Deckers Outdoor Corporation — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2011, compared with the same 2010 period. Deckers designs and markets footwear and accessories, principally through UGG and Teva, with other brands, eCommerce and retail operations. Sales are seasonal: UGG is strongest in the third and fourth quarters, while Teva is strongest in the first and second. In January 2011, Deckers converted several UK, Ireland, Benelux and France distributor arrangements to direct wholesale operations.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $204.9 | $155.9 |
| Gross profit / gross margin | $102.5 / 50.0% | $77.9 / 50.0% |
| SG&A / percent of sales | $74.3 / 36.3% | $49.1 / 31.5% |
| Operating income / margin | $28.2 / 13.8% | $28.8 / 18.5% |
| Net income attributable to Deckers | $19.2 | $17.9 |
| Diluted EPS | $0.49 | $0.46 |
| Operating cash flow | $3.6 | $21.6 |
Sales grew 31.4%, primarily on UGG strength. UGG sales rose 42.2% to $148.4 million; Teva rose 16.8% to $50.4 million; other-brand sales declined 28.3% to $6.0 million. International sales were 27.7% of total, versus 25.0%. Footwear volume rose 17.5% to approximately 4.7 million pairs; average wholesale selling price increased to $34.24 from $30.71.
Gross margin was flat, but higher SG&A reduced operating income by 2.2% despite revenue growth. SG&A increased primarily from new-store costs, international infrastructure, intellectual-property legal costs, commissions and marketing. The effective tax rate fell to 30.0% from 37.2%; management attributed this mainly to a higher projected share of income from lower-tax foreign jurisdictions. Net income attributable to Deckers increased 7.2%.
Financial position and liquidity
At March 31, cash and cash equivalents were $437.9 million, down from $445.2 million at year-end 2010. Total assets were $753.9 million; current assets were $654.7 million and current liabilities $68.8 million. No credit-agreement borrowings were outstanding; $19.3 million was available after $0.7 million of letters of credit. The facility provides up to $20 million and expires June 1, 2012. Deckers reported compliance with applicable covenants. The filing reports no material debt outstanding.
Operating cash flow was $3.6 million, with the year-over-year decline mainly reflecting larger cash payments for accrued payroll and income taxes. Investing cash use was $9.2 million, including property and equipment and acquired intangible assets; financing cash use was $1.9 million. Cash decreased $7.3 million during the quarter. Net working capital was $585.9 million.
Outlook, risks and contingencies
- No specific sales or earnings guidance was provided. Management expected the full-year 2011 effective tax rate to be significantly below 2010’s 37.2% rate.
- Management estimated remaining 2011 capital expenditures of approximately $55–$60 million, principally for offices and retail-store build-outs, and planned additional domestic and international stores.
- Management believed cash, internally generated funds and available credit would meet foreseeable working-capital needs. Liquidity depends on brand strength, consumer demand, collections, inventory management, credit availability and market conditions.
- Supply risks include production concentrated among a limited number of independent factories in China and constrained, price-volatile sheepskin sourcing. A sheepskin purchase arrangement had approximately $48 million of remaining commitments as of March 31; if buyers do not meet minimum purchases by July 31, Deckers may need to make a deposit. Management expected any deposit to be refundable.
- The IRS proposed transfer-pricing adjustments asserting approximately $55 million of additional taxable income and approximately $27 million of additional federal taxes and penalties, excluding interest. Deckers disagreed and said it would appeal if unresolved at the examination level; the timing and financial outcome were uncertain.
- Deckers expected approximately $4 million of distributor-transition payments from April through year-end 2011 and estimated approximately $1 million of possible remaining loans to its China joint venture. Routine legal proceedings were not expected by management to have a material effect.
- Foreign-exchange exposure increased; approximately $37 million, or 18.0% of quarterly sales, was denominated in foreign currencies. A 10% exchange-rate change was estimated to change derivative fair value by approximately $4.7 million. Other risks include seasonality, fashion and demand changes, rising input costs, and economic conditions.
Most important facts for investors to verify
- Whether sales growth, particularly UGG growth and direct-to-consumer expansion, is sustainable beyond the seasonally weaker first quarter.
- Whether SG&A growth moderates and operating margins recover as revenue expands.
- The resolution and potential financial impact of the IRS transfer-pricing dispute.
- Whether sheepskin buyers meet purchase minimums, and whether any required deposit is made and recovered.
- Execution, cost and returns from planned capital spending, new stores and international wholesale conversions.
- Exposure to concentrated manufacturing and sheepskin supply, foreign exchange movements, and the timing of working-capital cash flows.