Deckers Outdoor Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone Q4 filing. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Deckers designs and markets footwear and accessories, principally under UGG, Teva and Sanuk, and sells through wholesale, eCommerce and company-operated retail channels. Production is outsourced, primarily to independent manufacturers in Asia. Results are seasonal: UGG sales are concentrated in the second half, while Teva and Sanuk are more weighted to the first half. Sanuk results are included from July 1, 2011, limiting year-over-year comparability.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $1,414.4 | $1,377.3 | +2.7% |
| Gross profit / margin | $632.2 / 44.7% | $679.0 / 49.3% | Margin down 4.6 percentage points |
| SG&A | $445.2 | $394.2 | +13.0% |
| Operating income / margin | $186.9 / 13.2% | $284.8 / 20.7% | Operating income down 34.4% |
| Net income attributable to Deckers | $128.9 | $199.1 | Down 35.3% |
| Diluted EPS | $3.45 | $5.07 | Down 32.0% |
| Cash from operating activities | $163.9 | $30.1 | Up $133.8 |
Sales growth reflected Sanuk’s first full year, plus growth in UGG retail and eCommerce, partly offset by declines in UGG and Teva wholesale. UGG total sales fell 1.5%; UGG wholesale fell 10.5%. Teva total sales fell 7.4%. eCommerce sales rose 22.6% to $130.6 million and retail-store sales rose 30.1% to $246.0 million. Retail growth included 30 stores opened since year-end 2011; comparable-store sales declined 3.4%. Sanuk sales were $94.0 million across channels, versus six months of results in 2011.
Profitability weakened as sheepskin costs rose approximately 40%, other material costs increased, and discounted/closeout sales weighed on margins. SG&A growth included new-store costs, Sanuk expenses, and higher marketing. UGG wholesale operating income fell 31.0%; Teva wholesale operating income fell 50.3%. The Sanuk wholesale segment generated $15.6 million of operating income. Diluted EPS declined less than net income, partly because share repurchases reduced weighted-average shares.
Operating cash flow improved substantially, primarily from more favorable year-over-year working-capital movements. Cash and cash equivalents fell to $110.2 million from $263.6 million; inventories rose 18.5% to $300.2 million. Working capital was $424.6 million, down from $585.8 million. The company reported $33.0 million of revolver borrowings at year-end and $366.8 million available under its $400 million secured revolving facility; it reported repaying the $33.0 million after year-end, with no borrowings outstanding as of March 1, 2013. FY 2012 investing cash use was $75.4 million, including $61.6 million of property and equipment purchases; financing cash use was $242.6 million.
FY 2012 fourth-quarter sales were $617.3 million versus $603.9 million in Q4 2011; attributable net income was $98.1 million versus $124.7 million. Quarterly figures are unaudited.
Material changes and notable items
- Deckers repurchased approximately 4.514 million shares for $220.7 million during 2012 under two programs. The second program had $79.3 million remaining authorization at year-end; management said borrowing was largely associated with the repurchases.
- The company acquired the remaining 49% interest in its China UGG joint venture for approximately $20.0 million and acquired full ownership of Hoka in September 2012. Hoka was not material to the consolidated financial statements.
- Sanuk purchase consideration includes uncapped contingent payments tied to specified gross-profit years. The estimated Sanuk contingent-consideration liability was $70.4 million at year-end; the filing identifies valuation assumptions as subjective.
- Year-end wholesale/distributor backlog was approximately $323 million, down from $387 million. Orders are cancellable, and fewer customers had completed Fall 2013 pre-booking than a year earlier.
Outlook, risks and contingencies
- Management expected 2013 gross margin to improve from 2012, with most benefit anticipated in Q4, as lower negotiated sheepskin pricing for Fall 2013 products flows through. It also expected sheepskin costs to decrease overall in 2013. These are expectations, not guaranteed results.
- Planned 2013 capital expenditures were approximately $85–$90 million, mainly for the new headquarters and retail stores. Management planned further store openings, with most expected internationally.
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management cited ongoing seasonality and uncertainty from consumer preferences, weather, competition, order timing, inventory availability and economic conditions.
- Key exposures include UGG’s importance to overall results and its 2012 sales decline; concentrated sheepskin sourcing from two tanneries; reliance on independent manufacturers, especially in China; inventory forecasting and markdown risk; international currency and trade risks; and execution and return risks from retail expansion.
- A Delaware shareholder class action and shareholder derivative actions remained pending. The company stated it considered the claims without merit but could not reasonably estimate a possible loss range. The related California class action had been dismissed with prejudice.
- Contractual obligations included $221.6 million of operating leases and $342.2 million of purchase obligations, primarily due within one year. The revolver is secured by substantially all company and guarantor assets and contains financial covenants. The company reported covenant compliance at year-end.
Important facts for investors to verify
- Whether lower sheepskin costs and reduced discounting deliver the anticipated 2013 margin recovery, particularly in Q4.
- Whether UGG wholesale demand stabilizes and customer carryover inventory declines; monitor pre-orders, backlog and actual shipments, recognizing backlog is cancellable.
- Whether retail and eCommerce growth translates into stronger profit and cash returns, given lower same-store sales and planned capital spending.
- Inventory levels, turnover and markdowns, alongside receivables and customer concentration; one customer represented 18.8% of year-end net receivables.
- Sanuk’s performance and the assumptions underlying its uncapped contingent consideration, plus the pending litigation and any change in the company’s loss assessment.
- Use of cash for repurchases, acquisitions and expansion relative to liquidity, borrowing, covenant headroom and the $85–$90 million 2013 capital-spending plan.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2012.