Deckers’ Shares Plunge as UGG Brand Struggles to Regain Footing

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Deckers Outdoor Corp. is hoping that this winter will be colder, spurring sales of its UGG Australia boots.

Goleta, CA—Shares of Deckers Outdoor Corp., makers of UGG brand footwear, fell to their lowest levels in three years today after the company reported Thursday disappointing third quarter results and a full year forecast lower than analysts’ expected.

For the quarter ended Sept. 30, Deckers posted a net income drop of 31% to $43.06 million, or $1.18 a share, compared with $62.35 million, or $1.59 a share, in the year-ago quarter.

Net sales were down to $376.4 million from $414.4 million for the same period last year.

Analysts’ estimates had expected earnings of $1.04 a share on sales of $413.36 million.

The company attributed to sales decline to difficulties at its largest brand, UGG which has been plagued by prices increases and warmer-than-usual weather. In the third quarter, UGG brand sales declined 11.6% to $332.8 million, while Teva brand sales increased 22.1% to $17.9 million and Sanuk brand sales rose 17.6% to $18.3 million from last year.

“Over the past two years, we have raised prices on selective key styles to help mitigate the impact of an 80% increase in our sheepskin and raw material costs over this same period,” Angel Martinez, chairman/president/ceo told analysts on Thursday. “We believe that these selective price increases, particularly during a period of one of the warmest years on record, has pushed us above the consumer’s price-value expectations for the UGG brand.”We also believe that this has resulted in softer than expected third quarter sell-through trends in our Company owned stores, and has pushed back the start of the brand’s key selling season at retail this year,” Martinez added.

UGG Sales to be Flat for Year?

Furthermore, he defended the price decreases as a strategic decision.

“The price adjustment had been mischaracterized in recent industry coverage as ‘discounting.’ But in fact, it’s an important strategic decision that we believe is in the best interest of the brand for the long-term.”

Due to the struggles with UGG, Deckers lowered its fourth quarter earnings estimate 14% compared with its previous forecast for a 22% increase. Deckers management expects the gross margin ratio to narrow to 47% from previous guidance of 50%.

For its full year forecast, the company also lowered expectations to a 33% decline in profits compared with its previous forecast for a 9% to 10% decline. Net sales, which had been estimated to 10% increase, are adjusted to show only a 5% increase. Moreover, 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%.

One of the explanations for the drop in Deckers’ share prices may be due to a more pessimistic outlook that some analysts have about the company, and specifically the UGG brand.

Sam Poser, an analyst at Sterne Agee, said that “the worst is yet to come.” Weaker UGG sales might not just be due to weather, but may indicate that the boots have fallen out of fashion, he said. Poser expects Deckers to miss its already-lowered guidance for the fourth quarter, and that order cancellations will put “severe pressure” on the company next year.