06 Feb Deckers Profits Dragged Down By Sanuk Write-Down
Deckers Brands reported a sharply lower quarterly profit on lower sales during the holiday period and a write-down of its Sanuk sandals brand.
Based on third-quarter results, Deckers lowered its financial targets for its fiscal year ending in March, now expecting to make $3.45 to $3.55 a share, which compares to its previous range of $4.05 to $4.25. Sales are still expected to be in the range of down 3 percent to down 1.5 percent.
In its third quarter ended December 31, earnings tumbled 73.9 percent to $73.9 million, or $1.27 a share. Results include charges of $128.9 million related to the write-down of Sanuk brand goodwill and intangible assets, retail impairments and other restructuring-related charges. The Sanuk brand impairment charge was $118 million, retail-related charges were $9 million and other restructuring charges totaled $1.9 million.
On an adjusted basis, earnings were $4.11, short of its guidance calling for earnings in the range of $4.16 to $4.28.
Sales decreased 4.5 percent to $760.3 million and were down 3.7 percent on a currency-neutral basis. Deckers had expected sales to be down 2 percent to flat.
Gross margin was 50.5 percent compared to 49.1 percent for the same period last year. SG&A expenses as a percentage of sales were 43.5 percent compared to 23.7 percent for the same period last year. Non-GAAP SG&A expenses as a percentage of sales were 26.5 percent.
Its flagship Ugg brand suffered a sales decline of 5.3 percent in the quarter to $704 million. On a currency-neutral basis, Ugg’s sales slumped 4.4 percent.
On a conference call with analysts, Dave Powers, president and CEO, said the revenue and earnings shortfalls were caused by weaker-than-expected Ugg wholesale sales. Its wholesale and distributor business was challenged globally by lower-than-expected reorders and a few limited cancellations. This was partially offset by stronger-than-expected results from its direct-to-consumer channel, highlighted by a 4.7 percent comp increase.
“Domestically, we believe the warm temperatures at the start of the key selling season impacted sell-through in November,” said Powers. “The slow start heightened retailer caution, especially since they carried over product following last year’s warm winter. Sell-through accelerated as the weather turned colder; however, it was too late to get retailers to commit to taking additional orders.”
Powers said retailers instead were focused on selling through their inventory and not reorder for sales upside. While its net sell-in results were disappointing, Powers noted that retailers ended December with cleaner inventory levels compared to a year ago.
On the international side, wholesale and distributor sales were higher than last year, but fell short of expectation as demand was weaker than expected and the shipping delay experienced in Q2 with its new European 3PL caused a missed reorder opportunity.
“While we fell short of our expectation, overall we understand many of our wholesale partners were pleased with their sales performance of the Ugg brand and especially with the full price sell-through of the Classic II,” said Powers. “Collectively, our key wholesale partners had a solid season with Ugg and this underscores the brand’s importance to their business.”
With retailers’ inventory in a clean position, Ugg has transitioned the market to Classic II and expects to be able to drive more full-price selling.
“Looking ahead, we are focused on delivering high-quality sales through developing more compelling segmented product, better inventory management, appropriately managing the amount of Classics in the marketplace, diversifying and reducing the seasonality of the Ugg business, and finding growth in other full price opportunities, such as men’s, kids and apparel,” stated Powers.
Among its other brands, Teva’s sales increased 3.9 percent to $14.6 million and expanded 2 percent on a currency-neutral basis. The increase in sales was driven by an increase in global DTC sales.
Sanuk’s revenues fell 18.4 percent to $13.9 million on both a reported and constant currency basis. The decrease in sales was driven by a decrease in global wholesale and distributor sales.
Powers said Sanuk’s impairment charge was based on a more limited view of expansion opportunities, given the changing retail environment.
“We are confident that Sanuk will continue to be an important brand in the sandal and casual canvas category,” said Powers. “And with new leadership now in place, we have been able to reduce costs and also improve product design and marketing through leveraging innovation and collaboration across our brand.”
Combined net sales for the third quarter of the company’s Other Brands segment expanded 28.6 percent to $27.8 million. On a currency-neutral basis, sales increased 27.9 percent. The increase was primarily attributable to increased Hoka One One sales and Koolaburra by Ugg sales. Hoka sales increased 18.3 percent compared to the same period last year.
Powers said Hoka ended 2016 with over 20 awards, including Editor’s Choice by Runner’s World. Global media impressions for Hoka exceeded 2.2 million. For this year, Hoka is expected to gain a boost from the launch of its first stability running models.
“With Hoka, we see further opportunity to expand the North American presence with product extensions and category expansion that appeals to a broader consumer base,” said Powers. “On the international front, we have just begun to scratch the surface with Hoka and see significant potential for growth.”
Wholesale and distributor net sales for the quarter decreased 12.6 percent to $388.6 million and were off 12.5 percent on a currency-neutral basis. DTC sales increased 5.8 percent to $371.7 million while gaining 7.4 percent on a currency-neutral basis.
Domestic sales for the quarter slumped 9.9 percent to $489.5 million; international sales increased 7.2 percent to $270.8 million.
Powers said that with “the accelerated change that we are seeing in the marketplace,” Deckers plans to further transform its operating structure to support profit growth. On top of approximately $60 million in previously announced SG&A and gross margin improvements, another $90 million of additional savings has been identified through restructuring activities that it plans to implement over the course of the next two fiscal years.
Said Powers, “These new initiatives will better position the company to succeed in a more competitive and faster paced environment, drive improved profitability, and deliver greater shareholder value.”
For its fourth quarter ending in March, Deckers expects a per-share loss of 10 cents to break even with a 5 percent to 6 percent decline in revenue for the quarter, which works out to an estimate of $355.9 million to $359.7 million. Analysts had forecast earnings of 42 cents a share on revenue of $383 million.