Deckers Outdoor Corp. (DECK) reported the 3rd-quarter results after the market close on October 25, 2012. The quarterly numbers and the full-year guidance were much worse than market expectations. Shares fell 16% in aftermarket trading. The Earnings Call Transcript disclosed gross margin for the 3rd quarter was 42.3%. DECK's management expects the ratio to be 47% for the 4th quarter, down from the previous guidance of 50%. For full-year 2012, the management expects net earnings to decline 33%, while sales grow 5% against the previous guidance of 10%. Sales of Ugg brand boots are to be flat for the whole year, despite the 3rd-quarter revenue of Ugg boots that declined 11.6%. DECK's management indicated the outcome was due to warm weather and high sheepskin costs. Management explained the discount situation was to adjust for the price increases enacted earlier in the year.
Omar Saad from ISI Group Inc. then raised a good question, "what's going to be different in the fourth quarter from the third quarter in terms of it's going from a negative high single-digit sales number to more of a positive mid-single digit"? The CFO, Thomas A. George, suggested improvement in sales and discounting. During the conference, the management admitted Ugg boots are of high quality and durability, yet CEO Angel R. Martinez believed consumers loyal to the brand buy new Ugg boots as "replacement purchase." The statement is somewhat contradictory to the brand image. Ugg boots are very durable, so there is no need to buy additional pairs to replace old pairs in a year or two. Consumers supposedly buy more Ugg boots because of emotional satisfaction, not to replace old boots.
The quarterly results and the full-year outlook were a disappointment. Originally, I speculated the possible sales decline in my article, "Is Deckers Outdoor Still A Growth Story?" I did not believe that is a certainty, though I foresaw a fundamental change in Ugg brand. DECK's management is not candid in its assessment of Ugg boots. Management complains about warm weather repeatedly, but that was not controllable even if warm weather is the main reason. The shares stand at $30 now. This may not be the end of stock decline as sales continue to deteriorate. DECK's management needs to assess the possibility of erosion of the Ugg brand and realistic measures to deal with it in this very challenging economic environment.