Business context and reporting period
Deckers Outdoor Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Deckers designs, markets, and distributes footwear, apparel, and accessories, primarily under UGG, Teva, and Sanuk. Production is outsourced, primarily to independent manufacturers in Asia. Results are highly seasonal, with UGG sales concentrated in the second half of the calendar year.
After year-end, the Board approved a change in fiscal year-end from December 31 to March 31 to better align reporting and planning with seasonality. The company expected to file a transition report for the quarter ending March 31, 2014.
Financial performance and liquidity
Amounts below are in U.S. dollars; annual figures are for 2013 compared with 2012 unless noted.
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,556.6 million | $1,414.4 million |
| Gross profit / margin | $736.5 million / 47.3% | $632.2 million / 44.7% |
| Operating income / margin | $207.9 million / 13.4% | $186.9 million / 13.2% |
| Net income | $145.7 million | $129.0 million |
| Diluted EPS | $4.18 | $3.45 |
| Operating cash flow | $262.1 million | $163.9 million |
| Cash and cash equivalents at year-end | $237.1 million | $110.2 million |
| Working capital | $508.8 million | $424.6 million |
Fourth-quarter 2013 net sales were $736.0 million, operating income was $201.5 million, and net income attributable to Deckers was $140.9 million. The comparable fourth-quarter 2012 amounts were $617.3 million, $144.1 million, and $98.1 million, respectively.
At December 31, 2013, short-term borrowings were $9.7 million, principally under the China credit facility. There were no borrowings under the $400 million secured revolving facility; approximately $399.8 million was unused before covenant limits, and stated borrowing availability after applying covenants was approximately $251.8 million. Total assets were $1,259.7 million and stockholders’ equity was $888.1 million.
Net cash used in investing activities was $85.2 million, including $79.8 million of property and equipment purchases. Net cash used in financing activities was $50.5 million. Inventory was $260.8 million, down from $300.2 million. The company reported operating lease obligations of $322.6 million and purchase obligations of $245.2 million, principally due within one year.
Material changes versus the prior comparable period
- Sales rose 10.1%; international sales increased 16.5% to $514.3 million and represented 33.0% of total sales, up from 31.2%.
- UGG sales increased 9.7% to $1,298.9 million, driven by retail and e-commerce growth; UGG wholesale sales were essentially flat. UGG accounted for most of company sales.
- E-commerce sales grew 29.8% to $169.5 million and retail-store sales grew 32.8% to $326.7 million. The company opened 40 stores during the year; same-store sales increased 2.8%.
- Gross margin improved 2.6 percentage points, mainly from lower sheepskin costs, greater use of UGGpure, and a higher direct-to-consumer sales mix. SG&A increased 18.7% to $528.6 million, reflecting new-store costs, performance compensation, and e-commerce spending.
- Operating cash flow increased to $262.1 million, with lower inventory purchases and higher accrued payroll and income taxes among the cited factors. Cash increased by $126.9 million during the year.
- Weighted-average wholesale selling price per pair declined to $46.87 from $49.17; the overall weighted-average selling price per pair declined to $59.63 from $60.12. Total footwear volume increased 10.1% to approximately 26.1 million pairs.
Outlook, risks, contingencies, and unusual items
- Management expected full-year 2014 gross margin to increase, citing a full year of reduced sheepskin prices, greater use of UGGpure, and a higher direct-to-consumer mix. No clear company-wide 2014 revenue or earnings guidance is provided in the filing.
- Management estimated 2014 capital expenditures of $95 million to $100 million, mainly for a new distribution center, store openings, and an enterprise resource planning system upgrade. Additional retail-store openings were planned.
- Key risks include weather-sensitive and seasonal demand; UGG brand and fashion concentration; competition and changing consumer preferences; limited sheepskin sourcing; dependence on independent manufacturers and Asian supply chains; inventory forecasting and markdown risk; international and foreign-exchange exposure; cybersecurity and systems disruption; and retail expansion costs.
- Sanuk acquisition contingent consideration was estimated at $46.2 million at year-end; specified future payments have no maximum. Hoka contingent consideration was estimated at $1.8 million, subject to a $2.0 million maximum. These estimates depend on forecasts and could change.
- Sheepskin-related purchase commitments formed part of the company’s purchase obligations. Management said it expected factory purchases to exceed minimum commitment levels, but the company could be responsible if buyers fail to meet them.
- A shareholder derivative action had been dismissed with prejudice, but the plaintiffs’ appeal remained pending. The company said routine legal matters in aggregate were not expected to have a material adverse effect.
- The company reported immaterial impairment losses at three retail stores and no impairment of goodwill or indefinite-lived brand assets. The Sanuk goodwill valuation exceeded carrying value by 37.4% in its quantitative test.
- Management and the auditor concluded disclosure controls and internal control over financial reporting were effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether growth in UGG, e-commerce, international sales, and retail stores can be sustained, and whether new-store returns justify the increased fixed costs.
- The assumptions behind 2014 margin expectations, particularly sheepskin pricing, UGGpure adoption, and direct-to-consumer mix.
- Sanuk contingent consideration forecasts and the scale and timing of related cash payments.
- Exposure to sheepskin supply, purchase commitments, inventory markdowns, and wholesale customer cancellations.
- Actual borrowing availability under the revolver after covenants, and the cash-flow demands of planned capital spending, leases, and purchase obligations.
- Developments in the pending appeal and intellectual-property matters, as well as foreign-exchange, cybersecurity, and supply-chain risks.