While the Teva and UGG brands under Deckers umbrella experienced several quarters of consistent growth, Simple has been somewhat of a neglected stepchild. However, in the first quarter of 2006, these roles were reversed as Simple was the only brand to show any top-line growth. Both Teva and UGG sales were down in the double-digits, while Simple grew their business by nearly 50% thanks to their new eco-friendly “Green Toe” program. The company said the UGG business was up against difficult comparisons from last year when about $10 million in orders fell into the first quarter from Q4 2004.
In spite of the lower sales and earnings, Deckers seems to have control of all of its fundamentals. Inventories were down considerably, and the company is making several strategic investments in re-building the Teva brand in the performance outdoor and trail running market.
During a conference call with investors and the media, Deckers CEO Angel Martinez said that the company invested in rejuvenating the Teva image through advertising and enhanced retail presence. The company recently tagged key retail partners such as REI, Nordstrom, EMS, Dillard's, and The Walking Company in their advertising, and has seen positive impact on sell-through. The company was more than half way to their goal of re-merchandising 500 retailers with 75 EMS stores, 80 REI locations, and 44 Nordstrom doors. The cold wet weather hampered March sandal sales in the West, but sell-through has improved steadily over the last three weeks. Mr. Martinez emphasized that this is a transitional year for Teva. The brand is primarily focused on stopping the erosion of its market share in the sport sandal category through targeting a younger consumer, improved product, and better POS presentation.
Last year when he first joined the company as CEO, Martinez saw the opportunity to develop a “true spring collection” under the UGG brand, as well as the opportunity to create a viable and sustainable men's business. He said sell-through performance for this new spring collection was described as excellent, and has gone a long way towards developing more of a year-round business for the brand.
Martinez said the company had received its first orders from the new UGG distributors in France and Germany, which are both launching at retail this fall. He said the initial response from both French and German retailers has been positive, but the biggest challenge is still in educating the retail and consumer market to think beyond the original classic line of UGG products.
The company has opened its first retail outlet store in Camarillo, Calif., and will open its second store in the Wrentham Premium Outlet Mall in Mass. by the end of second quarter. They also see opening their first concept store in the U.S., which will open in New York City before year end.
Simple has been successfully re-positioned and the company hired a new street team to create buzz for Green Toe in markets like Los Angeles, Orange County, San Diego, and Austin with regional print campaigns in these same markets.
Whole Foods has given Simple a new opportunity for distribution and the brand has launched in several locations with “good sell-through.” Moving forward, Simple will look at health and wellness distribution channels for further opportunity. According to Mr. Martinez, there are 172 Whole Foods stores in the U.S. and over 500 health food stores in California alone.
In spite of the progress made with each of the brands, Deckers margins eroded slightly during the quarter due to higher closeouts and inventory write-downs. At the same time SG&A expenses increased as a percentage of sales because of increased marketing, payroll, and warehouse costs. The resulting operating margins fell 750 bps.
DECK now expects net sales to range from $268 million to $276 million, and earnings per diluted share to be $2.21 to $2.29, compared to its previous guidance of sales between $260 million to $270 million, and earnings per diluted share of $2.05 to $2.15. The company also reiterated its comfort with its previous sales guidance for the second quarter of 2006 of $38 million to $40 million. However, due to a change in sales mix which is expected to result in lower gross profit margin sales and a shift of certain expenses from the first quarter into the second quarter, DECK now expects earnings per diluted share of three cents to five cents compared to its previous guidance of earnings per diluted share of nine cents to 11 cents.
| Deckers Outdoor Corp. | |||||||
| First Quarter Results | |||||||
| (in $ millions) | 2006 | 2005 | Change | SportScan Fast Fact: | |||
| Total Sales | $56.0 | $64.3 | -12.9% |
Based on retail POS data compiled by SportsScanINFO, Teva has seen its market share in the over $50 sandal market improve by more than nine points in the YTD period. |
|||
| Teva | $34.7 | $39.4 | -11.9% | ||||
| Ugg | $17.8 | $22.5 | -20.9% | ||||
| Simple | $3.5 | $2.4 | +45.8% | ||||
| Gr Margins | 44.1% | 46.0% | -190 bps | ||||
| SG&A | 28.2% | 23.6% | +460 bps | ||||
| Net Income | $5.6 | $8.9 | -36.4% | ||||
| Diluted EPS | 44¢ | 69¢ | -36.2% | ||||
| Inventories | $31.3 | $45.4 | -31.2% | ||||
| Receivables | $28.2 | $39.2 | -28.1% | ||||
