To Have or Not to Have Stores; That is the Question. Deckers’ June 30 Quarter

The 10-Q reads this way:

“…in light of the recent and continuing changes in the retail environment, we also believe it is prudent to further reduce our global brick and mortar footprint. We expect to continue to reduce our footprint through a combination of store closures and the conversion of owned stores to partner retail stores, and, accordingly, we anticipate generating future cost savings. We are currently targeting a worldwide retail store count of approximately 125 owned stores by the end of fiscal year 2020.”

At June 30, Deckers had 96 concept stores and 63 outlet stores for a total of 159.  These are “predominantly” UGG stores.  Getting down to 125 stores will be a reduction of 21.4%.  Some of the decline will be due to converting owned to partner stores.  Partner stores “…are branded stores that are wholly-owned and operated by third parties. Upon conversion or opening of new partner retail stores, each of these stores become wholly-owned and operated by third parties.”

One can’t help but ask why, if Deckers doesn’t want to own these stores because of “changes in the retail environment,” the potential partners will.  Perhaps that suggests these will mostly be store closures.

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Deckers Under Pressure from Outside Investor

Marcato Capital Management has taken what is now a 6% position in Deckers’ common stock.  That Marcato was buying Deckers’ shares first became public knowledge towards the end of May.  Partly in response to this and, apparently, to growing unhappiness on the part of other large shareholders, Deckers has undertaken a strategic review process to determine what should happen to the company.

Recently, Marcato sent Deckers’ Board of Director a letter saying that if the review process didn’t lead to an attractive sale of the company, “…we will be prepared to seek significant Board change at the Company’s next annual meeting by nominating a slate of director candidates to replace the entire Board.”

Here’s a link to the letter in its entirety.  It’s pretty damning of Deckers’ management and board and, if the letter is accurate, they aren’t the only ones unhappy.  I can see why they might be concerned that Angel Martinez, the former CEO and still Chairman of Deckers, is running for Mayor of Santa Barbara rather than focusing on the company.

I guess I see this as the final denouement in the purchase and destruction of the Sanuk brand.  That might not have been the only problem Deckers has, but it’s certainly a major and public symptom of what went wrong.

If I were to read between the lines of the Marcato letter, what I hear them saying is, “Look, UGG is a great brand with real potential, but your attempts to make the company into a big footwear player by buying all these smaller brands has fallen flat on its face.  It’s cost you a pile of money, time, and focus.  Get rid of them or sell the company or we’ll come in and do it for you.”

I will be interested in watching how this moves forward.

A Discussion of Retail Prompted by Deckers’ 10-K

When I report on a public company’s results, it’s always important to review the numbers. But the more I do that the more I realize my focus needs to be on how companies are trying to transition to the new retail environment in circumstances of high uncertainty. That is, they must transition to something they can’t solidly identify yet. That’s awkward.

Deckers ended their March 31st fiscal year with 160 retail stores worldwide. 96 of them were what they call concept stores and the remainder outlet stores. “During fiscal year 2017,” they report in the 10-K, “we opened 17 new stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 stores.” Over the next two years, we learn in the conference call from President Dave Powers, “In regards to our global retail fleet, as we look out over next two years, we are planning to reduce our global company own brick-and-mortar footprint back 30 to 40 stores.”

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Deckers’ Quarter: More Sanuk Travails and the Public Company Conundrum.

I’ve reviewed Deckers’ 10Q for the three months ended December 31, 2016 and their conference call.  The company earned $41 million on sales of $760 million in the quarter, which isn’t bad.  But that’s down from net income of $157 million on revenues of $796 million in the same quarter last year.

The problem?  I’m sure regular readers already know.  Yup, it’s mostly Sanuk again.  But’s let start at the company’s top line.

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Finally, a Sign of Life at Sanuk: Deckers’ September 30 Quarter

Deckers, as you know, owns Ugg, Teva, and Hoka as well as Sanuk and some other smaller brands.  Their second quarter kind of reflected the economic and competitive conditions we’re seeing as most companies report their results.  However, Deckers is making a solid overall profit.

Total revenue at $485.9 million didn’t change much.  It was $1 million higher than last year’s quarter.  Contrary to what we’re seeing in other companies, U.S. business rose $312.3 million, up from $301.5 million.  International fell from $185.3 to $173.7 million.  Wholesale revenues were $400 million and direct to consumer $86.0 million, both down very slightly.

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Deckers’ June 30 Quarter; Continuing Problems with Sanuk

This is the first earnings release and conference call since Dave Powers, who was previously President, took over as CEO from Angel Martinez at the end of May.  He steps into the position at a time when Deckers, as well as other brands and retailers, are suffering from general economic conditions and the continuing growth of online.

Deckers’ sales for the quarter fell 18.4% from $214 million in last year’s quarter to $174 million in this years.

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Is Everybody Pursuing the Same Strategies? Deckers’ Year and Quarter

The quarter and year ended March 31st weren’t great for Deckers.  Mostly, you’ve probably noticed, they haven’t exactly been great for companies I’ve written about in general.  What somehow got my focus as I read Deckers’ 10-K was the continued and, indeed, increasing sameness of what all the public companies are saying.

Let’s start with a review of Deckers’ strategies and goals before we move on to the financial results including a look at Sanuk’s continuing problems as part of Deckers.

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Deckers’ (and Sanuk’s) Results

Deckers published its 10-Q for the quarter and nine months ending December 31 a couple of days ago. In the environment we’re in, where general expectations seem low, being a company with a solid balance sheet (though inventory was up 26% over a year ago) that’s nicely profitable and more or less holding its level of profitability is a pretty good thing.

Deckers owns the UGG, Teva and Sanuk brands, though their results are dominated by UGG. For the quarter, revenues were up 1.4% to $796 million. The gross margin took a hit, falling from 52.9% to 49.1%. 1.1% of the decline was the result of issues around foreign currency. The rest, which was $21 million, “…was driven by increased promotional activity…”

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Deckers June 30 Quarter and Some Perspective on Sanuk

It wasn’t a great quarter for Deckers, the owner of UGG and Teva as well as Sanuk, though let me start out by reminding you that seasonality means this is always Deckers’ worst quarter.

Sales rose 1.1% from $211.5 to $213.8 million. The gross profit margin fell slightly from 41% to 40.5%. SG&A expenses rose steeply from $37.3 to $47.3 million. The operating loss jumped 26% from $50.5 to $63.7 million.

The net loss also rose from $37.1 to $47.3 million, or by 27.5%. It’s less than the operating loss due to tax benefits of $13.7 million in last year’s quarter and $17.4 million in this year’s.

Sanuk, we find further on, had wholesale revenues for the quarter of $28.5 million, down 11.6% from $32.3 million in last year’s quarter. Operating income on that wholesale business fell 22.6% from $6.9 to $5.3 million.

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