Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to

 

Commission File Number: 0-22446

 

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3015862

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

495-A South Fairview Avenue, Goleta, California

 

93117

(Address of principal executive offices)

 

(zip code)

 

(805) 967-7611

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 27, 2010

 

 

 

Common Stock, $0.01 par value

 

38,544,429

 

 

 



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Table of Contents

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

1

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults Upon Senior Securities

31

 

 

 

Item 4.

(Removed and Reserved)

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

31

 

 

 

Signatures

 

33

 



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except par value)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

250,536

 

$

315,862

 

Restricted cash

 

200

 

300

 

Short-term investments

 

 

26,120

 

Trade accounts receivable, net of allowances of $10,809 and $11,790 as of September 30, 2010 and December 31, 2009, respectively

 

142,232

 

76,427

 

Inventories

 

197,313

 

85,356

 

Prepaid expenses and other current assets

 

7,921

 

7,210

 

Deferred tax assets

 

9,712

 

9,712

 

Total current assets

 

607,914

 

520,987

 

 

 

 

 

 

 

Restricted cash

 

200

 

400

 

Property and equipment, at cost, net

 

42,907

 

35,442

 

Goodwill and other intangible assets, net

 

25,239

 

23,940

 

Deferred tax assets

 

16,704

 

16,704

 

Other assets

 

4,214

 

1,570

 

Total assets

 

$

697,178

 

$

599,043

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

73,202

 

$

47,331

 

Accrued payroll

 

20,575

 

20,869

 

Other accrued expenses

 

9,879

 

12,985

 

Income taxes payable

 

23,109

 

19,685

 

Total current liabilities

 

126,765

 

100,870

 

 

 

 

 

 

 

Long-term liabilities

 

8,091

 

6,269

 

 

 

 

 

 

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Deckers Outdoor Corporation stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 125,000 and 50,000 shares; issued and outstanding 38,544 and 38,604 shares as of September 30, 2010 and December 31, 2009, respectively

 

385

 

129

 

Additional paid-in capital

 

136,971

 

125,431

 

Retained earnings

 

424,228

 

365,304

 

Accumulated other comprehensive income

 

174

 

494

 

Total Deckers Outdoor Corporation stockholders’ equity

 

561,758

 

491,358

 

Noncontrolling interest

 

564

 

546

 

Total equity

 

562,322

 

491,904

 

Total liabilities and equity

 

$

697,178

 

$

599,043

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

277,879

 

$

228,414

 

$

570,865

 

$

465,188

 

Cost of sales

 

146,926

 

130,463

 

301,262

 

267,539

 

Gross profit

 

130,953

 

97,951

 

269,603

 

197,649

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

64,639

 

44,871

 

161,252

 

121,018

 

Impairment loss

 

 

 

 

1,000

 

Income from operations

 

66,314

 

53,080

 

108,351

 

75,631

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense, net:

 

 

 

 

 

 

 

 

 

Interest income

 

(95

)

(101

)

(167

)

(973

)

Interest expense

 

216

 

8

 

340

 

(915

)

Other, net

 

(334

)

(12

)

(948

)

(54

)

 

 

(213

)

(105

)

(775

)

(1,942

)

Income before income taxes

 

66,527

 

53,185

 

109,126

 

77,573

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

24,555

 

19,434

 

40,104

 

28,702

 

Net income

 

41,972

 

33,751

 

69,022

 

48,871

 

Net loss (income) attributable to noncontrolling interest

 

171

 

74

 

(18

)

173

 

Net income attributable to Deckers Outdoor Corporation

 

$

42,143

 

$

33,825

 

$

69,004

 

$

49,044

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Deckers Outdoor Corporation common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.09

 

$

0.87

 

$

1.79

 

$

1.25

 

Diluted

 

$

1.07

 

$

0.86

 

$

1.76

 

$

1.24

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

38,615

 

38,928

 

38,638

 

39,183

 

Diluted

 

39,228

 

39,210

 

39,258

 

39,480

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

69,022

 

$

48,871

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation, amortization and accretion

 

8,836

 

7,360

 

(Recovery of) provision for doubtful accounts, net

 

(719

)

1,034

 

Write-down of inventory

 

1,627

 

3,076

 

Impairment loss

 

 

1,000

 

Stock compensation

 

10,212

 

7,378

 

Other

 

(741

)

182

 

Changes in operating assets and liabilities, net of assets and liabilities acquired in the acquisition of businesses:

 

 

 

 

 

Restricted cash

 

300

 

300

 

Trade accounts receivable

 

(65,086

)

(5,611

)

Inventories

 

(112,587

)

(96,275

)

Prepaid expenses and other current assets

 

(711

)

167

 

Other assets

 

(644

)

(556

)

Trade accounts payable

 

25,872

 

8,415

 

Accrued expenses

 

(3,952

)

(9,875

)

Income taxes payable

 

4,822

 

(2,131

)

Long-term liabilities

 

1,823

 

2,233

 

Net cash used in operating activities

 

(61,926

)

(34,432

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

 

(66,924

)

Proceeds from sales of short-term investments

 

26,080

 

33,613

 

Purchases of property and equipment

 

(14,496

)

(11,261

)

Acquisitions of businesses and equity method investment

 

(5,191

)

(1,877

)

Net cash provided by (used in) investing activities

 

6,393

 

(46,449

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash paid for shares withheld for taxes

 

(1,972

)

(1,487

)

Excess tax benefits from stock compensation

 

2,066

 

1,104

 

Cash received from issuances of common stock

 

86

 

 

Cash paid for repurchases of common stock

 

(10,082

)

(20,000

)

Net cash used in financing activities

 

(9,902

)

(20,383

)

 

 

 

 

 

 

Effect of exchange rates on cash

 

109

 

72

 

Net change in cash and cash equivalents

 

(65,326

)

(101,192

)

Cash and cash equivalents at beginning of period

 

315,862

 

176,804

 

Cash and cash equivalents at end of period

 

$

250,536

 

$

75,612

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

33,380

 

$

29,444

 

Interest

 

$

25

 

$

9

 

Non-cash investing activity:

 

 

 

 

 

Accruals for purchases of property and equipment

 

$

461

 

$

278

 

Non-cash financing activity:

 

 

 

 

 

Accruals for shares withheld for taxes

 

$

593

 

$

495

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

(1)                     General

 

(a)         Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for a fair presentation for each of the periods presented.  The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years.  Deckers Outdoor Corporation strives to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear and accessories, developed for both high performance outdoor activities and everyday casual lifestyle use.  The Company’s business is seasonal, with the highest percentage of UGG® brand net sales occurring in the third and fourth quarters and the highest percentage of Teva® brand net sales occurring in the first and second quarters of each year. The other brands do not have a significant seasonal impact on the Company.  The Company owns 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China.  Stella International is also one of the Company’s major manufacturers in China.  In March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear brand.  In January 2010, the Company acquired certain assets and liabilities, including reacquisition of its distribution rights, from its Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France.  On September 30, 2010, the Company purchased a portion of a privately held footwear company as an equity method investment.

 

As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company’s annual consolidated financial statements and footnotes thereto.  For further information, refer to the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

On May 28, 2010, the Company announced that the Company’s Board of Directors authorized a three-for-one stock split to be effected in the form of a stock dividend.  Each stockholder of record received two additional shares of common stock for each share held on June 17, 2010, that was paid on July 2, 2010.  All share and related information presented in these condensed consolidated financial statements and notes reflect the increased number of shares resulting from this stock split for all periods presented.

