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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2019
OR
|
| |
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-36436
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 95-3015862 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices and zip code)
(805) 967-7611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | DECK | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of the close of business on July 31, 2019, the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 28,881,327.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Three Months Ended June 30, 2019
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | Defaults Upon Senior Securities | * |
Item 4. | Mine Safety Disclosures | * |
Item 5. | Other Information | * |
Item 6. | | |
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*Not applicable.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for our first fiscal quarter ended June 30, 2019 (Quarterly Report), and the information and documents incorporated by reference into this Quarterly Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Quarterly Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Quarterly Report, and the information and documents incorporated by reference into this Quarterly Report, contain forward-looking statements relating to, among other things:
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• | our business, operating, investing, capital allocation, marketing and financing strategies; |
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• | the impacts of our ongoing operational system upgrades; |
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• | the expansion of our brands and product offerings, and changes to the geographic and seasonal mix of our products; |
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• | changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies and our decision to exit the warehouse channel for the Sanuk brand; |
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• | changes in consumer tastes and preferences with respect to our brands and products in particular, and the fashion industry in general; |
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• | trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and E-commerce businesses; |
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• | the impact of seasonality and weather on consumer behavior and our results of operations; |
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• | the impact of our efforts to continue to advance sustainable and socially conscious business operations; |
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• | expectations relating to the expansion of Direct-to-Consumer (DTC) capabilities; |
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• | the ongoing impacts from the implementation of our restructuring and operating profit improvement plans; |
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• | our plans to consolidate certain distribution center operations; |
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• | availability of raw materials and manufacturing capacity, and reliability of overseas production and storage; |
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• | commitments and contingencies, including purchase obligations for product and raw materials; |
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• | the impacts of new or proposed legislation, tariffs, regulatory enforcement actions or legal proceedings; |
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• | the value of goodwill and other intangible assets, and potential write-downs or impairment charges; |
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• | changes impacting our tax liability and effective tax rates; |
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• | repatriation of earnings of non-United States subsidiaries and any related tax impacts; |
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• | the impact from adoption of recent accounting pronouncements; and |
| |
• | overall global economic and political trends, including foreign currency exchange rate fluctuations, changes in interest rates and changes in fuel costs. |
Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part II, Item 1A, "Risk Factors," and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Quarterly Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements.
PART I. FINANCIAL INFORMATION
References in this Quarterly Report to "Deckers," "we," "our," "us," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA ONE ONE® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® by UGG (Koolaburra), and UGGpure® (UGGpure) are some of the Company's trademarks. Other trademarks or trade names appearing elsewhere in this Quarterly Report are the property of their respective owners. Solely for convenience, the above trademarks and trade names in this Quarterly Report are referred to without the ® and ™ symbols, but such references should not be construed as an indication that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Unless otherwise indicated, all dollar amounts herein are expressed in thousands, except per share or share data.
ITEM 1. FINANCIAL STATEMENTS
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar and share data amounts in thousands, except par value) |
| | | | | | | |
| June 30, 2019 |
| March 31, 2019 |
ASSETS | (UNAUDITED) | | |
Cash and cash equivalents | $ | 502,626 |
| | $ | 589,692 |
|
Trade accounts receivable, net of allowances ($10,045 and $18,824 as of June 30, 2019 and March 31, 2019, respectively) | 159,679 |
| | 178,602 |
|
Inventories, net of reserves ($8,808 and $9,723 as of June 30, 2019 and March 31, 2019, respectively) | 473,394 |
| | 278,842 |
|
Prepaid expenses | 20,470 |
| | 19,901 |
|
Other current assets | 28,485 |
| | 26,028 |
|
Income tax receivable | 3,839 |
| | 2,340 |
|
Total current assets | 1,188,493 |
| | 1,095,405 |
|
| | | |
Property and equipment, net of accumulated depreciation ($243,624 and $235,939 as of June 30, 2019 and March 31, 2019, respectively) | 211,254 |
| | 213,796 |
|
Operating lease assets | 232,071 |
| | — |
|
Goodwill | 13,990 |
| | 13,990 |
|
Other intangible assets, net of accumulated amortization ($72,762 and $71,186 as of June 30, 2019 and March 31, 2019, respectively) | 50,085 |
| | 51,494 |
|
Deferred tax assets, net | 32,964 |
| | 30,870 |
|
Other assets | 22,199 |
| | 21,651 |
|
Total assets | $ | 1,751,056 |
| | $ | 1,427,206 |
|
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Short-term borrowings | $ | 611 |
| | $ | 603 |
|
Trade accounts payable | 300,103 |
| | 124,974 |
|
Accrued payroll | 56,220 |
| | 54,462 |
|
Operating lease liabilities | 48,139 |
| | — |
|
Other accrued expenses | 35,212 |
| | 47,963 |
|
Income taxes payable | 78 |
| | 19,283 |
|
Value added tax payable | 1,382 |
| | 3,239 |
|
Total current liabilities | 441,745 |
| | 250,524 |
|
| | | |
Mortgage payable | 30,747 |
| | 30,901 |
|
Long-term operating lease liabilities | 206,888 |
| | — |
|
Income tax liability | 60,855 |
