Deckers Outdoor Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015. The company changed its year-end from December 31 to March 31; consequently, fiscal 2015 is compared below with the year ended December 31, 2013, and the periods are not aligned by calendar dates. The filing’s “2014 Q4” metadata does not describe the annual period covered by this 10-K.
Business context
Deckers designs, markets and distributes footwear, apparel and accessories, principally under UGG, Teva and Sanuk, with Ahnu, Hoka and other brands. Products are manufactured by independent contractors, primarily in Asia. Sales are made through wholesale, e-commerce and company-operated retail channels. UGG remains the dominant brand, and sales are highly seasonal and sensitive to weather.
Financial results
| Metric | FY ended Mar. 31, 2015 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $1,817.1 million | $1,556.6 million | +16.7% |
| Gross profit / margin | $878.1 million / 48.3% | $736.5 million / 47.3% | Margin +1.0 percentage point |
| SG&A | $653.7 million | $528.6 million | +23.7% |
| Operating income / margin | $224.4 million / 12.3% | $207.9 million / 13.4% | Income +7.9%; margin lower |
| Net income | $161.8 million | $145.7 million | +11.0% |
| Diluted EPS | $4.66 | $4.18 | Increased |
| Operating cash flow | $169.7 million | $262.1 million | Lower |
| Cash and cash equivalents | $225.1 million | $237.1 million at Dec. 31, 2013 | Lower |
| Working capital | $519.1 million | $508.8 million at Dec. 31, 2013 | Higher |
All amounts are in U.S. dollars. The prior-period figures are for the year ended December 31, 2013, not a matching fiscal year. Investing cash outflow was $100.6 million, including $91.1 million of property and equipment purchases; financing cash outflow was $78.3 million. Operating cash flow less capital expenditures was approximately $78.5 million.
- Sales mix and growth: UGG sales rose 15.0% to $1,493.2 million. E-commerce sales increased 37.5% to $233.1 million, retail-store sales increased 17.6% to $384.3 million, and international sales increased 26.7% to $651.7 million, representing 35.9% of total sales. The five largest customers represented 22.2% of worldwide sales; no single customer exceeded 10% of annual sales.
- Margins and expenses: Gross margin improved mainly because direct-to-consumer sales grew as a share of revenue and UGG wholesale margin benefited from the German distributor acquisition. SG&A grew faster than sales, reflecting new stores, marketing, e-commerce expansion, international infrastructure, technology and distribution costs. Retail same-store sales declined 8.4%.
- Liquidity and debt: The $400 million secured revolving facility had no borrowings at year-end and approximately $399.9 million available, subject to its terms and covenants. The China facility had approximately $4.9 million outstanding. The headquarters mortgage had an outstanding balance of approximately $33.6 million at a fixed 4.928% rate, including approximately $33.1 million classified as long-term mortgage payable. The filing reports $5.4 million of short-term borrowings on the balance sheet. Deckers reported covenant compliance.
Material changes, outlook and risks
- Sales increased across brands and channels; UGG wholesale, e-commerce and retail-store growth were significant contributors. Footwear volume rose 17.6% to approximately 30.7 million pairs, while weighted-average wholesale selling price per pair declined to $46.53 from $46.87.
- Management expects to continue expanding retail, international distribution and e-commerce, and to invest in its OmniChannel capabilities. No specific consolidated revenue or earnings guidance is provided. Fiscal 2016 capital expenditures were estimated at approximately $65–$70 million. The company planned additional store openings and further conversions of some China stores to partner-operated stores.
- Year-end wholesale and distributor backlog was approximately $609 million, versus $614 million at March 31, 2014. Orders may be cancelled, and management cautions that backlog is an imprecise indicator of annual revenue.
- Key risks include seasonal and weather-sensitive demand; dependence on UGG and fashion trends; competition and consumer preference shifts; limited sources of sheepskin and reliance on a single UGGpure supplier; manufacturing concentration in Asia; foreign-exchange exposure; and execution, cost and return risks from store and international expansion. A 10% currency-rate change was estimated to affect derivative fair value by approximately $5 million.
- Contractual obligations totaled approximately $1.10 billion, including $348.9 million of operating leases, $664.7 million of purchase obligations and $25.7 million of contingent consideration shown in the obligations table. Separately, the Sanuk contingent payment was estimated at $24.2 million and equals 40% of calendar-2015 Sanuk gross profit with no stated maximum; Hoka contingent consideration was estimated at $1.5 million.
- The company recorded no material goodwill or indefinite-lived intangible impairment; it recorded immaterial impairment losses for four retail stores. A shareholder derivative lawsuit was dismissed, with the appeal and subsequent review denied. Management stated that routine remaining legal proceedings were not expected in aggregate to materially affect the company.
- Foreign-currency translation reduced other comprehensive income by $18.9 million. Approximately $132 million of cash held outside the U.S. could be subject to additional tax if repatriated; management said it had no plans to repatriate foreign cash. The company repurchased $107.2 million of shares during fiscal 2015 and authorized a new $200 million repurchase program.
Important facts for investors to verify
- Compare fiscal 2015 with genuinely aligned periods and review the March 31, 2014 transition quarter separately; the filing’s principal annual comparison is not calendar-period aligned.
- Assess whether sales growth can translate into operating-margin improvement, given SG&A growth and the decline in retail same-store sales.
- Monitor UGG concentration, seasonal demand, weather, product mix, discounting and the continued expansion of e-commerce and international sales.
- Review inventory, purchase commitments, supplier concentration and the assumptions underlying the Sanuk contingent consideration estimate.
- Confirm future capital spending, store returns, lease commitments, cash generation and compliance with secured-credit covenants.
- Consider currency exposure, foreign cash and tax contingencies, and the effect of continuing share repurchases on cash and share count.