Deckers Outdoor Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited results; amounts below are in millions of dollars unless noted. Deckers designs and sells footwear and accessories under UGG, Teva, Sanuk and other brands, through wholesale, eCommerce and company-operated stores. Results are seasonal: UGG sales are concentrated in the third and fourth quarters. Sanuk was acquired in July 2011, making year-to-date comparisons less comparable.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $376.4 | $414.4 | $797.1 | $773.4 |
| Gross profit / margin | $159.3 / 42.3% | $202.9 / 49.0% | $346.2 / 43.4% | $371.2 / 48.0% |
| Operating income / margin | $59.6 / 15.8% | $90.7 / 21.9% | $42.8 / 5.4% | $108.1 / 14.0% |
| Net income | $43.1 | $62.3 | $31.0 | $74.7 |
| Diluted EPS | $1.18 | $1.59 | $0.81 | $1.89 |
| Operating cash flow | Not presented separately | Not presented separately | $(183.4) | $(222.3) |
- Q3 sales fell 9.2% and net income attributable to Deckers fell 31.1%. UGG wholesale sales declined 15.0%, partly offset by growth in Teva and Sanuk wholesale and in eCommerce and stores.
- For the nine months, sales rose 3.1%, largely reflecting Sanuk’s inclusion for the full period in 2012 versus only from July in 2011. UGG wholesale sales declined 11.0%; retail-store sales rose 22.5% and eCommerce sales 9.0%.
- Margin pressure was substantial: management attributed lower gross margin primarily to higher sheepskin and other material costs and more discounted/closeout sales in Europe. UGG wholesale operating income fell 33.2% year to date; retail stores recorded a $10.7 million operating loss, versus $1.6 million income a year earlier.
- Q3 SG&A decreased 11.1%, including lower performance compensation, international and legal costs, partly offset by new-store expenses. Year-to-date SG&A increased 15.3%, including costs of store expansion, Sanuk, and marketing.
Cash, debt and liquidity
- At September 30, cash was $61.6 million, down from $263.6 million at December 31, 2011. Inventory was $486.2 million, up from $253.3 million; accounts receivable was $239.3 million.
- Year-to-date operating cash outflow was $183.4 million. Inventory growth used $236.1 million of cash; investing outflow was $54.8 million, including $42.0 million for property and equipment. Financing provided $35.9 million, including $275.0 million of borrowings.
- Short-term borrowings were $275.0 million at quarter-end, with a 2.0% weighted-average interest rate; cash less borrowings was approximately negative $213.4 million. The amended five-year secured revolver totals $400 million, with $124.8 million available at quarter-end. After quarter-end, the company borrowed $32 million and repaid $7 million, leaving $300 million outstanding as of the report date.
- Management reported compliance with credit covenants and expected cash, internal funds and available credit to cover liquidity needs for at least 12 months. Net working capital was $374.0 million, down from $585.8 million at year-end.
Material changes, outlook and risks
- The company repurchased approximately $184.7 million of stock during the first nine months, including $84.7 million under a $200 million program approved in June; $115.3 million remained authorized at September 30. These repurchases were funded in part by borrowings.
- Deckers acquired the remaining 49% interest in its China retail joint venture for $20 million and acquired the remaining interest in Hoka in September. Hoka was described as immaterial to the financial statements.
- Sanuk acquisition consideration remains contingent and has no maximum for specified 2012, 2013 and 2015 payments. The related estimated liability was $67.9 million; total contingent consideration liabilities, including Hoka, were $69.0 million. A $6.2 million change in fair value was recorded year to date. Management notes estimates are sensitive to forecast assumptions.
- Management expected continued gross-profit pressure through fiscal 2012, primarily from sheepskin costs, but expected sheepskin costs to decrease in 2013 versus 2012. The projected full-year 2012 effective tax rate was approximately 29.2%; no specific full-year sales or earnings guidance is stated in the provided filing text. Remaining 2012 capital expenditures were estimated at $25–30 million.
- Management cited warm weather, prior-year carryover inventory, later in-season purchasing and recessionary conditions in Europe as factors affecting UGG wholesale orders. Q3 UGG store comparable sales fell 13.1%; year-to-date comparable sales fell 2.9%.
- Key exposures include sheepskin supply and pricing, consumer demand and fashion changes, inventory management, foreign exchange, overseas manufacturing and sourcing concentration, and global economic conditions. A Delaware securities class action and shareholder derivative suits remained pending; management said it could not estimate a loss range for these matters. The IRS transfer-pricing matter was settled in October 2012, with additional tax approximating the company’s September reserves.
Important facts for investors to verify
- Whether UGG wholesale order trends, European discounting and elevated inventory improve during the peak selling season.
- Inventory quality, turnover and sell-through, given inventory’s increase and the reported decline in inventory turnover.
- Liquidity and covenant headroom as borrowings rose to $300 million after quarter-end, including the funding impact of repurchases and seasonal working capital.
- The eventual Sanuk contingent-consideration payments and the assumptions supporting the recorded fair value.
- Progress and profitability of new stores and other direct-to-consumer channels, alongside comparable-store sales.
- Developments in the pending shareholder litigation and any changes to tax, supply-chain or sheepskin-cost exposures.