Deckers Outdoor Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The company designs and markets footwear and accessories under UGG, Teva, Sanuk and other brands, through wholesale, eCommerce and retail channels. Results are seasonal: UGG sales are strongest in the third and fourth quarters, while Teva and Sanuk are strongest in the first and second quarters. Sanuk results are included from its July 2011 acquisition.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $174.4 | $154.2 | $420.7 | $359.1 |
| Gross profit | $73.6 | $65.9 | $186.9 | $168.4 |
| Gross margin | 42.2% | 42.7% | 44.4% | 46.9% |
| SG&A | $102.3 | $76.7 | $203.6 | $151.0 |
| Operating income (loss) | $(28.7) | $(10.8) | $(16.8) | $17.4 |
| Net income (loss) | $(20.1) | $(7.5) | $(12.1) | $12.3 |
| Diluted earnings (loss) per share | $(0.53) | $(0.19) | $(0.32) | $0.30 |
Cash flow and liquidity: Six-month operating cash flow was $30.6 million, versus cash used of $78.4 million a year earlier; the improvement reflected working-capital movements, including receivable collections and higher payables. Investing cash outflow was $28.0 million, including $26.0 million of property and equipment purchases. Financing cash outflow was $152.0 million, largely from $100.0 million of share repurchases, $29.0 million of Sanuk contingent consideration payments and the $20.0 million purchase of the remaining China joint venture interest. Cash declined to $114.4 million from $263.6 million at year-end 2011. Net working capital was $433.7 million, down from $585.8 million.
At June 30, the company had no revolving-credit borrowings and approximately $199.8 million available under its $200 million secured facility; it reported compliance with covenants. It subsequently borrowed approximately $102 million through the report date and was negotiating a larger syndicated facility. No other debt balance is clearly identified in the supplied filing text. Current assets were $683.5 million and current liabilities $249.7 million.
Changes and operating drivers
- Quarterly sales rose 13.1%; six-month sales rose 17.2%. Sanuk’s inclusion and retail expansion contributed, while UGG and Teva wholesale sales weakened, particularly in Europe.
- Q2 UGG wholesale sales fell 7.9% and Teva wholesale sales fell 16.6%; Sanuk contributed $26.7 million of Q2 sales. Retail sales increased 25.0% in Q2, partly reflecting 21 stores opened since June 2011.
- Sales volume increased, but average wholesale selling price per pair declined to $35.06 in Q2 from $38.28, principally because Sanuk has lower average selling prices.
- Margins fell as sheepskin and other material costs increased and UGG and Teva European discounting and closeouts grew. Higher SG&A reflected Sanuk, new stores, marketing and international expansion. The company recorded a $6.2 million increase in the fair value of Sanuk contingent consideration in the first half.
Outlook, risks and contingencies
- Management expected continued gross-profit pressure, especially from higher sheepskin costs, for full-year 2012. It expected second-half sales to exceed first-half sales, consistent with seasonality, but gave no specific full-year sales or earnings guidance in the supplied text.
- Management estimated remaining 2012 capital expenditures of approximately $60–65 million, mainly for new headquarters construction and retail stores. It expected available cash, operating funds and credit to cover liquidity needs for at least 12 months, while noting financing and business risks.
- Key exposures include concentrated production among independent factories in China, reliance on limited sheepskin sources, commodity-cost volatility, currency movements, weaker European demand, inventory management and seasonality. Inventory was $346.3 million, up 36.7% from year-end; inventory turnover declined to 2.8 from 3.5.
- Sheepskin contracts included a remaining commitment, net of deposits, of $64.9 million, with a final target date of January 2013. Sanuk contingent consideration was recorded at $67.9 million and is based on subjective forecasts; there is no contractual maximum for specified future payment periods.
- The IRS had proposed transfer-pricing adjustments asserting approximately $55 million of additional taxable income and approximately $27 million of additional federal taxes and penalties, excluding interest. The company disputed the proposal; the ultimate outcome could materially affect results or cash flows.
- Shareholder securities class actions and a derivative action were pending; the company said it intended to defend them and could not estimate a possible loss range. Management did not believe routine legal matters would materially affect the company.
Important facts for investors to verify
- Whether seasonal second-half UGG demand offsets weaker wholesale performance and European order trends.
- Whether margin pressure from sheepskin costs, discounting and SG&A moderates, and whether inventory clears as planned.
- Actual capital spending, subsequent credit-facility terms and borrowing needs after the reported $102 million draw.
- Developments in the IRS transfer-pricing dispute, shareholder litigation and the valuation and payments of Sanuk contingent consideration.
- Execution and funding of the $200 million repurchase authorization; the company had repurchased $26.8 million under it through August 8, 2012.