 

(b)         Use of Estimates

 

The preparation of the Company’s condensed consolidated financial statements in accordance with US generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes.  Significant areas requiring the use of management estimates relate to inventory reserves, accounts receivable reserves, returns liabilities, stock compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities. Actual results could differ materially from these estimates.

 

(c)          Reclassifications

 

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current presentation.

 

(2)                     Stockholders’ Equity

 

In June 2009, the Company announced that the Board of Directors approved a stock repurchase program to repurchase up to $50,000 of the Company’s common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors.  The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company’s discretion.  The purchases will be funded from available working capital.  Prior to the stock split, we repurchased shares that were retired; the repurchased shares were not affected by the stock split.  During the three months ended September 30, 2010, the Company

 

4



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

repurchased 170,000 shares for approximately $7,400, or an average price of $43.89 per share, under this program.  During the nine months ended September 30, 2010, the Company repurchased 190,000 shares for approximately $10,100, or an average price of $53.05 per share.  As of September 30, 2010, the remaining approved amount for repurchases was approximately $20,000.

 

In May 2010, the stockholders of the Company approved an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 50,000,000 to 125,000,000 shares.

 

The following is a reconciliation of the Company’s retained earnings:

 

 

 

Retained 
Earnings

 

Balance at December 31, 2008

 

$

268,515

 

 

 

 

 

Net income attributable to Deckers Outdoor Corporation

 

116,786

 

Repurchase of common stock

 

(19,997

)

Balance at December 31, 2009

 

365,304

 

 

 

 

 

Net income attributable to Deckers Outdoor Corporation

 

69,004

 

Repurchase of common stock

 

(10,080

)

Balance at September 30, 2010

 

$

424,228

 

 

(3)                     Comprehensive Income

 

Comprehensive income is the total of net income and all other non-owner changes in equity. At September 30, 2010 and December 31, 2009, accumulated other comprehensive income of $174 and $494, respectively, consisted of unrealized gains and losses on short-term investments and cumulative foreign currency translation adjustments.

 

Comprehensive income is determined as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

41,972

 

$

33,751

 

$

69,022

 

$

48,871

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

3

 

(24

)

1

 

(19

)

Cumulative foreign currency translation adjustments

 

734

 

48

 

(321

)

42

 

Total other comprehensive income (loss)

 

737

 

24

 

(320

)

23

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

42,709

 

33,775

 

68,702

 

48,894

 

Comprehensive loss (income) attributable to noncontrolling interest

 

171

 

74

 

(18

)

173

 

Comprehensive income attributable to Deckers Outdoor Corporation

 

$

42,880

 

$

33,849

 

$

68,684

 

$

49,067

 

 

(4)                     Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders

 

Basic net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of common shares outstanding for the period.  Diluted net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock.  For the three and nine months ended September 30, 2010 and 2009, the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), stock appreciation rights (SARs), and options to purchase common stock.

 

5



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The reconciliations of basic to diluted weighted-average common shares outstanding were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Weighted-average shares used in basic computation

 

38,615,000

 

38,928,000

 

38,638,000

 

39,183,000

 

Dilutive effect of share-based awards*

 

613,000

 

282,000

 

620,000

 

297,000

 

 

 

39,228,000

 

39,210,000

 

39,258,000

 

39,480,000

 

 

 

 

 

 

 

 

 

 

 


*Excluded NSUs as of September 30, 2010 and 2009

 

313,000

 

282,000

 

313,000

 

282,000

 

 

The Company excluded the SARs and RSUs from the diluted net income per share computation for the awards that are expected to vest on December 31, 2011 through December 31, 2016.  SARs and RSUs that are expected to vest on December 31, 2010 are included in the three and nine months ended September 30, 2010, but not included in the three and nine months ended September 30, 2009.  These shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance through September 30, 2010 and 2009, respectively.

 

(5)                     Fair Value Measurements

 

The fair values of the Company’s cash and cash equivalents, restricted cash, trade accounts receivable, prepaid expenses and other current assets, trade accounts payable, accrued expenses, and income taxes payable approximate the carrying values due to the relatively short maturities of these instruments.  The fair values of the Company’s long-term liabilities, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.  The fair value of the Company’s derivatives are measured and recorded at fair value on a recurring basis (see footnote 6, “Foreign Currency Exchange Contracts and Hedging,” for further information).

 

The inputs used in measuring fair value are prioritized into the following hierarchy:

 

·                  Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

·                  Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

·                  Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

 

The Company has established a nonqualified deferred compensation program with an effective date of February 1, 2010 (referred to as “the Plan”).  The Plan permits a select group of management employees, designated by the Plan Committee, to defer earnings to a future date on a nonqualified basis.  For each plan year, the Board may, but is not required to, contribute any amount it desires to any participant under the Plan. The Company’s contribution will be determined by the Board annually in the fourth quarter. No such contribution has been approved as of September 30, 2010.  All amounts deferred under this plan are presented in long-term liabilities in the condensed consolidated balance sheet.  The value of the deferred compensation is recognized based on the fair value of the participants’ accounts based on Level 1 inputs.  The Company has established a trust as a reserve for the benefits payable under the Plan.  The amounts deferred and the assets in trust related to the Plan were immaterial as of September 30, 2010.

 

Short-term investments are classified as available for sale and are reported at fair value, with any unrealized gains and losses included as a separate component of stockholders’ equity. Interest and dividends are included in interest income in the condensed consolidated statements of income.  The cost of securities sold is based on the specific identification method.  Securities with original maturities of three months or less are classified as cash equivalents. Those that mature over three months from their original date and in less than one year are classified as short-term investments, as the funds are used for working capital requirements. The fair values of the Company’s short-term investments are shown in the table below and were determined based on Level 1 inputs.  The Company had no short-term investments at September 30, 2010.

 

6



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

 

 

December 31, 2009

 

 

 

Cost

 

Unrealized 
Gains

 

Fair Value

 

Short-term Investments

 

 

 

 

 

 

 

Government and agency securities

 

$

26,118

 

$

2

 

$

26,120

 

Total short-term investments

 

$

26,118

 

$

2

 

$

26,120

 

 

Proceeds from sales of available for sale securities were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Proceeds from sales

 

$

 

$

16,710

 

$

26,080

 

$

33,613

 

 

(6)                     Foreign Currency Exchange Contracts and Hedging

 

The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

 

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies.  In addition, the Company utilizes foreign exchange forward or option contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances.  The Company does not use foreign currency contracts for speculative or trading purposes.

 

Some foreign exchange contracts are not designated as hedging instruments for financial accounting purposes. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in selling, general and administrative expenses in the condensed consolidated statements of income. The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in selling, general and administrative expenses.

 

The Company has factored into the fair value measurements the nonperformance risk of the Company and the counterparty and it did not have a material impact on the fair value of the derivatives.  As of September 30, 2010, the fair value of the Company’s designated and non-designated derivatives was not significant.  For the nine months ended September 30, 2010, gains and losses on the Company’s designated option contracts were not significant, and the loss on the non-designated derivatives was $571.  As of September 30, 2010, our hedging contracts totaled approximately $10,000.  Subsequent to September 30, 2010, we entered into several new hedging contracts totaling approximately $61,000.

