Deckers Brands reported both earnings and sales for the fourth quarter ended March 31 came in better than expected.

Dave Powers, President and CEO, said, “Over the course of the last year, the organization has been hard at work identifying margin enhancing initiatives and detailing plans that significantly improve the profitability of the company. We now anticipate that the $150 million cumulative savings plan announced in February 2017 will drive a $100 million operating profit improvement by fiscal year 2020. I am proud of the work the team has accomplished, and I believe we have laid a solid foundation to execute on our savings plan. I am confident that these improvements will drive a significant increase in shareholder value over the long-term.”

Fourth Quarter Fiscal 2017 Financial Review
• Net sales decreased 2.4 percent to $369.5 million compared to $378.6 million for the same period last year. On a constant currency basis, net sales decreased 1.5 percent.
• Gross margin was 43.0 percent compared to 40.9 percent for the same period last year. Non-GAAP gross margin was 43.0 percent compared to 42.3 percent for the same period last year. The year over year increase was due to less domestic promotional activity and supply chain improvements partially offset by foreign exchange headwinds from the strengthening of the U.S. dollar.
• SG&A expenses as a percentage of sales were 51.4 percent compared to 48.3 percent for the same period last year. Non-GAAP SG&A expenses as a percentage of sales were 41.6 percent compared to 40.8 percent for the same period last year. The difference between the GAAP and Non-GAAP results for the fourth quarter was due to the company incurring charges of $35.9 million related to restructuring, impairment and other charges of which $9.9 million were non-cash charges.
• Operating (loss)/income was $(30.9) million compared to $(27.9) million for the same period last year. Non-GAAP operating income was $5.1 million compared to $5.7 million for the same period last year.
• Diluted (loss)/earnings per share was $(0.49) compared to $(0.73) for the same period last year. Non-GAAP diluted earnings per share was $0.11 compared to $0.11 for the same period last year.

On February 2 in reporting third-quarter results, the company said it expected sales to be down in the range of 5 to 6 percent. The Non-GAAP diluted earnings per share were projected to be in the range of a loss of 10 cents to break-even compared to non-GAAP diluted earnings per share of 11 cents for the same period last year. The company had expected  restructuring charges for fourth quarter fiscal year 2017 to be approximately $20 million.

Full Year Fiscal 2017 Financial Review
• Net sales decreased 4.5 percent to $1.790 billion compared to $1.875 billion last year. On a constant currency basis, net sales decreased 4.1 percent.
• Gross margin was 46.7 percent compared to 45.2 percent last year. Non-GAAP gross margin was 46.7 percent compared to 45.4 percent last year. The year over year increase in gross margin was primarily due to lower input costs and supply chain efficiencies, partially offset by foreign exchange headwinds from the strengthening of the U.S. dollar.
• SG&A expenses as a percentage of sales were 46.8 percent compared to 36.5 percent last year. Non-GAAP SG&A expenses as a percentage of sales were 37.4 percent compared to 35.0 percent last year. The difference between the GAAP and Non-GAAP results for the full year was due to the company incurring charges of $167.5 million related to restructuring, impairment and other charges of which $134.2 million were non-cash charges.
• Operating (loss)/income was $(1.9) million compared to $162.1 million last year. Non-GAAP operating income was $165.6 million compared to $195.7 million last year.
• Diluted earnings per share was $0.18 compared to diluted earnings per share of $3.70 last year. Non-GAAP diluted earnings per share was $3.82 compared to $4.50 last year.

Brand Summary
• Ugg brand net sales for the fourth quarter decreased 1.1 percent to $243.0 million compared to $245.6 million for the same period last year. On a constant currency basis, sales increased 0.2 percent. The decrease in sales was driven by a decrease in domestic wholesale sales, partially offset by an increase in international wholesale and direct to consumer (DTC) sales. For fiscal 2017, Ugg brand sales decreased 4.8 percent to $1.451 billion. On a constant currency basis, sales decreased 4.2 percent.
• Teva brand net sales for the fourth quarter decreased 13.3 percent to $51.3 million compared to $59.1 million for the same period last year. On a constant currency basis, sales decreased 13.2 percent. The decrease in sales was driven by a decrease in global wholesale sales, partially offset by an increase in DTC sales. For fiscal 2017, Teva brand sales decreased 11.5 percent to $117.7 million. On a constant currency basis, sales decreased 12.2 percent.
• Sanuk brand net sales for the fourth quarter decreased 16.1 percent to $32.3 million compared to $38.5 million for the same period last year on both a reported and constant currency basis. The decrease in sales was driven by a decrease in global wholesale and DTC sales. For fiscal 2017, Sanuk brand sales decreased 13.6 percent to $91.8 million. On a constant currency basis, sales decreased 13.7 percent.
• Combined net sales of the company’s other brands for the fourth quarter increased 21.2 percent to $42.9 million compared to $35.4 million for the same period last year. On a constant currency basis, sales increased 22.0 percent. The increase was primarily attributable to a $9.3 million, or 32.7 percent, increase in sales for the Hoka One One brand compared to the same period last year. For fiscal 2017, combined sales of the company’s other brands increased 16.2 percent to $129.6 million. On a constant currency basis, sales increased 16.3 percent.

