Deckers Outdoor Corporation — Form 10-Q Summary
Business context and period: Global footwear, apparel and accessories company selling UGG, HOKA, Teva, Sanuk and Koolaburra products through wholesale and direct-to-consumer (DTC) channels. This report covers the three months ended June 30, 2019, the first quarter of fiscal 2020; comparisons are with the three months ended June 30, 2018. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
- Revenue: $276.8, up 10.5% year over year (11.6% on a constant-currency basis). HOKA revenue rose 69.2% to $79.5; UGG rose 1.5% to $138.5. Teva fell 4.3% to $38.3 and Sanuk fell 23.5% to $18.7. Wholesale grew 10.7%; DTC grew 10.0%, with comparable DTC sales up 16.2%.
- Profitability: Gross profit was $130.0, with gross margin of 47.0% versus 45.9%. Operating loss narrowed to $31.4 from $39.4; net loss narrowed to $19.4 from $30.4. Diluted loss per share was $0.67 versus $1.00. Management attributed improved results mainly to higher sales and gross margins, partly offset by higher SG&A.
- Cash flow: Operating cash flow was negative $46.6, versus positive $8.1 a year earlier; inventory investment was a major use of cash, consistent with seasonal build. Investing cash outflow was $7.2 and financing cash outflow was $32.8, including $35.0 of share repurchases. Cash declined $87.1 to $502.6.
- Balance sheet and debt: Current assets were $1,188.5 and current liabilities $441.7. Inventory increased to $473.4 from $278.8 at March 31, 2019. Mortgage principal was $31.4; the company had no borrowings under its revolving credit facilities. Available facility capacity was approximately $494.1, including uncommitted China and Japan lines. The company reported compliance with debt covenants.
- Leases: Adoption of the new lease accounting standard added $232.1 of operating lease assets and $255.0 of operating lease liabilities at June 30. The filing says adoption did not materially affect earnings or liquidity.
Material changes and management commentary
- U.S. sales increased 18.1%, while international sales were nearly flat, up 0.6%. HOKA growth reflected new customer acquisition and updated Clifton and Bondi franchises. UGG wholesale benefited from spring/summer products and fewer closeouts; UGG DTC sales declined 3.6%.
- Gross margin improvement reflected favorable brand mix, HOKA rate expansion and fewer UGG closeout sales, partly offset by foreign exchange. Marketing and variable selling expenses increased.
- Management described continued focus on brand diversification, DTC and e-commerce, UGG product allocation and segmentation, and exiting the Sanuk warehouse channel. The business remains seasonal and sensitive to weather; management expects diversification and HOKA growth to moderate seasonality over time.
- No specific financial guidance for future periods is provided in the supplied filing text. Management said cash, operating cash flow and available borrowings should fund working capital needs for at least the next 12 months.
- The company repurchased 226,776 shares for $35.0 during the quarter. It repatriated $130.0 of cash and reported $189.3 of cash held outside the U.S. at quarter-end.
Risks, contingencies and unusual items
- Key exposures include seasonal demand and weather, changing consumer preferences and retail traffic, foreign currency movements, tariffs and other trade measures, and dependence on third-party manufacturers and a limited supplier base. Two Chinese tanneries supply most of the company’s sheepskin.
- One customer represented 11.6% of trade receivables at June 30, though no customer accounted for 10% or more of quarterly sales. A hypothetical 10% currency movement was estimated to change the fair value of financial instruments by approximately $3.0.
- A jury ruled for Deckers in its trademark infringement and counterfeiting case against Australian Leather; the defendant’s affirmative defense remained pending, and court rulings may be appealed. The company said an adverse ruling on UGG trademark enforceability would materially harm the business.
- The effective tax rate was 34.6%, versus 22.1%, affected by a favorable state tax audit settlement partly offset by tax reserves. Gross unrecognized tax benefits and related penalties and interest increased to $14.5.
Important facts for investors to verify
- Whether HOKA growth and improved gross margin persist, and whether UGG, Teva and Sanuk trends stabilize.
- How the seasonal inventory build converts into sales and operating cash flow in subsequent quarters.
- The effect of continued share repurchases on cash balances and capital allocation.
- Developments in the Australian Leather litigation, tax exposures, foreign exchange, tariffs and concentrated sourcing.
- Lease obligations and future liquidity needs; confirm any subsequent guidance or developments in later filings, as this report provides no quantified outlook.