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DECK > SEC Filings for DECK > Form 10-Q on 8-Aug-2011All Recent SEC Filings

Show all filings for DECKERS OUTDOOR CORP

Form 10-Q for DECKERS OUTDOOR CORP


8-Aug-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in this report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We sometimes use words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "will" and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:

†          our global business, growth, operating and financing strategies;

†          our product and geographic mix;

†          the success of new products, new brands, and other growth
initiatives;

†          the impact of seasonality on our operations;

†          expectations regarding our net sales and earnings growth and other
financial metrics;

†          our development of worldwide distribution channels;

†          trends affecting our financial condition or results of operations;

†          overall global economic trends; and

†          reliability of overseas factory production and storage and
availability of raw materials.

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in Part II, Item 1A, "Risk Factors." In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen. You should read this report in its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference in this report with the understanding that our future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements and we assume no obligation to update such forward-looking statements publicly for any reason.

References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the accompanying notes to those statements included elsewhere in this document.

Overview

We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. We market our products primarily under two proprietary brands:

† UGG®: Premier brand in luxury and comfort footwear and accessories; and

† Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals.

In addition to our primary brands, our other brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle footwear; MOZO®, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and Simple®, a line for which we are planning to cease distribution effective December 31, 2011.

We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce business and our retail stores. Independent third parties manufacture all of our products. In 2010, we converted our Teva business in Belgium, the Netherlands, and Luxemburg (Benelux), and France from a distributor model to a wholesale model. In January 2011, we converted from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the United Kingdom (UK) and Ireland and the UGG and Simple brands in Benelux and France.


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Our business has been impacted by several important trends affecting our end markets:

† The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.

† The top grade sheepskin used in certain UGG products is in high demand and limited supply and there have been significant increases in the prices of top grade sheepskin as the demand from competitors for this material has increased.

† The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.

† Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort and high performance attributes they have come to expect from traditional athletic footwear.

† Our customers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.

† Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.

† There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands and companies become more environmentally responsible.

By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences.

Below is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business.

UGG Brand Overview

The UGG brand has become well-known throughout the US as well as internationally. Over the past several years, our UGG brand has received increased global media exposure including increased print media in ads and cooperative advertising with our customers, which has contributed to broader public awareness of the brand and significantly increased demand for the collection. We believe that the increased global media focus and demand for UGG products were driven by the following:

†          consumer brand loyalty, due to the luxury and comfort of UGG
footwear;

†          continued innovation of new product categories and styles;

†          increased marketing in high-end magazines;

†          successful targeting of high-end distribution;

†          adoption by high-profile celebrities as a favored footwear brand;

†          increased media attention that has enabled us to introduce the brand

to consumers much faster than we would have otherwise been able to;

† increased exposure to the brand driven by our concept stores which showcase all of our product offerings;

† continued expansion of retail through new UGG Australia stores; and

† continued geographic expansion across the US and internationally.

We believe the luxury and comfort features of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our strategy seeks to prolong the longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. As part of this strategy we have increased our product offering, including a growing spring line, an expanded men's line, and a fall line that consists of a range of luxurious collections for both genders, an expanded kids' line, as well as handbags, cold weather accessories, and outerwear. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on prime twinface sheepskin, which is in high demand and subject to price volatility.


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Teva Brand Overview

Our Teva brand is positioned to be the leading innovative, global, action-outdoor brand, with over 25 years worth of contributions to the outdoor adventure experience. The Teva brand pioneered the water sport sandal category in 1984, and to this day, our brand mission is to inspire spontaneity, camaraderie and adventure on, around, or in water. Leveraging our core performance competencies of traction, hydro and comfort, we are focused on driving growth through innovation in the emerging action-outdoor space through multi-sport, light hiking, freestyle mountain bike riding, action water sports, and other action-outdoor lifestyle products.

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth in 2010. Throughout 2010 and the first half of 2011, our broader range of products demonstrated strong retail sell-through across all channels, and we believe that our retail partners have viewed both our product and marketing innovations as relevant and compelling.

We see an opportunity to grow the Teva brand significantly outside of the US. In January 2010, we converted from a distributor model to a wholesale model in the Benelux region and France, enhancing our marketing and distribution capabilities in the outdoor active Benelux market. In January 2011, we converted our Teva brand international business from an independent distributor to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this important influential market. Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands. Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be successful.

Other Brands Overview

Our other brands consist of the TSUBO, Ahnu, MOZO, and Simple brands. Our other brands are all sold through most of our distribution channels, with the majority through wholesale channels. We are planning to cease distribution of the Simple brand effective December 31, 2011.

TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers' unique needs of all-day comfort, innovative style, and superior quality.

