Change or Die, Deckers

Like the meteor that destroyed the dinosaurs, the credit crisis threatens companies with extinction. Only by evolving and adapting to a changing market will some businesses stand a chance of survival -- Deckers Outdoors (Nasdaq: DECK  ) not least among them.

What's kicking at Deckers?
The shoemaker's management had previously projected 34% and 12% growth for its third-quarter top and bottom lines. However, in its recent earnings release, it one-upped itself by reporting $197 million in revenue and $1.97 in earnings per diluted share -- 52.5% and 34% better than last year's period, respectively.

Officers also raised expectations for year-over-year revenue growth to 52% from 43%. They're expecting similar 52% growth in the bread-and-butter fourth quarter. Speaking of bread and butter, the UGG brand's net sales increased 57% over last year's third quarter to nearly $179 million, as domestic retailers and international distributors anticipated the fall shopping season. Chairman and CEO Angel Martinez seems to believe that the kicks are as fashionable as ever. While pre-order volumes appear to substantiate that notion, we still don't know whether consumers will actually show up to buy them.

Better safe than sorry
Deckers distributors still haven't backed down. Expiration dates for canceling preorders have either passed or are rapidly approaching, and most shipments will likely go out as scheduled. As it enters its peak buying season, trade receivable and inventory levels tend to dominate Deckers' current assets. Consequently, the company's quick ratio has dropped by 30% from nine months ago, and its trade receivables contribute a higher percentage of its working capital.

As a precautionary measure, the company increased its bad debt reserves. Given the global macroeconomic crisis, that reinforcement is a prudent move. Small independent retailers present more credit risk than the big chains, but even the larger customers' creditworthiness will be tested next year. To insulate itself from the economic winter, Deckers is also tightening its capital expenditures, remaining ever-vigilant on its inventories, and increasing its selectivity when determining which projects to undertake.

The Foolish takeaway
Management seeks to further penetrate Eurasian markets and increase foreign revenue to $300 million by 2012. Achieving that projection would bring international sales' contributions to 30% of total revenue, compared with around 20% now. Moreover, long-term guidance calls for 10% annual total sales growth over the next four years. If its consumer appeal weakens despite these efforts, Deckers will have difficulty besting its hungry neighbors: Crocs (Nasdaq: CROX  ) , K-Swiss (Nasdaq: KSWS  ) , Skechers (NYSE: SKX  ) , and Timberland (NYSE: TBL  ) .

Immunity to the global credit market blight is not a luxury that Deckers enjoys. If it doesn't continue to evolve, its breadwinning UGG brand could face extinction. And if that gravy train dries up, the Teva and Simple brands, which contributed less than 10% of net sales combined last quarter, probably couldn't pick up the slack.

Survival of the fittest reigns supreme in the trendy footwear industry, where New York and Paris have controlling stakes in the natural selection. Unless it plans to bet on some miraculous, coelacanth-like resurrection, Deckers must continue to adapt, or go extinct.

More Foolishness:

Fool contributor Chris Jones does not own shares of any companies mentioned. Crocs is a Motley Fool Hidden Gems Pay Dirt recommendation. The Motley Fool has a disclosure policy that Darwin himself would be proud of.


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