Deckers Takes its Q2 Medicine in Sandal Business; UGG Already Shining for Fall…

The right weather for sandals kicked in just in time to help Deckers Outdoor Corporation move Teva sandal inventory through at retail and off the warehouse floor. Teva inventories are down 49% since the end of the first quarter, but the effort to liquidate the goods, along with a decrease in higher margin Internet and catalogue sales, had the unwelcome – but expected – negative impact on gross margins in second quarter. The GM decline, coupled with an increase in ad spend and costs associated with a new DC that pushed SG&A higher, cut EPS in half for the second quarter ended June 30 when compared to the same period last year.

Despite the reduction in Teva inventories, Deckers’ total inventory position jumped 240% at quarter-end, due almost entirely to a ramp up in UGG product for the third quarter. The good news is that DECK is already shipping early Q3 deliveries and getting sell-through and re-orders. Deckers owned about $56 million in UGG inventory at quarter-end, compared to just $10 million at the same time last year. Teva inventories were up 18% to $8.6 million and Simple inventory was up roughly 9% to $2.5 million.

The UGG phenomenon continues and appears headed for yet another stellar back half where the brand is expected to represent 80% of company sales. The company is stressing diversity is styles and looks for both the Fall and Spring collections. The classic boot makes up 26% of the open orders for the back half, while slippers comprise 25% of the backlog and the metropolitan is seen as about 9% of the order book. DECK expects to ship three million pairs of UGG this year versus 2.2 million pairs in 2004.

Nordstrom makes up about 20% of the UGG business.

Deckers expects to triple its ad spend on the Teva brand in 2006 as new president and CEO Angel Martinez works to build relevance with a younger target age group. He plans to position Teva as more of a performance brand reborn from its river heritage rather than a sandal brand. The effort can’t come soon enough as 2005 certainly exemplified the need to be a year-round closed-toe resource for retailers, but even more important in 2007 when the company’s patent on the universal strap is set to expire.

Flip Flops made up a higher percentage of sales in the quarter, comprising about 28% of shipments versus 25% in Q2 last year. Diversity of styles will be seen here as well for Spring ’06 as Teva looks to more closed-toe product, but also takes a page out of the Keen book and unveils the Dozer, which was described as more appropriate for the trail versus the river and is sporting “more toe protection.” Martinez also described a new “fisherman-style sandal” for Spring ’06.

Don’t be surprised if we see some other entries into this end of the market for Spring as others work overtime to capture a bit of the Keen magic.

The Teva test at The Finish Line did not apparently go as planned (thanks to the weather this spring) and Teva will “consolidate” the inventory and move forward in a “more regionalized basis” with a bit different product mix. DECK chairman Doug Otto said he feels that a couple of new products slated for Spring ’06 will fit their operation better.

Deckers is apparently getting even more serious about the Direct-to-Consumer business, tapping former Williams-Sonoma exec George Troy to run the retail operation and assist in building a retail brand. DECK will open a 3,000 square foot store in the Camarillo Outlet Mall in Q4 and Otto said they envision rolling out “maybe a few stores” a year. He sees it helping with inventory control and brand-building. Martinez also mentioned that their Japanese distributor will open an UGG store in Tokyo in February.

Sales for the Internet and catalog retailing business declined nearly 29% to $3.5 million for Q2, compared to $4.9 million for the second quarter of 2004.

Deckers saw average selling prices decline a bit in Q2, selling roughly 1.9 million pairs at an ASP of $19.63, compared to approximately 1.7 million pairs at $20.73 per pair in the year-ago period.

Otto expects to capture more share of a shrinking pie in the sandal market as retailers partner up with key vendors going forward. He sees International playing a bigger part in the company’s future as well, expecting it to represent half the business by the time the company reaches its $500 million milestone.

Deckers now expects 2005 Teva sales to be $88 million to $89 million, Simple sales to be $10 million to $11 million, and UGG sales at $153 million to $158 million.