Deckers 1Q15 Earnings Preview; Expect Top and Bottom

Line beat
7/22/2014
Companies mentioned:

Deckers Outdoor (DECK) - $84.63

Why Read?

Deckers surprised many when it beat estimates by +5.7% reporting $294.7m vs. consensus of $278.7m (CF: $292.9m) in
4Q14/Transition Quarter. The company also beat EPS estimates reporting ($0.08) vs. ($0.16) consensus. We expect in the 2
nd

1Q15 (company annoyingly shifted FY end from December to March adding a gap quarter), the company will continue to beat
estimates on the back of stronger than expected sandal sales / non-UGG boot footwear as well as robust Other segment sales.
""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""

! Strong sell-through in 1Q15: During the first week of March, we called 37 UGG stores and 3
rd
party retailers of Deckers to
check on 4Q14 sales 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 was distributed unevenly across the country due to an extended winter in some regions. We expect these
trends strengthened through the remainder of the June end quarter. We are forecasting a +5.0% increase in comparable store
sales for 1Q15.

! Product mix and reduced clearance: We observed fewer send backs to DECK from 3
rd
party retailers, leading to lower
closeout volumes and margin benefits. We are forecasting around +100 Bps in gross margin improvement due to product mix
and lower closeout volumes in 1Q15.

! Brand breakdowns: Sales increased +11.7% in 4Q14/Transition Quarter on the back of strong UGG sales +15.8% and Other
sales +84.3%. We expect the trend for UGG sales to remain strong in 1Q15 and a greater shift to retail and ecommerce sales
channels. In 1Q15, we expect UGG brand sales to increase +16.3%, Teva brand sales to increase +8.6%, Sanuk brand sales to
increase +5.4%, and other brand sales to increase +93.6%.

! 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.
International sales increased +18.9% in 4Q14/Transition Quarter vs. +8.5% for the domestic segment.

! Estimates: We expect revenue of $197.4m vs. consensus of $192m and company guidance of $190.5m in 1Q15E. For 1Q15E
we expect a loss of ($1.18) vs. the company guidance of ($1.33) and consensus of ($1.28). For FY15E we expect $1.82bn vs.
consensus of $1.80bn and company guidance of $1.80bn. For FY15E we expect earnings of $4.93 vs. consensus of $4.69 and
implied management guide of $4.68.

(Continued on next page)









#
Strong sell-through in 1Q15:


The spring lines are performing well. 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 Sperrys, 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 2H15 sales, will lead to greater brand adoption and
allow Deckers sales to remain strong through FY15 and further move it towards its goal of a year round lifestyle brand.

With warmer weather we believe the Teva segment results will surprise analysts in 1Q15. We have included the Google Trend
results for Tevas and see a strong YoY uptick in the results.








(Continued on next page)














$

Product mix and reduced clearance:

We observed fewer send backs to DECK from 3rd party retailers, leading to lower closeout volumes and margin benefits, which
we expect will add +100 Bps in gross margin for the quarter.

Gross Profit
Impacts Q4 2013 Q1 2014 Q2 2014 Q3 2014
Old
FY2014 Q4 2014
UGG Pure

Decrease

Increase 150 Increase
Ecom Mix

Increase Increase 120 Increase
Closeout Mix

-100 -50
Retail Mix Increase Decrease

Increase Increase
FX impact -30
MD&A Total 0 -100 -50 0 240 0
Actual Total 85 (112) 83 478 262 210

We also believe the reduced reliance on closeout sales and greater shift towards Ecommerce will create gross margin leverage in
FY15. We do not attempt to forecast FX impacts for the year.




(Continued on next page)






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Brand breakdowns:

DECK Total
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
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% 5.8%
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% 0.2%
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% 2.0%
Retail+E-Commerce
trailing 4-qtr % Sales
22% 23% 22% 22% 22% 22% 23% 27% 28% 29% 29% 32% 33%

DECK sales increased +11.7% in 4Q14/Transition Quarter. This growth was driven by +31.6% growth in Retail and Ecommerce
sales while wholesale DECK sales increased +1.4% in 4Q14. Retail and Ecommerce as a percentage of total DECK sales have
increased from 22.4% in FY11 to 33.1% in FY14. We expect DECK sales to increase +16.1% in 1Q15 and +14.6% in FY15 driven
by a +16.1% increase in Retail and Ecommerce sales.

