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…”
They reduced expenses by 5.6% ($12 million). As a result, they managed to hold their net income constant at $157 million. That’s also because their provision for income taxes was down $13 million.
No single foreign country accounts for more than 10% of sales for the quarter and international sales were 31.7% of total revenue ($252 million). As with other U.S. dollar based companies, the dollar’s strength hurt their reported results. Some other trends they mention as impacting their business were warmer weather during the quarter, “Continuing uncertainty surrounding US and global economic conditions,” the fact that “…the retail industry appears to be experiencing a significant and prolonged decrease in consumer traffic.”
So Deckers has a lot of the same problems other consumer product companies have. Sanuk didn’t help their results.
For nine months, Sanuk’s revenues have fallen by 10.2% from $75.4 million last year to $67.7 million this year. Revenue rose from $9.4 to $12.4 million in direct to consumer, but fell at wholesale from $66 to $55.3 million. For the quarter revenue Sanuk wholesale revenue was $13.5 million, down 24.2% from $17.8 million in last year’s quarter.
Interestingly, Sanuk’s income from operations during the quarter rose from a loss of $282,000 to a profit of $2.94 million. Its total business fell from $20.5 to $17 million, a decline of 17.1%. The decline in the number of pairs sold at wholesale cost the brand $5 million in revenue. They recouped $1 million through higher prices.
The improvement in operating profit was “…primarily due to a decrease in operating expenses of approximately $5,000 [$5 million] partially offset by a decrease in gross profit.” They cut marketing and promotional expense by $1 million, and lower revenue and gross profit meant they didn’t have to pay about $3 million in contingent expense left over from the purchase.
You may recall that 2015 was the last year for which they had to pay for the purchase of Sanuk. The sellers were due 40% of gross profit which, we are told, came to “approximately” $19.7 million.”
In an attempt to improve Sanuk’s performance, and as part of an overall profit improvement plan, Deckers is moving Sanuk’s brand operations from Irvine, California to Deckers’ corporate headquarters in Goleta, California. Well, that will certainly cut some costs. Not so sure how it will help revenue and brand positioning.
Deckers continues to say, “We believe that the Sanuk brand provides substantial growth opportunities, especially within the casual shoe markets, supporting our strategic initiatives spanning new product
launches, Omni-Channel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful.” They say it every quarter.
Deckers is also closing 20 stores (15% of its total). Basically, they are closing ones that are not reaching their goal of a 20% return on sales. But it’s also related to elevating the brands’ presentations, being premium positioned, optimizing their wholesale partners (getting rid of ones who can’t maintain “premium positioning”).
I actually like what Deckers is doing in response to business conditions. I just wish they could be as successful with Sanuk as they are with UGG.