UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2015 | |
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 No. 0-22446
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 95-3015862 (I.R.S. Employer Identification No.) | |
250 Coromar Drive, Goleta, California (Address of principal executive offices) | 93117 (Zip Code) | |
Registrant's telephone number, including area code: (805) 967-7611 | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes o No ý
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 ý 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of September 30, 2014, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $3,280,043,169, based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on The New York Stock Exchange (NYSE) on that date, which was $97.18. This calculation does not reflect a determination that persons are affiliates for any other purposes.
The number of shares of the registrant's Common Stock outstanding at May 15, 2015 was 33,296,968.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2015 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K.
DECKERS OUTDOOR CORPORATION
For the Fiscal Year Ended March 31, 2015
Table of Contents to Annual Report on Form 10-K
Page | ||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K contains "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, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will," or "would," and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K and the information and documents incorporated by reference in this Annual Report on Form 10-K contains forward-looking statements relating to, among other things:
• | our global business, growth, operating, investing, and financing strategies; |
• | our product offerings, distribution channels and geographic mix; |
• | the success of our new products, brands, 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, results of operations, or cash flows; |
• | our expectations for expansion of our retail and E-Commerce capabilities; |
• | information security and privacy of customer, employee or company information; |
• | overall global economic trends; |
• | reliability of overseas factory production and storage; and |
• | the availability and cost of raw materials. |
Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in the section entitled "Risk Factors" Part I, Item 1A of this Annual Report on Form 10-K, as well as in our other filings with the Securities and Exchange Commission (SEC). Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. You should read this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements.
Except as required by applicable law or the listing rules of the NYSE we expressly disclaim any intent or obligation to update any forward-looking statements, or to update the reasons actual results could differ materially from those expressed or implied by these forward-looking statements, whether to conform such statements to actual results or changes in our expectations, or as a result of the availability of new information.
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We qualify all of our forward-looking statements by these cautionary statements.
PART I
References in this Annual Report on Form 10-K (Annual Report) to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Ahnu®, Deckers®, Hoka One One® (Hoka), MOZO®, Sanuk®, Teva®, TSUBO®, UGG® and UGGpureTM are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners.
Item 1. Business.
Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for employees, share quantity, per share data and selling prices.
General
Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands.
In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2015, 2013 and 2012 fiscal years ended March 31, 2015, December 31, 2013 and December 31, 2012, respectively. The transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end.
Products
We market our products primarily under three proprietary brands:
UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally.
Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility.
We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials.
Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga MatTM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding.
We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brands unique attitude. We also continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents.
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In addition to our primary brands, our other brands include Ahnu, a line of outdoor performance and lifestyle footwear; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; MOZO, a line of footwear crafted for culinary professionals that redefines the industry's dress code; and TSUBO, a line of mid and high-end dress and dress casual footwear that incorporates style, function, and maximum comfort.
With respect to MOZO and TSUBO, we are seeking strategic alternatives for these businesses.
In April 2015, the Company acquired inventory and certain intangible assets, including the trade name related to the Koolaburra® brand, a sheepskin and wool based footwear brand. The purchase price of the acquisition was not material to the Company’s consolidated financial statements.
Sales and Distribution
At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures.
Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market maximizes our selling efforts.
We distribute products sold in the US through our distribution centers in Camarillo, Moreno Valley and Ventura, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor.
Internationally, we distribute our products through independent distributors and retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites and our retail stores. For our wholesale and Direct-to-Consumer businesses, we operate distribution centers with third-party logistics (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers.
Our five largest customers accounted for approximately 22.2% of worldwide net sales for the year ended March 31, 2015 compared to 23.0% for the year ended December 31, 2013. No single customer accounted for greater than 10% of our consolidated net sales in the years ended March 31, 2015 and December 31, 2013, respectively.
UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products.
Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Journeys, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand.
Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand.
Other brands. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com.
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E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com, Teva.com, Sanuk.com, Ahnu.com, Hokaoneone.com, Mozo.com, and Tsubo.com websites. Our websites also drive wholesale and distributor sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases.
We have expanded our international capabilities by developing websites to service certain international markets. These websites are translated into the local language, may provide product through local distribution centers and price the products in the consumers' local currency. In 2012, we launched mobile websites for several of our brands in Europe, Japan and the US, in addition to websites in the US for our Sanuk brand. Our E-Commerce business sells products directly to consumers throughout the world, including the US, the United Kingdom (UK), Japan and China. In March 2015, we launched our first multi-brand E-Commerce website in the Asia-Pacific region, which is live in Singapore, Australia and Hong Kong and is expected to debut in Malaysia and South Korea during fiscal year 2016. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in California, the UK, the Netherlands, China and Japan. Products sold through our E-Commerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction.
Through our integrated OmniChannel strategy, we believe that consumers try on product in our retail stores, perform further online research and order products online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are mutually dependent in a way that will allow us to view them on a combined basis. Further, a number of our stores allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores.
Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013, we expanded our fleet and opened our first Sanuk (two concept, one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores.
In fiscal year 2015, we opened new stores in the US and internationally. A large majority of the new stores were in the US and China, with the remaining new stores in Japan, Canada and Hong Kong. As of March 31, 2015, we had a total of 142 stores worldwide. As of December 31, 2013, we had 113 stores worldwide. During fiscal year 2016, we plan to open additional retail stores in the US and internationally.
Product Design and Development
The design and product development staff for each of our brands creates new innovative footwear products that combine our standards of high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our research and development costs for the last three years.
In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis.
Manufacturing and Supply Chain
We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and
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environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances policy as a condition of doing business with our company. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs.
The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate. Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, a wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers.
At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 6 to our accompanying consolidated financial statements in Part IV of this Annual Report). We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth.
We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers.
Patents and Trademarks
We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, identifying the Company, and distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Ahnu, Hoka One One, MOZO, TSUBO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. As of March 31, 2015, we hold approximately 180 utility and design patent registrations in the US and abroad and have filed more than 20 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent or group of patents expiring in the same year is critical to our business.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Hoka brand beginning September 27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors". For further discussion on our working capital and inventory management, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources".
Backlog
Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including
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seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading.
At March 31, 2015, our backlog of orders from our wholesale customers and distributors was approximately $609,000 compared to approximately $614,000 at March 31, 2014. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2016. We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail stores during the year. Backlog is also affected by the timing of customers' orders and product availability.
Competition
The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products.
We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete depends on our ability to:
• | shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; |
• | anticipate and respond to changing consumer demands in a timely manner; |
• | maintain brand authenticity; |
• | develop high quality products that appeal to consumers; |
• | price our products suitably; |
• | provide strong and effective marketing support; and |
• | ensure product availability. |
We believe we are well positioned to compete in the footwear industry. We continually look to acquire or develop more footwear brands to complement our existing portfolio and grow our existing consumer base.
Employees
At March 31, 2015, we employed approximately 3,400 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,900 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,200 employees at December 31, 2013, including approximately 2,000 employees in our retail stores. The decrease in retail employees was largely due to employing fewer seasonal workers at March 31, 2015 compared to December 31, 2013. The overall increase in employees during fiscal year 2015 was primarily related to increased expansion efforts. As we open new retail stores and expand our operations, we expect that our employee count will increase accordingly. We believe that we have good relationships with our employees.
Financial Information about Segments and Geographic Areas
Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for further discussion of our business segments. Refer to Part I, Item 1A "Risk Factors" for a discussion of the risks related to our foreign operations.
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Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy. We have included the Chief Executive Officer (CEO) and Chief Financial Officer certifications regarding the Company’s public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1and Exhibit 31.2, respectively, to this report on Form 10-K. Additionally, we filed with the New York Stock Exchange (NYSE) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (Listing Standards) pursuant to Section 303A.12(a) of the Listing Standards, which indicated that the CEO was not aware of any violations of the Listing Standards by the Company.
Item 1A. Risk Factors.
Our short and long-term success is subject to many factors beyond our control. Investing in our common stock involves substantial risk. Before investing in our stock, stockholders and potential stockholders should carefully consider the following risk factors related to our company as well as general investor risks, in addition to the other information contained in this report and the information incorporated by reference in this report. If any of the following risks occur, our business, financial condition or results of operations could be adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report.
Many of our products are seasonal, and our sales are sensitive to weather conditions.
Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. For example, extended periods of unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. Furthermore, variations in weather conditions across the globe may impact sales of our products in ways that we cannot predict. If management is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns or unanticipated levels of order cancellations because of seasonal circumstances, our profitability may be materially affected. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly and annual results, with a resulting effect on our common stock price.
If raw materials do not meet our specifications, consumer expectations or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product return rates, a loss of sales, or a reduction in our gross margins.
We depend on a limited number of key sources for certain raw materials. For sheepskin, the raw material used in many of our UGG products, we rely on two tanneries. Both the top grade twin-face and other grades of sheepskin used in UGG products are in high demand and limited supply. Furthermore, our unique sheepskin needs require certain types of sheepskin that may only be found in certain geographic locations and tanneries with sufficient expertise and capacity to deliver sheepskin which meets our specifications. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Sheepskin is also a by-product of the food industry and is therefore dependent upon the demand by the food industry, which has generally been decreasing, thus leading to an overall reduction in the number of sheep available. The potential inability to obtain sheepskin, UGGpure and other raw materials could impair our ability to meet our production requirements and could lead to inventory shortages, which can result in lost sales, delays in shipments to customers, strain on our relationships with customers, and diminished brand loyalty. There
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have also been significant fluctuations in the prices of sheepskin as the demand from competitors for this material and the supply of sheep have changed. We experienced an increase in sheepskin costs in 2012 and a decrease in 2013, with the majority of the decrease being realized in the fourth quarter of 2013. In fiscal year 2015, average sheepskin prices decreased compared to 2013. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts.
We began using a new raw material, UGGpure, a wool woven into a durable backing, in some of our UGG products in 2013. If these raw materials and the end product do not conform to our specification or fail to meet consumer expectations, we could experience a higher rate of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. In addition, our sheepskin and UGGpure suppliers warehouse their inventory at a limited number of facilities in China, the loss of any of which due to natural disasters and other adverse events would likely result in shortages of sheepskin or UGGpure leading to delays in the production of our products and could result in a loss of sales and earnings.
Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are able to commensurately increase our selling prices and implement other cost-saving measures. Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design specifications and, in some cases, additional technical requirements for performance footwear.
Our new and existing retail stores may not realize returns on our investments.
Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to expand this segment in the future. We have entered into significant long-term leases for many of our retail locations. Global store openings involve substantial investments, including constructing leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or the closure of a store could result in significant write-downs of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of our working capital, which could adversely impact our financial position, results of operations, or cash flows.
In addition, from time to time we license the right to operate retail stores for our brands to third parties. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards, which could harm their sales and as a result harm our results of operations, result in loss of our capital or other contributions, or cause our brand image to suffer.
If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders.
Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and projected volumes many months before consumer tastes become apparent. The footwear and fashion industry is subject to rapid changes in consumer preferences, making it difficult to accurately forecast demand for our products and our future results of operations. Many factors may significantly affect demand for our products, which include: consumer acceptance of our products, the lifecycle of our products and consumer replenishment and buying behavior, changes in consumer demand for products of our competitors, effects of weather conditions, our reliance on manual processes and judgment for certain supply and demand planning functions that are subject to human error, unanticipated changes in general market conditions, and weak economic conditions or consumer confidence that reduces demand for discretionary items, such as our products.
A large number of models, colors, and sizes in our product lines can increase these risks. As a result, we may fail to accurately forecast styles, colors, and features that will be in demand. If we overestimate demand for any products or styles, we may be forced to incur higher markdowns or sell excess inventories at reduced prices resulting in lower, or negative, gross margins. On the other hand, if we underestimate demand for our products or if our independent factories are unable to supply products when we need them, we may experience inventory shortages that may prevent us from fulfilling customer orders or delaying shipments to customers. This could negatively affect our relationship with customers and diminish our brand loyalty, which may have a material adverse effect on our financial condition and results of operations.
Failure to adequately protect our trademarks, patents, and other intellectual property rights or deter counterfeiting could diminish the value of our brands and reduce sales.
We believe that our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights are of value and are integral to our success and our competitive position. Specifically, the success of the UGG brand has led to trademark counterfeiting, product imitation and other infringements of our intellectual property rights. We devote significant resources to the registration and protection of our trademarks and to anti-counterfeiting efforts worldwide. In spite of our efforts, counterfeiting still occurs and if we are unsuccessful in challenging a third-party’s use related to trademark, trade dress or other
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intellectual property rights, this could adversely affect our future sales, financial condition, and results of operation. If our brands are associated with infringers’ or competitors’ inferior products, this could also adversely affect the integrity of our brands.
Although we are aggressive in pursuing entities involved in the trafficking and sale of counterfeit merchandise through legal action or other appropriate means, we cannot guarantee that the action we have taken will be adequate to protect our brands and prevent counterfeiting in the future, especially because some countries' laws do not protect intellectual property rights to the same extent as do US laws. Our business could be significantly harmed if we are not able to protect our intellectual property, adequately secure intellectual property rights related to our brands in specific territories, or if a court found that we are infringing on other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in the US or internationally in which we are involved, either as a plaintiff or as a defendant, could cost a significant amount of time and money and distract management’s attention from operating our business. If we do not prevail on any intellectual property claims, then we may have to change our manufacturing processes, products, trade names, or enter into costly license agreements, any of which could have a material adverse effect on our results of operations and financial condition. Additionally, unplanned increases in legal fees and other costs associated with the defense of our intellectual property or rebranding could result in higher operating expenses and lower earnings.
For example, from time to time, we may need to defend against claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but such claims have been rejected by courts in the US, China, Turkey and in the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. Any decision or settlement in any of these matters that prevents trademark protection of the "UGG" brand in our major markets, or that allows a third-party to continue to use our brand trademarks in connection with the sale of products similar to our products, or to continue to manufacture or distribute counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of operations and financial condition.
Our success depends on our ability to retain the value of our brands and to anticipate and promptly respond to changing fashion and retail trends.
Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand, and react to the rapidly changing fashion tastes of footwear, apparel, and accessory consumers and to provide appealing merchandise in a timely and cost effective manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We are also dependent on consumer receptivity to our products and marketing strategy. There can be no assurance that consumers will continue to prefer our brands or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or (3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. For example, UGG products include fashion items that could go out of style at any time and competition for the sale of products by the UGG brand is intense and has increased over time. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our UGG brand image to be outdated or associate our UGG brand with styles that are no longer popular. UGG products represent a majority of our business, and if UGG product sales were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely affected.
We believe that the ongoing economic uncertainty in many countries where we sell our products and the corresponding impact on consumer confidence and discretionary income may increase the uncertainty of consumer preferences. Achieving market acceptance for new products will also likely require us to exert substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with our existing products would erode our competitive position, which would reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business.
Furthermore, the value of our brands is partially based on consumer perceptions on a variety of qualities; any misstep in product quality or design, customer service, marketing, unfavorable publicity or excessive discounting could negatively affect the image of our brand with our consumers. Negative claims or publicity regarding our company, our products or our brands, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative claims. Hence, even if our products do anticipate and promptly respond to changing consumer preferences and/or stay ahead of changing fashion trends, our brand image could become tarnished or undesirable in the minds of consumers or target markets, which could have a material adverse effect on our business, results of operations, and financial condition.
We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
The footwear industry is highly competitive, and many new competitors have entered into the marketplace. We believe that some of these competitors have entered the market place in response to the success of our brands and that such competitors have targeted or intend to target our products with their product offerings. Additionally, we have experienced increased competition
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from established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and accessory markets. Our competitors include fashion, athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production, and develop new products more quickly. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries.
Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can expect to receive for the sale of our competing products and may cause our consumers to shift their purchases away from our products. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, financial condition, and common stock price.
We may not succeed in implementing our growth strategies.
As part of our growth strategies, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets, partner with or acquire compatible and strategic companies or brands, expand geographically, increase our retail presence, and improve our operational performance. We continue to expand the nature and scope of our operations considerably, including significantly increasing the number of our employees worldwide. We anticipate that substantial further expansion will be required to realize our growth potential and new market opportunities.
We are growing globally through our retail, E-Commerce, wholesale, and distributor channels. In addition, as part of our international growth strategy, we may continue to transition from third-party distribution to direct distribution through wholly-owned subsidiaries. Implementing our growth strategies, or failure to effectively execute them, could affect near term revenues from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a negative effect on the value of our common stock. In addition, our growth initiatives could:
• | increase our working capital needs beyond our capacity; |
• | increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings; |
• | result in impairment charges related to acquired businesses; |
• | create remote-site management issues, which would adversely affect our internal control environment; |
• | have significant domestic or international legal or compliance implications; |
• | make it difficult to attract, retain, and manage adequate human resources in remote locations; |
• | cause additional inventory manufacturing, distribution, and management costs; |
• | cause us to experience difficulty in filling customer orders; |
• | result in distribution termination transaction costs; or |
• | create other production, distribution, and operating difficulties. |
We face risks associated with pursuing strategic acquisitions.
We have extended our brands into complementary product categories and markets in part through strategic acquisitions, and we may continue to do so in the future, depending on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, including risks inherent in entering new markets in which we may not have prior experience, potential loss of significant customers or key personnel of the acquired business, managing geographically-remote operations, and potential diversion of management’s attention from other aspects of our business operations. Acquisitions may also cause us to incur debt or result in dilutive issuances of our equity securities, write-offs of goodwill and substantial amortization expenses associated with other intangible assets. We may not be able to obtain financing for future acquisitions on favorable terms, making any such acquisitions more expensive. Any such financing may have terms that restrict our operations. Additionally, we cannot provide assurance that we will be able to successfully integrate the operations of any acquired businesses into our operations and achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have a material adverse effect on our results of operations and financial position. We will face cannibalization of existing product sales by our newly acquired products, unless we adequately
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integrate new brands and products with our existing products, aggressively target different consumers for our newly acquired products and increase our overall market share. Although we may not consummate a potential acquisition for a variety of reasons, we may nonetheless incur material costs in the preliminary stages of such an acquisition that we may not be able to recover.
Our goodwill and other intangible assets may incur impairment losses.
We conducted our annual impairment tests of goodwill and other intangible assets for fiscal year 2015, 2013, and 2012. In addition, we conducted interim impairment evaluations when impairment indicators arose. During the year ended March 31, 2015, the quarter ended March 31, 2014 and the years ended December 31, 2013 and 2012, we did not recognize any material impairment charges on our goodwill and other intangible assets.
If any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to write down the related intangible assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value of our trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of intangible assets is subject to a high degree of judgment and complexity. We may also decide to discontinue a brand which would result in the write down of all related intangible assets. The balances of goodwill and nonamortizable intangibles by brand are as follows:
As of March 31, 2015 | |||||||||||||||||||
UGG | Teva | Sanuk | Other | Total | |||||||||||||||
Trademarks | $ | 154 | $ | 15,301 | $ | — | $ | — | $ | 15,455 | |||||||||
Goodwill | 6,101 | — | 113,944 | 7,889 | 127,934 | ||||||||||||||
Total nonamortizable intangibles | $ | 6,255 | $ | 15,301 | $ | 113,944 | $ | 7,889 | $ | 143,389 | |||||||||
Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality standards.
Most of our production is performed by a limited number of independent manufacturers. We depend on these manufacturers' ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods in a safe and sound location pending shipment. We do not possess direct control over either the independent manufacturers or their materials suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have long standing relationships with most of our factories, we currently do not have long-term contracts with these independent manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of acceptable quality and competitively priced products from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to provide products or services of a comparable quality at an acceptable price or on a timely basis. If a change in our independent manufacturers becomes necessary, we would likely experience increased costs as well as substantial disruption of our business, which could result in a loss of sales and earnings.
Interruptions in the supply chain can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings.
Most of our independent manufacturers are located outside the US, where we are subject to the risks of international commerce.
Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following:
• | tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products, including the potential threat of anti-dumping duties and quotas; |
• | increasing transportation costs and a limited supply of international shipping capacity; |
• | increasing labor costs; |
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• | poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; |
• | restrictions on the transfer of funds; |
• | changing economic conditions; |
• | violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in China, Vietnam, the US, and elsewhere; |
• | refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; |
• | customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; |
• | labor disruptions; |
• | delays during shipping, at the port of entry or at the port of departure; |
• | decreased scrutiny by custom officials for counterfeit products; |
• | political instability, which can interrupt commerce, including acts of war and other external factors over which we have no control; |
• | heightened terrorism security concerns, which could subject imported or exported products to additional, more frequent or more lengthy inspections; |
• | imposition or the repeal of laws that affect intellectual property rights; |
• | use of unauthorized or prohibited materials or reclassification of materials; |
• | expropriation and nationalization; |
• | disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; |
• | disruptions at manufacturing or distribution facilities caused by natural or other disasters; and |
• | adverse changes in consumer perception of goods, trade, or political relations with China and Vietnam. |
These factors, or others of which we are currently unaware or which we do not currently view as material, could severely interfere with the manufacture or shipment of our products. This could make it difficult to obtain adequate supplies of quality products when we need them, thus materially affecting our sales and results of operations.
While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, and we could suffer an interruption in our product supply chain. In addition, the manufacturers' or designated suppliers' violations of such standards and laws could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products.
We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks.
The state of the global economy continues to influence the level of consumer spending for discretionary items. This affects our business as it is highly dependent on consumer demand for our products. The current political and economic environments in certain countries in Europe have resulted in significant macroeconomic risks, including high rates of unemployment, high fuel prices, and continued global economic uncertainty largely precipitated by the European debt crisis.
We operate on a global basis, with approximately 35.9% of our net sales for the year ended March 31, 2015 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations and global credit markets. A significant portion of our international operating
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expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impact the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future changes in foreign currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material fluctuations in foreign currency translation amounts or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected. We currently utilize forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign currency hedging activities, transactions, remeasurements or translations could materially impact our consolidated financial statements.
While our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in other currencies. As a result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly.
Labor disruptions could adversely affect our financial position, results of operations, or cash flows.
Our business depends on its ability to source and distribute products in a timely manner. Labor disputes at or that affect our independent manufacturers, shipping ports, including the recent labor dispute at west coast US ports, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions. Any such disruption may have a material adverse effect on our business by potentially resulting in cancelled orders by customers and unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position.
Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions, which could increase our costs and adversely impact our operating results.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and results of operations. These include:
• | changes in currency exchange rates, which impact the price to international consumers; |
• | ability to move currency out of international markets; |
• | the burdens of complying with a variety of foreign laws and regulations, the interpretation and application of which are uncertain; |
• | legal costs and penalties related to defending allegations of non-compliance; |
• | unexpected changes in legal and regulatory requirements; |
• | inability to successfully import into a country; |
• | changes in tax laws; |
• | complications due to lack of familiarity with local customs; |
• | difficulties associated with promoting products in unfamiliar cultures; |
• | political instability; |
• | changes in diplomatic and trade relationships; and |
• | general economic fluctuations in specific countries or markets. |
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International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays.
Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of the products and our forecasted gross margins.
We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations.
Additionally, the increased threat of terrorist activity and law enforcement responses to this threat have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs.
We could be adversely affected by the loss of our warehouses.
The warehousing of our inventory is located at a limited number of self-managed domestic facilities and self-managed and third-party managed international facilities, the loss of any of which due to natural disasters and other adverse events, could materially adversely impact our sales, business performance, and operating results. In addition, we could face a significant disruption in our domestic distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period, or if our plans for a new distribution facility are disrupted or delayed.
Key business processes and supporting information systems could be interrupted and adversely affect our business.
Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that:
• | critical business systems become inoperable or require significant costs to restore; |
• | key personnel are unable to perform their duties, communicate, or access information systems; |
• | significant quantities of merchandise are damaged or destroyed; |
• | we are required to make unanticipated investment in state-of-the-art technologies and security measures; |
• | key wholesale and distributor customers cannot place or receive orders; |
• | E-Commerce customer orders may not be received or fulfilled; |
• | confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; |
• | we are exposed to unanticipated liabilities; or |
• | carriers cannot ship or unload shipments. |
These interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings.
Furthermore, we rely on certain information technology management and enterprise resource planning systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand
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into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected.
The loss, theft or misuse of sensitive customer or company information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business.
Our business involves the storage and transmission of sensitive information including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and proprietary company financial and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information.
As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relations with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience.
Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our operations, and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse effect on our business, results of operations, and financial condition. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, other parties or employees, be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition. We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Our business could be adversely affected by the loss of key members of our management team or other key personnel.
Our future success and growth depend largely upon the continued services of our executive officers and other key employees. From time to time, there may be changes in our executive officers or other key employees resulting from the hiring or departure of these personnel, which may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that these personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees and the often extensive process of identifying and hiring other personnel, who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business.
We depend on highly skilled personnel and, if we are unable to retain or hire additional qualified personnel, we may not be able to achieve our strategic objectives.
To execute our growth plan and achieve our strategic objectives, we must continue to attract and retain highly qualified and motivated personnel across our company. In particular, in order to continue to develop new products and successfully operate
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and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessories designers and information technology specialists. Competition for these highly skilled professionals is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, our headquarters are located in Santa Barbara, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining suitably skilled personnel with the qualifications and motivation to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives and our operating results may suffer.
In addition, prospective and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our equity awards decline, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed.
Our revolving credit facility provides our lenders with a first-priority lien against substantially all of our assets and contains financial covenants and other restrictions on our actions.
From time to time, we have financed our liquidity needs in part from borrowing made under a revolving credit facility. Our credit facility provides for a committed revolving credit line of up to $400 million. Our obligations under the agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries, other than certain immaterial subsidiaries, foreign subsidiaries, foreign subsidiary holding companies and specified excluded subsidiaries, and are secured by a first priority security interest in substantially all of our assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries. The agreement for our credit facility also contains a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under the credit agreement could result in a default. A default under the credit agreement could cause the lenders to accelerate the timing of payments and exercise their lien on essentially all of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because borrowings under the revolving credit facility bear interest at variable interest rates, which we do not anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. There were no outstanding borrowings under our committed revolving credit facility as of March 31, 2015. In addition, we have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY 60 million, or approximately $10 million. At March 31, 2015, we had approximately $4.9 million of outstanding borrowings under the China Credit Facility.
The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business.
We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes.
We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of their audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports at a material cost. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments.
We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, including those in and involving the US, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. It is possible that tax proposals could result in changes to the existing US tax laws that affect us. We are unable to predict whether any proposals will ultimately be enacted. Any such changes could increase our income tax liability and adversely affect our net income and long term effective tax rates.
The disruption, expense, and potential liability associated with existing and future litigation.
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We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace.
New regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.
On August 22, 2012, the SEC adopted a new rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform due diligence, disclose and annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We are currently investigating the use of conflict materials, if any, within our supply chain.
Our common stock price has been volatile, which could result in substantial losses for stockholders.
Our common stock is traded on the NYSE. While our average daily trading volume for the 52-week period ended May 15, 2015 was approximately 740,000 shares, we have experienced more limited volume in the past and may do so in the future. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $66.05 to $99.38 for the 52-week period ended May 15, 2015. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following:
• | changes in expectations of our future performance, whether realized or perceived; |
• | changes in estimates by securities analysts or failure to meet such estimates; |
• | published research and opinions by securities analysts and other market forecasters; |
• | changes in our credit ratings; |
• | the financial results and liquidity of our customers; |
• | shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into agreements with related parties; |
• | claims brought against us by a regulatory agency or our stockholders; |
• | quarterly fluctuations in our sales, expenses, and financial results; |
• | general equity market conditions and investor sentiment; |
• | economic conditions and consumer confidence; |
• | broad market fluctuations in volume and price; |
• | increasing short sales of our stock; |
• | announcements to repurchase our stock; |
• | the declaration of stock or cash dividends; and |
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• | a variety of risk factors, including the ones described elsewhere in this Annual Report and in our other periodic reports. |
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price.
Changes in economic conditions may adversely affect our financial condition and results of operations.
Volatile economic conditions and general changes in the market have affected, and will likely continue to affect consumer spending generally and the buying habits and preferences of our customers and end-user consumers in particular. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by a continuation or worsening of recent economic conditions, increases in consumer debt levels, uncertainties regarding future economic prospects, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products and those who do shop may limit the amounts of their purchases. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses in response to lower than anticipated levels of demand for our products. In either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and could have a material adverse effect on our financial condition and results of operations.
We sell our products through higher-end specialty and department store retailers. These retailer customers may be impacted by continuing economic uncertainty, reduced customer demand for luxury products, and a significant decrease in available credit. If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial difficulties or insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of operations, and cash flows. Our business, access to credit, and trading price of common stock could be materially and adversely affected if the current economic conditions do not improve or worsen.
Our financial success is influenced by the success of our customers.
Much of our financial success is directly related to the success of our retailers and distributor partners to market and sell our brands through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss of sales.
We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five-years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or brands, then these customers could postpone, reduce, or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or extended credit terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our common stock price.
Our five largest customers accounted for approximately 22.2% of worldwide net sales in fiscal year 2015 and 23.0% of worldwide net sales in fiscal year 2013. Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations, and financial condition.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
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Our corporate headquarters are located in Goleta, California. We have three US distribution centers, all in California. Our international distribution centers, located in the Netherlands, the UK, Germany, China, Hong Kong and Japan, are managed by 3PLs. We recently began operating our new distribution center in Moreno Valley, California. Our E-Commerce operations are in Arizona, the UK, many Eurozone countries, China, Japan, Singapore, Australia and Hong Kong. We also have offices in Hong Kong, China and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK, the Netherlands and Germany to oversee European operations and administration. As of March 31, 2015, we had 51 retail stores in the US ranging from approximately 1,000 to 8,000 square feet. Internationally, we had 91 retail stores in China, Japan, the UK, Canada, France, Hong Kong, Belgium and the Netherlands. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers. The construction of our new fourteen acre corporate headquarters in Goleta, California was substantially completed in January 2014. Other than our new corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our E-Commerce and retail store facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations.
The following table reflects the location, use, segment, and approximate size of our significant physical properties as of March 31, 2015:
Facility Location | Description | Business Segment | Facility Size (Square Footage) | ||||
Moreno Valley, California | Warehouse Facility | Unallocated | 794,000 | ||||
Camarillo, California | Warehouse Facility | Unallocated | 723,000 | ||||
Goleta, California | Corporate Offices | Unallocated | 196,000 | ||||
Item 3. Legal Proceedings.
