Deckers Outdoor Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. The filing also reports the quarter ended March 31, 2019 (FY2019 Q4); this is not a calendar-year 2018 Q4 report. Unless noted, financial amounts below are in millions of U.S. dollars.
Business context
Deckers designs, markets and distributes footwear, apparel and accessories, principally under UGG, HOKA, Teva, Sanuk and Koolaburra. Products are sold through wholesale and direct-to-consumer (DTC) channels; manufacturing is outsourced to independent contractors, primarily in Asia. The business is seasonal, with UGG sales weighted toward fall and winter.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $2,020.4 | $1,903.3 | +6.2% |
| Gross profit / margin | $1,040.3 / 51.5% | $931.6 / 48.9% | Margin +2.6 pts |
| SG&A | $712.9 | $709.1 | +0.5% |
| Operating income / margin | $327.3 / 16.2% | $222.6 / 11.7% | +47.1% |
| Net income | $264.3 | $114.4 | +131.1% |
| Diluted EPS | $8.84 | $3.58 | +$5.26 |
| Operating cash flow | $359.5 | $327.4 | +$32.2 |
| Capital expenditures | $29.1 | $34.8 | -$5.7 |
Gross-margin improvement reflected less discounting, improved inventory and closeout-channel management, lower domestic wholesale air freight, and lower input costs. Operating cash flow less capital expenditures was approximately $330.4 million.
- Brands and channels: HOKA sales grew 45.4% to $223.1 million, led by wholesale growth. UGG grew 1.7% to $1,532.9 million: wholesale increased 5.5%, while UGG DTC declined 3.1%. Total DTC was essentially flat at $715.0 million; comparable DTC sales increased 1.9%. Sanuk sales fell 9.1% to $82.6 million. Total wholesale increased 9.9%.
- Geography: U.S. sales rose 8.9% to $1,278.4 million; international sales rose 1.8% to $742.1 million and represented 36.7% of total sales.
- FY2019 Q4: Net sales were $394.1 million, gross profit $203.3 million, operating income $31.6 million, and net income $24.0 million. Diluted EPS was $0.82. Compared with FY2018 Q4, sales declined from $400.7 million, while operating income rose from $18.3 million and net income from $20.6 million.
Liquidity, debt and capital allocation
Cash and cash equivalents were $589.7 million at March 31, 2019, versus $430.0 million a year earlier; working capital was $844.9 million. The company reported $30.9 million of long-term mortgage payable and $0.6 million of short-term borrowings, with no balance on its revolving facilities. Its $400 million unsecured primary facility had $399.5 million available, and additional uncommitted China and Japan facilities provided stated availability of $44.7 million and $49.6 million. The company reported compliance with debt covenants.
FY2019 share repurchases were $161.4 million (1.40 million shares); $350.2 million remained authorized under repurchase programs at year-end. No shares were repurchased in Q4. The company does not expect to pay dividends in the foreseeable future. Operating lease obligations totaled $290.4 million; product purchase obligations were $424.3 million and commodity purchase commitments, primarily sheepskin, were $208.6 million.
Material changes, outlook and risks
- Net income benefited from stronger sales and gross margins and a lower effective tax rate: 19.6% versus 48.2% in FY2018. The prior year included significant tax charges related to U.S. tax reform, including deferred-tax remeasurement and deemed repatriation. The filing provides no quantified financial guidance for FY2020.
- Management said its restructuring plan was complete, with approximately $63 million of cumulative annualized SG&A savings and $55.6 million of cumulative restructuring charges. It also reported more than $100 million of annualized operating-profit improvement from the combined restructuring and profit-improvement plans.
- The company plans to complete the Camarillo-to-Moreno Valley distribution-center migration and close Camarillo in the first half of FY2020. Estimated FY2020 capital expenditures were $35–$40 million, primarily for the Moreno Valley distribution center, IT and retail locations.
- Management cited continued E-Commerce opportunity, but noted ongoing pressure on physical-store traffic and wholesale customers from retail-industry change. It expects seasonality to persist; weather, consumer preferences, inventory forecasting and discounting remain important risks.
- Additional risks include competition, reliance on two Chinese tanneries for most sheepskin, outsourced Asian manufacturing, foreign exchange, and potential tariffs. In May 2019, U.S. officials had announced possible additional duties on remaining Chinese imports, including footwear and apparel; whether and at what rate they would apply was uncertain.
- The company adopted the new revenue standard in FY2019, including recognizing certain sales on shipment rather than delivery; prior-period figures were not restated. It expected FY2020 lease-accounting adoption to add approximately $219–$239 million of assets and $246–$266 million of lease liabilities, without a material income-statement impact.
- A May 10, 2019 jury verdict favored Deckers in a UGG trademark-infringement and counterfeiting case against Australian Leather; an affirmative defense and potential appeal remained. The company said ordinary-course litigation was not expected, in aggregate, to materially affect results, but adverse trademark rulings could be significant.
Important facts for investors to verify
- Whether HOKA’s rapid growth and UGG’s wholesale gains continue, and whether UGG DTC weakness reverses.
- Whether the gross-margin improvement and more than $100 million of annualized operating-profit improvements are sustainable, especially if tariffs, freight or input costs rise.
- Cash conversion, inventory quality, returns and chargeback reserves, and the execution and cost of the distribution-center transition.
- Tax-rate assumptions, repatriation plans and potential withholding taxes on overseas cash; $214.9 million of cash was held outside the U.S. at year-end.
- Developments in the Australian Leather trademark case and any U.S. tariff action affecting Chinese-sourced products.