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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 June 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 July 27, 2010

 

 

 

Common Stock, $0.01 par value

 

38,671,884

 

 

 



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 June 30, 2010 and December 31, 2009

1

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

Item 4.

(Removed and Reserved)

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

30

 

 

 

Signatures

 

32

 

 

 

 



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except par value)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

333,745

 

$

315,862

 

Restricted cash

 

200

 

300

 

Short-term investments

 

 

26,120

 

Trade accounts receivable, net of allowances of $5,702 and $11,790 as of June 30, 2010 and December 31, 2009, respectively

 

81,647

 

76,427

 

Inventories

 

120,460

 

85,356

 

Prepaid expenses and other current assets

 

6,725

 

7,210

 

Deferred tax assets

 

9,712

 

9,712

 

Total current assets

 

552,489

 

520,987

 

 

 

 

 

 

 

Restricted cash

 

250

 

400

 

Property and equipment, at cost, net

 

37,367

 

35,442

 

Goodwill

 

6,507

 

6,507

 

Other intangible assets, net

 

18,941

 

17,433

 

Deferred tax assets

 

16,704

 

16,704

 

Other assets

 

2,284

 

1,570

 

Total assets

 

$

634,542

 

$

599,043

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

79,953

 

$

47,331

 

Accrued payroll

 

12,850

 

20,869

 

Other accrued expenses

 

6,023

 

12,985

 

Income taxes payable

 

5,844

 

19,685

 

Total current liabilities

 

104,670

 

100,870

 

 

 

 

 

 

 

Long-term liabilities

 

6,891

 

6,269

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Deckers Outdoor Corporation stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 125,000 and 50,000 shares; issued and outstanding 38,669 and 38,604 shares as of June 30, 2010 and December 31, 2009, respectively

 

387

 

129

 

Additional paid-in capital

 

132,892

 

125,431

 

Retained earnings

 

389,530

 

365,304

 

Accumulated other comprehensive (loss) income

 

(563

)

494

 

Total Deckers Outdoor Corporation stockholders’ equity

 

522,246

 

491,358

 

Noncontrolling interest

 

735

 

546

 

Total equity

 

522,981

 

491,904

 

Total liabilities and equity

 

$

634,542

 

$

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

137,059

 

$

102,548

 

$

292,986

 

$

236,774

 

Cost of sales

 

76,316

 

61,763

 

154,336

 

137,076

 

Gross profit

 

60,743

 

40,785

 

138,650

 

99,698

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

47,527

 

36,560

 

96,613

 

76,147

 

Impairment loss

 

 

1,000

 

 

1,000

 

Income from operations

 

13,216

 

3,225

 

42,037

 

22,551

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense, net:

 

 

 

 

 

 

 

 

 

Interest income

 

(53

)

(276

)

(72

)

(872

)

Interest expense

 

106

 

(940

)

124

 

(923

)

Other, net

 

(550

)

(23

)

(614

)

(42

)

 

 

(497

)

(1,239

)

(562

)

(1,837

)

Income before income taxes

 

13,713

 

4,464

 

42,599

 

24,388

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

4,803

 

1,697

 

15,549

 

9,268

 

Net income

 

8,910

 

2,767

 

27,050

 

15,120

 

Net loss (income) attributable to noncontrolling interest

 

56

 

112

 

(189

)

99

 

Net income attributable to Deckers Outdoor Corporation

 

$

8,966

 

$

2,879

 

$

26,861

 

$

15,219

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.07

 

$

0.69

 

$

0.39

 

Diluted

 

$

0.23

 

$

0.07

 

$

0.69

 

$

0.38

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

38,667

 

39,348

 

38,649

 

39,309

 

Diluted

 

39,081

 

39,630

 

39,081

 

39,624

 

 

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

27,050

 

$

15,120

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation, amortization and accretion

 

6,236

 

4,723

 

(Recovery of) provision for doubtful accounts, net

 

(1,398

)

468

 

Write-down of inventory

 

823

 

1,669

 

Impairment loss

 

 

1,000

 

Stock compensation

 

6,557

 

4,873

 

Other

 

(820

)

(3

)

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

 

 

 

 

 

Restricted cash

 

250

 

300

 

Trade accounts receivable

 

(3,822

)

44,817

 

Inventories

 

(34,930

)

(52,755

)

Prepaid expenses and other current assets

 

485

 

(1,047

)

Other assets

 

