Decker’s 1Q14 Earnings Preview, Expect Top and Bottom Line beat; Phone Survey

4/7/2014 Companies mentioned:

Deckers Outdoor (DECK) - $78.42

Why Read?

Deckers had very strong 4Q13 and FY13 earnings, beating FY13 revenue estimates with $1.56bn actual versus consensus $1.53bn and earnings of $4.18 actual versus consensus $3.94. The stock traded down -12% on weak 1Q14 guidance, analysts were expecting $0.10 vs. the company guidance of a loss of ($0.16)).

_________________________________________________________________________________________________________    

§ Strong sell-through in 1Q14: Over the last week we called 37 UGG stores and 3rd party retailers of Decker’s to check how 1Q14 sales progressed and to determine the reaction to the UGG spring line. We observed strong sales in both the boots and moccasins, with a mixed reaction to the edgier fashion products. The spring line, (sandals and wedges), is also seeing strong demand although this is distributed unevenly across the country due to an extended winter in some regions.

§ Product mix and reduced clearance: Due to strong sales in the traditional UGG boots and moccasins, we expect gross margin expansion from UGG Pure technology as well as an overall higher average selling price due to mix. We observed fewer send backs to DECK from 3rd party retailers, leading to lower closeout volumes and margin benefits.

§ Brand breakdowns: Sales increased +10.1% in FY2013 on the back of strong UGG sales +9.7%

and Sanuk sales +8.2%. We expect the trend for UGG sales to remain strong in 1Q14 and a greater shift to retail and ecommerce sales channels. In 1Q14, we expect UGG brand sales to increase +12.9%, Teva brand sales to increase +2.1%, Sanuk brand sales to increase +3.5%, and other brand sales to increase +53.4%.

§ International expansion and brand perception: During our phone survey we observed strong

demand from international tourist customers, especially from Asia. We believe this trend also reflects demand preferences in overseas stores. Since FY11 International sales have increased +19.0% while domestic sales have only increased +10.3%.

§ Estimates: We believe DECK was conservative in their 1Q14 and FY14 guidance. We expect

revenue of $292.9mn vs. consensus of $278.7mn and company guidance of $279.6m. For 1Q14E we expect a loss of ($0.03) vs. the company guidance of ($0.16) and consensus of ($0.14). For FY14E we expect $1.75bn vs. consensus of $1.72bn and company guidance of $1.71bn.

(Continued on next page)

    2  

Strong UGG sell-through in 1Q14: We observed strong sell-through of the classic short and high UGG boots as well as increased demand for the Bailey Button and Bailey Bow styles. The Dakota moccasins are currently the second best selling style after the classic short boot. Although they have year round demand, the Dakota moccasin has seen stronger than usual demand with an extended winter. According to associates at Nordstrom, the Dakota moccasin is gaining traction against the Minnetonka brand moccasin, its greatest competitor. The spring lines are also performing well although they are not fully in all of the 3rd party retailers. So far this year Nordstrom has increased its wholesale buy in the spring line compared to pervious years to meet the growing demand. The two spring products gaining the most traction are the striped wedges (apparently stripes are in this year) and the Chivon, a flat shoe similar to Sperry’s, but according to sales associates more “light and delicate”. Younger female sales associates were more enthusiastic about the spring wedges; many owned a pair themselves. Older female and male associates were not as enthusiastic. We observed strong cross-selling in the brand with the classic UGG boot still being the shoe that introduces the customer to the brand. After a customer buys a pair of the classic UGG boots, they often buy a second pair a season later in either the Bailey Button or Bailey Bow or another color. Once the customer begins to feel more comfortable with the brand, often then they will start looking at sandals and wedges. We believe this trend, as well as strong 2H13 sales, will lead to greater brand adoption and allow Decker’s sales to remain strong through FY14 and further move it towards its goal of a year round lifestyle brand.

(Continued on next page)

Chivon  Flats   Striped  Wedges  

    3  

Product mix and reduced clearance: Due to strong sales in the traditional UGG boots and moccasins, we expect gross margin expansion from UGG Pure technology as well as an overall higher average selling price due to mix. We observed fewer send backs to DECK from 3rd party retailers, leading to lower closeout volumes and margin benefits.

 

Gross Profit Impacts Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY2013 UGG Pure

Decrease

Increase 150

Ecom Mix

Increase Increase 120 Closeout Mix

-100 -50

Retail Mix Increase Decrease

Increase FX impact -30 MD&A Total 0 -100 -50 0 240 Actual Total 85 (112) 83 478 262

 Because sheepskin pricing is locked in for 2014, we expect gross margin recapture as we lap the elevated sheepskin costs of 2013, with the positive impact subduing in 4Q14. On top of lapping the elevated sheep skin prices in 2013, we expect greater adoption of the UGG Pure technology will further create margin benefits in FY14 due to greater traditional boot and moccasin sell-through in 1H14. We also believe the reduced reliance on closeout sales and greater shift towards Ecommerce will create gross margin leverage in FY14. We do not attempt to forecast FX impacts for the year.

