Deckers Outdoor Corporation — Q1 FY2023 Form 10-Q
Business context and reporting period. Deckers designs, markets, and distributes footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and Koolaburra. This unaudited quarter covers the three months ended June 30, 2022, compared with the three months ended June 30, 2021. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 FY2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $614.5 | $504.7 | +21.8% |
| Gross profit / margin | $294.8 / 48.0% | $260.5 / 51.6% | Margin down 3.6 percentage points |
| Income from operations / margin | $56.3 / 9.2% | $61.8 / 12.2% | Income down 8.9% |
| Net income | $44.8 | $48.1 | Down 6.8% |
| Diluted earnings per share | $1.66 | $1.71 | Down $0.05 |
| Cash from operating activities | $(28.9) | $(36.3) | Cash use reduced by $7.4 |
| Capital expenditures | $12.5 | $15.5 | Cash investing use |
- Revenue mix: Wholesale sales rose 24.7% to $429.4 million; DTC sales rose 15.4% to $185.1 million. Domestic sales increased 14.4% to $384.5 million, while international sales increased 36.4% to $229.9 million. Constant-currency sales growth was 23.5%.
- Brands: HOKA sales rose 54.9% to $330.0 million, including wholesale growth of 53.4% and DTC growth of 58.4%. UGG sales declined 2.4% to $207.9 million, with DTC down 10.2%. Teva sales increased 2.0% to $59.6 million; Sanuk declined 5.9% to $14.2 million; Other brands declined 45.3% to $2.7 million.
- Cash, liquidity, and debt: Cash and cash equivalents were $695.2 million at June 30, down from $843.5 million at March 31. Current assets were $1,949.7 million and current liabilities were $799.8 million. The company had no revolving-credit borrowings and reported $466.2 million of available borrowing capacity; it was in compliance with its credit covenants.
- Working capital: Inventory increased to $839.5 million from $506.8 million at March 31. The filing attributes elevated inventory partly to early procurement intended to support product availability amid supply-chain disruption. Operating cash use reflected a $332.7 million inventory increase, partly offset by higher accounts payable.
- Other balance-sheet changes: Total assets were $2,513.3 million and stockholders’ equity was $1,472.4 million. Foreign-currency translation contributed to a $15.0 million comprehensive loss component for the quarter.
Material changes and management commentary
- Revenue growth was led by HOKA, supported by market-share gains, product updates, selective account expansion, and stronger DTC sales. Pair volume increased 20.2% to 11.9 million.
- Gross margin fell primarily because of higher ocean freight costs and air freight usage, unfavorable product and channel mix, normalized UGG promotions, and foreign-exchange effects. HOKA price increases and a favorable brand mix partly offset these pressures.
- SG&A increased 20.0% to $238.4 million. Management cited higher variable selling costs, foreign-currency-related losses, payroll and occupancy costs, advertising, and approximately $1.1 million of retail asset impairment charges.
- HOKA wholesale operating income increased to $69.6 million from $46.4 million. Higher unallocated overhead costs, including foreign-currency losses and warehousing fees, weighed on consolidated operating income.
- Management said transit lead times were beginning to improve, but expected ocean freight costs to continue negatively affecting future periods. The transition to a new European third-party logistics provider remained challenging.
- The company described HOKA as a year-round growth driver and noted plans to work toward opening its first permanent U.S. HOKA store in New York City in spring 2023. It also cited unfavorable exchange rates as a headwind to prospective UGG international growth.
Outlook, risks, and notable items
- The filing provides no specific numerical revenue or earnings guidance. Management expects working-capital needs to fluctuate with seasonality and inventory requirements, and said cash, operating cash flows, and available credit should be sufficient for obligations over at least the next 12 months.
- Key risks discussed include supply-chain and logistics disruption, freight and inflation costs, labor shortages, foreign-exchange movements, consumer demand and discretionary spending, seasonality, dependence on independent manufacturers, and concentration in certain suppliers. Most sheepskin is sourced from two Chinese tanneries.
- International sales represented 37.4% of revenue. The ten largest customers accounted for 29.5% of sales; one customer represented 14.6% of receivables at quarter-end.
- Ordinary-course legal matters include employment, intellectual-property, and product-liability claims. Management did not expect their outcomes, individually or in aggregate, to materially adversely affect the company, while acknowledging potential legal costs and management distraction.
- During the quarter, Deckers repurchased 384,413 shares for $100.0 million. After quarter-end, it repurchased another 68,674 shares for $18.0 million. On July 27, 2022, the board added $1.2 billion to the authorization, bringing the reported total authorization to approximately $1.5 billion.
- Deckers had signed a ten-year lease for additional warehouse and distribution-center space in Indiana, with an approximately $46 million minimum commitment; the filing also reports $52.4 million of undiscounted minimum payments for signed leases not yet commenced.
Important facts for investors to verify
- Whether HOKA’s rapid growth and UGG performance can offset ongoing freight, foreign-exchange, and operating-cost pressures.
- Whether elevated inventory converts to sales as expected, and how inventory levels affect working capital and operating cash flow.
- Whether supply-chain conditions and the European logistics transition improve, and whether air freight and ocean freight costs moderate.
- The effect of ongoing share repurchases and the expanded authorization on cash balances, liquidity, and share count.
- Potential effects of customer receivable concentration, supplier concentration, and the disclosed lease commitments.