Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2014. The quarter is the third quarter of fiscal 2015; the company changed its fiscal year-end to March 31 in 2014. Dollar amounts below are in millions unless noted.
Business context and results
Deckers designs and sells footwear, apparel and accessories, primarily under the UGG, Teva and Sanuk brands, through wholesale, e-commerce and company-operated retail channels. The business is seasonal: UGG sales are concentrated in the September and December quarters, while Teva and Sanuk are more weighted to spring and summer.
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $784.7 | $736.0 | $1,476.4 | $1,292.9 |
| Gross profit / margin | $415.1 / 52.9% | $376.2 / 51.1% | $725.8 / 49.2% | $612.9 / 47.4% |
| Operating income / margin | $214.6 / 27.4% | $201.5 / 27.4% | $223.7 / 15.2% | $205.2 / 15.9% |
| Net income | $156.7 | $140.9 | $160.4 | $144.7 |
| Diluted EPS | $4.50 | $4.04 | $4.59 | $4.15 |
Revenue drivers and changes
- Quarterly sales increased 6.6%; management cited UGG e-commerce and retail growth, growth in other brands, and modestly higher UGG wholesale sales. International sales rose 14.6% as reported and 19.8% on a constant-currency basis.
- For the nine months, sales rose 14.2%; UGG sales increased 13.1%, e-commerce 28.7%, and retail-store sales 13.2%. International sales rose 22.0% as reported and represented 35.8% of sales.
- Quarterly UGG wholesale sales were nearly flat, while Teva and Sanuk wholesale sales declined 12.8% and 11.1%, respectively. E-commerce revenue rose 25.2%. Retail same-store sales declined 7.2% for the quarter and 8.2% for the nine-month period, reflecting product mix and sales shifting online.
- Quarterly gross margin improved 1.8 percentage points, supported by higher UGG wholesale margins, a greater direct-to-consumer mix and fewer closeout sales. E-commerce margin fell because of increased discounts and promotions. Nine-month operating margin declined despite higher gross margin, as SG&A grew 23.2%, faster than sales.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $192.7, down from $246.4 a year earlier. The filing attributes the period’s working-capital use principally to increases in receivables and inventory, partly offset by higher payables. Investing cash outflow was $76.2, including $66.7 of property and equipment purchases.
- Cash and equivalents were $369.4 at December 31, 2014, versus $245.1 at March 31, 2014. Current assets were $943.2 and current liabilities $295.2. Inventory was $293.9, up from $211.5 at March 31.
- Debt included approximately $4.9 of China facility borrowings and a $33.3 mortgage payable; the balance sheet also reported $5.4 of short-term borrowings. The $400 million revolving facility had no borrowings and approximately $399.9 million available at quarter-end. The company reported compliance with its debt covenants.
- The headquarters mortgage carries a fixed 4.928% rate, has a 15-year maturity with an estimated $23.4 million balloon payment, and amortizes over 30 years. Management said existing cash, operating cash flow and available credit should cover liquidity needs for at least 12 months.
Outlook, risks and unusual items
- No specific sales or earnings forecast is provided. Management expected fiscal 2015 gross margin to increase versus fiscal 2014, citing lower average sheepskin prices, sales mix and other margin factors; it also expected the fiscal 2015 effective tax rate to be below fiscal 2014’s 29.1%. Remaining fiscal 2015 capital expenditures were estimated at $30–$35 million.
- Key risks include seasonality and weather sensitivity, changing consumer preferences, sheepskin supply and cost volatility, foreign exchange exposure, reliance on third-party manufacturers and concentrated sourcing, inventory and receivables management, and international operating risks. One customer represented 20.3% of net receivables at December 31, although no customer exceeded 10% of nine-month sales.
- The Sanuk acquisition consideration includes a payment equal to 40% of calendar 2015 gross profit, with no maximum. Its estimated fair value was $26.2 million; the total recorded contingent-consideration fair value was $27.7 million. Management noted that a 5% change in the estimated Sanuk growth rate would change the liability by about $2.0 million.
- After quarter-end, the company entered into $54 million of non-designated foreign-currency derivative contracts, repurchased approximately 468,000 shares for $34 million under its existing authorization, and approved a new $200 million repurchase program. It also acquired its German UGG distributor during the period; the purchase price was described as immaterial.
- Management reported routine legal matters as not expected to have a material effect. A shareholder derivative suit dismissal was affirmed on appeal; plaintiffs subsequently petitioned the California Supreme Court for review. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether UGG demand and direct-to-consumer growth can offset declining retail same-store sales and softness in Teva and Sanuk wholesale.
- Whether elevated inventory and receivables convert to cash without discounting, write-downs or collection issues; review the year-over-year decline in operating cash flow.
- Whether SG&A growth, new-store costs and international expansion weigh on operating margins despite management’s gross-margin outlook.
- The assumptions underlying the Sanuk contingent consideration and the exposure to sheepskin costs, foreign exchange and customer concentration.
- The capital-allocation implications of the expanded buyback authorization alongside planned capital spending and the new mortgage obligation.