Decker’s Quarter and Sanuk’s Role in it.

I’m looking at Decker’s filings not because of a general interest in Deckers, but because they purchased Sanuk last July. Unlike Reef as part of VF Corporation, Sanuk is a significant part of Decker’s sales and profits so we can find out way more about how it’s doing as part of Deckers than we can find out about Reef as part of VF, just to use one industry example.

Maybe more importantly, we can get some insight into how Decker views Sanuk and what its plans for it are. As more and larger corporations acquire action sports/youth culture brands as a means to learn about and penetrate that market, it’s increasingly important we think that way.

Before I start, here’s the link to the 10Q in case anybody wants to see it.
Deckers owns Ugg, Teva, Sanuk, and a few other small brands that generated only $6 million of their March 31 quarter revenue of $246.3 million. That’s up 20.2% from $204.9 million in the same quarter last year. But they didn’t own Sanuk in last year’s quarter, and Sanuk accounted for $32.4 million of their sales in this year’s quarter, or 13.2% of the total. That $32.4 million represents 78% of Decker’s $41.5 million increase. The rest came from the Ugg brand.   Without Sanuk, sales were up 5%.
Decker’s overall gross margin fell from 50% to 46% mostly due to a whopping increase in the price of sheep skin used in the Ugg products. Selling, general and administrative expenses grew from $74 million to $101 million. $9 million of that was due to the acquisition of Sanuk. Decker’s net income for the quarter fell from $19.8 million to $8 million. The balance sheet is in good shape, though inventory has grown quite a bit with the largest factor being the increase in the cost of sheep skin. 
Deckers reduced its guidance for the year. They now expect sales to grow 14% rather than 15%. Earnings per share are expected to decline 9% to 10% rather than be flat. The company is under a bit of pressure and that was reflected in some of the analyst’s questions.
With that as background, where does Sanuk fit in? Obviously, given the price Deckers paid for Sanuk, expectations are high. That price was $120 million plus an earn out. As of March 31, 2012, the “contingent consideration for acquisition of business” (the expected remaining earn out) was $62.8 million. A year earlier it was $91.6 million. Deckers has already paid $30 million to the former owners of Sanuk.
In calculating that contingent consideration, Deckers used sales forecasts that “…include a compound annual growth rate of 17% through 2015.” Note 10 of the 10Q tells us that the earn out, without any limit on amount, is 51.8% of Sanuk’s gross profit in 2012, 36% in 2013 and 40% in 2015. No, it doesn’t say anything about 2014.
For that price, Deckers is expecting big things from Sanuk.
“We believe that the Sanuk brand is an ideal addition to the Deckers family of brands and that each of our brands can leverage off each other’s distribution channels. The Sanuk business is a profitable business that we believe provides for substantial growth opportunities within the action sports market, as well as other markets and channels in which Deckers is already established, including retailers such as Dillard’s, Journey’s, Nordstrom,, and REI.”
One wonders if Sanuk will fit as well in some of those retailers as other Decker brands. Well, that’s what you pay management to figure out; keeping a brand authentic while growing its recognition and penetration. “The product,” they say, “is resonating very well with a broader cross-section of consumers and we’re also excited about the rapid growth trajectory.” Sanuk’s margins, they tell us, are “…ahead of expectations.”
Before Decker’s unallocated overhead costs of $41.4 million, Decker’s income from operations for the quarter was $53.3 million. Of that, Sanuk accounted for $10.6 million, or 19.9% of the total, even though it’s only 13% of sales. After those unallocated overhead costs, Decker’s income from operations was $11.9 million.
By way of comparison Ugg, Decker’s largest brand, generated $91.9 million of wholesale business in the quarter (37% of the total) and operating income of $28.4 million. That’s 31% of sales compared to 33% for Sanuk. Wow- imagine what Ugg can do when the winter isn’t lousy (unless you like warm winters) and the price of sheep skin isn’t through the roof.
Deckers did $46.2 million in retail revenue during the quarter, almost all with the Ugg brand. They have 46 stores of their own worldwide and expect to continue opening stores in 2012 and beyond. There’s a chart on page 19 of the 10Q that breaks down brand sales between wholesale, retail and ecommerce. Except for $107,000 of ecommerce sales, all of Sanuk’s sales are wholesale.
When you buy a brand as a public company, you need performance from that brand commensurate with the price you paid. Inevitably and appropriately, the purchasing management pushes the acquired brand into expanded distribution utilizing the channels, expertise and beliefs about the market that lead it to acquire the brand. As an industry, that’s our reality. Successful brands reach a level beyond which they can’t go without help and the owners want their pay day.
If that’s what’s happening, and if it’s the future, how does it impact your company? There’s a longer article coming up on this article I think.     



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