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Deckers Rallies More Than 20% in 3 Months: Can it Continue?

Zacks Equity Research

Shares of Deckers Outdoor Corporation DECK appears to be in good shape, courtesy of its increased focus on expanding brand assortments, product innovation, better marketing strategies on the digital front, sturdy e-commerce and enhanced omni-channel distribution. Notably, shares of the company have gained 20.5% in the past three months, outperforming the industry’s growth of 12.5%.

In fact, the Zacks Rank #3 (Hold) stock received a boost, following its second-quarter fiscal 2020 results. During the quarter, both top and bottom lines surpassed the Zacks Consensus Estimate and continued to improve on a year-over-year basis. This marked the 11th straight quarter of positive sales and earnings surprises. Robust performances in HOKA ONE ONE, Teva and Koolaburra brands contributed to results.

Encouragingly, management raised its fiscal 2020 view. Deckers now anticipates net sales of $2.115-$2.140 billion for fiscal 2020, which indicates growth of 5-6% from the year-ago reported figure. The company had earlier projected net sales between $2.100 billion and $2.125 billion for the same period. Adjusted earnings are envisioned to be $8.90-$9.05 per share, whereas it reported $8.84 per share in fiscal 2019. It had previously estimated earnings of $8.40-$8.60 per share for the period.

 

 

A Brief Introspection

Deckers remains focused on product and marketing strategies that are more inclined toward customers, and in this respect, it is implementing customer relationship management (CRM) software and concentrating on loyalty program. Moreover, the company is working toward the expansion of its product categories on consumers’ changing trends. In order to capture incremental sales and margins, it is selling directly to wholesale customers.

Keeping in these lines, the company has been constantly developing its e-commerce portal as per evolving consumer’s needs. In doing so, it made substantial investments to boost its online presence and improve shopping experience for customers. Additionally, expansion plans such as Retail Inventory Online; Infinite UGG; Buy Online, Return In Store; and Click and Collect to enhance customers’ shopping experience bode well.

These apart, the company boasts strong product portfolio — including Koolaburra, HOKA ONE ONE and UGG brands. Sturdy performances in these brands are likely to strengthen its position in the near term as well. In this regard, sales at the Koolaburra brand are expected to increase in the mid 50% range and sales from HOKA ONE ONE brand is anticipated to be up in the mid-to-high 40% range for the year. Also, management expects the UGG brand to witness flat to low-single-digit sales growth.

Hurdles

The company is grappling with challenging conditions in the EMEA region, which along with currency headwinds are expected to weigh on its sales to the tune of $25-$30 million for the remainder of fiscal 2020. Further, sluggishness in the Sanuk brand remains concerning. Management expects sales at the Sanuk brand to be down 30% in fiscal 2020. Also, the Sanuk domestic wholesale business is projected to remain soft on the decision to exit the warehouse channel.

Adding to the woes, higher freight costs and increased promotional environment are acting as deterrents. We note that gross margin in fiscal 2020 is expected to be 50.8%, whereas it reported 51.5% in fiscal 2019. Also, gross margin is projected to contract 90 basis points in the third quarter.  Moreover, operating margin is envisioned to be 15% in fiscal 2020, whereas it reported 16.2% in fiscal 2019 on increased SG&A expenses.

Bottom Line

Nevertheless, we expect brand strength, digital efforts and other growth endeavors to help keep the momentum going. In fact, the long-term earnings growth rate of 16.6% reflects Decker’s inherent strength. Moreover, the Zacks Consensus Estimate for fiscal 2020 top and bottom lines indicates year-over-year improvements of 6% and 2.6%, respectively.

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