Deckers Outdoor Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report; fourth-quarter figures are included below. Unless noted otherwise, dollar amounts are in millions.
Business context
Deckers designs and markets footwear and accessories, led by UGG, Teva and Sanuk. It sells through wholesale, eCommerce and company-operated or joint-venture retail stores, with manufacturing outsourced primarily to independent contractors in China. Sanuk results are included from its July 1, 2011 acquisition date; the company ceased Simple distribution at year-end. Growth also reflected European distributor-to-wholesale conversions and expanded retail and international operations.
Financial performance and position
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net sales | $1,377.3 | $1,001.0 | Up 37.6% |
| Gross profit / margin | $679.0 / 49.3% | $502.9 / 50.2% | Margin down 0.9 percentage points |
| Operating income / margin | $284.8 / 20.7% | $249.1 / 24.9% | Income up 14.4%; margin down |
| Net income attributable to Deckers | $199.1 | $158.2 | Up 25.8% |
| Diluted EPS | $5.07 | $4.03 | Up 25.8% |
| Operating cash flow | $30.1 | $139.9 | Down $109.8 |
| Cash and cash equivalents at year-end | $263.6 | $445.2 | Down $181.6 |
| Net working capital at year-end | $585.8 | $570.9 | Up 2.6% |
UGG sales were $1,201.8, up 37.6%, and remained the principal business. International sales rose 82.4% to $432.2 and represented 31.4% of sales, versus 23.7% in 2010. Retail-store sales increased 50.4% to $189.0; eCommerce rose 16.0% to $106.5. Five largest customers accounted for 24.0% of sales, compared with 28.9% in 2010; no customer exceeded 10% of 2011 sales.
Fourth-quarter sales were $603.9, versus $430.1 in 2010; income attributable to Deckers was $124.7, versus $89.2. Results are strongly seasonal, with UGG sales concentrated in the second half and Teva and Sanuk more weighted to the first half.
Operating cash flow fell as receivables, inventories and other current assets increased substantially. Year-end inventory was $253.3, up from $125.0, and receivables were $193.4, up from $116.7. Investing cash outflow was $184.8, including Sanuk acquisition spending and capital expenditures; financing cash outflow was $27.2. The company had no borrowings under its $200 million secured revolving facility at year-end and $199.4 million available, net of letters of credit. It reported $72.7 million of long-term liabilities and $841.4 million of total equity.
Changes, outlook and material items
- Sales growth was driven mainly by UGG, higher pair volumes, new stores, Sanuk, and direct wholesale operations in selected European markets. Total footwear volume increased 26.7% to about 22.8 million pairs.
- Gross margin declined primarily because sheepskin and other material costs and factory costs rose, and because approximately $7 million of 2010 duty refunds did not recur. SG&A rose 55.3%, including costs for retail expansion, international infrastructure, marketing, commissions and Sanuk acquisition-related amortization.
- Management expected FY2012 gross margin to decline from 2011. It forecast product costs about 10% higher, including a further 40% increase in sheepskin costs, and identified selective price increases, higher retail mix and Sanuk contribution as offsets. The filing does not provide a specific 2012 revenue or earnings forecast.
- Management planned 2012 capital expenditures of approximately $90–$95 million, mainly for the new headquarters and retail stores, and intended to open more stores than in 2011. It stated that available cash, internally generated funds and credit capacity should cover requirements for at least 12 months.
- Sheepskin costs rose 27% in 2011; supply depends on two principal tanneries and is exposed to availability and price risk. The company uses purchase contracts and deposits, but warns it may not offset significant cost increases through pricing.
- Sanuk acquisition consideration included $88.1 million of estimated contingent consideration at year-end, recorded as a liability of $91.6 million after a fair-value adjustment. The company expected a payment of up to $30 million in March 2012; additional 2012, 2013 and 2015 payments have no stated maximum and depend on brand gross profit.
- An IRS transfer-pricing notice proposed approximately $27 million in additional federal taxes and penalties, excluding interest. Deckers disagreed and the matter was scheduled for an IRS Appeals hearing in April 2012; management said the outcome could materially affect the financial statements.
- Other disclosed risks include discretionary consumer demand, fashion and weather sensitivity, customer and inventory concentration, foreign currency exposure, overseas manufacturing and logistics, counterfeiting and intellectual-property disputes, retail-store lease commitments, and potential impairment of acquired goodwill or intangibles. Routine legal claims were not expected by management to have a material effect.
- The company repurchased approximately $20 million of shares in 2011, completing its prior authorization, and announced a new discretionary $100 million repurchase authorization in February 2012. It paid no dividends and did not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- Whether operating cash generation recovers as the elevated inventory and receivables are converted to cash; inventory turnover fell to 3.3 times from 4.2 times.
- Whether expected 2012 cost inflation, especially sheepskin, pressures margins beyond management’s stated outlook and how effectively pricing and product mix offset it.
- Sanuk’s subsequent sales and profitability, the basis for the contingent-consideration estimate, and cash payments due under the acquisition terms.
- The outcome and potential cash and earnings impact of the IRS transfer-pricing dispute.
- Returns from planned store expansion and headquarters spending, alongside the company’s substantial operating-lease and purchase commitments.
- UGG’s continued contribution to growth, seasonality and fashion/weather sensitivity, plus execution of international direct-distribution expansion.