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DECK > SEC Filings for DECK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for DECKERS OUTDOOR CORP


8-Nov-2012

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, and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. We sometimes use words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "see," "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, investing, and financing
strategies;

†          our product, distribution channel, 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;

†          our expectations for expansion of our retail and eCommerce

capabilities;

† 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

You should read this report in its entirety, together with our Annual Report on Form 10-K, filed with the Securities Exchange Commission (SEC) on February 29, 2012, and the documents that we file as exhibits to these reports and the documents that we incorporate by reference in these reports.

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

† UGG®: Premier brand in luxury and comfort footwear, handbags, apparel, and cold weather accessories;

†          Teva®: High performance, outdoor footwear and sandals; and

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

Our financial condition and results of operations include the operations of the Sanuk brand beginning July 1, 2011, the 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 Hoka, a line of footwear for all capacities of runner designed to alleviate fatigue, impact and muscle strain.


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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.

We believe that our business has been, and will continue to be, impacted by several important trends affecting our end markets:

† The continued uncertainty surrounding US and global economic conditions has 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 sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant increases in the prices of sheepskin. We expect our sheepskin costs to decrease in 2013 compared to 2012.

† 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.

† We believe that 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.

† We believe that consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.

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

† We believe that there is an emerging sustainable lifestyle movement happening all around the world, and 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. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs.

We have experienced cost increases, most significantly with sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production, including in the US from where we have begun sourcing product this year. Also, refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk.

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

UGG Brand Overview

UGG® Australia has grown to be well-known in the US and internationally in the footwear industry. With loyal consumers around the world, including high-profile celebrities, the UGG brand continually earns media exposure from numerous outlets both organically and from strategic public relations efforts. The UGG brand has invested in paid media creating impactful integrated campaigns across multiple channels (including television, out-of-home (OOH), print, digital and social) that are globally scalable, contributing to broader public awareness of the brand.

We believe the increased global media focus and demand for UGG products has been driven by the following:

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

†          continued innovation of new product categories and styles, including

those beyond footwear;

† increased marketing for women and men in targeted high-end print, OOH, digital and social advertising;

†          a targeted UGG for Men campaign featuring Tom Brady;

†          targeted marketing at prospective consumers through email blasts, new
catalogs and direct mail pieces;

†          successful targeting of higher-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 that
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.


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We believe the luxurious comfort 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 apparel. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth.

Teva Brand Overview

The Teva brand is a leading innovative, global, outdoor adventure brand, with 30 years of contributions to the outdoor experience. The Teva brand pioneered the water sport sandal category in 1984, and today our brand mission is to inspire better stories through outdoor adventure. Leveraging our core performance competencies in footwear and delivering our brand promise to help our consumers Live Better Stories™, we are focused on driving growth through innovation in the growing outdoor space through our heritage sandals, off-road trail activities, freestyle mountain bike riding, action water sports, and other outdoor lifestyle products.

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth over the past few years. Additionally, our broader range of footwear 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 2013, we plan to further our Teva brand's global expansion in Asia and Latin America. 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. We continue to see strong sandal sales and growth in our closed-toe offerings. 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

The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a global presence. The Sanuk brand's use of unexpected materials and unconventional constructions has contributed to the brand's identity and growth since its inception, and led to successful products such as the Yoga Mat sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities within the action sports market, as well as other domestic and global markets and channels in which Deckers is already established.

Other Brands Overview

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

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.


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The MOZO brand strives to deliver revolutionary footwear for creative, passionate, and talented professionals who spend long hours working on their feet. Our high-performance footwear is designed to the standards of these professionals, not just their workplace. In 2011, MOZO introduced The Chef Signature Collection: footwear inspired by global style icon Marcus Samuelsson, recently-appointed head chef for the House of Blues group, Aaron Sanchez, and current Top Chef Masters winner, Chris Cosentino. This collection put the MOZO brand in the media for the first time and allowed the brand to open up new distribution opportunities. This year the brand signed the only female Iron Chef winner, Cat Cora, to design a collection built for women to wear in the home kitchen and anywhere else their busy lives take them. Current distribution includes culinary trade wholesale, national on-line retailers and the health care worker market.

The Hoka brand focuses on designing shoes that alleviate fatigue, impact and muscle strain. Runners from around the world are experiencing the benefits of the Hoka brand products. These shoes are used by marathon winners, and even ultra-marathon runners as well as every day runners to enjoy running, maintain top physical performance, and protect against shocks, jolts and injuries.

We expect to leverage our design, marketing, and distribution capabilities to grow our other 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 to grow these brands 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. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. 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, expansion into more international markets, 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 generate strong annual operating income. In addition, our UGG Australia concept stores allow us to showcase our entire product line including footwear, accessories, handbags, and outerwear; whereas, a wholesale account may not represent all of these categories. 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 limited outlet locations.

As of September 30, 2012, we had a total of 68 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During the remainder of 2012, we plan to open additional retail stores, with the majority in international locations, with the total being more than the number of stores we opened in 2011. We intend to continue opening more retail stores worldwide beyond 2012.