 

(7)                     Credit Agreement

 

In May 2010, the Company and its subsidiary, TSUBO, LLC, entered into the Second Amended and Restated Credit Agreement with Comerica Bank (the “Credit Agreement”).  The Credit Agreement provides for a maximum availability of $20,000.  Up to $12,500 of borrowings may be in the form of letters of credit.  Amounts borrowed under the Credit Agreement bear interest at the lender’s prime rate or, at the Company’s option, at the London Interbank Offered Rate, or LIBOR, plus 1.0%, and is secured by substantially all of the Company’s assets.  The Credit Agreement includes annual commitment fees of $60 per year, which can be waived if the Company deposits $10,000 in non-interest bearing new deposits with Comerica Bank; provided that such deposits may be removed by the Company at any time, subject to paying a pro-rated annual commitment fee.  The Credit Agreement expires on June 1, 2012.  At September 30, 2010, the Company had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $830.  As a result, $19,170 was available under the Credit Agreement at September 30, 2010.

 

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The Credit Agreement contains certain financial covenants.  The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000, maximum loans to employees of $200, and maximum loans to subsidiaries who are not parties to the Credit Agreement of $25,000. The Credit Agreement contains certain financial covenants if the outstanding obligations exceed $2,000, including a minimum tangible net worth requirement of $294,891 commencing with the fiscal year ended December 31, 2010 plus 75% of consolidated net profit on a cumulative basis, no consolidated net loss for two or more consecutive fiscal quarters and maximum acquisitions of $25,000 per calendar year.

 

(8)                     Business Segments, Concentration of Business, and Credit Risk and Significant Customers

 

In the first quarter of fiscal 2010, as part of a refinement of its business strategy, the Company combined its Simple® wholesale reportable segment into the other wholesale reportable segment.  None of the brands included in the other wholesale reportable segment met the quantitative thresholds for individual segment reporting, and they share a majority of the aggregation criteria, thus permitting the Company to aggregate these brands for segment reporting purposes.  This change in segment reporting did not have a material impact on the Company’s condensed consolidated financial statements for any periods. The segment information for the three and nine months ended September 30, 2009 and as of December 31, 2009 has been adjusted retrospectively to conform to the current period presentation.

 

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies, except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The Company’s reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, and its other brands (including the Simple, TSUBO®, and Ahnu® brands), its eCommerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing and sales strategies. The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, selling and marketing, depreciation, amortization and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs are the shared costs of the organization and include the following: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources and facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce and retail stores segments for the US is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit.

 

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

Net sales and operating income (loss) by business segment are summarized as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

229,128

 

$

194,842

 

$

381,728

 

$

324,443

 

Teva wholesale

 

12,226

 

7,318

 

83,549

 

62,130

 

Other wholesale

 

7,696

 

5,556

 

20,064

 

16,431

 

eCommerce

 

8,665

 

8,350

 

32,264

 

29,798

 

Retail stores

 

20,164

 

12,348

 

53,260

 

32,386

 

 

 

$

277,879

 

$

228,414

 

$

570,865

 

$

465,188

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

96,179

 

$

75,204

 

$

161,651

 

$

125,669

 

Teva wholesale

 

(780

)

(435

)

17,221

 

11,752

 

Other wholesale

 

(240

)

(1,616

)

(2,554

)

(11,106

)

eCommerce

 

785

 

886

 

5,424

 

6,365

 

Retail stores

 

1,819

 

183

 

5,742

 

188

 

Unallocated overhead costs

 

(31,449

)

(21,142

)

(79,133

)

(57,237

)

 

 

$

66,314

 

$

53,080

 

$

108,351

 

$

75,631

 

 

Business segment asset information is summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Total assets for reportable segments:

 

 

 

 

 

UGG wholesale

 

$

299,838

 

$

130,493

 

Teva wholesale

 

37,033

 

31,105

 

Other wholesale

 

13,875

 

11,551

 

eCommerce

 

1,890

 

2,431

 

Retail stores

 

37,422

 

27,931

 

 

 

$

390,058

 

$

203,511

 

 

The assets allocable to each reporting segment generally include accounts receivable, inventory, fixed assets, intangible assets and certain other assets that are specifically identifiable with one of the Company’s segments. Unallocated assets are the assets not specifically related to the segments and generally include cash and cash equivalents, short-term investments, deferred tax assets, and various other assets shared by the Company’s segments. Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets are as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Total assets for reportable segments

 

$

390,058

 

$

203,511

 

Unallocated cash and cash equivalents and short-term investments

 

250,536

 

341,982

 

Unallocated deferred tax assets

 

26,416

 

26,416

 

Other unallocated corporate assets

 

30,168

 

27,134

 

Consolidated total assets

 

$

697,178

 

$

599,043

 

 

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

At September 30, 2010, the Company had cash and cash equivalents of $250,536. A portion of these are held as cash in operating accounts that are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of September 30, 2010, the Company had experienced no loss or lack of access to cash in its operating accounts.

 

The remainder of the Company’s cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. Investment risk has been and may further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of September 30, 2010, the Company had experienced no loss or lack of access to its cash and cash equivalents.

 

The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions.  International sales were 26.3% and 21.6% of the Company’s total net sales for the three months ended September 30, 2010 and 2009, respectively.  International sales were 32.2% and 27.5% of the Company’s total net sales for the nine months ended September 30, 2010 and 2009, respectively.  The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments.

 

Long-lived assets, which consist of property and equipment, by major country were as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

US

 

$

31,674

 

$

27,405

 

UK

 

6,970

 

6,341

 

All other countries*

 

4,263

 

1,696

 

Total

 

$

42,907

 

$

35,442

 

 


*                 No other country’s long-lived assets comprised more than 10% of total long-lived assets as of September 30, 2010 or December 31, 2009.

 

Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations.  No single customer accounted for more than 10.0% of the Company’s net sales for the nine months ended September 30, 2010 or 2009.  As of September 30, 2010 and December 31, 2009, the Company had one customer representing 11.6% and 28.0% of net trade accounts receivable, respectively.

 

The Company’s production is concentrated at a limited number of independent contractor factories in China. The Company’s sourcing is concentrated in Australia and China.  The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.

 

(9)                      Commitments and Contingencies

 

The Company has a contract requiring minimum purchase commitments of sheepskin that Deckers’ affiliates, manufacturers, factories and other agents (each or collectively, a “Buyer”) must make on or before December 31, 2010. As of September 30, 2010 the remaining commitment is approximately $5,500. This contract may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before December 31, 2010, the Company is required to purchase any remaining amounts on or before December 31, 2010. The contract does not permit net settlement. As of September 30, 2010 the Company believes it is likely that it will need to purchase most of the remaining $5,500 of sheepskin.  The Company believes it will use the sheepskin in the ordinary course of business, and therefore not incur any material losses or have a material effect on the Company’s condensed consolidated financial statements.

 

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The Company agreed to make loans to its joint venture with Stella International, should the need arise. As of September 30, 2010, the estimated remaining loans by Deckers were expected to be approximately $1,000. The Company owns 51% of the joint venture. The Company also entered into or amended agreements with certain of its international distributors to assume control of the distribution rights in those regions. Under one of these agreements, the Company is obligated to make total payments of approximately $1,600 from October 1, 2010 through the second quarter of 2011. The payments include consideration for the purchase of certain assets and services.

 

In 2009, the Internal Revenue Service (IRS) selected the Company’s US federal income tax return for the year ended December 31, 2007 for examination and has since expanded the audit period to include the years ending December 31, 2006 through 2009.  The Company does not know the timing of completion of the examination or if the examination will result in a material effect to the Company’s financial statements.  It is reasonably possible that the Company’s unrecognized tax benefit could change, and the Company cannot determine if any such change will be material.  The Company believes its unrecognized tax benefits are appropriately reported.