The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor activities - whether on trails, beaches, or sidewalks.

The MOZO brand was designed for individuals that spend long hours working on their feet. It combines running shoe technology with work shoe toughness. The brand is currently focused on providing footwear for culinary professionals. We have recently expanded our distribution to include large on-line retailers and intend to expand further in 2011 into the health care worker market.

We expect to leverage our design, marketing and distribution capabilities to grow these brands over the next several years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts will be successful.


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eCommerce Overview

Our eCommerce business, which sells all of our brands, allows us to reinforce our relationship with the consumer. eCommerce enables us to meet the growing demand for our products, sell the products at retail prices and provide significant incremental operating income. The eCommerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. In recent years, our eCommerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases.

Managing our eCommerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our eCommerce business through improved website features and performance, increased marketing, more international websites, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow.

Retail Stores Overview

Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental operating income. In addition, our UGG Australia concept stores allow us to showcase our entire line; whereas, a retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through our UGG Australia outlet stores.

As of June 30, 2011, we had a total of 30 retail stores worldwide. These stores are company-owned and operated and include our China stores, which are owned and operated with our joint venture partner. For 2011, we plan to open additional retail stores in the US and significantly expand our retail presence internationally, primarily in Asia.

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters and the highest percentage of Teva brand net sales occurring in the first and second quarters of each year. Our other brands do not have a significant seasonal impact.

                                                  2011
                                  First      Second      Third    Fourth
                                 Quarter     Quarter    Quarter   Quarter
Net sales                       $ 204,851   $ 154,222
Income (loss) from operations   $  28,195   $ (10,798 )




                                             2010
                           First      Second       Third      Fourth
                          Quarter     Quarter     Quarter     Quarter
Net sales                $ 155,927   $ 137,059   $ 277,879   $ 430,124
Income from operations   $  28,821   $  13,216   $  66,314   $ 140,737

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part II, Item 1A, "Risk Factors."


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Results of Operations



Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010



The following table summarizes the Company's results of operations:



                                          Three Months Ended June 30,
                              2011                   2010                  Change
                        Amount        %        Amount        %        Amount        %
Net sales              $ 154,222     100.0 %  $ 137,059     100.0 %  $  17,163      12.5 %
Cost of sales             88,310      57.3       76,316      55.7       11,994      15.7
Gross profit              65,912      42.7       60,743      44.3        5,169       8.5
Selling, general and
administrative
expenses                  76,710      49.7       47,527      34.7       29,183      61.4
(Loss) income from
operations               (10,798 )    (7.0 )     13,216       9.6      (24,014 )  (181.7 )
Other income, net            (43 )       -         (497 )    (0.4 )        454      91.3
(Loss) income before
income taxes             (10,755 )    (7.0 )     13,713      10.0      (24,468 )  (178.4 )
Income tax (benefit)
expense                   (3,227 )    (2.1 )      4,803       3.5       (8,030 )  (167.2 )
Net (loss) income         (7,528 )    (4.9 )      8,910       6.5      (16,438 )  (184.5 )
Net loss
attributable to the
noncontrolling
interest                     189       0.1           56         -          133     237.5
Net (loss) income
attributable to
Deckers Outdoor
Corporation            $  (7,339 )    (4.8 )% $   8,966       6.5 %  $ (16,305 )  (181.9 )%

Overview. The increase in net sales was primarily due to an increase in Teva and UGG product sales. The loss from operations resulted primarily from the higher selling, general and administrative expenses and decreased gross margin, partially offset by higher net sales.


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Net Sales. The following tables summarize net sales by location, brand and distribution channel:

                                                     Three Months Ended June 30,
                                                                            Change
                                                 2011        2010       Amount      %
Net sales by location:
US                                             $  82,772   $  65,230   $ 17,542    26.9 %
International                                     71,450      71,829       (379 )  (0.5 )
Total                                          $ 154,222   $ 137,059   $ 17,163    12.5 %

Net sales by brand and distribution channel:
UGG:
Wholesale                                      $  85,347   $  88,100   $ (2,753 )  (3.1 )%
eCommerce                                          2,969       2,458        511    20.8
Retail stores                                     19,950       9,647     10,303   106.8
Total                                            108,266     100,205      8,061     8.0
Teva:
Wholesale                                         38,080      29,086      8,994    30.9
eCommerce                                          2,089       2,077         12     0.6
Retail stores                                        123          49         74   151.0
Total                                             40,292      31,212      9,080    29.1
Other:
Wholesale                                          4,963       4,744        219     4.6
eCommerce                                            651         642          9     1.4
Retail stores                                         50         256       (206 ) (80.5 )
Total                                              5,664       5,642         22     0.4
Total                                          $ 154,222   $ 137,059   $ 17,163    12.5 %

