Deckers (DECK) Collapses 11% on Weak Guidance

Shares of footwear manufacturer Deckers (DECK: Charts, News) were severely punished at the end of last week after the company revised its first quarter guidance substantially downwards. For the company's first quarter, it now expects earnings of 25 cents per share on revenue of $243.8 billion, far below the analysts' forecast of 63 cents per share on revenue of $262.2 million.

For fiscal 2012, Deckers anticipates earnings of $5.07 per share, missing expectations of $5.82 per share. The Goleta, California-based company was founded in 1973, and currently offers seven main brands - Teva, UGG Australia, Simple Shoes, Sanuk, Tsuno, Ahnu and Mozo. The company's UGG brand, which specializes in sheepskin (ugg) boots, remains the company's trendiest brand with the highest growth potential. Its Teva brand of outdoor shoes also remains a strong growth segment.

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A flurry of analyst downgrades followed the dire announcement. Credit Suisse's Christian Buss lowered Deckers from "Outperform" to "Neutral", cutting its price target from $127 to $91. Buss cited shrinking margins due to rising commodity costs and limited growth opportunities for its UGG brand as near-term bottlenecks. Jeffries & Co.'s Toposh Bari reaffirmed its "Buy" rating but cut its target price from $125 to $120. Bari stated that warmer-than-expected winter weather was an unforeseen variable that cut into the company's UGG sales, but that the segment's growth remains intact.

Deckers' sobering guidance for 2012 distracted many investors from the company's strong fourth quarter results. Adjusted earnings per share increased 40.1% to $3.18 and revenue increased 40.4% to $603.9 million over the prior year quarter. This topped analyst EPS estimates by 4 cents.

The company's UGG brand posted a 37.7% revenue increase to $568.5 million, while its Teva brand reported a 45.9% increase to $19.4 million. Teva' strength was boosted by a shift to a wholesale business model in the United Kingdom. The company is also in the midst of an aggressive UGG marketing campaign in the United Kingdom, and has recently launched the brand's UK website.

Company wide, domestic sales within the U.S. increased 21% to $456.3 million, while international sales grew 178.6% to $147.6 million. Retail (brick and mortar) sales rose 36.5% to $98.8 million while e-commerce (Internet) sales rose 12.6% to $61.7 million. The sole blemish in the company's fourth quarter report was a decline of gross margin from 54.2% to 51% due to volatile commodity and raw material prices. The rising cost of sheepskin was a notable factor, denting the bottom line for a second consecutive year. However, the company claims that strategic price increases have helped offset these rising costs. The company is currently phasing out its non-performing Simple brand, which ceased distribution at the end of 2011. This process was the main factor in Deckers' 9% decrease in net sales for the full year.

CEO Angel Martinez was upbeat regarding the company's fourth quarter earnings. "Our fourth quarter results exceeded expectations and were the highest in the history of the company for sales and profitability," he stated. "UGG brand sales once again grew at a robust pace during the holidays, fueling our record performance and easily pushing annual sales for the UGG brand above $1 billion for the first time."

Deckers is currently a mixed bag for investors. While the company's fourth quarter growth is exceptional, the risk of rising costs and declining margins offset its growth possibilities. The company's cash has also decreased substantially, dropping from $445.2 million to $263.6 million over a year. $125.2 million of this drop was attributed to its acquisition of Sanuk, a manufacturer of sandals, surfer and racing footwear. Deckers also spent approximately $20 million on land for a new headquarters facility.

Shares of Deckers currently trade at 11.8 times forward earnings with a 5-year PEG ratio of 0.88, signifying strong growth potential down the road for patient investors, despite current concerns.

Other News About DECK
Deckers Outdoor Shares Plunge 11% On Weak Outlook
Deckers shares plummet after weak guidance.
Deckers Outdoor & Crocs Slid, Magna International Jump After Results
Deckers slides along with Crocs after poor guidance for 2012. Other Stocks in the News
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Apple is still trying to clean up a PR nightmare in China.
P&G Reveals Plans To Slash Costs By $10 Bil, Cut Jobs
Procter & Gamble reveals its new cost-cutting initiatives.

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Published on Feb 27, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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