Deckers Has a Pretty Good Quarter. Sanuk, Not So Much.

The overall numbers for Deckers for the quarter look pretty good. But some of the comments left me a bit perplexed. Meanwhile, Sanuk is still not performing the way Deckers must have expected when they bought it.

Overall Results

In the quarter ended December 31, Deckers’ revenue rose 6.6% from $736 to $785 million. The gross profit margin rose from 51.1% to 52.9%. Part of the increase was due to their acquiring their German distributor. Net income was up 11.2% from $141 to $157 million. It would have been stronger, but revenue came in 3% below expectations.

CEO Angel Martinez explained the revenue miss in the conference call.

“As temperatures turned colder across the U.S. with the exception of the West Coast, which has remained unseasonably warm, demand for our weather collections spiked. We experienced strong gains in technical boots, fashion waterproof boots and boots with rain application. In total, sales of our weather offerings grew over 70%.”

“In many instances, demand for casual and weather boots [due to early cold weather] exceeded our inventory investments . As a result, we believe we missed nearly $7 million to $10 million in sales from domestic wholesale reorders as we were unable to fulfill 100% of the demand for these collections. We also believe that we missed approximately $2 million in online sales due to sellout of weather and casual boot product.”

“This shift to expanded categories has highlighted the need to further improve our ability to plan and manage our product and inventory strategy against these consumer purchasing trends. This also requires some adjustments in our product and marketing strategies at both wholesale and in our DTC channels, which we are currently implementing.”

This is a little confusing to me. If they were projecting revenues 3% higher, I would have expected them to have the required inventory on hand. But above he’s saying they missed $9-$12 million in revenue because they didn’t have inventory. Is that on top of the 3% miss?

At some level, this is a great problem to have as a CEO. Sure, we can all stand to work on improving our flexibility in getting the right product to the right market at the right time and to respond more quickly to changing market conditions. But I doubt either Mr. Martinez or any of Deckers’ other executives are going to get any better at predicting the weather.

Meanwhile, the gross margin rose and, as I’ve argued a bunch of times before, I bet a little scarcity wasn’t completely a bad thing for the brand. I might even connect some of the gross margin improvement with the scarcity. We do learn that, “…closeout sales decreased as a percentage of overall sales and had higher margins compared with the same period last year.”

But then he goes on and confuses me some more.

“Classics had a very good second quarter, both from a sell-in and sell-through perspective, which created some bullish expectations among our retailers and internally for the third quarter. This was the main driver behind our decision to raise guidance on our last earnings call. Unfortunately, most of November, with the exception of Black Friday and Cyber Monday weekend, was below plan, which we believe was a result of mild temperatures in certain markets and weak store traffic trends across the industry. Sales trends accelerated as the quarter progressed. However, it wasn’t enough to offset the slow start, which eventually led to some cancellations primarily in our domestic wholesale channels in December.”

You can, I think, see my confusion. On the one hand, Deckers missed some sales because of cold weather. On the other hand, they missed some because of warm weather. And all in the same quarter. I guess they are talking about different geographic markets and products, but a little clarity would be nice.

The UGG brand is branching out. You might check out their web site and note the UGG branded products under categories such as loungewear, handbags and home.

$402 million of the quarter’s revenue, or 51%, came from the UGG wholesale business. But that was up only half a percent from last year’s quarter. Total wholesale business for the quarter was $445 million, up from $441 million in last year’s quarter.

But revenues from ecommerce rose 25.2% from $117.3 to $146.9 million. And retail store revenue was up 8.3% from $178 to $193 million, though comparative store sales declined in the high single digits. They are working on improving store performance, but in the meantime have “…decided to moderate and assess the pace of new store openings.”  They ended the quarter with 138 stores worldwide.

Sanuk

Sanuk’s total revenue for the quarter came in at $20.5 million, down 7.9% from $22.2 million in last year’s quarter. Sales for nine months rose 6.7% to $75.4 million from $70.7 million in the same nine months last year. Happily for Deckers, Sanuk’s revenue represents just 2.26% of the quarter’s total.