(714

)

(200

)

Trade accounts payable

 

32,623

 

7,901

 

Accrued expenses

 

(15,918

)

(17,715

)

Income taxes payable

 

(12,870

)

(20,384

)

Long-term liabilities

 

622

 

1,338

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities

 

4,174

 

(9,895

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

 

(66,948

)

Proceeds from sales of short-term investments

 

26,080

 

16,903

 

Purchases of property and equipment

 

(6,733

)

(6,563

)

Acquisitions of businesses

 

(3,191

)

(1,675

)

Net cash provided by (used in) investing activities

 

16,156

 

(58,283

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash paid for shares withheld for taxes

 

(1,417

)

(1,124

)

Excess tax benefits from stock compensation

 

1,479

 

659

 

Cash received from issuances of common stock

 

84

 

 

Cash paid for repurchases of common stock

 

(2,635

)

 

Net cash used in financing activities

 

(2,489

)

(465

)

 

 

 

 

 

 

Effect of exchange rates on cash

 

42

 

2

 

Net change in cash and cash equivalents

 

17,883

 

(68,641

)

Cash and cash equivalents at beginning of period

 

315,862

 

176,804

 

Cash and cash equivalents at end of period

 

$

333,745

 

$

108,163

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

27,243

 

$

28,854

 

Interest

 

$

1

 

$

4

 

Non-cash investing activity:

 

 

 

 

 

Accruals for purchases of property and equipment

 

$

324

 

$

1,456

 

Non-cash financing activity:

 

 

 

 

 

Accruals for shares withheld for taxes

 

$

555

 

$

363

 

 

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.

 

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, the Company repurchased shares that were retired; the repurchased shares and repurchase price were not affected by the stock split.  During both the three and six months ended June 30, 2010, the

 

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)

 

Company repurchased 20,000 shares for approximately $2,600, or an average price of $129.16 per share, under this program.  As of June 30, 2010, the remaining approved amount for repurchases was approximately $27,400.

 

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

 

26,861

 

Repurchase of common stock

 

(2,635

)

Balance at June 30, 2010

 

$

389,530

 

 

(3)                      Comprehensive Income

 

Comprehensive income is the total of net income and all other non-owner changes in equity. At June 30, 2010 and December 31, 2009, accumulated other comprehensive (loss) income of $(563) 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

8,910

 

$

2,767

 

$

27,050

 

$

15,120

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

 

5

 

(2

)

5

 

Cumulative foreign currency translation adjustments

 

(640

)

41

 

(1,055

)

(6

)

Total other comprehensive income (loss)

 

(640

)

46

 

(1,057

)

(1

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

8,270

 

2,813

 

25,993

 

15,119

 

Comprehensive loss (income) attributable to noncontrolling interest

 

56

 

112

 

(189

)

99

 

Comprehensive income attributable to Deckers Outdoor Corporation

 

$

8,326

 

$

2,925

 

$

25,804

 

$

15,218

 

 

(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 six months ended June 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) and options to purchase common stock.

 

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

 

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)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Weighted-average shares used in basic computation

 

38,667,000

 

39,348,000

 

38,649,000

 

39,309,000

 

Dilutive effect of NSUs and stock options*

 

414,000

 

282,000

 

432,000

 

315,000

 

 

 

39,081,000

 

39,630,000

 

39,081,000

 

39,624,000

 

 


*Excluded NSUs as of June 30, 2010 and 2009

 

312,000

 

270,000

 

312,000

 

270,000

 

 

The Company excluded all of its stock appreciations rights (SARs) and restricted stock units (RSUs) from the diluted net income per share computation for the three and six months ended June 30, 2010 and 2009, respectively.  The shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance through June 30, 2010 and 2009, respectively.

 

(5)                      Restricted Cash

 

In January 2007, the Company entered into an escrow agreement initiated in conjunction with the Company’s purchase obligation with a movie production company for advertising services.  As a result of the agreement, during the six months ended June 30, 2010, the Company paid $300 of the purchase obligation and had $400 of restricted cash related to this obligation remaining as of June 30, 2010.  Of the total restricted cash related to this obligation, $200 is short-term and is included as a current asset, and the remaining $200 is long-term and is included as a noncurrent asset in the Company’s condensed consolidated balance sheet at June 30, 2010.  The agreement contains a disbursement schedule according to when the remaining funds will be disbursed to the production company, which is as follows:

 

January 2011

 

$

200

 

January 2012

 

200

 

 

 

$

400

 

 

(6)                      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 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 June 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 June 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)

 

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 June 30, 2010.

