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.
“The decrease in overall net sales was due to decreases in sales in each segment, largely driven by UGG, Teva and Sanuk brand wholesale sales. We experienced a decrease in the number of pairs sold in each segment. This resulted in a decrease in the overall volume of footwear sold for all brands of 22.4% to approximately 4,500 pairs sold for the three months ended June 30, 2016 from approximately 5,800 pairs for the three months ended June 30, 2015. Overall net sales were primarily impacted by a difference in the timing of shipments as we shifted shipments in advance of our Business Transformation Project implementation, which benefited the fourth quarter of fiscal year 2016 and negatively impacted the first quarter of fiscal year 2017.”
The good news is that the gross profit margin rose from 40.5% to 43.7%, though total gross profit fell by 11.9% to $76.3 million.
“The overall improvement in gross margin was driven by the sales variances noted above primarily reflecting a lower proportion of closeout sales to total net sales, improved wholesale margins and improved international margins.”
SG&A expenses rose 2.8% from $150.3 to $154.6 million.
The operating loss increased from $63.7 million in last year’s quarter to $78.3 in this years. The net loss rose 24.5% from $47.3 to $58.9 million.
Sanuk saw its total revenue fall 20.2% from $33.4 to $26.7 million. Wholesale revenues fell 21.8$ to $22.3 million and direct to consumer was down 10.9% to $4.4 million.
The numbers in the quote below are in thousands. WASPP stands for weighted average selling price per pair.
“Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold reflecting the difference in the timing of shipments noted above, partially offset by an increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $7,000, offset in part by an increase in WASPP of 24 approximately $1,000. The increase in WASPP was attributable to the higher margins on closeout sales compared to the prior period and a shift in product mix.”
The operating profit from Sanuk’s wholesale business fell 21.8% from $5.35 million to $4.18 million.
“The decrease in income from operations of Sanuk brand wholesale was primarily due to a decrease in sales reflecting the timing of shipments noted above, partially offset by a decrease in operating expenses of approximately $1,000. The decrease in operating expenses was primarily attributable to changes in the current period for the Sanuk brand contingent consideration compared to the prior period.”
Given the continuing poor performance of Sanuk since it’s purchase by Deckers, it’s amazing we haven’t heard at least an occasional question from the analysts about what went wrong. I was concerned from the first conference call after the acquisition, when it began to seem that they didn’t understand what they’d bought. You may recall that Deckers paid $120 million in cash plus a hefty earn out for a company with $43 million in revenues. As I said at the time, “Not in the middle of snowboard industry lunacy in the mid 90s did a company go for three times sales.” As of June 30, 2016, Deckers carries $128 million on goodwill on its balance sheet and $114 million of that (89%) is for the Sanuk brand which generated 15.3% of the company’s revenues in the quarter.
Dave Powers tells us in the conference call that they’ve finished moving Sanuk to their corporate headquarters and that they’ve brought in a gentlemen named Magnus Wedhammar as General Manager of the brand. He has experience at Sperry, Converse and Nike. Dave Powers says, “We look forward to Magnus’s impact on repositioning the brand and developing new product and marketing to ignite sale.” Me too.
Deckers bought Sanuk in May 2011. In all that time, I don’t recall a single comment about what went wrong or how they are going to fix it.
The balance sheet is in pretty good shape. I would note the increase in inventory from $374 million at the end of last year’s quarter to $469 million at the end of this year’s while sales are down 18.4%. Part of that is apparently due to the installation of new systems that delayed some shipments. In addition, Deckers has made a decision we’ve seen at other companies to carry over some perfectly good inventory to next season rather than close it out. They tell us that’s most of the inventory increase actually.
I want to briefly focus on Deckers’ four strategic priorities as laid out last quarter and described again this quarter by new CEO Dave Powers.
“Our first priority is on product, with a focus on elevating product design, fueling innovation and increasing our speed to market.” He indicated later that their product lead time was 15 to 16 months and, as a start, they’ve reduced 25% of their line to 9 months.
“Second, connecting with consumers digitally through targeted marketing and robust eCommerce. A strong digital presence is key to creating brand heat and driving sales.”
“Third, we must drive growth by optimizing our Omni-Channel distribution globally. We need to ensure that we are reaching new consumers through the right channels and distribution and existing consumers in the channels where they shop the most. To do this, we are segmenting our product line and wholesale accounts and working with wholesalers to develop product that appeals to the taste of their consumers.”
My point of view is that segmentation is way more important and way harder to do than in the past. More than ever, it’s a moving target.
“Fourth and finally, driving efficiencies to streamline the organization and improve operations. We have completed our major investments in Omni-Channel, new talent and upgraded systems and are now fine tuning our business.”
You know what I’m going to say right? That’s all good, necessary stuff but no different from what everybody else is doing. Advantage larger companies with strong balance sheets.
The trends impacting their business seem a lot like those impacting everybody else. I’d particularly highlight two. They won’t surprise anybody
“We believe there has been a meaningful shift in the way customers shop for products and make purchasing decisions. In particular, brick-and-mortar retail platforms appear to be experiencing a significant and prolonged decrease in consumer traffic, while Ecommerce businesses continue to evolve and experience growth.”
They are reviewing their brick and mortar stores and have plans to close 24 stores.
“Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide.” There’s a shocker.
We’ll continue to watch to see what happens to Sanuk. In the meantime, I’d point out that this conference call seemed a bit more upbeat and action oriented than some of the previous ones. I don’t know if I’m imagining that or if it means anything. We’ll find out.