What’s Up at Sanuk? Oh- And Decker’s June 30 Quarter

Deckers, as you know, owns UGG, Teva and some other smaller brands as well as Sanuk. At June 30, they had 89 retail stores as well. 

In the quarter ended June 30, Deckers reported sales that fell 2.5% to $170 million compared to last year’s June 30 quarter. The gross profit margin declined from 42.2% to 41.1%. Selling, general and administrative expenses rose 10.1% from$102.3 million to $112.6 million. There was a net loss of $29.3 million, up from a loss of $20.1 million in last year’s quarter.
 
With that cheery news behind us, let’s jump right to a breakdown of Decker’s revenue and operating income by segment taken right from their 10Q, which you can view, if you’d like, right here. The chart below is from page 9.
 
 
You can see that UGG wholesale business was down 20.7% and Teva wholesale fell 9.5%. Sanuk was up 4% at wholesale, ecommerce grew 34% and retail 29% due to new store openings since last year. Sanuk’s ecommerce sales rose from $1.26 million to $2.09 million. Their sales through Decker’s retail stores were up from $0 to $218,000. Total Sanuk sales in the quarter were $30.1 million.
 
It always intrigues me that there’s never a discussion of how, for better or worse, the direct to consumer business impacts wholesale business. It almost seems like there’s a conspiracy of assuming that it’s inevitably a good thing. I suppose, in the case of ecommerce, brands have no choice but to be involved in it, so you might as well assume that’s true. In the case of retail, I’m not quite so sure and never have been. I’d love to be a fly on the wall as companies try and decipher how their wholesale and direct to consumer businesses influence each other.
 
Back to the chart. In its bottom part, we see income from operations for each segment. Only ecommerce and Sanuk grew their operating profit. UGG actually lost a little money, and the retail stores more than tripled their operating loss. Opening more stores and losing more money doesn’t seem like a good plan.
 
But back to Sanuk’s wholesale results. You can see they grew operating profit during the quarter by 143% from $2.7 to $6.5 million even though sales were up only 4% or $1 million. How’d they do that?
 
Off to the fine print.
 
As background, Deckers acquired Sanuk in July 2011 for, uh, a lot of money. The contingency payments include 36% of Sanuk’s gross profit in 2013 and 40% in 2015 with no upside limit (no payment in 2014). Deckers has to estimate what these payments may be. They are included on the balance sheet in other accrued expenses and long term liabilities. At least some of the amount impacts the income statement. It’s interesting, given Sanuk’s recent results, that “The estimated sales forecast [for Sanuk] includes a compound annual growth rate (CAGR) of 17.3% from fiscal 2012 through fiscal 2015.”
 
Anyway, Sanuk’s big operating income improvement “…was partially the result of decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately $5,000,000 partially offset by increased selling and marketing expenses of approximately $3,000,000. The increase in income from operations was also due to the increase in net sales and resulting gross profit.”
 
To some extent, then, Sanuk’s improved operating profit  from its wholesale business during the quarter is partly the result of Decker’s reduced expectations for the brand through 2015, resulting in a reduced accrual of the earn out. Isn’t accounting wonderful?
 
I’d also note that of the net goodwill of $128.7 million carried on Decker’s balance sheet, $113.9 million is related to Sanuk. At some point, if Sanuk’s performance doesn’t meet expectations, that will have to be written down. Don’t know how much. It would be a noncash charge, but still a hit to income.
 
We also learn that Sanuk’s wholesale sales “…increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the average selling price. The decrease in average selling price was primarily due to increased closeout sales, as well as a change to the discount program for prebook and re-orders.” The volume increase was about $1.5 million, but the discounting cost them $500,000.
 
I’ve been writing and speaking lately about how hard it seems to be a public company in our space. I’m beginning to worry that Sanuk is another example of what happens when an excellent brand is acquired for a high price by a public company that has to meet Wall Street growth expectations, but doesn’t really understand our space.
 
Deckers CEO Angel Martinez, in the conference call, talks about Sanuk this way:
 
“…the Sanuk brand started off as a predominantly male one-season surf brand when we acquired them in 2011. Now we’re transitioning the Sanuk brand into a lifestyle brand that will be featured in department stores, sporting goods and outdoor retailers in 2014.”
 
He says that so easily. But as I think about why Sanuk succeeded and what the brand stands for, I think he may be surprised just how hard it is to accomplish that transition without damaging the brand. It’s not that it can’t be done; I am just not sure it can be done as quickly as a public company might require. I am sure that “department stores, sporting goods and outdoor retailers” is way too broad a definition of the target market to be useful, and I assume appropriate slicing and dicing is ongoing at Deckers. 
 
