Deckers Outdoor Corporation — Q3 FY2019 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2018. Deckers designs and sells footwear, apparel, and accessories through wholesale and direct-to-consumer (DTC) channels, including UGG, HOKA, Teva, Sanuk, and Koolaburra. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Change year over year | Nine months ended Dec. 31, 2018 | Change year over year |
|---|---|---|---|---|
| Net sales | $873.8 | +7.8% | $1,626.3 | +8.2% |
| Gross profit / margin | $470.1 / 53.8% | Margin +1.6 pts | $836.9 / 51.5% | Margin +2.3 pts |
| Operating income / margin | $244.7 / 28.0% | +26.7%; margin +4.2 pts | $295.7 / 18.2% | +44.8%; margin +4.6 pts |
| Net income | $196.4 | +127.4% | $240.3 | +156.3% |
| Diluted EPS | $6.68 | vs. $2.69 | $7.99 | vs. $2.91 |
Q3 growth was led by wholesale sales, up 12.5%, while DTC sales rose 2.6%. HOKA sales increased 79.2% for the quarter and 51.4% year to date. UGG remained the largest brand by sales. Sanuk sales declined 7.0% in the quarter and 7.5% year to date. Management attributed stronger gross margins to fewer closeouts, improved full-price selling, lower input costs, and supply-chain initiatives; year-to-date results also benefited from lower domestic wholesale air-freight costs and favorable currency movements.
Q3 SG&A declined 2.1% to $225.4 million, including lower professional and consulting costs and a one-time legal credit, partly offset by increased marketing and DTC operating expenses. Nine-month SG&A increased 1.2% to $541.2 million. Effective tax rates were 19.7% for Q3 and 18.6% year to date, compared with 55.3% and 53.8%, respectively, in the prior-year periods; the comparisons reflect U.S. tax reform and discrete tax benefits.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $279.7 million, versus $253.1 million; investing cash outflow was $21.8 million, and financing cash outflow was $167.2 million, largely reflecting $161.4 million of share repurchases.
- Cash and cash equivalents were $515.9 million at December 31, 2018, up from $430.0 million at March 31, 2018. Inventory was $342.0 million and trade receivables were $279.0 million at quarter-end.
- Deckers reported no balance drawn on its $400 million unsecured revolving facility and $399.5 million of availability, after letters of credit. China and Japan facilities also had no outstanding balance. Mortgage principal was $31.7 million, including $0.6 million classified as short-term borrowings. The company reported compliance with debt covenants.
- Cash outside the U.S. was $304.9 million. Management said cash, operating cash flow, and available borrowing capacity should meet working-capital needs for at least 12 months.
Changes, outlook, and risks
- Deckers reported more than $100 million of net annualized operating-profit improvement from its transformation initiatives, exceeding its stated target by December 31, 2018. Cumulative restructuring charges were $55.6 million; management did not anticipate material future restructuring charges.
- The company estimated remaining fiscal 2019 capital expenditures at $8 million to $10 million, primarily for distribution facilities, IT and systems, and retail-store improvements. It did not provide specific revenue or earnings guidance in the supplied filing text.
- A new $261 million repurchase authorization was approved in January 2019, bringing remaining authorized repurchases to $350.2 million. The program is discretionary; no additional repurchases had occurred through February 1, 2019.
- Revenue recognition changed beginning April 1, 2018: certain wholesale and E-Commerce sales are recognized on shipment rather than delivery. The company recorded an approximately $1 million after-tax increase to opening retained earnings. The prior-year comparative periods were not restated and included approximately $12 million of deferred in-transit sales, so reported comparisons are affected by accounting-policy differences.
- Key exposures include seasonality and weather, changing consumer shopping patterns, foreign exchange, reliance on limited Asian manufacturing and sheepskin suppliers, and potential trade tariffs and transportation-cost increases. The filing notes that footwear sourced in China had not yet been included in U.S. tariff lists, but additional tariffs remained a risk.
- A trial in the Australian Leather intellectual-property case was scheduled for May 2019. The company said it did not expect pending legal matters, in aggregate, to have a material adverse effect, while noting litigation can entail costs and management distraction.
Important facts for investors to verify
- How much of reported sales growth reflects underlying demand versus the shipment-based revenue-recognition change and currency effects.
- Whether HOKA’s rapid growth and improved profitability continue, and whether UGG wholesale and DTC trends remain durable.
- Whether margin gains from pricing, product mix, sourcing, and fewer closeouts persist as input, freight, and tariff risks evolve.
- Working-capital trends, especially receivables and inventory, and the use of cash for repurchases versus business investment.
- The timing and effects of the expected material balance-sheet increase from adopting lease accounting in Q1 FY2020.
- Potential tax, foreign-cash repatriation, customer-concentration, supplier, and legal developments.