Earnings Preview: Deckers

Zacks

Deckers Outdoor Corporation (DECK) is slated to report its second-quarter 2012 financial results on July 26, 2012. The current Zacks Consensus Estimate for the quarter portrays a wider loss of 60 cents a share compared with a loss of 19 cents reported in the year-ago quarter. Revenue, as per the Zacks Consensus Estimate, is $166 million.

First-Quarter Overview

The first-quarter earnings of 20 cents a share missed the Zacks Consensus Estimate of 25 cents, and dropped more than 50% from 49 cents earned in the prior-year quarter.

However, Deckers’ total net sales of $246.3 million came almost in line with the Zacks Consensus Estimate, and jumped 20.2% from the prior-year quarter, reflecting strength across the Sanuk brand coupled with healthy demand for the UGG brand’s spring collection. However, these were partially offset by sluggishness experienced in UGG boots sales due to unusually warm weather conditions.

Guidance

Management lowered the fiscal 2012 guidance following the company’s disappointing first-quarter results. Management projects total revenue growth of 14% for fiscal 2012 (down from its earlier guidance of 15% increase).

Earnings per share is expected to decline between 9% and 10% (the company’s earlier projection of fiscal 2012 earnings was flat with the prior year). Deckers also forecast a gross profit margin contraction of 250 basis points (earlier the company forecasted a contraction of 200 basis points in gross margin).

Though management forecasted an 8% growth in total revenue for the second quarter of 2012, it anticipates a loss per share of 60 cents. Gross margin is expected to be about 43%, whereas SG&A expense as a percentage of sales is anticipated to be around 63% due to increased fixed overhead for new retail outlets.

Agreement of Estimate Revisions

During the last 30 days, there were no upward or downward revisions in the estimates for the upcoming quarter. However, for fiscal 2012, 2 out of 13 estimates were revised downwards, while none were raised.     

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the quarter remained stable over the last 30 days.  However, it decreased 3 cents for fiscal 2012 as continuously rising sheepskin prices and other input costs are pulling down the margins for the company. Moreover, analysts remain concerned about the lingering economic woes, which is likely to hamper the company’s sales and profitability in the near term.

Mixed Surprise History

With respect to earnings surprises, Deckers has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 20% to a positive 20.8%. The average stands at a positive 5.3%, indicating that the company has surpassed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Our Take

Deckers is trying every means to keep itself afloat in a difficult consumer environment, by focusing on new product introductions, and new store openings along with geographic expansion.

The company portrays a debt-free balance sheet and is actively managing its cash flows, returning much of its free cash to shareholders via share repurchases, and is making prudent capital expenditures.

However, rise in sheepskin prices and increased operating expenses are likely to hurt profitability in the coming quarters. Further, sluggish economic condition continues to weigh upon the company, indicating a dismal outlook in terms of profitability and consequent growth.

Currently, we have a long-term Underperform recommendation on the stock. However, Deckers, which competes with Nike Inc. (NKE), Wolverine World Wide Inc. (WWW) and Timberland Co. (:TBL), holds a Zacks #3 Rank that translates into a short-term Hold rating.

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