Decker's Third Quarter Performance Was Absolutely Terrible

Ugg bootmaker Deckers (DECK) reported awful third quarter results Thursday afternoon. Revenue fell 9% yearoveryear to $376 million, which was worse than consensus estimates. Earnings fell 26% yearoveryear to $1.18 per share, roughly inline with consensus expectation. We're placing shares from the firm under review because of the materially more negative guidance.

However, headline numbers were far from the worst developments during the quarter. Gross margins fell 670 basis points yearoveryear to 42.3%, negatively influenced by both rising costs and the need to affordable prices. We wouldn't be too concerned about this number after the huge improvement in sheepskin prices (key input to Ugg boots), but the company's decision to reposition its prices are an enormous red flag suggesting demand might be waning. Further, a laundry listing of excuses from CEO Angel Martinez frustrated investors and revealed a lack of responsibility for the business' performance. Martinez has spoken many times as to how Uggs are a fashion brand, but he proceeded responsible warm weather in america among the primary drivers for the brand's weakness.

The firm's balance sheet also took a turn for the worse,Cheap Uggs as inventories ballooned to $486 million, a 36% increase when compared to same period last year. Concurrently, Ugg sales tumbled 12% yearoveryear to $332 million. The mixture of declining sales and increasing inventories are only able to end negatively, in our view. Plus the company's cash reserves fell to $61.Six million, and also the firm increased its loans outstanding on its credit revolver to $274 million. The firm spent $28 million on a new corporate headquarters, and $29 million to expand its retail footprintwhich posted negative samestore sales development of 13.1% throughout the third quarter. The firm also repurchased $84 million of shares during the quarter. The business's capital allocation plans have come into question.

Along with poor capital allocation, the firm provided investors with terrible fullyear guidance. Revenue is now expected to increase 5% versus prior guidance of 14%, and salary is expected to fall 33% yearoveryear, when compared with previous guidance with a 9%10% decline. We think management has misled investors regarding proper expectations, and we're by no means happy with management's capital allocation decisions. Deckers offers an intriguing illustration of the downside of heavily relying on one product Crocs (CROX) is in a similar situation. Shares look inexpensive at current levels, but fourthquarter performance could also be materially worse than expected. We doubt Uggs will disappear, however the brand might have to go through significant rightsizing to become a financial success again.

Source: Decker Third Quarter Performance Was Absolutely Terrible

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