Deckers Outdoor Corporation — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise. Deckers sells UGG, HOKA, Teva, Sanuk and other brands through wholesale and direct-to-consumer (DTC) channels. Its business is seasonal, and products are made by independent third-party manufacturers.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $721.9 million, up 15.8% | $1,226.6 million, up 35.3% |
| Gross profit / margin | $367.1 million / 50.9%, versus 51.2% | $627.6 million / 51.2%, versus 50.9% |
| Operating income / margin | $128.2 million / 17.8%, versus $128.6 million / 20.6% | $190.0 million / 15.5%, versus $120.9 million / 13.3% |
| Net income | $102.1 million, up 0.5% | $150.2 million, up 60.5% |
| Diluted EPS | $3.66, versus $3.58 | $5.37, versus $3.30 |
Quarterly sales growth was led by HOKA, whose total sales rose 47.0%, and UGG, up 8.0%. Wholesale sales increased 20.7%; DTC increased 2.8%, with HOKA DTC growth offset in part by lower UGG DTC sales. For the six-month period, HOKA sales rose 68.0% and UGG sales rose 22.5%. Management cited market-share gains, brand awareness, product updates and recovery from prior-year pandemic disruption as key contributors.
Quarterly gross margin declined as higher freight costs, including air freight, and a greater wholesale channel mix offset favorable brand and product mix. SG&A rose 25.5% in the quarter, driven by advertising, payroll, warehousing and other selling costs; operating income was nearly flat despite higher sales. For the six months, stronger sales and gross margin, and lower SG&A as a share of sales, supported higher operating income.
Cash flow, balance sheet and capital resources
- Cash and cash equivalents were $746.2 million at September 30, down from $1,089.4 million at March 31, 2021.
- Operating cash flow was negative $172.7 million for the six months, versus negative $16.0 million a year earlier. Inventory increased by $358.0 million and receivables by $154.6 million; higher accounts payable partly offset the working-capital outflow.
- Investing cash outflow was $26.7 million, primarily reflecting capital spending for a new U.S. distribution center and information technology. Financing cash outflow was $144.3 million, mainly due to $136.0 million of share repurchases.
- Inventory was $636.3 million, up from $278.2 million at March 31. Management attributed elevated inventory in part to early procurement and supply-chain delays, with inventory in transit notably higher than in comparable historical quarters.
- No borrowings were outstanding under the company’s credit facilities. It reported $399.5 million available on its primary facility, plus available capacity under China and Japan facilities; it was in compliance with financial covenants. Operating lease liabilities totaled $230.956 million, current and long-term combined.
- The company repurchased 381,861 shares for $136.0 million during the six months. Through October 21, it repurchased a further 130,517 shares for $46.7 million.
Outlook, risks and contingencies
No formal full-year sales or earnings guidance is provided in the supplied filing text. Management said it did not then expect sourcing and production disruptions to cause a material negative full-year FY2022 sales effect, while cautioning that the outlook remained uncertain. It highlighted extended transit times, port congestion, container and trucking shortages, higher freight costs, distribution-center operating challenges, and possible order cancellations. These factors could pressure product availability and future gross margins. A new U.S. distribution center was expected to begin limited operations in the December 2021 quarter.
Other risks include continuing COVID-19 effects, labor recruitment and retention challenges, consumer and seasonal demand shifts, dependence on a limited number of manufacturers and sheepskin suppliers, foreign-currency exposure, and customer concentration. The ten largest customers represented 35.5% of quarterly sales; one customer accounted for 12.5% of receivables at quarter-end. Management reported no material change to the risk factors in its prior annual report. Ordinary-course litigation was not expected to have a material adverse effect; in a UGG trademark case, the opposing party filed a petition for Supreme Court review on October 4, 2021.
Management stated that cash, operating cash generation and available credit were expected to be sufficient for working-capital needs and debt service for at least 12 months, while noting that seasonal inventory needs and other uncertainties could affect liquidity. There were no off-balance-sheet arrangements and no material out-of-ordinary-course changes to previously disclosed contractual obligations.
Important facts for investors to verify
- Whether freight, logistics and distribution-center pressures persist and affect product delivery, sales timing and gross margin.
- Whether the large seasonal inventory build converts into sales as expected, and how working capital affects operating cash flow.
- Whether HOKA’s growth and UGG wholesale strength continue, and whether UGG DTC sales recover.
- How higher SG&A and ongoing marketing, payroll and infrastructure investments affect operating leverage.
- Future share repurchases, liquidity needs, and the outcome of the pending UGG trademark review petition.