Decker's Second Quarter Results Were Strong Despite The Headline Loss

| About: Deckers Outdoor (DECK)

UGG boots maker Deckers (DECK) reported strong second quarter results Thursday afternoon. The firm reported a better-than-expected loss during the period, losing $0.53 per share compared to a consensus estimate calling for a $0.60 per share loss. Meanwhile, revenue increased 13.1% year-over-year to $174.1 million, which was slightly higher than the Street expected. We thought the results were strong--even given the loss in the period--and we continue to believe shares are undervalued.

The second quarter is traditionally a weak quarter for Deckers, and 2012 was no different. Net of the Sanuk brand revenue, which added $28 million in sales during the second quarter, revenue shrank across the board. Revenues in the UGG brand fell 0.3% to $107.9 million, though CEO Angel Martinez noted positive momentum during the anniversary sale at Nordstrom (JWN), which tends to introduce fall and winter styles before their traditional release dates.

Same-store sales at UGG stores grew in the mid-single digits, but international sales fell year-over-year. Management pointed out that business is somewhat stabilizing in Europe, though it remains challenged. We suspect a cold winter will be able to drive growth in Europe even if macroeconomic indicators remain negative. UGG still has a relatively tiny presence in China and is working to retool its business in the region. We're very optimistic about the future of UGG, as we believe the weak results were a function of weather rather than fashion. A strong winter this year could clear excess inventory for a solid 2013.

Teva brand, Deckers' second largest segment, saw sales tumble 15.4% to $34.1 million. Teva tends to perform fairly well in Europe, but it was unable to escape economic headwinds during the second quarter. The firm also struggled to drive new orders for the back half of the year since several retailers still have inventory from last year's weak winter. Sanuk sales grew double digits during the second quarter to $28 million. It appears Sanuk has been a fairly shrewd acquisition, and we like the diversity the brand adds to Deckers' product mix. Still, the firm reiterated its 2012 guidance of a 14% revenue increase and a 9-10% fall in earnings.

Overall, we thought Deckers' second quarter was pretty strong, in spite of an inventory overhang from the weak winter season. The firm finished its $100 million buyback, repurchasing $80 million worth of stock during the second quarter at what we view as favorable levels. Its balance sheet remains strong, with over $114 million in cash and no debt. Inventory remains high, however, due to a lack of sell-through during the winter, but we expect levels to moderate in the back half of 2012. We continue to believe shares are relatively attractive, trading at less than 10 times forward earnings and at a discount to its intrinsic value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.