Business Context and Reporting Period
Company: Deckers Outdoor Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: The Company operates three strategic business units: Teva, Simple, and Ugg. The first quarter is historically a low-volume period for Ugg due to seasonality, while Teva sales are typically higher in the first half of the year.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Net Sales | $33,259,000 | $34,911,000 |
| Gross Profit | $15,114,000 | $15,734,000 |
| Gross Margin | 45.4% | 45.1% |
| Income from Operations | $3,714,000 | $4,081,000 |
| Net Income (Loss) | $(6,811,000) | $2,487,000 |
| Diluted EPS (Loss) | $(0.70) | $0.26 |
| Cash and Equivalents | $12,966,000 | $11,940,000 |
| Working Capital | $45,191,000 | N/A |
| Long-term Debt | $120,000 | N/A |
Cash Flow: Net cash used in operating activities was $2,920,000 for Q1 2002, compared to $4,491,000 provided in Q1 2001. Capital expenditures totaled $817,000.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 4.7% to $33.3 million. Teva sales dropped 2.6%, Simple sales fell 14.9% (primarily in Europe), and Ugg sales declined 32.6% (seasonal).
- Accounting Change Impact: The Company implemented SFAS 142 (Goodwill and Other Intangible Assets) on January 1, 2002. This resulted in a non-cash goodwill impairment charge of $8,973,000 (net of tax), turning a pre-change net income of $2.16 million into a net loss of $6.81 million.
- Goodwill Write-downs: The impairment included approximately $1.2 million for Simple and $7.8 million for Ugg. Consequently, Simple has no remaining goodwill, while Ugg retains approximately $6.1 million.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased 2.2% to $11.4 million, largely due to the elimination of goodwill amortization and lower bad debt expense compared to the prior year's Track 'n Trail bankruptcy charge.
- Liquidity: Cash decreased by $3.7 million during the quarter. Trade accounts receivable increased 20.8% while inventories decreased 16.7% since year-end 2001.
Guidance, Outlook, and Risks
Management Guidance
- Q2 2002 Outlook: Net sales expected to range from $18 million to $19 million; diluted EPS expected to range from $0.02 to $0.03.
- Full Year 2002 Outlook: Net sales expected to range from $90 million to $94 million. Diluted EPS before the cumulative effect of accounting change is expected to range from $0.23 to $0.26. Including the accounting change, the Company expects a net loss per share of approximately $0.66 to $0.69.
- Brand Specifics: Teva sales expected to range $60M-$62M; Simple $10M-$11M; Ugg $20M-$21M.
Risks and Contingencies
- Teva License Agreement: The Company holds a license to sell Teva footwear until 2004 (with renewal options). The agreement requires minimum annual sales of $107.9 million in 2004. The Company believes it is unlikely to achieve this level and is in discussions with the licensor. Failure to resolve this could result in the loss of the Teva brand.
- Legal Proceedings:
- Molly Strong-Butts Litigation: A judgment of approximately $2.0 million was paid in November 2001. Potential exposure for additional exemplary damages and fees remains up to $2.5 million.
- Netherlands Distributor: Litigation regarding breach of contract with potential exposure up to $500,000.
- Antidumping Duties: The Company has accrued $500,000 for potential antidumping duties on Teva footwear imported from China into Europe. If duties are applied, products may become too costly to import from China.
- Market Risks: Sales are sensitive to weather conditions, consumer preferences, and the retail environment. The Company faces risks related to California power outages affecting its distribution center.
Investor Verification Checklist
- Goodwill Impairment: Verify the impact of the $8.97 million non-cash charge on the reported net loss and confirm the remaining goodwill balance for the Ugg brand ($6.1 million).
- Teva License Status: Monitor the outcome of negotiations regarding the 2004 minimum sales requirement ($107.9 million) and the potential exercise of the option to acquire the Teva brand.
- Legal Exposure: Track the status of the remanded proceedings in the Molly Strong-Butts case regarding exemplary damages and the European antidumping duty appeal.
- Seasonality and Sales Mix: Assess the shift in sales mix toward Ugg in the latter half of the year and the performance of the new Teva fall line.
- Liquidity Position: Confirm the utilization of the new $20 million credit facility and the impact of outstanding letters of credit ($2.49 million) on available borrowing capacity.