The firm’s balance sheet also took a turn for the worse, as inventories ballooned to $486 million, a 36% increase compared to the same period a year ago. Concurrently, Ugg sales tumbled 12% year-over-year to $332 million. The combination of declining sales and increasing inventories can only end negatively, in our view. Plus the company’s cash reserves fell to $61.6 million, and the firm increased its loans outstanding on its credit revolver to $274 million. The firm spent $28 million on a new corporate headquarters, and $29 million to expand its retail footprint-which posted negative same-store sales growth of 13.1% during the third quarter. The firm also repurchased $84 million of shares during the quarter. The company’s capital allocation plans have come into question.
On top of poor capital allocation, the firm provided investors with terrible full-year guidance. Revenue is now expected to increase 5% versus prior guidance of 14%, and earnings are expected to fall 33% year-over-year, compared to previous guidance calling for a 9%-10% decline. We think management has misled investors with respect to proper expectations, and we are not at all pleased with management’s capital allocation decisions.The 2011-2012 winter was the fourth warmest of record dating back to 1895. The warm weather was not good for DECK as it reduced demand for UGG boots. CEO Angel R Martinez said on the Q1 conference call:For the UGG brand, as I mentioned, we believe that the extended period of warm weather throughout the first quarter has adversely impacted cold-weather UGG brand boot sales. However, we also believe that the UGG brand continues to make important inroads, developing a more meaningful spring season business.
If we get a more normal winter in 2012-2013 DECK should benefit. If we get another warm winter, DECK will not be hurt as much because the stock is not priced for perfection.On Friday, April 27, DECK shares plunged over 25% to a new 52 week low following a weaker than expected Q1 earnings report. DECK traded over 14 million shares. DECK has just 38.5 million shares outstanding, so the 14 million share turnover represents a significant portion of the shares outstanding. This was the highest volume day since 2008. The volume suggest that Friday may have been the final capitulation day for the stock.Management expects the company to post a $0.60 loss in the second quarter (versus a loss of $0.19 in the same period a year ago) and thinks its gross margin will fall to 43% for the year. Furthermore, the company’s decision to open new retail stores will boost fixed costs and hurt profitability through the course of 2012. Inventories nearly doubled over last year, though they fell slightly sequentially. However, we aren’t as worried about growing inventories given the rise in raw material costs for Ugg boots. Plus, the company can sell Uggs any year since they don’t actually change from one year to the next.