Deckers Outdoor Corporation — Q1 FY2024 (10-Q)
Reporting period: Three months ended June 30, 2023, compared with the three months ended June 30, 2022. Deckers designs, markets, and distributes footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and Koolaburra. Sales are through wholesale and direct-to-consumer (DTC) channels.
Financial performance
- Net sales: $675.8 million, up 10.0%. DTC sales grew 35.3% to $250.4 million; wholesale sales declined 0.9% to $425.4 million. Constant-currency sales growth was 11.1%.
- Brand and channel trends: HOKA sales rose 27.4% to $420.5 million, with DTC up 62.7% and wholesale up 12.5%. UGG sales declined 6.0% to $195.5 million; Teva declined 18.8% to $48.4 million; Sanuk declined 32.3% to $9.6 million; and Other brands declined 33.9% to $1.8 million.
- Profit and margins: Gross profit was $346.4 million, up 17.5%; gross margin increased to 51.3% from 48.0%. Operating income rose 25.5% to $70.7 million, with operating margin of 10.5% versus 9.2%. Net income increased 41.7% to $63.6 million. Diluted EPS was $2.41, up 45.5%.
- Costs and other income: SG&A increased 15.6% to $275.7 million, reflecting higher payroll, operating, marketing, occupancy, and IT costs, partly offset by lower foreign-currency-related losses. Net interest income increased substantially, primarily due to higher invested cash balances and rates.
- Cash flow: Operating cash flow was $125.3 million, versus cash used of $28.9 million a year earlier. Capital expenditures were $30.7 million; financing cash outflow was $25.6 million, including $25.5 million of share repurchases. Cash increased $65.1 million to $1,046.9 million.
- Liquidity and debt: Current assets were $2,175.2 million and current liabilities were $735.8 million. No revolving-credit borrowings were outstanding; available borrowing capacity was $440.4 million. The company reported compliance with all financial covenants. Operating lease liabilities totaled $260.6 million.
- Working capital: Inventory rose to $740.6 million from $532.9 million at March 31, 2023, consistent with seasonal inventory needs. Trade accounts payable increased to $523.0 million from $265.6 million.
Material changes and management commentary
- Growth was led by HOKA and DTC, while total pairs sold declined 9.2% to 10.8 million. Management attributed some wholesale comparisons to prior-year shipment timing, including customer shipment front-loading and earlier distributor shipments.
- Gross-margin improvement primarily reflected lower freight costs and a more favorable DTC and HOKA sales mix, partly offset by domestic promotional and closeout activity and unfavorable currency movements.
- Management continues to prioritize HOKA brand growth, localized UGG marketing in Europe and Asia, and expansion of DTC. It expects increased warehouse, distribution-center, and third-party logistics investment to bring higher costs in the current and future periods.
- The business remains seasonal: UGG and Koolaburra sales are generally strongest in the September and December quarters; Teva and Sanuk in the March and June quarters. Management expects seasonality to moderate over time as HOKA and year-round products grow.
- No numerical earnings or sales guidance was provided in the supplied filing text. Management stated that cash, operating cash flow, and available facilities are expected to cover working capital and contractual obligations for at least the next 12 months.
Risks, contingencies, and unusual items
- Risks include changing consumer demand and preferences, seasonality and weather, inflation, interest rates, currency volatility, recession concerns, supply-chain and labor constraints, and reliance on independent manufacturers. Production is concentrated among a limited number of factories, primarily in Asia; most sheepskin for certain UGG products is sourced through two Chinese tanneries.
- One customer represented 11.1% of accounts receivable at June 30, 2023; no customer accounted for 10% or more of quarterly sales. The ten largest customers represented 22.8% of sales, down from 29.5%.
- The company reported ordinary-course legal and intellectual-property matters, including anti-counterfeiting activity, but stated that no material loss was considered probable and reasonably estimable and that ordinary-course proceedings were not expected to have a material adverse effect.
- Foreign-currency translation loss was $8.7 million, contributing to an $8.3 million total other comprehensive loss. The filing reported no material changes to previously disclosed risk factors or contractual obligations.
Important facts for investors to verify
- Whether HOKA and DTC growth can continue to offset declines in UGG wholesale and smaller brands, and whether pair volumes stabilize.
- Whether gross-margin gains persist as freight, promotions, product mix, and foreign-exchange effects change.
- Inventory levels, seasonal working-capital needs, and cash conversion, including the timing of supplier payments and customer collections.
- The cost and execution of distribution, technology, marketing, and DTC investments, alongside the pace of share repurchases.
- Exposure to supplier concentration, currency movements, macroeconomic conditions, and customer receivable concentration.