Deckers Outdoor Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts below are in millions of dollars unless stated otherwise. Deckers designs and sells footwear and accessories, led by UGG and Teva, through wholesale, eCommerce and retail channels. Its business is seasonal: UGG sales typically peak in the second half of the year, while Teva is strongest in the first half.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $137.1 | $102.5 | $293.0 | $236.8 |
| Gross profit / margin | $60.7 / 44.3% | $40.8 / 39.8% | $138.7 / 47.3% | $99.7 / 42.1% |
| Operating income / margin | $13.2 / 9.6% | $3.2 / 3.1% | $42.0 / 14.3% | $22.6 / 9.5% |
| Net income attributable to Deckers | $9.0 | $2.9 | $26.9 | $15.2 |
| Diluted EPS | $0.23 | $0.07 | $0.69 | $0.38 |
Q2 sales rose 33.7%; six-month sales rose 23.7%. Growth was led by UGG and Teva, with international sales up 54.8% in Q2 and 41.1% for the half. For the six months, UGG sales increased 23.4%, Teva 28.0%, retail-store sales 65.2%, and eCommerce 10.0%. Improved gross margin reflected reduced closeout sales, the shift to direct Teva distribution in Benelux and France, and a higher retail-sales mix. The company also recognized about $3.1 million of duty refunds in Q2 and $5.5 million for the half; management said refunds were not expected to recur at that level.
SG&A increased 30.0% in Q2 and 26.9% for the half, reflecting growth-related payroll, new stores and costs associated with Teva distribution. Six-month operating cash flow was $4.2 million, versus cash used of $9.9 million a year earlier. The improvement was driven chiefly by timing-related growth in accounts payable and a smaller inventory increase; inventory still rose 41.1% from year-end to $120.5 million. Investing activities provided $16.2 million, mainly from sales of short-term investments; financing activities used $2.5 million, including share repurchases. Cash and cash equivalents were $333.7 million at June 30, compared with $315.9 million at year-end. Working capital was $447.8 million.
Current assets were $552.5 million and current liabilities $104.7 million. The company reported no borrowings under its credit facility, with $19.1 million available after letters of credit. Total liabilities were $111.6 million; the filing reports no material outstanding debt borrowings. Six-month capital expenditures were $6.7 million.
Changes, outlook and risks
- Q2 improvement was supported by higher UGG and Teva sales and stronger gross margins. UGG wholesale operating income increased to $33.6 million from $23.1 million; Teva wholesale operating income rose to $6.7 million from $4.4 million. Other wholesale remained loss-making, at $1.5 million.
- Management expected 2010 gross margin to exceed 2009’s level and the full-year effective tax rate to be slightly above 2009’s 36.2%. It estimated $18–$23 million of capital expenditures for the remainder of 2010, principally for retail-store build-outs and systems. The filing provides no specific full-year sales or earnings guidance.
- Management planned significant retail-store expansion and continued international distribution development, but cautioned that growth rates may moderate and that brand, channel and new-product initiatives may not succeed. Second-half sales historically exceed first-half sales, but results remain dependent on consumer demand, product availability and customer orders.
- Key exposures include fashion and consumer-preference shifts, economic conditions, foreign-exchange movements, reliance on independent manufacturers concentrated in China, sourcing concentration in Australia and China, and inventory and receivables management. International sales were 52.4% of Q2 sales. Cash held at financial institutions sometimes exceeded insured limits, although the company reported no loss or access restrictions.
- Commitments include $116.2 million of operating lease obligations and $243.7 million of purchase obligations. The latter includes open orders; about $8.8 million remained under a sheepskin minimum-purchase commitment, which management considered unlikely to require a company payment. Additional expected distributor-rights payments were about $7.1 million through 2011; potential joint-venture loans were estimated at $1.8 million. The IRS was examining federal tax returns for 2006–2008; the outcome and any material effect were uncertain. Routine litigation was not expected by management to have a material effect.
- Q2 2009 included a $1.0 million TSUBO trademark impairment, absent in 2010. In May 2010, shareholders approved a three-for-one stock split, paid July 2; share and per-share data in the filing reflect the split. The company repurchased about $2.6 million of shares during the first half, with $27.4 million remaining under its $50 million authorization.
Important facts for investors to verify
- Whether demand, orders and margins sustain the first-half growth, especially given UGG’s seasonal concentration and the nonrecurring duty refunds.
- Whether the inventory build and low operating cash flow reflect seasonal timing as management states, and how effectively inventory converts to sales and cash.
- Execution and returns from planned store expansion, international distribution takeovers and technology spending.
- Exposure to China-based manufacturing and sourcing, currency movements, customer credit, and the IRS examination and contractual commitments.