Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended June 30, 2015; unaudited. Comparisons are with the three months ended June 30, 2014 unless otherwise noted. Deckers designs, markets and distributes footwear, apparel and accessories, including UGG, Teva and Sanuk. Results are seasonal: UGG sales are concentrated in the September and December quarters, while Teva and Sanuk are strongest in the March and June quarters.
Financial performance
- Sales: $213.8 million, up 1.1% reported. On a constant-currency basis, sales increased 4.5% to approximately $221 million. International sales were 37.1% of total sales; constant-currency international sales increased 9.1%.
- Gross profit and margin: $86.6 million and 40.5%, compared with $86.8 million and 41.0%. Management attributed the margin decline primarily to about 200 basis points of foreign-exchange pressure, partly offset by a higher DTC sales mix.
- Operating results: Operating loss was $63.7 million, versus $50.5 million. SG&A rose 9.5% to $150.3 million; operating margin was negative 29.8%, compared with negative 23.9%.
- Net results: Net loss was $47.3 million, or $1.43 per diluted share, versus a $37.1 million loss, or $1.07 per share. The effective tax rate was 26.8%; the quarter included a $17.4 million income-tax benefit.
- Sales mix: UGG total sales fell 7.2% to $114.5 million; Teva rose 6.8% to $41.9 million; Sanuk fell 7.0% to $33.5 million; and other brands increased 85.6% to $23.9 million, primarily reflecting Hoka. DTC sales increased 5.2% to $60.4 million, while comparable DTC sales were flat on a constant-currency basis.
- Cash flow: Operating cash used was $27.0 million, compared with $65.0 million used. Investing cash used was $23.5 million, including capital spending and the Koolaburra asset acquisition. Financing cash used was $7.7 million, including $45.4 million of share repurchases, partly offset by $38.0 million of short-term borrowings. Ending cash was $168.7 million, down from $225.1 million at March 31, 2015.
- Balance sheet and liquidity: Total assets were $1.253 billion and stockholders’ equity was $847.9 million. Current assets were $760.9 million against current liabilities of $338.2 million. Inventory increased to $373.6 million from $238.9 million. Short-term borrowings and current mortgage payable totaled $43.4 million; long-term mortgage payable was $33.0 million. The company reported $38.0 million outstanding under its main credit agreement and approximately $361.9 million of unused capacity at June 30. It was in compliance with covenants.
Material changes and management commentary
- Reported sales growth was modest, with currency effects reducing the reported result; unit volume across all brands declined 1.7% to approximately 5.8 million pairs. Growth in other brands, DTC and Teva was partly offset by lower UGG and Sanuk wholesale sales.
- Operating loss widened mainly because of higher SG&A: increased marketing and promotions (about $4 million), distribution-center costs (about $3 million), DTC costs related to new stores (about $3 million), and increased receivables allowances (about $3 million).
- In the first quarter, Deckers combined retail and E-Commerce into one Direct-to-Consumer reporting segment to reflect its omni-channel strategy; prior periods were adjusted for presentation, with no effect on consolidated sales or operating income.
- The company acquired inventory and certain Koolaburra intangible assets in April 2015. After quarter-end it sold MOZO assets, including the trade name, and continued to pursue strategic alternatives for TSUBO; management said the financial statement impacts were not material.
Outlook, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $51–$56 million, including investments in technology, DTC expansion and the Moreno Valley distribution center. It stated that available cash, internally generated funds and credit facilities should cover liquidity needs for at least the next 12 months.
- Management anticipated an approximately 27% effective tax rate for fiscal 2016. Approximately $127 million of cash held outside the U.S. could incur additional tax if repatriated; management expected those earnings to remain invested abroad indefinitely.
- Subsequent to June 30, the company borrowed $64 million under its main credit agreement, bringing its outstanding balance to $102 million through August 10, 2015, and repaid approximately $4.9 million under its China facility.
- The Sanuk acquisition’s contingent consideration was estimated at $23.3 million, with no contractual maximum and a payment based on 40% of 2015 Sanuk gross profit. Management noted that a 5% change in its estimated sales-growth assumption could change the liability by about $2 million. Hoka contingent consideration was approximately $1.5 million.
- Key risks include seasonality and weather-sensitive demand, foreign-exchange movements, sheepskin supply and pricing, concentrated sourcing from independent manufacturers and suppliers, inventory management, customer credit and collection, and the success of brand and DTC growth initiatives. A 10% currency-rate change was estimated to change derivative fair value by approximately $8 million. Management reported no material change to the risk factors in its latest annual report.
- Legal matters were described as arising in the ordinary course; management did not expect pending proceedings in aggregate to materially affect the company. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether the seasonal build in inventory converts into sales and cash collections in the September and December quarters.
- Whether UGG and Sanuk wholesale trends improve, and whether Hoka and other-brand growth can be sustained.
- Whether currency effects, gross-margin pressure and elevated SG&A continue to weigh on profitability.
- How the $102 million post-quarter main-facility borrowing, planned capital spending and remaining share-repurchase authorization affect liquidity and leverage.
- Whether the Sanuk contingent-consideration estimate, customer receivables exposure and sheepskin sourcing assumptions change materially.