Specifically, the company posted EPS of $6.59, easily surpassing the $5.29 consensus, with revenue up 8% to $873.8 mln to also crush the $822.9 mln expectation. On top of that, DECK authorized an additional $261 mln to its existing share repurchase program, for a total of $350 mln available for future buy-backs. As a result, the stock is launching higher this morning, trading at its highest levels since the fall of 2011.
While DECK's Q3 results were unquestionably impressive and business is certainly strong, the company really tried to manage investors' and analysts' expectations going forward during the earnings call last night. Its Q4 outlook was quite weak with DECK forecasting EPS of $0.00-$0.10 vs. the $0.28 consensus on revenue of $360-$374 mln vs. the $394.2 mln expectations. But, given that Q4 is a seasonally slow period, investors don't seem overly concerned with the downside outlook, instead focusing on the exceptionally strong Q3 results, a much more important (and insightful) quarter due to the holiday selling season.
That said, management's more cautious tone regarding its fiscal year 2020 is something that did catch our attention.
Overview of 3Q19
There are a few items that stand out about DECK's quarterly results. First, gross margin continued to improve, coming in at 53.8% compared to 52.2% in the year ago period. Going back even further, gross margin was 50.5% in 3Q17. This quarter, the company benefited from increased full-price selling with reduced promotions during its peak selling season. As noted above, favorable weather was another factor as cold temperatures in October and November created early demand for its men's product line. These items drove a majority of the margin expansion, but, DECK's strategic actions that it began implementing two years ago also continue to improve margins.
To rewind, back in April 2017, the company announced that it initiated a process to review various strategic alternatives -- including the possible sale of the company. Obviously, a deal that DECK liked never surfaced, so, instead it laid out a program in which it looked to drive improved profitability. This plan included streamlining its cost structure, optimizing its retail fleet, re-aligning its brands, consolidating its factory base, and taking corporate costs out.
The ultimate goal was to reach sales of $2 bln while achieving an operating margin of at least 13% in fiscal 2020. The company is well ahead of schedule as it guided for FY19 revenue of $1.986-$2.0 bln and operating margin of 14.5-14.7% in its press release last night.
DECK's core UGG brand (87% of Q3 revenue) had another solid quarter, up 3.6%, following last year's 4.3% growth. Within the UGG brand, it was the men's category that carried the growth, now accounting for 15% of total UGG sales. In particular, styles like Neumel UGGs (a fashionable boot style) continue to take market share, especially with younger consumers.
On top of the solid performance from UGGs, Hoka One One continued to exhibit significant growth surging 79% to $57 mln. That is actually an acceleration from last year's Q3 when Hoka sales jumped by 66%. Skeptics of DECK often accuse the company of being a "one trick pony", totally reliant on its UGG brand. Furthermore, customers tastes can be fickle, so, if UGGs fall out of favor, DECK's financials would be severely impacted. Therefore, the success of another brand is paramount to its longer term viability, and DECK has been investing in other brands accordingly. So far, Hoka is DECK's biggest success outside of its UGG line.
Like many other companies, DECK did experience some softness in its Chinese and European markets. Overall, international sales (34% of total) fell by 2.6%. During the call last night, management noted that there are some macro related challenges, including weakening consumer sentiment. However, the company does not expect any meaningful impact from the new tariffs, and, it has already been shifting its production outside of China anyways. As of the end of Q3, less than a quarter of its production was done in that country.
In our opinion, one of the key takeaways from last night's call was how management really "talked down" expectations for 2020. Although it didn't provide specific financial guidance for next fiscal year, it warned people that there were a few positive year-to-date items that probably won't repeat themselves in 2020.
For example, it does not anticipate benefiting from high full-price selling with reduced promotions and close-outs during its peak selling season. Additionally, DECK has used less airfreight this year, which it believes might be needed more in future periods. Last, favorable weather this fall season led to stronger re-orders and fewer order cancellations.
Not only does DECK expect these favorable factors to subside in FY20, it is also planning on ramping up investments in certain growth initiatives, such as growing its UGG Men's and Hoka brands, while supporting them through increased marketing efforts.
Consequently, the company said that future results may include lower operating margins as compared to this year. These items are all likely reasons why DECK's Q4 guidance came up short of expectations.
Key Takeaways: DECK delivered an impressive result for its most important quarter of the year, demonstrating that demand remains quite healthy for its core UGG's brand and its up-and-coming Hoka brand. The strategic initiatives it implemented a couple years ago also continue to pay dividends, driving improved margins and profits. The cherry on top was the sizable increase to its share repurchase program. However, the stock's 12% surge still is a bit of a surprise given DECK's comments about 2020. To put it bluntly, management told investors and analysts not to get used to this level of upside performance as certain one-time benefits soon dissipate.