On July 17, 2012 and July 26, 2012, two purported shareholder derivative lawsuits were filed in the California Superior Court for the County of Santa Barbara against our Board of Directors and several of our officers. The Company is named as nominal defendant. Plaintiffs in the state derivative actions allege, among other things, that the Board allowed certain officers to make allegedly false and misleading statements. The complaints include claims for breach of fiduciary duties, insider trading, unjust enrichment, and violations of the California Corporations Code. The complaints seek compensatory damages, disgorgement, and other relief. The actions were consolidated on September 13, 2012, and the Plaintiffs filed a consolidated complaint on November 20, 2012. On March 21, 2013, the Company’s demurrer to the consolidated complaint was sustained with leave to amend. The Plaintiffs did not timely amend the consolidated complaint and a final judgment and order of dismissal with prejudice was entered on May 6, 2013. Plaintiffs filed an appeal on May 22, 2013. The court of appeal affirmed the judgment of dismissal on October 2, 2014. Plaintiffs filed a petition for review in the California Supreme Court on December 5, 2014, which was denied on February 25, 2015 resulting in dismissal of the suits.
As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual properties, including our trademark registration for UGG. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva, UGG, and Sanuk products.
Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NYSE under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK".
The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated.
Common Stock Price Per Share | |||||||
Low | High | ||||||
Year ended March 31, 2015 | |||||||
March Quarter | $ | 66.05 | $ | 94.10 | |||
December Quarter | $ | 81.56 | $ | 98.57 | |||
September Quarter | $ | 81.53 | $ | 99.38 | |||
June Quarter | $ | 76.11 | $ | 86.33 | |||
Transition Period ended March 31, 2014 | |||||||
March Quarter | $ | 72.86 | $ | 88.56 | |||
Year ended December 31, 2013 | |||||||
December Quarter | $ | 57.84 | $ | 86.09 | |||
September Quarter | $ | 51.07 | $ | 66.09 | |||
June Quarter | $ | 47.35 | $ | 59.69 | |||
March Quarter | $ | 36.12 | $ | 55.69 | |||
As of May 15, 2015, we had approximately 57 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
We did not sell any equity securities during the year ended March 31, 2015 that were not registered under the Securities Act of 1933, as amended.
STOCK PERFORMANCE GRAPH
Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the NASDAQ Market Index, the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year and one quarter period commencing December 31, 2009 and ending March 31, 2015. The data represented below assumes one hundred dollars invested in each of the Company's common stock, the NYSE Composite Index, the NASDAQ Market Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2010.
Beginning in fiscal year 2015, we are using the NYSE Composite Index rather than the NASDAQ Market Index that we used in prior years due to the May 5, 2014 change in listing of our stock to the NYSE. For this Annual Report, we have included both the NYSE Composite Index and the NASDAQ Market Index.
The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under either of such Acts. Total return assumes reinvestment of dividends; we have not declared or paid any cash dividends on our common stock since our inception.
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ASSUMES $100 INVESTED ON JAN. 01, 2010
ASSUMES DIVIDEND REINVESTED
12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 3/31/2015 | |||||||||||||||||||
Deckers Outdoor Corporation | $ | 100.0 | $ | 235.2 | $ | 222.9 | $ | 118.8 | $ | 249.1 | $ | 214.9 | ||||||||||||
NASDAQ Market Index# | 100.0 | 118.0 | 117.0 | 137.5 | 192.6 | 229.4 | ||||||||||||||||||
S&P 500 Apparel, Accessories & Luxury Goods Index | 100.0 | 141.2 | 175.6 | 180.1 | 225.0 | 214.9 | ||||||||||||||||||
NYSE Composite Index* | 100.0 | 113.8 | 109.7 | 127.5 | 161.2 | 176.9 | ||||||||||||||||||
# | The NASDAQ Market Index is the same NASDAQ Index used in our 2013 Form 10-K. | |||||||||||||||||||||||
* | The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE. | |||||||||||||||||||||||
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00.
STOCK REPURCHASE PROGRAM
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In June 2012, the Company approved a stock repurchase program to repurchase up to $200 million 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 did not obligate the Company to acquire any particular amount of common stock and the program may have been suspended at any time at the Company's discretion. As of February 28, 2015, the Company had repurchased approximately 3,823,000 shares under this program, for approximately $200 million, or an average price of $52.31 per share. As of February 28, 2015, the Company had repurchased the full amount authorized under this program.
In January 2015, the Company approved a new stock repurchase program to repurchase up to $200 million 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. As of March 31, 2015, the Company has repurchased approximately 377,000 shares under this program for approximately $27.9 million, or an average price of $74.09 per share, leaving the remaining approved amount at approximately $172.1 million.
Total number of shares purchased* (in thousands) | Average price paid per share | Approximate dollar value of shares added/(purchased) (in thousands) | Approximate dollar value of shares that may yet be purchased (in thousands) | |||||||||||
December 31, 2012 | $ | 79,300 | ||||||||||||
January 1, 2013 — September 30, 2014 | — | $ | — | $ | — | $ | 79,300 | |||||||
October 1, 2014 — October 31, 2014 | 157 | $ | 84.66 | $ | (13,300 | ) | $ | 66,000 | ||||||
November 1, 2014 — December 31, 2014 | — | $ | — | $ | — | $ | 66,000 | |||||||
January 1, 2015 — January 31, 2015 | — | $ | — | $ | 200,000 | $ | 266,000 | |||||||
February 1, 2015 — February 28, 2015 | 1,089 | $ | 73.41 | $ | (79,900 | ) | $ | 186,100 | ||||||
March 1, 2015 — March 31, 2015 | 190 | $ | 73.73 | $ | (14,000 | ) | $ | 172,100 | ||||||
Total | 1,436 | $ | 74.68 | |||||||||||
* All shares purchased were purchased as part of a publicly announced program in open-market transactions.
Item 6. Selected Financial Data.
We derived the following selected consolidated financial data from our consolidated financial statements.
The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report:
•Consolidated statements of operations for the years ended December 31, 2010 and 2011
•Consolidated balance sheets as of December 31, 2010, 2011 and 2012
The financial data are further derived from, and qualified by reference to, the following accompanying consolidated financial statements in Part IV of this Annual Report:
• | Consolidated statements of operations for the years ended December 31, 2012 and 2013, March 31, 2015, and the transition quarter ended March 31, 2014 |
•Consolidated balance sheets as of December 31, 2013, March 31, 2014 and March 31, 2015
Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our accompanying consolidated financial statements in Part IV of this Annual Report and the related notes and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".
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Year ended | Quarter ended (transition period) | Years ended December 31, | |||||||||||||||||||||
3/31/2015 | 3/31/2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||
Statements of Operations Data | |||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
UGG wholesale | $ | 903,926 | $ | 83,271 | $ | 818,377 | $ | 819,256 | $ | 915,203 | $ | 663,854 | |||||||||||
Teva wholesale | 116,931 | 45,283 | 109,334 | 108,591 | 118,742 | 96,207 | |||||||||||||||||
Sanuk wholesale | 102,690 | 28,793 | 94,420 | 89,804 | 26,039 | — | |||||||||||||||||
Other brands wholesale | 76,152 | 18,662 | 38,276 | 20,194 | 21,801 | 23,476 | |||||||||||||||||
E-Commerce | 233,070 | 38,584 | 169,534 | 130,592 | 106,498 | 91,808 | |||||||||||||||||
Retail stores | 384,288 | 80,123 | 326,677 | 245,961 | 189,000 | 125,644 | |||||||||||||||||
1,817,057 | 294,716 | 1,556,618 | 1,414,398 | 1,377,283 | 1,000,989 | ||||||||||||||||||
Cost of sales | 938,949 | 150,456 | 820,135 | 782,244 | 698,288 | 498,051 | |||||||||||||||||
Gross profit | 878,108 | 144,260 | 736,483 | 632,154 | 678,995 | 502,938 | |||||||||||||||||
Selling, general and administrative (SG&A) expenses | 653,689 | 144,668 | 528,586 | 445,206 | 394,157 | 253,850 | |||||||||||||||||
Income (loss) from operations | 224,419 | (408 | ) | 207,897 | 186,948 | 284,838 | 249,088 | ||||||||||||||||
Other expense (income), net | 3,280 | 334 | 2,340 | 2,830 | (424 | ) | (1,021 | ) | |||||||||||||||
Income (loss) before income taxes | 221,139 | (742 | ) | 205,557 | 184,118 | 285,262 | 250,109 | ||||||||||||||||
Income taxes | 59,359 | 1,943 | 59,868 | 55,104 | 83,404 | 89,732 | |||||||||||||||||
Net income (loss) | 161,780 | (2,685 | ) | 145,689 | 129,014 | 201,858 | 160,377 | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | (148 | ) | (2,806 | ) | (2,142 | ) | ||||||||||||||
Net income (loss) attributable to Deckers Outdoor Corporation | $ | 161,780 | $ | (2,685 | ) | $ | 145,689 | $ | 128,866 | $ | 199,052 | $ | 158,235 | ||||||||||
Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: | |||||||||||||||||||||||
Basic | $ | 4.70 | $ | (0.08 | ) | $ | 4.23 | $ | 3.49 | $ | 5.16 | $ | 4.10 | ||||||||||
Diluted | $ | 4.66 | $ | (0.08 | ) | $ | 4.18 | $ | 3.45 | $ | 5.07 | $ | 4.03 | ||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||||||
Basic | 34,433 | 34,621 | 34,473 | 36,879 | 38,605 | 38,615 | |||||||||||||||||
Diluted | 34,733 | 34,621 | 34,829 | 37,334 | 39,265 | 39,292 | |||||||||||||||||
As of | |||||||||||||||||||||||
3/31/2015 | 3/31/2014 | 12/31/2013 | 12/31/2012 | 12/31/2011 | 12/31/2010 | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Balance Sheet Data | |||||||||||||||||||||||
Cash and cash equivalents | $ | 225,143 | $ | 245,088 | $ | 237,125 | $ | 110,247 | $ | 263,606 | $ | 445,226 | |||||||||||
Working capital | $ | 519,051 | $ | 501,647 | $ | 508,786 | $ | 424,569 | $ | 585,823 | $ | 570,869 | |||||||||||
Total assets | $ | 1,169,933 | $ | 1,064,204 | $ | 1,259,729 | $ | 1,068,064 | $ | 1,146,196 | $ | 808,994 | |||||||||||
Long-term liabilities | $ | 65,379 | $ | 53,140 | $ | 51,092 | $ | 62,246 | $ | 72,687 | $ | 8,456 | |||||||||||
Total Deckers Outdoor Corporation stockholders' equity | $ | 937,012 | $ | 888,849 | $ | 888,119 | $ | 738,801 | $ | 835,936 | $ | 652,987 | |||||||||||
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should be read together with our accompanying consolidated financial statements in Part IV of this Annual Report and the accompanying notes to those statements included in Part IV of this Annual Report.
