Business Context and Reporting Period
Company: Deckers Outdoor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Deckers designs, produces, and markets footwear under three primary brands: Teva (sport sandals), UGG (luxury sheepskin boots), and Simple (sustainable footwear). The company also operates a Consumer Direct business (internet, catalog, and retail stores). Operations are seasonal, with Teva peaking in Q1/Q2 and UGG peaking in Q3/Q4.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2006 |
Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Net Sales | $82,322 | $180,047 |
| Gross Profit | $37,173 | $80,914 |
| Gross Margin | 45.2% | 44.9% |
| Income from Operations | $17,308 | $30,230 |
| Net Income | $10,599 | $18,979 |
| Diluted EPS | $0.83 | $1.48 |
| Cash & Equivalents | $17,141 | $17,141 (Balance Sheet) |
| Short-term Investments | $28,110 | $28,110 (Balance Sheet) |
| Working Capital | $128,638 | $128,638 (Balance Sheet) |
| Debt Outstanding | $0 | $0 |
Liquidity: The company maintains a $20,000 revolving credit facility with Comerica Bank. As of September 30, 2006, there were no outstanding borrowings, leaving $19,948 available. The company reported net cash used in operating activities of $6,535 for the nine-month period, primarily due to inventory build-up and increased accounts receivable.
Material Changes vs. Prior Period
- Revenue Growth (Q3): Net sales increased 19.0% year-over-year to $82.3 million, driven by strong performance in UGG (+15.4%) and Simple (+105.9%) wholesale sales. Teva wholesale sales remained relatively flat (+1.0%).
- Revenue Growth (YTD): Net sales increased 3.6% year-over-year to $180.0 million. Growth was offset by a 9.8% decline in Teva wholesale sales due to increased competition and lack of new product innovation.
- Profitability:
- Q3: Net income rose 30.0% to $10.6 million, aided by improved gross margins (45.2% vs. 42.0% prior year) and higher full-price sales.
- YTD: Net income declined 4.0% to $19.0 million. Despite higher gross margins, operating income fell 8.7% due to a 22.1% increase in Selling, General, and Administrative (SG&A) expenses related to marketing and payroll.
- Segment Performance:
- UGG: Remains the primary growth engine, with wholesale operating income up 30.3% in Q3.
- Simple: Reported an operating loss of $648 in Q3 despite sales growth, attributed to negative margins on closeouts and increased marketing spend.
- Teva: Operating income declined 10.5% in Q3 due to marketing expenses and lower margins on closeouts.
- Balance Sheet: Inventories increased 54.4% to $51.5 million, primarily driven by UGG inventory build-up for the holiday season. Accounts receivable increased 22.0% to $49.9 million.
Guidance, Outlook, and Risks
- Outlook: Management expects Teva to return to positive year-over-year growth in 2007 following increased investment in product design and marketing. Gross margins are expected to normalize to a range of 42.0% to 44.0% in 2007.
- Capital Expenditures: Estimated remaining capital expenditures for 2006 range from $2.3 million to $2.5 million, focused on distribution center upgrades and new retail outlet stores.
- Seasonality: The company anticipates continued seasonality, with UGG sales peaking in Q3/Q4 and Teva in Q1/Q2.
- Risks and Contingencies:
- Teva Decline: Risk of impairment charges if Teva sales continue to decline and fair value drops below carrying value.
- Inventory Management: High inventory levels ($51.5M) pose a risk if consumer demand shifts or closeout sales increase.
- Legal Proceedings: Ongoing disputes regarding trademark infringement and counterfeit products for Teva and UGG brands.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) in 2006, increasing compensation expense. Future adoption of FIN 48 (Uncertainty in Income Taxes) is being evaluated.
Investor Verification Checklist
- Teva Turnaround: Verify if the new product lines and marketing strategies for Teva are successfully reversing the sales decline in upcoming quarters.
- UGG Sustainability: Assess whether UGG sales growth can be sustained given the fashion-driven nature of the product and potential market saturation.
- Simple Profitability: Monitor Simple's path to profitability, as the segment currently operates at a loss despite significant revenue growth.
- Inventory Levels: Watch for changes in inventory turnover and potential write-downs, given the 54% increase in inventory year-over-year.
- SG&A Control: Evaluate if the company can manage SG&A expenses (which rose 22% YTD) as a percentage of sales to protect operating margins.