Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2014, the first quarter of fiscal 2015 following the company’s change in fiscal year-end from December 31 to March 31. Comparative figures are for the three months ended June 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
- Net sales: $211.5 million, up 24.3% from $170.1 million. Sales increased across brands and channels; international sales rose 32.1% and accounted for 37.5% of sales.
- Gross profit and margin: $86.8 million, up 24.3%; gross margin was 41.0%, compared with 41.1%.
- Operating results: SG&A increased 21.9% to $137.3 million. Operating loss widened to $50.5 million from $42.8 million; operating margin was negative 23.9%, versus negative 25.1%.
- Net loss: $37.1 million, or $1.07 per diluted share, compared with a $29.3 million loss, or $0.85 per diluted share. The income tax benefit was $13.7 million; the effective tax rate was 27.0%, versus 32.0%.
- Cash flow: Operating cash outflow was $65.0 million, versus $13.2 million in the prior-year quarter. Investing cash outflow was $18.7 million, primarily capital expenditures; financing cash outflow was $3.6 million.
- Liquidity and balance sheet: Cash and equivalents were $158.2 million, down from $245.1 million at March 31. Current assets were $725.6 million and current liabilities $259.6 million; working capital was $466.0 million. Inventory rose 68.3% to $356.0 million, reflecting seasonal purchases and expected sales.
- Debt and borrowing capacity: Short-term borrowings were $3.2 million, under the China facility. No borrowings were outstanding under the $400 million revolving credit agreement; approximately $256.3 million was available after applying borrowing tests. Subsequent to quarter-end, the company obtained a $33.9 million headquarters mortgage at a fixed 4.928% rate.
Material changes and business drivers
- UGG sales increased 22.8% to $123.3 million; Teva rose 25.7% to $39.3 million; Sanuk rose 19.6% to $36.0 million; and other brands rose 54.5% to $12.9 million.
- E-commerce sales grew 43.7% to $15.4 million and retail-store sales grew 29.4% to $42.0 million. Retail growth included 37 stores opened since June 30, 2013; same-store sales declined 2.8%.
- Operating losses increased mainly because of higher SG&A, including approximately $11 million in additional retail costs associated with new stores, $4 million in marketing and promotion costs, $3 million in IT costs, and $3 million in e-commerce costs.
- Wholesale UGG, Teva, and Sanuk operations were profitable. Retail stores had a $15.9 million operating loss, other wholesale a $4.0 million loss, and unallocated overhead was $45.8 million.
- Cash use reflected seasonal inventory and receivables growth, partly offset by higher trade payables. The company reported improved receivables and inventory turnover over the trailing twelve months.
Outlook, risks, and contingencies
- Management expects fiscal 2015 gross margin to improve compared with fiscal 2014, citing lower sheepskin costs, greater use of UGGpure, and a higher mix of direct-to-consumer sales. It also expects the fiscal 2015 effective tax rate to be below fiscal 2014’s 29.1%. No specific revenue or earnings guidance is provided in the filing.
- The business is seasonal: UGG sales are concentrated in the September and December quarters, while Teva and Sanuk sales are strongest in the March and June quarters. Management expects the fall/winter sales pattern to continue.
- Planned capital expenditures for the next 12 months are approximately $100 million, including distribution-center equipment, retail-store buildouts, and technology and infrastructure. Approximately $21 million of material capital commitments existed at June 30.
- Key risks include weather and fashion sensitivity, limited and volatile sheepskin supply and cost, reliance on independent factories and concentrated sourcing, foreign-exchange movements, changing consumer preferences, and execution of international retail and e-commerce expansion.
- Sanuk acquisition contingent consideration was valued at $30 million, including approximately $28 million recorded as long-term liabilities; its amount has no maximum and depends on 2015 gross profit. Management noted that a 5% change in the estimated sales-growth assumption would change the liability by approximately $2 million.
- Management said ordinary-course legal matters were not expected to materially affect results. A shareholder derivative action had been dismissed with prejudice, with an appeal scheduled for oral argument in August 2014. The company reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether seasonal sales in the September and December quarters convert revenue growth into improved operating profit.
- Inventory levels, sell-through, and cash conversion, given the quarter’s substantial inventory build and operating cash outflow.
- Whether new stores and international e-commerce expansion generate adequate returns relative to their added operating costs.
- The assumptions and potential variability underlying Sanuk contingent consideration, and the effect of the new mortgage and planned capital spending on liquidity.
- Whether anticipated margin and tax-rate improvements materialize; the filing provides expectations, not specific sales or earnings guidance.