Deckers Outdoor Corporation — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2016 (fiscal 2017); comparisons are with the corresponding 2015 periods. Unaudited consolidated results. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $760.3 | $795.9 | $1,420.7 | $1,496.6 |
| Gross profit / margin | $383.6 / 50.5% | $391.0 / 49.1% | $676.3 / 47.6% | $691.7 / 46.2% |
| Operating income / margin | $53.3 / 7.0% | $202.5 / 25.4% | $29.0 / 2.0% | $190.0 / 12.7% |
| Net income | $41.0 | $156.9 | $21.4 | $146.0 |
| Diluted EPS | $1.27 | $4.78 | $0.66 | $4.40 |
| Operating cash flow | Not presented quarterly | $166.7 | $145.6 |
Quarterly sales fell 4.5%; nine-month sales fell 5.1%. Gross margin improved in both comparisons, helped by lower material costs and a higher DTC sales mix. Profitability declined sharply as SG&A rose, principally from impairment and restructuring charges. Nine-month SG&A was $647.4 million versus $501.7 million.
Sales and segment developments
- For the quarter, wholesale sales declined 12.6% to $388.6 million, while DTC sales rose 5.8% to $371.8 million. UGG wholesale sales fell 14.4%; UGG DTC increased 5.3%. Other brands’ sales increased, led by Hoka and Koolaburra.
- For the nine months, wholesale sales fell 9.4% to $904.7 million and DTC increased 3.5% to $516.0 million. UGG wholesale sales fell 10.5%; Teva and Sanuk wholesale sales also declined. Other brands increased 13.9% overall.
- Management attributed weaker wholesale results to lower UGG average selling prices, product mix and closeout sales, lower pair volumes, shipment timing, and European logistics disruption. DTC growth was led by e-commerce; comparable DTC sales rose 4.7% for the quarter and 2.2% for the nine-month period on a constant-currency basis.
Cash, debt and liquidity
- At December 31, cash and cash equivalents were $296.4 million; current assets were $968.7 million and current liabilities $327.0 million, implying working capital of approximately $641.7 million.
- Short-term borrowings were $30.2 million, comprising approximately $21 million under the China facility and $9 million under the Japan facility; there were no domestic facility borrowings. Mortgage payable was $32.2 million. The company reported compliance with borrowing covenants.
- Nine-month operating cash flow was $166.7 million; investing outflow was $36.7 million, primarily capital expenditures; financing outflow was $70.4 million. Capital expenditures were $36.7 million. Cash increased $50.5 million from March 31, 2016.
- Management stated that cash, operating cash flow and available credit were expected to meet working-capital needs for at least 12 months. As of February 9, 2017, approximately $389 million was available under the domestic facility, $22 million under the China facility, and $47 million under the Japan facility.
Material changes, outlook and risks
- Impairments: The company recorded a $113.9 million non-cash Sanuk goodwill impairment, a $4.1 million Sanuk patent impairment, and $6.0 million of retail-related impairments in the quarter. Sanuk goodwill fell to zero. Management cited lower forecast sales, reduced market multiples and more limited expansion prospects; further impairment remains possible.
- Restructuring: Approximately $32.5 million of charges had been incurred through December 31; $5.7 million remained accrued. Management anticipated about $20 million of additional similar costs in the remainder of fiscal 2017. Twelve of 24 identified candidate stores had closed; management was considering further footprint reduction and conversions to partner-operated stores.
- Operations: The worldwide ERP system went live in April 2016, with further improvement work continuing. Transition to a new European third-party logistics provider caused shipment delays and reduced European wholesale sales.
- Near-term estimates: Management estimated $11–15 million of capital expenditures for the remainder of fiscal 2017. The filing provides no consolidated sales or earnings guidance figure.
- Key risks: Seasonality and weather sensitivity; changing consumer and wholesale buying patterns; retail traffic shifts toward e-commerce; foreign-exchange movements; sheepskin supply and price exposure; customer collections and inventory management; reliance on independent Asian factories; and execution risks from restructuring, ERP and logistics transitions. One customer represented 19.7% of receivables at quarter-end, though no customer exceeded 10% of sales.
- Approximately $257.4 million of cash was held outside the United States and could be subject to additional tax if repatriated. Ordinary-course legal matters were not expected by management to have a material adverse effect. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether underlying operating performance improves when the large Sanuk and retail impairment charges and restructuring costs are excluded—and whether further impairments arise.
- Whether UGG wholesale sales, average selling prices and closeout activity stabilize, and whether DTC and e-commerce growth can offset wholesale weakness.
- Whether European logistics and ERP implementation issues are resolved without further shipment or cost disruption.
- Whether inventory turns and wholesale receivables collections recover; both turnover measures weakened year over year.
- Whether restructuring delivers expected savings and whether cash, facility availability and remaining capital spending support the business through seasonal working-capital swings.