Deckers Outdoor Corporation — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2013, compared with the same period in 2012. Deckers designs and markets footwear and accessories under UGG, Teva, Sanuk and other brands, selling through wholesale, eCommerce and retail channels. Results are seasonal: UGG sales are weighted toward the second half of the year, while Teva and Sanuk are more weighted toward the first half. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $263.8 | $246.3 | +7.1% |
| Gross profit / gross margin | $123.6 / 46.8% | $113.3 / 46.0% | Margin +0.8 percentage points |
| SG&A | $120.9 | $101.4 | +19.3% |
| Operating income / margin | $2.7 / 1.0% | $11.9 / 4.8% | −77.8% |
| Net income | $1.0 | $8.0 | −87.5% |
| Diluted EPS | $0.03 | $0.20 | −$0.17 |
| Operating cash flow | $15.8 | $27.1 | −41.8% |
| Capital expenditures | $12.1 | $11.2 | +$0.9 |
Operating cash flow less capital expenditures was approximately $3.7 million, versus $15.9 million a year earlier. Cash and cash equivalents fell to $64.6 million from $110.2 million at year-end 2012. At March 31, short-term borrowings were $10.0 million, down from $33.0 million; the company reported $186.9 million available to borrow after applying the facility’s asset-coverage ratio. Net working capital was $410.1 million, compared with $424.6 million at year-end. The company said it was in compliance with credit covenants and expected available liquidity to cover needs for at least 12 months.
Current assets were $537.2 million and current liabilities were $127.2 million. The company reported total contractual obligations of $729.8 million, including $508.1 million due in less than one year; this schedule excludes contingent consideration whose amount is not yet determinable. Sanuk contingent consideration was estimated at $45.6 million, with no maximum on specified future payments.
Material changes and management discussion
- Sales growth came mainly from UGG retail and eCommerce, other-brand wholesale and Teva wholesale. UGG and Sanuk wholesale sales declined. Retail sales rose 37.6% and eCommerce sales 22.6%; UGG wholesale sales fell 10.0%.
- Overall footwear volume fell 1.6% to approximately 6.0 million pairs, while weighted-average wholesale price per pair rose to $31.99 from $31.64.
- Gross margin improved largely because retail, a higher-margin channel, represented a greater share of sales. SG&A increased by $19.6 million, with management citing new-store costs, international expenses including foreign-exchange effects, performance compensation and Hoka expenses. Operating income declined despite higher gross profit.
- Operating cash flow was lower year over year. Management cited, among other factors, increased VAT receivables, lower cash collections and a larger reduction in accounts payable. Receivables and inventory balances declined from year-end, and inventory turnover was lower year over year.
- Q1 financing cash use included $22.6 million of contingent-consideration payments and repayment of borrowings; no shares were repurchased during the quarter. The company had repurchased approximately 2.765 million shares for $120.7 million under its $200 million authorization, leaving approximately $79.3 million available.
Outlook, risks and unusual items
- Management expected full-year 2013 gross margin to improve versus 2012, with most of the benefit in Q4, and expected lower sheepskin costs in Q4 versus the prior year. It estimated a full-year 2013 effective tax rate of approximately 32%, versus 29.9% in 2012. The filing provides no clear full-year sales or EPS guidance.
- The company planned to open approximately 30 retail stores in 2013, about two-thirds in Asia, primarily China and Japan. Estimated remaining 2013 capital expenditures were $80–$85 million, primarily for store and corporate-facility construction.
- Key risks include seasonal demand and weather sensitivity, economic weakness and slower overseas receivable collections, consumer and fashion shifts, sheepskin availability and cost, dependence on a limited number of independent factories and suppliers, foreign-exchange exposure, inventory execution and the returns on acquisitions. Management noted that significant commodity-cost increases may not be offset by higher selling prices.
- A Delaware shareholder securities class action remained pending; management said it could not reasonably estimate a possible loss. The California class action had been dismissed with prejudice, and a related derivative action was dismissed in May 2013. Management did not expect pending proceedings in aggregate to materially affect the company.
- Auditor independence matter: Deckers disclosed that a former KPMG partner allegedly provided nonpublic information used to trade in securities of KPMG clients, including Deckers. KPMG concluded, and Deckers’ Audit Committee concurred, that the partner’s conduct did not affect the objectivity of the company’s audits or interim reviews and that prior financial statements remained reliable. The Audit Committee conducted its own review with outside counsel.
Most important facts for investors to verify
- Whether UGG wholesale demand and customer carryover inventory improve, particularly given the mild prior winter and weakness in Europe.
- Whether higher retail and eCommerce sales, new-store openings and planned capital spending generate sufficient returns without further pressure on operating margins.
- Whether cash conversion improves, including collections outside the U.S., inventory turnover and the timing of supplier payments.
- How actual sheepskin costs and gross margins compare with management’s expectations, and whether Sanuk’s uncapped contingent payments change materially as forecasts evolve.
- Developments in the pending Delaware litigation and any further information about the KPMG independence matter.