Business Context and Reporting Period
Company: Deckers Outdoor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Deckers operates four reportable segments: Teva, Simple, and Ugg wholesale divisions, and a newly acquired Internet and catalog retailing business. The company designs, markets, and distributes footwear and accessories.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 |
|---|---|---|
| Net Sales | $24,894,000 | $85,338,000 |
| Gross Profit | $9,502,000 | $37,574,000 |
| Gross Margin | 38.2% | 44.0% |
| Operating Income | $1,782,000 | $14,547,000 |
| Net Income | $481,000 | $6,690,000 |
| Diluted EPS | $0.04 | $0.57 |
| Cash and Equivalents | $1,941,000 | (Balance Sheet Item) |
| Operating Cash Flow (9mo) | $2,532,000 | |
| Total Debt (Current + Long-term) | $34,556,000 | |
| Working Capital | $27,537,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 40.4% in Q3 and 16.3% for the nine-month period compared to 2002. This was driven by strong performance in the Ugg and Teva brands and the inclusion of the new Internet/catalog retail segment.
- Profitability Turnaround: The company reported a net income of $481,000 in Q3 2003, a significant improvement from a net loss of $2,547,000 in Q3 2002. The nine-month period showed net income of $6,690,000 versus a loss of $8,716,000 in 2002.
- Segment Performance:
- Ugg Wholesale: Sales increased 40.4% (Q3) and 45.5% (9mo), with operating income rising to $4,555,000 (Q3) and $4,522,000 (9mo).
- Teva Wholesale: Sales increased 39.6% (Q3) and 10.5% (9mo). Operating income improved significantly to $647,000 (Q3) and $18,677,000 (9mo), aided by the elimination of royalty expenses following the acquisition of Teva assets.
- Simple Wholesale: Sales declined 27.7% (Q3) and 32.6% (9mo), resulting in operating losses of $258,000 (Q3) and $439,000 (9mo).
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased as a percentage of sales to 31.0% (Q3) and 27.0% (9mo) from 42.2% and 38.0% in 2002, respectively. This was largely due to the elimination of $4.3 million in Teva royalty and license costs.
- Interest Expense: Net interest expense increased to $981,000 (Q3) and $3,412,000 (9mo) from net interest income in 2002, due to borrowings incurred to finance the Teva acquisition.
Guidance, Outlook, and Risks
Management Guidance
- Fiscal 2003 Full Year: Sales expected to range from $113 million to $115 million; Diluted EPS expected to range from $0.62 to $0.64.
- Q4 2003: Sales expected to range from $28 million to $30 million; Diluted EPS expected to range from $0.06 to $0.08.
- Fiscal 2004: Sales expected to range from $126 million to $132 million; Diluted EPS expected to range from $0.92 to $0.96.
Capital Actions
- Debt Repayment: The company expects to make an additional $2 million early repayment of subordinated debt in Q4 2003.
- Preferred Stock Repurchase: The company plans to repurchase $5.5 million of preferred stock in Q4 2003. This will incur a premium of approximately $425,000, expected to reduce Q4 EPS by $0.04 but improve future EPS by eliminating dilution.
- Financing: The company amended its revolving credit facility in November 2003, providing up to $20 million availability. As of Sep 30, 2003, $14.8 million was available.
Risks and Contingencies
- Seasonality: Sales are highly seasonal, with Teva peaking in Q1/Q2 and Ugg in Q4. Weather conditions significantly impact demand.
- Consumer Preferences: Rapid shifts in consumer tastes could lead to obsolete inventory and reduced sales.
- Guarantees: The company guarantees up to $1 million of an officer's bank loan and up to $450,000 of a third-party factory's payables.
- Legal Proceedings: A European anti-dumping duty matter was resolved favorably in May 2003, resulting in a $500,000 reversal of accruals. A Dutch distributor lawsuit was settled for $200,000 in Q2 2003.
Investor Verification Checklist
- Verify the sustainability of Ugg and Teva sales growth rates given the high year-over-year increases.
- Confirm the execution of the planned $5.5 million preferred stock repurchase and $2 million subordinated debt repayment in Q4 2003.
- Monitor inventory levels, particularly for the Simple brand, which continues to show declining sales and operating losses.
- Assess the impact of the new Internet/catalog retail segment on overall gross margins and operating costs.
- Review the company's ability to secure the $3.5 million increase in senior term debt required to fund the debt and equity transactions.