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Deckers Outdoor Corp.: "Less Bad" is Actually Good in Year of Transition


Deckers Outdoor is counting on its Hoka One One brand to help drive growth. Image source; Deckers Outdoor. 

It's not very often that a company can report an 18% decline in sales and a loss of $1.84 per share, and then see its stock price go up. But that was the case for Deckers Outdoor Corp. (NYSE: DECK) on July 29, following release of the company's fiscal first-quarter financial results. 

So what happened? In short: The company, which heavily relies on sales of its popular Ugg footwear and accessories during colder weather to drive results, reported "bad" numbers that weren't as bad as expected. In fact, there were things about the quarter that were actually pretty good, when considering that this is something of a transitional year for Deckers Outdoor. 

Here's a closer look at the company's first-quarter financial and operating results.

A look at the results versus the expectations

Here's how Deckers finished on the top and bottom lines, compared to investor expectations as reported in the earnings preview:

MetricQ1 2017Q1 2016 Actual ChangeExpected Change
Revenue  $174.4  $213.8 (18.4)%  (20)%
Earnings (loss) per share  $(1.84)  $(1.43) (28.7)%  (45)%

Revenue in millions. Data sources: Deckers Outdoor and Yahoo! Finance.

As you can see above, Deckers' actual revenue decline and loss versus the year-ago period were better (less bad?) than expectations, in what CEO Dave Powers called a "year of transition" for the company. 

Keys to the quarter

On the earnings call, CFO Tom George reiterated that the company was expecting the revenue decline Deckers reported, as the company works through changes in its product lineup that are impacting the timing of sales, both at retail and with distributors and wholesale. He pointed out that some sales were pulled into the prior quarter (Q4 of 2016) due to planned implementation of a new ERP system at the start of the first quarter, and also stated that some orders shifted into the second quarter, due to new products that will launch in Q2. In other words, there's definitely some timing impact here. 

But at the same time, the company reported about $5 million more in sales than its Q2 guidance was calling for, due to better sales than expected, and fewer closeout sales than anticipated. Fewer closeout sales meant more revenue; they were also a driver behind a lower net loss than expected, and 43.7% gross margins, which were better than the year-ago quarter. 

Expenses were up too, however. The company reported it spent $155 million on sales, general, and administrative expense, $4 million more than last year; this was primarily due to higher fixed costs related to new retail-store openings, and depreciation related to the ERP implementation. But also like revenue, the end result was actually better than expected, largely because of a shift in marketing spending to the third quarter. 

Put it all together, and management was pretty clear that it saw both some gains and some headwinds in the quarter, but that both were largely timing, as the company builds on its progress heading into the part of the year when it generates the vast majority of revenue and profits. 

Taking a step forward

Deckers reaffirmed its guidance for the full year, with expectations of $4.05 to $4.40 per share net income, excluding about $15 million in restructuring charges. For the upcoming second quarter, management expects earnings per share of $1.12 to $1.22, which would be an improvement from $1.11 per share last year. Revenue is expected to start growing again, up between 1% and 3% in the quarter. George also said that the company would shift marketing expense into the third quarter, its most important. 

Deckers Outdoor is still heavily reliant on its Ugg brand, but the company continues working to expand its lineup in ways that will help generate more year-round sales. This includes sandals, boots, running and casual shoes from several of its other brands including Teva, Ahnu, Sanuk, and Hoka One One, which recently had its Clayton running shoe named "Editor's Choice" by Runner's World magazine. 

Looking ahead

Deckers has become synonymous with its Ugg brand, but management is working hard to change that by growing its other brands. It's early in the process, but the company hopes to build on Ugg's success and to strike footwear gold with Teva, Hoka One One, or one of its other brands. That could help leverage its high fixed costs in warmer months while allowing it to focus resources on its cash cow (sheep?), Ugg, when the weather turns chilly. 

There's a lot of work to be done, but the company has been dedicating more resources to its other brands in recent quarters, and global demand for active and leisure footwear is on pace to grow with the global middle class for years to come. Deckers Outdoor can benefit from that, both with Ugg and by continuing to develop and market its other well-received, if less well-known, brands.

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Jason Hall has no position in any stocks mentioned. The Motley Fool recommends Deckers Outdoor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.