Image source: Deckers Outdoor.
The footwear business is one where fashions come in and out of style, and lately, Deckers Outdoor (DECK 3.34%) has suffered from concerns that its brands might be on the way out. Just as Crocs (CROX 1.53%) went through a stratospheric rise before falling back to earth, so too has Deckers and its Ugg brand of sheepskin footwear started to wane from its once-dominant position in the fashion world.
Coming into its fiscal second-quarter financial report, Deckers investors were looking to see a big slowdown in revenue growth and slight declines in earnings. Yet the company actually did better than expected, posting stronger sales and managing to minimize the damage to its bottom line. Let's take a closer look at what Deckers Outdoor told investors this quarter to see whether the share-price surge after its announcement makes sense.
For Deckers, the shoe fits
Deckers Outdoor's fiscal second-quarter results were quite impressive compared to the downbeat outlook that most investors had. Revenue rose 5.4% to $506.2 million, easily topping the $487 million in sales that analysts expected to see. Net income slid 3% to $36.3 million, but earnings of $1.12 per share were $0.06 better than the consensus forecast among investors.
Looking more closely at Deckers' results, the Ugg brand continues to drive the entire business, bringing in almost 85% of the company's total revenue. Ugg sales rose 0.9% during the fiscal second quarter, with the strong dollar costing the company more than four percentage points of potential growth. Domestic wholesale sales rose, which was the primary contributor to the segment's overall gains, but global direct-to-consumer sales dropped because of the strong dollar's influence in reducing tourist traffic within U.S. borders.
Meanwhile, Deckers' other major brands generally performed much worse. Sales of the Teva brand dropped almost 14%, with global wholesale and distributor sales falling sharply. The Sanuk brand had revenue decline by 9%, with rising global direct-to-consumer sales unable to offset a larger drop in global wholesale sales. The Hoka One One brand was the lone standout, helping to send sales in Deckers' Other Brands category up 30% for the quarter.
From a channel perspective, Deckers still got most of its revenue from wholesale and distributor sales, which rose 1.2% for the quarter. The direct-to-consumer channel enjoyed slightly faster growth of 2.1%, but comparable sales were down 5.2% compared to the year-ago quarter. Geographically, U.S. sales rose 4%, while international sales dropped 3%, but the drop was entirely due to 10 percentage points of currency pressure.
CEO Angel Martinez celebrated Deckers' positive results. "I'm very pleased with our current performance," Martinez said, "which wouldn't have been possible without the strategic investment we've made in key areas of the business over the past several years." He also pointed to its product innovation and its channel development efforts as helping to build up growth momentum even through some tough times for the company.
Can Deckers Outdoor turn things around?
Deckers' future guidance was mixed but generally favorable. For the full 2016 fiscal year, revenue of $1.96 billion would represent 8% growth and is slightly higher than investors expect. Earnings of $5.18 per share would also be slightly ahead of the current consensus forecast. Deckers' fiscal third-quarter guidance was a bit weaker than most expected, with the company projecting earnings of $5 per share compared to the $5.22 analyst estimate. Yet for the fiscal fourth quarter, Deckers sees its results holding up better than most expect.
Deckers has also been putting money toward stock repurchases. It bought back 354,000 shares of stock during the fiscal second quarter, spending $23.8 million to buy shares at an average price of just over $67 per share. That's substantially above the current stock price, but it has more than $100 million left in its current repurchase program for future use if it wants.
The real question going forward for Deckers is whether it can go beyond its Ugg brand to have further successes. What hurt Crocs was its inability to keep innovating, although the company did eventually bounce back somewhat as it found ways to come out with new products. Excitement about Hoka One One running shoes could be a catalyst toward further growth, but moving from a stylish fashion shoe like Ugg to an athletic shoe like Hoka One One is a substantial leap that might not bring as much business into the Deckers fold.
Deckers investors were happy about the results, sending the stock soaring 14% after the announcement. To justify that jump, Deckers will have to keep delivering strong results in the holiday season and beyond, but if it does, a true turnaround might actually be taking place.
