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Deckers Posts Stronger Performance but Ends Sale Plans

A poor environment for retailers has hurt Deckers Outdoor (NYSE: DECK) recently. The situation had gotten so bad that activist investors wanted Deckers to put itself up for sale, and the shoemaker did indeed do a strategic review process to consider various moves it could make. After particularly gloomy guidance last quarter, many were nervous about the company's long-term prospects.

Coming into Thursday's fiscal second-quarter financial report, investors had braced themselves for large potential drops in sales and earnings. Instead, Deckers was able to keep revenue declines to a minimum and actually boosted its earnings. Let's look more closely to see how Deckers did and what's ahead for the company.

Image source: Deckers Outdoor.

Deckers bounces back

Deckers Outdoor's fiscal second-quarter results showed both the difficulties it faces and the ways that it's working to overcome those difficulties. Revenue was down 0.7% to $482.5 million, which was a lot better than the nearly 10% dip that many had feared Deckers would suffer. Yet operating income was up by more than a fifth to $67.4 million, and that produced adjusted earnings of $1.54 per share, easily topping the $1.02-per-share consensus forecast among investors in the stock.

Among Deckers' key brands, Hoka One One continued to provide the bulk of the company's positive sales performance. Revenue for the brand jumped by more than a third compared to last year's fiscal second quarter. Gains in the Teva sandal line also helped lift overall sales, with a 25% rise adding about $4.3 million in incremental sales. However, poor performance from the key Uggs brand was too large to overcome, with a nearly 3% drop pulling down Deckers' top line. The Sanuk brand also performed poorly.

Deckers continued to see success in its direct-to-consumer channel. Revenue there was up 6% on a nearly 4% rise in comparable sales, and that stood in stark contrast to the 2% drop in wholesale-related revenue. Geographically, Deckers benefited from better conditions overseas, with international revenue rising 3.5% even as domestic sales fell by slightly more than 3%.

CEO Dave Powers was happy about the way Deckers did. "This quarter is yet another testament to the power of our transformation," Powers said, "as we generated a [2.2 percentage point] increase in gross margin and earnings per share that were ahead of expectations." The CEO also pointed to the company's long-term cost-cutting and revenue-enhancing efforts to boost its financial results.

What's next for Deckers?

Deckers is also optimistic about the future. In Powers' words, "As we head into the holiday selling season with a stronger product lineup and cleaner channel inventories compared to a year ago, we are confident that Deckers is well positioned to achieve our near- and medium-term financial targets."

That optimism showed up in boosted guidance for the remainder of the year. Deckers now believes that sales will be up 1% to 2% for the year, rather than flat to down 2% as it had expected three months ago. Adjusted earnings of $4.15 to $4.30 per share would be $0.15 to $0.20 higher than its previous guidance. Yet some might be disappointed with the Uggs maker's fiscal third-quarter adjusted earnings projections of $3.65 to $3.75 per share, as that would be weaker than the $4.10 per share that many investors expect.

Deckers also allocated capital toward buying back undervalued shares. It authorized a new $335 million repurchase program, bringing its total authorized available buyback to $400 million. That's about a fifth of Deckers' market cap, and it makes up for the fact that the company decided not to pursue a sale of all or part of its business in the immediate future.

Even with the results, Deckers shareholders didn't celebrate everything in the release, and the stock declined almost 2% in after-market trading following the announcement. In the long run, what matters is whether sales of Uggs will do well for the holiday season. If they do, then Deckers will be in a better position to implement key initiatives to bolster its results in fiscal 2019 and beyond.

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