Total eCommerce                                $   5,709   $   5,177   $    532    10.3 %

Total Retail stores                            $  20,123   $   9,952   $ 10,171   102.2 %

The increase in net sales was primarily driven by strong sales for the Teva and UGG brands. We experienced an increase in the number of pairs sold primarily through our Teva wholesale channels, partially offset by a decrease in pairs sold in our UGG wholesale segment. This resulted in the overall volume of footwear sold for all brands to remain relatively flat at approximately 3.6 million pairs sold for the three months ended June 30, 2011 and 2010. Our weighted-average wholesale selling price per pair increased to $38.28 for the three months ended June 30, 2011 from $35.41 for the three months ended June 30, 2010.

Wholesale net sales of our UGG brand decreased primarily due to a decrease in international sales, mainly in the European region. This decrease was related to our conversion from a distributor model to a direct wholesale model, causing a shift in sales of our fall products to later in the year in 2011 versus 2010. We also experienced a decrease in the overall volume of pairs sold. The decrease was partially offset by an increase in domestic sales, including an increase in the average selling price. We cannot assure investors that UGG brand sales will continue to grow at their past pace.

Wholesale net sales of our Teva brand increased due to both an increase in the volume of pairs sold and an increase in the average selling price.

Wholesale net sales of our other brands increased due to an increase in pairs sold, partially offset by a decrease in the average selling price.

Net sales of our eCommerce business increased due to both an increase in the average selling price and a slight increase in the number of pairs sold.

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of eleven new stores opened since June 30, 2010. New stores that were not open during the full three months ended June 30, 2010 contributed approximately $8,000 of retail sales for three months ended June 30, 2011. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For those stores that were


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open during the full second quarter of 2011 and 2010, same store sales grew by 23.6%. Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point decline.

International sales, which are included in the segment sales above, for all of our products combined represented 46.3% and 52.4% of worldwide net sales for the three months ended June 30, 2011 and 2010, respectively. The decrease in international sales was largely due to decreased sales for our UGG wholesale channel, primarily in the European region, related to our conversion to a direct wholesale model. This decrease was partially offset by increases in our Teva wholesale channel in the European region, as well as our retail store business in the Asian region.

Gross Profit. As a percentage of net sales, gross margin decreased primarily due to approximately $3,100 of duty refunds in the second quarter of 2010 that did not recur in the second quarter of 2011. In addition, in the second quarter of 2011, we experienced increased production costs for all brands, as well as an increased impact of closeout sales and increased inventory write-downs, primarily related to our Simple brand. The decrease was partially offset by an increased mix of retail sales, which generally carry higher margins.

Selling, General and Administrative Expenses (SG&A). As a percentage of net sales, SG&A increased primarily from:

† increased retail costs of approximately $6,000, largely related to eleven new retail stores that were not open as of June 30, 2010;

† increased divisional brand expenses of approximately $4,000 in support of our continued growth;

† increased international division expenses of approximately $3,000 in support of our continued international expansion and our distributor conversions to the wholesale model;

† increased marketing expenses of approximately $3,000; and

† increased legal expenses of approximately $2,000.

SG&A expenses as a percentage of sales were unusually high during this period primarily due to the items discussed above as well as our second quarter generally being our lowest volume selling season. However, we expect SG&A as a percentage of sales for the full year 2011 to be closer to that of the full year 2010.

(Loss) Income from Operations. The gross profit derived from the sales to third parties of the eCommerce and retail store segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and retail stores segments. The following table summarizes operating (loss) income by segment:

                                    Three Months Ended June 30,
                                                          Change
                               2011        2010      Amount       %
UGG wholesale                $  23,432   $ 33,776   $ (10,344 )  (30.6 )%
Teva wholesale                   7,678      7,556         122      1.6
Other wholesale                 (2,682 )   (1,496 )    (1,186 )  (79.3 )
eCommerce                         (390 )      (69 )      (321 ) (465.2 )
Retail stores                   (3,005 )   (1,549 )    (1,456 )  (94.0 )
Unallocated overhead costs     (35,831 )  (25,002 )   (10,829 )  (43.3 )
Total                        $ (10,798 ) $ 13,216   $ (24,014 ) (181.7 )%

We incurred a loss from operations versus income due to the increase in SG&A expenses and cost of sales, partially offset by an increase in net sales.

The decrease in income from operations of UGG brand wholesale was primarily the result of decreased international sales of approximately $10,000 and higher marketing and promotional and divisional expenses of approximately $5,000. The . . .

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