| | 60,616 |
|
Deferred rent obligations | — |
| | 21,107 |
|
Other long-term liabilities | 15,542 |
| | 18,928 |
|
Total long-term liabilities | 314,032 |
| | 131,552 |
|
| | | |
Commitments and contingencies |
| |
|
| | | |
Stockholders' equity | | | |
Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 28,965 and 29,141 as of June 30, 2019 and March 31, 2019, respectively) | 290 |
| | 291 |
|
Additional paid-in capital | 184,049 |
| | 178,227 |
|
Retained earnings | 833,843 |
| | 889,266 |
|
Accumulated other comprehensive loss | (22,903 | ) | | (22,654 | ) |
Total stockholders' equity | 995,279 |
| | 1,045,130 |
|
Total liabilities and stockholders' equity | $ | 1,751,056 |
| | $ | 1,427,206 |
|
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(dollar and share data amounts in thousands, except per share data)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net sales | $ | 276,839 |
| | $ | 250,594 |
|
Cost of sales | 146,820 |
| | 135,629 |
|
Gross profit | 130,019 |
| | 114,965 |
|
Selling, general and administrative expenses | 161,436 |
| | 154,379 |
|
Loss from operations | (31,417 | ) | | (39,414 | ) |
| | | |
Interest income | (2,866 | ) | | (1,586 | ) |
Interest expense | 1,146 |
| | 1,234 |
|
Other income, net | (92 | ) | | (11 | ) |
Total other income, net | (1,812 | ) | | (363 | ) |
Loss before income taxes | (29,605 | ) | | (39,051 | ) |
Income tax benefit | (10,254 | ) | | (8,644 | ) |
Net loss | (19,351 | ) | | (30,407 | ) |
| | | |
Other comprehensive (loss) income, net of tax | | | |
Unrealized (loss) gain on cash flow hedges | (317 | ) | | 5,323 |
|
Foreign currency translation gain (loss) | 68 |
| | (7,463 | ) |
Total other comprehensive loss | (249 | ) | | (2,140 | ) |
Comprehensive loss | $ | (19,600 | ) | | $ | (32,547 | ) |
| | | |
Net loss per share | | | |
Basic | $ | (0.67 | ) | | $ | (1.00 | ) |
Diluted | $ | (0.67 | ) | | $ | (1.00 | ) |
Weighted-average common shares outstanding | | | |
Basic | 29,089 |
| | 30,423 |
|
Diluted | 29,089 |
| | 30,423 |
|
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Three Months Ended June 30, 2019 | | | | | | | | | | | |
Balance, March 31, 2019 | 29,141 |
| | $ | 291 |
| | $ | 178,227 |
| | $ | 889,266 |
| | $ | (22,654 | ) | | $ | 1,045,130 |
|
Stock compensation expense | 1 |
| | — |
| | 3,424 |
| | — |
| | — |
| | 3,424 |
|
Shares issued upon vesting | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Exercise of stock options | 46 |
| | 1 |
| | 2,772 |
| | — |
| | — |
| | 2,773 |
|
Cumulative adjustment from adoption of recent accounting pronouncements (refer to Note 1) | — |
| | — |
| | — |
| | (1,069 | ) | | — |
| | (1,069 | ) |
Shares withheld for taxes | — |
| | — |
| | (374 | ) | | — |
| | — |
| | (374 | ) |
Repurchases of common stock | (227 | ) | | (2 | ) | | — |
| | (35,003 | ) | | — |
| | (35,005 | ) |
Net loss | — |
| | — |
| | — |
| | (19,351 | ) | | — |
| | (19,351 | ) |
Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (249 | ) | | (249 | ) |
Balance, June 30, 2019 | 28,965 |
| | $ | 290 |
| | $ | 184,049 |
| | $ | 833,843 |
| | $ | (22,903 | ) | | $ | 995,279 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Three Months Ended June 30, 2018 | | | | | | | | | | | |
Balance, March 31, 2018 | 30,447 |
| | $ | 304 |
| | $ | 167,587 |
| | $ | 785,871 |
| | $ | (12,983 | ) | | $ | 940,779 |
|
Stock compensation expense | 2 |
| | — |
| | 3,526 |
| | — |
| | — |
| | 3,526 |
|
Shares issued upon vesting | 6 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative adjustment from adoption of recent accounting pronouncements | — |
| | — |
| | — |
| | 720 |
| | — |
| | 720 |
|
Shares withheld for taxes | — |
| | — |
| | (328 | ) | | — |
| | — |
| | (328 | ) |
Repurchases of common stock | (86 | ) | | — |
| | — |
| | (9,999 | ) | | — |
| | (9,999 | ) |
Net loss | — |
| | — |
| | — |
| | (30,407 | ) | | — |
| | (30,407 | ) |
Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2,140 | ) | | (2,140 | ) |
Balance, June 30, 2018 | 30,369 |
| | $ | 304 |
| | $ | 170,785 |
| | $ | 746,185 |
| | $ | (15,123 | ) | | $ | 902,151 |
|
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollar amounts in thousands)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
OPERATING ACTIVITIES | | | |
Net loss | $ | (19,351 | ) | | $ | (30,407 | ) |
Reconciliation of net loss to cash (used in) provided by operating activities | | | |
Depreciation, amortization and accretion | 10,345 |
| | 11,405 |
|
Bad debt (benefit) expense | (937 | ) | | 608 |
|
Deferred tax benefit | (1,646 | ) | | (509 | ) |
Stock-based compensation | 3,424 |
| | 3,526 |
|
Employee stock purchase plan | 49 |
| | 45 |
|
Excess tax benefits from stock-based compensation | (580 | ) | | (106 | ) |
Loss on disposal of property and equipment | 59 |
| | 58 |
|
Changes in operating assets and liabilities: | | | |
Trade accounts receivable, net | 19,860 |
| | 11,940 |
|
Inventories, net | (194,552 | ) | | (136,641 | ) |
Prepaid expenses and other current assets | (7,172 | ) | | (9,295 | ) |
Income tax receivable | (1,499 | ) | | (229 | ) |
Net operating lease assets and liabilities | (1,033 | ) | | — |
|
Other assets | (547 | ) | | 1,418 |
|
Trade accounts payable | 175,129 |
| | 168,569 |
|
Accrued expenses | (8,598 | ) | | (1,795 | ) |
Income taxes payable | (18,625 | ) | | (6,204 | ) |
Long-term liabilities | (955 | ) | | (4,310 | ) |
Net cash (used in) provided by operating activities | (46,629 | ) | | 8,073 |
|
| | | |
INVESTING ACTIVITIES | | | |
Purchases of property and equipment | (7,393 | ) | | (7,286 | ) |
Proceeds from sale of property and equipment, net | 227 |
| | 47 |
|
Net cash used in investing activities | (7,166 | ) | | (7,239 | ) |
| | | |
FINANCING ACTIVITIES | | | |
Cash received from issuances of common stock | 2,773 |
| | — |
|
Cash paid for repurchase of common stock | (35,005 | ) | | (9,999 | ) |
Cash paid for shares withheld for taxes | (374 | ) | | (499 | ) |
Repayment of mortgage principal | (146 | ) | | (139 | ) |
Net cash used in financing activities | (32,752 | ) | | (10,637 | ) |
| | | |
Effect of foreign currency exchange rates on cash | (519 | ) | | (2,316 | ) |
Net change in cash and cash equivalents | (87,066 | ) | | (12,119 | ) |
Cash and cash equivalents at beginning of period | 589,692 |
| | 429,970 |
|
Cash and cash equivalents at end of period | $ | 502,626 |
| | $ | 417,851 |
|
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollar amounts in thousands)
(continued)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
SUPPLEMENTAL CASH FLOW DISCLOSURE | | | |
Cash paid during the period for | | | |
Income taxes, net of refunds of $4,293 and $2,744, as of June 30, 2019 and 2018, respectively | $ | 11,833 |
| | $ | 1,961 |
|
Interest | 563 |
| | 1,494 |
|
Operating leases | 15,265 |
| | — |
|
Non-cash investing activities | | | |
Accrued for purchases of property and equipment | 1,116 |
| | 2,315 |
|
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Note 1. General
The Company
Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its Omni-Channel platform, the Company's proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands.
