The Teva brand had its had its best quarter in Deckers company history in Q1 and the company saw UGG sales transcend its usual back-half niche to post a 226% increase in sales for that brand. The expansion of the Teva brand beyond its traditional open-toe roots, the creation of a year round business with UGG, and a new strategy for Simple that appears to be meeting with a nice response from retailers encouraged the company to raise guidance for the second quarter and 2004.
DECK now estimates second quarter EPS to be in the 32 cents to 34 cents per share range on sales between $34 million and $35 million. The EPS estimate would represent an 88% to 100% increase in earnings per share for the period, while the sales forecast expects to generate an increase in the 40% to 44% range.
The company raised its full year guidance to a range of $1.42 to $1.51 per diluted share, up significantly from its previous estimate of $1.25 to $1.35 per share and representing an increase in the range of 62% to 96% from 2003. Sales are now seen in the $166 million to $174 million range, up from previous guidance of $153 million to $162 million, or an increase of 37% to 44% from full year 2003.
Teva sales for the year are forecast in the $85 million to $87 million range, an increase of approximately 12.5%, while UGG sales are expected to double to $72 to $76 million. Simple sales are estimated to be in the $9 million to $11 million.
The UGG line has now grown to more than 70 styles from a mere two boots and two slippers when Deckers bought the brand and saw its sixth consecutive year of double-digit growth in 2003. Sales for the 2004 first quarter “more than tripled”. Slippers are contributing to the year round growth, maintaining about 20% of UGG sales.
The sharp increase in sales for the brand and the heightened demand for product in the coming year has Deckers working aggressively to source the double-sided shearling in Asia as well as its historically sources in New Zealand and Australia. Deckers chairman and CEO Doug Otto said that “UGG is well on its way to becoming a global luxury lifestyle brand”.
The company is now reporting UGG demand in Europe, Canada and other international markets and sees the international business growing “dramatically” this year. Nordstrom is still the largest customer for the product and Neiman Marcus has now moved into the number two spot. Otto said Neiman featured UGG in its Spring catalog and sold out of product within four hours.
Nordstrom is the largest retailer for Simple as well, which has given the company all-store placement for the brand. Deckers said that margins increased to 31% in the quarter despite the sales decline and pointed to an increase in future bookings as a good sign for the brand.
DECK will take a multi track strategy with Simple, first by building on the brands “icon status” as an “old school sneaker” and “the original clog” and to launch updated versions of the classic styles. Secondly, the company will expand the Simple sandal offering, which they said they could not do prior to owning the Teva brand, to open up distribution that they dont target with Teva. Lastly, the same lower distribution tier will see “moderately-priced shearling boots and slippers” they cant get through the UGG brand.
The company also sees tremendous upside for the Teva brand now that the restrictions of the former licensing deal have been lifted. The closed-toe business will be a top beneficiary here as Teva moves forward aggressively to capture a piece of the “entire rugged outdoor footwear market”, a market they see as “seven times the size of the sports sandal market”.
Otto pointed to the Gamma Amphibious shoe as “retailing well” and said the Romero Trail Runner was “experiencing double-digit sell-through” at key retailers. The closed-toe business is now estimated to be roughly 12% to 13% of Teva sales, a percentage they see growing to 30% of sales in their strategic plan.
The direct business is becoming a bigger piece of the pie as Internet and catalog sales for the company grew approximately 226% in the first quarter to $3.6 million from $1.1 million in the year-ago period.
The inventory increase at quarter-end was due mostly to a $2.3 million increase in Teva inventory, offset in part by a $300,000 decrease in Simple inventory and a $1.0 million decrease in UGG stocks. The company plans year-end inventory for the current year to include increased inventory of the UGG product for Q1 2005 delivery.
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