Image: Deckers.
The holidays are a key season for any consumer goods company, and Deckers Outdoor (DECK -5.54%) depends on a successful gift-giving season to support its business. Coming into Thursday's fiscal third-quarter financial report, Deckers investors wanted to see that the company was on track to continue growing at least at a moderate pace.
Even though Deckers managed to exceed investor expectations on earnings, its lagging sales and downbeat guidance for 2016 made shareholders think twice about the stock's value proposition, even at a depressed price. Let's look more closely at how Deckers did this quarter, and what could lie ahead for the shoe maker in the year to come.
Deckers feels the pinch
Deckers Outdoor's fiscal third-quarter results were mixed in the eyes of most investors. Revenue climbed 1.4%, to $795.9 million, which was a record level, but still well below the 6% growth that investors had hoped to see. Net income inched higher by 0.1%, to $156.9 million, but a dramatic reduction in share counts sent per-share earnings up to $4.78, topping the consensus forecast among investors by $0.03 per share.
A closer examination of Deckers' results shows that Uggs utterly dominated the company's other brands. Ugg sales were up 1%, and made up more than 93% of the company's overall sales for the quarter. The dollar continued to weigh on sales, but only by about two percentage points, which is less than in past quarters. The company said global direct-to-consumer sales and domestic wholesale results improved, but international wholesale and distributor sales fell.
Sales of Deckers' other major brands were mixed. Teva revenue rose 3.2% due to an increase in international distributor sales, but the Sanuk brand continued to struggle, seeing a 17% drop in net sales due to weak wholesale and distributor performance. The Hoka One One brand again produced strong gains, pushing the Other Brands category up by nearly half, but making up less than 3% of its total revenue.
Deckers again saw stronger growth in its direct-to-consumer channel, but got the majority of its revenue from wholesale and distributor sales. Geographically, international sales fell solely because of the strong dollar, and in constant-currency terms, international sales outpaced domestic growth.
CEO Angel Martinez explained some of Deckers' difficulties. "Our third quarter was more challenging than we expected as warm weather and weak store traffic across retail pressured demand," Martinez said. The CEO said that, despite successful efforts to diversify beyond Uggs, Deckers needs to accelerate its efforts.
What's next for Deckers Outdoor?
To move forward more aggressively, Martinez said that Deckers would streamline its organization. Moves of the Sanuk and Ahnu brands will involve closing local offices, and Deckers will create two brand groups going forward. The Fashion Lifestyle group will include Ugg and Koolaburra brands, and Teva, Sanuk, and Hoka One One will go into the Performance Lifestyle category. Deckers also anticipates closing 20 retail store locations, and looking for other opportunities to cut costs, with the goal of producing $35 million in annual savings.
Deckers also lowered its guidance for the full year. The new revenue target of $1.86 billion is $100 million less than previously estimated, and even the constant-currency projection of $1.91 billion is less than investors expected. The downgrade in adjusted earnings to $5.15 per share is just a $0.03 reduction, but the GAAP expectation for $4.49 would be more than a quarter per share less than the current consensus forecast among investors.
Deckers investors were stunned by the results, and the stock fell more than 10% in after-hours trading following the announcement. Given the company's continued reliance on Uggs, Deckers has a lot of work to do to diversify its sales, and avoid a potential catastrophe in the future if the sheepskin boots go out of style.