The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its DTC business, which is comprised of its retail stores and E‑Commerce websites. Independent third-party contractors manufacture all of the Company's products. A significant part of the Company's business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes thereto (referred to herein as condensed consolidated financial statements) as of June 30, 2019 and for the three months ended June 30, 2019 and 2018 have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements and accompanying notes thereto. The condensed consolidated balance sheet as of March 31, 2019 was derived from the Company's audited consolidated financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments consisting of all normal and recurring entries necessary to fairly present the results of interim periods presented but are not necessarily indicative of results to be achieved for full fiscal years or other interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the SEC on May 30, 2019 (2019 Annual Report).
Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications. Certain reclassifications were made for prior periods presented to conform to the current period presentation.
Use of Estimates. The preparation of the Company's condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting standard pronouncements, and other factors that management believes to be reasonable. These estimates are based on information available as of the date of the condensed consolidated financial statements and actual results could differ materially from the results assumed or implied based on these estimates.
Significant areas requiring the use of management estimates relate to inventory write-downs, trade accounts receivable allowances, including variable consideration for net sales provided to customers, contract assets and liabilities, stock-based compensation, impairment assessments, goodwill and other intangible assets, depreciation and amortization, income tax receivables and liabilities, uncertain tax positions, the fair value of financial instruments, and the reasonably certain lease term, lease classification, and the Company's incremental borrowing rate (IBR) utilized to discount its operating lease assets and liabilities.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Reportable Operating Segments
The Company's six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's reportable operating segments.
Recent Accounting Pronouncements
Recently Adopted. The Financial Accounting Standards Board (FASB) issued Accounting Standard Updates (ASUs) that have been adopted by the Company for its annual and interim reporting periods as stated below. The following is a summary of each standard and the impact on the Company:
|
| | | | |
Standard | | Description | | Impact on Adoption |
ASU No. 2016-02, Leases (as amended by ASUs 2015-14, 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01) | | Requires a lessee to recognize a lease asset and lease liability in its condensed consolidated balance sheets. A lessee should recognize a right-of-use (ROU) asset representing its right to use the underlying asset for the estimated lease term, and a liability for related lease payments. | | The Company adopted this ASU (the new lease standard) on a modified retrospective basis beginning April 1, 2019. On adoption, the Company recorded a $230,048 increase to total assets due to the recognition of ROU assets, net of prior legacy US GAAP lease-related balances for deferred rent obligations and tenant allowances of $27,895, as previously recorded in other accrued expenses, deferred rent obligations, and other long-term liabilities, in the condensed consolidated balance sheets. In addition, the Company recorded a corresponding $254,538 increase to total liabilities due to the recognition of lease liabilities, net of a prior legacy US GAAP lease-related balance for prepaid rent of $4,846, as previously recorded in prepaid expenses, in the condensed consolidated balance sheets. ROU assets and lease liabilities include lease obligations for operating leases for retail stores, showrooms, offices, and distribution facilities. ROU assets and related lease liabilities are presented as operating lease assets and operating lease liabilities in the condensed consolidated balance sheets. In addition, the Company recorded a net cumulative effect after-tax decrease to opening retained earnings of $1,069 in the condensed consolidated balance sheets due to the impairment of select operating lease assets related to retail stores whose fixed assets had been previously impaired and for which the initial carrying value of the operating lease assets were determined to be above fair market value on adoption.
The adoption of the new lease standard did not materially affect the condensed consolidated statements of comprehensive loss as the classification and recognition of lease cost did not materially change from legacy US GAAP. Similarly, it did not have a material impact on the Company's liquidity or on its debt covenant compliance under current agreements including its borrowing strategy subject to leverage ratios. However, it did result in additional disclosures and presentation changes to the condensed consolidated statement of cash flows, including supplemental cash flow disclosure, as well as expanded disclosures on existing and new lease commitments.
The Company elected the “package of practical expedients” permitted under the transition guidance of this ASU, which provides a number of transition options, including (1) exemption from reassessment of prior conclusions about lease identification, classification and initial direct costs; (2) the ability to elect a short-term lease recognition exemption; and (3) the option to not separate lease and non-lease components. In addition, the Company did not apply the optional hindsight election and maintained original lease terms as estimated at lease inception.
The comparative condensed consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented.
Refer to Note 7, “Leases and Other Commitments,” for the Company's accounting policy and expanded disclosures required under the new lease standard.
|
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
|
| | | | |
Standard | | Description | | Impact on Adoption |
ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (as amended by ASUs 2018-16 and 2019-04) | | Seeks to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities and to reduce the complexity of and simplify the application of hedge accounting. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness. | | The Company adopted this ASU (the new hedging standard) beginning April 1, 2019 on a prospective basis, which did not have a material impact on the condensed consolidated financial statements.
However, the Company made a change in accounting policy with respect to ineffective hedges and elected not to exclude hedge components from the periodic assessment of hedge effectiveness. Under legacy US GAAP, these amounts were excluded from hedge effectiveness and therefore as a component of accumulated other comprehensive loss (AOCL), and immediately recognized in selling, general and administrative (SG&A) expenses in the condensed consolidated statements of comprehensive loss. Under the new hedge standard, these gains or losses will now be recognized as a component of AOCL and will be reclassified to earnings in the condensed consolidated statements of comprehensive loss in the same period or periods as the related net sales are recorded.
The comparative condensed consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented.
