and due diligence, audit, and transaction fees associated with the acquisition of the Sanuk brand.

Third quarter revenues are forecast to increase 38 percent with EPS up 22 percent over 2010 levels. Fourth quarter revenues are expected to increase approximately 22 percent with EPS increasing 36 percent for the period.