Deckers Outdoor Corporation — Q1 FY2019 Form 10-Q
Business context and reporting period. The filing covers the three months ended June 30, 2018, Deckers’ first fiscal quarter. Deckers designs and sells footwear, apparel and accessories under UGG, HOKA, Teva, Sanuk and other brands through wholesale and direct-to-consumer (DTC) channels. Results are seasonal; this quarter is not necessarily indicative of full-year performance. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $250.6 | $209.7 |
| Gross profit / gross margin | $115.0 / 45.9% | $90.6 / 43.2% |
| SG&A | $154.4 | $146.9 |
| Operating loss / operating margin | $(39.4) / (15.7)% | $(56.3) / (26.8)% |
| Net loss | $(30.4) | $(42.1) |
| Basic and diluted loss per share | $(1.00) | $(1.32) |
| Operating cash flow | $8.1 | $(7.3) |
| Capital expenditures | $7.3 | $3.8 |
Sales increased 19.5% (17.6% on a constant-currency basis). Wholesale sales rose 22.9% and DTC sales rose 12.0%; comparable DTC sales increased 6.2% on a constant-currency basis. UGG sales grew 18.9% and HOKA sales grew 53.1%; Sanuk sales declined 6.6%. Gross margin improved primarily on favorable foreign exchange, better full-price selling and lower input costs. SG&A increased 5.1%, reflecting compensation, marketing, foreign-currency and warehouse costs, partly offset by lower professional fees, bad debt and impairment costs.
Operating cash flow improved year over year, mainly due to working-capital timing and a smaller loss after non-cash adjustments. Higher accounts payable and accrued expenses supported cash generation, partly offset by higher receivables and inventory. Cash and cash equivalents were $417.9 at June 30, 2018, versus $430.0 at March 31, 2018; inventory was $435.6 versus $299.6, reflecting seasonal stocking. Total assets were $1,386.7 and stockholders’ equity was $902.2.
Debt consisted principally of a $31.9 mortgage balance, including $0.6 classified as short-term; the mortgage bears fixed interest of 4.928% and includes a stated $23.7 balloon payment at maturity in 2029. There were no borrowings under the revolving facilities at quarter-end, and the company was compliant with debt covenants. Available borrowing capacity was about $399.5 domestically, plus $45.3 in China and $49.7 in Japan; the China and Japan facilities are uncommitted. The company stated that cash, operating cash flow and available facilities should meet working-capital needs for at least 12 months.
Changes, outlook and key risks
- Restructuring and savings: Deckers had realized approximately $57 of its targeted $85 in annualized SG&A savings by June 30, 2018, and expected about $28 more by March 31, 2020. Separately, operating-profit improvement initiatives target approximately $150 in gross annualized savings and cost-of-sales improvements, translating to about $100 in net annualized operating-profit improvement after reinvestment, by March 31, 2020. These are targets, not guarantees; timing and amounts remain uncertain.
- Capital spending and stores: Management estimated remaining FY2019 capital expenditures of $28–$33. Deckers had 160 company-operated stores worldwide and continued to target approximately 125; it closed six and opened one concept store in the quarter. It did not anticipate material future restructuring charges, though store optimization remains ongoing.
- Capital allocation: The company repurchased $10.0 of shares during the quarter. From July 1 through August 3, it repurchased a further $33.1. The board-authorized remaining amount was $207.5 as of August 3.
- Accounting and tax items: Deckers adopted the new revenue standard on April 1, 2018, using the modified retrospective method. Certain wholesale and e-commerce revenue is now recognized at shipment rather than delivery; opening retained earnings increased by approximately $1.0 after tax. Comparative periods were not restated, which limits direct comparability. The company also recorded a $0.5 reduction in provisional state tax expense related to tax reform and expected to finalize provisional tax estimates by December 31, 2018.
- Risks and contingencies: Results remain exposed to seasonality and weather, changing shopping patterns, foreign exchange, customer credit and inventory management, and dependence on a limited number of Asian manufacturers and key sheepskin suppliers. Two customers represented 25.8% of net receivables at quarter-end. In pending litigation, Australian Leather challenges UGG trademark and design-patent rights; Deckers says it believes the counterclaims lack merit but cannot estimate a possible loss. The filing reports no material change to previously disclosed risk factors.
No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management’s stated liquidity outlook and cost-savings targets are forward-looking and subject to risks.
Important facts for investors to verify
- Whether sales growth and gross-margin improvement persist beyond the seasonally weaker first quarter, particularly for UGG and HOKA.
- Progress toward restructuring and operating-profit improvement targets, including the costs and timing of store closures and transformation initiatives.
- Inventory growth and the extent to which quarter-end operating cash flow benefited from payment timing and higher payables.
- The effects of the new revenue-recognition policy on period-to-period comparisons, and final tax-reform adjustments.
- Developments in the UGG intellectual-property litigation, foreign-exchange exposure, and the company’s post-quarter share repurchases.