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Deckers Projects Higher Profits for 2018

By Dan Caplinger – May 25, 2017 at 10:40PM

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The shoemaker made investors a lot happier with a solid performance and optimistic guidance.

Footwear producer Deckers Outdoor (DECK -3.25%) has dealt with many of the same struggles as other companies in the retail sector. Despite the historical success of its Uggs line of boots, Deckers has had to search for ways to sustain its growth and remain profitable, and that's an especially tough challenge during seasonally slow months for its business.

Coming into Thursday's fiscal fourth-quarter financial report, Deckers investors fully expected that the company would suffer a modest loss, and see declines in its revenue. Yet Deckers did better than those expectations, actually turning an adjusted profit and projecting better results for the new fiscal year. Let's look more closely at Deckers and what its results say about its future.

Assembly line for Uggs.

Image source: Deckers.

Deckers puts in a solid performance

Deckers Outdoor's fiscal fourth-quarter results delivered on what most investors had wanted to see. Revenue slid by 2.4%, to $369.5 million, but that was less than half the decline that those following the stock were expecting from the shoe retailer.

Decker's GAAP net loss was only about half what it was in the previous year's fiscal fourth quarter, and after making allowances for extraordinary items, adjusted net income of $3.44 million worked out to $0.11 per share. That was flat from year-ago levels and far better than the consensus forecast for an adjusted loss of $0.06 per share.

Taking a closer look at the numbers, Deckers Outdoor made a lot of progress in controlling its cost of sales, as gross margin improved by more than 2 percentage points, to 43%. Reductions in promotional activity and improvements to Deckers' supply chain helped the results, offsetting some negative foreign-exchange impacts from a strong U.S. dollar. Operating expenses rose at a faster rate than sales, but much of the jump came from extraordinary restructuring and impairment charges.

Deckers' various brands performed in a fairly consistent manner with previous quarters. Sales of Uggs were down 1%, as the domestic wholesale business was weak enough that better performance internationally and in direct-to-consumer sales wasn't enough to offset the overall decline. Teva and Sanuk continued to be substantial drags on Deckers' performance, as both posted double-digit sales declines from year-ago levels. The only bright side came from the company's other brands category, where strength in the Hoka One One line was the biggest contributor to a 21% jump in segment revenue.

From a channel perspective, Deckers had a tough time with traditional retail distribution, seeing net sales fall almost 6% in the wholesale arena. Direct-to-consumer sales were up, but only by 3%, representing about two-fifths of total sales. International sales posted modest growth, but domestic weakness pulled the entire company's numbers downward.

What's ahead for Deckers?

CEO Dave Powers was thrilled with the internal efforts that Deckers has made to control costs. "Over the course of the past year," Powers said, "the organization has been hard at work identifying margin enhancing initiatives and detailing plans that significantly improve the profitability of the company." The CEO pointed to specific plans to produce between $100 million and $150 million in cost savings by fiscal 2020.

Those savings were just part of the relatively favorable guidance that Deckers gave investors. For the fiscal first quarter, which is historically extremely weak due to weather and shopping patterns, Deckers expects to lose $1.65 to $1.70 per share on an adjusted basis, but sales should climb by low-single-digit percentages from year-ago levels.

More encouraging was Deckers' full-year guidance for fiscal 2018. The shoe company expects sales to be flat to down 2%, but improving margin and expense figures should help Deckers produce adjusted earnings of $3.95 to $4.15 per share. That would represent growth of 3% to 9% from fiscal 2017's final numbers, and it would get Deckers back on target to return to a more sustainable growth path going forward.

Deckers shareholders were quite pleased with the news, and the stock jumped 13% in after-hours trading following the announcement. The turnaround isn't a sure thing just yet, but Deckers showed investors that it has made significant progress. If the company can sustain its forward momentum, then Deckers could see fundamental improvement continue into the coming fiscal year.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Deckers Outdoor. The Motley Fool has a disclosure policy.

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