DECK

Deckers Outdoor Corp. Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Deckers Outdoor Corporation designs, markets, and sells footwear and accessories under brands including UGG, Teva, Simple, TSUBO, and Ahnu. The business is seasonal, with UGG sales concentrated in the third and fourth quarters. The company operates through wholesale, eCommerce, and retail store segments.

Key Financial Metrics

Liquidity: The company maintains a $20 million revolving credit facility with Comerica Bank, expiring June 1, 2010. As of March 31, 2010, there were no outstanding borrowings, and $19.8 million remained available.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16.2% year-over-year, driven by strong performance in UGG and Teva brands. International sales grew 20.8% to $38.9 million (25.0% of total sales).
• Margin Expansion: Gross margin improved to 50.0% from 43.9%, attributed to a higher mix of retail sales and reduced closeout sales on Teva products.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses rose 24.0% to $49.1 million, primarily due to payroll increases, costs for five new retail stores, and expenses related to assuming Teva distribution rights in Benelux and France.
• Segment Performance:
  • UGG Wholesale: Sales up 2.4%; Operating income up 16.3%.
  • Teva Wholesale: Sales up 21.9%; Operating income up 44.9%.
  • Retail Stores: Sales up 66.1% due to new store openings; Operating income up 388.6%.
• Cash Flow: Net cash provided by operating activities decreased 45.3% to $21.6 million, primarily due to lower decreases in accounts receivable and inventory compared to the prior year. Net cash from investing activities turned positive ($19.7 million) due to the sale of short-term investments.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates remaining capital expenditures for 2010 will range from $22 million to $27 million, primarily for new retail store build-outs and IT infrastructure.
• Stock Repurchase: A $50 million repurchase program was approved in June 2009. No shares were repurchased in Q1 2010; approximately $30 million remains authorized.
• Seasonality: The company expects the trend of higher sales in the second half of the year to continue, driven by the UGG brand.
• Risks and Contingencies:
  • IRS Audit: The IRS is auditing federal returns for 2006–2008; the timing and materiality of the outcome are uncertain.
  • Supply Chain: Production is concentrated in China, New Zealand, and Australia, exposing the company to currency fluctuations and geopolitical risks.
  • Contractual Obligations: A sheepskin purchase commitment of approximately $47 million remains due by December 31, 2010, though management deems the risk of non-performance payments remote.
  • Market Risk: Approximately 11% of Q1 2010 sales were denominated in foreign currencies, creating exposure to exchange rate fluctuations.

Investor Verification Checklist

• Verify the sustainability of the 50.0% gross margin given the shift in sales mix toward retail and reduced closeouts.
• Monitor the impact of the $47 million sheepskin purchase commitment on future cash flows and inventory levels.
• Assess the performance of the five new retail stores opened since Q1 2009 to validate the 66.1% sales growth in that segment.
• Review the status of the IRS audit for tax years 2006–2008 for potential adjustments to unrecognized tax benefits.
• Track the renewal of the $20 million credit facility expiring June 1, 2010, and any changes to financial covenants.