Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended September 30, 2022, compared with the same periods in 2021. Amounts below are in millions of dollars unless stated otherwise. Deckers sells UGG, HOKA, Teva, Sanuk and Koolaburra products through wholesale and direct-to-consumer (DTC) channels.
Key financial results
| Metric | Three months ended Sept. 30, 2022 | Year-over-year change | Six months ended Sept. 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $875.6 | +21.3% | $1,490.1 | +21.5% |
| Gross margin | 48.2% | 50.9% prior year | 48.1% | 51.2% prior year |
| Operating income | $127.8 | -$0.4; -0.3% | $184.2 | -$5.8; -3.1% |
| Net income | $101.5 | -$0.5; -0.5% | $146.4 | -$3.8; -2.5% |
| Diluted EPS | $3.80 | $3.66 prior year | $5.46 | $5.37 prior year |
| Cash from operations | Not separately provided for the quarter | -$236.8 | -$172.7 prior year |
- Sales drivers: HOKA was the leading growth engine. Q2 HOKA sales rose 58.3% to $333.0 million; six-month sales rose 56.5% to $663.0 million. Six-month DTC sales increased 25.8% to $424.2 million, and wholesale sales increased 19.8% to $1,065.9 million. Six-month international sales rose 29.8% to $487.9 million.
- Margins and costs: Lower gross margins reflected normalized UGG promotional activity, unfavorable product mix, foreign-exchange effects and higher ocean freight costs in inventory sold. HOKA price increases, reduced airfreight, and favorable brand and channel mix partly offset pressure. SG&A rose 21.7% in the first half, including higher payroll, marketing, warehousing and currency-related costs.
- Cash flow and liquidity: First-half operating cash use was $236.8 million, driven substantially by inventory investment. Inventory was $925.0 million at September 30, versus $506.8 million at March 31. Cash and cash equivalents were $419.3 million, down from $843.5 million at March 31. Investing cash use was $24.3 million and financing cash use was $152.5 million, including $150.2 million of share repurchases.
- Debt and obligations: No revolving-credit borrowings were outstanding; available borrowings were $461.9 million, and the company reported compliance with financial covenants. Current and long-term operating lease liabilities totaled $197.1 million. The filing notes $58.3 million of undiscounted minimum lease payments for signed leases not yet commenced, including a warehouse expansion.
Material changes and management outlook
- Revenue growth did not translate into higher operating or net income in the first half, as gross margin contracted by 3.1 percentage points. Diluted EPS nevertheless increased, primarily because of fewer weighted-average shares following repurchases.
- Management reported improving transit lead times and less airfreight use, but expected higher ocean freight costs embedded in inventory to weigh on second-half gross margins. It also expected inventory growth to outpace sales growth in future periods to support demand and supply-chain resilience.
- Management highlighted ongoing HOKA expansion, including new stores, and continued UGG international brand-building. Foreign-exchange headwinds were expected to affect UGG international sales and margins. The filing provides no quantified revenue or EPS guidance.
- Management believes cash, operating cash generation and available credit facilities will meet working-capital needs and contractual obligations for at least the next 12 months, while noting risks from recessionary pressures, inflation, supply disruptions and consumer demand.
Risks, contingencies and unusual items
- Supply-chain delays, port congestion, labor constraints, higher freight costs, and the transition to a new European third-party logistics provider remained operational risks. Products are made by independent manufacturers, with production concentrated in a limited number of factories, primarily in Asia.
- Foreign-exchange movements reduced reported results and contributed to a $27.4 million first-half other comprehensive loss, primarily from currency translation. The company had $57.8 million notional value of currency derivatives outstanding at September 30.
- The company recorded $1.1 million of impairment charges for certain DTC store lease assets and improvements. Ordinary-course legal proceedings include intellectual-property, employment and product-liability matters; management did not expect them, individually or collectively, to have a material adverse effect.
- Customer concentration bears monitoring: the ten largest customers accounted for 40.1% of Q2 sales, and two customers represented 22.2% of receivables at September 30. Sheepskin sourcing is concentrated in two Chinese tanneries.
Investor facts to verify
- Whether HOKA and DTC growth can continue to offset slower UGG growth and declines in some smaller brands.
- Whether gross margins recover as freight costs, promotions, foreign exchange and product mix evolve.
- Inventory conversion, receivable collections and operating cash flow, given the sharp increase in inventory and first-half cash use.
- Execution of the European logistics transition, supply-chain diversification and planned warehouse and retail expansions.
- Capital allocation and liquidity, including future repurchases, lease commitments and continued availability of credit facilities.