Despite hitting its estimates for sales and earnings for the first quarter, Deckers Outdoor Corporation saw its shares plunge 25% last week after the company started to show some weakness in its core Teva business. Analysts may also be spooked a bit by the reliance placed on the UGG brand to achieve full year sales and earnings targets. DECK is shifting its guidance for the year, expecting the second quarter to see flat sales to the year-ago period, while earnings will fall far short of Q2 last year and analysts estimates.
Analysts looked immediately to newly appointed president and CEO Angel Martinez, who willingly obliged by explaining a number of things he saw wrong with the business and what he was already doing in the first week to turn around the product gaps, particularly in closed-toe footwear and womens product. He described Deckers as a “building of well-kept secrets.”
Company chairman Doug Otto said he was excited to have Angel “working for us instead of against us.”
Deckers is now forecasting that second quarter EPS will be in the 28 cents to 30 cents per share range on sales between $40 million and $41 million. The company posted earnings of 43 cents per share in the second quarter last year on sales of $40.5 million. Analysts, on average, were looking for 44 cents per share on sales approaching $45 million.
Otto did his best on a very rough call with analysts to assure the market that the full year forecast, which calls for earnings in the $2.45 to $2.55 per share range on sales between $250 million and $265 million. The concerns are clearly centered around the companys need to backfill the year with heavier shipments of UGG products, while Teva brand sales run about 30 days behind last year.
Teva brand sales for the year are now expected to be in the $92 million to $95 million range, about $5 million less than the year-end forecast. Simple sales are seen in the $13 million to $15 million range, a decline of $3 million from the previous forecast. UGG brand sales, on the other hand, are now seen delivering between $148 million and $153 million in revenues for the company, and making up the $8 million shortfall for the other brands.
The Teva division is getting pressure from other brands like Keen, Merrell, and Chaco just as sandals take a hit from a later Spring this year and a Winter that doesnt want to go away in some key outdoor markets in the U.S. Based on comments made by management, Teva has not moved quickly enough towards more closed-toe product in order to compete as a four quarter brand. Keen has moved much faster to be a “footwear brand” rather than a “sandal brand”. This was obviously on the forefront of thinking when Martinez was tapped to take the reins at Deckers. He said “Tevas success beyond sandals is tantamount to the future.”
The other issue for the company is the International business, an area that Martinez also sees as undeveloped. Otto said they will rely on Angels experience in the International markets to help fuel its growth.
One glaring issue popped up in the first quarter as the companys U.K. UGG distributor went south on them, causing Deckers to terminate the deal and write off about $500k to bad debt, costing the company about two cents on the bottom line.
Despite the bad debt expense, Deckers was still able to post a 65% increase in net income for the period as sales jumped more than 45% on meteoric UGG brand growth. Domestic sales increased nearly 57% to $49.2 million for the quarter, compared to $31.4 million in the year-ago period. The International end of the business grew about 17% to $15.1 million, compared to $12.9 million in Q1 last year.
Direct sales through the Internet and catalog businesses rose approximately 38% to $5.0 million in the quarter. UGG sales accounted for more than 75%, or $3.8 million, of the consumer direct sales, while Teva contributed about $963k and Simple did about $244k though the direct channel. Based on the numbers, nearly 17% of total UGG sales were done through the companys consumer direct business.
The average wholesale selling price was up more than 14% to $21.23 from $18.61 in the year-ago period. DECK shipped 2.76 million pair in Q1 versus 2.17 million in the same period last year.
Management said the strong UGG showing in the quarter was due primarily to carryover shipments of 2004 Fall and Holiday product, coupled with initial deliveries of the brands first Spring line.
The Simple brand shrugged off the lackluster performance of its Simple Sheep program last Fall to post solid growth in sneakers, sandals, and clogs. Otto said that the brand saw “strong double-digit sell-through” on Simple sneakers for Spring and it is getting “good bookings” for Fall. Look for Angel to take this brand by the hand and lead it to new opportunities. He said he was surprised that Simple was “so fully evolved and complete.”
The large jump in inventories at quarter-end can be directly tied to last years struggle to fill UGG orders. But Teva inventory was up nearly 46% to $16.9 million at the end of the period, a reality that must have spooked more than one investor, especially given the fact that Teva Q2 sales are expected to be sluggish. UGG sales for Q2 are expected to be flat as well, but backlog at quarter-end was said to be “up significantly” for the brand. Otto hinted that it was well in line with the expected sales increase for the back half.
>>> Looks like some were surprised at the notion that this thing was broken. Now Angel is expected to fix everything fast
>>> Looking out a year, if DECK ships all the UGG orders for Fall/Holiday, wont they have a tough time trying to anniversary this Q1???
