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Deckers (DECK) Down 2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Deckers (DECK). Shares have lost about 2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Deckers due for a breakout? 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 Tops Q3 Earnings Estimate, Raises FY20 View

Deckers Outdoor Corporation continued with its upbeat performance in fiscal 2020. The company’s third-quarter results are the testament to the same. Remarkably, both the top and the bottom lines surpassed the Zacks Consensus Estimate and continued to improve on a year-over-year basis. Impressive performance across HOKA ONE ONE and Koolaburra brands, and strength witnessed at the UGG brands’ domestic operations aided the results.

Notably, this marked the 12th straight quarter of positive sales and earnings surprises. Apparently, better-than-expected numbers prompted management to lift fiscal 2020 view. However, the company’s fourth-quarter projection came below analysts’ expectations.

Nonetheless, the company 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.

Let’s Delve Deep

This Goleta, CA-based company reported quarterly earnings of $7.14 surpassing the Zacks Consensus Estimate of $6.50. The figure also improved significantly from $6.59 reported in the year-ago period. Higher net sales and improved gross margin aided the bottom line.

Net sales rose 7.4% to $938.7 million during the reported quarter, following an increase of 8% in the preceding quarter. The metric also surpassed the Zacks Consensus Estimate of $898.6 million. On a constant currency basis, net sales improved 8.4%.

Deckers had earlier guided net sales in the range of $885-$900 million and earnings in the band of $6.30-$6.40 per share for the quarter under review. However, the company went on to report better-than-anticipated results. The quarterly results gained from strong performance across HOKA ONE ONE brand, earlier wholesale shipments for the UGG brand, and reorders captured in the Koolaburra brand.

Gross margin expanded 30 basis points to 54.1% during the quarter under review due to reduced promotional activities. The company reported operating income of $255.8 million, up 5.6% year over year. However, operating margin shrunk 50 basis points to 27.2%.

SG&A expenses jumped 11.8% year over year to $251.9 million, while as a percentage of net sales SG&A expenses increased 100 basis points to 26.8%.

Sales by Geography & Channel

The company’s domestic net sales jumped 12.7% to $645.7 million in the reported quarter. Meanwhile, international net sales fell 2.6% to $293.1 million. Direct-to-Consumer net sales rose 5.6% to $413.7 million. Direct-to-Consumer comparable sales climbed 4.7% year over year. Wholesale net sales in the reported quarter grew 8.9% to $525.1 million.

Brand-wise Discussion

UGG brand net sales increased 2.6% to $781.1 million in the reported quarter. Koolaburra brand global sales soared 94% to $39 million.

HOKA ONE ONE brand net sales surged 63.6% to $93.1 million, while Teva brand net sales declined 25.1% to $17.2 million. Net sales for the Sanuk brand, known for its exclusive sandals and shoes, came in at $8.5 million, down 34.5% year over year.

Other Financial Aspects

At the end of the quarter, Deckers had cash and cash equivalents of $616.9 million, total short-term borrowings and mortgage payable of $37.1 million and shareholders’ equity of $1,123.7 million. During the quarter under review, Deckers did not make any share repurchases. As of Dec 31, 2019, the company had $160 million remaining under share repurchase program.

Guidance

Deckers now anticipates fiscal 2020 net sales to be in the band of $2.150-$2.160 billion, which indicates year-over-year growth of about 6-7%. The company had earlier projected net sales between $2.115 billion and $2.140 billion.

The company also forecast adjusted earnings between $9.40 and $9.50 per share. The company had delivered adjusted earnings of $8.84 per share in fiscal 2019. Management had previously estimated earnings in the range of $8.90-$9.05 per share.

Deckers anticipates flat to low single-digit sales growth at UGG brand. Management now expects sales from HOKA ONE ONE brand to reach about $350 million. Sales at Teva brand is expected to be approximately flat, while at Koolaburra brand the metric is expected to reach approximately $70 million. This will be offset by reduction in the Sanuk revenues on account of the decision to exit the warehouse channel. Sanuk is expected to be down in the mid 30% range.

Gross margin for the current fiscal year is anticipated to be 51.5%, flat year over year. Further, SG&A expenses as a percentage of sales is projected to be marginally lower than 36%. Operating margin is envisioned to be at or marginally better than 15.5% compared with 16.2% in fiscal 2019.

For the fourth quarter, net sales are estimated to be in the range of $392-$402 million, the mid-point of which — $397 million — is higher than $394.1 million reported in the year-ago period. Management forecasts fourth-quarter earnings in the band of 35-45 cents a share, which is substantially below the prior-year reported figure of 85 cents.

Management expects fourth-quarter sales from HOKA ONE ONE brand to increase in the high 40% range. Sales at Teva brand is anticipated to rise in the mid to high-teens, while at Koolaburra brand the metric is expected to increase in high teens. This will be offset by lower Sanuk brand sales on account of the decision to exit the warehouse channel. Sanuk is expected to be down approximately 50%. Sales at UGG are anticipated to decline roughly 8-11% thanks to ongoing reset and pressure in Europe. Also, the impact of current travel restrictions in China because of the coronavirus outbreak cannot be ignored.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -33.53% due to these changes.

VGM Scores

Currently, Deckers has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Deckers has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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