Deckers Outdoor Corp. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Deckers Outdoor Corporation, a designer and marketer of footwear and accessories under brands including UGG, Teva, Simple, TSUBO, and Ahnu. The report covers the three and nine months ended September 30, 2009. The company operates through wholesale, eCommerce, and retail store segments. The business is highly seasonal, with UGG sales peaking in the third and fourth quarters.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $228.4 million | $465.2 million |
| Gross Profit | $98.0 million (42.9% margin) | $197.6 million (42.5% margin) |
| Income from Operations | $53.1 million (23.2% margin) | $75.6 million (16.3% margin) |
| Net Income (Attributable to Deckers) | $33.8 million | $49.0 million |
| Diluted EPS | $2.59 | $3.73 |
| Cash and Cash Equivalents | $75.6 million | $75.6 million (Balance Sheet) |
| Short-Term Investments | $49.9 million | $49.9 million (Balance Sheet) |
| Working Capital | $349.6 million | $349.6 million |
| Debt | No outstanding borrowings | No outstanding borrowings |
Liquidity: The company maintains a strong liquidity position with $125.5 million in unallocated cash and short-term investments. A $20.0 million revolving credit facility is available, with $19.8 million currently unused.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.8% for the quarter and 20.5% for the nine-month period compared to 2008. Growth was driven primarily by the UGG brand (wholesale sales up 17.9% QoQ and 27.3% YoY) and retail store expansion.
- Profitability: Operating income rose 23.2% for the quarter and 42.2% for the nine-month period. The nine-month improvement was significantly aided by a $13.9 million reduction in impairment losses compared to the prior year (which included a $14.9 million Teva trademark impairment in 2008).
- Margin Pressure: Gross margins declined slightly to 42.9% (quarter) and 42.5% (nine months) from 43.3% and 43.5% respectively in 2008. This was attributed to lower margins in Teva and Simple brands due to closeout sales and a higher mix of international distributor sales.
- Inventory Build: Inventories increased 102.5% year-over-year to $187.8 million, reflecting seasonal buildup for the UGG holiday season and inventory requirements for new retail stores.
- Share Repurchases: The company initiated a $50.0 million stock repurchase program in June 2009. By September 30, it had repurchased approximately 300,000 shares for $20.0 million.
Guidance, Outlook, and Risks
- Outlook: Management expects gross margins for the full year 2009 to be comparable to 2008. The company anticipates continued growth in UGG sales but notes that retail store growth rates may slow as the base expands. International sales are expected to continue growing, led by Europe.
- Impairment Risks: The company recorded a $1.0 million impairment loss on TSUBO trademarks in Q2 2009 due to missed sales targets. Management warns that further deterioration in economic conditions could lead to additional impairments of goodwill or intangible assets.
- Acquisitions: The company acquired Ahnu, Inc. in March 2009. Future earn-out payments for Ahnu (based on gross profit targets) could range up to $8.8 million, though none are currently accrued beyond the initial $0.82 million liability.
- Supply Chain: Production is concentrated in China, New Zealand, and Australia. Risks include currency fluctuations, customs duties, and labor unrest. The company has a sheepskin purchase commitment of approximately $64.0 million through 2010, though management believes third-party purchases will cover this obligation.
- Legal: The company is involved in routine litigation and actively pursues counterfeiters of UGG and Teva products globally.
Investor Verification Checklist
- UGG Brand Sustainability: Verify if the 19% quarterly growth in UGG wholesale sales is sustainable given the fashion-dependent nature of the product and potential market saturation.
- Inventory Levels: Monitor the $187.8 million inventory balance against sell-through rates in Q4 to assess the risk of future write-downs or closeout sales impacting margins.
- International Exposure: Review the impact of a strengthening US dollar on international sales, which now represent 21.6% of quarterly revenue.
- TSUBO and Simple Performance: Assess the turnaround strategy for the TSUBO and Simple brands, which continue to report operating losses and have faced impairment charges.
- Cash Flow Usage: Track the deployment of the remaining $30.0 million in the stock repurchase program and the timing of capital expenditures for new retail stores.