Deckers Outdoor Corporation (DECK) posted third-quarter 2013 earnings of 95 cents a share that surpassed the Zacks Consensus Estimate of 72 cents, buoyed by expanding direct-to-consumer operations, omnichannel strategies, effective inventory management and optimum capital allocation.
However, the quarterly earnings dropped significantly by 19.5% from $1.18 earned in the year-ago quarter due to higher selling, general and administrative expenses (up 20.8%).
Deckers’ total net sales jumped 2.7% year over year to $386.7 million and came almost in line with the Zacks Consensus Estimate. Earlier, management had anticipated revenue to climb 2.5% for the quarter under review.
During the quarter, the company’s domestic sales declined 1.4% year over year to $238.8 million. However, international sales rose 10.3% to $147.9 million.
Rising sheepskin costs has always been a concern for Deckers. In order to safeguard against rising sheepskin costs and other raw materials, the company 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. Also, Deckers has developed a new material namely UGG Pure to safeguard against cost fluctuations.
The company is also targeting other profitable markets, and remains focused on product introductions, store augmentation along with geographic expansion. Management is eyeing opportunities for store expansion in Asia, mainly Japan and China.
Segment Discussion
UGG brand net sales rose 1.3% to $337 million, primarily due to an increase in direct-to-consumer business on account of new store openings and the commencement of new e-Commerce websites, partly offset by a fall in domestic wholesale sales. The company during the quarter opened 15 UGG brand outlets with major openings coming up in Asia. Deckers anticipates opening 36 outlets this year (24 in Asia), and remains on track to take the store count to 113 by the end of the year.
Teva brand net sales showed a marginal improvement of 0.6% to $18 million, reflecting a rise in wholesale and direct-to-consumer sales globally, partly offset by a drop in international distributor sales.
Sales for the Sanuk brand, known for its exclusive sandals and shoes, were $18.4 million, up 0.5% from the year-ago quarter, reflecting higher wholesale sales globally and rise in domestic direct-to-consumer sales, offset by a decline in distributor sales, principally in the Asia Pacific region and in Canada.
Combined net sales of Deckers’ Other brands for the quarter were $13.3 million that surged 81.3% year over year on the back of HOKA ONE ONE brand, acquired in Sep 2012.
Retail Stores sales ascended 34.5% to $52.6 million, propelled by the opening of 37 new stores after third-quarter 2012 and comparable-store sales growth of 1.9%. Deckers witnessed comps growth in high teens in China, a low double-digit increase in Japan, a low single-digit rise in the European region, partly offset by a low single-digit decline in the U.S. comps.
e-Commerce sales surged 12.2% to $14.9 million, reflecting robust demand of the UGG brand in international markets and the inclusion of new international eCommerce websites.
Gross profit climbed 4.8% to $166.9 million from the comparable prior-year quarter, whereas gross margin expanded 90 basis points to 43.2%. Deckers reported operating income of $46.5 million, down 22% from the prior-year period, whereas operating margin contracted 380 basis points to 12%.
Other Financial Aspects
Deckers ended the quarter with cash and cash equivalents of $84.1 million, up significantly from $61.6 million in the prior-year quarter. Shareholders’ equity was $755.8 million at the end of the quarter. Inventories declined 8.6% year over year to $444.6 million. The company had borrowings of $245.5 million under its credit facility.
Management anticipates capital expenditures between $85 million and $90 million for 2013.
During the quarter, Deckers did not buy back any shares. As of Sep 30, the company had $79.3 million remaining at its disposal under its $200 million share repurchase authorization declared in Jul 2012.
Guidance
This Zacks Rank #1 (Strong Buy) stock continues to project total revenue growth of 8% for 2013, anticipating an increase of 7% to 8% in UGG brand sales, flat to marginally down sales at Teva brand, 5% increase in Sanuk brand sales and sales worth $39 million from other brands.
Management now envisions a 10% rise in 2013 earnings per share, up from 8% predicted earlier.
Deckers reiterated revenue growth of 14.5% for the fourth quarter, however, with some selling, general and administrative expenses coming in the fourth quarter from the third quarter, earnings per share are forecasted to surge 32% from the year-ago quarter, down from 38% projected earlier.
Other Stocks to Consider
Besides Deckers, other stocks worth considering include Carter's, Inc. (CRI) and Brown Shoe Co. Inc. (BWS), both carrying a Zacks Rank #1 (Strong Buy) and Nike, Inc. (NKE) sporting a Zacks Rank #2 (Buy).
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