Deckers Outdoor Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017; filed May 30, 2017. The request refers to 2016 Q4, but this filing reports FY2017 and includes unaudited quarterly figures, including the quarter ended March 31, 2017. Unless stated otherwise, amounts below are USD millions.
Business context
Deckers designs, markets and distributes footwear, apparel and accessories under UGG, Teva, Sanuk, Hoka, Koolaburra and Ahnu brands. Products are made by independent manufacturers, primarily in Asia, and sold through wholesale, distributors and direct-to-consumer (DTC) retail and e-commerce channels. Business is seasonal, with UGG sales concentrated in fall and winter and Teva and Sanuk sales more concentrated in spring and summer.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $1,790.1 | $1,875.2 | -4.5% |
| Gross profit / margin | $835.2 / 46.7% | $846.7 / 45.2% | Margin +1.5 percentage points |
| SG&A | $837.2 | $684.5 | +22.3% |
| Operating income (loss) | $(1.9) | $162.1 | Down $164.0 |
| Net income | $5.7 | $122.3 | -95.3% |
| Diluted EPS | $0.18 | $3.70 | Down $3.52 |
| Operating cash flow | $198.7 | $125.6 | +$73.1 |
Sales declined mainly as UGG, Teva and Sanuk wholesale sales fell; higher DTC and other-brand sales partly offset the declines. Wholesale sales fell 8.7%, while DTC sales rose 3.4%. E-commerce growth was partly offset by lower retail-store sales. Gross margin improved on a higher DTC mix, lower material costs, product-mix changes and less promotional activity. Operating results were sharply reduced by higher SG&A, including large non-cash impairments and restructuring costs. The tax benefit of $12.7 million contributed to positive net income despite a pre-tax loss of $7.0 million.
Quarter ended March 31, 2017 (unaudited): Sales were $369.5 million versus $378.6 million in the prior-year quarter; operating loss was $30.9 million versus $27.9 million; net loss was $15.7 million versus $23.7 million; diluted EPS was $(0.49) versus $(0.73).
Liquidity, debt and other metrics
- Cash and cash equivalents were $291.8 million at March 31, 2017, up from $246.0 million. Working capital was $661.8 million; current assets were $820.8 million and current liabilities $159.1 million.
- Cash provided by operations was $198.7 million; investing activities used $44.5 million and financing activities used $103.1 million. Capital expenditures were $44.5 million.
- No borrowings were outstanding under the domestic, China or Japan revolving facilities at year-end; reported short-term borrowings were $0.5 million. Domestic facility capacity available was approximately $378 million, with further uncommitted capacity of approximately $44 million in China and $49 million in Japan.
- Mortgage principal was approximately $32.6 million, at a fixed 4.928% rate. The company reported compliance with debt covenants and no off-balance-sheet arrangements.
- Contractual obligations totaled $906.2 million, including $311.5 million of operating leases, $392.7 million of product purchase orders and $122.9 million of sheepskin commitments.
Material changes, outlook and risks
- Impairments: Deckers recorded a $113.9 million non-cash impairment of Sanuk wholesale goodwill and a $4.1 million impairment of a Sanuk patent. It also recorded $4.7 million of DTC intangible-asset impairment and approximately $11.3 million of retail-store and software impairments. Sanuk’s impairment reflected lower-than-forecast sales, lower market multiples and reduced expansion expectations.
- Restructuring: FY2017 charges were approximately $29.1 million, following $24.8 million in FY2016. About $11.1 million remained accrued at year-end, expected to be paid in FY2018. Deckers announced plans to reduce its owned global store footprint by 30–40 stores and target approximately 125 owned stores by FY2020.
- Savings plan and strategic review: Management set a goal of approximately $100 million in operating-profit improvement by FY2020, excluding reinvestment, through cost-of-sales and SG&A initiatives. In April 2017, the board began reviewing strategic alternatives, potentially including a sale or other transaction; no outcome was assured.
- Other outlook: Management expects e-commerce to remain a long-term growth driver, while its year-over-year growth rate may moderate as the business expands. The filing does not provide a clear numerical FY2018 revenue or earnings forecast.
- Principal risks: Seasonality and weather sensitivity; changing consumer preferences and competitive pricing; retail traffic shifting online; inventory forecasting and wholesale order cancellations; reliance on Asian manufacturers and two primary sheepskin tanneries; foreign-exchange exposure; and execution risks in restructuring, savings initiatives and systems changes. Five largest customers generated 20.3% of FY2017 sales.
- Contingency: Australian Leather asserted counterclaims challenging UGG trademark registrations and design patents in litigation. The company said it intended to defend the claims and could not reasonably estimate any potential loss. It warned that an adverse ruling invalidating the UGG trademark could materially harm the business.
Investor verification points
- Assess the underlying performance excluding the $113.9 million Sanuk goodwill impairment, other impairments and restructuring costs, and verify whether Sanuk’s sales and outlook stabilize.
- Track execution and realized savings against the approximately $100 million FY2020 operating-profit-improvement goal, including costs required to achieve it.
- Monitor UGG wholesale pricing, volume, promotional activity and inventory, alongside e-commerce growth and owned-store closures or conversions.
- Review cash conversion, inventory turnover (2.2 times versus 2.7 times in FY2016), purchase commitments and available borrowing capacity.
- Follow the strategic-alternatives review and Australian Leather litigation for material developments; neither had a stated outcome in this filing.