Refer to Note 9, “Derivative Instruments,” for further information on the Company's hedging instruments. |
Not Yet Adopted. The FASB issued the following ASUs that have not yet been adopted by the Company and are expected to be adopted, beginning April 1, 2020 (Q1 FY 2021). The following is a summary of each new ASU and the expected impact on the Company when adopted:
|
| | | | | | |
Standard | | Description | | Planned Period of Adoption | | Expected Impact on Adoption |
ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06) | | Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge. | | Q1 FY 2021 | | The Company is evaluating the timing and effect that adoption of this ASU will have on its condensed consolidated financial statements and related disclosures. |
ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, and 2019-05) | | Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
| | Q1 FY 2021 | | The Company is evaluating the timing and effect that adoption of this ASU will have on its condensed consolidated financial statements and related disclosures. |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Note 2. Revenue Recognition
Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimated variable consideration is included in the transaction price to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period.
As a result of the short durations of the Company's customer contracts, which are typically effective for one year or less and have payment terms that are generally 30-60 days, these arrangements are not considered to have a significant financing component.
Contract Assets and Liabilities
Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets.
Sales Returns. The following table provides activity during the three months ended June 30, 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels:
|
| | | | | | | |
| Contract Asset | | Contract Liability |
Balance, March 31, 2019 | $ | 10,441 |
| | $ | (24,787 | ) |
Net additions to sales return allowance* | 3,776 |
| | (14,632 | ) |
Actual returns | (8,713 | ) | | 24,447 |
|
Balance, June 30, 2019 | $ | 5,504 |
| | $ | (14,972 | ) |
The following table provides activity during the three months ended June 30, 2018 related to estimated sales returns for the Company’s existing customer contracts for all channels:
|
| | | | | | | |
| Contract Asset | | Contract Liability |
Balance, March 31, 2018 | $ | 11,251 |
| | $ | (23,156 | ) |
Net additions to sales return allowance* | 1,780 |
| | (10,965 | ) |
Actual returns | (8,212 | ) | | 22,604 |
|
Balance, June 30, 2018 | $ | 4,819 |
| | $ | (11,517 | ) |
*Net additions to sales return allowance include provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns.
Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Note 3. Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
The Company's goodwill and other intangible assets are recorded in the condensed consolidated balance sheets, as follows:
|
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
Goodwill | | | |
UGG brand | $ | 6,101 |
| | $ | 6,101 |
|
HOKA brand | 7,889 |
| | 7,889 |
|
Total goodwill | 13,990 |
| | 13,990 |
|
| | | |
Other intangible assets | | | |
Indefinite-lived intangible assets | | | |
Trademarks | 15,454 |
| | 15,454 |
|
Definite-lived intangible assets | | | |
Trademarks | 55,245 |
| | 55,245 |
|
Other | 52,148 |
| | 51,981 |
|
Total gross carrying amount | 107,393 |
| | 107,226 |
|
Accumulated amortization | (72,762 | ) | | (71,186 | ) |
Net definite-lived intangible assets | 34,631 |
| | 36,040 |
|
Total other intangible assets, net | 50,085 |
| | 51,494 |
|
Total | $ | 64,075 |
| | $ | 65,484 |
|
Amortization Expense
Aggregate amortization expense for amortizable intangible assets during the three months ended June 30, 2019 and 2018 was $1,413 and $1,978, respectively. A reconciliation of the changes in total other intangible assets recorded in the condensed consolidated balance sheets, is as follows:
|
| | | |
Balance, March 31, 2019 | $ | 51,494 |
|
Amortization expense | (1,413 | ) |
Foreign currency translation net gain | 4 |
|
Balance, June 30, 2019 | $ | 50,085 |
|
Note 4. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
| |
• | Level 1: Quoted prices in active markets for identical assets and liabilities. |
| |
• | Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities. |
| |
• | Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions. |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.
The assets and liabilities that are measured on a recurring basis at fair value in the condensed consolidated balance sheets, are as follows:
|
| | | | | | | | | | | | | | | |
| | | Measured Using |
| June 30, 2019 | Level 1 | | Level 2 | | Level 3 |
Non-qualified deferred compensation asset | $ | 7,473 |
| | $ | 7,473 |
| | $ | — |
| | $ | — |
|
Non-qualified deferred compensation liability | (4,406 | ) | | (4,406 | ) | | — |
| | — |
|
Designated Derivative Contracts liability | (417 | ) | | — |
| | (417 | ) | | — |
|
Non-Designated Derivative Contracts liability | (356 | ) | | — |
| | (356 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| | | Measured Using |
| March 31, 2019 | Level 1 | | Level 2 | | Level 3 |
Non-qualified deferred compensation asset | $ | 7,300 |
| | $ | 7,300 |
| | $ | — |
| | $ | — |
|
Non-qualified deferred compensation liability | (4,447 | ) | | (4,447 | ) | | — |
| | — |
|
In 2010, the Company established a non-qualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. Deferred compensation is recognized based on the fair value of the participants' accounts. A rabbi trust was established for the purpose of supporting benefits payable under this program, with the assets invested in Company-owned life insurance policies. As of June 30, 2019, the non-qualified deferred compensation asset of $7,473 was recorded in other assets in the condensed consolidated balance sheets. As of June 30, 2019, the non-qualified deferred compensation liability of $4,406 was recorded in the condensed consolidated balance sheets, with $1,174 in other accrued expenses and $3,232 in other long-term liabilities.
The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The fair values of liabilities associated with derivative instruments and hedging activities are recorded in other accrued expenses, in the condensed consolidated balance sheets. Refer to Note 9, “Derivative Instruments,” for further information.
Note 5. Income Taxes
Income tax benefit and the effective income tax rate were as follows:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Income tax benefit | $ | (10,254 | ) | | $ | (8,644 | ) |
Effective income tax rate | 34.6 | % | | 22.1 | % |
The tax provisions for the three months ended June 30, 2019 and 2018 were computed using the estimated effective income tax rates applicable to each of the domestic and foreign taxable jurisdictions for the full fiscal year and were adjusted for discrete items that occurred within the periods presented. The increase in the effective income tax rate was primarily due to a discrete tax benefit for the favorable settlement of a state income tax audit, which was partially offset by a discrete tax expense for tax reserves recorded during the three months ended June 30, 2019.
Due to the enactment of the Tax Cuts and Jobs Act (Tax Reform Act) in December 2017, the Company is subject to US taxation of its foreign subsidiary earnings considered global intangible low-taxed income as well as limitations
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
on the deductibility of executive compensation, which are included in income tax benefit in the condensed consolidated statements of comprehensive loss for the periods presented above. The Company continues to evaluate new guidance and legislation as it is issued.
