Deckers Outdoor Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited. Amounts below are in millions of U.S. dollars unless otherwise stated. Deckers designs and markets footwear and accessories under UGG, Teva, Sanuk and other brands; sales are seasonal, with UGG strongest in the second half of the year.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $170.1 | $174.4 | $433.8 | $420.7 |
| Gross profit / margin | $69.8 / 41.1% | $73.6 / 42.2% | $193.4 / 44.6% | $186.9 / 44.4% |
| SG&A | $112.6 | $102.3 | $233.5 | $203.6 |
| Operating loss | $(42.8) | $(28.7) | $(40.1) | $(16.8) |
| Net loss | $(29.3) | $(20.1) | $(28.3) | $(12.1) |
| Basic and diluted loss per share | $(0.85) | $(0.53) | $(0.82) | $(0.32) |
| Operating cash flow | Not separately presented for the quarter | $2.6 | $30.6 |
Q2 sales fell 2.5%, while six-month sales rose 3.1%. Q2 gross margin declined year over year; for the six-month period it was broadly stable. Higher SG&A, including costs associated with store expansion and performance-based compensation, contributed to larger operating and net losses. Six-month operating cash flow weakened substantially, while investing activities used $29.7 million, primarily for capital expenditures.
Business and balance-sheet developments
- Q2 UGG wholesale sales declined 20.7% to $62.4 million; UGG retail and eCommerce sales increased. Teva wholesale declined 9.5%, while Sanuk wholesale grew 4.0% and other-brand wholesale grew 92.0%, partly reflecting Hoka, acquired in September 2012.
- For the first six months, total eCommerce sales rose 25.7% to $37.4 million and retail-store sales rose 34.6% to $96.0 million. Retail growth largely reflected 36 stores opened since June 2012. Same-store sales were down 5.3% in Q2 but up 2.3% for the six-month period.
- At June 30, cash was $49.1 million, down from $110.2 million at year-end 2012. Inventories were $362.1 million, up 20.6% from year-end; management cited seasonal inventory needs, carryover product, and support for additional stores. Current assets were $629.1 million and current liabilities $258.0 million.
- Short-term borrowings were $26.0 million at June 30, with a 3.75% weighted-average rate. The $400 million revolving facility had $220.8 million available after applying the asset coverage ratio. After quarter-end, Deckers borrowed another $156 million; borrowings totaled $182 million through August 9. The company reported compliance with covenants.
- Six-month capital expenditures were $28.8 million. Management estimated remaining 2013 capital expenditures of $35–$40 million and expected to open approximately 36 stores during 2013, including 24 in the second half.
Outlook, risks and unusual items
- Management expected full-year 2013 gross margin to improve versus 2012, with most of the improvement in Q4, and expected lower sheepskin costs in Q4 compared with Q4 2012. These are expectations, not guarantees.
- Management expected a full-year 2013 effective tax rate of approximately 32%, versus 29.9% in 2012. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Key risks include seasonal demand, changing consumer preferences, economic weakness and customer inventory levels, slower international receivable collections, foreign-currency movements, and dependence on a limited number of factories and key sheepskin sources. Management warned that higher commodity costs may not be offset by pricing.
- Sanuk acquisition contingent consideration was estimated at $45.6 million, with payments based on gross profit and no maximum for specified 2013 and 2015 payments. Hoka contingent consideration was $1.6 million, with a $2.0 million maximum. Sanuk’s fair value depends on forecasts; management noted that a 5% change in estimated sales CAGR would change the liability by about $4 million.
- Remaining sheepskin minimum commitments, net of deposits, included $48.8 million due against a contract targeted for July 2013, $12.8 million against a September 2013 target, and $26.8 million against a September 2014 target. Deckers was discussing an extension of the first contract. Routine legal matters were not expected by management to have a material effect; shareholder litigation matters described in the filing had been dismissed, with an appeal pending in one derivative action.
- Management stated that the credit facility, cash and internally generated funds were expected to meet liquidity needs for at least 12 months. The filing cautions that actual results may differ materially from forward-looking statements.
Most important facts for investors to verify
- Whether UGG wholesale demand, customer carryover inventory and international collections improve, and whether direct-to-consumer growth offsets wholesale weakness.
- Whether Q4 sheepskin cost reductions deliver the expected full-year margin improvement, given discounting, outlet mix and other cost pressures.
- How store expansion affects profitability, cash needs and same-store sales; Q2 retail-store operations reported a $9.8 million operating loss.
- Cash generation, inventory levels and borrowing needs after the post-quarter $156 million draw, including continued compliance with credit covenants.
- Changes in Sanuk contingent consideration estimates and the timing and exposure under sheepskin commitments.