Why Is Deckers (DECK) Down 1.8% Since Last Earnings Report?

Zacks Equity Research

Sat, Aug 29, 2020, 9:31 AM 6 min read

Will the recent negative trend continue leading up to its next earnings release, or is Deckers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Deckers Records Narrower-Than-Expected Loss in Q1

Deckers Outdoor Corporation reported narrower-than-expected loss in first-quarter fiscal 2021. Moreover, its sales outpaced the Zacks Consensus Estimate for the 14th straight quarter. Both top and bottom lines also compared favorably with the year-ago quarter’s respective figures. Notably, strength in the company’s direct-to-consumer platform aided the quarterly results. Brand wise HOKA ONE ONE contributed to sales growth.

We note that Deckers reopened majority of its stores in fiscal first quarter and about 20% of its stores remained open for the full 90-day period. Nearly 95% of the company’s global stores are open as of this week. Many of such reopened outlets are working at a limited capacity as they are adapting to new and evolving challenges tied to the pandemic. Going forward, management anticipates potential risk of more closures or limitations in the peak periods owing to the ongoing and volatile pandemic-induced restrictions on retail store operations.

Deckers’ distribution center in Moreno Valley, CA, and other third-party distribution facilities are currently operating and supporting logistics. Further, management estimates operational headwinds like capacity constraints with increased levels of e-commerce shipments in peak wholesale-volume periods, coupled with higher costs in relation to warehouse employees’ safety and payroll expenses. To address these issues, the company has been phasing certain wholesale shipments earlier than in prior years. This might impact the timing of revenues between upcoming quarters.

Although, management did not issue any outlook given the fluid economic landscape with respect to COVID-19, it expects contribution from direct-to-consumer business and HOKA ONE ONE brand to increase as a proportion of total revenues in the current fiscal year. However, the company expects overall revenues to decline year over year for the fiscal year.

Deckers posted quarterly loss of 28 cents per share, which is narrower than the Zacks Consensus Estimate of a loss of $1.11 and the year-ago quarter’s loss of 67 cents. This year-over-year improvement in the bottom line can be attributed to increased revenue mix of HOKA ONE ONE brand including benefits from a greater portion of direct-to-consumer sales and higher revenue and profitability from domestic UGG business as direct-to-consumer performance was able to offset declines in wholesale business. Cost savings on account of reduced travel and lower marketing spend also contributed to the bottom-line performance. These were partly offset by lower UGG international wholesale revenues, year-over-year declines in Teva and Sanuk brands, no tax benefit this year, and reduced interest income.

Net sales rose 2.3% to $283.2 million during the reported quarter and also surpassed the Zacks Consensus Estimate of $265 million. On a constant-currency basis, net sales grew 2.8%.

We note that gross margin expanded 330 basis points to 50.3% during the quarter, driven by a favorable shift in channel mix stemming from lower wholesale volume, comprising reduction of closures and higher e-commerce penetration. Moreover, the HOKA ONE ONE brand's growth and its increased mix of overall revenues contributed to growth. SG&A expenses fell 6.9% year over year to $150.3 million due to reduce travel and shifting of a portion of marketing expenditure, to be used later this fiscal. Furthermore, the company reported operating loss of $7.7 million compared to operating loss of $31.4 million in the year-ago quarter.

Sales in Description

The company’s domestic net sales increased 10.2% to $184.3 million in the reported quarter. Meanwhile, international net sales dropped 9.7% to $98.9 million. Wholesale net sales in the reported quarter declined 27.1% to $143.3 million owing to pandemic-induced store closures worldwide. Direct-to-consumer net sales jumped 74.2% to $139.8 million driven by online growth in both the UGG and HOKA ONE ONE brands. The UGG brand registered a 53% increase in its direct-to-consumer business with e-commerce helping in recouping much of the lost volume on account of owned retail store closures. HOKA witnessed triple-digit revenue growth in its direct-to-consumer business. Notably, approximately 49% of net sales came from direct-to-consumer channel, heavily skewed towards e-commerce.

UGG brand net sales decreased 10% to $124.7 million in the reported quarter owing to 49% decline in wholesale business, which was mainly caused by the COVID-19-related wholesale door closures. HOKA ONE ONE brand net sales surged 37.1% to $109 million, while Teva brand net sales declined 7.9% to $35.2 million. Net sales for the Sanuk brand, known for its exclusive sandals and shoes, came in at $13.2 million, down 29.2% year over year.

Other Financial Aspects

At the end of the reported quarter, Deckers had cash and cash equivalents of $661.9 million, outstanding borrowings including mortgages of $30.7 million and shareholders’ equity of $1,136.9 million. Further, inventories as of Jun 30, 2020 were $435 million, down 8.1% year over year. The company had $469.7 million available under its existing revolving-credit facilities. It did not have outstanding borrowings under any of the existing revolving-credit facilities at fiscal first-quarter end. During fiscal first quarter, management did not buy back shares and had $160 million available under its stock-repurchase program as of Jun 30.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 16.01% due to these changes.

VGM Scores

Currently, Deckers has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Deckers has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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