Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017 (fiscal 2018 first quarter); filed August 9, 2017. Deckers designs and sells footwear, apparel and accessories through wholesale and direct-to-consumer channels. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $209.7 million | $174.4 million |
| Gross profit / margin | $90.6 million / 43.2% | $76.3 million / 43.7% |
| Operating loss | $56.3 million | $78.3 million |
| Net loss | $42.1 million | $58.9 million |
| Loss per diluted share | $1.32 | $1.84 |
| Cash used in operating activities | $7.3 million | $43.3 million |
| Cash and cash equivalents, June 30 | $279.9 million | $291.8 million at March 31, 2017 |
Sales increased 20.3% (21.5% on a constant-currency basis), largely due to UGG and other-brand wholesale growth, earlier wholesale and distributor shipments, and continued Hoka growth. Wholesale sales rose 24.5% to $144.6 million; DTC sales rose 11.8% to $65.1 million. International sales increased 37.2% and represented 42.4% of sales. E-commerce growth supported DTC results, while retail-store sales declined. The gross margin fell 0.5 percentage point, primarily from an 80-basis-point foreign-exchange impact, partly offset by stronger wholesale margins. Lower SG&A and higher sales narrowed the operating and net losses.
Inventory was $441.6 million at June 30, up from $298.9 million at March 31, consistent with seasonal preparation for UGG’s fall and winter selling period. Operating cash use improved year over year but remained negative; investing cash use was $3.8 million, primarily capital expenditures. The company reported $0.6 million of short-term borrowings and a $31.9 million long-term mortgage balance. It had no borrowings under its domestic, China or Japan revolving facilities at quarter-end and reported covenant compliance. At August 9, it had borrowed approximately $58 million domestically, $1 million in China and $5 million in Japan.
Material changes and management outlook
- UGG wholesale sales rose 37.8%; other-brand sales rose 47.3%, primarily reflecting Hoka growth. Sanuk sales declined 2.0%. Segment operating results improved across UGG wholesale, Teva, Sanuk, other brands and DTC; unallocated overhead costs were broadly flat.
- The company’s restructuring plan had incurred cumulative charges of $55.3 million since its announcement; $7.8 million remained accrued at June 30. It had closed 25 retail stores as of that date and continued to target approximately 125 owned stores worldwide by fiscal 2020, with additional restructuring costs anticipated.
- The Savings Plan targets approximately $100 million of operating-profit improvement from fiscal 2017 through the end of fiscal 2020, excluding reinvestment. Planned measures include sourcing and materials efficiencies, factory-base consolidation, store reductions and process improvements.
- Management estimated fiscal 2018 remaining capital expenditures at $43–$45 million, mainly for DTC and facility build-outs and IT infrastructure. It stated that cash, operating cash generation and available credit were expected to cover liquidity needs for at least 12 months.
Risks, contingencies and unusual items
- Results are seasonal and weather-sensitive. Management cited changing shopping behavior, declining store traffic, shorter wholesale ordering windows, foreign-exchange volatility and the need to optimize the retail footprint.
- Foreign-currency forward contracts had a total notional value of $155.4 million. The filing estimated that a hypothetical 10% currency fluctuation could change their fair value by approximately $13.5 million. Foreign-exchange effects reduced gross margin and contributed to other comprehensive loss.
- Two customers represented 15.7% and 11.7% of trade receivables, respectively. Production is concentrated among independent factories in Asia, and key UGG sheepskin supply depends significantly on two Chinese tanneries.
- A June 2017 warehouse lease amendment extended the Moreno Valley, California, lease to June 2028 and added approximately $77.2 million of future minimum lease commitments. Ordinary-course purchase obligations had no material reported change.
- The company faces ongoing tax examinations; gross unrecognized tax benefits were $11.3 million, and approximately $3.1 million could settle within 12 months. A UGG trademark and patent dispute includes counterclaims challenging trademark and patent rights; the company said it could not estimate a loss range, and an adverse trademark ruling could materially affect the business.
- Management stated that disclosure controls were effective as of June 30, 2017, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales growth from earlier shipments and wholesale timing is sustainable, and how inventory levels and turnover develop.
- Progress toward the $100 million Savings Plan target and approximately 125 owned stores by fiscal 2020, including future restructuring charges and realized savings.
- Whether gross margins recover from currency pressure, promotional activity and product-mix effects.
- Customer receivable concentration, collections, and subsequent-period borrowing needs relative to available credit.
- Developments in the UGG intellectual-property litigation, tax examinations and the financial effects of the expanded warehouse lease.