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DECK > SEC Filings for DECK > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for DECKERS OUTDOOR CORP


10-May-2013

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, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this interim report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "project," 'plan", "predict", "should," "will," and similar expressions, or the negative of these expressions, as they relate to us, our management and our industry. 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;

† information security and privacy of customer, employee or company information;

†          overall global economic trends;

†          reliability of overseas factory production and storage; and

†          the availability and cost of raw materials.

We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy.

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 of this interim report in the section entitled "Risk Factors," as well as in our other filings with the SEC. In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. As a result, actual results may differ materially from the results stated in or implied by our forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results.

You should read this report in its entirety, together with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 1, 2013 (Annual Report), and the documents that we file as exhibits to these reports and the documents that we incorporate by reference in these reports, with the understanding that our future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements and we expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of the NASDAQ Stock Market.

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 per pair. 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.


Table of Contents

Overview

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.

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 innovative footwear designed and engineered for culinary professionals that spend long hours working on their feet; and Hoka One One® (Hoka), a line of footwear for all capacities of runner designed to alleviate fatigue, impact and muscle strain.

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.

Our business has been impacted by what we believe are several important trends that we expect will continue:

† Continuing uncertainty surrounding US and global economic conditions have adversely impacted businesses worldwide. 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 as the demand from competitors for this material has increased. However, we expect our sheepskin costs to decrease in 2013 compared to 2012 due to lower pricing negotiated for our Fall 2013 product costs.

† 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.

† Consumers 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, and consumers are demanding that brands and companies become more environmentally responsible.

† Consumers are following a recent trend of buy now, wear now. This trend entails the consumer waiting to purchase shoes until they will actually wear them, which includes the impact weather will have on their decision of when to buy, contrasted with a tendency in the past to purchase shoes they did not plan to wear until later.

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 significant cost increases over the past several years, notably with respect to 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 began sourcing products in 2012. Also, refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk.


Table of Contents

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

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 media 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; and

†          continued geographic expansion through our UGG Australia concept and

outlet stores globally.

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, 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 are furthering Teva'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 offering including Teva's new proprietary outdoor cross trainer, TevaSphere™. 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.


Table of Contents

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 a 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 female 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 is dedicated to creative culinary leadership for people who succeed by pushing their craft and art of food to the edge of possible. MOZO footwear provides protection, support, comfort, style and ultimately the confidence needed to thrive in a world where consistently flawless execution is the only way to exist.

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 by increasing 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.


Table of Contents

As of March 31, 2013, we had a total of 78 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 2013, we plan to open additional retail stores, with the majority in international locations. We intend to continue opening more retail stores worldwide beyond 2013.

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 other brands do not have a significant seasonal impact.

                                          2013
                           First     Second     Third    Fourth
                          Quarter    Quarter   Quarter   Quarter
Net sales                $ 263,760
Income from operations   $   2,652




                                                    2012
                                  First      Second       Third      Fourth
                                 Quarter     Quarter     Quarter     Quarter
Net sales                       $ 246,306   $ 174,436   $ 376,392   $ 617,264
Income (loss) from operations   $  11,933   $ (28,708 ) $  59,609   $ 144,114

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 March 31, 2013 Compared to Three Months Ended March 31, 2012



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



                                                 Three Months Ended March 31,
                                        2013                  2012                Change
                                  Amount        %       Amount        %       Amount       %
Net sales                        $ 263,760    100.0 %  $ 246,306    100.0 %  $ 17,454      7.1 %
Cost of sales                      140,201     53.2      133,018     54.0       7,183      5.4
Gross profit                       123,559     46.8      113,288     46.0      10,271      9.1
Selling, general and
administrative expenses            120,907     45.8      101,355     41.2      19,552     19.3
Income from operations               2,652      1.0       11,933      4.8      (9,281 )  (77.8 )
Other expense (income), net            142      0.1         (401 )   (0.2 )       543    135.4
Income before income taxes           2,510      1.0       12,334      5.0      (9,824 )  (79.6 )
Income taxes                         1,503      0.6        4,299      1.7      (2,796 )  (65.0 )
Net income                           1,007      0.4        8,035      3.3      (7,028 )  (87.5 )
Net income attributable to
the noncontrolling interest              -        -         (148 )   (0.1 )       148        *
Net income attributable to
Deckers Outdoor Corporation      $   1,007      0.4 %  $   7,887      3.2 %  $ (6,880 )  (87.2 )%



* Calculation of percentage change is not meaningful.

Overview. The Hoka brand operations are included in our results of operations effective upon our acquisition date of September 27, 2012, and are included in our other brands segment. The increase in our overall net sales was primarily due to an increase in UGG retail and eCommerce sales, as well as increases in our other brands and Teva wholesale sales, partially offset by a decrease in UGG and Sanuk wholesale sales. The decrease in income from operations resulted primarily from higher selling, general and administrative expenses, partially offset by an increase in gross profit.


Table of Contents

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

                                                     Three Months Ended March 31,
                                                                            Change
                                                 2013        2012       Amount      %
Net sales by location:
US                                             $ 182,693   $ 170,558   $ 12,135     7.1 %
International                                     81,067      75,748      5,319     7.0
Total                                          $ 263,760   $ 246,306   $ 17,454     7.1 %

Net sales by brand and distribution channel:
UGG:
Wholesale                                      $  82,706   $  91,934   $ (9,228 ) (10.0 )%
eCommerce                                         24,409      20,058      4,351    21.7
Retail stores                                     63,466      46,079     17,387    37.7
Total                                            170,581     158,071     12,510     7.9
Teva:
Wholesale                                         50,504      48,409      2,095     4.3
eCommerce                                          1,057       1,347       (290 ) (21.5 )
Retail stores                                         46          74        (28 ) (37.8 )
Total                                             51,607      49,830      1,777     3.6
Sanuk:
Wholesale                                         30,011      32,272     (2,261 )  (7.0 )
eCommerce                                            918         107        811   757.9
Retail stores                                         17           -         17       *
Total                                             30,946      32,379     (1,433 )  (4.4 )
Other:
Wholesale                                         10,369       5,787      4,582    79.2
eCommerce                                            230         193         37    19.2
Retail stores                                         27          46        (19 ) (41.3 )
Total                                             10,626       6,026      4,600    76.3
Total                                          $ 263,760   $ 246,306   $ 17,454     7.1 %

Total eCommerce                                $  26,614   $  21,705   $  4,909    22.6 %

Total Retail stores                            $  63,556   $  46,199   $ 17,357    37.6 %



* Calculation of percentage change is not meaningful.

The increase in net sales was primarily due to an increase in UGG retail and eCommerce sales, as well as increases in our other brands and Teva wholesale sales, partially offset by a decrease in UGG and Sanuk wholesale sales. We . . .

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