Deckers Outdoor Corporation — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020, including the quarter ended that date. The request metadata says “2019 Q4,” but this filing reports FY2020; its fourth-quarter data are for the three months ended March 31, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context
Deckers designs, markets and distributes footwear, apparel and accessories under UGG, HOKA, Teva, Sanuk and Koolaburra. It sells through wholesale and distributor channels and direct-to-consumer (DTC) retail stores and e-commerce. Products are made by independent manufacturers, primarily in Asia. The business is seasonal, with UGG sales concentrated in fall and winter.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $2,132.7 | $2,020.4 | +5.6% |
| Gross profit / margin | $1,103.7 / 51.8% | $1,040.3 / 51.5% | Margin +0.3 percentage points |
| Operating income / margin | $338.1 / 15.9% | $327.3 / 16.2% | Income +3.3% |
| Net income / margin | $276.1 / 12.9% | $264.3 / 13.1% | Income +4.5% |
| Diluted EPS | $9.62 | $8.84 | +8.8% |
| Cash from operations | $286.3 | $359.5 | -20.4% |
| Capital expenditures | $32.5 | $29.1 | +$3.4 |
Cash and cash equivalents were $649.4 at year-end; working capital was $893.2. Deckers reported $469.5 of available borrowing capacity across its revolving facilities. It had no year-end balance under those facilities and $30.9 of mortgage debt outstanding, including $0.6 classified as short-term borrowings. The company was in compliance with debt covenants. Operating lease liabilities were $264.8, separately reported from debt.
Operating cash flow fell mainly because of unfavorable working-capital movements, including inventory and tax-related changes. Net cash used in financing was $192.1, including $190.4 of share repurchases. The company paused repurchases amid COVID-19 uncertainty. It does not anticipate paying cash dividends in the foreseeable future.
Material changes versus FY2019
- HOKA sales rose 58.0% to $352.6, led by wholesale growth of 49.7% and DTC growth of 98.3%. HOKA wholesale operating income increased 73.2% to $61.9.
- UGG sales declined 0.8% to $1,520.8: modest wholesale growth was more than offset by a 2.6% decline in UGG DTC sales. Sanuk sales fell 38.1% to $51.2, reflecting the warehouse-channel exit, weaker surf specialty sales and pandemic disruption.
- Other-brand sales, including Koolaburra, increased 57.9% to $70.1; Teva sales were nearly flat at $138.0. Total DTC sales rose 3.1% to $736.9, while wholesale sales increased 6.9% to $1,395.8.
- Gross margin improved on favorable brand mix, HOKA margin expansion and fewer closeout sales, partly offset by currency effects and higher promotions in Europe and Asia. SG&A rose 7.4%, faster than sales, with higher marketing, professional, e-commerce, shipping and payroll costs.
- International sales declined 1.5% to $731.0 and represented 34.3% of sales, down from 36.7%. Total pair volume increased 2.8% to 36.8 million.
- Operating cash flow decreased despite higher net income. Year-end inventory increased to $311.6 from $278.8.
In the fourth quarter, sales were $374.9 versus $394.1 a year earlier; operating income was $16.7 versus $31.6, and net income was $16.1 versus $24.0. Store closures, delayed shipments and order acceptance related to COVID-19 affected the quarter.
Outlook, risks and unusual items
- COVID-19: Management said the full impact was highly uncertain and did not provide a clear numerical sales or earnings forecast. Company-operated stores and nearly all partner and wholesale-customer stores were closed for part of Q4 and largely remained closed early in FY2021. E-commerce remained operational and demand was strong, particularly for UGG and HOKA, but management did not expect online demand to fully offset wholesale and store weakness.
- Orders and fulfillment: Backlog was $1,022.9 at March 31, up 4.6% year over year, but cancellations had brought it roughly flat with the prior period by May 14. Further cancellations or deferrals were possible. Distribution centers and logistics providers were operating with reduced or modified capacity, creating shipment delays.
- Actions and spending: Management introduced temporary expense controls, including travel and discretionary-spending limits, hiring restrictions and retail furloughs. Planned FY2021 capital expenditures were approximately $45–$50, subject to change.
- Structural risks: Demand is exposed to seasonality, weather, consumer preferences and discretionary spending. The company also cited wholesale-customer health, competition, foreign exchange, tariffs and transportation costs, and reliance on independent manufacturers. Most sheepskin used in UGG products is sourced through two Chinese tanneries.
- Commitments: Contractual obligations totaled $939.7, including $361.9 of product purchase obligations and $186.0 of commodity commitments, primarily sheepskin and leather. Some product orders may be cancellable under specified circumstances; management was reviewing orders in light of the pandemic.
- Accounting and legal matters: Adoption of the lease accounting standard added $243.5 of operating lease assets and $264.8 of lease liabilities at year-end; management said adoption did not materially affect earnings or liquidity. Retail-store and related long-lived-asset impairment charges were $1.4, versus $0.2 the prior year. A jury and court rulings favored Deckers in its Australian Leather trademark litigation, but the rulings remained subject to appeal. The auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Subsequent backlog, wholesale cancellations and customer payment trends after the May 14, 2020 disclosure.
- Whether e-commerce growth and HOKA demand can offset COVID-related weakness in stores and wholesale, particularly during UGG’s peak season.
- Inventory levels, markdowns, return and credit-loss allowances, and the timing or cancellation of product and raw-material commitments.
- Liquidity and borrowing availability as operations and working-capital needs change; distinguish debt from lease liabilities.
- Execution of distribution-center operations, planned capital spending and cost controls, plus exposure to sheepskin sourcing, tariffs and currency movements.