 

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Proceeds from sales

 

$

 

$

11,425

 

$

26,080

 

$

16,903

 

 

(7)                      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 forward 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 forward contracts are reported in selling, general and administrative expenses in the condensed consolidated statements of income. The gains and losses on these forward 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.

 

As of June 30, 2010, the Company had no derivatives that were designated as accounting hedges, and gains and losses on the Company’s non-designated forward contracts were not significant.

 

(8)                      Credit Agreement

 

In May 2010, the Company and its subsidiary, TSUBO, LLC, entered into the Second Amendment 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 June 30, 2010, the Company had no outstanding borrowings under the

 

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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)

 

Credit Agreement and outstanding letters of credit of $941.  As a result, $19,059 was available under the Credit Agreement at June 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. 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.

 

(9)                      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 incorporated 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 six months ended June 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 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. Business segment information is summarized as follows:

 

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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)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

88,100

 

$

66,616

 

$

152,600

 

$

129,601

 

Teva wholesale

 

29,086

 

20,175

 

71,323

 

54,812

 

Other wholesale

 

4,744

 

4,392

 

12,368

 

10,875

 

eCommerce

 

5,177

 

5,262

 

23,599

 

21,448

 

Retail stores

 

9,952

 

6,103

 

33,096

 

20,038

 

 

 

$

137,059

 

$

102,548

 

$

292,986

 

$

236,774

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

33,601

 

$

23,072

 

$

65,472

 

$

50,465

 

Teva wholesale

 

6,686

 

4,377

 

18,001

 

12,187

 

Other wholesale

 

(1,498

)

(5,980

)

(2,314

)

(9,490

)

eCommerce

 

(62

)

552

 

4,639

 

5,479

 

Retail stores

 

(1,041

)

(1,011

)

3,923

 

5

 

Unallocated overhead costs

 

(24,470

)

(17,785

)

(47,684

)

(36,095

)

 

 

$

13,216

 

$

3,225

 

$

42,037

 

$

22,551

 

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Total assets for reportable segments:

 

 

 

 

 

UGG wholesale

 

$

152,949

 

$

130,493

 

Teva wholesale

 

49,678

 

31,105

 

Other wholesale

 

11,493

 

11,551

 

eCommerce

 

1,544

 

2,431

 

Retail stores

 

32,410

 

27,931

 

 

 

$

248,074

 

$

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:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Total assets for reportable segments

 

$

248,074

 

$

203,511

 

Unallocated cash and cash equivalents and short-term investments

 

333,745

 

341,982

 

Unallocated deferred tax assets

 

26,416

 

26,416

 

Other unallocated corporate assets

 

26,307

 

27,134

 

Consolidated total assets

 

$

634,542

 

$

599,043

 

 

At June 30, 2010, the Company had cash and cash equivalents of $333,745. 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 June 30, 2010, the Company had experienced no loss or lack of access to cash in its operating accounts.

 

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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 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. While the Company does not hold any investments whose value is directly correlated to mortgage debt, 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 June 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 52.4% and 45.3% of the Company’s total net sales for the three months ended June 30, 2010 and 2009, respectively.  International sales were 37.8% and 33.1% of the Company’s total net sales for the six months ended June 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:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

US

 

$

28,172

 

$

27,405

 

UK

 

6,520

 

6,341

 

All other countries*

 

2,675

 

1,696

 

Total

 

$

37,367

 

$

35,442

 

 


*  No other country’s long-lived assets comprised more than 10% of total long-lived assets as of June 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 either the three or six months ended June 30, 2010 or 2009.  As of June 30, 2010, no single customer represented more than 10.0% of net trade accounts receivable.  As of December 31, 2009, the Company had one customer representing 28.0% of net trade accounts receivable.

 

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.

 

(10)                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 June 30, 2010 the remaining commitment is approximately $8,800. 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. The Company expects sheepskin purchases by third party factories will exceed the contract levels. Therefore, management believes the likelihood of any non-performance payments under this contractual arrangement is remote and would have an immaterial effect on the consolidated financial statements. The Company determined this based upon its historical and projected sales and inventory purchases.

