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Deckers Sees a Tough Time Ahead

By Dan Caplinger - May 26, 2016 at 6:49PM

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The footwear company did better than investors had expected in the first quarter, but gave ugly guidance for the full year.

Image source: Deckers.

The retail environment has been a tough one throughout the industry, and footwear specialist Deckers Outdoor (DECK -2.80%) has worked hard to try to overcome strong headwinds that have made many of its industry peers suffer. Coming into Thursday's fiscal fourth-quarter financial report, Deckers investors were hoping that the company would be able to post a modest profit and growing sales, and Deckers managed to execute well on that front.

Yet what many investors are now worried about is the downbeat guidance that the company gave investors as part of its report. Let's take a closer look at exactly what Deckers said in its report, and what investors may see for the remainder of the year, and beyond.

Deckers tops expectations

Deckers' fiscal fourth-quarter results were reasonably solid from most investors' perspectives. Revenue jumped 11%, to $378.6 million, setting a new record and nearly doubling the pace of growth that most investors were expecting to see. Despite a large GAAP net loss, adjusted net income came in positive at $3.6 million, and that produced adjusted earnings of $0.11 per share. That was $0.05 per share above the consensus forecast among those following the stock.

Looking more closely at Deckers' results, currencies continued to play a role in holding back sales, but that impact has lessened. During the quarter, the strong dollar cost Deckers only about a percentage point of sales growth. Direct-to-consumer comparable sales rose 2.6%.

On a brand-by-brand basis, the company's key Uggs line enjoyed 13% sales growth, which Deckers said was due to rises in the wholesale business, as well as direct-to-consumer sales. Teva revenue also jumped double-digit percentages thanks to wholesale strength, and the catch-all other-brand category climbed 12%, thanks to outperformance once again from the Hoka One One shoe line. Only the Sanuk brand remained weak, and even its sales were down just 2%.

Deckers' performance by other metrics was relatively consistent. Wholesale and distributor sales grew at a faster pace than direct-to-consumer sales, and international sales growth outpaced gains in domestic revenue by about two percentage points.

CEO Angel Martinez was quite pleased with the results. "Our stronger than expected fourth quarter non-GAAP operating results are very encouraging," Martinez said, "given the current market environment." The CEO also pointed to record warm weather across the globe in holding Deckers back throughout the entire fiscal year.

Can Deckers jump forward?

Deckers is optimistic about the company's long-term prospects. As Martinez said, "While these issues have created lingering headwinds for the industry, I am confident that Deckers is well positioned to increase long-term shareholder value."

However, investors will need to look to another leadership team to produce those results. In a separate announcement, Deckers said that Martinez will give up the CEO post, remaining as board chairman, but turning over the executive reins to Dave Powers. With experience at Nike, Timberland, and Gap, Powers has been at Deckers since 2012, and he believes that he can continue the progress that his predecessor has made toward greater success.

Still, the near term could be difficult for investors in Deckers. Fiscal 2017 net sales will likely be flat to down 3% according to the company's guidance, and earnings of $4.05 to $4.40 per share would be well below the $4.60 per share consensus expectation among investors. The current quarter could be uglier still, with Deckers projecting a loss of $2.10 to $2.20 per share, and sales falling between 20% and 25%. The fiscal first quarter is traditionally weak for Deckers, given the cold-weather appeal of its Uggs boots. Yet those numbers are far below the losses and sales declines that investors were preparing to see.

Deckers investors didn't have an immediate negative reaction to the news, as the stock fell just half a percent in after-hours trading following the announcement. Nevertheless, for the company to avoid more pain down the road, Deckers will have to work hard to innovate and broaden its product lines to give itself a more-balanced path toward long-term growth.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
$10.33 (-5.49%) $0.60
NIKE, Inc. Stock Quote
NIKE, Inc.
$108.63 (0.58%) $0.63
Deckers Outdoor Corporation Stock Quote
Deckers Outdoor Corporation
$248.13 (-2.80%) $-7.15

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