UGG Brand
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
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% 5.5%
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% 0.1%
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% 2.1%
Retail+E-Commerce
trailing 4-qtr % Sales
25% 26% 24% 24% 24% 25% 26% 31% 32% 33% 34% 37% 38%

UGG brand sales increased +15.8% in 4Q14/Transition Quarter. This growth was driven by +30.1% growth in Retail and
Ecommerce sales while wholesale UGG sales increased +0.7% in 4Q14/Transition Quarter. Retail and Ecommerce as a percentage
of total UGG sales have increased from 24.0% in FY11 to 38.2% in FY14. We expect UGG brand sales to increase +16.3% in
1Q15 and +12.3% in FY15 driven by a +15.6% increase in Retail and Ecommerce sales.

Teva Brand
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
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% 6.5%
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% -4.8%
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% -4.1%
Retail+E-Commerce
trailing 4-qtr % Sales
5% 4% 5% 5% 5% 6% 6% 6% 6% 6% 6% 6% 7%

Teva brand sales decreased -9.2% in 4Q14. This decrease was driven by a -10.3% decrease in wholesale sales offset by a +41.8%
growth in Retail and Ecommerce sales. The Teva wholesale segment comprised 93.3% of total Teva brand sales in FY14. We
expect Teva brand sales to increase +8.6% in 1Q15 and +10.4% in FY15 driven by stronger adoption of the product, especially the
reintroduction of the classic Teva Universal style.

)
Sanuk Brand
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Retail+Ecom Trailing 4
Qtr Seq. Sales Growth
56.5% 40.2% 19.8% 20.8% 7.3% 11.6% 13.4%
Wholesale Trailing 4
Qtr Seq. Sales Growth
1.9% 3.6% -2.5% 1.2% -0.4% 7.0% -1.3%
Total Trailing 4 Qtr
Seq. Sales Growth
3.1% 4.8% -1.5% 2.3% 0.1% 7.3% -0.2%
Retail+E-Commerce
trailing 4-qtr % Sales
2% 3% 4% 5% 6% 7% 7% 8%

Sanuk brand sales decreased -0.8% in 4Q14. This decrease was driven by -4.1% wholesale sales growth offset by +104.2% growth
in Retail and Ecommerce sales. Retail and Ecommerce as a percentage of total Sanuk sales have increased from 5.4% in FY13 to
8.1% in FY14. We expect Sanuk brand sales to increase +5.4% in 1Q15 and +20.9% in FY15 driven by a +27.3% increase in Retail
and Ecommerce sales.

Other Brand
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
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% 47.9%
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% 21.7%
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% 22.6%
Retail+E-
Commerce trailing
4-qtr % Sales
12% 11% 11% 10% 8% 7% 6% 5% 5% 4% 3% 4% 4%

Other brand sales increased +84.3% in 4Q14. This growth was driven by +259.9% growth in Retail and Ecommerce sales while
wholesale Other sales increased +80.0% in 4Q14. Retail and Ecommerce as a percentage of total Other sales have decreased from
4.5% in FY13 to 4.2% in FY14. We expect Other brand sales to increase +93.6% in 1Q15 and +84.1% in FY15 driven by a +76.2%
increase in wholesale sales.

Growth in international:

During our phone survey of 37 UGG and 3
rd
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 3Q14, 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.

(Continued on next page)

*
Wrap-up:

Currently, DECK is trading at just 17.2x our FY15E earnings estimate of $4.93 (consensus of $4.69). DECK is also trading at 1.6x
our FY15E sales estimate of $1.82bn (consensus $1.8bn) and at a forward EV/EBITDA ratio of only 9.2x. As of June 30
h
, DECK
had 18.6% of the shares outstanding sold short. If DECK beats consensus for 1Q15 earnings and maintains FY15 guidance we
believe shares could move materially higher.








































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