Business Context and Reporting Period
Company: Deckers Outdoor Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Deckers is a leading designer, producer, and marketer of innovative footwear and accessories. The company operates primarily through three proprietary brands: UGG (luxury comfort), Teva (outdoor performance), and Simple (sustainable lifestyle), alongside acquired brands TSUBO and Ahnu. Products are sold via wholesale, eCommerce, and retail stores. Manufacturing is outsourced to independent contractors, primarily in China and New Zealand.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Net Sales | $813,177 | $689,445 |
| Gross Profit | $371,090 | $305,318 |
| Gross Margin | 45.6% | 44.3% |
| Operating Income | $181,247 | $116,919 |
| Net Income (Attributable to Deckers) | $116,786 | $73,948 |
| Diluted EPS | $8.89 | $5.60 |
| Cash & Cash Equivalents | $315,862 | $176,804 |
| Working Capital | $420,117 | $317,755 |
| Total Assets | $599,043 | $483,721 |
| Long-Term Liabilities | $6,269 | $3,847 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.9% to $813.2 million, driven primarily by a 17.2% increase in UGG wholesale sales and a 107.5% surge in retail store sales. International sales grew 54.9% to $167.2 million.
- Profitability: Operating income rose 55.0% to $181.2 million. This was fueled by higher gross margins (up 130 basis points) and a significant reduction in impairment losses.
- Impairment Losses: Impairment charges dropped from $35.8 million in 2008 to $1.0 million in 2009. The 2008 charge included significant write-downs of Teva and TSUBO goodwill and trademarks. The 2009 charge was limited to TSUBO trademarks.
- Segment Performance:
- UGG: Continued strong growth in wholesale and retail channels.
- Teva: Wholesale sales declined 11.0% due to lower volume, though operating income improved significantly due to the absence of the prior year's impairment charge.
- Simple: Wholesale sales declined 24.2% due to lower volume and pricing pressure.
- Retail Stores: Sales doubled (105.3% increase) due to new store openings and same-store sales growth of 27.6%.
- Liquidity: Cash and cash equivalents increased 78.7% to $315.9 million. Net cash provided by operating activities surged 248.1% to $185.5 million, aided by improved collections and inventory management.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- 2010 Strategy: Management plans to expand retail store presence globally, particularly for the UGG brand. They intend to assume distribution rights from international distributors to sell directly to retailers.
- Capital Expenditures: Estimated at $25 million to $30 million for 2010, focused on new retail store build-outs and warehouse expansion.
- Stock Repurchase: In June 2009, the Board approved a $50 million repurchase program. As of year-end, approximately $20 million had been utilized, with $30 million remaining.
Risks and Contingencies
- Brand Concentration: The UGG brand represents a majority of the business. A decline in UGG sales or fashion trends could materially impact results.
- Supply Chain: Reliance on independent manufacturers in China and New Zealand exposes the company to labor unrest, political instability, and raw material shortages (specifically sheepskin).
- Counterfeiting: Significant competition from counterfeit products, particularly for UGG, poses a risk to brand integrity and sales.
- Seasonality: Sales are heavily weighted toward the third and fourth quarters due to the UGG brand's winter focus.
- Customer Concentration: One customer (Nordstrom) accounted for greater than 10% of consolidated net sales in 2009.
Investor Verification Checklist
- UGG Sustainability: Verify if the double-digit growth in UGG wholesale sales is sustainable given the brand's fashion-cycle nature and increasing competition from counterfeiters.
- Inventory Levels: Review inventory turnover ratios and write-down reserves, as the company noted a decrease in turnover (4.1x to 3.8x) and potential risks of overestimating demand.
- Intangible Asset Valuation: Assess the remaining goodwill and trademark values ($21.9 million total), particularly for Teva, which had a fair value only 12% above carrying value as of year-end.
- International Expansion Costs: Monitor the impact of transitioning from distributor models to direct-to-retail models on operating expenses and working capital requirements.
- Sheepskin Supply: Confirm the status of the $64 million sheepskin purchase commitment and potential price volatility in raw materials.