 

The Company agreed to make loans to its joint venture with Stella International, should the need arise. As of June 30, 2010, the estimated remaining loans by Deckers were expected to be approximately $1,800. 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

 

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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)

 

approximately $1,500 from July 1, 2010 through the first 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 2008.  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 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.

 

(11)                Goodwill and 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 three and six months ended June 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

 

(2,218

)

Balance at June 30, 2010

 

$

18,941

 

 

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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 international distribution channels;

·                  trends affecting our financial condition or results of operations;

·                  overall global economic trends; and

·                  reliability of overseas factory production 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 sport shoes and rugged outdoor footwear.

 

In addition to our primary brands, our other brands include Simple®, a line of innovative sustainable-lifestyle footwear 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.

 

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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

 

Because of our Teva brand’s heritage in outdoor footwear and continued commitment to product innovation, the brand remains popular with traditional outdoor athletes and enthusiasts.  Since early 2009, we have employed proprietary consumer insights to help fine tune our strategic plan.  Our integrated product, marketing and sales efforts are now focused on growth markets that expand the Teva brand’s reach beyond sandals and the traditional outdoor market.  Going forward, we intend to leverage the Teva brand’s core performance competencies of traction, hydro and comfort to drive growth through innovation in the growing closed toe markets of multi-sport and light hiking, which enjoy strong appeal to a large number of consumers.

 

Teva product sales grew in 2010, resulting largely from the strong sell through at retail in 2009 and due to our conversion of a distributor to a direct subsidiary in Benelux, despite the economic downturn.  This included our small but relevant fall multi-sport and

 

13



Table of Contents

 

light hiking line of shoes for men, women and children, as well as our greatly contemporized spring line of performance and lifestyle sandals.  We started off the first half of 2010 with growing brand momentum, and our new spring and fall product lines and marketing support have been viewed by our retailers as exciting, innovative and appealing.

 

We see continuing opportunity to grow the Teva brand within our core outdoor specialty and sporting goods channels of trade, but we also believe we have significant expansion opportunities into the family footwear, department store, better footwear, and other channels.  Through effective channel management and clear product line segmentation, we believe we can grow the Teva brand in all of these channels without alienating our core consumer or retailers in the outdoor specialty channel.  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 committed to style and innovation in fashionable, youthful, functional, and sustainably-produced footwear.  The brand is a leader in sustainable footwear, and we are committed to our objective of making Simple products 100% sustainable, thus minimizing the ecological footprint left on the planet.  Green Toe®, our collection of sustainable footwear, represents a revolutionary shift in thinking about footwear by building a shoe from the inside out using sustainable materials and processes.  The progress in Green Toe has influenced the rest of the Simple product line, which has led to the development of additional product platforms, such as ecoSNEAKS®.  This product collection also uses sustainable materials such as water-based cements, certified organic cotton, British Leather Consortium (BLC) and International Standards Organization (ISO) 14001 leathers, hemp, and outsoles made from recycled car tires.  Our marketing vehicles include small print in regional publications, a digital media platform, including a social media strategy, public relations and consumer events that focus on music and sustainability.

 

TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function and maximum comfort.  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 product addressing 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, enables us to meet the growing demand for these products, sell the products at retail prices and provide significant incremental operating income.  The eCommerce business enables us to directly interact and reinforce our relationships with the consumer.  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, 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 and some of our other brands through our UGG Australia outlet stores.  In June 2010, we opened our second store in China, located in Shenyang, with our joint venture partner.  As of June 30, 2010, we had a total of 19 retail stores worldwide.  For the remainder of 2010, we plan to significantly expand our retail stores business through opening additional stores in the US and internationally.

 

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

 

 

 

 

 

Income from operations

 

$

28,821

 

$

13,216

 

 

 

 

 

 

 

 

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 in recent 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 June 30, 2010 Compared to Three Months Ended June 30, 2009

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

137,059

 

100.0

%

$

102,548

 

100.0

%

$

34,511

 

33.7

%

Cost of sales

 

76,316

 

55.7

 

61,763

 

60.2

 

14,553

 

23.6

 

Gross profit

 

60,743

 

44.3

 

40,785

 

39.8

 

19,958

 

48.9

 

Selling, general and administrative expenses

 

47,527

 

34.7

 

36,560

 

35.7

 

10,967

 

30.0

 

Impairment loss

 

 

 

1,000

 

1.0

 

(1,000

)

*

 

Income from operations

 

13,216

 

9.6

 

3,225

 

3.1

 

9,991

 

309.8

 