Unrecognized Tax Benefits. During the three months ended June 30, 2019, the amount of gross unrecognized tax benefits and associated penalties and interest increased by $1,120 to $14,518, primarily related to state income tax reserves recorded in income tax liability in the condensed consolidated balance sheets.
Note 6. Revolving Credit Facilities and Mortgage Payable
Primary Credit Facility
In September 2018, the Company entered into a credit agreement that provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023.
At the Company's election, interest under the Primary Credit Facility is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternate Base Rate (ABR). Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate (CDOR) if made in Canadian dollars. As of June 30, 2019, the effective interest rates for US dollar LIBOR and ABR, with relevant spreads for borrowings made during the reporting period, were 3.52% and 5.63%, respectively.
During the three months ended June 30, 2019, the Company made no borrowings or repayments under the Primary Credit Facility. As of June 30, 2019, the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $549. As of June 30, 2019, available borrowings under the Primary Credit Facility were $399,451. Subsequent to June 30, 2019 through July 31, 2019, the Company made no additional borrowings under the Primary Credit Facility. At July 31, 2019, the Company had no outstanding balance, outstanding letters of credit of $549, and had available borrowings of $399,451 under the Primary Credit Facility.
China Credit Facility
In August 2013, Deckers (Beijing) Trading Co., LTD (DBTC), a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000, or $43,681, with an overdraft facility sublimit of CNY 100,000, or $14,560.
The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate, which was 4.35% as of June 30, 2019, and is multiplied by a variable liquidity factor, which resulted in an effective interest rate of 4.79%.
During the three months ended June 30, 2019, the Company made no borrowings or repayments under the China Credit Facility. As of June 30, 2019, the Company had no outstanding balance and available borrowings of $43,681 under the China Credit Facility. Subsequent to June 30, 2019 through July 31, 2019, the Company made no additional borrowings, had no outstanding balance, and had available borrowings of approximately $43,681 under the China Credit Facility.
Japan Credit Facility
In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a revolving credit facility agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 5,500,000, or $50,928, for a maximum term of six months for each draw on the facility.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
The Japan Credit Facility renews annually and is guaranteed by the Company. The Company has renewed the Japan Credit Facility through January 31, 2020. Interest is based on the Tokyo Interbank Offered Rate (TIBOR), plus 0.40%. As of June 30, 2019, the effective interest rate was 0.47%.
During the three months ended June 30, 2019, the Company made no borrowings or repayments under the Japan Credit Facility. As of June 30, 2019, the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $50,928. Subsequent to June 30, 2019 through July 31, 2019, the Company made no additional borrowings, had no outstanding balance, and had available borrowings of approximately $50,928 under the Japan Credit Facility.
Mortgage
In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $33,931. As of June 30, 2019, the outstanding principal balance under the mortgage was $31,358, which includes $611 in short-term borrowings and $30,747 in mortgage payable in the condensed consolidated balance sheets. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that amortizes the principal balance over a 30-year period; however, the loan will mature and requires a balloon payment of $23,695, in addition to any then-outstanding balance, on July 1, 2029.
Debt Covenants
As of June 30, 2019, and through July 31, 2019, the Company was in compliance with all debt covenants under its revolving credit facilities and mortgage.
Note 7. Leases and Other Commitments
Leases
The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts. Some of the Company's operating leases contain extension options of anywhere from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants.
Operating lease assets and liabilities. The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the condensed consolidated balance sheets on the lease commencement date, based on the present value of the unpaid lease payments over the reasonably certain lease term. The lease term includes the non-cancellable period at the lease commencement date, plus any additional periods covered by the Company's options to extend (or not to terminate) the lease that are reasonably certain of exercise, or an option to extend (or not to terminate) a lease that is controlled by the lessor.
Operating lease assets are initially measured at cost, which comprise the initial amount of the associated operating lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances.
Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Rent expense for operating lease payments is recognized on a straight-line basis over the lease term in SG&A expenses in the condensed consolidated statements of comprehensive loss. Lease payments included in the operating lease liability include (1) fixed payments, including in-substance fixed payments, owed over the lease term, including fixed rate increases and (2) exclude any lease prepayments as of the period presented.
Operating lease assets are presented separately in the condensed consolidated balance sheets. The associated lease liabilities are presented as operating lease liabilities, with the current portion of operating lease liabilities included
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
in other current liabilities and the long-term portion presented separately as long-term operating lease liabilities in the condensed consolidated balance sheets.
Certain leases require additional payments based on actual or forecasted sales volume (either monthly or annually), as well as reimbursement for real estate taxes (tax), common area maintenance (CAM), and insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and liabilities, discussed above, and are recognized in rent expense and recorded as a component of SG&A expenses in the condensed consolidated statements of comprehensive loss. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments are used to measure the operating lease assets and lease liabilities, discussed above.
The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the condensed consolidated statements of comprehensive loss.
Discount Rate. The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its IBR. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not generally borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its noncollateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
Remeasurements. The Company monitors for events that require a change in estimates for its operating lease assets and liabilities, such as contract terms modifications or lease term estimates. When a change in estimate results in the remeasurement of the operating lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset.
Reassessments may include impairments of operating lease assets as determined under the requirements of ASC Subtopic 360-10, Property, Plant, and Equipment – Overall (ASC 360). Any impairment charges incurred under the requirements of ASC 360 are allocated to the long-lived assets in the defined asset group, which include the operating lease asset unless doing so would reduce the carrying amount of the operating lease asset to an amount less than zero. Impairment charges are recorded in SG&A expenses in the condensed consolidated statements of comprehensive loss. After impairment, the operating lease asset is remeasured and amortized on a straight-line basis over the remaining lease term, with no impact to the operating lease liability.
