Business context and reporting period
Deckers Outdoor Corporation designs and sells footwear, apparel and accessories under UGG, HOKA, Teva, Sanuk and Koolaburra. This unaudited Form 10-Q covers its fiscal first quarter ended June 30, 2021, compared with the three months ended June 30, 2020. The business is seasonal; UGG and Koolaburra sales are typically strongest in the September and December quarters.
Key financial results
Amounts below are in millions of U.S. dollars unless otherwise indicated.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $504.7 | $283.2 |
| Gross profit / margin | $260.5 / 51.6% | $142.6 / 50.3% |
| Operating income (loss) / margin | $61.8 / 12.2% | $(7.7) / (2.7)% |
| Net income (loss) | $48.1 | $(8.0) |
| Diluted earnings (loss) per share | $1.71 | $(0.28) |
| Operating cash flow | $(36.3) | $21.2 |
| Capital expenditures | $15.5 | $9.3 |
| Cash and cash equivalents at period end | $956.7 | $661.9 |
Sales rose 78.2% (76.1% on a constant-currency basis); total pairs sold increased 80.0%, to 9.9 million. Wholesale sales increased 140.2% to $344.3 million, while DTC sales rose 14.7% to $160.4 million. Gross margin improved 1.3 percentage points, reflecting favorable brand/product mix, lower reserves as a share of sales and currency effects, partly offset by channel mix and higher air freight costs. SG&A increased to $198.7 million from $150.3 million, but declined as a share of sales to 39.4% from 53.0%.
Material changes and segment performance
- HOKA sales increased 95.5% to $213.1 million, with wholesale up 114.0% and DTC up 61.4%.
- UGG sales increased 70.8% to $213.0 million; wholesale rose 211.0%, while DTC declined 4.1%. Management cited earlier fall shipments, replenishment orders and a prior-year pandemic-disrupted comparison.
- Teva sales rose 65.9% to $58.5 million. Sanuk sales rose 13.7% to $15.0 million; Other brands sales rose 435.9% to $5.0 million from a small base.
- Operating income improved to $61.8 million from a loss, primarily on higher sales and gross profit. Unallocated overhead costs increased to $80.7 million from $55.6 million, including higher warehousing, payroll, performance compensation and IT costs.
- Operating cash flow turned negative, mainly reflecting seasonal inventory investment and other working-capital movements. Inventory increased to $457.7 million from $278.2 million at March 31, 2021; accounts payable increased to $393.6 million from $231.6 million.
Liquidity, debt and capital allocation
Cash was $956.7 million at June 30, 2021, including $180.8 million held by foreign subsidiaries. The company reported no borrowings under its U.S., China or Japan revolving facilities and had approximately $572.9 million of available borrowing capacity in total. It was in compliance with financial covenants. Current and long-term operating lease liabilities were $46.3 million and $185.8 million, respectively. Financing cash outflow was $82.2 million, primarily due to $82.2 million of share repurchases; 249,331 shares were repurchased at an average $329.55 per share. The board authorized an additional $750 million repurchase amount in April; $728.5 million remained authorized at quarter end.
Management believes cash, operating cash flow and available facilities will be sufficient for working capital and debt service for at least the next 12 months, while noting liquidity can be affected by seasonality, pandemic impacts and business conditions.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided in the filing. Management expects meaningful HOKA growth for the current fiscal year but cautions that its Q1 growth rate is not expected to continue in future periods.
- COVID-19 remains a source of uncertainty. Supply-chain disruptions include factory closures, container shortages, port congestion, delivery delays and potential higher air-freight costs. Management expects some disruptions to continue, with timing uncertain.
- Workforce recruitment and retention challenges at distribution centers have contributed to higher wages. The company is investing in distribution/logistics, planning systems, e-commerce, marketing and personnel.
- About 66% of company-owned stores were open for the full quarter, versus about 20% a year earlier; all were reopened by July 29, 2021. Temporary regional closures could recur.
- Other exposures include seasonality and consumer demand shifts, dependence on third-party manufacturers and a limited number of suppliers, sheepskin/leather price volatility, foreign-exchange risk and customer credit concentration. A hypothetical 10% currency movement would change the fair value of financial instruments by approximately $11.8 million.
- Ordinary-course litigation was not expected by management to have a material adverse effect. An appellate court affirmed the ruling upholding the UGG trademark in the Australian Leather case; a further challenge was considered possible.
Important facts for investors to verify
- Whether sales and margins remain strong after accounting for the unusually disrupted prior-year comparison and earlier wholesale shipments.
- Whether supply-chain delays, freight costs and distribution-center staffing pressures affect product availability, expenses or seasonal deliveries.
- Whether inventory and working-capital needs continue to absorb cash as the company prepares for peak selling seasons.
- Whether HOKA growth moderates as management anticipates, and whether UGG DTC performance recovers.
- How repurchases, international cash availability, foreign-exchange movements and seasonal liquidity needs affect capital allocation and cash balances.