Other income, net

 

(497

)

(0.4

)

(1,239

)

(1.2

)

(742

)

(59.9

)

Income before income taxes

 

13,713

 

10.0

 

4,464

 

4.4

 

9,249

 

207.2

 

Income taxes

 

4,803

 

3.5

 

1,697

 

1.7

 

3,106

 

183.0

 

Net income

 

8,910

 

6.5

 

2,767

 

2.7

 

6,143

 

222.0

 

Net loss attributable to the noncontrolling interest

 

56

 

 

112

 

0.1

 

(56

)

(50.0

)

Net income attributable to Deckers Outdoor Corporation

 

$

8,966

 

6.5

%

$

2,879

 

2.8

%

$

6,087

 

211.4

%

 

* Calculation of percentage change is not meaningful.

 

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

 

16



Table of Contents

 

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

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

65,230

 

$

56,132

 

$

9,098

 

16.2

%

International

 

71,829

 

46,416

 

25,413

 

54.8

 

Total

 

$

137,059

 

$

102,548

 

$

34,511

 

33.7

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

88,100

 

$

66,616

 

$

21,484

 

32.3

%

eCommerce

 

2,458

 

2,070

 

388

 

18.7

 

Retail stores

 

9,647

 

5,733

 

3,914

 

68.3

 

Total

 

100,205

 

74,419

 

25,786

 

34.6

 

Teva:

 

 

 

 

 

 

 

 

 

Wholesale

 

29,086

 

20,175

 

8,911

 

44.2

 

eCommerce

 

2,077

 

2,208

 

(131

)

(5.9

)

Retail stores

 

49

 

167

 

(118

)

(70.7

)

Total

 

31,212

 

22,550

 

8,662

 

38.4

 

Other:

 

 

 

 

 

 

 

 

 

Wholesale

 

4,744

 

4,392

 

352

 

8.0

 

eCommerce

 

642

 

984

 

(342

)

(34.8

)

Retail stores

 

256

 

203

 

53

 

26.1

 

Total

 

5,642

 

5,579

 

63

 

1.1

 

Total

 

$

137,059

 

$

102,548

 

$

34,511

 

33.7

%

 

 

 

 

 

 

 

 

 

 

Total eCommerce

 

$

5,177

 

$

5,262

 

$

(85

)

(1.6

)%

 

 

 

 

 

 

 

 

 

 

Total Retail stores

 

$

9,952

 

$

6,103

 

$

3,849

 

63.1

%

 

The increase in net sales was primarily driven by strong sales for the UGG and Teva brands.  In addition, our weighted-average wholesale selling price per pair increased 1.8% to $35.41 for the three months ended June 30, 2010 from $34.78 for the three months ended June 30, 2009, resulting primarily from higher UGG and Teva sales, with UGG products generally carrying a higher average selling price.  During the quarter, we experienced an increase in the number of pairs sold primarily through our UGG and Teva wholesale channels, partially offset by a decrease in our other wholesale segment.  This resulted in a 28.6% overall increase in the volume of footwear sold for all brands to approximately 3.6 million pairs for the three months ended June 30, 2010 compared to approximately 2.8 million pairs for the three months ended June 30, 2009.

 

Wholesale net sales of our UGG brand increased primarily due to an increase in global shipments of fall products, combined with solid sales of the spring line at company owned retail stores.  We cannot assure investors that UGG brand sales will continue to grow at their past pace.

 

Wholesale net sales of our Teva brand increased primarily due to higher reorders of the expanded spring line of open and closed toe footwear, combined with an increase in the weighted-average wholesale selling price per pair.  The average selling price increase was the result of significantly 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, primarily due to an increase in the weighted average selling prices.

 

Net sales of our eCommerce business decreased slightly.

 

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of five new stores opened since June 30, 2009.  We do not expect this growth rate to continue because as we increase the number of our stores, each new

 

17



Table of Contents

 

store will have less proportional impact on our growth rate.  For those stores that were open during the full second quarter of 2009 and 2010, same store sales grew by 19.2%.  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 52.4% and 45.3% of worldwide net sales for the three months ended June 30, 2010 and 2009, respectively.  The majority of the international sales growth was from the UGG brand in the European region.

