Deckers Outdoor Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended June 30, 2016, compared with the three months ended June 30, 2015. Deckers designs, markets and distributes footwear, apparel and accessories, principally under UGG, Teva and Sanuk, and sells through wholesale and direct-to-consumer (DTC) channels. The business is seasonal; UGG sales are generally strongest in the September and December quarters.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $174.4 | $213.8 | Down 18.4% |
| Gross profit / gross margin | $76.3 / 43.7% | $86.6 / 40.5% | Margin up 3.2 percentage points |
| SG&A | $154.6 | $150.3 | Up 2.8% |
| Operating loss / operating margin | $(78.3) / (44.9)% | $(63.7) / (29.8)% | Loss widened |
| Net loss / diluted loss per share | $(58.9) / $(1.84) | $(47.3) / $(1.43) | Loss widened |
| Cash used in operations | $(43.4) | $(27.0) | Outflow increased |
| Cash used in investing | $(20.1) | $(23.5) | Outflow decreased |
Gross margin improved principally because closeout sales were a smaller share of sales and wholesale and international margins improved. The larger operating loss reflected lower sales and higher SG&A, partly offset by better gross margin.
Sales and segments
- Wholesale sales fell 24.3% to $116.1 million; DTC sales fell 3.6% to $58.3 million. Comparable DTC sales declined 7.3% on a constant-currency basis for the thirteen weeks ended July 3, 2016.
- UGG total sales fell 19.8% to $91.9 million; Teva fell 17.3% to $34.7 million; Sanuk fell 20.2% to $26.7 million; and other brands fell 11.6% to $21.1 million.
- Management attributed the wholesale decline substantially to shipment timing: shipments were advanced into Q4 FY2016 ahead of the Business Transformation Project, reducing Q1 FY2017 shipments. Total footwear pairs sold fell 22.4% year over year.
- DTC weakness reflected lower retail-store traffic and store closures, partly offset by E-Commerce growth and improved conversion. Segment operating losses widened for UGG wholesale and DTC; Teva and Sanuk wholesale operating income declined. Other brands’ operating loss narrowed.
Balance sheet, debt and liquidity
- At June 30, 2016, cash and cash equivalents were $202.3 million, inventories $469.2 million, and total assets $1.358 billion. Cash declined $43.6 million from March 31, while inventories increased $169.3 million.
- Short-term borrowings were $110.6 million and mortgage payable was $32.5 million. The mortgage carries a 4.928% fixed rate. The company reported $298.3 million of available borrowing under its domestic facility at quarter-end; it also had $9.0 million outstanding and $14.0 million available under its China facility. No Japan facility borrowings were outstanding at quarter-end.
- After quarter-end, the company borrowed an additional $72.0 million under the domestic facility and approximately $7.1 million under the Japan facility. Management said cash, operating cash generation and available credit were expected to meet working-capital needs for at least the next 12 months; the company reported compliance with borrowing covenants.
- Operating cash outflow reflected seasonal inventory investment, the net loss and other working-capital movements. Inventory turnover declined to 2.4 from 2.8 for the comparable trailing 12-month periods.
Outlook, changes and risks
- Restructuring: The retail-store and office consolidation had generated approximately $26.5 million of charges through June 30, 2016, with $4.0 million accrued and expected to be paid in FY2017. Management expected another $8–$13 million of similar costs during the remainder of FY2017. Twenty-four stores were identified as potential closure candidates; six closed in the quarter and three in the preceding quarter.
- Transformation and investment: The worldwide ERP upgrade went live in April 2016. The company identified approximately $2.0 million of current-quarter project-related expense. Estimated remaining FY2017 capital expenditures, including commitments, were $35–$40 million.
- Commitments: Outstanding product purchase orders were $311.1 million, sheepskin purchase obligations $78.5 million, and other purchase obligations $26.2 million. Product orders may be cancellable in certain circumstances and are estimates of expected fulfillment, not necessarily binding minimum commitments.
- Unusual items: The company paid the final Sanuk contingent-consideration installment of approximately $19.7 million during the quarter. A final Hoka payment of approximately $0.3 million remained pending.
- Key risks: Sales are seasonal and weather-sensitive; management also cited changing retail traffic and shopping behavior, foreign-exchange movements, economic uncertainty, and the limited supply and price volatility of sheepskin. Production is concentrated among independent factories in Asia, and certain raw materials have limited suppliers. A 10% currency-rate change was estimated to affect the fair value of financial instruments by approximately $12 million.
- No formal quarterly or annual earnings guidance is provided in the supplied filing text. Management described DTC and E-Commerce as growth and profitability opportunities, while cautioning that initiatives to grow individual brands may not succeed.
Most important facts for investors to verify
- Whether the shipment shift into Q4 FY2016 was temporary and whether wholesale demand and order timing recover in subsequent quarters.
- Whether inventory levels, sell-through and working-capital cash usage normalize as the seasonal selling cycle progresses.
- Actual restructuring charges, store closures and savings compared with the stated FY2017 cost estimate.
- Whether the ERP implementation and planned capital spending deliver expected operating efficiencies without disrupting shipments or controls.
- Credit-facility utilization, liquidity needs, and the extent to which foreign-held cash can be accessed without additional tax cost.
- Exposure to retail traffic, weather, currency and sheepskin costs, alongside progress in DTC and E-Commerce.