Deckers CEO Admits Extreme Challenges

“This year has been the most challenging period of my tenure as CEO,” declared Angel Martinez late Thursday on a call with analysts.

The chairman, president and CEO of Deckers Outdoor Corp. told analysts as they pushed him on how the firm is adapting to various short-term pressures, “I hope you get the sense that we are certainly not sitting here waiting for the weather to punch us in the face. That’s not our approach.”

He added, “We’ve been proactive at controlling expenses. We’ve been proactive at innovating new product. We’ve been proactive about expanding retail opportunities to maximize profitability and we will continue to do that — and I think the key word is flexibility.”

With a lot of investor focus still centered on the health of Deckers’ Ugg Australia brand, Martinez reiterated that the brand has not lost its relevance, illustrated by market research the firm conducted recently.

He said data shows a growing percentage of women in America — 67 percent today, compared with 51 percent in 2010 — have a high opinion of the Ugg brand. In China, 40 percent of the women surveyed have a high opinion of Ugg; in France, 66 percent.

The push factor for consumers, Martinez added, was that prices got too high. Sheepskin costs rose 40 percent in 2012 over 2011, after rising 30 percent in 2011 over 2010, leaving Deckers with a third quarter that was more challenging than expected.

It didn’t help that 2012 has so far been the warmest year on record in the U.S. But Martinez said the firm has dealt with the headwinds by mitigating exposure to sheepskin through new raw material innovations and product diversification; reducing dependency on classics with the introduction of compelling fashion and casual collections that are less sensitive to the weather; and smoothing out the seasonality in the business with the acquisition of Sanuk.

The good news, according to Deckers CFO Thomas George, is the strong performance of owned stores.

“Our plan right now is to open a similar amount of new stores in 2013 as we [did] in 2012. Our stores generate some of the higher sales per square foot in the industry and on average pay back in one year,” said George. “Expansion of our retail stores continues to be an excellent use of capital going forward. [But] we will react quickly to adjust our plans if situations change or we are not meeting our target.”

While analysts continue to view Ugg as a quality brand with future global growth opportunities and applaud management for being more flexible on costs, they remain concerned that the bottom has yet to be reached.

“The ending’s still not written,” said Scott Krasik, analyst at BB&T Capital Markets.

Christopher Svezia, analyst at Susquehanna Financial, said, “At this point, who can predict the weather? Clearly this stock has been and will continue to be sentiment-driven, not valuation-driven. There could potentially be a nice rebound in earnings in fiscal 2013 given lower raw material costs and significant share repurchases.”

For the period ended Sept. 30, the Goleta, Calif.-based company earned a net income of $43.1 million, or $1.18 a share, compared with $62.5 million, or $1.59, in the year-ago period.

Net sales slid to $376.4 million, from $414.4 million, and gross margin fell to 42.3 percent, from 49 percent. Ugg brand sales decreased 11.6 percent to $332.8 million; Teva surged 22.1 percent to $17.9 million; Sanuk advanced 17.6 percent to $18.3 million.

Retail revenue grew 12.8 percent to $39.1 million, driven by 29 new stores opened in the last year, while e-commerce revenue swelled 29.3 percent to $13.3 million.

Deckers lowered its guidance for both the fourth quarter and the full year. Fourth-quarter EPS is expected to decline 14 percent on a 6 percent rise in revenue. Full-year EPS is expected to drop 33 percent on a sales increase of 5 percent.

Canaccord Genuity analyst Camilo Lyon said the guidance “could be attainable with weather.”

Deckers’ shares were down about 17 percent in mid-day trading on Friday.

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