 

Gross Profit.  As a percentage of net sales, gross margin increased to 44.3% for the three months ended June 30, 2010, compared to 39.8% for the three months ended June 30, 2009.  The increase was primarily attributable to higher margins on our Teva and other brands, related to reduced closeout sales, and realizing the benefit of the Teva direct wholesale business in Benelux starting in January 2010.  In addition, we received approximately $3,100 in duty refunds during the three months ended June 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 decreased to 34.7% for the three months ended June 30, 2010 compared to 35.7% for the three months ended June 30, 2009.  The increase in SG&A in absolute dollars resulted primarily from:

 

·      increased payroll and related costs in support of our continued growth;

·      fixed costs related to five new retail stores that were not open in the first quarter of 2009; and

·      costs associated with our Teva distribution in Benelux, both the costs incurred to assume the distribution as well as operating expenses.

 

The increase in absolute dollars was partially offset by increased net bad debt recoveries and an overall decrease in marketing expenses.

 

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 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:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

UGG wholesale

 

$

33,601

 

$

23,072

 

$

10,529

 

45.6

%

Teva wholesale

 

6,686

 

4,377

 

2,309

 

52.8

 

Other wholesale

 

(1,498

)

(5,980

)

4,482

 

74.9

 

eCommerce

 

(62

)

552

 

(614

)

(111.2

)

Retail stores

 

(1,041

)

(1,011

)

(30

)

(3.0

)

Unallocated overhead costs

 

(24,470

)

(17,785

)

(6,685

)

(37.6

)

Total

 

$

13,216

 

$

3,225

 

$

9,991

 

309.8

%

 

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 a higher gross margin, partially attributable to the duty refunds, and the higher sales, combined with higher net bad debt recoveries.  These results were partially offset by higher research, development, and design expenses.

 

The increase in income from operations of Teva brand wholesale was largely due to higher sales and gross margin, primarily due to the decreased impact of closeout sales and the benefit of direct business in Benelux.  These results were partially offset by increased divisional expenses.

 

The loss from operations of our other brands wholesale improved primarily due to increased gross margins and decreased marketing and promotional expenses in 2010, as well as an impairment charge in 2009.

 

We had a loss from operations of our eCommerce business, primarily due to a lower gross margin and higher operating expenses, partially offset by an increase in UGG eCommerce sales.

 

18



Table of Contents

 

The loss from operations of our retail store business remained relatively flat.  We incurred higher operating expenses primarily related to our new store openings, which were partially offset by increased sales and gross margins.

 

The increase in unallocated overhead costs resulted primarily from higher 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.  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.

 

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

 

 

 

June 30,

 

 

 

2010

 

2009

 

Income tax expense

 

$

4,803

 

$

1,697

 

Effective income tax rate

 

35.0

%

38.0

%

 

The decrease in the effective tax rate was primarily due to the increase in our projected annual international pre-tax income as a percentage of worldwide pre-tax income, as income generated in most of our foreign jurisdictions are taxed at significantly lower rates than the US.  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 $56 and $112 for the three months ended June 30, 2010 and 2009, respectively.

 

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 213.6% to $0.23 for the three months ended June 30, 2010 compared to $.0.07 in the same period of 2009, primarily as a result of the increase in net income.

 

19


 


Table of Contents

 

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

292,986

 

100.0

%

$

236,774

 

100.0

%

$

56,212

 

23.7

%

Cost of sales

 

154,336

 

52.7

 

137,076

 

57.9

 

17,260

 

12.6

 

Gross profit

 

138,650

 

47.3

 

99,698

 

42.1

 

38,952

 

39.1

 

Selling, general and administrative expenses

 

96,613

 

33.0

 

76,147

 

32.2

 

20,466

 

26.9

 

Impairment loss

 

 

 

1,000

 

0.4

 

(1,000

)

*

 

Income from operations

 

42,037

 

14.3

 

22,551

 

9.5

 

19,486

 

86.4

 

Other income, net

 

(562

)

(0.2

)

(1,837

)

(0.8

)

(1,275

)

(69.4

)

Income before income taxes

 

42,599

 

14.5

 

24,388

 

10.3

 

18,211

 

74.7

 

Income taxes

 

15,549

 

5.3

 

9,268

 

3.9

 

6,281

 

67.8

 

Net income

 

27,050

 

9.2

 

15,120

 

6.4

 

11,930

 

78.9

 

Net (income) loss attributable to the noncontrolling interest

 

(189

)

 

99

 

0.0

 

(288

)

*

 

Net income attributable to Deckers Outdoor Corporation

 

$

26,861

 

9.2

%

$

15,219

 

6.4

%

$

11,642

 

76.5

%

 


* Calculation of percentage change is not meaningful.