Overview
We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under three proprietary brands:
• | UGG®: Premier brand in luxurious comfort footwear, handbags, apparel, home and cold weather accessories; |
• | Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and |
• | Sanuk®: Innovative action sport footwear brand rooted in the surf community. |
Our financial condition and results of operations include the operations of Hoka One One® (Hoka) beginning September 27, 2012, the acquisition date. In addition to our primary brands, our other brands include Ahnu®, a line of outdoor performance and lifestyle footwear; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; MOZO®, a line of footwear crafted for culinary professionals that redefines the industry's dress code; and TSUBO®, a line of mid and high-end dress and dress casual comfort footwear that incorporates style and function with maximum comfort.
We sell our brands through quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce business and retail stores. Independent third parties manufacture all of our products.
Our business has been and we expect that it will continue to be impacted by what we believe are several important trends:
• | Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant. |
• | Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. |
• | The sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant fluctuations in the price of sheepskin over the years as the demand from competitors for this material has changed. |
• | Our use of UGGpure®, real wool woven into a durable backing used as an alternative to table grade sheepskin, in select products, primarily in linings and foot beds, continues to grow. |
• | The markets for casual, outdoor, and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles, and a growing emphasis on comfort. |
• | Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort, and high performance attributes they have come to expect from traditional athletic footwear. |
• | Consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders. |
• | Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable. |
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• | There is an emerging sustainable lifestyle movement happening all around the world, and consumers are demanding that brands and companies become more environmentally responsible. |
• | Consumers are following a recent trend of buy now, wear now. This trend entails the consumer waiting to purchase shoes until they will actually wear them, contrasted with a tendency in the past to purchase shoes they did not plan to wear until later. |
By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs.
We have experienced significant cost fluctuations over the past several years, notably with respect to sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production. Also, refer to Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for further discussion of our commodity price risk.
Below is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business.
UGG Brand Overview
The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including mobile, digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand.
We believe the increased global media focus and demand for UGG products has been driven by the following:
• | High consumer brand loyalty, due to over 35 years of delivering quality and luxuriously comfortable UGG footwear; |
• | Continued innovation of new product categories and styles, including those beyond footwear such as loungewear, handbags, cold-weather accessories and a new home offering; |
• | A more robust footwear offering, including transitional products that bridge the seasons between spring and fall; |
• | Expanded slipper category showing incremental growth with added styles for both women, men and children; |
• | Growing Direct-to-Consumer platform and enhanced OmniChannel capabilities that enable us to increasingly engage existing and prospective consumers in a more connected environment to introduce our evolving product lines; |
• | Product customization with our UGG by You program allows for deeper connection with brand and products; |
• | Focus on mobile consumers with responsive website design providing shoppers access to the brand from their mobile devices; |
• | Year-round holistic paid advertising approach for women, men and children in targeted digital, high-end print, OOH and across multiple social media platforms; |
• | Holiday and winter focused advertising campaign to drive important seasonal sales; |
• | Continued creation of targeted UGG for Men campaigns; |
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• | Targeted E-Commerce based marketing to existing and prospective consumers through integrated outreach including email blasts, interactive website design and search engine optimization based content; |
• | Continued partnerships with high-end retailers such as Nordstrom, Dillard's and Bloomingdales; |
• | Expanded product assortments from existing accounts; |
• | Adoption by high-profile celebrities as a favored footwear brand; |
• | Continued media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to; |
• | Increased exposure to the brand driven by our concept stores that showcase all of our product offerings; and |
• | Continued expansion of worldwide retail through new UGG stores. |
We believe the luxurious comfort of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our key strategies include presenting UGG as a year-round global, premium lifestyle brand with a broad product line suitable for wear in a variety of climates and occasions and limiting retail distribution. As part of this strategic approach, we have increased our product offerings, including a growing transitional collections and spring line, an expanded men’s line, a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as home, handbags, cold weather accessories, and apparel products. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth.
Teva Brand Overview
For 30 years Teva has fueled the expression of freedom through the adventure lifestyle around the globe. Teva pioneered the sport sandal category in 1984. We believe that Teva’s Originals Collection is a key platform in driving market penetration for the brand. The Originals Collection honors the heritage of Teva by revamping the styles the brand was founded on by blending their original simplicity with modern sophistication. In the US, our focus will be to bolster our leadership position in sandals and grow our market share through casual category extensions. Globally, we seek to establish the Originals Collection as a catalyst for the Teva brand's success across warm-weather climates.
Within the US, we expect that Teva will grow its position as a market leader within the sport sandal category. Growth opportunities within our current core channels of distribution - outdoor specialty, sporting goods and family footwear retail chains - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However, we cannot assure investors that these efforts will be successful.
Sanuk Brand Overview
The Sanuk brand was founded 17 years ago, and from its origins in the Southern California surf culture, has grown into a global brand with an expanding fan base and growing presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and funky branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga MatTM sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities, especially within the casual sneaker markets, supporting our strategic initiatives spanning new product launches, and OmniChannel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful.
Other Brands Overview
Our other brands consist of Ahnu, Hoka, MOZO and TSUBO. Our other brands are sold through most of our distribution channels, primarily through wholesale channels.
Ahnu is an authentic performance footwear brand that makes footwear for fashion-minded people who prefer trails, yoga mats, and hybrid fitness workouts. Ahnu's products feature après-yoga styling, innovative trail and city hikers, and everyday casual shoes and sandals. Ahnu’s go-anywhere approach blurs the lines between performance and fashion through modern color and material stories infused with Numentum® performance technology.
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The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. We believe runners from around the world are experiencing the benefits of Hoka brand products. These shoes are used by marathon runners, and even ultra-marathon runners as well as every day runners to enjoy running.
With respect to Ahnu and Hoka, we expect to leverage our design, marketing, and distribution capabilities. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful.
With respect to MOZO and TSUBO, we are seeking strategic alternatives for these businesses.
E-Commerce Overview
Our E-Commerce business, which sells all of our brands, allows us to build our relationship with the consumer and is a key component of our integrated OmniChannel strategy. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases.
Managing our E-Commerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our E-Commerce business through improved website features and performance, increased marketing, expansion into more international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our E-Commerce business will continue to grow.
Retail Stores Overview
Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013, we expanded our fleet and opened our first Sanuk (two concept, one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. Through our integrated OmniChannel strategy, we believe that consumers try on products in our retail stores, perform further online research and order products online and, conversely, E-Commerce fuels our retail locations. As a result, we believe that our stores and websites are mutually dependent in a way that will allow us to view them on a combined basis. Further, a number of our stores allow the consumer to buy through our E-Commerce channel using internet capable devices in our stores.
As of March 31, 2015, we had a total of 142 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During fiscal year 2016, we plan to open additional company-owned retail stores worldwide.
During the year ended March 31, 2015, we converted seven of our retail stores in China to partner retail stores, whereby, upon conversion, the stores became wholly-owned and operated by local, third-party companies within China. These conversions included the assignment of the lease and the sale of both our on-hand inventory and store leasehold improvements to the operator. As of the date of conversion, partner retail stores sales are included in our UGG brand wholesale segment and not included in our retail stores segment. During fiscal year 2016, we plan to convert additional retail stores in China to partner retail stores.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31, and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our other brands are not significantly impacted by the season.
In February 2014, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our business. The fiscal 2015 and 2013 years ended on March 31, 2015 and December 31, 2013, respectively. The 2014 transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end.
The following table summarizes our quarterly net sales and income (loss) from operations:
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FY 2015 | |||||||||||||||
Quarter ended 6/30/2014 | Quarter ended 9/30/2014 | Quarter ended 12/31/2014 | Quarter ended 3/31/2015 | ||||||||||||
Net sales | $ | 211,469 | $ | 480,273 | $ | 784,678 | $ | 340,637 | |||||||
Income (loss) from operations | $ | (50,482 | ) | $ | 59,583 | $ | 214,581 | $ | 737 | ||||||
FY 2013 | 2014 | ||||||||||||||
Quarter ended 6/30/2013 | Quarter ended 9/30/2013 | Quarter ended 12/31/2013 | Quarter ended 3/31/2014 | ||||||||||||
Net sales | $ | 170,085 | $ | 386,725 | $ | 736,048 | $ | 294,716 | |||||||
Income (loss) from operations | $ | (42,751 | ) | $ | 46,497 | $ | 201,499 | $ | (408 | ) | |||||
With the large growth in the UGG brand over the past several years, net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors" for a further discussion of our risk factors.
Results of Operations
Year Ended March 31, 2015 Compared to Year Ended December 31, 2013
The following table summarizes our results of operations:
Years ended | ||||||||||||||||||||
3/31/2015 | 12/31/2013 | Change | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
Net sales | $ | 1,817,057 | 100.0 | % | $ | 1,556,618 | 100.0 | % | $ | 260,439 | 16.7 | % | ||||||||
Cost of sales | 938,949 | 51.7 | 820,135 | 52.7 | 118,814 | 14.5 | ||||||||||||||
Gross profit | 878,108 | 48.3 | 736,483 | 47.3 | 141,625 | 19.2 | ||||||||||||||
Selling, general and administrative (SG&A) expenses | 653,689 | 36.0 | 528,586 | 33.9 | 125,103 | 23.7 | ||||||||||||||
Income from operations | 224,419 | 12.3 | 207,897 | 13.4 | 16,522 | 7.9 | ||||||||||||||
Other expense, net | 3,280 | 0.2 | 2,340 | 0.2 | 940 | 40.2 | ||||||||||||||
Income before income taxes | 221,139 | 12.1 | 205,557 | 13.2 | 15,582 | 7.6 | ||||||||||||||
Income taxes | 59,359 | 3.2 | 59,868 | 3.8 | (509 | ) | (0.9 | ) | ||||||||||||
Net income | $ | 161,780 | 8.9 | % | $ | 145,689 | 9.4 | % | $ | 16,091 | 11.0 | % | ||||||||
Overview. Overall net sales increased for all distribution channels of all segments. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses.
