Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016, corresponding to fiscal 2017 Q2 and first half. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context and results
Deckers designs, markets and distributes footwear, apparel and accessories, primarily under UGG, Teva and Sanuk, with Hoka, Ahnu and Koolaburra among its other brands. It sells through wholesale and direct-to-consumer (DTC) channels, and uses independent manufacturers. Sales are seasonal: UGG is strongest in the fall and winter quarters.
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Six months ended Sep. 30, 2016 | Six months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Net sales | $485.9m | $486.9m | $660.3m | $700.7m |
| Gross profit / margin | $216.4m / 44.5% | $214.1m / 44.0% | $292.7m / 44.3% | $300.7m / 42.9% |
| Operating income (loss) | $54.0m | $51.2m | ($24.3m) | ($12.5m) |
| Net income (loss) | $39.3m | $36.4m | ($19.6m) | ($11.0m) |
| Diluted EPS | $1.21 | $1.11 | ($0.61) | ($0.33) |
Second-quarter sales were nearly flat year over year, while net income rose 8%. Gross margin improved in both periods, primarily from lower material costs and improved closeout margins. For the first half, sales declined 5.8% and the net loss widened; higher gross margin did not offset lower sales and higher SG&A.
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $110.0m, down from $246.0m at March 31. Inventory was $578.0m (versus $299.9m) and receivables were $300.2m (versus $160.2m), reflecting seasonal inventory buildup and working-capital needs.
- Short-term borrowings were $278.0m, compared with $67.5m at March 31; mortgage payable was $32.4m. Total current liabilities were $545.9m and total stockholders’ equity was $957.3m.
- For the six months, operating cash flow was negative $289.6m, investing cash flow was negative $31.6m, and financing cash flow was positive $188.3m. Operating cash use improved from $328.4m in the comparable period, mainly due to changes in inventory and receivables.
- At September 30, approximately $144.4m remained available under the domestic credit facility; the China facility was fully drawn and the Japan facility had no borrowings. The company reported covenant compliance and said available cash, operating cash flow and credit facilities should cover needs for at least 12 months.
Material changes and operating drivers
- First-half UGG sales fell 5.9%, Teva fell 13.4%, and Sanuk fell 10.2%; other-brand sales increased 8.0%, supported by Hoka and Koolaburra. Wholesale sales declined 6.8%, while DTC sales declined 1.9%.
- International sales declined 9.9% in the first half, compared with a 3.3% decline in U.S. sales. European wholesale orders were deferred to the third quarter during a transition to a new logistics provider; currency movements also weighed on reported sales.
- Management attributed first-half sales weakness partly to shipment timing around the Business Transformation Project and lower footwear pair volumes. First-half comparable DTC sales declined 4.8% on a constant-currency basis, with weaker retail-store sales partly offset by e-commerce growth.
- Second-quarter UGG wholesale sales were down 2.0%; total UGG sales were down 2.1%. Other brands’ second-quarter sales rose 23.3%, while Teva total sales declined 4.2%.
Outlook, risks and unusual items
- No specific full-year sales or earnings guidance is stated in the provided filing text. Management expects liquidity to be adequate for at least the next 12 months, subject to operating and market risks.
- The retail and office restructuring had incurred approximately $27.4m of charges through September 30; $3.6m remained accrued. Ten of 24 stores identified as potential closure candidates had closed. Management expected an additional $7m–$12m of similar restructuring costs in the remainder of fiscal 2017.
- The worldwide ERP upgrade went live in April 2016 and implementation remained ongoing. Management cited shipment timing effects and project-related expenses.
- Management warned that the annual Sanuk goodwill impairment analysis was underway and could result in an impairment charge. Sanuk goodwill was $113.9m of the company’s $127.9m total goodwill.
- Key business risks include weather-sensitive and seasonal demand, changing retail traffic and shopping behavior, foreign-exchange movements, sheepskin supply and cost volatility, and concentration in independent Asian factories and select material suppliers. A 10% foreign-exchange-rate change was estimated to move the fair value of financial instruments by approximately $10m.
- The company reported no material litigation outcome expected, no off-balance-sheet arrangements, and no material change to internal control over financial reporting during the quarter. It had $5m of material capital-expenditure commitments and estimated fiscal 2017 capital expenditures of $23m–$28m.
Important facts for investors to verify
- Whether deferred European orders shipped as expected and whether the new logistics provider and ERP transition caused further disruption.
- Progress on store closures, restructuring costs versus the $7m–$12m estimate, and the expected benefits of the reorganization.
- Results of the Sanuk goodwill impairment test and developments in Sanuk’s operating performance.
- Inventory conversion, receivables collection and seasonal borrowing needs, including available credit capacity and covenant compliance.
- Whether e-commerce growth can offset weaker store traffic and whether margin gains from lower material costs persist.