Deckers Outdoor Corp. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Deckers Outdoor Corporation for the three and six months ended June 30, 2009. Deckers is a designer, producer, and brand manager of footwear and accessories, primarily under the UGG, Teva, and Simple brands. The company also operates eCommerce and retail store segments. In March 2009, the company acquired Ahnu, Inc., an outdoor performance footwear brand. The business is seasonal, with UGG sales peaking in the third and fourth quarters and Teva sales peaking in the first and second quarters.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $102.5 million | $236.8 million |
| Gross Profit | $40.8 million (39.8% margin) | $99.7 million (42.1% margin) |
| Operating Income | $3.2 million | $22.6 million |
| Net Income (Attributable to Deckers) | $2.9 million | $15.2 million |
| Diluted EPS | $0.22 | $1.15 |
| Cash and Cash Equivalents | $108.2 million | $108.2 million (Balance Sheet) |
| Short-Term Investments | $67.1 million | $67.1 million (Balance Sheet) |
| Working Capital | $334.3 million | $334.3 million |
| Debt | No outstanding borrowings | No outstanding borrowings |
Liquidity: The company maintains a revolving credit facility with a maximum availability of $20.0 million. As of June 30, 2009, there were no outstanding borrowings, and $19.8 million was available. The company holds significant cash and short-term investments totaling approximately $175.3 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12.5% for the quarter and 25.5% for the six-month period compared to the same periods in 2008. This growth was primarily driven by the UGG brand, which saw a 22.9% increase in total sales for the quarter and 43.8% for the six months.
- Profitability Improvement: Operating income turned from a loss of $6.9 million in Q2 2008 to a profit of $3.2 million in Q2 2009. This significant improvement was largely due to the absence of a $14.9 million impairment loss on Teva trademarks recorded in Q2 2008, alongside increased sales.
- Impairment Losses: The company recorded a $1.0 million impairment loss on TSUBO trademarks in Q2 2009 due to missed sales targets and reduced long-term forecasts. This is a significant reduction from the $14.9 million impairment recorded in the prior year.
- Inventory Build: Inventories increased 57.0% to $145.6 million from $92.7 million at year-end 2008, reflecting seasonal buildup for the UGG fall/winter season and inventory requirements for new retail stores.
- Segment Performance: While UGG wholesale and retail stores grew significantly, Teva wholesale sales declined 11.9% for the quarter and 8.2% for the six months. Simple wholesale sales also declined due to lower average selling prices and closeout sales.
Guidance, Outlook, and Risks
- Stock Repurchase: In June 2009, the Board approved a program to repurchase up to $50.0 million of common stock. Subsequent to the period end, the company repurchased approximately 150,000 shares for $10.2 million.
- Expansion: The company plans to open two additional domestic retail stores and two international stores in the second half of 2009. It also expects to continue reporting a loss from operations for its "Other Brands" (TSUBO and Ahnu) for the remainder of 2009 due to marketing investments and the economic recession.
- Tax Outlook: Management anticipates an effective tax rate of approximately 37% to 38% for the full year 2009.
- Risks: Key risks include the impact of global economic conditions on consumer spending, the seasonality of the business, reliance on the UGG brand, and the ability to manage inventory levels effectively. The company also faces risks related to foreign currency fluctuations and potential impairment of goodwill and intangible assets if sales forecasts are not met.
- Unusual Items: Interest expense was negative (a benefit) due to the reversal of previously accrued interest and penalties related to tax obligations for a foreign subsidiary, which management now considers remote.
Investor Verification Checklist
- UGG Brand Sustainability: Verify the durability of UGG sales growth given the fashion-driven nature of the product and the potential for market saturation.
- Inventory Levels: Monitor the $145.6 million inventory balance and subsequent sell-through rates to ensure no significant write-downs are required in future quarters.
- TSUBO and Ahnu Performance: Track the performance of the newly acquired and struggling brands to assess the timeline for profitability and potential future impairment charges.
- International Exposure: Review the 45.3% international sales mix for the quarter and assess exposure to currency fluctuations and regional economic downturns.
- Credit Facility Covenants: Confirm continued compliance with the amended credit facility covenants, particularly the quick ratio and profitability requirements.