Strong demand for the UGG brand product line, product introductions and in-demand inventory has helped Deckers Outdoor Corporation (DECK”>DECK) to carve a niche in the footwear and accessories market for outdoor sports.
We believe that growth of UGG and Teva brands will lead to increase in sales. Deckers anticipates its UGG brand sales to increase approximately 25% and Teva brand sales to increase in the low-20's in 2011, while other brand sales are expected to remain flat with the prior year. Deckers’ top line has increased at a CAGR of 35% in the last five fiscal years.
In order to seek better prospects and enhance its earnings potential, Deckers has taken initiatives like diversification of merchandise offering, resumption of distribution rights in significant geographic areas, rapid retail store openings, acquisition of the Sanuk brand, and strengthening of the eCommerce platform.
International markets provide a significant growth opportunity inspiring our optimism about the company’s incremental sales. Deckers distributes its products throughout Europe, Asia Pacific, Canada, and Latin America.
Earlier, the company had posted better-than-expected second-quarter 2011 results. A quarterly loss per share of 19 cents was narrower than the Zacks Consensus Estimate of a loss of 24 cents.
Deckers said that total net sales jumped to $154.2 million, up 12.5% from the prior-year quarter, and ahead of the Zacks Consensus Estimate of $143 million. The company’s robust growth in all its divisions and sustained focus on product innovations along with geographic expansion have helped achieve higher growth.
Based on strong growth in all the brands and an improved outlook, management raised its full-year outlook. Including the impact of the Sanuk brand acquired on July 1, the company now forecasts total revenue growth of 26% and earnings per share increase of 17% for fiscal 2011. Earlier, Deckers had projected total revenue to increase 21% and earnings per share to rise 13%.
Deckers portrays a healthy balance sheet with cash and cash equivalents of $325.2 million and no debt at the end of second-quarter 2011. It has ample liquidity to capitalize on growth opportunities.
However, the company’s over-reliance on the UGG brand is a matter of concern. In the event of stagnation or decline of UGG sales growth, Deckers’ overall results will be affected adversely. This is because the percentage of contribution from the company’s other brands is too small to offset any slowdown in UGG sales.
Moreover, Deckers faces intense competition in the footwear industry from other big players such as Nike Inc. (NKE”>NKE) on several attributes such as style, price, quality, comfort and brand strength. This may dent the company’s sales and margins.
Given the pros and cons, we maintain our Neutral rating on the stock. Further, Deckers’ increased sales and earnings outlook is well defined by a Zacks #2 Rank, which translates into a short-term 'Buy' recommendation.
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