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Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel:
Years ended | ||||||||||||||
Change | ||||||||||||||
3/31/2015 | 12/31/2013 | Amount | % | |||||||||||
Net sales by location: | ||||||||||||||
US | $ | 1,165,350 | $ | 1,042,274 | $ | 123,076 | 11.8 | % | ||||||
International | 651,707 | 514,344 | 137,363 | 26.7 | ||||||||||
Total | $ | 1,817,057 | $ | 1,556,618 | $ | 260,439 | 16.7 | % | ||||||
Net sales by brand and channel: | ||||||||||||||
UGG: | ||||||||||||||
Wholesale | $ | 903,926 | $ | 818,377 | $ | 85,549 | 10.5 | % | ||||||
E-Commerce | 209,722 | 155,635 | 54,087 | 34.8 | ||||||||||
Retail stores | 379,545 | 324,868 | 54,677 | 16.8 | ||||||||||
Total | 1,493,193 | 1,298,880 | 194,313 | 15.0 | ||||||||||
Teva: | ||||||||||||||
Wholesale | 116,931 | 109,334 | 7,597 | 6.9 | ||||||||||
E-Commerce | 9,179 | 6,627 | 2,552 | 38.5 | ||||||||||
Retail stores | 633 | 426 | 207 | 48.6 | ||||||||||
Total | 126,743 | 116,387 | 10,356 | 8.9 | ||||||||||
Sanuk: | ||||||||||||||
Wholesale | 102,690 | 94,420 | 8,270 | 8.8 | ||||||||||
E-Commerce | 8,214 | 6,077 | 2,137 | 35.2 | ||||||||||
Retail stores | 3,807 | 1,183 | 2,624 | 221.8 | ||||||||||
Total | 114,711 | 101,680 | 13,031 | 12.8 | ||||||||||
Other brands: | ||||||||||||||
Wholesale | 76,152 | 38,276 | 37,876 | 99.0 | ||||||||||
E-Commerce | 5,955 | 1,195 | 4,760 | 398.3 | ||||||||||
Retail stores | 303 | 200 | 103 | 51.5 | ||||||||||
Total | 82,410 | 39,671 | 42,739 | 107.7 | ||||||||||
Total | $ | 1,817,057 | $ | 1,556,618 | $ | 260,439 | 16.7 | % | ||||||
Total E-Commerce | $ | 233,070 | $ | 169,534 | $ | 63,536 | 37.5 | % | ||||||
Total Retail stores | $ | 384,288 | $ | 326,677 | $ | 57,611 | 17.6 | % | ||||||
In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations, throughout this Annual Report we provide certain financial information on a "constant currency basis", which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US generally accepted accounting principles.
We experienced an increase in net sales in all brands and distribution channels with the largest impact due to increased UGG brand sales through our wholesale channel, retail stores and E-Commerce websites, as well as increased other brands sales through our wholesale channel. On a constant currency basis, net sales increased by 18.0% to approximately $1,837,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 17.6% overall increase in the volume of footwear sold for all brands and channels to approximately 30.7 million pairs for the year ended March 31, 2015 compared to approximately 26.1 million pairs for the year ended December 31, 2013. Our weighted-average wholesale selling price per pair decreased to $46.53 for the year ended March 31, 2015 from $46.87 for the year ended December 31, 2013. The decreased average selling price was primarily due to our Teva and Sanuk wholesale segments, partially offset by an increase in the average selling price in our other brands wholesale segment.
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Wholesale net sales of our UGG brand increased primarily due to an increase in the volume of pairs sold, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, wholesale sales of our UGG brand increased by 11.1% to approximately $909,000. For UGG wholesale net sales, the increase in volume had an impact of approximately $89,000, including approximately $5,000 related to the negative impact of foreign currency exchange rate fluctuations.
Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to a shift in product mix and an increased impact from closeout sales. For Teva wholesale net sales, the increase in volume had an impact of approximately $15,000 and the decrease in average selling price had an impact of approximately $7,000.
Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to a shift in product mix. For Sanuk wholesale net sales, the increase in volume had an impact of approximately $14,000 and the decrease in average selling price had an impact of approximately $5,000.
Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold as well as an increase in the weighted-average wholesale selling price per pair. The increase in average selling price was primarily due to a shift in brand mix. The increase in volume of pairs sold had an impact of approximately $36,000 and the increase in average selling price had an impact of approximately $2,000.
Net sales of our E-Commerce business increased due to an increase in the number of pairs sold, partially offset by a decrease in the weighted-average selling price per pair. The decrease in the average selling price was primarily due to a shift in product mix and increased sales discounts. For E-Commerce net sales, the increase in volume had an impact of approximately $63,000 and the decrease in average selling price had an impact of approximately $2,000.
Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of new stores opened since December 31, 2013, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 20.7% to approximately $394,000. A large majority of the new stores were in the US and China, with the remaining new stores in Japan, Canada and Hong Kong. Same store sales for the 52 weeks ending March 29, 2015 decreased 8.4% compared to the 52 weeks ended December 29, 2013. The decrease in same store sales is primarily due to a shift in sales of our Classic styles to online from in-store, as well as a shift in product mix whereby we sold more casual styles, which generally carry lower price points. For retail same store sales, we experienced a decrease in weighted-average selling price of approximately $19,000. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate.
International sales, which are included in the segment sales above, for all of our products combined increased by 26.7% for the year ended March 31, 2015 as compared to the year ended December 31, 2013, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 30.5% to approximately $671,000. International sales represented 35.9% and 33.0% of worldwide net sales for the years ended March 31, 2015 and December 31, 2013, respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand internationally across all channels of approximately $122,000.
Foreign income before income taxes was $95,850 and $60,851, and worldwide income before income taxes was $221,139 and $205,557 for the years ended March 31, 2015 and December 31, 2013, respectively. Foreign income before income taxes represented 43.3% and 29.6% of worldwide income before income taxes for the years ended March 31, 2015 and December 31, 2013, respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of a strategic supply chain reorganization completed during the year ended March 31, 2015.
We expect that our foreign income before income taxes will fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years.
Gross Profit. Overall gross margin increased 100 basis points, primarily due to an increase in the mix of retail and E-Commerce sales, which generally carry higher margins than our wholesale segments. The increased mix of retail and E-Commerce sales contributed approximately 70 basis points to the overall increase in gross margin. An increase in the UGG brand wholesale gross margin, primarily related to the July 2014 acquisition of our UGG brand distributor in Germany, contributed approximately
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20 basis points to the overall increase in gross margin. The factors discussed above include the negative impact of foreign currency exchange rate fluctuations. Our gross margins fluctuate based on several factors including the factors discussed above.
Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to:
• | increased retail costs of approximately $44,000 largely related to new retail stores that were not open as of December 31, 2013 and related corporate infrastructure; |
• | increased expenses of approximately $20,000 for marketing and promotions related to our wholesale business, primarily for the Hoka and UGG brands; |
• | increased E-Commerce expenses of approximately $18,000 largely related to increased marketing and advertising and the expansion of our E-Commerce business; |
• | increased expenses of approximately $16,000 for corporate infrastructure to support our international wholesale expansion and OmniChannel transformation; |
• | increased information technology costs of approximately $8,000, in part due to accelerating the amortization expense for certain software projects that will not be used; |
• | increased sales and commission expenses of approximately $8,000 largely driven by the increase in wholesale sales; |
• | increased US distribution center costs of approximately $7,000, largely driven by the increase in sales and our new Moreno Valley distribution center; and |
• | increased expenses of approximately $7,000 related to the negative impact of foreign currency exchange rate fluctuations. |
These increases were partially offset by decreased recognition of performance-based cash compensation of approximately $8,000.
Performance-Based Compensation
As noted above, the recognition of performance-based cash compensation decreased by approximately $8,000 over the prior fiscal year period. As of March 31, 2015, the target level of the performance objectives relating to our fiscal year 2015 performance-based cash awards was only partially achieved, and we have recognized the expense accordingly. In contrast, as of December 31, 2013, we achieved above the target level of the performance objectives relating to our 2013 performance-based cash awards and we recognized expense for those 2013 awards accordingly at that time.
At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for the next fiscal year and for subsequent fiscal years. The Committee then establishes specific annual Company financial goals and specific strategic goals for each executive. Performance-based cash compensation awards for the fiscal year ended December 31, 2013 were earned above target levels, and performance-based cash compensation awards for the fiscal year ended March 31, 2015 were only partially earned, based on our achievement of certain targets for annual earnings before interest, taxes, depreciation and amortization (EBITDA), as well as achievement of pre-determined individual financial and non-financial performance goals that are tailored to individual employees based on their role and responsibilities at the Company. The performance objectives and goals, as well as the targets, differ each year and are based upon many factors, including the Company’s current business stage and strategies, recent Company financial and operating performance, expected growth rates over prior year's performance, business and general economic conditions and market and peer group analysis. For example, in evaluating targets for the 2013 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2012, which was approximately $229.7 million, and, in evaluating targets for the 2015 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2013, which was approximately $251.8 million. Performance objectives for the 2015 fiscal year were based, in part, upon the expected achievement of growth in the Company’s EBITDA for the fiscal year ended March 31, 2015 as compared to the Company’s EBITDA for the fiscal year ended December 31, 2013. The Company’s higher EBITDA for the fiscal year ended December 31, 2013 as compared to the fiscal year ended December 31, 2012 resulted in fiscal year 2015 EBITDA targets that were higher than the 2013 EBITDA targets.
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In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the compensation expense we recognize may also fluctuate from period to period.
