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DECK > SEC Filings for DECK > Form 10-Q on 9-Nov-2011All Recent SEC Filings

Show all filings for DECKERS OUTDOOR CORP

Form 10-Q for DECKERS OUTDOOR CORP


9-Nov-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, results of operations, or
cash flows;

†          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
three proprietary brands:



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

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

†          Sanuk®: Innovative action sport footwear brand rooted in the surf
community.

Our financial condition and results of operations include the operations of Sanuk beginning July 1, 2011, our acquisition date. 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 which we plan 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 continue to 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 and outdoor advertising;

†          targeted marketing at prospective consumers in new catalogs and
direct mail pieces;

†          successful targeting of high-end distribution;

†          expanded product assortment purchases from existing accounts;

†          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 worldwide retail through new UGG Australia
stores;

†          continued geographic expansion across the US and internationally; and

†          expansion of our shop-in-shop program worldwide.

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


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of product diversification also will help decrease our reliance on prime twinface sheepskin, which is in high demand and subject to price volatility.

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 year-to-date 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.

Sanuk Brand Overview

On July 1, 2011 we acquired the Sanuk brand, a dynamic action sport footwear brand rooted in surf, known for its original sandals and shoes and irreverent marketing. The brand has a history of innovation, product invention, foot-friendly comfort and clever branding. Sanuk is currently available in more than 1,700 retailers in 40 countries and at Sanuk.com. The brand enjoys diverse acceptance across multiple channels driven by key action sports retailers as well as outdoor retailers such as REI, EMS, and Bass Pro, specialty retailers including Fred Segal and Nordstrom, and larger national chains including Journeys, Dillards, and The Buckle.

Sanuk products have been twice recognized at the Surf Industry Manufacturers Association (SIMA) Image Awards as the 2007 and 2010 Footwear Product of the Year. The brand is best known for its Sidewalk Surfers®, "These are not shoes, they're sandals®", often referred to as "Not-A-Shoe," for the patented sandal construction, which allows the consumers feet to bend and flex in natural comfort. The Sanuk brand uses innovative materials in its footwear such as yoga mats and indoor-outdoor carpet.

We believe that the Sanuk brand is an ideal addition to the Deckers family of brands and all can leverage off each others' distribution channels. The Sanuk business is a profitable, well-run business that we believe provides for substantial growth opportunities within the action sports market, as well as other markets and channels in which Deckers is already established. In the 14 years since its inception, the founder and the team have consistently brought creativity, fun, and comfort to the line of sandals and shoes for men, women, and children. The Sanuk brand's offerings now include the patented Sidewalk Surfer shoe which effectively introduced the deconstructed footwear movement, the Fraid Not sandal collection, and the Yoga Mat sandal made from yoga mat material, which was cited as the 2010 Product of the Year by SIMA. The Sanuk brand continues to build on its authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents.

Other Brands Overview

Our other brands consist of TSUBO, Ahnu, MOZO, and Simple. Our other brands are all sold through most of our distribution channels, with the majority through wholesale channels. We plan 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


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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 strives to deliver revolutionary footwear for creative, passionate, and talented professionals that spend long hours working on their feet. Our high-performance footwear is designed to the specifications of these professionals, not just their workplace. In 2011, MOZO introduced The Chef Signature Collection: footwear designed by Marcus Samuelsson, Aaron Sanchez, and Chris Cosentino. This collection has put the MOZO brand in the press for the first time and allowed the brand to open up new distribution opportunities. We have recently expanded our distribution to include large on-line retailers and 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.

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 September 30, 2011, we had a total of 37 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. During the fourth quarter of 2011, we opened or plan to open additional retail stores in Canada, the UK, and Asia. We intend to continue opening more retail stores worldwide beyond 2011.

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 and Sanuk brand net sales occurring in the first and second quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a significant seasonal impact.


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                                                   2011
                                  First      Second       Third     Fourth
                                 Quarter     Quarter     Quarter    Quarter
Net sales                       $ 204,851   $ 154,222   $ 414,358
Income (loss) from operations   $  28,195   $ (10,798 ) $  90,661




                                             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."

