Business context and reporting period
Deckers Outdoor Corporation designs, markets and distributes footwear, apparel and accessories under UGG, Teva, Sanuk, Hoka and Koolaburra. It sells through wholesale customers and its direct-to-consumer (DTC) stores and websites; independent manufacturers produce its products, primarily in Asia. This Form 10-K covers the fiscal year ended March 31, 2018, compared with fiscal 2017. The filing is an annual report, not a standalone fourth-quarter filing.
The business is seasonal: UGG sales are concentrated in the fall and winter, while Teva and Sanuk sales tend to peak in spring and summer. At year-end, Deckers operated 165 stores and targeted a longer-term company-owned store count of approximately 125.
Financial performance and liquidity
Unless noted otherwise, amounts are in U.S. dollars. The filing presents most financial statement amounts in thousands; figures below are converted to millions.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,903.3 million | $1,790.1 million |
| Gross profit / gross margin | $931.6 million / 48.9% | $835.2 million / 46.7% |
| Operating income (loss) / margin | $222.6 million / 11.7% | ($1.9) million / (0.1%) |
| Net income | $114.4 million | $5.7 million |
| Diluted earnings per share | $3.58 | $0.18 |
| Cash from operating activities | $327.4 million | $199.3 million |
| Cash used in investing activities | $34.7 million | $44.5 million |
| Cash used in financing activities | $157.7 million | $103.8 million |
- Sales grew 6.3% (6.1% on a constant-currency basis). DTC sales increased 7.4%, and international sales increased 12.4%, representing 38.3% of total sales.
- By brand, UGG sales rose 3.9%, Teva 13.5%, Sanuk declined 0.9%, and other brands rose 32.4%. Growth in other brands was driven primarily by Hoka.
- At March 31, 2018, cash and cash equivalents were $430.0 million, working capital was $721.5 million, total assets were $1,264.4 million and stockholders’ equity was $940.8 million.
- There were no outstanding borrowings on the revolving credit facilities at year-end. The company had a $32.1 million mortgage balance; short-term borrowings of $0.6 million on the balance sheet reflect the mortgage’s current portion. Available revolving credit capacity was approximately $498.9 million, including domestic, China and Japan facilities. Debt covenants were reported as satisfied.
Material changes versus the prior comparable period
- Gross margin increased by 2.2 percentage points, attributed mainly to lower input costs, more full-price selling, favorable weather and foreign-exchange movements.
- Operating income improved substantially from a loss to $222.6 million. FY2017 included approximately $118.0 million of Sanuk goodwill and patent impairment charges, as well as higher restructuring and other impairment costs; these unusual prior-year charges materially affect the comparison.
- SG&A declined to $709.1 million from $837.2 million. In FY2018, increased payroll and proxy-contest costs partly offset lower impairment, rent, professional-services and restructuring costs.
- Net income rose despite income tax expense of $106.3 million, compared with a $12.7 million tax benefit in FY2017. The FY2018 effective tax rate was 48.2%, affected by the Tax Cuts and Jobs Act, including deemed-repatriation taxes and deferred-tax remeasurement.
- Operating cash flow increased; management attributed much of the change to operating assets and liabilities, including a higher long-term tax liability, accrued compensation and other liabilities, and timing of tax receivables.
- Deckers repurchased $149.7 million of shares in FY2018. The remaining authorized repurchase amount at March 31, 2018 was $250.6 million.
Outlook, management commentary, risks and unusual items
- Management expected approximately $85 million of annualized gross SG&A savings from the restructuring plan by March 31, 2020; approximately $54 million had been realized by March 31, 2018, with about $31 million more expected. Separately, the operating-profit improvement plan targeted approximately $65 million in additional annualized cost-of-sales improvements and SG&A savings. Combined gross savings were estimated at approximately $150 million, with about $100 million of net annualized operating-profit improvement after reinvestment, by fiscal 2020. Timing and achievement were expressly uncertain; these are targets, not guaranteed results.
- Management expected no material further restructuring charges, while continuing to optimize stores and targeting approximately 125 owned stores. It also expected fiscal 2019 capital expenditures of $35–$40 million.
- Management said FY2018 sales benefited from weather. Key risks include weather-driven demand and seasonality, changing consumer preferences, competition and discounting, wholesale-customer concentration, inventory forecasting, foreign exchange, and reliance on Asian manufacturers and a limited number of sheepskin suppliers. The five largest customers accounted for 23.6% of FY2018 sales.
- At March 31, 2018, contractual obligations totaled approximately $1,004.0 million, including $336.5 million of operating leases, $455.2 million of product purchase obligations and $106.9 million of sheepskin commitments. Product purchase obligations are estimates and a significant portion may be cancellable only in limited circumstances.
- Deckers repatriated $250 million of foreign cash during the fourth quarter and recorded a provisional tax provision related to the Tax Act. The company stated that its tax accounting was not yet final and could be adjusted during the measurement period.
- A UGG trademark and patent dispute with Australian Leather remained pending; management said it could not reasonably estimate a possible loss. The company warned that an adverse ruling affecting UGG trademark protection could materially harm the business. It considered other routine legal matters not expected to have a material aggregate effect.
- Auditor KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2018.
Important facts for investors to verify
- Whether the planned cost savings and operating-profit improvement are achieved on schedule, and what implementation or reinvestment costs reduce their net benefit.
- Underlying earnings excluding FY2017 impairment charges and FY2018 Tax Act effects, and the eventual final tax accounting and effective tax rate.
- Whether UGG, Hoka and DTC growth can continue, particularly amid weather sensitivity, store optimization and shifts from physical retail to e-commerce.
- Inventory levels, markdowns, return allowances and the quality of wholesale receivables, including exposure to major customers.
- Progress and costs in consolidating distribution operations, and continued access to sheepskin and other materials at acceptable prices.
- Developments in the Australian Leather litigation, foreign-exchange exposure, and the company’s use of remaining share-repurchase authorization.