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DECK > SEC Filings for DECK > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for DECKERS OUTDOOR CORP

Form 10-Q for DECKERS OUTDOOR CORP


11-Aug-2014

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 E-Commerce 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.


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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 Securities and Exchange Commission (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 (FY) ended December 31, 2013 filed with the SEC on March 3, 2014 (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 New York Stock Exchange.

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.

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.

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®, an active lifestyle brand that is rooted with a yoga-inspired mindset; MOZO®, a line of footwear crafted for culinary professionals that redefines the industry dress code; and Hoka One One® (Hoka), a line of footwear for all capacities of runner designed with a unique performance midsole geometry, oversized midsole volume and active foot frame. We sell our brands through quality 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.


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•           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 are expected to decrease
            for the fiscal year ending March 31, 2015 compared to the trailing
            twelve months ended March 31, 2014 due to the increased use of
            UGGpureTM, 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
            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, 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. 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 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 our 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;


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


•           Growing Direct-to-Consumer platform and enhanced OmniChannel
            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 a deeper
            connection with the 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, out-of-home, digital and social media;

• Holiday focused advertising campaign to drive important seasonal sales;

•           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;

• Continued partnership with high-end retailers such as Nordstrom;

• 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 collection is a key platform in driving market penetration for the brand. In the US, we will continue to bolster our leadership position in sandals and grow our market share through casual category extensions. Globally, we expect that the Originals collection will establish Teva's beachhead across the warm-weather climates of Asia and Latin America, setting the foundation to support future core lifestyle collections within these regions.
Within the US, we expect that Teva will grow its position as a market leader within the sport sandal category. Growth opportunities within our current core channels of distribution - outdoor specialty, sporting goods, and family footwear retail chains - will be


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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 16 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, OmniChannel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful.
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.
Ahnu is an active lifestyle brand rooted with a yoga-inspired mindset, offering performance products that encourage a balanced life though fitness, healthy living, nature sufficiency and giving back. Ahnu's products feature après-yoga styling, innovative trail and city hikers, and everyday casual shoes and sandals. Ahnu's go-anywhere approach blurs the lines between performance and fashion through modern color and material stories infused with patented Numentum® performance technology.
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 Zappos.com and Amazon.com. Beginning later in calendar year (CY) 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, allows us to build our relationship with the consumer and is a key component of our integrated OmniChannel strategy. 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


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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) 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, as well as full price in-line product, and products made specifically for the outlet stores. Within our OmniChannel strategy, we believe that consumers try on product in our retail stores, perform further online research and order product online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are interconnected in a way that will allow us to view them on a combined basis. Further, our stores will allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores.
As of June 30, 2014, we had a total of 126 retail stores worldwide. These stores are company-owned and operated. During the remainder of fiscal year 2015, we plan to open additional retail stores worldwide.

Seasonality

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 other brands do not have a significant seasonal impact.

In February 2014, our Board of Directors approved a change in our 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.

The following table summarizes our quarterly net sales and income (loss) from operations:

                                                              FY 2015
                              Quarter Ended       Quarter Ending      Quarter Ending     Quarter Ending
                              June 30, 2014     September 30, 2014   December 31, 2014   March 31, 2015
Net sales                    $      211,469
Loss from operations         $      (50,482 )



                                                        CY 2013                                   FY 2014
                               Quarter Ended         Quarter Ended            Quarter Ended        Quarter Ended
                               June 30, 2013       September 30, 2013       December 31, 2013      March 31, 2014
Net sales                     $      170,085     $            386,725     $           736,048     $      294,716
(Loss) Income from operations $      (42,751 )   $             46,497     $           201,499     $         (408 )

With the large growth in the UGG brand over the past several years, net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. 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 June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table summarizes our results of operations:


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                                                       Three Months Ended June 30,
                                         2014                      2013                     Change
                                  Amount          %         Amount          %         Amount         %
Net sales                       $ 211,469      100.0  %   $ 170,085      100.0  %   $ 41,384       24.3  %
Cost of sales                     124,697       59.0        100,253       58.9        24,444       24.4
Gross profit                       86,772       41.0         69,832       41.1        16,940       24.3
Selling, general and
administrative expenses           137,254       64.9        112,583       66.2        24,671       21.9
Loss from operations              (50,482 )    (23.9 )      (42,751 )    (25.1 )      (7,731 )    (18.1 )
Other expense, net                    288        0.1            301        0.2           (13 )     (4.3 )
Loss before income taxes          (50,770 )    (24.0 )      (43,052 )    (25.3 )      (7,718 )    (17.9 )
. . .
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