Deckers Squeezes Into Profit Gains Despite Falling Sales

By Markets Fool.com

Many retailers have struggled lately, and the tough environment has put pressure on footwear specialist Deckers Outdoor (NYSE: DECK) to come up with ways to grow its business. Coming into Thursday's fiscal second-quarter financial report, Deckers investors didn't have aggressive expectations for the company's growth, but they still expected that the maker of Uggs would boost its top and bottom lines -- at least to some extent.

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That proved overly optimistic in the case of revenue, but Deckers nevertheless delivered better earnings than most were looking to see. Let's look more closely at the latest from Deckers and what its report says about its future prospects.


Image source: Deckers Outdoor.

Deckers posts a mixed quarter

Deckers' fiscal second-quarter results lived up to some, but not all, of what investors wanted. Net sales eased downward by 0.2%, to $485.9 million, which was worse than the roughly 2% sales growth that those following the stock had forecast. However, on the bottom line, net income climbed 8%, to $39.3 million. That worked out to adjusted earnings of $1.23 per share, which were $0.04 per share higher than the consensus estimate among investors.

Taking a closer look at the results from Deckers, currencies proved to be the difference between the company gaining and losing ground. On a constant-currency basis, net sales would have risen by 0.3%, but the fact that the difference is only half a percentage point shows how much smaller the currency headwinds have become for Deckers. Direct-to-consumer comparable sales were down a fairly sharp 3.2%, showing some of the more fundamental challenges facing the company.

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Looking at Deckers' brands, the Ugg line saw sales fall by more than 2%. Deckers said that the declines came from delays in European shipments that were deferred to the fiscal third quarter. In addition, drops in direct-to-consumer sales hit the Ugg division fairly markedly. Meanwhile, the other brands under the Deckers umbrella had mixed performances. Teva sales fell, but sales of Sanuk, Hoka One One, and the rest of the other-brand category enjoyed substantial growth.

Deckers' weakness showed up across its different channels. Wholesale and distributor sales fell 0.1%, while direct-to-consumer sales were down 0.7%. In a reversal from periods earlier in the year, domestic sales growth outpaced the international markets, with a nearly 4% increase in the U.S. compared to a worse than 6% drop internationally.

CEO Dave Powers said he was happy with the results. "Despite a challenging consumer environment," Powers said, "we delivered earnings per share results that were higher than last year and at the top end of our expectations." The CEO also said he's happy with the progress that Deckers has made in executing its annual plans.

What's down the road for Deckers?

Deckers is also enthusiastic about its chances to capitalize on future opportunities. In Powers' words, "Our teams are prepared for the upcoming selling season, and we are excited about our fall and holiday product and marketing plans."

One problem, though, is that guidance for the near future is still less than encouraging. For the full 2017 fiscal year, Deckers expects sales to fall between 1.5% and 3%, and earnings are expected to come in between $4.05 and $4.25 per share. Both figures are toward the lower end of ranges given earlier in the calendar year. Moreover, fiscal third-quarter revenue is seen staying flat to down 2%, and earnings of $4.16 to $4.28 per share will be down at least $0.50 per share from year-ago levels. Those numbers are all below what most investors were looking to see.

Deckers investors didn't react in a volatile fashion right away, with the stock staying fairly close to unchanged in after-hours trading immediately following the announcement. Nevertheless, Deckers has put itself in a position in which its holiday season has to go well in order for the company to salvage a strong year in fiscal 2017. Anything other than success could lead to further punishment for investors.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Deckers Outdoor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.