Income (Loss) from Operations. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment:
Years ended | ||||||||||||||
Change | ||||||||||||||
3/31/2015 | 12/31/2013 | Amount | % | |||||||||||
UGG wholesale | $ | 269,489 | $ | 224,738 | $ | 44,751 | 19.9 | % | ||||||
Teva wholesale | 13,320 | 9,166 | 4,154 | 45.3 | ||||||||||
Sanuk wholesale | 21,914 | 20,591 | 1,323 | 6.4 | ||||||||||
Other brands wholesale | (9,838 | ) | (9,807 | ) | (31 | ) | (0.3 | ) | ||||||
E-Commerce | 92,392 | 66,849 | 25,543 | 38.2 | ||||||||||
Retail stores | 57,928 | 65,683 | (7,755 | ) | (11.8 | ) | ||||||||
Unallocated overhead costs | (220,786 | ) | (169,323 | ) | (51,463 | ) | (30.4 | ) | ||||||
Total | $ | 224,419 | $ | 207,897 | $ | 16,522 | 7.9 | % | ||||||
Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.5% to approximately $236,000.
The increase in income from operations of UGG brand wholesale was primarily the result of the increase in net sales as well as a 3.1 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $16,000 including the negative impact of foreign currency exchange rate fluctuations. The increase in gross margin was primarily due to an increase in higher-margin wholesale sales, largely related to the acquisition of our UGG brand distributor in Germany. The increase in operating expenses was primarily due to marketing and promotions, amortization and sales and commissions.
The increase in income from operations of Teva brand wholesale was primarily the result of a decrease in operating expenses of approximately $5,000 as well as the increase in net sales, partially offset by a 3.1 percentage point decrease in gross margin. The decrease in operating expenses was primarily due to decreased design and sales and commission expenses. The decrease in gross margin was primarily due to an increased impact from closeout sales.
The increase in income from operations of Sanuk brand wholesale was primarily the result of the increase in net sales as well as a decrease in operating expenses of approximately $2,000, partially offset by a 4.8 percentage point decrease in gross margin. The decrease in gross margin was primarily due to a shift in sales mix as well as an increased impact from closeout sales.
Loss from operations of our other brands wholesale was comparable to the prior period.
The increase in income from operations of our E-Commerce business was primarily due to the increase in net sales. This increase was partially offset by an overall increase in operating expenses of approximately $9,000 as well as a 3.0 percentage point decrease in gross margin. The overall increase in operating expenses was primarily due to increased marketing and advertising and the expansion of our E-Commerce business of approximately $18,000, partially offset by the positive impact of foreign currency exchange rate fluctuations in the current year of approximately $7,000 compared to the negative impact of foreign currency exchange rate fluctuations of approximately $2,000 in the prior period. The decrease in gross margin was primarily due to increased sales discounts.
The decrease in income from operations of our retail store business, which primarily relates to the UGG brand, was primarily due to increased operating expenses of approximately $43,000, largely offset by the increase in net sales, and includes the negative impact of foreign currency exchange rate fluctuations. The increase in operating expenses largely related to our new store openings
33
and related corporate infrastructure. On a constant currency basis income from operations of our retail store business decreased 2.6% to approximately $64,000.
The increase in unallocated overhead costs was primarily due to (1) expense related to increased corporate infrastructure of approximately $16,000 to support our OmniChannel transformation and international wholesale expansion, (2) the negative impact of foreign currency exchange rate fluctuations of approximately $16,000, (3) increased information technology costs of approximately $8,000, (4) increased US distribution center costs of approximately $7,000 and (5) increased depreciation expenses of approximately $4,000 related to our corporate headquarters buildings, partially offset by a reduction in performance-based compensation of approximately $5,000.
Other Expense, Net. The increase in other expense, net was primarily due to an increase in interest expense.
Income Taxes. Income tax expense and effective income tax rates were as follows:
Years ended | |||||||
3/31/2015 | 12/31/2013 | ||||||
Income tax expense | $ | 59,359 | $ | 59,868 | |||
Effective income tax rate | 26.8 | % | 29.1 | % | |||
The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. This decrease was partially offset by overall discrete tax liabilities of approximately $1,600 recognized during the year ended March 31, 2015 compared to overall discrete tax benefits of approximately $900 recognized during the year ended December 31, 2013. The discrete tax liabilities relate to provisions recorded for unrecognized tax benefits as well as prior year US federal and state tax adjustments. The discrete tax benefits relate to a combination of prior year US federal, state and foreign tax adjustments. For the fiscal year 2015, we generated approximately 25.0% of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2015, we had approximately $132,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We have no plans to repatriate any of our foreign cash.
Net Income. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding was the result of our share repurchases during the year ended March 31, 2015. The weighted-average impact of the share repurchases was a reduction of approximately 200,000 shares.
Transition Period Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 (Unaudited)
The following table summarizes the Company’s results of operations:
Three Months Ended March 31, | ||||||||||||||||||||
2014 | 2013 (unaudited) | Change | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
Net sales | $ | 294,716 | 100.0 | % | $ | 263,760 | 100.0 | % | $ | 30,956 | 11.7 | % | ||||||||
Cost of sales | 150,456 | 51.1 | 140,201 | 53.2 | 10,255 | 7.3 | ||||||||||||||
Gross profit | 144,260 | 48.9 | 123,559 | 46.8 | 20,701 | 16.8 | ||||||||||||||
Selling, general and administrative (SG&A) expenses | 144,668 | 49.1 | 120,907 | 45.8 | 23,761 | 19.7 | ||||||||||||||
(Loss) income from operations | (408 | ) | (0.2 | ) | 2,652 | 1.0 | (3,060 | ) | (115.4 | ) | ||||||||||
Other expense, net | 334 | 0.1 | 142 | 0.1 | 192 | 135.2 | ||||||||||||||
(Loss) income before income taxes | (742 | ) | (0.3 | ) | 2,510 | 0.9 | (3,252 | ) | (129.6 | ) | ||||||||||
Income tax expense | 1,943 | 0.6 | 1,503 | 0.5 | 440 | 29.3 | ||||||||||||||
Net (loss) income | $ | (2,685 | ) | (0.9 | )% | $ | 1,007 | 0.4 | % | $ | (3,692 | ) | (366.6 | )% | ||||||
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Overview. The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce sites as well as an increase in our other brands wholesale sales, partially offset by a decrease in Teva wholesale sales. We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations for the three months ended March 31, 2013. The change resulted from higher SG&A expenses, partially offset by an increase in gross profit.
Net Sales. The following tables summarize net sales by location, brand, and distribution channel:
Three Months Ended March 31, | ||||||||||||||
Change | ||||||||||||||
2014 | 2013 (unaudited) | Amount | % | |||||||||||
Net sales by location: | ||||||||||||||
US | $ | 198,293 | $ | 182,693 | $ | 15,600 | 8.5 | % | ||||||
International | 96,423 | 81,067 | 15,356 | 18.9 | ||||||||||
Total | $ | 294,716 | $ | 263,760 | $ | 30,956 | 11.7 | % | ||||||
Net sales by brand and channel: | ||||||||||||||
UGG: | ||||||||||||||
Wholesale | $ | 83,271 | $ | 82,706 | $ | 565 | 0.7 | % | ||||||
E-Commerce | 35,362 | 24,409 | 10,953 | 44.9 | ||||||||||
Retail stores | 78,947 | 63,466 | 15,481 | 24.4 | ||||||||||
Total | 197,580 | 170,581 | 26,999 | 15.8 | ||||||||||
Teva: | ||||||||||||||
Wholesale | 45,283 | 50,504 | (5,221 | ) | (10.3 | ) | ||||||||
E-Commerce | 1,314 | 1,057 | 257 | 24.3 | ||||||||||
Retail stores | 250 | 46 | 204 | 443.5 | ||||||||||
Total | 46,847 | 51,607 | (4,760 | ) | (9.2 | ) | ||||||||
Sanuk: | ||||||||||||||
Wholesale | 28,793 | 30,011 | (1,218 | ) | (4.1 | ) | ||||||||
E-Commerce | 1,034 | 918 | 116 | 12.6 | ||||||||||
Retail stores | 875 | 17 | 858 | 5,047.1 | ||||||||||
Total | 30,702 | 30,946 | (244 | ) | (0.8 | ) | ||||||||
Other: | ||||||||||||||
Wholesale | 18,662 | 10,369 | 8,293 | 80.0 | ||||||||||
E-Commerce | 874 | 230 | 644 | 280.0 | ||||||||||
Retail stores | 51 | 27 | 24 | 88.9 | ||||||||||
Total | 19,587 | 10,626 | 8,961 | 84.3 | ||||||||||
Total | $ | 294,716 | $ | 263,760 | $ | 30,956 | 11.7 | % | ||||||
Total E-Commerce | $ | 38,584 | $ | 26,614 | $ | 11,970 | 45.0 | % | ||||||
Total Retail stores | $ | 80,123 | $ | 63,556 | $ | 16,567 | 26.1 | % | ||||||
The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands sales through the wholesale channel, increased Sanuk brand sales through our retail stores, increased other brands sales through our E-commerce sites, and increased UGG brand wholesale sales. These increases were partially offset by decreased wholesale sales of our Teva brand and our Sanuk brand. On a constant currency basis, net sales increased by 12.4% to approximately $296,000. We experienced an increase in the number of pairs sold in the retail, other brands wholesale and E-Commerce segments, partially offset by a decrease in the number of pairs sold in the Teva brand, Sanuk brand and UGG brand wholesale segments. This resulted in an increase in the overall volume of footwear sold for all brands of 3.3% to approximately 6.2 million pairs sold for the three months ended March 31, 2014 from approximately 6.0 million pairs for the three months ended March 31, 2013.
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Wholesale net sales of our UGG brand increased primarily due to an increase in the weighted-average wholesale selling price, partially offset by a decrease in the volume of pairs sold. The increase in average selling price was primarily due to a shift in product mix of cold weather shoe products that generally carry higher price points and higher average closeout prices. For UGG wholesale net sales, the increase in average selling price had an impact of approximately $1,000 and the decrease in volume had an impact of approximately $500.
Wholesale net sales of our Teva brand decreased due to a decrease in the weighted-average wholesale selling price per pair as well as a decrease in volume of pairs sold. The decrease in average selling price was primarily due to a shift in product mix. For Teva wholesale net sales, the decrease in average selling price had an impact of approximately $3,000 and the decrease in volume had an impact of approximately $2,000.
Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold outside the US as well as a decrease in the weighted-average wholesale selling price per pair, partially offset by an increase in the volume of pairs sold in the US. The decrease in average selling price was primarily due to increased closeout sales. For Sanuk wholesale net sales, the decrease in volume of pairs sold outside the US had an impact of approximately $3,000, the decrease in average selling price had an impact of approximately $2,000 and the increase in volume of pairs sold in the US had an impact of approximately $4,000.
Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold of approximately $8,500. The increase in volume was primarily due to the continued growth of the Hoka brand. The change in average selling price had no material impact on sales.
Net sales of our E-Commerce business increased due to an increase in the number of pairs sold as well as an increase in the weighted-average selling price per pair. For E-Commerce net sales, the increase in volume had an impact of approximately $8,000 and the increase in average selling price had an impact of approximately $2,000.
Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 42 new stores opened since March 31, 2013, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 28.3% to approximately $82,000. Over half of these new stores were in Asia, primarily in China and Japan, with the remaining new stores in the US and Europe. Same store sales for the thirteen weeks ended March 30, 2014 increased by 4.0% compared to the same period in 2013. For retail same store sales, we experienced an increase in volume of approximately $4,000 partially offset by a decrease in weighted-average selling price of approximately $2,000. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate.
International sales, which are included in the segment sales above, for all of our products combined increased by 18.9% for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 21.0% to approximately $98,000. International sales represented 32.7% and 30.7% of worldwide net sales for the three months ended March 31, 2014 and 2013, respectively. The increase in international sales as a percentage of worldwide net sales was primarily due to the continued growth in our UGG brand's international retail and E-Commerce business of approximately $16,000.
Foreign loss before income taxes and worldwide loss before income taxes was $3,631 and $742, respectively, during the three months ended March 31, 2014, as compared to foreign income before income taxes and worldwide income before income taxes of $335 and $2,510, respectively, during the three months ended March 31, 2013. The change from foreign income before income taxes to a foreign loss before income taxes was primarily due to an increase in foreign operating expenses of approximately $14,000, which is primarily related to the expansion of our international retail and E-Commerce operations. The increase in foreign operating expenses was partially offset by an increase in foreign gross margin of 2.2 percentage points, which was primarily related to the increase in international retail and E-Commerce sales which generally carry higher margins than wholesale sales.
We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in improved foreign operating results in future years.
Gross Profit. As a percentage of net sales, gross margin increased compared to the same period in 2013 due to reduced sheepskin costs and increased use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix of retail and E-Commerce sales, which generally carry higher
36
margins than our wholesale segments. The change in sales between our wholesale customers and distributors was immaterial to gross margin.
Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to:
• | increased retail costs of approximately $14,000, largely related to 42 new retail stores that were not open as of March 31, 2013 and related corporate infrastructure; |
• | increased E-Commerce costs of approximately $5,000, largely related to marketing and advertising, the negative impact of foreign currency exchange rate fluctuations, and increased expenses related to the international expansion of our E-Commerce business; and |
• | increased expenses of approximately $3,000 for marketing and promotions, largely related to the UGG and Hoka brands. |
Income (Loss) from Operations. Refer to Note 11 to our accompanying consolidated financial statements in Part IV of this Annual Report for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment:
Three Months Ended March 31, | ||||||||||||||
Change | ||||||||||||||
2014 | 2013 (unaudited) | Amount | % | |||||||||||
UGG wholesale | $ | 13,595 | $ | 14,081 | $ | (486 | ) | (3.5 | )% | |||||
Teva wholesale | 6,425 | 9,640 | (3,215 | ) | (33.4 | ) | ||||||||
Sanuk wholesale | 7,530 | 9,360 | (1,830 | ) | (19.6 | ) | ||||||||
Other wholesale | (758 | ) | (2,580 | ) | 1,822 | 70.6 | ||||||||
E-Commerce | 13,272 | 8,969 | 4,303 | 48.0 | ||||||||||
Retail stores | 7,646 | 10,433 | (2,787 | ) | (26.7 | ) | ||||||||
Unallocated overhead costs | (48,118 | ) | (47,251 | ) | (867 | ) | (1.8 | ) | ||||||
Total | $ | (408 | ) | $ | 2,652 | $ | (3,060 | ) | (115.4 | )% | ||||
We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations during the three months ended March 31, 2013 due to increased SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by increased gross profit. On a constant currency basis, income from operations decreased by 59.2% to approximately $1,000.
The slight decrease in income from operations of UGG brand wholesale was primarily the result of an increase in operating expenses of approximately $2,000 as well as the negative impact of foreign currency rate fluctuations of approximately $300, partially offset by a 2.0 percentage point increase in gross margin, primarily due to decreased sheepskin costs.
The decrease in income from operations of Teva brand wholesale was primarily the result of a 5.8 percentage point decrease in gross margin as well as the decrease in net sales, partially offset by a decrease in operating expenses of approximately $1,000. The decrease in gross margin was primarily due to a shift in sales mix as well as increased freight expense.
The decrease in income from operations of Sanuk brand wholesale was primarily the result of the decrease in net sales, as well as increased operating expenses of approximately $1,000.
The decrease in loss from operations of our other brands wholesale was primarily the result of the increase in net sales as well as a 7.8 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $2,000. The increase in sales and gross margin is largely due to the continued growth of the Hoka brand which generally carries higher margins than the other brands included in this segment.
The increase in income from operations of our E-Commerce business was primarily due to the increase in net sales as well as a 5.7 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000. The increase in gross margin was largely due to the reduced sheepskin costs related to our UGG brand products. The increase in operating expenses was primarily due to increased expenses related to marketing and advertising, the negative impact of foreign currency exchange rate fluctuations and increased expenses related to the international expansion of our E-commerce business.
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Income from operations of our retail store business, which primarily relates to the UGG brand, decreased primarily due to increased operating expenses of approximately $14,000 largely related to our new store openings and related corporate infrastructure, as well as the negative impact of foreign currency exchange rate fluctuations of approximately $1,000. These results were partially offset by increased gross profit of approximately $12,000.
Unallocated overhead costs were comparable to the same period in 2013.
Other Expense, Net. The increase in other expense, net was primarily due to expenses related to our credit facilities.
Income Taxes. Income taxes for the three months ended March 31, 2014 are computed using the actual tax rate for the transition period (see Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report for an explanation of our change in fiscal year). Income taxes for the three months ended March 31, 2013 were computed using the effective tax rate estimated to be applicable for the full fiscal year ended December 31, 2013. Income tax expense and effective income tax rates were as follows:
Three Months Ended March 31, | |||||||
2014 | 2013 (unaudited) | ||||||
Income tax expense | $ | 1,943 | $ | 1,503 | |||
Effective income tax rate | (261.9 | )% | 59.9 | % | |||
We recognized income tax expense of $1,943 on a pre-tax loss of $742 for the three months ended March 31, 2014 compared to income tax expense of $1,503 on pre-tax earnings of $2,510 for the three months ended March 31, 2013. The income tax expense of $1,943 primarily relates to taxable income in the US and certain foreign jurisdictions during the three months ended March 31, 2014. The pre-tax loss of $742 includes the loss of a foreign subsidiary in a jurisdiction with no corporate income tax, therefore providing no tax benefit from the loss that was recognized.
Net (Loss) Income. We experienced a net loss for the three months ended March 31, 2014 compared to net income for the three months ended March 31, 2013 as a result of the items discussed above. As a result of the net loss for the three months ended March 31, 2014, we recognized a loss per share compared to diluted earnings per share during the three months ended March 31, 2013.
Year ended December 31, 2013 Compared to Year ended December 31, 2012
The following table summarizes our results of operations:
Years ended December 31, | ||||||||||||||||||||
2013 | 2012 | Change | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
Net sales | $ | 1,556,618 | 100.0 | % | $ | 1,414,398 | 100.0 | % | $ | 142,220 | 10.1 | % | ||||||||
Cost of sales | 820,135 | 52.7 | 782,244 | 55.3 | 37,891 | 4.8 | ||||||||||||||
Gross profit | 736,483 | 47.3 | 632,154 | 44.7 | 104,329 | 16.5 | ||||||||||||||
Selling, general and administrative (SG&A) expenses | 528,586 | 33.9 | 445,206 | 31.5 | 83,380 | 18.7 | ||||||||||||||
Income from operations | 207,897 | 13.4 | 186,948 | 13.2 | 20,949 | 11.2 | ||||||||||||||
Other expense, net | 2,340 | 0.2 | 2,830 | 0.2 | (490 | ) | (17.3 | ) | ||||||||||||
Income before income taxes | 205,557 | 13.2 | 184,118 | 13.0 | 21,439 | 11.6 | ||||||||||||||
Income taxes | 59,868 | 3.8 | 55,104 | 3.9 | 4,764 | 8.6 | ||||||||||||||
Net income | 145,689 | 9.4 | 129,014 | 9.1 | 16,675 | 12.9 | ||||||||||||||
Net income attributable to the noncontrolling interest | — | — | (148 | ) | — | 148 | * | |||||||||||||
Net income attributable to Deckers Outdoor Corporation | $ | 145,689 | 9.4 | % | $ | 128,866 | 9.1 | % | $ | 16,823 | 13.1 | % | ||||||||
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* Calculation of percentage change is not meaningful.
Overview. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel, and increased Sanuk brand sales through our E-Commerce sites and retail stores. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses.
Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel:
Years ended December 31, | ||||||||||||||
Change | ||||||||||||||
2013 | 2012 | Amount | % | |||||||||||
Net sales by location: | ||||||||||||||
US | $ | 1,042,274 | $ | 972,987 | $ | 69,287 | 7.1 | % | ||||||
International | 514,344 | 441,411 | 72,933 | 16.5 | ||||||||||
Total | $ | 1,556,618 | $ | 1,414,398 | $ | 142,220 | 10.1 | % | ||||||
Net sales by brand and channel: | ||||||||||||||
UGG: | ||||||||||||||
Wholesale | $ | 818,377 | $ | 819,256 | $ | (879 | ) | (0.1 | )% | |||||
E-Commerce | 155,635 | 118,886 | 36,749 | 30.9 | ||||||||||
Retail stores | 324,868 | 245,397 | 79,471 | 32.4 | ||||||||||
Total | 1,298,880 | 1,183,539 | 115,341 | 9.7 | ||||||||||
Teva: | ||||||||||||||
Wholesale | 109,334 | 108,591 | 743 | 0.7 | ||||||||||
E-Commerce | 6,627 | 6,578 | 49 | 0.7 | ||||||||||
Retail stores | 426 | 347 | 79 | 22.8 | ||||||||||
Total | 116,387 | 115,516 | 871 | |||||||||||