Deckers Plunges 17% After Q3 Results, Weak Outlook

Deckers Outdoor DECK reported earnings Thursday afternoon after the closing bell. On Friday, DECK fell nearly 17 percent and closed at $29.48. After the plunge in the company's share price, DECK has now lost 61 percent in 2012 and is sitting near a new 52-week low. While the company beat Wall Street earnings estimates, its quarterly revenue missed expectations and its forward looking guidance was terrible. For the third-quarter, Deckers reported earnings of $43.06 million or $1.18 per share, compared to $62.35 million or $1.59 per share, in last year's corresponding quarter. This easily exceeded Wall Street analysts' consensus EPS estimates of $1.04. Net sales in the quarter were $376.4 million compared to $414.4 million last year. This missed Street consensus revenue estimates of $413.46 million by a very wide margin. The company's margins also continued to fall in the quarter. Gross margin contracted 670 basis points to 42.3 percent versus last year's 49 percent. Deckers guided down its views both for the fourth quarter, and for the entire year. The company stated that it thought its revenue would be up 6 percent in the fourth quarter, however, it had previously said that its revenue would be up 19 percent. It also said it said its EPS would decline by 14 percent, while it had previously thought it would increase by 22 percent. Deckers also provided its outlook for the entire fiscal year 2012, guiding up sales 5 percent and EPS down 33 percent. It had previously seen sales up 14 percent and EPS down 9 to 10 percent. To make matters worse, a couple of analysts opted to downgrade the stock early Friday. RBC cut its rating to Sector Perform from Outperform, while Susquehanna downgraded the company to Neutral from Positive. The stock saw a minor bounce midway through the session on Friday when analysts at Sterne Agee revised their rating upwards, moving the stock to Neutral. In the note, Sterne Agee did not recommend buying the stock, but stated that the sell-off was severe enough to prompt an upgrade. They recommended that investors take a “wait-and-see” approach to DECK. Deckers Outdoor is primarily known for its UGG Boots, from which the company derives the majority of its revenue. Deckers also owns the Teva brand. Deckers' President and CEO Angel Martinez elaborated on some of the problems that have plagued the company (and the stock) in 2012. "Over the past two years, we have raised prices on selective key styles to help mitigate the impact of an 80% increase in our sheepskin and raw material costs over this same period. We believe that these selective price increases, particularly during a period of one of the warmest years on record, has pushed us above the consumer's price-value expectations for the UGG brand," Martinez said in a statement. He added, "We also believe that this has resulted in softer than expected third quarter sell-through trends in our Company owned stores, and has pushed back the start of the brand's key selling season at retail this year." While Martinez notes that the pricing pressures have been acute for two years, they did not start effecting DECK's stock price until the end of 2011 and throughout 2012. In fact, the stock traded as high as $117 as recently as October 2011. This compares to the current price of around $29.00. The catalyst for the sell-off has been declining trends in the company's key UGG sheepskin boot brand. In the third-quarter, sales fell 11.6 percent to $332.8 million. While the rise of UGG helped drive the company's stock price ever higher for years, the momentum is now falling off a cliff. As input costs rose, Deckers has been forced to raise prices. In turn, it appears that this is effecting sales rather significantly. It could also be argued that there is a faddish component to the UGG story, and rising prices may be helping to further steer already fatigued consumers away from the brand. Looking ahead, Deckers has repeatedly said that weather will be critical for the fourth-quarter. In fact, according to Sterne Agee, the word "weather" was mentioned 39 times in the company's third-quarter conference call. According to management, unseasonably warm weather patterns in many markets has pushed back the beginning of the peak selling season for the UGG brand. In addition to weather trends, Deckers' upcoming quarter could also be adversely effected by wholesale order cancellations -- something that management is not currently modeling in its guidance. The Sterne Agee analysts noted that "neither sales nor margin guidance includes potential material cancellations from wholesale accounts despite the fact that orders have already been pushed out of 3Q into 4Q."