Deckers Outdoor Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016, filed May 31, 2016. Although the request metadata refers to “2015 Q4,” this filing reports FY2016; the filing also provides results for the quarter ended March 31, 2016. Dollar figures below are in millions unless stated otherwise.
Business context
Deckers designs, markets and distributes footwear, apparel and accessories, primarily under UGG, Teva, Sanuk, Hoka, Ahnu and Koolaburra. Products are made by independent contractors, primarily in Asia. Sales are through wholesale and direct-to-consumer (DTC) channels; UGG is the largest brand. The business is seasonal and exposed to weather, consumer demand, foreign exchange and fashion trends.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $1,875.2 | $1,817.1 | +3.2% |
| Gross profit / margin | $846.7 / 45.2% | $878.1 / 48.3% | Margin down 3.1 percentage points |
| Operating income / margin | $162.1 / 8.7% | $224.4 / 12.3% | Down 27.8% |
| Net income | $122.3 | $161.8 | Down 24.4% |
| Diluted EPS | $3.70 | $4.66 | Down 20.6% |
| Operating cash flow | $125.6 | $169.7 | Down $44.1 |
Sales growth reflected higher DTC, other-brand, UGG wholesale and Teva wholesale sales, partly offset by lower Sanuk wholesale sales. DTC revenue grew 4.4% to $644.3 million; constant-currency comparable DTC sales fell 1.0%, with weaker retail-store results partly offset by e-commerce growth. International sales were 35.0% of total sales and grew 0.6% reported, or 8.2% in constant currency.
Gross-margin pressure came primarily from currency effects, increased promotions, restructuring and closeout sales; improved sheepskin costs partly offset the decline. Warmer-than-usual fall and holiday weather weakened sell-through and prompted UGG promotions. Increased store impairments and restructuring costs also weighed on profitability.
FY2016 fourth-quarter net sales were $378.6 million versus $340.6 million a year earlier. The quarter recorded a net loss of $23.7 million versus net income of $1.4 million; operating loss was $27.9 million. The quarter included approximately $25 million of restructuring charges.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $246.0 million at March 31, 2016, up from $225.1 million. Working capital was $547.3 million; current assets were $785.8 million and current liabilities $238.5 million.
- Inventory increased to $299.9 million from $238.9 million. Inventory turnover declined to 2.7 times from 2.9 times; wholesale receivables turnover declined to 6.8 times from 7.2 times.
- Reported short-term borrowings were $67.5 million, including $53 million drawn on the domestic revolving facility and approximately $14 million under the China facility. Long-term mortgage payable was $32.6 million; total debt was approximately $100.1 million. The domestic facility had $346.3 million of unused availability, net of letters of credit. The company reported covenant compliance.
- Operating cash flow was $125.6 million; investing cash outflow was $67.2 million and financing cash outflow was $36.3 million. Operating cash flow fell mainly due to working-capital increases, including inventory and receivables, and lower net income.
- Operating lease obligations totaled $315.4 million and purchase obligations $990.9 million, much of the latter reflecting open orders expected to be paid within a year. These commitments are not equivalent to funded debt.
Material changes, outlook and risks
- In February 2016, Deckers announced store-fleet optimization and office consolidation. It had identified 24 stores as candidates for closure or relocation and reorganized brands into Fashion Lifestyle and Performance Lifestyle groups. It also acquired Koolaburra in April 2015 and sold the MOZO and TSUBO assets; those sales were not material.
- FY2016 restructuring and related charges were approximately $25 million, including lease termination, severance, asset and software impairments, and contract termination. Management expected another $10–15 million of similar charges in FY2017, annualized expense savings of $30–35 million, and completion of most activity by FY2017. Management cautioned that savings may be offset by other SG&A increases.
- The worldwide ERP upgrade went live in April 2016. Successful implementation of the broader Business Transformation Project and disruption to systems and operations remain risks.
- Management estimated FY2017 capital expenditures of $60–65 million. The filing does not provide a clear consolidated revenue or earnings forecast.
- Principal risks include warm or otherwise unfavorable weather, fashion and demand shifts, promotional pressure, foreign-exchange movements, reliance on a limited number of sheepskin suppliers and manufacturers, inventory and customer-credit risks, changing retail traffic, and execution of restructuring and systems initiatives. Approximately 23.0% of FY2016 pretax earnings came from a jurisdiction with no corporate income tax; $233 million of cash was held outside the U.S., and repatriation could trigger additional taxes.
- The five largest customers represented 21.9% of FY2016 sales. No individual customer exceeded 10% of sales, but one customer represented 12.8% of net receivables at year-end.
Most important facts for investors to verify
- Whether sales, gross margin and operating performance recover from FY2016’s currency, weather and promotional pressures.
- Inventory quality and sell-through, receivables collections, and the sustainability of operating cash flow.
- Actual restructuring costs and realized savings versus the stated $10–15 million additional-cost and $30–35 million annualized-savings estimates.
- Whether the ERP and supply-chain transformation operates reliably, and whether planned store closures improve DTC economics.
- Debt and liquidity trends, including subsequent revolver borrowing: the domestic facility balance was $113 million at May 31, 2016, and the China facility balance was $9.2 million.
- The effects of foreign currency, overseas cash and potential repatriation taxes, and supplier concentration in sheepskin and Asian manufacturing.