Deckers Outdoor Corporation — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise. Deckers sells footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and Koolaburra through wholesale and direct-to-consumer (DTC) channels.
Financial performance
- Quarter: Net sales rose 13.3% to $1,345.6; gross profit was $712.5 and gross margin improved to 53.0% from 52.3%. Operating income increased 23.6% to $362.7, with a 27.0% operating margin versus 24.7%. Net income increased 19.6% to $278.7; diluted EPS was $10.48 versus $8.42.
- Nine months: Net sales increased 17.5% to $2,835.7; gross profit was $1,429.2 and gross margin declined to 50.4% from 51.7%. Operating income rose 13.1% to $546.8, while operating margin eased to 19.3% from 20.0%. Net income increased 10.9% to $425.0; diluted EPS rose to $15.90 from $13.73.
- Sales mix: Nine-month HOKA sales increased 66.9% to $1,015.2; UGG sales were nearly flat at $1,614.9 (+0.5%). DTC revenue grew 21.3% to $1,123.5, and wholesale revenue increased 15.1% to $1,712.3. Quarterly DTC sales rose 18.7%; HOKA sales increased 90.8%.
- Cash flow: Nine-month operating cash flow was $477.9, versus $227.4 in the prior-year period. Capital expenditures were $56.1. Cash and cash equivalents were $1,057.8 at December 31, up from $843.5 at March 31, 2022. Inventory was $723.4, compared with $506.8 at fiscal year-end.
- Liquidity and debt: The company reported no borrowings under its revolving facilities. It refinanced its primary facility in December with a $400.0 unsecured revolving commitment maturing in 2027; total available borrowing capacity across facilities was reported as $466.3. The company said it was covenant-compliant and expected liquidity to cover working capital and obligations for at least 12 months.
- Capital returns: Nine-month share repurchases totaled $194.9, for 685,075 shares at a weighted-average $284.44 per share. Remaining authorized repurchase capacity was $1,459.1.
Material changes and management commentary
- Growth was led by HOKA wholesale and DTC, alongside UGG DTC. UGG wholesale declined as Deckers reduced domestic shipments to manage marketplace inventory and experienced shifts in international shipment timing.
- For the nine-month period, gross margin pressure reflected foreign exchange, ocean freight costs embedded in inventory sold, more normalized UGG promotions and closeouts, and UGG product mix. Lower air freight usage, favorable HOKA mix and prior price increases, and a shift toward DTC partly offset these pressures. In the quarter, lower freight costs and favorable DTC and HOKA mix supported margin improvement.
- Management said transit times and freight costs were improving from the prior period but remained above pre-pandemic levels, with near-term pressure expected to continue. It noted that inventory could grow faster than sales in the near term as the company prioritizes customer demand and service levels.
- Deckers continues to prioritize HOKA expansion and DTC growth, while applying selective price increases. Management expects HOKA growth and broader product offerings to reduce, but not eliminate, seasonality over time. The filing provides no specific numerical earnings or revenue guidance.
Risks, contingencies, and unusual items
- Key exposures include supply-chain and logistics disruptions, inflation and recession concerns, foreign-exchange volatility, seasonal demand and weather, and dependence on independent manufacturers. Production is concentrated at a limited number of factories, primarily in Asia; most sheepskin is sourced through two Chinese tanneries.
- Inventory, receivable collection, and customer credit merit attention: one customer represented 16.2% of net trade receivables at December 31, 2022. The ten largest customers accounted for 27.4% of nine-month sales, though no single customer represented 10% or more of sales.
- New international logistics agreements added approximately $86.0 of minimum commitments payable over three to five years. Signed leases not yet commenced carried $52.4 of undiscounted minimum payments. Sheepskin supplier deposits included $16.3 remaining in other assets and a further $6.9 refund due but unpaid at period-end.
- The company recorded $2.1 of store-related long-lived asset impairment charges for the nine months, versus $3.2 in the prior-year period. Ordinary-course legal matters were not expected by management to have a material adverse effect, although the filing notes ongoing intellectual-property enforcement and other claims.
- Foreign currency translation contributed to a $15.3 nine-month other comprehensive loss. A hypothetical 10% currency movement was estimated to change the fair value of financial instruments by approximately $3.3. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether HOKA growth and DTC expansion continue, and how UGG wholesale shipments and marketplace inventory develop.
- Whether elevated inventory converts to sales without added markdowns, write-downs, or working-capital pressure.
- Whether freight, foreign-exchange, and product-mix trends support a recovery in year-to-date gross margin.
- The terms and use of the new credit facility, new logistics and lease commitments, and the pace of share repurchases.