Rent Expense. The components of rent expense for operating leases recorded in the condensed consolidated statements of comprehensive loss are as follows:
|
| | | |
| Three Months Ended June 30, 2019 |
Operating | $ | 14,247 |
|
Variable | 5,454 |
|
Short-term | 542 |
|
Total | $ | 20,243 |
|
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
The components of rent expense for operating leases recorded in the condensed consolidated statements of comprehensive loss under legacy US GAAP are as follows:
|
| | | |
| Three Months Ended June 30, 2018 |
Minimum rentals | $ | 14,800 |
|
Contingent rentals | 1,205 |
|
Total | $ | 16,005 |
|
Operating Lease Liabilities. Maturities of undiscounted operating lease liabilities remaining as of June 30, 2019 under the new lease standard, reconciled to the present value of operating lease liabilities recorded in the condensed consolidated balance sheets, are as follows:
|
| | | | |
Years Ending March 31, | | Amount |
2020 | | $ | 38,269 |
|
2021 | | 50,069 |
|
2022 | | 42,737 |
|
2023 | | 37,983 |
|
2024 | | 33,334 |
|
Thereafter | | 82,848 |
|
Total undiscounted future lease payments | | 285,240 |
|
Less: Imputed interest | | (30,213 | ) |
Total | | $ | 255,027 |
|
Operating lease liabilities recorded in the condensed consolidated balance sheets, exclude $2,829 of legally binding undiscounted minimum lease payments for leases signed but not yet commenced, which are included in the legacy US GAAP future minimum commitments, presented below.
Future minimum commitments for operating lease contracts as of March 31, 2019 under legacy US GAAP are as follows:
|
| | | | |
Years Ending March 31, | | Amount |
2020 | | $ | 53,015 |
|
2021 | | 47,803 |
|
2022 | | 40,629 |
|
2023 | | 35,915 |
|
2024 | | 31,329 |
|
Thereafter | | 81,746 |
|
Total | | $ | 290,437 |
|
Supplemental Disclosure. Key estimates and judgments related to operating lease assets and liabilities presented in the condensed consolidated balance sheets are as follows:
|
| | |
| June 30, 2019 |
Weighted-average remaining lease term in years | 6.6 |
|
Weighted-average discount rate | 3.3 | % |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Supplemental information for amounts presented in the condensed consolidated statements of cash flows related to operating leases is as follows:
|
| | | |
| Three Months Ended June 30, 2019 |
Non-cash operating activities | |
ROU assets obtained in exchange for lease liabilities* | $ | 16,422 |
|
Reductions to ROU assets resulting from reductions to lease liabilities* | (2,549 | ) |
*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements.
Other Commitments
During the three months ended June 30, 2019, there were no material changes to the obligations reported in the 2019 Annual Report with respect to (1) purchase obligations for product; (2) purchase obligations for commodities; (3) future capital expenditures, commitments under service contracts, or contractual requirements to pay promotional expenses; and (4) legal proceedings, other than those that occurred in the ordinary course of business.
Note 8. Stock Compensation
The Company uses various types of stock-based compensation under the 2006 Equity Incentive Plan, as amended (2006 EIP), and the 2015 Stock Incentive Plan, as amended (2015 SIP), including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights (SARs), and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs) to key employees and certain executive officers, and long-term incentive plan (LTIP) awards to certain officers. During the three months ended June 30, 2019, no awards were granted under these plans with the exception of the Annual PSUs and Annual RSUs, summarized below. Refer to the 2019 Annual Report for further information on previously granted awards under these plans.
Annual Awards
The Company granted Annual RSUs and Annual PSUs under the 2015 SIP, as summarized below:
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
| Shares Granted | | Weighted-average grant date fair value per share | | Shares Granted | | Weighted-average grant date fair value per share |
Annual RSUs | 11,334 |
| | $ | 173.77 |
| | 16,359 |
| | $ | 118.88 |
|
Annual PSUs | 10,764 |
| | 173.69 |
| | 14,112 |
| | 118.67 |
|
Total | 22,098 |
| | $ | 173.73 |
| | 30,471 |
| | $ | 118.78 |
|
Stock-based compensation is recorded net of estimated forfeitures in SG&A expenses in the condensed consolidated statements of comprehensive loss. The Annual RSUs vest in equal annual installments over three years following the date of grant. The Annual PSUs are earned based on the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted and, to the extent the performance criteria are met, vest in equal annual installments over three years thereafter. As of June 30, 2019, the Company estimates that the target performance criteria related to the fiscal year ending March 31, 2020 Annual PSUs will be achieved.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Future unrecognized stock-based compensation expense for Annual RSUs and Annual PSUs outstanding as of June 30, 2019, was $10,452.
Subsequent to June 30, 2019 through July 31, 2019, the Company granted 25,266 Annual RSUs and 9,174 Annual PSUs at a weighted-average grant date fair value of $175.14 per share.
Note 9. Derivative Instruments
The Company may enter into foreign currency forward or option contracts (derivative contracts), and certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment.
The after-tax unrealized gains or losses from changes in the fair value of Designated Derivative Contracts are recognized as a component of AOCL and are reclassified to earnings in the condensed consolidated statements of comprehensive loss in the same period or periods as the related net sales are recorded. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in other comprehensive income or loss (OCI) related to the hedging relationship are immediately recorded in earnings in the condensed consolidated statements of comprehensive loss.
As of June 30, 2019, the Company had the following derivative contracts recorded at fair value in the condensed consolidated balance sheets:
|
| | | | | | | | | | | |
| Designated Derivative Contracts | | Non-Designated Derivative Contracts | | Total |
Notional value | $ | 54,870 |
| | $ | 19,913 |
| | $ | 74,783 |
|
Fair value recorded in other accrued expenses | (417 | ) | | (356 | ) | | (773 | ) |
As of June 30, 2019, the Company's outstanding derivative contracts were held by an aggregate of three counterparties, all with various maturity dates within the next nine months.
As of March 31, 2019, the Company had no outstanding derivative contracts.
The following table summarizes the effect of Designated Derivative Contracts:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Amount of (loss) gain recognized in OCI | $ | (417 | ) | | $ | 6,770 |
|
Amount of gain excluded from effectiveness testing recognized in SG&A expenses* | — |
| | 846 |
|
*Amounts presented for the three months ended June 30, 2018 are recognized under legacy US GAAP. Beginning April 1, 2019, under the new hedging standard, these amounts are now recognized as a component of AOCL and reclassified into earnings in accordance with the accounting policy above, however, there was no impact to earnings during the three months ended June 30, 2019.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
The Company records the changes in AOCL for unrealized gains or losses on Designated Derivative Contracts net of income tax effects in the condensed consolidated statements of comprehensive loss, which were as follows:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Income tax (benefit) expense | $ | (100 | ) | | $ | 1,447 |
|
The following table summarizes the effect of Non-Designated Derivative Contracts:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Amount of (loss) gain recognized in SG&A expenses | $ | (356 | ) | | $ | 487 |
|
The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. As of June 30, 2019, the amount of unrealized (loss) gains on derivative contracts recognized in AOCL are expected to be reclassified into income within the next 12 months. Refer to Note 10, “Stockholders' Equity,” for further information.
