Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017. The filing was submitted February 9, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Net sales | $810.5 million | $760.3 million | $1,502.7 million | $1,420.7 million |
| Gross margin | 52.2% | 50.5% | 49.2% | 47.6% |
| Operating income | $193.2 million | $53.3 million | $204.3 million | $29.0 million |
| Net income | $86.3 million | $41.0 million | $93.8 million | $21.4 million |
| Diluted EPS | $2.69 | $1.27 | $2.91 | $0.66 |
Third-quarter sales rose 6.6% year over year, while nine-month sales increased 5.8%. Management attributed the gains to UGG wholesale, Hoka and other-brand growth, and DTC growth. International sales grew 14.0% in the quarter and 13.4% for the nine-month period. Gross-margin improvement reflected lower input costs, supply-chain initiatives and more full-price selling; favorable currency effects also helped the quarter.
Third-quarter DTC sales increased 2.7%, with comparable DTC sales up 1.7% on a constant-currency basis. E-commerce growth was partly offset by weaker store sales and discounting through UGG Closet. For the nine months, DTC sales increased 4.3% and comparable DTC sales rose 3.9% on a constant-currency basis.
Operating income and net income comparisons were substantially affected by approximately $118 million of Sanuk goodwill and patent impairment charges, together with other impairment and restructuring costs, recorded in the prior-year period. Current-period operating results also included higher performance-based compensation and proxy-contest-related professional and legal costs.
Cash flow, balance sheet and capital
- Cash and cash equivalents: $493.0 million at December 31, 2017, compared with $291.8 million at March 31, 2017.
- Operating cash flow: $253.1 million for the nine months, versus $168.1 million a year earlier. Investing cash outflow was $21.4 million, principally capital expenditures; financing cash outflow was $32.6 million. Capital expenditures were $21.4 million. Operating cash flow less capital expenditures was approximately $231.7 million, a derived measure.
- Liquidity: Current assets were $1,184.9 million and current liabilities were $364.8 million at quarter-end. Management said cash, operating cash generation and available credit were expected to cover working-capital needs for at least the next 12 months.
- Debt: No outstanding borrowings under the domestic, China or Japan revolving facilities; approximately $32.2 million remained on the headquarters mortgage. The company reported compliance with debt covenants. Revolving credit availability was approximately $494.3 million in total, subject to facility terms.
- Working capital: Inventory was $396.3 million and trade receivables were $232.6 million at December 31. Inventory and receivables increased from March 31, consistent in part with seasonal and growth-related needs.
- Share repurchases: The company repurchased $24.7 million of stock during the nine months and authorized a new $335 million program in October 2017. It reported an additional $20.2 million of repurchases after quarter-end through February 7, 2018.
Material changes, outlook and risks
- Tax reform: The Tax Cuts and Jobs Act drove provisional tax charges, including approximately $52.8 million related to deemed repatriation of accumulated foreign earnings and approximately $13.4 million to remeasure deferred tax assets and liabilities. The nine-month effective tax rate was 53.8%, compared with 12.5% in the prior year. Estimates remained provisional and subject to change.
- Cash repatriation: Approximately $399.1 million of cash was held outside the U.S. Management was authorized to repatriate up to $250 million before fiscal year-end, with possible additional foreign withholding and state taxes.
- Transformation plans: Management targeted approximately $150 million in annual gross cost savings by fiscal year-end 2020: approximately $85 million from restructuring and $65 million from operating-profit improvement initiatives. It said roughly $45 million of restructuring-related annualized SG&A savings had been realized and approximately 80% of expected cost-of-sales improvements had been achieved. The company estimated these initiatives could deliver approximately $100 million of net annualized operating-profit improvement after reinvestment. Timing and realized savings were uncertain.
- Retail footprint: The company had 168 owned stores at December 31 and described approximately 125 worldwide owned stores as its target. It expected to continue closures or conversions, generally as leases expire, while seeking to limit termination costs. It reported 27 closures since the restructuring plan began.
- Operating risks: Results are seasonal and weather-sensitive; management said favorable U.S. Northeast weather benefited the quarter. Other risks include the shift from stores to online shopping, foreign-exchange volatility, reliance on a limited number of Asian manufacturers and sheepskin suppliers, and inventory and receivables management. One customer represented 20.6% of net receivables at quarter-end, though no customer accounted for 10% or more of sales.
- Legal and other contingencies: The company said ordinary-course litigation was not expected to have a material overall impact. It highlighted an ongoing UGG trademark and patent dispute with Australian Leather; an adverse ruling invalidating the UGG trademark could materially harm the business, and the company could not estimate a loss range. It also disclosed approximately $77.2 million of future minimum lease commitments for its expanded and extended Moreno Valley warehouse lease, plus approximately $11.7 million of material future capital commitments.
- Formal guidance: The filing provides cost-savings targets and a capital-expenditure estimate of approximately $17–18 million for the remainder of fiscal 2018, but no clear full-year revenue or EPS guidance.
Most important facts for investors to verify
- How much of reported earnings improvement reflects underlying operating performance versus prior-year impairment comparisons, and how the unusually high tax expense affects full-year earnings.
- Whether the company realizes the stated cost savings and operating-profit improvement by fiscal 2020, including the costs and timing of store closures and conversions.
- The pace and profitability of UGG, Hoka and E-commerce growth, alongside Sanuk trends, discounting and the balance between wholesale and DTC channels.
- Final tax-reform accounting, actual repatriation amounts and any additional tax or withholding costs.
- Progress on the Australian Leather litigation, foreign-exchange exposure, supplier concentration and the customer receivable concentration.