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Deckers (DECK) Up 16.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Deckers (DECK). Shares have added about 16.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Deckers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Deckers Q4 Earnings Surpass Estimate, Decline Y/Y

Deckers Outdoor Corporation came out with fourth-quarter fiscal 2020 results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate but declined year over year, thanks to the coronavirus outbreak that compelled the company to keep its stores closed. While the impressive performance across HOKA ONE ONE and Teva brands aided the results, UGG and Sanuk brands took the sheen out of the stock. Nonetheless, this marked the 13th straight quarter of positive sales and earnings surprises.

In mid-March, Deckers temporarily closed its retail stores in North America and Europe. Stores in Japan were also closed due to this biological catastrophe. In the earnings call, the company informed that approximately 20% of stores in North America are open and operating in a limited capacity; about half of stores in EMEA are open; roughly 20% of stores in Japan are open; and all of owned retail stores in China are operational. Also, the company has started operations on a limited capacity across its distribution center in Moreno Valley, California, as well as other third-party distribution facilities.

The company, undoubtedly, remains focused on expanding brand assortments, introducing more innovative line of products, targeting consumers digitally through marketing and sturdy e-commerce, and optimizing omni-channel distribution. All these bode well for the company. However, management did caution that the company’s performance in fiscal 2021 might be impacted depending on the period and brutality of COVID-19.

To address the challenges tied to the pandemic, Deckers remains focused on lowering operating expenses. The company is curbing employee travel, suspending hiring of certain non-essential associates and annual salary increment, switching over to virtual meetings, and eliminating or deferring other discretionary expenditures.

Let’s Delve Deeper

Deckers posted quarterly earnings of 57 cents a share that came miles ahead of the Zacks Consensus Estimate of 3 cents. However, the figure declined significantly from the 85 cents reported in the year-ago period. Lower net sales and higher SG&A expenses hurt the bottom line.

Net sales fell 4.9% to $374.9 million during the reported quarter, following an increase of 7.4% in the preceding quarter. However, the metric surpassed the Zacks Consensus Estimate of $346.5 million. On a constant currency basis, net sales decreased 4.5%. The lower than expected revenue was predominantly driven by approximately $25 million headwind related to the COVID-19 pandemic.

We note that the gross margin contracted 10 basis points to 51.5% during the quarter, driven by gains in performance lifestyle group. The company reported operating income of $16.7 million, down from the year-ago period’s $32.9 million. Again, the operating margin shrunk 390 basis points (bps) to 4.4%.

SG&A expense jumped 3.5% year over year to $176.3 million, while as a percentage of net sales SG&A expense expanded 380 bps to 47%.

Sales by Geography & Channel

The company’s domestic net sales decreased 8.4% to $230.8 million in the reported quarter. Meanwhile, international net sales advanced 1.4% to $144.1 million. Direct-to-Consumer net sales decreased 7.9% to $144.2 million. Direct-to-Consumer comparable sales slid 3.7% year over year. Wholesale net sales in the reported quarter declined 2.9% to $230.7 million.

Brand-wise Discussion

UGG brand net sales decreased 17.9% to $196.3 million in the reported quarter. HOKA ONE ONE brand net sales surged 51.8% to $101.9 million, while Teva brand net sales rose 12.5% to $59.6 million. Net sales for the Sanuk brand, known for its exclusive sandals and shoes, came in at $13.3 million, down 57.8% year over year.

Other Financial Aspects

At the end of the reported quarter, Deckers had cash and cash equivalents of $649.4 million, total short-term borrowings and mortgage payable of $30.9 million and shareholders’ equity of $1,140.1 million. The company had $469.5 million available under its existing revolving credit facilities. During the fiscal fourth quarter, Deckers did not make any share repurchases. As of Mar 31, 2020, the company had $160 million remaining under its share-repurchase program.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months. The consensus estimate has shifted 36.99% due to these changes.

VGM Scores

At this time, Deckers has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Deckers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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