Deckers Outdoor Corporation — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended September 30, 2019; fiscal second quarter. Dollar figures below are in millions unless noted. The company designs and sells footwear, apparel, and accessories through wholesale and direct-to-consumer (DTC) channels, including UGG, HOKA, Teva, Sanuk, and Koolaburra. Results are seasonal, with UGG sales concentrated in the September and December quarters.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $542.2 | $501.9 | $819.0 | $752.5 |
| Gross profit / margin | $273.0 / 50.4% | $251.9 / 50.2% | $403.0 / 49.2% | $366.9 / 48.8% |
| Operating income / margin | $97.1 / 18.0% | $90.4 / 18.0% | $65.7 / 8.0% | $51.0 / 6.8% |
| Net income | $77.8 | $74.4 | $58.5 | $44.0 |
| Diluted EPS | $2.71 | $2.48 | $2.01 | $1.45 |
Q2 sales grew 8.0% (9.5% at constant currency); six-month sales increased 8.8% (10.2% constant currency). Q2 diluted EPS rose 9.3%, supported by higher earnings and fewer weighted-average shares following buybacks.
- Brands and channels: Q2 HOKA sales rose 49.9% to $78.1 million; UGG grew 2.2% to $404.9 million; Sanuk fell 22.4% to $10.7 million. DTC sales increased 5.1% to $98.7 million and comparable DTC sales rose 7.2%. For the first half, HOKA grew 59.1%, UGG 2.0%, and Sanuk declined 23.1%; comparable DTC sales increased 11.3%.
- Margins and expenses: Q2 gross margin expanded 0.2 percentage points, reflecting favorable brand mix and HOKA margin growth, partly offset by foreign exchange and a higher wholesale mix. Six-month SG&A increased 6.8% to $337.3 million, including higher brand marketing and professional/consulting costs.
- Cash flow: Six-month operating cash use was $216.2 million, versus $160.7 million used a year earlier, largely reflecting seasonal inventory and other working-capital investment. Investing cash use was $14.7 million; financing cash use was $179.4 million, primarily due to share repurchases. Cash declined by $412.0 million to $177.7 million.
- Balance sheet and liquidity: At September 30, cash was $177.7 million, current assets $1,135.0 million, and current liabilities $465.8 million. Inventory was $558.9 million, up from $278.8 million at March 31, consistent with seasonal stocking. Short-term borrowings were $13.6 million and mortgage principal was $31.2 million. The company reported $399.5 million available under its primary facility, $29.0 million under its China facility, and $50.9 million under its Japan facility; it was in covenant compliance.
Material changes and notable items
- HOKA was the leading growth contributor, driven by customer additions, franchise updates, and launches including Rincon and Carbon X. UGG wholesale grew, while international UGG weakness and lower UGG DTC sales partly offset gains.
- The company repurchased 1.30 million shares for $190.4 million in the first half at an average $146.89 per share; $159.8 million remained authorized. Outstanding shares fell to 28.0 million from 29.1 million at March 31.
- Adoption of the new lease accounting standard on April 1 added $228.0 million of operating lease assets and $254.5 million of lease liabilities net of specified legacy balances. At September 30, reported operating lease assets were $228.0 million and lease liabilities totaled $250.5 million. The filing says adoption did not materially affect earnings or liquidity.
- Q2 effective tax rate increased to 20.0% from 17.2%, mainly due to forecast jurisdictional income mix and discrete tax items. First-half rate was 13.5% versus 13.3%, with a current-period benefit from settling a state tax audit.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects cash, operating cash generation, and available revolver capacity to meet working-capital needs for at least the next 12 months.
- Management expects continued HOKA growth, further diversification of UGG products, and ongoing expansion of DTC and e-commerce. It also noted continued seasonality and weather sensitivity, retail-channel pressure, and planned strategic management of distribution and product allocation, including exiting Sanuk’s warehouse channel.
- Key exposures include consumer preferences and weather, foreign exchange, tariffs and broader political/economic conditions, and dependence on independent manufacturers and a limited number of sheepskin suppliers. Two tanneries supply most sheepskin used in UGG products. One customer represented 11.8% of receivables at quarter-end, though no customer contributed 10% or more of sales.
- The company disclosed ongoing intellectual-property proceedings. A jury ruled in Deckers’ favor in its trademark infringement and counterfeiting case against Australian Leather; an affirmative defense remained unresolved and the ruling was subject to appeal. Deckers said an adverse ruling on UGG trademark enforceability could materially harm the business, while it did not expect pending matters in aggregate to have a material financial effect.
- Operating lease commitments include $38.977 million for a signed but not yet commenced flagship-store lease. The mortgage requires a $23.695 million balloon payment, in addition to the then-outstanding balance, on July 1, 2029.
Important facts for investors to verify
- Whether HOKA’s rapid growth and improving segment profitability continue, and whether UGG sales and international demand stabilize.
- How seasonal inventory converts into sales and cash, given the substantial first-half operating cash outflow and inventory build.
- Whether buybacks continue at a pace consistent with liquidity needs and the company’s capital-allocation plans.
- Future operating lease costs and commitments, including the flagship lease not yet reflected in recorded lease liabilities.
- Updates on the Australian Leather litigation, foreign-exchange exposure, and the concentration of receivables with one customer.