 

The Company has on-going income tax examinations under various state tax jurisdictions.  It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s condensed consolidated financial statements.

 

The Company is currently involved in various legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property.

 

(10)                Other Intangible Assets

 

As of June 30, 2009, the Company did not reach its 2009 TSUBO brand period-to-date sales targets and reduced its long-term forecast for TSUBO brand sales.  These factors were indicators that the TSUBO intangible assets were possibly impaired.  As a result, the Company conducted an interim impairment evaluation of the TSUBO intangible assets as of June 30, 2009 and concluded that the fair value of the TSUBO trademarks was lower than the carrying amount.  Therefore, the Company recognized an impairment loss of $1,000 on the TSUBO trademarks during the nine months ended September 30, 2009.  The impairment loss is included as a part of the other wholesale reportable segment.  The Company’s other intangible assets, net are summarized as follows:

 

Balance at December 31, 2009

 

$

17,433

 

Purchases of intangible assets

 

3,726

 

Amortization expense

 

(2,427

)

Balance at September 30, 2010

 

$

18,732

 

 

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Table of Contents

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This report and the information incorporated by reference in this report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:

 

·                  our global business, growth, operating and financing strategies;

·                  our product and geographic mix;

·                  the success of new products and 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 or results of operations;

·                  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, and “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.

 

The “UGG,” “Teva,” “Simple,” “TSUBO,” and “Ahnu” families of related marks, images and symbols are our trademarks and intellectual property.  Other trademarks, trade names and service marks appearing in this report are the property of their respective holders.  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.  All share and related information presented herein reflects the increased number of shares resulting from the three-for-one stock split effected on June 17, 2010.

 

Overview

 

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

 

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

 

·                  Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals.

 

In addition to our primary brands, our other brands include Simple®, a line of casual and sustainable-lifestyle sneakers and accessories; TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; and Ahnu®, a line of outdoor performance and lifestyle footwear.

 

We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce business and our retail stores. Independent third parties manufacture all of our products. In 2011, we will convert from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the UK and the UGG and Simple brands in the Benelux region.

 

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Table of Contents

 

Our business has been impacted by several important trends affecting our end markets:

 

·                  The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.

·                  The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.

·                  Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort and high performance attributes they have come to expect from traditional athletic footwear.

·                  Our customers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.

·                  Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.

·                  There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands and companies take a more responsible approach when it comes to protecting the environment.

 

By emphasizing our brands’ images and our focus on comfort, performance and authenticity, we believe we can maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences.

 

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

 

UGG Brand Overview

 

The UGG brand has become well-known throughout the US as well as internationally.  Over the past several years, our UGG brand has received increased global media exposure including increased print media in ads and cooperative advertising with our customers, which has contributed to broader public awareness of the brand and significantly increased demand for the collection.  We believe that the increased global media focus and demand for UGG products were driven by the following:

 

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

·                  continued innovation of new product categories and styles;

·                  increased marketing in high-end magazines;

·                  successful targeting of high-end distribution;

·                  adoption by high-profile celebrities as a favored footwear brand;

·                  increased media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to;

·                  increased exposure to the brand driven by our concept stores which showcase all of our product offerings; and

·                  continued geographic expansion across the US and internationally.

 

We believe the luxury and comfort features of UGG products will continue to drive long-term consumer demand.  Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our strategy seeks to prolong the longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers.  As part of this strategy we have increased our product offering, including a growing spring line, an expanded men’s line, and a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as handbags and cold weather outerwear and accessories.

 

Teva Brand Overview

 

Our Teva brand is positioned to be the innovative global adventure brand, with a 25-year track record of contributing to the outdoor experience.  We pioneered the water sport sandal category in 1984, and heading into 2011, our brand mission is to inspire spontaneity, camaraderie and adventure on, around, or in water.  Leveraging our core performance competencies of traction, hydro and comfort, we are focused on driving growth through innovation in the growing closed toe markets of multi-sport and light hiking, while maintaining our stronghold in the sandal market.

 

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Table of Contents

 

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, have contributed to the significant revenue growth in 2010.  Throughout 2010, our broader range of products has shown 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 2010, we converted from a distributor model to a direct subsidiary model in the Benelux region and France, enhancing our marketing and distribution capabilities in the outdoor active Belgium, Netherlands and Luxembourg markets.  Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands.  Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels.  However, we cannot assure investors that these efforts will be successful.

 

Other Brands Overview

 

Our other brands consist primarily of the Simple, TSUBO, and Ahnu brands.  The Simple brand is our casual sneaker brand recognized by its name.  We feel the strength of the brand includes our limited distribution to specialty retailers and select department stores.  We believe that we have expertise and a reputation of leadership in sustainable footwear.  Since 2005, sustainability has been the primary marketing focus.  Beginning in 2011, we are expanding the brand’s positioning to deliver on a broader brand promise of “less is more.”  Sustainability will remain a very important brand attribute, but equal emphasis will be placed on style, comfort, quality, and the price to value relationship.  We intend to make Simple sneakers timeless and versatile, and we plan to selectively increase our distribution.

 

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 that are constructed to provide consumers with contemporary footwear that incorporates style, function and maximum comfort.  The TSUBO brand has a rich heritage with consumers in major cities around the world who appreciate design, pay attention to detail, and will not sacrifice comfort.  We are building on this heritage, positioning the TSUBO brand as the premium footwear solution for people in the city, providing all day comfort, style and quality.  We are continuing to create products to address consumers’ unique needs: all-day comfort, innovative style and superior quality.  At the same time, we are marketing to the TSUBO brand consumers where they live, emphasizing regional advertising and in-market grass roots, product placement and public relations efforts.

 

In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc.  The Ahnu brand is an outdoor performance and lifestyle footwear brand with products for men, women and children.  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.  Ahnu products are sold throughout the US, primarily at outdoor specialty stores and independent shoe stores, as well as certain regions internationally.

 

We expect to leverage our design, marketing and distribution capabilities to grow these brands over the next several years, consistent with our mission to build niche brands into global market leaders.  Nevertheless, we cannot assure investors that our efforts will be successful.

 

eCommerce Overview

 

Our eCommerce business, which sells most of our brands, allows us to reinforce our relationship with the consumer.  eCommerce enables us to meet the growing demand for our products, sell the products at retail prices and provide significant incremental operating income.  The eCommerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands’ promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments.  In recent years, our eCommerce business has had strong revenue growth, much of which occurred as the UGG brand gained global 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 including a new eCommerce platform, increased marketing and more international websites.  Nevertheless, we cannot assure investors that revenue from our eCommerce business will not decline.

 

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Table of Contents

 

Retail Stores Overview

 

Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores.  Our retail stores enable us to directly impact our customers’ experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental operating income.  In addition, our UGG Australia concept stores allow us to showcase our entire UGG product line; whereas, our retailers may not carry the whole line.  Through our outlet stores, we sell some of our discontinued styles from prior seasons plus products made specifically for the outlet stores.  We sell Teva products as well as some of our other brands through our UGG Australia outlet stores.  During the third quarter, we opened five new retail stores globally.  We opened two UGG Australia concept stores in Shanghai, China with our joint venture partner.  Domestically, we opened one UGG Australia outlet store in Orlando, Florida and two UGG Australia concept stores, one in Miami’s historical South Beach area and one in Georgetown, Washington, DC.  As of September 30, 2010, we had a total of 24 retail stores worldwide.  For the remainder of 2010, we plan to continue expanding our retail stores business through opening additional stores in the US.