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Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar 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.

                                                   2012
                                  First      Second       Third     Fourth
                                 Quarter     Quarter     Quarter    Quarter
Net sales                       $ 246,306   $ 174,436   $ 376,392
Income (loss) from operations   $  11,933   $ (28,708 ) $  59,609




                                                    2011
                                  First      Second       Third      Fourth
                                 Quarter     Quarter     Quarter     Quarter
Net sales                       $ 204,851   $ 154,222   $ 414,358   $ 603,852
Income (loss) from operations   $  28,195   $ (10,798 ) $  90,661   $ 176,780

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded net sales for the first half of the year. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties.

Results of Operations



Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011



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



                                            Three Months Ended September 30,
                                   2012                   2011                  Change
                             Amount        %        Amount        %        Amount        %
Net sales                   $ 376,392     100.0 %  $ 414,358     100.0 %  $ (37,966 )    (9.2 )%
Cost of sales                 217,099      57.7      211,505      51.0        5,594       2.6
Gross profit                  159,293      42.3      202,853      49.0      (43,560 )   (21.5 )
Selling, general and
administrative expenses        99,684      26.5      112,192      27.1      (12,508 )   (11.1 )
Income from operations         59,609      15.8       90,661      21.9      (31,052 )   (34.3 )
Other expense, net                607       0.2           50         -          557         *
Income before income
taxes                          59,002      15.7       90,611      21.9      (31,609 )   (34.9 )
Income tax expense             15,941       4.2       28,266       6.8      (12,325 )   (43.6 )
Net income                     43,061      11.4       62,345      15.0      (19,284 )   (30.9 )
Net loss attributable to
the noncontrolling
interest                            -         -          139         -         (139 )  (100.0 )
Net income attributable
to Deckers Outdoor
Corporation                 $  43,061      11.4 %  $  62,484      15.1 %  $ (19,423 )   (31.1 )%



* Calculation of percentage change is not meaningful.

Overview. The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011. The decrease in net sales was primarily due to a decrease in UGG wholesale sales, partially offset by an increase in UGG retail and eCommerce sales, and Teva and Sanuk wholesale sales. The decrease in income from operations resulted primarily from a decrease in gross profit, partially offset by a decrease in 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
                                                 2012        2011       Amount       %
Net sales by location:
US                                             $ 242,230   $ 257,934   $ (15,704 )  (6.1 )%
International                                    134,162     156,424     (22,262 ) (14.2 )
Total                                          $ 376,392   $ 414,358   $ (37,966 )  (9.2 )%

Net sales by brand and distribution channel:
UGG:
Wholesale                                      $ 284,075   $ 334,308   $ (50,233 ) (15.0 )%
eCommerce                                          9,726       7,844       1,882    24.0
Retail stores                                     39,007      34,523       4,484    13.0
Total                                            332,808     376,675     (43,867 ) (11.6 )
Teva:
Wholesale                                         15,922      12,879       3,043    23.6
eCommerce                                          1,946       1,674         272    16.2
Retail stores                                         73         140         (67 ) (47.9 )
Total                                             17,941      14,693       3,248    22.1
Sanuk:
Wholesale                                         17,008      15,350       1,658    10.8
eCommerce                                          1,307         228       1,079   473.2
Retail stores                                          -           -           -       *
Total                                             18,315      15,578       2,737    17.6
Other:
Wholesale                                          6,991       6,866         125     1.8
eCommerce                                            284         508        (224 ) (44.1 )
Retail stores                                         53          38          15    39.5
Total                                              7,328       7,412         (84 )  (1.1 )
Total                                          $ 376,392   $ 414,358   $ (37,966 )  (9.2 )%

Total eCommerce                                $  13,263   $  10,254   $   3,009    29.3 %

Total Retail stores                            $  39,133   $  34,701   $   4,432    12.8 %



* Calculation of percentage change is not meaningful.

The decrease in net sales was primarily due to a decrease in UGG wholesale sales, partially offset by an increase in UGG retail and eCommerce sales, and Teva and Sanuk wholesale sales. We experienced a decrease in the number of pairs sold in our UGG, other brands and Sanuk wholesale segments, partially offset by an increase in pairs sold in our Teva wholesale, retail stores and eCommerce segments. This resulted in a decrease in the overall volume of footwear sold for all brands of 9.7% to approximately 5.6 million pairs sold for the three months ended September 30, 2012 from 6.2 million pairs for the three months ended September 30, 2011. Our weighted-average wholesale selling price per pair decreased to $62.89 for the three months ended September 30, 2012 from $63.99 for the three months ended September 30, 2011. The decreased average selling price was primarily due to discounted UGG sales in Europe, partially offset by increases in average selling price for UGG sales in the US as well as the Sanuk and Teva brands.

Wholesale net sales of our UGG brand decreased primarily due to a decrease in the volume of pairs sold, as well as a decrease in the average selling price. The decrease in volume was primarily to our wholesale customers in the US, as . . .

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