Subsequent to June 30, 2019 through July 31, 2019, the Company entered into Non-Designated Derivative Contracts with notional values totaling $15,317, which are expected to mature over the next 5 months, and no additional Designated Derivative Contracts. As of July 31, 2019, the Company’s outstanding hedging contracts were held by an aggregate of five counterparties.
Note 10. Stockholders' Equity
Stock Repurchase Programs
The Company's Board of Directors has authorized various stock repurchase programs pursuant to which the Company may repurchase its common stock. The Company's stock repurchase programs do not obligate it to acquire any particular amount of common stock and may be suspended at any time at the Company's discretion. As of June 30, 2019, the Company had a remaining stock repurchase approval in the amount of $315,207.
Stock repurchase activity under these programs for the three months ended June 30, 2019, is as follows:
|
| | | |
Total number of shares repurchased* | 226,776 |
|
Average price paid per share | $ | 154.36 |
|
Dollar value of shares repurchased | $ | 35,005 |
|
*All shares were repurchased as part of publicly-announced programs in open-market transactions.
Subsequent to June 30, 2019 through July 31, 2019, the Company repurchased 84,330 shares for $13,200 at an average price of $156.53 per share, leaving the aggregate remaining stock repurchase approval in the amount of $302,007.
Accumulated Other Comprehensive Loss
The components within AOCL, net of tax, recorded in the condensed consolidated balance sheets, are as follows:
|
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
Unrealized loss on cash flow hedges | $ | (317 | ) | | $ | — |
|
Cumulative foreign currency translation loss | (22,586 | ) | | (22,654 | ) |
Total | $ | (22,903 | ) | | $ | (22,654 | ) |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Note 11. Basic and Diluted Shares
The reconciliation of basic to diluted weighted-average common shares outstanding, was as follows:
|
| | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Basic | 29,089,000 |
| | 30,423,000 |
|
Dilutive effect of equity awards | — |
| | — |
|
Diluted | 29,089,000 |
| | 30,423,000 |
|
| | | |
Excluded* | | | |
Annual RSUs and Annual PSUs | 245,000 |
| | 306,000 |
|
LTIP PSUs | 77,000 |
| | — |
|
LTIP NQSOs | 317,000 |
| | 377,000 |
|
Deferred Non-Employee Director Equity Awards | 7,000 |
| | 7,000 |
|
Employee Stock Purchase Plan | — |
| | 7,000 |
|
*The equity awards excluded from the dilutive effect are excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented. The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. The actual number of shares to be issued pursuant to these awards will be based on Company performance in future periods, net of forfeitures. Refer to Note 8, “Stock Compensation,” for further information.
Note 12. Reportable Operating Segments
The Company's six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. The Other brands wholesale reportable operating segment consists of the Koolaburra brand and includes other discontinued brands during the prior period presented.
Information reported to the Chief Operating Decision Maker (CODM), who is the Company's Principal Executive Officer (PEO), is organized into these reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources.
The Company does not consider international operations a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the aforementioned reportable operating segments.
Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments.
The Company evaluates reportable operating segment performance, primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments include only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with distribution centers, certain
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
executive and stock compensation, accounting, finance, legal, information technology, human resources, and facilities, among others.
Reportable operating segment information, with a reconciliation to the condensed consolidated statements of comprehensive loss, is summarized as follows:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Net sales | | | |
UGG brand wholesale | $ | 85,400 |
| | $ | 81,353 |
|
HOKA brand wholesale | 64,006 |
| | 39,954 |
|
Teva brand wholesale | 30,831 |
| | 33,196 |
|
Sanuk brand wholesale | 14,607 |
| | 20,503 |
|
Other brands wholesale | 1,727 |
| | 2,637 |
|
Direct-to-Consumer | 80,268 |
| | 72,951 |
|
Total | $ | 276,839 |
| | $ | 250,594 |
|
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Income (loss) from operations | | | |
UGG brand wholesale | $ | 9,441 |
| | $ | 5,869 |
|
HOKA brand wholesale | 11,358 |
| | 5,728 |
|
Teva brand wholesale | 8,316 |
| | 8,064 |
|
Sanuk brand wholesale | 1,935 |
| | 4,200 |
|
Other brands wholesale | 132 |
| | 350 |
|
Direct-to-Consumer | (4,572 | ) | | (7,424 | ) |
Unallocated overhead costs | (58,027 | ) | | (56,201 | ) |
Total | $ | (31,417 | ) | | $ | (39,414 | ) |
Assets allocated to each reportable operating segment include trade accounts receivable, net of allowances and inventories, net of reserves, property and equipment, net, goodwill, other intangible assets, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments.
Assets allocated to each reportable operating segment, with a reconciliation to the condensed consolidated balance sheets, are as follows:
|
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
Assets | | | |
UGG brand wholesale | $ | 422,189 |
| | $ | 240,411 |
|
HOKA brand wholesale | 106,810 |
| | 94,157 |
|
Teva brand wholesale | 56,601 |
| | 76,370 |
|
Sanuk brand wholesale | 54,414 |
| | 71,285 |
|
Other brands wholesale | 36,152 |
| | 14,618 |
|
Direct-to-Consumer | 228,048 |
| | 95,501 |
|
Total assets from reportable operating segments | 904,214 |
| | 592,342 |
|
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
|
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
Unallocated cash and cash equivalents | 502,626 |
| | 589,692 |
|
Unallocated deferred tax assets, net | 32,964 |
| | 30,870 |
|
Unallocated other corporate assets | 311,252 |
| | 214,302 |
|
Total | $ | 1,751,056 |
| | $ | 1,427,206 |
|
Note 13. Concentration of Business
Regions and Customers
The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations as follows:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
International net sales | $ | 109,544 |
| | $ | 108,887 |
|
% of net sales | 39.6 | % | | 43.5 | % |
Net sales in foreign currencies | $ | 59,358 |
| | $ | 64,426 |
|
% of net sales | 21.4 | % | | 25.7 | % |
Ten largest customers as % of net sales | 27.2 | % | | 27.0 | % |
For the three months ended June 30, 2019 and 2018, no single foreign country comprised 10.0% or more of the Company's total net sales. No single customer accounted for 10.0% or more of the Company's total net sales during the three months ended June 30, 2019 and 2018.
