Footwear retailer Deckers Outdoor (DECK 113.61, +4.66)
trades about 4.3% higher, near the middle of its daily range, in reaction to
its better than expected second quarter report and full year 2019 guidance
Deckers reported Q2 earnings per share of $2.38 on revenues that grew 4.0% compared to last year to $501.9 mln on gross margins that were 350 basis points higher than last year’s margins at 50.2%.
The year/year increase in gross margin was driven by a significant reduction in airfreight usage for inventory brought in during the quarter, better full-price selling in Deckers’ wholesale channel combined with the benefit of growing DTC sales, lower material costs, in-quarter savings from vendor support marketing that will be shifted from the second quarter into the third quarter to support the UGG brand 40th anniversary campaign, and benefit from foreign currency.
Despite modest weakness in the UGG brand, net sales down 1.0% to $396.3 mln in Q2, overall sales grew 4.0%, as mentioned before. The performance out of the company’s HOKA ONE ONE brand helped offset the modest declines in UGG as HOKA saw net sales growth of 28.4% in the quarter to $52.1 million. What’s more, Teva reported net sales up 0.6% to $21.5 mln, offsetting the weakness in Sanuk, which saw net sales fall 9.4% to $13.8 mln.
Looking ahead, management sees in-line Q3 EPS between $5.10-5.25. Net sales are expected in the range of $805.0-825.0 mln as the company is seeing more order shift into Q3 from Q4 as its wholesalers want to take spring product earlier. Further, gross margin upside is expected in the quarter as a result of management’s cost improvement efforts.
Deckers also raised certain guidance for the full year 2019. The company now expects EPS of $6.65-6.85 vs $6.25-6.45 prior. Net sales are now slated to come in between $1.935-1.960 bln vs $1.930-1.955 bln prior. Management has updated its outlook with regard to several brand-level forecasts: UGG sales are still expected to be down low single-digit, HOKA is now expected to be up in the mid to high 30% range, Teva is now expected to be down low single-digit, and Sanuk is now expected to be down mid-single digit.
Further, gross margins are now expected to be 50% for the year, which includes certain one-time benefits achieved this year. Additionally, to remain competitive, Deckers has increased its U.S.-based distribution center labor cost. During this period, the company also provided an update on its sheepskin pricing. DECK continues to see stable prices in sheepskin market; they expect their sheepskin cost for fiscal 2020 to be similar to this year and not to materially affect gross margins. This does not constitute its gross margin guidance for next year as DECK’s sheepskin costs are only one component of gross margins.
Overall, the company’s cost improvement efforts are paying dividends in part aided by gross margin strength and HOKA ONE ONE stepping in to offset weakness in the core UGG brand. The guidance raise, too, was well received as investors appeared pleased that Deckers updated its outlook into the all-important holiday quarter.
Shares add to YTD gains, up north of 40% in 2018, vs the S&P Retail ETF’s (XRT 45.63, -1.27, -2.7%) 1.1% advance on the year. The stock finds resistance today, though, in the 50-day simple moving average (113.68), which so far this morning has served as a line in the sand twice without the stock able to break through.
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