Deckers Outdoor (DECK -17%) is experiencing a significant drop today, even after reporting a strong Q3 (Dec) performance. Known for its brands UGG, HOKA, and Teva, the company had seen a significant rise in stock value, reaching all-time highs just before the Q3 results. This put their Q3 numbers under intense scrutiny.

What's Disappointing Investors?

The main issue causing today's sell-off is the guidance. DECK increased its FY25 (Mar) outlook, but the hike was less than analysts expected, primarily concerning revenue. The company projected FY25 revenues of $4.9 billion, which only reflects the size of its Q3 top-line beat, not factoring in any additional upside for Q4.

DECK typically provides conservative guidance, but investors are not overlooking it this time. The concern arises from inventory issues, particularly with the UGG brand. UGG saw strong sales in December year-over-year, helped by DECK's strategy of increasing and advancing inventory to avoid last year's shortages. However, this strategy, which benefited Q3, is now negatively impacting Q4, unlike last year when it boosted Q4 results. This doesn't indicate weakening demand but is enough to trigger selling pressure, considering DECK's high valuation and expectations.

Despite these concerns, Q3 highlights show continued demand for DECK's brands, especially compared to competitors like NIKE (NKE, Financial), which recently projected another quarter of year-over-year revenue decline, highlighting comeback challenges.

• In Q3, DECK reported EPS of $3.00, with a gross margin expansion of 160 basis points year-over-year to 60.3%. However, DECK warned that such margin expansion is not typical, attributing it to high levels of full-price selling and low levels of wholesale closeouts.
• Revenue increased by 17.1% year-over-year to $1.83 billion, driven by strong performances from UGG and HOKA, with net sales up 16.1% and 23.7%, respectively. International net sales growth outpaced domestic growth, rising 28.5% year-over-year to $657.9 million compared to an 11.5% increase to $1.169 billion. Direct-to-consumer (DTC) and wholesale sales growth were similar, at 17.9% and 16.2%, respectively.
• Looking forward to FY26, DECK plans to expand its DTC business through consumer acquisition and retention and enhance its international presence by applying its domestic strategies.

In conclusion, while DECK's Q3 results highlighted strong demand, inventory-related challenges have impacted Q4 revenue expectations, leading to significant selling pressure after a substantial rally before the Q3 results.