Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2019, ended September 30, 2018; comparisons are with the corresponding 2017 periods. Deckers designs and sells footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and other brands through wholesale and direct-to-consumer (DTC) channels. Its business is seasonal.
Key financial results
Dollar amounts are in millions, except per-share data. The six-month cash-flow figures are year-to-date; the filing does not present quarterly cash flows.
| Metric | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2018 |
|---|---|---|
| Net sales | $501.9; +4.0% | $752.5; +8.7% |
| Gross profit / margin | $251.9 / 50.2% (46.7% prior year) | $366.9 / 48.8% (45.6% prior year) |
| Operating income / margin | $90.4 / 18.0% (14.0% prior year) | $51.0 / 6.8% (1.6% prior year) |
| Net income | $74.4 (up 50.1%) | $44.0 (up from $7.4) |
| Diluted EPS | $2.48 (from $1.54) | $1.45 (from $0.23) |
| Effective tax rate | 17.2% (25.3% prior year) | 13.3% (23.6% prior year) |
For the six months, operating cash flow was negative $160.7 million, investing cash flow negative $14.0 million, and financing cash flow negative $69.4 million. Cash declined to $182.2 million from $430.0 million at March 31, 2018. Operating cash use reflected seasonal working-capital needs, including higher receivables and inventory, partly offset by higher payables.
At September 30, current assets were $1,078.5 million and current liabilities $448.2 million. Short-term borrowings were $71.5 million; mortgage payable was $31.2 million long-term, with total mortgage principal of $31.8 million. The new $400 million unsecured revolving facility had $52.0 million drawn at quarter-end, with $347.5 million available; the China facility had $18.9 million drawn. The company reported compliance with debt covenants.
Material changes and operating performance
- Quarterly sales growth was led by HOKA, whose total brand sales increased 28.4%, and Other brands, up 273.3% from a smaller base. UGG total sales declined 1.0%; Sanuk declined 9.4%. DTC sales grew 2.8%, and comparable DTC sales increased 4.8%.
- For the six months, HOKA sales increased 39.0%, UGG 3.4%, and DTC 6.6%; Sanuk sales fell 7.6%. Comparable DTC sales rose 5.0%. International sales grew 11.3% and represented 39.8% of sales.
- Higher gross margins reflected lower air-freight and input costs, improved full-price selling, and favorable currency effects. Operating income also benefited from improved DTC results and stronger wholesale performance, while higher compensation, foreign-exchange losses, marketing, and warehouse costs pressured expenses.
- The company began reporting HOKA wholesale as a separate operating segment in fiscal 2019 and reclassified prior-period segment information.
Outlook, risks, and unusual items
- Management expects approximately $85 million of annualized SG&A savings from restructuring by March 31, 2020; about $61 million had been realized by September 30. Separately, it expects about $150 million of total gross annualized savings from restructuring and transformation initiatives and approximately $100 million of net annualized operating-profit improvement by that date. Amount and timing remain uncertain; no specific earnings or revenue guidance is provided here.
- Capital expenditures for the remainder of fiscal 2019 were estimated at $12–$18 million. Management said existing cash, operating cash flows, and available facilities should meet liquidity needs for at least 12 months.
- The company repurchased 1.15 million shares for $134.7 million during the six months. After quarter-end through November 2, it repurchased another 249,439 shares for $26.7 million.
- A September refinancing replaced the prior credit agreement with a five-year $400 million revolving facility maturing in 2023. The company recorded a $0.4 million write-off of unamortized prior financing costs. Revenue-standard adoption changed recognition timing for certain sales from delivery to shipment and increased opening retained earnings by about $1 million after tax.
- Tax reform lowered the U.S. federal corporate rate; the company also recorded discrete tax benefits. It continued to assess provisional tax-reform accounting and expected to finalize estimates by December 31, 2018. Unrecognized tax benefits and related interest and penalties totaled $12.9 million.
- Key exposures include seasonal and weather-sensitive demand, shifting purchases toward e-commerce and shorter wholesale buying windows, foreign exchange, concentrated Asian manufacturing and sheepskin sourcing, and potential tariffs or higher freight costs. The filing notes possible additional U.S. tariffs on Chinese footwear, apparel, and accessories; none of the company’s China-sourced footwear was then on the imposed tariff lists.
- In UGG trademark litigation, the court upheld the UGG mark against key counterclaims; remaining infringement issues were scheduled for trial in May 2019. The company warned that an adverse ruling invalidating the mark could materially harm its business.
Important facts for investors to verify
- Whether seasonal inventory and receivables convert to cash as the peak selling season progresses.
- Progress and realized net benefit of the cost-savings plans, including costs required to achieve them.
- HOKA growth durability, UGG wholesale pricing and product mix, and continued weakness in Sanuk.
- Impact of potential tariffs, freight-cost increases, currency movements, and foreign sourcing concentration on margins.
- Available borrowing capacity, covenant compliance, and the effect of ongoing share repurchases on cash and leverage.
- Final tax-reform accounting and the outcome and timing of the UGG trademark litigation.