Business Context and Reporting Period
Company: Deckers Outdoor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Deckers is a designer and brand manager of footwear, primarily marketing the UGG, Teva, Simple, and TSUBO brands. The business is seasonal, with UGG sales peaking in Q3/Q4 and Teva sales peaking in Q1/Q2. In May 2008, the company acquired TSUBO, LLC.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|
| Net Sales | $91,116 | $188,651 | $125,305 |
| Gross Profit | $36,340 | $82,488 | $55,106 |
| Gross Margin % | 39.9% | 43.7% | 44.0% |
| Operating Income (Loss) | $(6,944) | $10,116 | $17,936 |
| Net Income (Loss) | $(3,820) | $7,474 | $11,718 |
| Diluted EPS | $(0.29) | $0.57 | $0.90 |
| Cash & Equivalents | $79,636 | (Balance Sheet Data) | |
| Short-term Investments | $45,175 | ||
| Working Capital | $245,046 | (Calculated) | |
| Debt (Credit Facility) | $0 Outstanding |
Note: All amounts in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 72.8% in Q2 2008 and 50.6% for the six-month period compared to 2007. This was driven primarily by a 135.9% increase in UGG wholesale sales and a 99.9% increase in Simple wholesale sales.
- Impairment Loss: The company recorded a non-cash impairment loss of $14,900 on Teva trademarks in Q2 2008 due to missed sales targets and reduced long-term forecasts. This charge turned Q2 operating income into a loss of $(6,944).
- Acquisition: TSUBO, LLC was acquired in May 2008 for $5,876 in cash plus a potential earn-out. TSUBO contributed $653 in sales for the quarter.
- Inventory Build: Inventories increased 117.9% to $112,802 from $51,776 at year-end 2007, reflecting seasonal buildup for the UGG and Simple brands.
- Cash Flow: Net cash used in operating activities was $27,366 for the six months ended June 30, 2008, compared to $5,788 used in the prior year period, largely due to increased inventory purchases and changes in income taxes payable.
Guidance, Outlook, and Risks
- Seasonality: Management expects the trend of higher sales in the second half of the year to continue, driven by UGG's Fall/Winter season.
- Capital Expenditures: Estimated remaining capital expenditures for 2008 range from $15,000 to $17,000, including a new inventory pick module and retail store build-outs.
- Liquidity & Credit Facility: The company has a $20,000 revolving credit facility with $19,395 available. Due to the Q2 operating loss, the company technically defaulted on a profitability covenant but secured a waiver from the lender through June 30, 2008.
- Investment Risk: The company holds $2,250 in auction rate securities that experienced failed auctions. These have been reclassified to long-term investments. Management believes they can be liquidated at par value but acknowledges market uncertainty.
- Contingencies: There is an accrued liability of approximately $1,600 related to tax obligations in China for a foreign subsidiary.
Investor Verification Checklist
- Teva Brand Viability: Verify the long-term sales forecast for the Teva brand following the $14.9M impairment charge and the shift in consumer preferences.
- Inventory Levels: Monitor the $112.8M inventory balance to ensure it converts to sales in the upcoming Q3/Q4 peak season without requiring significant markdowns.
- Auction Rate Securities: Track the liquidity status of the $2.25M in auction rate securities and any potential write-downs if secondary market prices decline further.
- UGG Growth Sustainability: Assess whether the 135.9% Q2 growth rate for UGG is sustainable or if it indicates a peak in the product lifecycle.
- Credit Covenant Compliance: Confirm that the company remains in compliance with its credit facility covenants following the Q2 loss and the expiration of the waiver.