DECK

Business Context and Reporting Period

Company: Deckers Outdoor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Deckers is a designer, producer, and brand manager of footwear, operating three primary brands: Teva (sport sandals), UGG (luxury sheepskin), and Simple (sustainable footwear). The company sells through wholesale channels and a Consumer Direct division (internet, catalog, and retail stores). The business is seasonal, with Teva sales peaking in Q1/Q2 and UGG sales peaking in Q3/Q4.

Key Financial Metrics

Note: Debt figures reflect no outstanding borrowings under the revolving credit facility as of March 31, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 29.6% year-over-year, driven by a 62.1% surge in UGG wholesale sales, an 11.5% increase in Teva wholesale sales, and a 69.7% jump in Consumer Direct sales.
• Profitability: Income from operations rose 70.2% to $15.18 million. Net income increased 71.7% to $9.70 million.
• Margins: Gross margin expanded to 46.2% from 44.1%, attributed to improved sales mix, fewer closeouts for UGG, and lower inventory write-downs. SG&A expenses as a percentage of sales decreased to 25.3% from 28.2%.
• Cash Flow: Net cash provided by operating activities was $11.69 million, slightly up from $11.56 million in the prior year. Net cash used in investing activities was $21.14 million, primarily due to net purchases of short-term investments.
• Balance Sheet: Accounts receivable decreased 26.6% to $36.4 million due to seasonality. Inventory increased 5.5% to $34.2 million to support the expanded Spring line.

Guidance, Outlook, and Risks

• Full Year 2007 Guidance: Management expects full-year sales to be approximately 25% higher than 2006. Diluted earnings per share are projected to be approximately 15% higher than 2006, excluding a non-recurring $15.3 million pre-tax impairment loss on the Teva trademark recorded in Q4 2006.
• Brand Outlook: Teva brand growth is expected to be in the mid-teens year-over-year. UGG growth is driven by expanded product lines and distribution, though management notes fashion trends can fluctuate.
• Liquidity: The company maintains a $20 million revolving credit facility with $19.95 million available. Management believes internal funds and existing credit facilities are sufficient for the next 12 months.
• Risks and Contingencies:
  • Seasonality: Significant revenue concentration in specific quarters for Teva and UGG.
  • Intellectual Property: Ongoing disputes regarding unauthorized use of Teva, UGG, and Simple trademarks and counterfeit products.
  • Supply Chain: Production is concentrated in China, Australia, and New Zealand, exposing the company to foreign currency fluctuations and import controls.
  • Tax: An IRS examination of the 2004 tax return is ongoing; management does not anticipate a material impact.

Investor Verification Checklist

• Sustainability of UGG Growth: Verify if the 62% sales increase in UGG is sustainable given the fashion-driven nature of the product and potential market saturation.
• Inventory Levels: Monitor inventory turnover and write-downs, as the company increased inventory by 5.5% in Q1 to support future sales.
• Consumer Direct Margins: Assess the profitability of the rapidly growing Consumer Direct segment, which saw operating income rise but faces higher operating costs from new retail stores.
• Intellectual Property Litigation: Review the status of trademark disputes and counterfeit product investigations, as these could materially impact brand value and sales.
• Seasonal Cash Flow: Confirm the company's ability to manage working capital requirements during the heavy inventory build-up periods for UGG (Q2/Q3) and Teva (Q4/Q1).