Deckers Outdoor Corporation — Q1 FY2021
Business context and period: This unaudited 10-Q covers the three months ended June 30, 2020, compared with the same period in 2019. Deckers designs and sells footwear, apparel and accessories through wholesale and direct-to-consumer (DTC) channels, under UGG, HOKA, Teva, Sanuk and other brands. The business is seasonal. Unless otherwise stated, dollar amounts below are rounded to millions.
Financial performance
- Net sales: $283.2 million, up 2.3% year over year (2.8% on a constant-currency basis). Total pairs sold declined 9.8%, to 5.5 million.
- Channel mix: DTC sales rose 74.2% to $139.8 million; wholesale sales fell 27.1% to $143.3 million. DTC growth reflected strong e-commerce, partly offset by store closures.
- Brand sales: HOKA increased 37.1% to $109.0 million. UGG declined 10.0% to $124.7 million; Teva fell 7.9% to $35.2 million; Sanuk fell 29.2% to $13.2 million; other brands declined 48.3% to $0.9 million.
- Profit and margins: Gross profit was $142.6 million and gross margin was 50.3%, versus 47.0%. Operating loss narrowed to $7.7 million from $31.4 million. Net loss was $8.0 million, or $0.28 per diluted share, versus $19.4 million, or $0.67 per share.
- Expenses and unusual items: SG&A decreased 6.9% to $150.3 million. The quarter included $2.7 million of operating-lease and other long-lived-asset impairment charges related to early store closures, and higher bad-debt expense reflecting increased risk of wholesale customer defaults.
- Cash flow: Operating activities provided $21.2 million, compared with $46.6 million used in the prior-year quarter. Investing used $9.2 million, primarily reflecting capital expenditures; financing provided $0.003 million, versus $32.8 million used, including prior-year share repurchases. Cash and equivalents ended at $661.9 million.
- Balance sheet and liquidity: Current assets were $1,289.8 million and current liabilities $395.0 million. Inventory was $435.0 million, up from $311.6 million at March 31, 2020. The company reported $469.7 million of available borrowing capacity across revolving facilities, with no revolver borrowings. Mortgage principal was $30.7 million; the company was in compliance with debt covenants. Management cited liquidity of more than $1.1 billion including cash and available facilities.
Material changes and management commentary
- COVID-19 store closures and restrictions weighed heavily on wholesale sales, especially UGG, Teva and Sanuk. DTC e-commerce demand was strong, particularly for UGG and HOKA, while retail-store closures reduced in-store sales.
- About 20% of global company stores were open throughout the quarter; the average store was open roughly half the quarter. By July 30, about 95% were open, generally with limited operations. Civil unrest damaged some stores, and three were identified for permanent closure.
- Gross margin improved with a favorable shift toward DTC, lower wholesale closeout sales and favorable HOKA mix, partly offset by higher freight costs. Operating loss improved as sales and margins increased and SG&A declined.
- DTC operating income was $31.0 million versus a $4.6 million loss. HOKA wholesale operating income increased to $17.2 million. UGG wholesale shifted to a $3.7 million operating loss from $9.4 million income.
- Management said e-commerce growth in the quarter was not expected to persist at the same rate for the full year or offset typical peak-season UGG sales weakness across wholesale and retail. Wholesale order cancellations were expected to exceed reorders, and the company anticipated a competitive UGG peak season with greater promotional activity.
Outlook, risks and contingencies
The filing provides no numerical earnings or sales guidance. Management said the pandemic’s duration and financial impact were highly uncertain, while expressing confidence in the company’s liquidity and ability to meet working-capital needs for at least 12 months. It planned to preserve liquidity through expense controls and a temporary pause in share repurchases; no shares were repurchased during the quarter.
- Key risks include renewed store closures, weaker consumer spending and confidence, wholesale cancellations or customer defaults, and uncertainty around peak-season demand.
- Reduced-capacity distribution operations and third-party logistics providers faced shipping delays, staffing constraints and higher safety and payroll costs, creating potential fulfillment and lost-sales risks.
- The company reported some sourcing-capacity constraints but no major manufacturing disruption at the time of filing. Production is concentrated among independent manufacturers, primarily in Asia; most UGG sheepskin is sourced through two Chinese tanneries.
- Unrecognized tax benefits, including related penalties and interest, increased by $1.0 million to $18.7 million. No material changes to previously disclosed legal proceedings or risk factors were reported; management did not expect pending proceedings in aggregate to materially affect the company.
Important facts for investors to verify
- Whether strong e-commerce demand can continue and offset weaker wholesale and physical-store sales, especially during UGG’s peak season.
- Whether wholesale order cancellations, bad-debt exposure and customer concentration worsen; one customer exceeded 10% of quarterly sales and one exceeded 10% of receivables.
- Whether inventory growth, distribution constraints and shipment timing affect cash conversion, fulfillment and gross margin.
- Whether the company maintains its stated liquidity and covenant compliance as pandemic-related uncertainty evolves.