Channel Summary (included in the brand sales numbers above)
• Wholesale net sales for the fourth quarter decreased 5.8 percent to $219.1 million compared to $232.7 million for the same period last year. On a constant currency basis, sales decreased 5.2 percent. The decrease in sales was driven by a decrease in global wholesale sales. For fiscal 2017, wholesale sales decreased 8.7 percent to $1.124 billion. On a constant currency basis, sales decreased 8.6 percent.
• DTC net sales for the fourth quarter increased 3.0 percent to $150.4 million compared to $145.9 million for the same period last year. On a constant currency basis, sales increased 4.3 percent. DTC comparable sales for the fourth quarter were flat compared to the same period last year. For fiscal 2017, DTC sales increased 3.4 percent to $666.3 million and DTC comparable sales increased 2.6 percent primarily driven by strength across our global ecommerce business. On a constant currency basis, DTC sales increased 4.5 percent.

Geographic Summary (included in the brand and channel sales numbers above)
• Domestic net sales for the fourth quarter decreased 4.3 percent to $230.0 million compared to $240.4 million for the same period last year. For fiscal 2017, domestic sales decreased 6.4 percent to $1.141 billion.
• International net sales for the fourth quarter increased 0.9 percent to $139.5 million compared to $138.2 million for the same period last year. On a constant currency basis, sales increased 4.1 percent. For fiscal 2017, international sales decreased 1.0 percent to $648.8 million. On a constant currency basis, sales increased 1.6 percent.

Balance Sheet
At March 31, 2017, cash and cash equivalents were $291.8 million compared to $246.0 million at March 31, 2016. The company had no outstanding borrowings under its credit facility at March 31, 2017 compared to $67.0 million at March 31, 2016.
company-wide inventories at March 31, 2017 decreased 0.4 percent to $298.9 million from $299.9 million at March 31, 2016. By brand, Ugg inventory increased 1.4 percent to $221.3 million, Teva inventory decreased 7.7 percent to $30.7 million, Sanuk inventory decreased 23.4 percent to $18.6 million, and the other brand inventory increased 16.5 percent to $28.3 million.

Update on the Cost Savings Plan and Long-term Outlook
The company believes that the previously identified $150 million in cumulative savings before reinvestment will drive operating profit improvement of $100 million that will be fully realized by the end of fiscal year 2020. The savings are expected to come from both cost of sales improvements and SG&A reductions.

Cost of sales improvements are expected to come from the following:
• Reducing product development cycle times
• Optimizing material yields
• Consolidating our factory base, and
• Moving production outside of China

SG&A savings are expected to come from the following:
• Further retail store consolidations
• Process improvement efficiencies
• Lower unallocated indirect spend

Based on the implementation of these initiatives over the next three years, the company is providing its long-term outlook for fiscal year 2020:
• Total sales of approximately $2.0 billion
• Operating margin of 13 percent
• ROIC over 20 percent

Full Year Fiscal 2018 Outlook
The company’s fiscal year 2018 outlook includes targeted savings which are expected to result in over $17 million of operating profit improvement.
• Net sales are expected to be in the range of down 2 percent to flat
• Gross margin is expected to be approximately 47.5 percent
• SG&A expenses as a percentage of sales are projected to be approximately 37 percent
• Non-GAAP diluted earnings per share are expected to be in the range of $3.95 to $4.15. This excludes any charges that may occur from additional store closures and other restructuring charges.

First Quarter Fiscal 2018 Outlook
• Net sales are expected to be up low single digits over the same period last year, and we project a Non-GAAP diluted loss per share of approximately $(1.70) to $(1.65) compared to a Non-GAAP diluted loss per share of $(1.80) for the same period last year.
• As a reminder, a significant amount of our operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter. We expect the majority of our earnings increase in fiscal 2018 to come in the third and fourth quarters.

Photo courtesy Ugg