Its wholesale revenue for the quarter fell 11.1%, from $19.97 to $17.76 million. For nine months, wholesale revenues have risen slightly from $64.4 to $66 million.

“Wholesale net sales of our Sanuk brand decreased primarily [for the quarter] due to a decrease in the weighted-average wholesale selling price per pair as well as a decrease in the volume of pairs sold.” Volume and price both down. Not so good.

Sanuk’s operating profit from wholesale revenues for the quarter fell from $1.085 million to a loss of $282,000. For the nine months period, it’s down 17.1% from $11.2 to $9.3 million.

The last piece of the earn out for Sanuk has to be paid by Deckers based on 2015 results and equals 40% of the total gross profit Sanuk earns in calendar year 2015. As of December 31, Deckers is estimating that amount to be $27.7 million. That’s down from $30 million at the end of March, 2014. If you knew what Sanuk’s gross profit was, you could pretty much calculate Sanuk’s projected sales this year, though that calculation is complicated by the fact that the estimated earn out is discounted at 7% to allow for the time value of money.

Oh hell, I can’t resist, but I’m going to ignore the 7% discount rate. If GP is Sanuk’s total projected gross profit for 2015, then .4 x GP = the earn out, or $27.7 million. Dividing both sides of the equation by 0.4, we see that total projected gross profit for Sanuk in 2015 is $69.25 million.

We know that Sanuk did $102 million in all of 2013. In nine months of fiscal 2015, it’s had revenue of $75 million (Deckers changed its fiscal year to March 31 last year).  In the first calendar quarter of 2014, Sanuk’s revenues were $30.7 million. If it did the same in this quarter, total Sanuk revenues for the fiscal year ending March 31, 2015 would be $105.7 million.

And just to finish up this little exercise in speculative financial analysis, if sales did come in at $105.7 million and gross profit were $69.25 million, the Sanuk gross margin would be 66%. Wow.

But how can that be with a $660,000 operating loss for the quarter on Sanuk’s wholesale business when ecommerce and brick and mortar sales of the brand total only $2.7 million? Perhaps the quarter isn’t indicative of business for the year.

Okay, I have got to stop this. But this is what happens when I get curious about something and there’s no information provided; I try to figure it out from what I’ve got.   See, the 10Q shows business segment assets for the Sanuk wholesale business of $208.8 million. The similar number for UGG wholesale is $334.9 million, or about 1.6 times Sanuk. But UGG’s wholesale revenues were 22.6 times greater than Sanuk’s during the quarter.

This is the best I can do with what I’ve got, but it doesn’t completely make sense to me. Perhaps some of you wise people out there can help me out?

Based on Sanuk’s performance since the acquisition, it’s pretty clear they overpaid for the brand and I wonder if that might have to be acknowledged by one of those noncash write downs of intangible assets.  We’ll see.

Anyway, Deckers has a strong balance sheet, they grew revenue and profit, and I’m intrigued by some of the brand extensions they are doing with UGG. We’ll see how that works out as we follow Sanuk.

4 replies
  1. You Know Who
    You Know Who says:

    Stop torturing yourself. They do not have a 66% starting margin. Only gains came from B2C sales with heavy discounting during the Holidays, moving mountains of closed out inventory and opening their own stores. Could this explain the decline in their core business? Mmmm, just maybe?

    • jeff
      jeff says:

      I thought you might be the first comment. As I said, the operating loss at wholesale tells us there’s no 66% gross margin no matter how clever my calculations are. Still, it was fun to do. An analyst actually asked a question on Sanuk’s inventory in the conference call this time. What was the gross profit margin before the brand was sold? Also, remember I kind of try to restrain myself to dealing with information I actually have rather than what I hear.

      Thanks,

      J.

  2. you know who
    you know who says:

    Acording to the public documents, the gross (sales, minus discounts and returns)margin was 58%. They are no where near that now and declining.

    • jeff
      jeff says:

      Howdy YKW,
      I know they aren’t 66%. That’s just what the calculation showed. But the calculation for determining the present value of the earnout is a bit complex and doesn’t reflect what’s going to actually happen. It’s a projection after all. And they just can’t have had the operating result they had and be at 66% anyway. I said that.

      Thanks,
      J.

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