 

Seasonality

 

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters and the highest percentage of Teva brand net sales occurring in the first and second quarters of each year.  Our other brands do not have a significant seasonal impact.

 

 

 

2010

 

 

 

First 
Quarter

 

Second 
Quarter

 

Third 
Quarter

 

Fourth 
Quarter

 

Net sales

 

$

155,927

 

$

137,059

 

$

277,879

 

 

 

Income from operations

 

$

28,821

 

$

13,216

 

$

66,314

 

 

 

 

 

 

2009

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Net sales

 

$

134,226

 

$

102,548

 

$

228,414

 

$

347,989

 

Income from operations*

 

$

19,326

 

$

3,225

 

$

53,080

 

$

105,616

 

 

 

 

2008

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Net sales

 

$

97,535

 

$

91,116

 

$

197,288

 

$

303,506

 

Income (loss) from operations*

 

$

17,060

 

$

(6,944

)

$

43,081

 

$

63,722

 

 


*       Included in income (loss) from operations in the second quarter of 2008 is a $14,900 impairment loss on our Teva trademarks.  Included in the fourth quarter of 2008 is a $20,925 impairment loss on our Teva trademarks, Teva goodwill, and TSUBO goodwill.  Included in the second quarter of 2009 is a $1,000 impairment loss on our TSUBO trademarks.

 

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part II, Item 1A, “Risk Factors.”

 

15



Table of Contents

 

Results of Operations

 

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

277,879

 

100.0

%

$

228,414

 

100.0

%

$

49,465

 

21.7

%

Cost of sales

 

146,926

 

52.9

 

130,463

 

57.1

 

16,463

 

12.6

 

Gross profit

 

130,953

 

47.1

 

97,951

 

42.9

 

33,002

 

33.7

 

Selling, general and administrative expenses

 

64,639

 

23.3

 

44,871

 

19.6

 

19,768

 

44.1

 

Income from operations

 

66,314

 

23.9

 

53,080

 

23.2

 

13,234

 

24.9

 

Other income, net

 

(213

)

(0.1

)

(105

)

 

108

 

102.9

 

Income before income taxes

 

66,527

 

23.9

 

53,185

 

23.3

 

13,342

 

25.1

 

Income taxes

 

24,555

 

8.8

 

19,434

 

8.5

 

5,121

 

26.4

 

Net income

 

41,972

 

15.1

 

33,751

 

14.8

 

8,221

 

24.4

 

Net loss attributable to the noncontrolling interest

 

171

 

0.1

 

74

 

 

97

 

131.1

 

Net income attributable to Deckers Outdoor Corporation

 

$

42,143

 

15.2

%

$

33,825

 

14.8

%

$

8,318

 

24.6

%

 

Overview.  The increase in net sales was primarily due to an increase in UGG product sales.  The increase in income from operations resulted primarily from the higher net sales and increased gross margin, partially offset by higher selling, general and administrative expenses, or SG&A.

 

Net Sales.  The following table summarizes net sales by location and net sales by brand and distribution channel:

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

204,728

 

$

179,047

 

$

25,681

 

14.3

%

International

 

73,151

 

49,367

 

23,784

 

48.2

 

Total

 

$

277,879

 

$

228,414

 

$

49,465

 

21.7

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

229,128

 

$

194,842

 

$

34,286

 

17.6

%

eCommerce

 

6,827

 

5,862

 

965

 

16.5

 

Retail stores

 

19,835

 

12,046

 

7,789

 

64.7

 

Total

 

255,790

 

212,750

 

43,040

 

20.2

 

Teva:

 

 

 

 

 

 

 

 

 

Wholesale

 

12,226

 

7,318

 

4,908

 

67.1

 

eCommerce

 

1,295

 

1,576

 

(281

)

(17.8

)

Retail stores

 

171

 

132

 

39

 

29.5

 

Total

 

13,692

 

9,026

 

4,666

 

51.7

 

Other:

 

 

 

 

 

 

 

 

 

Wholesale

 

7,696

 

5,556

 

2,140

 

38.5

 

eCommerce

 

543

 

912

 

(369

)

(40.5

)

Retail stores

 

158

 

170

 

(12

)

(7.1

)

Total

 

8,397

 

6,638

 

1,759

 

26.5

 

Total

 

$

277,879

 

$

228,414

 

$

49,465

 

21.7

%

 

 

 

 

 

 

 

 

 

 

Total eCommerce

 

$

8,665

 

$

8,350

 

$

315

 

3.8

%

 

 

 

 

 

 

 

 

 

 

Total Retail stores

 

$

20,164

 

$

12,348

 

$

7,816

 

63.3

%

 

The increase in net sales was primarily driven by strong sales for the UGG brand.  We experienced an increase in the number of pairs sold primarily through our UGG and Teva wholesale channels, partially offset by a decrease in pairs sold in our eCommerce segment. 

 

16



Table of Contents

 

This resulted in an 18.4% overall increase in the volume of footwear sold for all brands to approximately 4.5 million pairs for the three months ended September 30, 2010 compared to approximately 3.8 million pairs for the three months ended September 30, 2009.  Our weighted-average wholesale selling price per pair increased slightly to $58.61 for the three months ended September 30, 2010 from $58.56 for the three months ended September 30, 2009.

 

Wholesale net sales of our UGG brand increased primarily due to the increase in pairs sold, as well as a slight increase in the average selling price.  We cannot assure investors that UGG brand sales will continue to grow at their past pace.

 

Wholesale net sales of our Teva brand increased due to both an increase in the average selling price and an increase in the volume of pairs sold.  The average selling price increase was the result of decreased closeout sales and was also the result of realizing the benefit of assuming the distribution rights in Benelux and France starting in January 2010.

 

Wholesale net sales of our other brands increased due to both an increase in pairs sold and an increase in the average selling price.

 

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

 

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of eight new stores opened since September 30, 2009.  New stores that were not open during the full three months ended September 30, 2009 contributed approximately $6,000 of retail sales for three months ended September 30, 2010.  We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate.  For those stores that were open during the full third quarter of 2009 and 2010, same store sales grew by 17.9%.  Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point decline.

 

International sales, which are included in the segment sales above, for all of our products combined represented 26.3% and 21.6% of worldwide net sales for the three months ended September 30, 2010 and 2009, respectively.  The international sales growth was led by the UGG brand in the European region.

 

Gross Profit.  As a percentage of net sales, gross margin increased to 47.1% for the three months ended September 30, 2010, compared to 42.9% for the three months ended September 30, 2009.  The increase was primarily attributable to an increased mix of retail sales, direct distribution for the Teva brand in Benelux, reduced closeout revenues and improved initial margins for all brands.  In addition, we received approximately $1,000 in duty refunds during the three months ended September 30, 2010, which we do not expect to recur at this level.

 

Selling, General and Administrative Expenses (SG&A).  As a percentage of net sales, SG&A increased to 23.3% for the three months ended September 30, 2010 compared to 19.6% for the three months ended September 30, 2009.  The increase in SG&A resulted primarily from:

 

·                  increased payroll and related costs of approximately $11,000 in support of our continued growth;

·                  fixed costs of approximately $2,000 related to eight new retail stores that were not open as of September 30, 2009; and

·                  increased marketing expenses of approximately $2,000 primarily related to our UGG brand.

