Deckers Outdoor Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. Unless stated otherwise, financial amounts are in millions of U.S. dollars; per-share data reflect the three-for-one stock split.
Business context
Deckers designs and markets footwear and accessories, principally under UGG and Teva, with Simple, TSUBO and Ahnu among its other brands. Products are sold through wholesale, eCommerce and company-operated retail channels. Manufacturing is outsourced, predominantly to China. UGG sales are concentrated in the third and fourth quarters; Teva sales are more weighted to the first and second quarters.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net sales | $1,000.989 | $813.177 | +23.1% |
| Gross profit / margin | $502.938 / 50.2% | $371.090 / 45.6% | Margin +4.6 percentage points |
| Operating income / margin | $249.088 / 24.9% | $181.247 / 22.3% | +37.4% |
| Net income attributable to Deckers | $158.235 | $116.786 | +35.5% |
| Diluted EPS | $4.03 | $2.96 | +36.1% |
| Operating cash flow | $139.922 | $185.474 | −24.6% |
- FY 2010 sales growth was led by UGG across channels and Teva wholesale. UGG generated $873.146 million, about 87% of sales; Teva generated $101.347 million. International sales were $236.878 million, or 23.7% of total sales, versus 20.6% in 2009.
- Sales growth reflected a 14.6% increase in footwear volume to about 18.0 million pairs and a 4.1% increase in weighted-average wholesale price per pair to $47.71.
- Gross margin benefited from a higher retail-sales mix, improved wholesale margins, lower Teva closeout impact and approximately $7 million in duty refunds, which management did not expect to recur at that level. SG&A rose 34.4% to $253.850 million, including spending for international expansion and new stores.
- Fourth-quarter 2010 sales were $430.124 million and net income attributable to Deckers was $89.231 million, compared with $347.989 million and $67.742 million, respectively, in fourth-quarter 2009.
- Cash and cash equivalents were $445.226 million at year-end, with no short-term investments (versus $26.120 million in 2009). Working capital was $570.869 million. Current assets were $715.732 million and current liabilities $144.863 million.
- Operating cash flow declined as receivables and inventory increased; year-end receivables were $116.663 million and inventories $124.995 million. Cash used in investing activities was $1.600 million and cash used in financing activities was $9.052 million.
- No credit-facility borrowings were outstanding; $19.276 million remained available under the $20 million Comerica facility. Long-term liabilities were $8.456 million. Total assets were $808.994 million and total equity was $655.675 million.
Changes versus the prior year
- Net sales rose 23.1%, operating income 37.4%, and net income attributable to Deckers 35.5%. Operating margin improved to 24.9% from 22.3%.
- UGG sales increased 22.7%; Teva sales increased 30.5%, principally through wholesale. Retail-store sales rose 59.1%, reflecting nine store openings since year-end 2009; comparable-store sales increased 16.6% for stores open throughout both years. eCommerce sales grew 21.3%.
- International sales grew 41.7%, faster than U.S. sales growth of 18.3%. International distribution conversions included Teva in Benelux and France.
- Operating cash flow fell despite higher earnings, largely because of increased accounts receivable and inventory. Capital expenditures were $22.489 million, compared with $13.699 million in 2009.
- No goodwill or intangible-asset impairment charge was recorded in 2010; 2009 included a $1 million TSUBO trademark impairment.
Outlook, risks and unusual items
- Management expected FY 2011 gross margin to increase from 2010 and the effective tax rate to decrease, partly due to a greater share of international pretax income. The filing provides no clear numerical 2011 revenue or earnings guidance.
- Planned 2011 capital expenditures were approximately $55–$60 million. The company planned further retail openings and distributor-to-wholesale conversions, including UGG, Teva and Simple in the UK and Ireland and UGG and Simple in Benelux.
- Year-end wholesale backlog was approximately $336 million, compared with $245 million a year earlier; orders were cancellable, and management cautioned that backlog is an imprecise indicator of annual revenue.
- Key risks include UGG concentration and fashion or weather sensitivity; discretionary consumer spending and retailer health; customer concentration (the five largest customers represented 28.9% of sales, and one customer exceeded 10%); competition and counterfeiting; limited sheepskin supply and rising input costs; reliance on independent manufacturers in China; and foreign-exchange, trade-duty and distribution-transition risks.
- Contractual commitments included $120.204 million of operating lease obligations and $196.427 million of purchase obligations. The company also expected approximately $12 million of 2011 payments associated with distribution-rights conversions and estimated about $1 million of remaining potential loans to its China joint venture.
- Other notable items: a one-time foreign sales-tax exemption of approximately $1 million; $5.506 million of unrecognized tax benefits, with an IRS examination of 2006–2009 returns ongoing; and no material adverse outcome expected from routine legal proceedings, according to management.
- The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether UGG demand, pricing and brand strength can sustain growth, given its dominant share of sales and seasonal exposure.
- Whether the reported margin improvement is repeatable without the approximately $7 million duty refund and amid higher sheepskin, freight and other costs.
- Whether receivables and inventory convert to cash as expected, and whether the 2011 sales outlook supports the larger inventory and expansion plans.
- Progress, costs and returns from store openings and international distribution conversions; review lease commitments and other purchase obligations.
- Customer and supplier concentration, sheepskin sourcing resilience, foreign-exchange hedging exposures, and the outcome of tax examinations.