DECK

Deckers Outdoor Corp. Q3 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008. Deckers Outdoor Corporation is a designer, producer, and brand manager of footwear and accessories, primarily marketing the UGG, Teva, Simple, and TSUBO brands. The company operates through wholesale, eCommerce, and retail store segments. The business is highly seasonal, with UGG sales peaking in the third and fourth quarters.

Key Financial Metrics

Liquidity: The company maintains a $20 million revolving credit facility with $19.3 million available as of September 30, 2008. There were no outstanding borrowings under the facility.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 52.5% for the quarter and 51.5% for the nine-month period compared to 2007, driven primarily by a 56.3% increase in UGG wholesale sales.
• Margin Compression: Gross margin decreased to 43.3% (quarter) and 43.5% (nine months) from 45.4% and 44.7% in the prior year periods, respectively. This was attributed to material cost increases and a higher mix of international sales which carry lower margins.
• Impairment Loss: An impairment loss of $14.9 million was recognized in the second quarter of 2008 related to Teva trademarks due to lower-than-expected sales growth and reduced long-term forecasts. This charge significantly impacted operating income for the nine-month period.
• Acquisition: The company acquired TSUBO, LLC in May 2008, contributing $2.2 million in wholesale sales for the quarter.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 50.6% for the quarter, driven by personnel costs, stock compensation, bad debt reserves, and costs associated with new retail stores.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margins to decrease for the full year 2008 compared to 2007 due to increased costs. The company anticipates continued strong demand for UGG products but notes that sales growth may not continue at recent paces.
• Capital Expenditures: Remaining capital expenditures for 2008 are estimated between $9 million and $11 million, focused on retail store build-outs and distribution center improvements.
• Risks:
  • Economic Conditions: The recent financial crisis and recessionary environment may cause consumers to defer purchases and impact retailer solvency.
  • Liquidity Risk: While the company holds significant cash and investments, adverse conditions in financial markets could impact the liquidity of short-term investments or access to credit.
  • Inventory: Inventory levels increased 205% year-over-year to $157.9 million, primarily to support anticipated UGG sales in the fourth quarter. High inventory levels pose a risk if demand softens.
  • Intellectual Property: Ongoing litigation regarding counterfeit products and trademark infringement remains a risk to brand value and sales.

Investor Verification Checklist

• Inventory Turnover: Verify the ability to sell the significant inventory buildup ($157.9 million) in the upcoming fourth quarter to avoid future write-downs.
• Teva Brand Recovery: Monitor Teva sales performance post-impairment to ensure the $14.9 million charge was a one-time event and not indicative of a permanent decline.
• Bad Debt Reserves: Review the adequacy of the allowance for doubtful accounts, which increased due to economic conditions and higher credit risk.
• International Exposure: Assess the impact of currency fluctuations and international economic conditions on the growing international sales mix (22.8% of nine-month sales).
• Stock Compensation: Note the increase in stock-based compensation expense ($6.5 million for nine months) and its impact on future earnings.