Deckers Outdoor Corp. found its third quarter fortunes lined with sheepskin as their UGG brand continued its meteoric growth and DECK pushed net income up more than 1100% on the leveraging of SG&A expenses. Return on Sales came in at more than 10.5% of sales.
The company is also building off of its Consumer Direct platform, a business that jumped 241% in the period to contribute approximately 10% of sales for the third quarter. Consumer Direct sales also boosted margins since they carry a gross margin in excess of 70%compared to mid-40s for the wholesale divisions.
The balance of the gross margin gains for the quarter came from “$400,000 of net licenses revenues from UGG handbags and outerwear, a reduced impact of inventory write down or overhead cost per pair.”
Despite the companys moves to push create more of a year round business for Teva, it looks as though UGG remains the primary driver to the business, with its Q3 business surpassing UGG sales for all of last year. The company said they will ship $25 million to $30 million in UGG product into California alone within the next two years. They point to the other 90% of the U.S. population that provide very compelling growth prospects.
Chairman and CEO Doug Otto said the reaction to UGGs first Spring collection has been “excellent” and bookings for the first half of next year are “strong”. He said that the early response to UGGs Fall 2005 collection has also been outstanding.
“We continue to offer certain 2005 styles on an allocation basis so that we can better control distribution and enhance the image of the brand,” said Otto in a conference call with analysts. He said this despite the fact they have “already secured more top quality sheep-skin and manufacturing capacity for next year” than they will use this year.
“We are hearing the customers are passing on the knock-offs and waiting for the authentic UGG branded boots,” he said. “If we left it to our retailers, they would double or triple our business.”
Otto admitted that they have had some shipping problems on pastel colored UGG boots. “We have been running a bit late. Those are the things that are most difficult to dye. I will say that we shipped 86% of the products that had start ship dates as of September 30th during third quarter. We have been air freighting some product in, is continuing to go out. We expect to get up to 95% in shipping this quarter.”
Teva sales were driven by both sandal and closed-toe footwear sales. Teva product was said to have retailed very well this year. A third of Q3 Teva sales were in closed-toe product. Otto noted, “We are sold out of some core sandal styles well before the end of the season.” He also announced a 300 door program with The Finish Line slated for next spring.
Otto also sees opportunity outside the U.S. International sales represented just 18.5% of sales in 2003, but he pointed to European sales that grew 84% for the YTD period.
Accounts receivable turnover improved to 7.6x from 5.8x a year ago and inventory turnover improved to 4.8x compared to 3.3x a year ago.
Deckers also updated its guidance for the fourth quarter, now forecasting diluted EPS in the 47 cents to 51 cents per share range on sales between $55 million and $60 million. For the year, DECK sees diluted EPS in the range of $1.84 to $1.88 per share on sales between $196 million and $201 million. The full year guidance is up from the previous guidance of $1.70 to $1.75 per diluted share on sales of $182 million to $190 million.
Teva are expected to be roughly $89 million to $90 million, with Simple delivering $10 million to $11 million, and UGG leading the gains with $97 million to $100 million in full year sales.
For fiscal 2005, net sales are seen in the range of $220 million to $230 million, including sales of $97 million to $100 million for Teva, $13 million to $15 million for Simple, and $110 million to $115 million for UGG. Deckers currently expects its diluted earnings per share for fiscal 2005 to be in the $2.15 to $2.25 range.