Deckers Outdoor Corporation — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended December 31, 2015. Financial statement amounts below are in millions of dollars unless stated otherwise. Deckers designs, markets and distributes footwear, apparel and accessories, primarily under UGG, Teva and Sanuk, through wholesale and direct-to-consumer (DTC) channels. Results are seasonal, with UGG sales concentrated in the September and December quarters.
Financial performance and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $795.9 | $784.7 | $1,496.6 | $1,476.4 |
| Gross profit / margin | $391.0 / 49.1% | $415.1 / 52.9% | $691.7 / 46.2% | $725.8 / 49.2% |
| Operating income / margin | $202.5 / 25.4% | $214.6 / 27.4% | $190.0 / 12.7% | $223.7 / 15.2% |
| Net income | $156.9 | $156.7 | $146.0 | $160.4 |
| Diluted EPS | $4.78 | $4.50 | $4.40 | $4.59 |
- Q3 reported sales rose 1.4%; on a constant-currency basis they rose 3.6%. Q3 net income was nearly unchanged, while diluted EPS increased as share repurchases reduced weighted-average shares.
- For the nine months, sales rose 1.4% reported and 4.4% constant currency, but net income fell 9.0%. Gross margin declined 300 basis points, reflecting currency headwinds, more promotions and higher closeouts.
- Nine-month operating cash flow was $145.6, down from $193.5 a year earlier. Investing cash outflow was $52.8 versus $76.2; financing cash outflow was $53.2 versus $14.9 of inflow. Inventory growth of $130.8 and receivables growth of $56.8 used operating cash.
- At December 31, cash and cash equivalents were $263.0; current assets were $911.4 and current liabilities $319.9. Inventories were $370.6, up from $238.9 at March 31. The company reported $23.0 of China facility borrowings, no borrowings under its main credit agreement, and a $33.3 headquarters mortgage. Approximately $373.5 remained available under the main agreement after applying its leverage test. The company reported covenant compliance.
- Cash outside the U.S. was approximately $227.0 and was intended to remain invested abroad indefinitely; repatriation could result in additional taxes.
Material changes and segment trends
- Q3 UGG sales increased 1.0% overall: DTC rose 2.8%, while wholesale fell 0.5%. Teva sales rose 3.2%; Sanuk fell 17.0%; other brands, principally Hoka, rose 48.4%. DTC sales overall rose 3.4%, led by e-commerce, while comparable DTC sales declined 0.9% on a constant-currency basis.
- Q3 operating income fell 5.6% despite lower SG&A, as promotional activity and foreign exchange reduced gross margin. Management attributed about $21 million of gross-margin pressure to promotions and cited a 110-basis-point currency impact.
- Nine-month DTC operating income fell 24.7%; UGG wholesale operating income fell 9.3%. Other-brand wholesale results improved but remained loss-making. Lower performance-based compensation and currency-related expense reductions partly offset higher operating costs.
- The company repurchased approximately 979,000 shares for $69.2 million during the nine months. About $102.9 million remained authorized under its $200 million repurchase program at December 31.
Outlook, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management estimated remaining FY2016 capital expenditures, including existing commitments, at $13–$18 million; approximately $9 million of commitments primarily related to land near headquarters.
- Management cited unseasonably warm weather in key markets, weaker retail traffic, a stronger U.S. dollar and increased promotional activity as pressures on sales and margins. Sheepskin availability and price volatility, international sourcing, and changing consumer preferences were also identified as risks. Production is concentrated among independent factories in Asia, and certain raw materials have limited supplier bases.
- In February 2016, after the reporting date, the company announced a brand realignment to streamline operations and reduce infrastructure costs. Plans included relocating Sanuk operations, closing the Ahnu office and seeking strategic alternatives for Ahnu, and evaluating 20 stores as potential closures. The company expected lease, asset write-off, relocation and severance charges, but did not provide a clear amount. It also sold the TSUBO brand; the sale was not material.
- Q3 included approximately $4.5 million of impairment charges for ten stores; nine-month results included approximately $6.8 million for fifteen stores. The company increased receivables allowances by approximately $3 million in the nine-month period. Management said ordinary-course legal claims were not expected to materially affect results; ongoing state and foreign tax examinations could produce different outcomes from recorded estimates.
- The company had a $19.7 million Sanuk contingent-consideration payment due within 60 days after December 31, 2015. It also disclosed that the fair value of contingent consideration could change materially in the near term.
Important facts for investors to verify
- Whether promotional pressure, warm weather and foreign-exchange effects persist, and how they affect gross margin and UGG demand.
- Inventory levels, sell-through, receivables quality and customer concentration; one customer represented 22.9% of net receivables at December 31.
- The final costs, timing and realized savings from the brand realignment and potential store closures.
- Execution of DTC and e-commerce growth plans, including comparable-store traffic and profitability.
- Cash availability, borrowing capacity and covenant compliance, including the treatment and tax implications of overseas cash.