The Company sells its products to customers for trade accounts receivable and, as of June 30, 2019, had one customer that represented 11.6% of trade accounts receivable, net, compared to no customers that exceeded 10% of trade accounts receivable, net as of March 31, 2019. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations.
Suppliers
The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and the majority of sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. The supply of sheepskin can be adversely impacted by weather patterns, harvesting decisions, incidents of disease, and the price of other commodities, such as wool and leather. Furthermore, the price of sheepskin is impacted by numerous other factors, including demand for the Company's products, demand for sheepskin by competitors, changes in consumer preferences, and changes in discretionary spending. In an effort to partially reduce its dependency on sheepskin, the Company began using a proprietary raw material, UGGpure, which is a re-purposed wool woven into a durable backing, in some of its UGG brand products. The Company currently purchases UGGpure from two suppliers. The other production materials used by the Company are sourced primarily from Asia. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, foreign currency exchange rate fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes, and, in certain parts of the world, political instability.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2019 and 2018
(dollar amounts in thousands, except per share or share data)
Long-Lived Assets
Long-lived assets, which consist of property and equipment, net, recorded in the condensed consolidated balance sheets, was as follows:
|
| | | | | | | |
| June 30, 2019 | | March 31, 2019 |
US | $ | 194,574 |
| | $ | 196,702 |
|
Foreign* | 16,680 |
| | 17,094 |
|
Total | $ | 211,254 |
| | $ | 213,796 |
|
*No single foreign country’s net property and equipment comprised 10.0% or more of the Company’s total property and equipment, net, as of June 30, 2019 and March 31, 2019.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, and the audited consolidated financial statements included within our 2019 Annual Report. This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled "Risk Factors," in Part II, Item 1A, and “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report.
Overview
We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. We market our products primarily under our five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and by offering products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent third-party contractors.
Trends Impacting our Overall Business
Our business and the industry in which we operate continue to be impacted by several important trends:
| |
• | The overall scope and shape of our brand portfolio is evolving, especially as we continue to experience a high rate of net sales growth within our HOKA brand and as net sales within this brand continue to comprise a greater proportion of our aggregate net sales. Within the UGG brand, we have achieved a strategic reduction in our reliance on sales of products within the core Classics franchise, as we have experienced increased sales across other UGG brand product offerings, including non-core Women's spring and summer lines, as well as Men's lines. We expect each of these trends will continue in the future, which will have a corresponding impact on the diversity and reach of our brands. |
| |
• | Sales of our products within our brand portfolio are highly seasonal and are sensitive to weather conditions, which are largely unpredictable and beyond our control. In an ongoing and strategic effort to reduce the impact of seasonality on our results of operations, we continue to introduce counter-seasonal products across our brands. In particular, the significant growth of our HOKA brand's year-round performance product offerings as a percentage of our aggregate net sales has had a meaningful positive impact on our seasonality trends. In addition, the UGG brand continues to experience success through the introduction of products within the Women's spring and summer lines. However, while we will continue to focus on reducing the impact of seasonality through innovation and the expansion of our product offerings, and by continuing to adjust product mix within our brand portfolios, given the historical and projected magnitude of net sales within the UGG brand relative to our other brands, the effect of favorable or unfavorable weather on our aggregate net sales and operating results may continue to be significant. |
| |
• | There has been a meaningful shift in the way consumers shop for products and make purchasing decisions, and these consumer trends and behaviors continue to evolve. For example, the traditional retail industry is experiencing prolonged decreases in consumer traffic as customers continue to migrate to online shopping that is being fueled by technology, resulting in a shrinking retail footprint. This shift is positively impacting the performance of our E-Commerce business, while creating challenges and headwinds for our traditional retail business and the businesses of our key customers. As a result, we expect our E-Commerce business will continue to be a driver of long-term growth, although we expect the year-over-year percentage growth rate will decline over time as the size of our E-Commerce business increases. Further, we believe that our traditional retail business will continue to be an important component of our DTC business and we expect to continue to seek opportunities to optimize our retail store fleet. |
| |
• | As a result of changes in consumer purchasing behavior, we continue to focus on the enhancement of our Omni-Channel strategy to enable us to better engage existing and prospective consumers and expose them to our brands. Our strategy is transforming the way we approach marketing, including through a sustained focus on our digital marketing efforts, as well as marketing activations to drive brand heat. |
| |
• | During the fiscal year ended March 31, 2019, we implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the US wholesale marketplace. These strategies are designed to assist us in controlling product inventory, reducing the impact of discounts and close-outs on our sales and gross margins, and increasing full-priced selling across our product offerings. We plan to continue this strategic management of the US marketplace in future seasons and expect to explore similar strategies internationally during fiscal year 2020. |
| |
• | We continue to strategically assess our distribution positioning across our entire brand portfolio. For example, we regularly review our UGG brand distribution channels globally and recently announced our decision to exit the warehouse channel for the Sanuk brand. We will continue to assess the impact that our distribution channels have on the overall strength and financial performance of our brands. |
| |
• | We believe consumers are increasingly buying brands that advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. Through our Corporate Responsibility and Sustainability Program, we expect to continue to advance our sustainable business initiatives with the goal of consistently delivering brand promises that meet consumer expectations. |
Reportable Operating Segment Overview
Our six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the CODM, who is our PEO, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources.
UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that attracts women, men, and children.
We believe demand for UGG brand products will continue to be driven by the following:
| |
• | High consumer brand loyalty due to consistently delivering quality and luxuriously comfortable footwear, apparel, and accessories. |
| |
• | Diversification of our footwear product offerings, such as Women's spring and summer lines, as well as expanded category offerings for Men's, apparel, and accessories. |
HOKA Brand. The HOKA brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. While the HOKA products were originally designed for ultra-runners, we believe they now appeal to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth.
We believe demand for HOKA brand products will continue to be driven by the following:
| |
• | Leading product innovation and key franchise management. |
| |
• | Increased brand awareness through enhanced marketing activations. |
| |
• | Category extensions in authentic performance footwear offerings. |
Teva Brand. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product offerings include sandals, shoes, and boots.