DECK

Deckers Outdoor Corp. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Deckers Outdoor Corporation is a leading designer and brand manager of footwear, primarily marketing the UGG, Teva, and Simple brands. The company operates through wholesale, eCommerce, and retail store segments. The quarter included the acquisition of Ahnu, Inc., an outdoor performance footwear brand, in March 2009.

Key Financial Metrics

Note: All amounts in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 37.6% to $134.2 million, driven primarily by a 78.0% increase in UGG wholesale sales. International sales grew 71.0% to $32.2 million.
• Margin Compression: Gross margin decreased to 43.9% from 47.3%. This was attributed to the higher growth rate of the wholesale business (lower margin) compared to eCommerce, higher closeout sales, and a reduction in sales return estimates in the prior year.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 36.1% to $39.6 million due to increased payroll, marketing investments (specifically for Simple and TSUBO), and costs associated with six new retail stores.
• Segment Performance:
  • UGG Wholesale: Operating income surged 64.5% to $27.4 million.
  • Teva Wholesale: Operating income declined 11.6% to $7.8 million due to lower sales volume and margins.
  • Simple Wholesale: Reported an operating loss of $2.5 million compared to a profit of $53k in the prior year, driven by closeout sales and inventory write-downs.
  • Retail Stores: Sales increased 161.9% to $13.9 million, with operating income rising to $1.0 million.
• Acquisition: Acquired Ahnu, Inc. for total consideration of $2.62 million (including $945k in contingent consideration), resulting in $757k of goodwill.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margins to increase slightly for the full year 2009 compared to 2008. The company anticipates the trend of higher sales in the second half of the year (driven by UGG seasonality) to continue.
• Capital Expenditures: Estimated remaining capital expenditures for 2009 range from $16 million to $18 million, primarily for new retail stores and warehouse upgrades.
• Liquidity: The company maintains a strong liquidity position with $179 million in cash and $51 million in short-term investments. It has a $20 million revolving credit facility with no outstanding borrowings as of March 31, 2009.
• Risks and Contingencies:
  • Economic Conditions: Adverse global economic conditions may impact customer demand and financial results.
  • China Tax Liability: A remaining liability of approximately $1.6 million exists regarding tax obligations in China, with a statute of limitations expiring June 30, 2009.
  • Sheepskin Commitments: A contract requires minimum sheepskin purchases of $64 million by December 2010; however, management believes current purchase levels will exceed this, making the obligation remote.
  • Brand Performance: No assurance that UGG sales growth will continue or that new brands (TSUBO, Ahnu) will achieve profitability.

Investor Verification Checklist

• Verify the sustainability of UGG brand sales growth given the 78% year-over-year increase in wholesale sales.
• Monitor the resolution of the $1.6 million China tax liability before the June 30, 2009 statute of limitations expires.
• Track the profitability timeline for the newly acquired Ahnu brand and the re-launch of the TSUBO brand, both currently operating at a loss.
• Assess the impact of the 3.4 percentage point decline in gross margin on future earnings projections.
• Confirm the company's ability to maintain inventory levels and working capital efficiency amidst potential economic downturns.