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DECK > SEC Filings for DECK > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for DECKERS OUTDOOR CORP



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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 consolidated financial statements and the accompanying notes to those statements included elsewhere in this annual report. Overview
We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under three proprietary brands:
•           UGG®: Premier brand in luxurious comfort footwear, handbags, apparel,
            and cold weather accessories;

•           Teva®: Born from the outdoors, active lifestyle footwear for the
            adventurous spirit; 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 and Hoka One One® (Hoka) beginning September 27, 2012, the acquisition dates. In addition to our primary brands, our other brands include TSUBO®, a line of mid and high-end dress and dress casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle footwear; MOZO®, a line of footwear crafted for culinary professionals that redefines the industry dress code; Hoka, a line of footwear for all capacities of runner designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; and Simple®, a line for which we ceased distribution effective December 31, 2011.
We sell our brands through higher-end domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce 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 and we expect that it will continue to be impacted:

•           Sales of our products are highly seasonal and are sensitive to
            weather conditions, which are beyond our control.  Even though we are
            creating more year-round styles for our brands, the effect of
            favorable or unfavorable weather on sales can be significant.

•           Continuing uncertainty surrounding US and global economic conditions
            has 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 fluctuations in the
            price of sheepskin as the demand from competitors for this material
            has changed. However, our sheepskin costs decreased in 2013 compared
            to 2012 due to lower pricing negotiated for our Fall 2013 product
            costs, as well as the use of UGGpure, real wool woven into a durable
            backing used as an alternative to table grade sheepskin, in select
            linings and foot beds.

•           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

•           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.

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• 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, 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 fluctuations, most 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 7A. 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 some key factors that affect each business and some of our strategies for growing each business.
UGG Brand Overview
The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company's successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including digital, social, out-of-home (OOH) and print, which 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:

•           High consumer brand loyalty, due to over 35 years of delivering
            quality and luxuriously comfortable UGG footwear;

•           Continued innovation of new product categories and styles, including
            those beyond footwear such as loungewear, handbags, cold-weather
            accessories and a new home offering;

•           A more robust footwear offering, including transitional collections
            to better bridge the gap between late summer and the start of the
            holiday season;

•           Expanded slipper category showing incremental growth with added
            styles for both women and men;

•           Growing Direct-to-Consumer platform and enhanced omni-channel
            capabilities that enable us to increasingly engage existing and
            prospective consumers in a more connected environment to introduce
            our evolving product lines;

•           Product customization with our UGG by You program allows for deeper
            connection with brand and products;

•           Focus on mobile consumers with responsive site design providing
            shoppers access to the brand from their mobile device;

•           Year-round holistic paid advertising approach for women, men and kids
            in targeted high-end print, OOH, digital and social media;

• Holiday focused advertising campaign to drive important seasonal sales;

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•           Continued creation of targeted UGG for Men campaigns featuring brand
            ambassador Tom Brady;

•           Targeted E-Commerce based marketing to existing and prospective
            consumers through integrated outreach including email blasts,
            interactive site design and search engine optimization based content;

• Successful targeting of higher-end distribution;

• Expanded product assortments from existing accounts;

• Adoption by high-profile celebrities as a favored footwear brand;

•           Continued 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 stores; and

• Continued geographic expansion through our UGG 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 presenting UGG as a global, premium lifestyle brand and limiting distribution to selected higher-end retailers. As part of this strategy, we have increased our product offering, including a growing transitional collections and 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 home, 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 will also 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
For 30 years Teva has fueled the adventure lifestyle around the globe. Teva pioneered the sport sandal category in 1984 and today our mission remains steadfast: to enable spontaneous adventure with versatile, utility-centered footwear for active consumers. By designing simple, functional footwear, Teva is driving growth by extending our established global platforms in sandals and water-related products and by leveraging our authenticity with active lifestyle consumers.
We believe that Teva's Originals product line will be a key platform in driving market penetration for the brand. In the US, we believe the line will continue to bolster our leadership position in sandals and grow our market share through casual category extensions. Globally, we expect that the Originals line will establish Teva's position across the warm-weather climates of Asia and Latin America, setting the foundation to support core lifestyle collections within these regions.
Within the US, Teva maintains its position as a market leader within the sport sandal category. Growth opportunities within our current core channels of distribution - outdoor specialty and sporting goods - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. 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 brand with an expanding consumer audience and growing presence in the casual canvas and sandals categories. The Sanuk brand's use of unexpected materials and unconventional constructions combined with its fun and funky branding has contributed to the brand's identity and growth since its inception, and led to successful products such as the Yoga MatTM sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities, especially within the casual canvas markets, supporting our strategic initiatives spanning new product launches, and Direct-to-Consumer channel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful. Other Brands Overview

