Business context and reporting period
Deckers Outdoor Corporation’s fiscal second quarter and first half ended September 30, 2020. The company designs and sells footwear, apparel, and accessories under UGG, HOKA, Teva, Sanuk, and Koolaburra, through wholesale and direct-to-consumer (DTC) channels. The business is seasonal, and results remain subject to substantial COVID-19 uncertainty. Unless indicated otherwise, dollar amounts below are rounded to millions.
Financial performance and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $623.5 | $542.2 | $906.7 | $819.0 |
| Gross profit / margin | $319.0 / 51.2% | $273.0 / 50.4% | $461.5 / 50.9% | $403.0 / 49.2% |
| Operating income / margin | $128.6 / 20.6% | $97.1 / 18.0% | $120.9 / 13.3% | $65.7 / 8.0% |
| Net income | $101.6 | $77.8 | $93.6 | $58.5 |
| Diluted EPS | $3.58 | $2.71 | $3.30 | $2.01 |
- Q2 sales rose 15.0%; first-half sales rose 10.7%. First-half sales grew 10.3% on a constant-currency basis.
- Q2 total DTC sales increased 74.2% to $171.9 million; wholesale sales increased 1.8% to $451.6 million. HOKA sales grew strongly, while UGG wholesale sales declined.
- First-half operating cash flow was negative $16.0 million, versus negative $216.2 million a year earlier. Investing cash outflow was $13.3 million; financing provided $3.8 million. Cash declined by $23.0 million to $626.4 million.
- At September 30, current assets were $1,499.7 million and current liabilities were $503.8 million. Inventory was $484.1 million, up from $311.6 million at March 31; receivables were $326.3 million, up from $185.6 million.
- Debt included $10.0 million of short-term borrowings and $29.9 million of mortgage payable. The $400 million primary revolver had no borrowings and $399.5 million available; total available borrowing across facilities was $462.6 million. The company reported compliance with debt covenants.
Material changes versus prior comparable periods
- Q2 growth reflected HOKA wholesale sales and broad DTC growth, partly offset by a 12.1% decline in UGG wholesale sales. HOKA total sales increased 83.2% and UGG total sales increased 2.5%.
- For the first half, DTC sales increased 74.2% to $311.8 million, while wholesale sales fell 7.1% to $594.9 million. HOKA total sales rose 59.9%; UGG total sales slipped 0.7%, with UGG wholesale down 19.6%.
- Gross margin improved in both periods, mainly from higher DTC mix and favorable HOKA brand mix. SG&A increased 8.2% in Q2; for the first half it was broadly flat year over year, with higher credit-loss allowances, DTC selling costs, marketing, and warehouse costs offset by lower travel, occupancy, and other costs.
- First-half net income increased despite the first-quarter loss; Q2 profitability more than offset it. The effective tax rate was 21.9% for the first half versus 13.5% a year earlier, partly reflecting a prior-year state tax audit benefit.
- First-half operating cash use improved substantially year over year, but remained negative as seasonal working-capital needs absorbed cash. Management attributed the comparison partly to more disciplined inventory purchasing.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said liquidity should be sufficient to meet working-capital needs and debt obligations for at least 12 months, while emphasizing that the pandemic’s duration and effects cannot be reliably predicted.
- Management expected some store closures or operating limits in the third fiscal quarter and warned that e-commerce growth rates were unlikely to persist at first-half levels or necessarily offset weaker UGG wholesale demand. Approximately 95% of global stores were open throughout Q2, generally with capacity limits.
- Distribution-center, third-party logistics, carrier, and sourcing constraints could disrupt shipments and peak-season sales. The company cited staffing challenges, potential shipping delays, and the possibility of lost sales or customer harm.
- The company deferred deposits on expired sheepskin supply agreements. Remaining minimum commitments were about $48 million at September 30, expected to fall to approximately $25–$35 million by April 1, 2021; payment was expected in Q1 FY2022.
- Two customers individually accounted for more than 10% of receivables at September 30, compared with none at March 31. The company increased its allowance for doubtful accounts amid heightened wholesale-customer default risk.
- Australian Leather appealed judgments upholding the UGG trademark. Deckers believes the appeal lacks merit, but an invalidation of the trademark could materially harm the business. Management believes ordinary-course legal matters are not expected to have a material aggregate impact.
- Other exposures include dependence on a limited number of manufacturers and sheepskin suppliers, commodity-price and foreign-exchange fluctuations, and pandemic-related changes in consumer demand. A hypothetical 10% currency move would change derivative fair value by approximately $7.3 million.
Important facts for investors to verify
- Whether DTC growth and improved margins can continue as pandemic-driven online demand moderates, and whether UGG wholesale demand recovers during peak season.
- Inventory quality and sell-through, receivables collectability, and the adequacy of the increased credit-loss allowance.
- Distribution and sourcing capacity, peak-season fulfillment, and progress against the deferred sheepskin commitments.
- Cash generation and liquidity as seasonal working-capital requirements evolve, including any renewed share repurchases or borrowing.
- The outcome of the Australian Leather appeal and any other material developments in trademark protection.