Friday, August 08, 2008

Deckers (NASDAQ:DECK): Colour on quarter

Several firms comment on Deckers (NASDAQ:DECK) after the co issued quarterly results and guidance last night:

- RBC Capital notes yotal inventory for the quarter increased 70%, in-line with revenue growth of 73%. The increase is predominantly attributable to the UGG brand which saw a 74% increase. While in isolation this increase appears high, they note the following: 1) revenues at the UGG brand grew 131% in 2Q, and 2) the vast majority of this inventory has orders written against it and was not produced "on spec."

Gross margin decreased 120 basis points vs. RBC expectations for a 90 basis point increase. The decline in gross margin relates predominantly to above plan international shipments which carry lower margins. SG&A expense leveraged a dramatic 450 basis points vs. RBC estimate for a 150 basis point deleverage. As a result, operating margin was 8.7%, representing a 330 basis point improvement vs. last year.

For 2008, management guided EPS to grow 34% vs. prior guidance of 27%. Hence, they are raising their estimate from $6.40 to $6.75. However, based on some earlier shipments of fall product in 2Q and an increase in SG&A expense (mostly an increase in long-term incentive compensation accruals due to earlier realization of performance targets), they are adjusting our 3Q estimate down while taking their 4Q estimate up.

RBC believes the story here continues to be the strength of the Ugg brand. Uggs remain one of the few must-have items in the footwear arena and they believe the momentum in the brand will continue this fall season. Remain buyers of the shares. Reits Outperform and $154 tgt.

- Baird notes DECK exceeded Q2 expectations and raised its guidance. But some will argue that inventory is too high. Firm says they are glad that UGG inventory is up 74% because it suggests that DECK has a very strong backlog, as the company is essentially building product to its orders, and they see little risk of order cancellation. firm continues to like DECK because they believe the shares are undervalued relative tothe company's prospects. Reits Outperform and $190 tgt.

- Piper Jaffray says they are reiterating their Buy rating and revisitingLT peak EPS analysis following another solid quarter and upwardly revised guidance. Ugg sales growth in the period at 130% far exceeded even lofty expectations and firm's published estimates at 85% - a theme they expect to continue into the prime selling cycle in 2H. EPS of $0.39 (net of items) exceeded PJ and Street $0.24 estimates. Given broader concerns surrounding macroeconomic and spending pressures balanced with an upward bias to estimates, they are resetting their PT multiple closer to the LT growth range at 22x, resulting in a price target revision from $169 to $150. (Peak earnings analysis suggests close to $11-$12/share in EPS)

Notablecalls: The stock briefly hit $100 level in after hours action in reaction to Q3 guidance and reported inventory levels. I think DECK's no Crocs (CROX) - the demand is for real (as confirmed by management comments on conf call).

The real question here is of course what to do with the stock trading at $115. Should you chase it after the 15pt rebound in after mkt or lay low and hope for a pull-back?

I think that there will be some people out there that will look at the inventory growth and hit the sell buttons. That will give us a good entry point. $110 looks like the level.

I would not want to chase DECK here.

Hell, did you see the comps miss ANF posted yesterday? I sure haven't seen a miss of this magnitude in a while from them. Goes to show how tough the business is out there.

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