   

(Continued on next page)  

44.0%  45.0%  46.0%  47.0%  48.0%  49.0%  50.0%  51.0%  

Q1  2010  

Q2  2010  

Q3  2010  

Q4  2010  

Q1  2011  

Q2  2011  

Q3  2011  

Q4  2011  

Q1  2012  

Q2  2012  

Q3  2012  

Q4  2012  

Q1  2013  

Q2  2013  

Q3  2013  

Q4  2013  

Gross  Pro6it  Margin  Trailing  4-­‐qtr    

Elevated  sheepskin    prices  

10.0%  12.0%  14.0%  16.0%  18.0%  20.0%  22.0%  24.0%  26.0%  

Q1  2010  

Q2  2010  

Q3  2010  

Q4  2010  

Q1  2011  

Q2  2011  

Q3  2011  

Q4  2011  

Q1  2012  

Q2  2012  

Q3  2012  

Q4  2012  

Q1  2013  

Q2  2013  

Q3  2013  

Q4  2013  

Operating  Margin  Trailing  4-­‐qtr    

    4  

   

Brand breakdowns:

DECK Total Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Retail+Ecom Trailing 4 Qtr Seq. Sales Growth 7.9% 4.6% 6.5% 12.9% 3.0% 2.6% 2.4% 17.9% 5.9% 2.5% 3.7% 17.0%

Wholesale Trailing 4 Qtr Seq. Sales Growth 4.0% 0.8% 12.8% 13.9% 0.0% 6.7% -4.0% -4.0% -0.5% -1.4% -0.5% 4.6%

Total Trailing 4 Qtr Seq. Sales Growth 4.9% 1.6% 11.3% 13.7% 0.7% 5.8% -2.6% 1.0% 1.2% -0.3% 0.7% 8.3%

Retail+Ecommerce trailing 4-qtr % Sales 22% 23% 22% 22% 22% 22% 23% 27% 28% 29% 29% 32%

 DECK sales increased +10.1% in FY13. This growth was driven by +31.8% growth in Retail and Ecommerce sales while wholesale DECK sales increased +2.2% in FY13. Retail and Ecommerce as a percentage of total DECK sales have increased from 22.0% in FY10 to 32.0% in FY13. We expect DECK sales to increase +11.0% in 1Q14 and +12.3% in FY14 driven by a +19.7% increase in Retail and Ecommerce sales.    

UGG Brand Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Retail+Ecom Trailing 4 Qtr Seq. Sales Growth 8.3% 4.8% 6.6% 13.2% 3.1% 2.1% 2.1% 18.2% 6.0% 2.3% 3.7% 17.4%

Wholesale Trailing 4 Qtr Seq. Sales Growth 4.0% -0.4% 15.3% 15.4% 0.1% -0.7% -5.5% -4.6% -1.1% -2.0% -1.3% 4.5%

Total Trailing 4 Qtr Seq. Sales Growth 5.0% 0.9% 13.1% 14.9% 0.8% 0.0% -3.6% 1.4% 1.1% -0.6% 0.4% 8.9%

Retail+Ecommerce trailing 4-qtr % Sales 25% 26% 24% 24% 24% 25% 26% 31% 32% 33% 34% 37%

 UGG brand sales increased +9.7% in FY13. This growth was driven by +31.9% growth in Retail and Ecommerce sales while wholesale UGG sales decreased -0.1% in FY13. UGG wholesale sales did see acceleration during in 2H13 due to reduced orders earlier in the year. Wholesale doors delayed their orders in FY13 to later in the year because of the mild winter in FY12, anticipating a similar result in FY13. Retail and Ecommerce as a percentage of total UGG sales have increased from 24.0% in FY10 to 37.0% in FY13. We expect UGG brand sales to increase +12.9% in 1Q14 and +11.5% in FY14 driven by a +19.9% increase in Retail and Ecommerce sales.

(Continued on next page)

    5  

 

Teva Brand Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Retail+Ecom Trailing 4 Qtr Seq. Sales Growth -0.2% 1.7% 6.7% 8.2% 8.3% 1.9% 3.1% 1.1% -4.6% 2.2% 1.9% 2.5%

Wholesale Trailing 4 Qtr Seq. Sales Growth 7.5% 8.7% 0.6% 5.0% -0.9% -5.4% 2.7% -5.1% 1.9% -2.7% 0.0% 1.6%

Total Trailing 4 Qtr Seq. Sales Growth 7.1% 8.4% 0.9% 5.1% -0.5% -5.0% 2.8% -4.7% 1.5% -2.4% 0.1% 1.6%

Retail+Ecommerce trailing 4-qtr % Sales 5% 4% 5% 5% 5% 6% 6% 6% 6% 6% 6% 6%

Teva brand sales increased +0.8% in FY13. This growth was driven by +1.8% growth in Retail and Ecommerce sales while wholesale Teva sales increased +0.7% in FY13. The Teva wholesale segment still comprised 93.9% of total Teva brand sales in FY13. We expect Teva brand sales to increase +2.1% in 1Q14 and +5.9% in FY14 driven by stronger adoption of the product, especially the reintroduction of the classic Teva Universal style.    

