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Increased cost pressures as well as higher markdowns took a toll on the financials of Deckers Outdoor Corporation (DECK - Analyst Report), as the company’s fourth-quarter 2012 earnings reached $2.77 per share, down 12.9% year over year.  

However, the quarterly earnings came ahead of the Zacks Consensus Estimate of $2.58 per share and also fared better than the projected decline of 14% in the bottom line, thanks to the share repurchases.  

Deckers’ total net sales inched up 2.2% year over year to $617.3 million but fell short of the Zacks Consensus Estimate of $632 million. The company had earlier forecasted top-line growth of 6%.

During the quarter, the company’s domestic sales declined 2.1% year over year to $446.7, whereas international sales jumped 15.6% year over year to $170.5 million.

Deckers, which competes with Wolverine World Wide Inc. (WWW - Snapshot Report), has been grappling with increased inventory and higher input costs, primarily an 80% rise in sheepskin costs. Moreover, warm weather conditions adversely impacted the demand of the UGG brand.

To counter this, Deckers decided to make retrospective adjustment in prices of selected Classic styles that were shipped since Jul 1, 2012. Moreover, in order to safeguard against rising sheepskin costs and other raw materials, Deckers has undertaken certain long term programs, which include increasing the mix of non-sheepskin merchandises, new casual footwear materials less prone to weather, and innovative production technologies.

The company is also eyeing other profitable markets, and remains focused on product introductions, store augmentation along with geographic expansion.

Segment Discussion

UGG brand net sales increased 2.9% to $584.8 million primarily driven by increased sales through new outlets and higher worldwide eCommerce sales. The increases were partly offset by fall in domestic and international wholesale sales and decreased comparable-store sales.

The sales for the Sanuk brand, known for exclusive sandals and shoes, were $15.3 million, up 39.2% from the year-ago quarter, attributable to increased domestic wholesale and eCommerce sales on account of higher consumer demand. 

Teva brand net sales plunged 29.5% to $13.7 million as the quarter lacked reorders resulting in lower distributor sales internationally.

Combined net sales of Deckers’ other brands for the quarter were $3.5 million, down 29.6% year over year as the company stopped the distribution of Simple brand.

Retail Stores sales ascended 37.1% to $135.5 million, propelled by the opening of 30 new stores but offset by a 3.4% decline in comparable-store sales.

eCommerce sales jumped 30.6% to $87.6 million, reflecting robust demand of the UGG brand in both domestic and international markets. Moreover, inclusion of new international eCommerce websites and higher domestic demand of Sanuk brand bolstered sales.

Margins

Gross profit waned 7.1% to $286 million from the comparable prior-year quarter due to an increase in cost of goods sold. Gross profit margin contracted 470 basis points to 46.3% due to higher product costs, increased markdowns and closeout sales and adverse product mix.

Operating income declined 18.5% year over year to $144.1 million, whereas operating margin contracted 600 basis points to 23.3%, reflecting lower gross profit and higher expenses.

Other Financial Aspects

Deckers ended the quarter with cash and cash equivalents of $110.2 million down significantly from $263.6 million in the year-ago quarter, while short-term borrowings increased to $33 million. The company had no short-term borrowings in the prior-year quarter. Shareholders’ equity was $738.8 million at the end of the quarter. 

During the quarter, Deckers bought back approximately 932,000 shares, aggregating $36 million or at a price of $38.64 per share. As of Dec 31, 2012, the company still had $79.3 million remaining at its disposal under its $200 million share repurchase authorization declared in Jul 2012.

On account of lower pre-bookings for the UGG brand, the company’s backlog went down significantly (by 17%) to $323 million as of Dec 31, 2012.

Guidance

This Zacks Rank #3 (Hold) stock now projects total revenue growth of 7% for 2013, anticipating an increase of 4% in UGG brand sales, 6% in Teva brand sales, 15% in Sanuk brand and sales worth $40 million in net sales of other brands.

Management now envisions a 5% rise in 2013 earnings per share. Deckers also forecasts gross profit margin to expand by 180 basis points to 46.5% expecting lower input costs, while operating margin is expected to be 12.5% of sales.

The company typically generates lowers sales during the first half of the year and hence foresees revenues to remain flat in the first quarter of 2013. Moreover, the company expects to post a loss of 12 cents per share.

Other Stocks to Consider

Until any further upward revision in the rating of Deckers, other stocks in the same industry worth considering include Skechers USA Inc.(SKX - Analyst Report) carrying a Zacks Rank #1 (Strong Buy) and Adidas AG (ADDYY) carrying a Zacks Rank #2 (Buy).

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