Deckers Outdoor Corporation announced first quarter net sales increased 9% to $36.1 million versus $33.3 million in the same period last year. Net earnings for the quarter increased to $4,203,000 compared to earnings before cumulative effect of change in accounting principle described below of $2,162,000 last year and diluted earnings per share increased 68% to $0.37, versus diluted earnings per share before cumulative effect of change in accounting principle of $0.22 in the first quarter of 2002.
As previously reported, on January 1, 2002 Deckers implemented Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment. The implementation of SFAS 142 resulted in a goodwill impairment charge of approximately $9.0 million during the quarter ended March 31, 2002, which was recorded as a cumulative effect of change in accounting principle. In addition, SFAS 142 provides that goodwill no longer be amortized.
Douglas Otto, Chairman and Chief Executive Officer stated, “We begin fiscal 2003 with solid momentum that reflects both the strength of our brands and the incremental earnings resulting from our acquisition of Teva. Strong sales of Teva, especially in the domestic market, coupled with the elimination of Teva royalty expenses resulted in a significant increase in earnings per share for the first quarter.”
Including both wholesale sales and the sales of the newly acquired catalog and Internet retailing business, Teva sales for the quarter increased 8% to $31.7 million compared to $29.3 million in the same period a year ago. Ugg sales for the quarter increased 297% to $1.6 million from $0.4 million last year, while Simple sales decreased 22% to $2.8 million compared to $3.6 million last year. Included above are aggregate catalog and Internet retail sales of $1.1 million, including $0.6 million for Teva, $0.4 million for Ugg and $0.1 million for Simple.
Gross margin for the quarter was 45.0% compared to 45.4% for the first quarter of 2002, largely due to the non-recurrence of a supplier rebate received in 2002. In addition, Deckers experienced an increased volume of discounted sales for Simple and Teva, which was partially offset by lower inventory write-downs, above average margins at the newly acquired Internet and catalog retail sales operation and the favorable impact of the strong Euro.
Selling, general and administrative expenses decreased $3.2 million to $8.2 million for the first quarter of 2003 from $11.4 million in the first quarter of 2002, primarily due to the elimination of $2.3 million of Teva royalty expense and related license costs. Deckers also had a $1.1 million reduction in first quarter marketing costs as the timing of marketing programs will occur later in the year in 2003 than in 2002 and Deckers experienced a $0.3 million reduction in bad debt expense. These decreases were partially offset by increased operating expenses with the addition of the catalog and Internet retailing business and slightly higher sales commission expense on the increased sales levels.
Mr. Otto further commented, “During the quarter, Teva increased its retail presence and experienced strong domestic sell-through in several key accounts including REI, Dillard’s, Gart Sports and Steve’s Shoes. We are also encouraged by the continued success in several of our closed toe footwear styles, including the recently introduced Gamma amphibious model. We intend to build on our existing share of the sport sandal category while simultaneously leveraging the strength and lifestyle nature of the Teva brand in order to further penetrate the substantially larger outdoor footwear market.”
“Coming off its fifth straight year of double-digit annual sales growth, Ugg posted record first quarter revenues of $1.6 million. While historically the first quarter has not been a seasonally significant period for the brand, Ugg continues to experience strong momentum, fueled by new product introductions, geographic expansion and celebrity exposure. Early reaction to the Fall 2003 line has been very positive and we remain enthusiastic about our growth prospects for this year and beyond.”
Mr. Otto continued, “Simple remains a work in progress. While it did not meet our financial targets in the first quarter, we are pleased with early feedback on Simple’s fall line of athletically inspired styles and expect to see growth in the second half of this year. For 2004, we plan to expand Simple’s sandal offering and introduce Simplegirl, a moderately priced collection aimed at a younger teen demographic. We believe we have taken the necessary steps to get the brand back on track and are headed in the right direction. However, we have established specific performance criteria for the remainder of 2003 and will consider other strategic alternatives for Simple if they are not met.”
Despite the debt incurred to finance the Teva acquisition, Deckers cash flow and liquidity remain strong. Due to the seasonal nature of the business, March has historically been the peak borrowing period for Deckers. Even with this historical seasonality, at March 31, 2003 Deckers had cash of $4.8 million and had reduced the outstanding borrowings under its $20 million line of credit to $1.8 million.
Deckers also increased its guidance for 2003. Deckers currently anticipates sales for fiscal year 2003 to range from $103 million to $107 million and expects diluted earnings per share to range from $0.50 to $0.53, up from the previous guidance of $0.41 to $0.46 per share. Deckers currently expects second quarter of 2003 sales to range from $23 million to $24 million and diluted earnings per share to range from $0.10 to $0.11 per share.
Deckers expects 2003 Teva sales to be $68 million to $70 million, Simple sales to be $11 million to $12 million and Ugg sales to be $24 million to $25 million.
Mr. Otto concluded, “Teva remains the sport sandal leader. Its strong heritage in whitewater sports and its lifestyle status in the market should enable us to effectively leverage the Teva name across a host of additional footwear and non-footwear products. We believe similar opportunities exist for Ugg. We are committed to executing a strategy that will allow us to fully maximize the strength of our assets and expand our business into the future.”
Condensed Consolidated Statements of Operations
(Unaudited)
Three-month period ended
March 31,
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2003 2002
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Net sales $36,102,000 33,259,000
Cost of sales 19,862,000 18,145,000
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Gross profit 16,240,000 15,114,000
Selling, general and administrative
expenses 8,153,000 11,400,000
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Earnings from operations 8,087,000 3,714,000
Other expense (income):
Interest, net 1,097,000 (17,000)
Other (15,000) 17,000
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Income before income taxes and cumulative
effect of accounting change 7,005,000 3,714,000
Income taxes 2,802,000 1,552,000
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Income before cumulative effect of
accounting change 4,203,000 2,162,000
Cumulative effect of accounting change, net
of $843,000 income tax benefit --- (8,973,000)
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Net income (loss) $ 4,203,000 (6,811,000)