Sanuk Brand Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Retail+Ecom Trailing 4 Qtr Seq. Sales Growth 56.5% 40.2% 19.8% 20.8% 7.3% 11.6%

Wholesale Trailing 4 Qtr Seq. Sales Growth 1.9% 3.6% -2.5% 1.2% -0.4% 7.0%

Total Trailing 4 Qtr Seq. Sales Growth 3.1% 4.8% -1.5% 2.3% 0.1% 7.3%

Retail+Ecommerce trailing 4-qtr % Sales 3% 4% 5% 6% 7% 7%

 Sanuk brand sales increased +8.2% in FY13. This growth was driven by +73.2% growth in Retail and Ecommerce sales while wholesale Sanuk sales increased +5.1% in FY13. Retail and Ecommerce as a percentage of total Sanuk sales have increased from 4.5% in FY12 to 7.1% in FY13. We expect Sanuk brand sales to increase +3.5% in 1Q14 and +11.8% in FY14 driven by a +14.2% increase in Retail and Ecommerce sales.  

           

(Continued on next page)      

    6  

Other Brand Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Retail+Ecom Trailing 4 Qtr Seq. Sales Growth

-6.6% -7.0% -5.9% -6.8% -14.1% -19.9% -13.2% -16.3% 1.6% 5.0% -3.4% 17.5%

Wholesale Trailing 4 Qtr Seq. Sales Growth

-9.3% 1.0% -3.9% 5.4% 1.5% -3.7% 0.6% -5.9% 22.7% 15.4% 21.0% 10.6%

Total Trailing 4 Qtr Seq. Sales Growth

-8.9% 0.1% -4.1% 4.1% 0.0% -5.0% -0.4% -6.5% 21.5% 15.0% 20.0% 10.9%

Retail+Ecommerce trailing 4-qtr % Sales

12% 11% 11% 10% 8% 7% 6% 5% 5% 4% 3% 4%

Other brand sales increased +85.8% in FY13. This growth was driven by +21.0% growth in Retail and Ecommerce sales while wholesale Other sales increased +89.5% in FY13. Retail and Ecommerce as a percentage of total Other sales have decreased from 11.4% in FY10 to 3.5% in FY13. We expect Other brand sales to increase +53.4% in 1Q14 and +65.0% in FY14 driven by a +60.1% increase wholesale sales.  

Growth in international: During our phone survey of 37 UGG and 3rd party retailers, we noticed many associates mentioned the strong demand driven by international tourists. Many tourists buy multiple pairs to bring home as gifts as well as for their own use. This trend has especially benefited West Coast stores, and the Honolulu store, which is the most productive store in the UGG retail fleet. In Las Vegas store traffic is dominated by European and Asian tourists. The associate spoke of “buses” of Asian tourists coming to the store to stock up on UGG boots. In particular, we observed strong sales driven by “Bling” stations in the West Coast locations. These “Bling” stations allow shoppers to customize their UGGs with stitched writing, colors, and added ornamentation like rhinestones. We believe the strong trend in tourist traffic in American stores continues to reflect the growing strength in the brand overseas. During 4Q13, Japan DTC comparable sales rose +49% and store comparable store sales rose +27%. We expect International revenue to continue to grow faster than Domestic revenue, especially given the MILD winter experienced in Europe.

Wrap-up: We believe that management has been conservative in their 1Q14 guidance and FY14 guidance. Although analysts were disappointed in the SG&A spend guide and have been waiting for SG&A spend to finally lever, we are more than happy to remain patient as long as sales remain strong. We believe international growth will continue to remain strong and adoption of non-classic UGG styles will beat expectations. Currently, DECK is trading at just 16.7x our FY14E earnings estimate of $4.74 (consensus of $4.57). At the end of 4Q13, on Dec. 31, 2013, DECK traded at a P/E ratio of 20.2x TTM earnings. DECK is also trading at 1.6x our FY14E sales estimate of $1.75bn (consensus $1.72bn) and at a forward EV/EBITDA ratio of only 8.7x. As of March 14th, DECK had 20% of the shares outstanding sold short. If DECK beats consensus for 1Q14 earnings and raises guidance we believe shares could move materially higher.

    7  

Disclaimer: The information contained herein reflects the views of Consumer Fox as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell the securities mentioned or to invest in any specific security or investment product. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade-marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from Consumer Fox. It should be noted that Consumer Fox has no position in any security of the company mentioned in the report/presentation.