This apparel company is seeing tremendous growth, with some very high-end brand names.
Deckers Outdoor Corporation (DECK)
From Canaccord Genuity Research
Deckers Outdoor Corporation (DECK) reported very strong FQ3 results with adj. EPS of $6.59 trouncing our/consensus estimates of $5.36/$5.29. Without doubt, the beat was a high quality one with revenue (+40c), gross margin (+36c) and SG&A margin (+31c) all contributing to the upside relative to our model, which also led to an increase in annual guidance of $1.15 over the prior $6.65-$6.85 guide, flowing through nearly the entire $1.24 beat to EPS.
Consistent with our preview and channel checks, exceptionally strong growth in October and November more than offset a softer December, resulting in total sales growth of 7.8% vs. our +1.3% est. Sales in FQ3 came in $49M above the high end of guidance. Specifically, $18M of upside came from UGG’s domestic w/s business driven by women’s non-core styles and men’s, and $15M from greater full-price selling/less promotional activity, resulting in an impressive +3.6% growth globally (vs. our -0.5% est.) for the brand.
While weather was clearly favorable, DECK’s new allocation and segmentation strategy (e.g. limiting initial orders in UGG Classics and shifting buys to other UGG non-classic categories) drove the majority of the outperformance vs. plan. We are also highly encouraged by the 79% growth in HOKA (contributed $8M to total sales upside) as the brand continues to gain market share particularly in the specialty run channel. Koolaburra also had a strong Q3 (added $2M to sales upside) driven partly by robust in-season reorders. Gross margin expanded 155bps (vs. our flattish est.) with the majority of the expansion driven by less promotions, fewer closeouts, higher full price selling and supply chain initiatives. Lastly, with inventory down 14% vs. sales up 8%, DECK enters the pre-order season from a strong position.
Overall, the outperformance in FQ3 underscores the success of the initiatives management has implemented across its business, ones that we believe are having a structurally positive impact on the business.
While management did not provide guidance for F20, it reaffirmed a path towards a sustainable MSD revenue growth target driven by growth in HOKA, men’s, Koolaburra, and women’s spring while core UGG holds serve, which in total should also result in expense leverage. That said, the team was quick to point out that while it is possible if favorable conditions permit, it does not expect the same gross margin contributors to manifest next year, leading us to believe initial F20 gross margins will be guided down. In our model, the net result remains DD EPS growth, which should support the stock’s high teens P/E multiple.
Bullish points: (1) revenue beat high end of guidance by $49M or 6%; (2) UGG +3.6% vs. our -0.5% est.; (3) exceptionally strong growth in HOKA (+79%); (4) gross margin +155bps; (5) product allocation and segmentation of UGG w/s drove outperformance; (6) implementing allocation strategy in Europe and Japan next season; (7) UGG inventory is clean (down more than 14% vs. +3.6% sales); (8) positioning the business for sustainable MSD sales growth in future years; (9) opportunity for incremental gross margin gains from supply chain initiatives in F20; (10) Q3 DTC comps were up 1.4%; (11) increased share repurchase authorization to by $261M to a total of $350M.
Bearish points: (1) UK / China macro issues hurting international sales (-2.6%).
Given the massive FQ3 beat and flow through, full year EPS guidance was raised to $7.85-$7.95 from $6.65-$6.85 on revenues of $1.986B-$2.0B (from $1.935B-$1.6B), gross margin to exceed 50.5% (from ~50%) and SG&A margin to be below 36.5% (from slightly below 37%), resulting in EBIT margin of 14.5%-14.7% (from 13%-13.2%). For FQ4, DECK is guiding to $360-$374M in sales and 0-10c in EPS.
Our $164 price target is an average of 18x our F2020 EPS estimate, 11x EV/EBITDA, and DCF.
Camilo Lyon and Pallav Saini, Canaccord Genuity Research, www.canaccordgenuity.com, February 1, 2019