 

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

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

182,235

 

$

158,302

 

$

23,933

 

15.1

%

International

 

110,751

 

78,472

 

32,279

 

41.1

 

Total

 

$

292,986

 

$

236,774

 

$

56,212

 

23.7

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

152,600

 

$

129,601

 

$

22,999

 

17.7

%

eCommerce

 

19,396

 

16,651

 

2,745

 

16.5

 

Retail stores

 

32,582

 

19,536

 

13,046

 

66.8

 

Total

 

204,578

 

165,788

 

38,790

 

23.4

 

Teva:

 

 

 

 

 

 

 

 

 

Wholesale

 

71,323

 

54,812

 

16,511

 

30.1

 

eCommerce

 

2,969

 

3,079

 

(110

)

(3.6

)

Retail stores

 

89

 

224

 

(135

)

(60.3

)

Total

 

74,381

 

58,115

 

16,266

 

28.0

 

Other:

 

 

 

 

 

 

 

 

 

Wholesale

 

12,368

 

10,875

 

1,493

 

13.7

 

eCommerce

 

1,234

 

1,718

 

(484

)

(28.2

)

Retail stores

 

425

 

278

 

147

 

52.9

 

Total

 

14,027

 

12,871

 

1,156

 

9.0

 

Total

 

$

292,986

 

$

236,774

 

$

56,212

 

23.7

%

 

 

 

 

 

 

 

 

 

 

Total eCommerce

 

$

23,599

 

$

21,448

 

$

2,151

 

10.0

%

 

 

 

 

 

 

 

 

 

 

Total Retail stores

 

$

33,096

 

$

20,038

 

$

13,058

 

65.2

%

 

The increase in net sales was primarily driven by strong sales for the UGG and Teva brands.  In addition, our weighted-average wholesale selling price per pair increased 5.5% to $32.97 for the six months ended June 30, 2010 from $31.25 for the six months ended June 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

 

20



Table of Contents

 

an increase in the number of pairs sold primarily through our Teva and UGG wholesale segments.  This resulted in a 15.2% overall increase in the volume of footwear sold for all brands to approximately 7.6 million pairs for the six months ended June 30, 2010 compared to approximately 6.6 million pairs for the six months ended June 30, 2009.

 

Wholesale net sales of our UGG brand increased primarily due to an increase of global sales of fall orders combined with solid sales of the spring line at company owned retail stores.  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 weighted-average wholesale selling price per pair.  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.  We cannot assure investors that the Teva brand sales will continue to grow at their recent pace or that revenue from the Teva brand products 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.

 

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

 

The increase in net sales of our retail store business, being mainly UGG sales, was largely due to the addition of five new stores opened since June 30, 2009.  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 six months ended June 30, 2009 and 2010, same store sales grew by 25.6%.  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 37.8% and 33.1% of worldwide net sales for the six months ended June 30, 2010 and 2009, respectively.  The majority of the international sales growth was from the UGG brand in our European region.

 

Gross Profit.  As a percentage of net sales, gross margin increased to 47.3% for the six months ended June 30, 2010 compared to 42.1% for the six months ended June 30, 2009.  The increase was primarily attributable to a higher percentage of retail sales and higher margins on our Teva and other brands, related to reduced closeout sales, and realizing the benefit of the Teva direct wholesale business in Benelux starting in January 2010.  In addition, we received approximately $5,500 in duty refunds during the six months ended June 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, selling, general and administrative expenses, or SG&A, increased to 33.0% for the six months ended June 30, 2010 compared to 32.2% for the six months ended June 30, 2009.  The increase in SG&A resulted primarily from a planned increase in payroll expenses, five new retail stores that were not open as of June 30, 2009, and divisional expenses primarily related to our new 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 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:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2010

 

2009

 

Amount

 

%

 

UGG wholesale

 

$

65,472

 

$

50,465

 

$

15,007

 

29.7

%

Teva wholesale

 

18,001

 

12,187

 

5,814

 

47.7

 

Other wholesale

 

(2,314

)

(9,490

)

7,176

 

75.6

 

eCommerce

 

4,639

 

5,479

 

(840

)

(15.3

)

Retail stores

 

3,923

 

5

 

3,918

 

*

 

Unallocated overhead costs

 

(47,684

)

(36,095

)