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.
They got an uptick on their gross profit margin from 44.0% to 44.5%. “The overall improvement in gross margin was driven by lower material costs resulting in improved wholesale and international margins, as well as improved closeout sale margins.”
SG&A expenses were constant at $162 million. Net income was up from $36.4 million in last year’s quarter to $39.3 million in this year’s. The quarter’s income was 8.1% of revenue, a good result these days.
There’s nothing worth discussing on the balance sheet. It’s fine. I will just point out that Deckers is among the companies that held over inventory from last year and is expecting to sell it at full price this year. I don’t know the quantity we’re talking about. But it means that inventory doesn’t come down as much as it might otherwise but then, in a later quarter, doesn’t increase as much as might have been expected.
Ugg continues to represent most of their revenue- 84.8% this quarter. Sanuk’s total sales rose 9.18% from $17.3 to $18.9 million. That included growth in wholesale from $13.3 to $15.0 and direct to consumer sales down from $3.96 to $3.84 million. Sanuk had an operating loss of $211,000 on its wholesale business, up from a loss of $23,000 in last year’s quarter. “The increase in loss from operations of Sanuk brand wholesale was primarily attributable to lower margins on closeout sales compared to the prior period, partially offset by lower SG&A expenses largely due to lower selling and marketing costs.”
They sold, then, closeouts for less but apparently didn’t get any improvement in their inline margins.
Here’s what they say about Sanuk’s revenues.
“Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold partially offset by a decrease in WASPP [weighted average selling price per pair]. The increase in the volume of pairs sold had an impact of approximately $4,000, primarily driven by higher domestic wholesale sales. The increase was offset in part by a decrease in WASPP of approximately $2,000, which was attributable to an increased impact from closeout sales.”
Here’s how CEO Dave Powers described the current situation at Sanuk:
“For Sanuk, the brand continues to establish itself since transitioning to our corporate headquarters. The new leadership team is now in place, and we have filled key management positions in marketing, product, and sales. Sanuk is looking ahead and is focused on returning to its core product and marketing strength.” Good idea.
So, still a lot of work to be done. As I’ve documented since the acquisition, Deckers has experienced terrible results with Sanuk, especially given the price they paid. I continue to think they just didn’t understand what they had bought or the market it was in.
Last February, Deckers undertook a company wide restructuring involving, “the implementation of a retail store fleet optimization and office consolidation that is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration, and includes the closure of facilities and relocation of employees [Sanuk to Goleta].” They’ve also been involved in a Business Transformation Project, “…to improve, automate and streamline our operational systems, processes, infrastructure and management…”
They’ve identified 21 stores for closing and have closed 10 of them, leaving them with 165 stores at the end of the quarter. They are also opening some stores.
If you were to read the section of their 10-Q called “Trends Impacting our Overall Business” you’d find the conditions they describe and the actions they are taking in response are pretty much the same ones most other companies in our industry are taking. Here’s how they describe their strategy at the end of that section. You could cut and paste it into various other company’s documents.
“By emphasizing our brands’ images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. In addition, by continuing to diversify our brands, and responding to our customers’ demands for innovative product offerings, we believe we can mitigate the impact of seasonality on our business and provide sustainable growth across our brands.”
There’s an element of hunkering down and waiting for the storm to blow over across most companies, including Deckers, though they wouldn’t describe it that way. Deckers expect revenues to be down 2% to flat in the third quarter and are lowering the top end of their guidance range for the whole year. “Our outlook now assumes a weaker demand environment for reorders.”
Deckers is solidly profitable and is taking the actions they need to take (restructuring, the Business Transformation Project) to manage expense and make them more responsive. Imagine what they’d look like if things hadn’t gone south with Sanuk.