Deckers is taking Sanuk into new markets, they are taking it into new, broader distribution, they are trying, according to CEO Martinez, to “…allow our Sidewalk Surfer-loving customers the ability to wear their favorite styles deeper into the year [UGG by Sanuk?],” and, he says, they want to “transition the brand from primarily hanging footwear merchandise brand to a meaningful player on the footwear wall in our surf, outdoor and footwear specialty channels, during what has traditionally been the brand’s off season.”
 
I seem to remember a successful, fast growing, quirky, male surf brand called Sanuk. Whatever happened to that brand anyway?
 
It feels like Deckers is trying to change and grow Sanuk to meet Wall Street requirements and to justify the price they paid for the brand. But they now expect Sanuk sales during the year “…to grow approximately 5% versus our previous expectation of between 10% and 13%.” My hope is that they don’t see the reduced sales expectations as a reason to push some of these transitions even more quickly. I’d suggest they consider that some part of the lower sales is the result of what they’ve done already. Hope I’m wrong and that they listen to the people they’ve recently hired.

 

 

12 replies
  1. m_lac
    m_lac says:

    Jeff,

    The yoga mat is one of Sanuk’s successful women’s sandal, that has helped define the brand.

    • jeff
      jeff says:

      Sometimes I am having too much fun and write too fast for my own good. I did not know that and have changed the article. Thanks for letting me know.

      J.

  2. RB
    RB says:

    Being public is tough and requires a different outlook and operating strategy that a small private action sports brand. I believe Sanuk is about 90-105 mil in sales and 65% of that is probably in north america, when you split up the seasons, then split by gender and then compare with other successful brands, you’ll see that Sanuk is a relatively small and under distributed across distribution channels. Typically you’ll find that company stores not only provide volume but provide a “brand presentation” which most specialty and independent retailer don’t do, as well as provide significantly more margin, also required as many retailers like to send back product and take markdowns after a season or a quarter. Sanuk under Deckers, got global distribution, better manufacturing, operational efficiency and now has the ability to achieve a level of sales not possible as a private company, those are all great expect they have to deal with being public in this economy.

    • jeff
      jeff says:

      Hi RB,
      Well, the thing is I agree with you that being public requires a different outlook and operating strategy. But what I’m suggesting is that just because you’re public doesn’t make that required strategy good for the brand. All the benefits you site of being owned by a larger company are, I hope, true in this case. My concern is not that they are going to expand Sanuk, but that they are going to try and do it too fast and possibly in the wrong places.

      Retail stores do provide more product margin, but much of that is offset by the additional costs of operating the store. Depends, I suppose, on how good an operator you are and how many stores you have. Right now, Deckers is losing a bunch of money on its stores at the operating level. I agree that good brand stores provide good brand presentation, but at some point that argument begins to wear thin as the number of stores grow.

      You know what has me most concerned? In listening now to a few conference calls and seeing the filings with Deckers as the owner of Sanuk, I am just not sure they understand what they have and how to maximize its value. I know I can’t expect them to spill the details of their strategy in a conference call or public filing, but much of what they’ve said makes me doubt they understand the market and Sanuk’s place in it.

      Thanks for the great comment.

      J.

  3. Glenn Brumage
    Glenn Brumage says:

    Jeff,

    Thanks again for the synopsis.

    As you’ve stated and we’ve all seen, the constant is corporate profits and stock price. It’s a simple fact that none of us buys stock to see it languish or drop. Hence, the absolute certainty that Sanuk will be driven to over distribute and lose it’s original consumer base.
    Not faulting anyone, but if it walks like a duck……….so on n so forth.

    Quick note on B2C or in lay terms consumer direct. Times they are a changin. Not a question of if but how. Depending on a number of factors like product category, physical dimensions, technical nature, pricepoint and brand equity, all brands have to be forming their omni channel strategy or be left in the dust.

    Thanks again,
    Glenn
    see you in Orlando?

    • jeff
      jeff says:

      Hi Glenn,
      No Orlando for me. January probably.

      Let’s hope we’re both wrong about how Deckers manages Sanuk and its distribution. Hope the new hires can stand up to the pressure for quick growth.

      Agree with you about the requirement for an omni channel strategy. Wish somebody would define that really well.

      Thanks,
      J.

  4. Bob Hall
    Bob Hall says:

    Drill way down, into a conference room inside Deckers. The bright, young MBA that has just been handed the Sanuk brand crows, “What we really need here is SLOW growth.” It’s a career-killer in that world. And it ain’t gonna’ happen……

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