Deckers Outdoor Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Amounts are in U.S. dollars unless stated otherwise. The company designs and markets footwear and accessories, led by UGG and Teva. Results are seasonal: UGG sales are strongest in the third and fourth quarters, while Teva sales are strongest in the first and second quarters.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $277.9 million, up 21.7% | $570.9 million, up 22.7% |
| Gross profit / margin | $131.0 million / 47.1%, versus 42.9% | $269.6 million / 47.2%, versus 42.5% |
| Operating income / margin | $66.3 million / 23.9%, up 24.9% | $108.4 million / 19.0%, up 43.3% |
| Net income attributable to Deckers | $42.1 million, up 24.6%; diluted EPS $1.07 versus $0.86 | $69.0 million, up 40.7%; diluted EPS $1.76 versus $1.24 |
- Sales mix and growth: UGG remained the largest business. UGG sales rose 20.2% in the quarter and 21.6% year to date. Teva sales rose 51.7% and 31.2%, respectively; retail-store sales rose 63.3% and 64.5%. International sales grew 48.2% in the quarter and 43.9% year to date, reaching 26.3% and 32.2% of total sales, respectively.
- Cash flow: Net cash used in operating activities was $61.9 million for the nine months, compared with $34.4 million used in 2009. Investing activities provided $6.4 million; financing activities used $9.9 million. Cash and cash equivalents ended the period at $250.5 million, down from $315.9 million at December 31, 2009.
- Liquidity and debt: Current assets were $607.9 million and current liabilities $126.8 million; working capital was $481.1 million. No borrowings were outstanding under the $20 million Comerica credit facility; $19.2 million remained available after letters of credit. The facility expires June 1, 2012. The company reported covenant compliance.
- Balance sheet changes: Inventory increased to $197.3 million from $85.4 million at year-end 2009, and receivables rose to $142.2 million from $76.4 million, reflecting seasonal inventory build, higher projected sales, and international growth. Total assets were $697.2 million.
Material changes and management commentary
- Sales growth was driven primarily by UGG, increased wholesale footwear volumes, Teva’s expanded direct distribution in Benelux and France, and additional retail stores. Overall footwear volume rose 18.4% in the quarter and 17.3% year to date.
- Higher gross margins reflected a greater retail-sales mix, improved initial margins, reduced Teva closeout sales, and direct distribution in Benelux. Duty refunds contributed approximately $1 million in the quarter and $7 million year to date; management did not expect refunds at those levels to recur.
- SG&A increased 44.1% in the quarter and 33.2% year to date, including costs for growth-related staffing, new stores, marketing, and international infrastructure. The nine-month 2009 comparison included a $1 million TSUBO trademark impairment; no impairment was recorded in 2010.
- Retail-store same-store sales increased 17.9% in the quarter and 23.0% year to date. Management cautioned that the growth rate from new store openings would moderate as the store base expanded.
- The company opened five stores in the quarter and had 24 worldwide at September 30. It expected further U.S. store expansion during the remainder of 2010. It also planned 2011 shifts from distributor to wholesale models in the U.K. and Benelux for specified brands.
Outlook, risks, and contingencies
- Management expected full-year 2010 gross margin to exceed 2009’s and the full-year effective tax rate to be slightly above 2009’s 36.2%. It estimated $10 million to $15 million of remaining 2010 capital expenditures, mainly for stores and technology. The filing does not provide a specific full-year sales or earnings forecast.
- Liquidity was considered sufficient for current and foreseeable needs, but management identified risks from growth, consumer preferences, collections, inventory management, credit availability, and market volatility. UGG fashion and demand, competition, and seasonality can also affect results.
- Production is concentrated among a limited number of independent manufacturers in China, with sourcing concentrated in Australia and China. Supply interruption, manufacturing costs, raw-material availability, and currency movements—including potential renminbi appreciation—could affect sales and margins. The company also cited intellectual-property enforcement and counterfeiting risks.
- Contractual obligations totaled $281.7 million, including $114.9 million of operating leases and $161.8 million of purchase obligations. The company expected it would likely need to purchase most of a remaining $5.5 million sheepskin commitment by year-end, but expected to use the material in ordinary operations. Other disclosed items included approximately $6.1 million of payments to international distributors through 2011 and an estimated $1 million of potential remaining joint-venture loans.
- The IRS was examining federal tax years 2006–2009; the timing and outcome were uncertain, and a material effect could not be determined. Management did not expect routine legal matters or state tax examinations to have a material effect. No material change to the previously disclosed risk factors was reported beyond the risks described in this filing.
- Foreign-exchange hedging contracts totaled approximately $10 million at September 30; subsequent contracts totaled approximately $61 million. The company reported a $571,000 loss on non-designated derivatives for the nine months.
Most important facts for investors to verify
- Whether seasonal fourth-quarter demand, particularly for UGG, supports the elevated inventory balance without requiring significant discounting or write-downs.
- How much reported margin improvement is repeatable after excluding duty refunds and other favorable or one-time items.
- Whether receivables and operating cash flow improve as seasonal sales are collected, given the nine-month operating cash outflow.
- Whether international expansion, new stores, and distributor-to-wholesale transitions deliver returns sufficient to offset higher SG&A and infrastructure costs.
- The outcome of the IRS examination, the sheepskin commitment, and other purchase and distribution obligations, as well as developments in China manufacturing, currency, and intellectual-property risks.