By Staff Report Thursday, October 25th, 2012

Ugg boot company Deckers Outdoor Corp.’s shares plunged 14.7 percent in after-hours trading on Oct. 25 as the footwear firm’s sales slipped and it said 2012 profits are expected to be down one-third compared to last year.

Deckers, currently building a new, campus-style headquarters in Goleta, reported third-quarter net income of $43.1 million, compared to $62.3 million in the same quarter last year.

At $1.18 per share, the quarter’s profits topped the expectations of 14 analysts compiled by Yahoo Finance by 14 cents.

But the outlook for the Ugg parent is grim. Deckers said it expects total profits in 2012 to be down about 33 percent compared to last year. It had previously expected to be off 9 percent to 10 percent.
Deckers’ third-quarter profits dropped as total sales fell 9.2 percent to $376.4 million, a decline largely due to its signature Ugg brand.

Company executives have pinned the sales drop this year — which follows a record-breaking 2011 — on warmer weather and more expensive sheepskin, the key component in many of its Ugg boots.

But analysts that follow the company closely have said Deckers overestimated demand for Ugg, resulting in a glut of inventory on retail shelves. The over-supply has in turn caused many retailers to pass the boots on to discount stores such as flash-sale websites and Marshalls, where they can sell for as much as 40 percent off their original price tag.

“They’re still going to sell a lot of boots,” Sterne Agee analyst Sam Poser said in a September interview with the Business Times. “The question is what’s going to happen to their margins.”

In September, Poser lowered his 2012 earnings estimate for Deckers from $3.97 per share to $3.49 and his share price target from $38 to $32 on Sept. 25. He also lowered his earnings outlook for 2013 to $3.62 from $4.37 per share.

As of Oct. 25, the average earnings estimate for Deckers from 14 analysts compiled by Yahoo Finance is $3.99 per share for 2012 and $4.58 for 2013.
Deckers said it expects its fourth-quarter sales to ring in about 6 percent higher than a year earlier, but that outlook compares to its previous expectations that sales would be 19 percent higher.

And as a result of lower prices, Deckers now expects fourth-quarter profits to decrease about 14 percent over 2011 levels. It had previously said fourth-quarter profits would likely be 22 percent above last year.

In September, Deckers cut wholesale prices on much of its product line ahead of the holiday shopping season. “We believe this is in the best interests of the brand and will help drive sell-through during the holiday season,” President and CEO Angel Martinez said in the third-quarter earnings release.

He said that for the past two years, Deckers gradually raised prices on its key styles “to help mitigate the impact of an 80 percent increase in our sheepskin and raw materials costs.” He said that the company has since come to realize the price increases have “pushed us above the consumer’s price-value expectations for the Ugg brand.”

Deckers’ share price is down more than 53 percent year-to-date, making it the second-worst-performing stock based in the Tri-Counties. (The largest share-price decline has been at Thousand Oaks-based energy crop company Ceres, down more than 59 percent since going public in February.)

Deckers’ recent woes come on the heels of a groundbreaking for a new, 150,000-square-foot headquarters on 13.8 acres at the Cabrillo Business Park in Goleta. Once complete, the project is expected to house about 400 corporate employees.