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Deckers (DECK) Up 34% in a Year: Will Momentum Sustain?

Zacks Equity Research

Shares of Deckers Outdoor Corporation DECK have outperformed the industry in the past one year. Notably, shares of this Goleta, CA-based company have gained approximately 34% in the aforementioned time frame compared with the industry’s growth of 10.5%. Also, the stock has comfortably outperformed the Consumer Discretionary sector that has decreased 5.3% and the S&P 500 Index that grew 0.3% in the said time frame.

The company has been benefiting from its focus on expanding brand assortments, introducing more innovative line of products, targeting consumers digitally through marketing and sturdy e-commerce along with optimizing omni-channel distribution.

Backed by these tailwinds, the company commenced fiscal 2020 on a strong note, wherein both the top line and the bottom line beat the Zacks Consensus Estimate and improved year over year. Results gained from earlier delivery of wholesale and distributor shipments in the UGG brand and strong performance across HOKA ONE ONE brand. Consequently, management raised fiscal 2020 view.

For fiscal 2020, net sales are estimated in the band of $2.100-$2.125 billion, which indicate year-over-year growth of about 4-5%. The company had earlier guided net sales between $2.095 billion and $2.120 billion for fiscal 2020.

Let’s delve deeper into the factors that have been driving this Zacks Rank #3 (Hold) stock.

Factors Narrating Deckers’ Growth Potential

Deckers is focusing on product and marketing strategies that are more skewed toward customers and in this respect, it is implementing customer relationship management software and concentrating on loyalty program. Moreover, the company is focusing on expanding its product categories according to the customer purchasing trends. In order to capture incremental sales and margins, it is selling directly to wholesale customers.

The company is constantly developing its e-commerce portal to capture incremental sales. Deckers has made substantial investments to strengthen its online presence and improve shopping experience for its customers. Its focus on expanding programs — Retail Inventory Online; Infinite UGG; Buy Online, Return In Store; and Click and Collect — to enhance customers’ shopping experience is an added positive.

Apart from these, the company is undertaking efforts to bolster its portfolio. It is making marketing investments to build brand awareness of HOKA ONE ONE and UGG Men’s and UGG Women’s non-core category. Impressive performance across HOKA ONE ONE and Koolaburra brands aided results. The first-quarter fiscal 2020 results also gained from earlier delivery of wholesale and distributor shipments in the UGG brand and strong performance across HOKA ONE ONE brand driven by the launch of Carbon X.

Deckers now anticipates second-quarter net sales in the range of $515-$525 million. In the year-ago period, the company had reported $501.9 million net sales. Management expects revenues from HOKA ONE ONE brand to increase in the high 30% range for the year.

Near Term Headwinds

Deckers is grappling with falling sales from the Sanuk Brand. During the first quarter of fiscal 2020, net sales from the Sanuk brand came in at $18.7 million, down 23.5% year over year. Sanuk brand sales came in about $3 million below management’s expectation mainly due to sluggishness in the yoga sling franchise. Further, management expects reductions in the Sanuk domestic wholesale business on account of the decision to exit the warehouse channel. Though the move is likely to impact fiscal 2020 revenue adversely, it will help the brand focus on other underpenetrated channels.

Although full-year sales are anticipated to increase, margins are likely to be soft and earnings are expected to fall. Management expects gross margin for fiscal 2020 to be 50.5%. The company reported 51.5% gross margin in fiscal 2019. Also, operating margin is envisioned to be in the range of 14.5%. Operating margin in fiscal 2019 was 16.2%.

The company envisions fiscal 2020 adjusted earnings between $8.40 and $8.60 per share. We note that it had delivered adjusted earnings of $8.84 per share in fiscal 2019. For the second quarter, management forecasts adjusted earnings of $2.15-$2.25 per share. The company had reported earnings of $2.38 per share in the prior-year period.

Bottom Line

Although weakness in the Sanuk Brand has been eclipsing the company’s performance, we expect solid yields from UGG and HOKA ONE ONE brands along with other efforts to offset the aforementioned hurdles and help drive growth.

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