 

Income from Operations.  The gross profit derived from the sales to third parties of the eCommerce and retail store segments for the US is separated into two components:  (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and retail stores segments.  The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit.  The following table summarizes operating income (loss) by segment:

 

17



Table of Contents

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

UGG wholesale

 

$

96,179

 

$

75,204

 

$

20,975

 

27.9

%

Teva wholesale

 

(780

)

(435

)

(345

)

(79.3

)

Other wholesale

 

(240

)

(1,616

)

1,376

 

85.1

 

eCommerce

 

785

 

886

 

(101

)

(11.4

)

Retail stores

 

1,819

 

183

 

1,636

 

894.0

 

Unallocated overhead costs

 

(31,449

)

(21,142

)

(10,307

)

(48.8

)

Total

 

$

66,314

 

$

53,080

 

$

13,234

 

24.9

%

 

Income from operations increased due to the increase in net sales and gross margin, partially offset by the higher SG&A expenses.

 

The increase in income from operations of UGG brand wholesale was primarily the result of higher sales and a 3.9 percentage point increase in gross margin, partially attributable to the higher content of retail sales, combined with higher net bad debt recoveries of approximately $700.  These results were partially offset by higher marketing and promotional and divisional expenses of approximately $3,000.

 

The increase in loss from operations of Teva brand wholesale was largely due to higher operating expenses of approximately $3,000, partially offset by higher gross profit, primarily due to increased sales and an 11.1 percentage point increase in gross margin. The increase in gross margin was primarily due to the decreased impact of closeout sales and the benefit of direct business in Benelux.

 

The loss from operations of our other brands wholesale improved primarily due to increased sales and a 13.3 percentage point increase in gross margin.  These results were partially offset by increased net bad debt expenses of approximately $600, as 2009 experienced net bad debt recoveries.

 

Income from operations of our eCommerce business decreased slightly.

 

The increase in income from operations of our retail store business was primarily due to increased sales and a 5.3 percentage point increase in gross margin.  The increase was partially offset by approximately $3,000 of higher operating expenses primarily related to our new store openings.

 

The increase in unallocated overhead costs resulted most significantly from an increase of approximately $3,000 related to international infrastructure costs to support our continued growth.

 

Other (Income) Expense, Net.  Interest expense increased primarily due to interest expense on income tax related liabilities.  Other income, net increased primarily due to a one-time foreign sales tax exemption.

 

Income Taxes.  Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management and can vary from quarter to quarter.  Income tax expense and effective income tax rates were as follows:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Income tax expense

 

$

24,555

 

$

19,434

 

Effective income tax rate

 

36.9

%

36.5

%

 

The slight increase in the effective tax rate was primarily due to the increase in our projected annual domestic pre-tax income as a percentage of worldwide pre-tax income, as income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions.  The effective tax rate is subject to ongoing review and evaluation by management and can vary from quarter to quarter.  We anticipate our effective tax rate for the full year 2010 to be slightly higher than the full year rate of 36.2% in 2009.

 

Net Loss Attributable to the Noncontrolling Interest.  Net loss attributable to the noncontrolling interest in our joint venture with Stella International was $171 and $74 for the three months ended September 30, 2010 and 2009, respectively.

 

18



Table of Contents

 

Net Income Attributable to Deckers Outdoor Corporation.  Our net income increased as a result of the items discussed above.  Our diluted earnings per share increased by 24.4% to $1.07 for the three months ended September 30, 2010 compared to $0.86 in the same period of 2009, primarily as a result of the increase in net income.

 

19



Table of Contents

 

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

 

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

 

 

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

570,865

 

100.0

%

$

465,188

 

100.0

%

$

105,677

 

22.7

%

Cost of sales

 

301,262

 

52.8

 

267,539

 

57.5

 

33,723

 

12.6

 

Gross profit

 

269,603

 

47.2

 

197,649

 

42.5

 

71,954

 

36.4

 

Selling, general and administrative expenses

 

161,252

 

28.2

 

121,018

 

26.0

 

40,234

 

33.2

 

Impairment loss

 

 

 

1,000

 

0.2

 

(1,000

)

*

 

Income from operations

 

108,351

 

19.0

 

75,631

 

16.3

 

32,720

 

43.3

 

Other income, net

 

(775

)

(0.1

)

(1,942

)

(0.4

)

(1,167

)

(60.1

)

Income before income taxes

 

109,126

 

19.1

 

77,573

 

16.7

 

31,553

 

40.7

 

Income taxes

 

40,104

 

7.0

 

28,702

 

6.2

 

11,402

 

39.7

 

Net income

 

69,022

 

12.1

 

48,871

 

10.5

 

20,151

 

41.2

 

Net (income) loss attributable to the noncontrolling interest

 

(18

)

 

173

 

 

(191

)

(110.4

)

Net income attributable to Deckers Outdoor Corporation

 

$

69,004

 

12.1

%

$

49,044

 

10.5

%

$

19,960

 

40.7

%

 


* Calculation of percentage change is not meaningful.

 

Overview.  The increase in net sales was primarily due to an increase in UGG product sales.  The increase in income from operations resulted primarily from the higher net sales and increased gross margin, partially offset by higher SG&A.

 

Net Sales.  The following table summarizes net sales by location and net sales by brand and distribution channel:

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

386,963

 

$

337,349

 

$

49,614

 

14.7

%

International

 

183,902

 

127,839

 

56,063

 

43.9

 

Total

 

$

570,865

 

$

465,188

 

$

105,677

 

22.7

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

381,728

 

$

324,443

 

$

57,285

 

17.7

%

eCommerce

 

26,223

 

22,513

 

3,710

 

16.5

 

Retail stores

 

52,417

 

31,582

 

20,835

 

66.0

 

Total

 

460,368

 

378,538

 

81,830

 

21.6

 

Teva:

 

 

 

 

 

 

 

 

 

Wholesale

 

83,549

 

62,130

 

21,419

 

34.5

 

eCommerce

 

4,264

 

4,655

 

(391

)

(8.4

)

Retail stores

 

260

 

356

 

(96

)

(27.0

)

Total

 

88,073

 

67,141

 

20,932

 

31.2

 

Other:

 

 

 

 

 

 

 

 

 

Wholesale

 

20,064

 

16,431

 

3,633

 

22.1

 

eCommerce

 

1,777

 

2,630

 

(853

)

(32.4

)

Retail stores

 

583

 

448

 

135

 

30.1

 

Total

 

22,424

 

19,509

 

2,915

 

14.9

 

Total

 

$

570,865

 

$

465,188

 

$

105,677

 

22.7

%

 

 

 

 

 

 

 

 

 

 

Total eCommerce

 

$

32,264

 

$

29,798

 

$

2,466

 

8.3

%

 

 

 

 

 

 

 

 

 

 

Total Retail stores

 

$

53,260

 

$

32,386

 

$

20,874

 

64.5

%

 

20



Table of Contents

 

The increase in net sales was primarily driven by strong sales for the UGG and Teva brands as well as our retail segment.  In addition, our weighted-average wholesale selling price per pair increased 3.3% to $42.51 for the nine months ended September 30, 2010 from $41.14 for the nine months ended September 30, 2009, resulting primarily from higher UGG and Teva sales, with UGG products generally carrying a higher average selling price.  During the period, we experienced an increase in the number of pairs sold primarily through our UGG and Teva wholesale segments.  This resulted in a 17.3% overall increase in the volume of footwear sold for all brands to approximately 12.2 million pairs for the nine months ended September 30, 2010 compared to approximately 10.4 million pairs for the nine months ended September 30, 2009.