Results of Operations

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

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

                                         Three Months Ended September 30,
                                2011                   2010                  Change
                         Amount        %        Amount        %        Amount        %
Net sales               $ 414,358      100.0 % $ 277,879      100.0 % $ 136,479       49.1 %
Cost of sales             211,505       51.0     146,926       52.9      64,579       44.0
Gross profit              202,853       49.0     130,953       47.1      71,900       54.9
Selling, general and
administrative
expenses                  112,192       27.1      64,639       23.3      47,553       73.6
Income from
operations                 90,661       21.9      66,314       23.9      24,347       36.7
Other expense
(income), net                  50          -        (213 )     (0.1 )       263      123.5
Income before income
taxes                      90,611       21.9      66,527       23.9      24,084       36.2
Income taxes               28,266        6.8      24,555        8.8       3,711       15.1
Net income                 62,345       15.1      41,972       15.1      20,373       48.5
Net loss attributable
to the noncontrolling
interest                      139          -         171        0.1         (32 )    (18.7 )
Net income
attributable to
Deckers Outdoor
Corporation             $  62,484       15.1 % $  42,143       15.2 % $  20,341       48.3 %

Overview. The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011. The increase in net sales was primarily due to an increase in UGG product sales as well as the addition of Sanuk product sales. The increase in income from operations resulted primarily from higher net sales and increased gross margin, partially offset by higher selling, general and administrative expenses.


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

                                                   Three Months Ended September 30,
                                                                            Change
                                                 2011        2010       Amount       %
Net sales by location:
US                                             $ 257,934   $ 204,728   $  53,206    26.0 %
International                                    156,424      73,151      83,273   113.8
Total                                          $ 414,358   $ 277,879   $ 136,479    49.1 %

Net sales by brand and distribution channel:
UGG:
Wholesale                                      $ 334,308   $ 229,128   $ 105,180    45.9 %
eCommerce                                          7,844       6,827       1,017    14.9
Retail stores                                     34,523      19,835      14,688    74.1
Total                                            376,675     255,790     120,885    47.3
Teva:
Wholesale                                         12,879      12,226         653     5.3
eCommerce                                          1,674       1,295         379    29.3
Retail stores                                        140         171         (31 ) (18.1 )
Total                                             14,693      13,692       1,001     7.3
Sanuk:
Wholesale                                         15,350           -      15,350       *
eCommerce                                            228           -         228       *
Retail stores                                          -           -           -       *
Total                                             15,578           -      15,578       *
Other:
Wholesale                                          6,866       7,696        (830 ) (10.8 )
eCommerce                                            508         543         (35 )  (6.4 )
Retail stores                                         38         158        (120 ) (75.9 )
Total                                              7,412       8,397        (985 ) (11.7 )
Total                                          $ 414,358   $ 277,879   $ 136,479    49.1 %

Total eCommerce                                $  10,254   $   8,665   $   1,589    18.3 %

Total Retail stores                            $  34,701   $  20,164   $  14,537    72.1 %



* Calculation of percentage change is not meaningful.

The increase in net sales was primarily driven by strong sales for the UGG brand and the addition of the Sanuk brand. We experienced an increase in the number of pairs sold primarily through our UGG wholesale segment plus the addition of our Sanuk wholesale segment, partially offset by a decrease in pairs sold in our other brands wholesale segment. This resulted in an increase in the overall volume of footwear sold for all brands of 37.8% to approximately 6.2 million pairs sold for the three months ended September 30, 2011 from 4.5 million pairs for the three months ended September 30, 2010. Our weighted-average wholesale selling price per pair increased to $63.99 for the three months ended September 30, 2011 from $58.61 for the three months ended September 30, 2010. The increased average selling price was partially due to higher selling prices resulting from our conversion from a distributor model to a direct wholesale model for our UGG brand in the UK and Benelux and for our Teva brand in the UK. The increased selling prices over the prior year period from this conversion will not recur; however, we expect to maintain the wholesale selling prices in these regions in the future.

Wholesale net sales of our UGG brand increased primarily due to an increase in the overall volume of pairs sold as well as an increase in the average selling price largely related to our conversion to a direct wholesale model in the UK and Benelux. We cannot assure investors that UGG brand sales will continue to grow at their past pace.

Wholesale net sales of our Teva brand increased primarily due to an increase in the average selling price, largely related to our conversion to a direct wholesale model in the UK.


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Wholesale net sales of our Sanuk brand, which we acquired in July 2011, was $15,350.

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

Net sales of our eCommerce business increased due to an increase in the number of pairs sold, partially offset by a decrease in the average selling price.

. . .

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