Deckers Posts Loss; Ups Outlook

Deckers Outdoor Corporation (DECK - Analyst Report), the maker of sheepskin boots and slippers, recently delivered a loss per share in the second-quarter 2011 results owing to costs associated with the transition to a wholesale business model from a distributor business model, opening of new stores and other investments. Despite higher costs, Deckers projects an improved outlook for fiscal 2011 driven by the acquisition of the Sanuk brand.

The company has posted a quarterly loss per share of 19 cents, lower than the loss expectation of the Zacks Consensus Estimate of 24 cents. However, Deckers reported positive earnings of 23 cents in the prior-year quarter.

Let’s Dig Deep

Deckers said that total net sales jumped to $154.2 million, up 12.5% from the prior-year quarter, which came ahead of the Zacks Consensus Estimate of $143 million. The company’s robust growth in all its divisions and sustained focus on new product introductions along with geographic expansion have helped achieve increased growth.

Domestic sales for the quarter surged 26.9% to $82.8 million in the quarter. Sales also increased in the international wholesale channels as well as the consumer direct channels.

UGG brand net sales surged 8.0% to $108.3 million and Teva brand net sales grew 29.1% to $40.3 million. Combined net sales of Deckers’ other brands for the quarter were $5.7 million as against $5.6 million in the prior-year period.
 
Sales for the retail store business jumped 102.2% to $20.1 million, propelled by same-store sales growth of 23.6%, and the opening of 11 new stores.

Sales for the company’s eCommerce business climbed 10.3% to $5.7 million, reflecting higher demand for the UGG brand.

Cost of goods sold increased 15.7% in the quarter under review which led to the rise in gross profit to $65.9 million from $60.7 million in the prior-year quarter. Gross profit margin was 42.7% in the second quarter of 2011 as opposed to 44.3% last year.

With the transition to a wholesale model, Deckers now manages the distribution of UGG, Teva and Simple brands in the U.K. and the UGG and Simple brands in the Benelux region. This will help capture incremental sales by selling directly to wholesale customers.

Other Financial Aspects

Deckers ended the quarter with cash and cash equivalents balance of $325.2 million, down 2.6%, which excludes the cash payment of $126.6 million associated with the acquisition of substantially all of the assets related to the Sanuk brand that closed on July 1, 2011.

In the quarter, shareholders’ equity was $648.9 million, excluding a non-controlling interest of $3.2 million. This provides ample liquidity to capitalize on future growth opportunities.

During the quarter, Deckers did not buy back any shares. The company still has approximately $20 million at its disposal under its $50 million share repurchase authorization announced in June 2009. Capital expenditures for the quarter were $54.5 million.

Acquisition Update

Recently on July 1, Deckers has completed its buyout of the Sanuk brand with an initial payment of $120 million in cash. The Sanuk brand is known for its exclusive sandals and shoes and marketing.

The deal included participation payments based on the performance of the brand in the next five years and contained certain assets and liabilities of the brand. The buyout will help Deckers in gaining Sanuk’s customer base in the action sports footwear segment and will be modestly accretive to the earnings of fiscal 2011.

Walking through Guidance

Based on strong growth in all the brands and an improved outlook, management is raising its full-year outlook, including the impact of the Sanuk brand which was acquired on July 1, 2011.

The company now forecasts a total revenue growth of 26% and earnings per share increase of 17% in fiscal 2011. Earlier, Deckers had projected total revenue to increase by 21% and earnings per share to rise by 13%. Besides, the company anticipates the newly acquired Sanuk brand to generate sales in the low $20 million range in the remaining year of 2011.

Further, the outlook for fiscal 2011 includes approximately $34.5 million, or 60 cents per share, pertaining to incremental investments and expenses in 2011.

For third-quarter 2011, Deckers projects revenue growth of 38% and earnings growth of 22%, whereas the company forecasts revenue growth of 22% and earnings growth of 36% for the fourth quarter of 2011.

The current Zacks Consensus Estimate for third-quarter 2011 is $1.52 per share. Following the company’s recent improved guidance, we believe that growth of UGG and Teva brands will lead to the increase in sales. Deckers anticipate its UGG brand sales to increase approximately 25% and Teva brand sales to increase in the low 20% range in 2011.

Moreover, the company’s growth opportunities in key geographic regions, including retail store openings, and acquiring the innovative Sanuk brand will strengthen the focus on product innovation and terrain expansion facilitated the company to achieve robust growth.

Currently, we have a long-term ‘Neutral’ rating on the stock. However, Deckers, which competes with Nike Inc. (NKE - Analyst Report) and Timberland Co. (TBL), holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.

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