 

Wholesale net sales of our UGG brand increased primarily due to an increase in global pairs sold.  We cannot assure investors that UGG brand sales will continue to grow at their past pace or that revenue from UGG products will not at some point decline.

 

Wholesale net sales of our Teva brand increased primarily due to an increase in the number of pairs sold, as well as an increase in the average selling price.  The average selling price increase was primarily the result of realizing the benefit of assuming the distribution rights in Benelux and France starting in January 2010, as well as a decreased impact of closeout sales.  We cannot assure investors that the Teva brand sales will continue to grow at their recent pace or that revenue from the Teva brand will not at some point decline.

 

Wholesale net sales of our other brands increased primarily due to an overall increase in the number of pairs sold, as well as an increase in the average selling price.

 

Net sales of our eCommerce business increased, primarily from an increase in UGG brand eCommerce sales, as well as higher overall average selling prices.

 

The increase in net sales of our retail store business, consisting mainly of UGG brand sales, was largely due to the addition of eight new stores opened since September 30, 2009.  New stores that were not open for the full nine months ended September 30, 2009 contributed approximately $15,000 of retail sales for the nine months ended September 30, 2010.  We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate.  For those stores that were open during the full nine months ended September 30, 2009 and 2010, same store sales grew by 23.0%.  Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point decline.

 

International sales, which are included in the segment sales above, for all of our products combined represented 32.2% and 27.5% of worldwide net sales for the nine months ended September 30, 2010 and 2009, respectively.  The international sales growth was led by the UGG and Teva brands in the European region.

 

Gross Profit.  As a percentage of net sales, gross margin increased to 47.2% for the nine months ended September 30, 2010 compared to 42.5% for the nine months ended September 30, 2009.  The increase was primarily attributable to a higher percentage of retail sales and higher margins led by our UGG and Teva brands and our retail stores segment.  We experienced a reduced impact of closeout sales for the Teva brand and began realizing the benefit of the direct wholesale business in Benelux starting in January 2010.  In addition, we received approximately $7,000 in duty refunds during the nine months ended September 30, 2010, which we do not expect to recur at this level.  Our gross margins fluctuate based on several factors, and we expect our gross margin to increase for the full year of 2010 compared to 2009.

 

Selling, General and Administrative Expenses.  As a percentage of net sales, SG&A increased to 28.2% for the nine months ended September 30, 2010 compared to 26.0% for the nine months ended September 30, 2009.  The increase in SG&A resulted primarily from:

 

·                  a planned increase in payroll expenses of approximately $24,000 in support of our continued growth globally,

·                  fixed costs of approximately $5,000 related to eight new retail stores that were not open as of September 30, 2009, and

·                  approximately $3,000 of divisional expenses primarily related to our UGG and Teva brands.

 

21



Table of Contents

 

Income from Operations.  The gross profit derived from the sales to third parties of the eCommerce and retail store segments for the US is separated into two components:  (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and retail stores segments.  The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit.  The following table summarizes operating income (loss) by segment:

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

UGG wholesale

 

$

161,651

 

$

125,669

 

$

35,982

 

28.6

%

Teva wholesale

 

17,221

 

11,752

 

5,469

 

46.5

 

Other wholesale (1)

 

(2,554

)

(11,106

)

7,552

 

74.7

 

eCommerce

 

5,424

 

6,365

 

(941

)

(14.8

)

Retail stores

 

5,742

 

188

 

5,554

 

2954.3

 

Unallocated overhead costs

 

(79,133

)

(57,237

)

(20,896

)

(35.9

)

Total

 

$

108,351

 

$

75,631

 

$

32,720

 

43.3

%

 


(1)  Included in Other wholesale income from operations is an impairment loss of $1,000 during the second quarter of 2009.

 

Income from operations increased primarily due to the increase in sales and gross margins, partially offset by higher selling, general and administrative expenses.

 

The increase in income from operations of UGG brand wholesale was primarily the result of the higher sales and an increase of 4.2 percentage points on gross margin, partially attributable to the duty refunds and the higher content of retail sales, as well as increased net bad debt recoveries of approximately $2,000.  The increase was partially offset by approximately $7,000 of increased marketing and promotional expenses; research, development, and design expenses; and divisional sales expenses.

 

The increase in income from operations of Teva brand wholesale was primarily the result of higher sales and an increase of 5.0 percentage points on gross margin due to the benefit of the direct business in Benelux, partially offset by an approximate $4,000 increase in other divisional expenses.

 

The loss from operations of our other brands wholesale improved primarily due to increased sales, an 18.1 percentage point increase on gross margin, and an approximate $4,000 decrease in marketing and promotional expenses.

 

Income from operations of our eCommerce business decreased primarily due to approximately $2,000 in increased operating expenses, partially offset by an increase in gross margin from higher UGG brand sales.

 

Income from operations of our retail store business increased primarily due to the higher sales and a 6.2 percentage point increase in gross margin, partially offset by approximately $8,000 of higher operating expenses primarily related to our new store openings.

 

Unallocated overhead costs increased most significantly from an increase of approximately $7,000 related to international infrastructure costs to support our continued growth.

 

Other (Income) Expense, Net.  Interest expense increased due to negative interest expense in 2009 due to the reversal of accrued interest related to certain tax obligations for one of the Company’s foreign subsidiaries.  In addition, we incurred additional interest expense on income tax related liabilities in 2010.  Interest income decreased primarily from significantly lower market interest rates, as well as a shift in our investment mix to all highly liquid cash equivalents. Other income, net increased primarily due to a one-time foreign sales tax exemption.

 

Income Taxes.  Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management and can vary from quarter to quarter.  Income tax expense and effective income tax rates were as follows:

 

22



Table of Contents

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Income tax expense

 

$

40,104

 

$

28,702

 

Effective income tax rate

 

36.8

%

37.0

%

 

Our effective tax rate is based on pre-tax income projections for the full year, which are management’s best estimates based on available information.  We anticipate our effective tax rate for the full year 2010 to be slightly higher than the full year rate of 36.2% in 2009.

 

Net (Income) Loss Attributable to the Noncontrolling Interest.  Net income attributable to the noncontrolling interest in our joint venture with Stella International, was $18 for the nine months ended September 30, 2010, versus a net loss of $173 for the nine months ended September 30, 2009.

 

Net Income Attributable to Deckers Outdoor Corporation.  Our net income increased as a result of the items discussed above.  Our diluted earnings per share increased by 41.9% to $1.76 for the nine months ended September 30, 2010 compared to $1.24 in the same period of 2009, primarily as a result of the increase in net income.

 

Off-Balance Sheet Arrangements

 

We have off-balance sheet arrangements consisting of operating lease obligations and purchase obligations.  See “Contractual Obligations” below.

 

Liquidity and Capital Resources

 

We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, short-term investments, cash generated from operations and, as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, we may be unable to realize a return on our cash and cash equivalents and short-term investments, secure additional credit on favorable terms, renew our existing credit or access our existing line of credit. Such failures may impact our working capital reserves and have a material adverse effect on our business.

