DECK

Deckers Outdoor Corp. Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Deckers Outdoor Corporation is a leading designer and brand manager of footwear, operating under three primary proprietary brands: UGG (luxury sheepskin), Teva (sport sandals), and Simple (sustainable footwear). The company sells through wholesale channels, eCommerce, and retail stores. The business is highly seasonal, with UGG sales peaking in Q3/Q4 and Teva sales peaking in Q1/Q2.

Key Financial Metrics

Liquidity: The company maintains a $20 million revolving credit facility with Comerica Bank. As of March 31, 2008, there were no outstanding borrowings, with $19.9 million available. The company holds $2.25 million in auction rate securities that experienced failed auctions but are currently valued at par.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 34.4% year-over-year, driven primarily by a 75.6% surge in UGG wholesale sales and a 21.1% increase in Simple wholesale sales. This was partially offset by a 2.4% decline in Teva wholesale sales due to shipment delays and lower fill-in orders.
• Margin Expansion: Gross margin improved to 47.3% from 46.0%, attributed to higher full-priced sales of UGG products and a lower impact of closeout sales, despite increased inventory write-downs.
• Expense Increase: Selling, General, and Administrative (SG&A) expenses rose 58.6% to $29.1 million. This increase was driven by variable costs (commissions, marketing), share-based compensation, and a $1.25 million advertising expense related to a documentary film sponsored by Teva.
• Cash Flow: Net cash provided by operating activities increased to $21.4 million from $11.7 million, largely due to improved collections of trade accounts receivable.

Outlook, Risks, and Unusual Items

• Guidance: Management expects the trend of higher second-half sales to continue in 2008 due to UGG seasonality and the introduction of a Fall Teva line. However, they explicitly state they do not expect the current high growth rates of UGG or eCommerce to continue indefinitely.
• Unusual Items: The company recorded a $1.25 million advertising expense for the "Grand Canyon Adventure" IMAX film. Additionally, a reversal of previously accrued penalties related to Far East tax matters contributed to "Other income."
• Risks:
  • Auction Rate Securities: $2.25 million of investments are in failed auctions; liquidity depends on future market conditions or redemptions.
  • China Tax Contingency: A remaining liability range of $2.9 million to $3.4 million exists regarding tax obligations for a Hong Kong subsidiary.
  • Brand Dependency: Significant reliance on the UGG brand, which is subject to fashion trends and potential demand saturation.
  • Supply Chain: Production is concentrated in China, exposing the company to labor unrest, currency fluctuations, and import controls.
• Subsequent Event: In May 2008, the company acquired 100% of TSUBO, LLC for approximately $6 million in cash plus a potential earn-out.

Investor Verification Checklist

• Auction Rate Securities Liquidity: Verify the status of the $2.25 million in failed auction rate securities and the company's ability to liquidate them at par value.
• UGG Sustainability: Assess whether the 75% growth in UGG wholesale sales is sustainable or if it indicates a peak in the product lifecycle.
• Teva Turnaround: Monitor Teva's performance in Q2 and Q3 to see if the Q1 decline was a temporary supply issue or a structural shift in consumer preference.
• China Tax Resolution: Track the resolution of the $2.9M–$3.4M tax contingency in China/Hong Kong.
• Capital Expenditures: Confirm the operational readiness of the new inventory pick module in the Camarillo distribution center, estimated for June 2008.