Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015 (fiscal 2016 Q2). Unaudited results; amounts below are in U.S. dollars and rounded to millions unless noted.
Business context and reporting period
Deckers designs, markets, and distributes footwear, apparel, and accessories, principally under UGG, Teva, and Sanuk, with Hoka, Ahnu, and Koolaburra among its other brands. It sells through wholesale and Direct-to-Consumer (DTC) channels; independent contractors manufacture its products. UGG sales are seasonally concentrated in the September and December quarters.
The company combined retail and e-commerce into one DTC reporting segment in fiscal Q1 2016; prior-period segment figures were recast, with no effect on consolidated sales or operating income. Deckers acquired Koolaburra assets in April and sold certain MOZO assets in July 2015.
Financial performance
| Metric | Three months ended September 30, 2015 | Prior-year quarter | Six months ended September 30, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $486.9 | $480.3 | $700.7 | $691.7 |
| Gross profit / margin | $214.1 / 44.0% | $223.9 / 46.6% | $300.7 / 42.9% | $310.6 / 44.9% |
| Operating income (loss) | $51.2 | $59.6 | $(12.5) | $9.1 |
| Net income (loss) | $36.4 | $40.7 | $(11.0) | $3.7 |
| Diluted EPS | $1.11 | $1.17 | $(0.33) | $0.10 |
- Quarterly sales rose 1.4% as reported; management said sales grew 5.4% on a constant-currency basis. UGG wholesale, other brands (primarily Hoka), and DTC contributed to growth; Teva and Sanuk wholesale sales declined.
- Quarterly operating margin was 10.5%, versus 12.4% a year earlier. Gross margin fell 2.6 percentage points, largely due to currency effects, closeouts, and discounts. Management estimated currency reduced gross margin by about 210 basis points.
- Six-month sales increased 1.3% as reported and 5.1% on a constant-currency basis, but the company moved from prior-year operating income and net income to losses. Management attributed the operating loss mainly to currency-related gross-margin pressure and higher SG&A.
- Six-month operating cash flow was a use of $328.4, compared with a use of $259.4 a year earlier. Investing cash use was $38.7; financing provided $241.5. Cash declined to $99.8 from $225.1 at March 31, primarily amid seasonal working-capital needs and share repurchases.
- At September 30, cash was $99.8, inventory $595.0 (up from $238.9 at March 31), and net accounts receivable $285.5 (up from $143.1). Current liabilities were $639.2 and total assets $1,572.7.
- Short-term borrowings and current mortgage portion totaled $316.8; long-term mortgage payable was $32.9. Credit-agreement borrowings were $307.0, with about $92.9 of unused capacity; China facility borrowings were about $9.3. The company reported compliance with debt covenants. Credit-agreement weighted-average interest rate was 1.46%.
Material changes and management commentary
- Quarterly UGG wholesale sales increased 1.4%; other brands wholesale rose 27.3%, mainly on Hoka growth. Teva and Sanuk wholesale sales fell 19.9% and 16.5%, respectively. DTC sales rose 2.1%, while comparable DTC sales declined 5.2% on a constant-currency basis.
- For the six months, other brands sales rose 50.1%, primarily Hoka; UGG total sales declined 0.9%, and Sanuk total sales declined 7.7%. Comparable DTC sales declined 3.2% on a constant-currency basis. Management cited weaker traffic at large U.S. tourist-destination stores, partly offset by online growth.
- SG&A included an approximately $2.2 impairment charge for five retail stores. Higher distribution-center, DTC, credit-allowance, and Hoka marketing costs were partly offset by lower international and currency-related expenses.
- Deckers repurchased about 979,000 shares for $69.2 during the six months at an average $70.69 per share. About $102.9 remained under its $200 million repurchase authorization at September 30.
- Management expected a fiscal 2016 effective tax rate of approximately 26% and estimated remaining fiscal 2016 capital expenditures of $35–$40. It stated that cash, internally generated funds, and available credit should cover liquidity needs for at least the next 12 months. No full-year revenue or earnings guidance is stated in the provided filing text.
Risks, contingencies, and unusual items
- Currency movements materially affected reported sales and margins. A 10% foreign-exchange-rate change was estimated to alter derivative fair value by approximately $6.0; hedges do not eliminate broader operating exposure.
- Business performance is seasonal and weather-sensitive. The company also cited risks from consumer preferences, global economic conditions, sheepskin supply and cost, and reliance on a limited number of independent factories and key material suppliers.
- Sanuk acquisition contingent consideration was approximately $22.4 at quarter-end, based on 40% of Sanuk’s 2015 calendar-year gross profit with no stated maximum. The estimate is assumption-sensitive; a 5% change in estimated sales CAGR would change the liability by about $2.0. Total contingent consideration, including Hoka, was $23.0.
- Ongoing state and foreign tax examinations could affect results or cash flows; approximately $0.6 of uncertain tax positions was considered reasonably possible to settle within 12 months. Management said ordinary-course litigation was not expected to have a material effect.
- About $72.0 of cash held outside the U.S. could be subject to additional tax if repatriated. The filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether seasonal inventory and receivables convert to cash as expected, given the $328.4 six-month operating cash outflow and increased short-term borrowing.
- Whether constant-currency growth translates into improved reported sales and margins, and whether closeouts, discounts, and strong-dollar effects persist.
- Whether Hoka and other-brand growth can offset weakness in Teva and Sanuk wholesale and declining comparable DTC sales.
- The assumptions and eventual payment for Sanuk contingent consideration, alongside the company’s remaining repurchase activity and available credit capacity.
- Progress on fiscal 2016 capital spending, the expected tax rate, and the company’s ability to maintain liquidity through seasonal working-capital swings.