 

Since the latter part of 2007, US and foreign credit markets have experienced adverse conditions, including unusual volatility and a lack of secondary market liquidity, which conditions have presented, and continue to present, significant challenges to the investment markets and have limited the availability of short-term debt for working capital. While it is difficult to predict how long these adverse conditions will exist, these factors, if they continue, could adversely impact our future financial condition and our future results of operations.

 

Our cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories and the eventual collection of the resulting accounts receivables. As a result, our working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the second and third quarters to support sales for the UGG brand’s major selling seasons, which historically occur during the third and fourth quarters; whereas, the Teva brand generally begins to build its inventory levels beginning in the fourth and first quarters in anticipation of the spring selling season that occurs in the first and second quarters.  Given the seasonality of our UGG and our Teva brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has been provided using our internal cash flows. If necessary, we may borrow funds under our credit agreement.  During 2009 and the nine months ended September 30, 2010, we did not borrow funds under our credit agreement.

 

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The following table summarizes the Company’s cash flows and working capital:

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Net cash used in operating activities

 

$

(61,926

)

$

(34,432

)

$

(27,494

)

(79.9

)%

Net cash provided by (used in) investing activities

 

$

6,393

 

$

(46,449

)

$

52,842

 

113.8

%

Net cash used in financing activities

 

$

(9,902

)

$

(20,383

)

$

10,481

 

51.4

%

 

 

 

September 30,

 

December 31,

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Cash and cash equivalents

 

$

250,536

 

$

315,862

 

$

(65,326

)

(20.7

)%

Short-term investments

 

 

26,120

 

(26,120

)

(100.0

)

Trade accounts receivable

 

142,232

 

76,427

 

65,805

 

86.1

 

Inventories

 

197,313

 

85,356

 

111,957

 

131.2

 

Other current assets

 

17,833

 

17,222

 

611

 

3.5

 

Total current assets

 

607,914

 

520,987

 

86,927

 

16.7

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

73,202

 

47,331

 

25,871

 

54.7

 

Other current liabilities

 

53,563

 

53,539

 

24

 

 

Total current liabilities

 

126,765

 

100,870

 

25,895

 

25.7

 

 

 

 

 

 

 

 

 

 

 

Net working capital

 

$

481,149

 

$

420,117

 

$

61,032

 

14.5

%

 

Cash from Operating Activities.  Net cash used in operating activities increased primarily due to trade accounts receivable and inventories increasing more in the nine months ended September 30, 2010 versus 2009. The larger increase in trade accounts receivable was primarily due to increased international accounts receivable, driven by the international sales growth which carry longer terms, and also due to the timing of customer purchases and higher cash-based sales at the end of 2009 compared to the end of 2008 related to our retail and eCommerce businesses.  The larger increase in inventories was primarily due to higher projected sales in the fourth quarter of 2010 versus 2009, eight new stores, and increased international inventory. These changes were partially offset by trade accounts payable increasing more in the first nine months of 2010 compared to 2009.  The larger increase in accounts payable is primarily due to timing of cash payments, as well as increased purchases of inventory and other expenses.  Net working capital increased from December 31, 2009 to September 30, 2010, primarily as a result of higher inventories and accounts receivable, partially offset by lower cash and cash equivalents and short-term investments and higher trade accounts payable.  Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments.

 

Wholesale accounts receivable turnover increased to 7.9 times in the twelve months ended September 30, 2010 from 7.0 times for the twelve months ended September 30, 2009, primarily due to increased sales and cash collections for the twelve months ended September 30, 2010 compared to the twelve months ended September 30, 2009.

 

Inventory turnover increased slightly to 3.6 times for the twelve months ended September 30, 2010 compared to 3.3 times for the twelve months ended September 30, 2009, mainly due to increased sales while maintaining comparable average inventory balances, during the twelve months ended September 30, 2010 compared to the twelve months ended September 30, 2009.

 

Cash from Investing Activities.  Net cash provided by investing activities for the nine months ended September 30, 2010 resulted primarily from sales of short-term investments, partially offset by purchases of property and equipment and acquisitions of businesses.  Our larger capital expenditures were related to the build out of new retail stores and computer hardware and software.  In addition, we did not purchase short-term investments in the nine months ended September 30, 2010, as we shifted our investments to highly liquid cash equivalents.  For the nine months ended September 30, 2009, net cash used in investing activities resulted primarily from net purchases of short-term investments and purchases of property and equipment.  Our larger capital expenditures were related to the build-out of new retail stores, expansion of our warehouse pick module and computer hardware and software.

 

As of September 30, 2010, we had no material commitments for future capital expenditures but estimate that the remaining capital expenditures for 2010 will range from approximately $10,000 to $15,000. We anticipate these expenditures will primarily include the build-out of new retail stores and computer software and hardware including a new product management system and eCommerce

 

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Table of Contents

 

platform.  The actual amount of capital expenditures for the remainder of 2010 may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures.

 

Cash from Financing Activities.  For both the nine months ended September 30, 2010 and 2009, net cash used in financing activities was comprised primarily of cash used for repurchases of our common stock and for shares withheld for taxes from employee stock unit vestings, partially offset by excess tax benefits from stock compensation.

 

In June 2009, we announced that our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors.  The program does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.  Prior to the stock split, we repurchased shares that were retired; the repurchased shares and repurchase price were not affected by the stock split.  During the three months ended September 30, 2010, we repurchased approximately 170,000 shares of our common stock under this program for approximately $7,400, or an average price of $43.89 per share.  During the nine months ended September 30, 2010, we repurchased approximately 190,000 shares for approximately $10,100, or an average price of $53.05 per share.  As of September 30, 2010, the remaining amount approved to repurchase shares was approximately $20,000.

 

In May 2010, we entered into the Second Amended and Restated Credit Agreement with Comerica Bank, or the Credit Agreement.  The Credit Agreement provides for a maximum availability of $20,000. Up to $12,500 of borrowings may be in the form of letters of credit. The Credit Agreement bears interest at the lender’s prime rate (3.25% at September 30, 2010) or, at our option, at the London Interbank Offered Rate, or LIBOR, (0.26% at September 30, 2010) plus 1.0%, and is secured by substantially all of our assets. The Credit Agreement includes annual commitment fees of $60 per year which can be waived if we deposit $10,000 in non-interest bearing new deposits with Comerica Bank, provided that such deposits may be removed by us at any time, subject to paying a pro-rated annual commitment fee.  The Credit Agreement expires on June 1, 2012.  At September 30, 2010, we had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $830.  As a result, $19,170 was available under the Credit Agreement at September 30, 2010.

 

The Credit Agreement contains certain financial covenants.  The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000, maximum loans to employees of $200, and maximum loans to subsidiaries who are not parties to the Credit Agreement of $25,000.  As of September 30, 2010, we were in compliance with all covenants and remain so as of the date of this report.  The agreements underlying the Credit Agreement also contain certain financial covenants, if outstanding obligations exceed $2,000, including a minimum tangible net worth requirement of $294,891 plus 75% of the consolidated net profit on a cumulative basis, commencing with the fiscal year ended December 31, 2010, no consolidated net loss for two or more consecutive fiscal quarters and maximum acquisitions of $25,000 per calendar year.  At September 30, 2010, these covenants were not in effect because our balance did not exceed $2,000.

 

Contractual Obligations.  The following table summarizes our contractual obligations at September 30, 2010, and the effects such obligations are expected to have on liquidity and cash flow in future periods.

 

<

 

 

Payments Due by Period

 

 

 

 

 

Less than

 

 

 

 

 

More than