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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.
MOZO creates footwear for culinary professionals that redefines the industry dress code. Crafted for the most discerning of palates, MOZO shoes blend function, performance, and style. Each product is lightweight, durable, comfortable, and easy to clean. MOZO footwear is designed for casual, every day wear and built to challenge any culinary environment so you never have to compromise your personal style to perform at your very best. MOZO shoes are sold through food service equipment and supply distributors and online at and Beginning in 2014, we expect that MOZO products will be available at footwear retailers nationwide.
The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. Runners from around the world are experiencing the benefits of Hoka brand products. These shoes are used by marathon runners, and even ultra-marathon runners as well as every day runners to enjoy running.
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. E-Commerce Overview
Our E-Commerce business, which sells all of our brands except Mozo, allows us to build our relationship with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce 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 E-Commerce 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 E-Commerce 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 E-Commerce 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 E-Commerce business will continue to grow.
Retail Stores Overview
Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our fleet and opened our first Sanuk (two concept, one outlet) and Teva (one 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 concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge and retail exclusive items; 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. As of December 31, 2013, we had a total of 117 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 2014, we plan to open additional retail stores worldwide. Seasonality

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Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a significant seasonal impact.
Subsequent to December 31, 2013, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our business. Under the applicable rules of the Securities and Exchange Commission, the Company intends to file a transition report on Form 10-QT for the quarter ending March 31, 2014.

                                First        Second        Third        Fourth
                               Quarter       Quarter      Quarter      Quarter
Net sales                     $ 263,760    $ 170,085     $ 386,725    $ 736,048
Income (loss) from operations $   2,652    $ (42,751 )   $  46,497    $ 201,499

                                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 level of UGG brand net sales over the past several years, net sales in the last half of the calendar year have exceeded net sales for the first half of the calendar 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 wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors."
Results of Operations
Year ended December 31, 2013 Compared to Year ended December 31, 2012 The following table summarizes our results of operations:

                                                       Years ended December 31,
                                       2013                       2012                     Change
                                Amount          %          Amount          %         Amount          %
Net sales                    $ 1,556,618      100.0 %   $ 1,414,398      100.0 %   $ 142,220       10.1  %
Cost of sales                    820,135       52.7         782,244       55.3        37,891        4.8
Gross profit                     736,483       47.3         632,154       44.7       104,329       16.5
Selling, general and
administrative expenses          528,586       33.9         445,206       31.5        83,380       18.7
Income from operations           207,897       13.4         186,948       13.2        20,949       11.2
Other expense, net                 2,340        0.2           2,830        0.2          (490 )    (17.3 )
Income before income taxes       205,557       13.2         184,118       13.0        21,439       11.6
Income taxes                      59,868        3.8          55,104        3.9         4,764        8.6
Net income                       145,689        9.4         129,014        9.1        16,675       12.9
Net income attributable to
the noncontrolling interest            -          -            (148 )        -           148         *
Net income attributable to
Deckers Outdoor Corporation  $   145,689        9.4 %   $   128,866        9.1 %   $  16,823       13.1  %

* Calculation of percentage change is not meaningful. Overview. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale

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channel, and increased Sanuk brand sales through our E-Commerce sites and retail stores. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher selling, general and administrative expenses (SG&A).
Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel:

                                                    Years Ended December 31,
                                       2013            2012           Amount           %
Net sales by location:
US                                 $ 1,042,274     $   972,987     $   69,287           7.1  %
International                          514,344         441,411         72,933          16.5
Total                              $ 1,556,618     $ 1,414,398     $  142,220          10.1  %
Net sales by brand and
distribution channel:
Wholesale                          $   818,377     $   819,256     $     (879 )        (0.1 )%
E-Commerce                             155,635         118,886         36,749          30.9
Retail stores                          324,868         245,397         79,471          32.4
Total                                1,298,880       1,183,539        115,341           9.7
Wholesale                              109,334         108,591            743           0.7
E-Commerce                               6,627           6,578             49           0.7
Retail stores                              426             347             79          22.8
Total                                  116,387         115,516            871           0.8
Wholesale                               94,420          89,804          4,616           5.1
E-Commerce                               6,077           4,172          1,905          45.7
Retail stores                            1,183              20          1,163       5,815.0
Total                                  101,680          93,996          7,684           8.2
Other brands:
Wholesale                               38,276          20,194         18,082          89.5
E-Commerce                               1,195             956            239          25.0
Retail stores                              200             197              3           1.5
Total                                   39,671          21,347         18,324          85.8
Total                              $ 1,556,618     $ 1,414,398     $  142,220          10.1  %
Total E-Commerce                   $   169,534     $   130,592     $   38,942          29.8  %
Total Retail stores                $   326,677     $   245,961     $   80,716          32.8  %

In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations, we provide certain financial information on a "constant currency basis", which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. generally accepted accounting principles. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel and increased Sanuk brand sales through our E-Commerce sites and retail stores. On a constant currency basis, net sales increased by 11.1% to approximately $1,571,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 10.1% overall increase in the volume of footwear sold for all brands and channels to approximately 26.1 million pairs for the year ended December 31, 2013 compared to approximately 23.7 million pairs for 2012. Our weighted-average wholesale selling price per pair decreased to $46.87 for the year ended December 31, 2013 from $49.17 for 2012. The decreased average selling price . . .

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