Deckers Outdoor Corporation — Q3 FY2022 10-Q
Reporting period: Third fiscal quarter and nine months ended December 31, 2021; comparisons are with the same periods ended December 31, 2020. Amounts below are in millions of U.S. dollars unless stated otherwise.
Business context
Deckers designs, markets, and distributes footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and Koolaburra. Sales are made through wholesale and direct-to-consumer (DTC) channels, including owned stores and e-commerce. The business is seasonal, with UGG and Koolaburra sales concentrated in the September and December quarters.
Financial performance
- Quarter: Revenue was $1,187.8 million, up 10.2%. Gross profit was $621.2 million and gross margin was 52.3%, down from 57.0%. Operating income was $293.4 million, down 10.7%; net income was $232.9 million, down 8.8%. Diluted EPS was $8.42 versus $8.99.
- Nine months: Revenue was $2,414.3 million, up 21.7%. Gross profit was $1,248.8 million and gross margin was 51.7%, down from 54.2%. Operating income was $483.4 million, up 7.5%; net income was $383.1 million, up 9.7%. Diluted EPS was $13.73 versus $12.30.
- Cash flow, nine months: Operating cash flow was $227.4 million, compared with $522.3 million. Capital expenditures were $41.3 million, versus $21.3 million. Financing cash outflow was $278.3 million, primarily reflecting $266.7 million of share repurchases. Cash declined $91.1 million from March 31, 2021 to $998.3 million.
- Balance sheet and liquidity: Inventory was $550.7 million, up from $278.2 million at March 31, 2021. Trade receivables were $334.5 million and trade payables were $482.1 million. The company had no borrowings outstanding under its credit facilities and reported $399.5 million available on its primary facility, plus available China and Japan facilities. It reported compliance with financial covenants.
- Capital returns: Deckers repurchased approximately 736,000 shares for $266.7 million during the nine months. At December 31, $544.0 million remained authorized under its repurchase programs.
Material changes and drivers
- Quarterly growth was led by HOKA, up 30.3%, and UGG, up 7.9%; DTC revenue rose 13.4%. International sales increased 27.5% and represented 33.0% of quarterly revenue.
- For the nine months, HOKA revenue increased 54.4%, UGG increased 13.5%, and Teva increased 37.2%. Wholesale sales grew 29.1% and DTC sales grew 11.4%.
- Freight costs, including air freight, ocean container rates, and delivery fees, were the principal reason gross margin fell. Higher marketing, warehousing, technology, and labor costs also increased SG&A.
- Quarterly operating income declined despite higher revenue, as freight-related margin pressure and higher SG&A outweighed sales growth. Year-to-date operating income and net income still increased.
- Operating cash flow fell sharply, mainly because working capital absorbed cash, particularly inventory growth and receivables. Management said inventory was elevated partly due to early procurement and higher goods in transit.
Outlook, commentary, and risks
The filing provides no specific numerical revenue or earnings guidance. Management expects supply-chain pressures, elevated transportation costs, labor shortages, and distribution-center challenges to continue. It expects inventory levels may remain higher to support service levels into fiscal 2023, and anticipates growth headwinds while new sourcing partners ramp production. Management said cash, operating cash flow, and available credit should be sufficient for at least the next 12 months.
Key uncertainties include COVID-19 disruptions, shipping delays and costs, product availability and wholesale order cancellations, labor and wage pressures, consumer demand and discretionary spending, seasonality, foreign exchange, and raw-material availability and pricing. Production is concentrated among independent manufacturers, primarily in Asia; most sheepskin is sourced through two tanneries in China. Management is exploring selective price increases but cautions that price increases may not fully offset significant raw-material cost increases.
Other notable items: Deckers recorded $3.2 million of retail lease and other long-lived asset impairment charges in the nine months. The U.S. Supreme Court denied Australian Leather’s petition challenging the UGG trademark; the filing says ordinary-course legal matters are not expected to have a material adverse effect. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Most important facts for investors to verify
- Whether freight and logistics cost pressures ease, and the resulting effect on gross margin.
- Whether elevated inventory converts to sales without increased discounting, cancellations, or obsolescence.
- Whether HOKA and UGG growth continues across wholesale and DTC channels, and whether DTC growth remains profitable.
- Whether operating cash flow recovers as working-capital needs normalize.
- How labor, distribution-center execution, sourcing capacity, and potential price increases affect costs and product availability.
- Use of cash for share repurchases relative to business investment and liquidity needs.