Deckers Outdoor Corporation announced financial results for Q2 ended June 30, 2003. Net sales increased 9% to $24.3 million compared to $22.4 million in the same period last year. Net earnings for the quarter increased 212% to $2,006,000, compared to net earnings of $642,000 last year, and diluted earnings per share increased 143% to $0.17 compared to diluted earnings per share of $0.07 in the second quarter of 2002.
The improvement in second quarter earnings partly resulted from a favorable final ruling in the Company's appeal against European anti-dumping duties which were levied in 1997. The matter was ultimately decided in the Company's favor during the second quarter, resulting in the reversal of the previously established $500,000 accrual ($300,000 after tax, or $0.03 per share).
For the six months ended June 30, 2003, net sales increased 9% to $60.4 million compared to $55.6 million in the same period last year. Net earnings for the first half of fiscal 2003 increased 121% to $6.2 million, compared to net earnings before cumulative effect of change in accounting principle described below of $2.8 million last year. Diluted earnings per share increased 86% to $0.54 compared to earnings before cumulative effect of change in accounting principle of $0.29 in the first half of fiscal 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 six months ended June 30, 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 & CEO, stated, “We exceeded expectations primarily due to double digit growth in our Teva business during the second quarter. Teva branded product experienced a strong sell through and healthy reorder business despite the unseasonably cold weather experienced throughout much of the country. Additionally, our earnings continue to be positively impacted by our recent Teva acquisition which has resulted in the elimination of royalty payments as well as increased sales from the growing high-margin Internet and catalog retailing business, which was acquired as part of the Teva acquisition.”
Teva sales for the second quarter increased 15% to $22.4 million from $19.5 million in the same period a year ago, while Simple sales were $1.5 million compared to $2.6 million last year. Reflecting the seasonal nature of Ugg's business, Ugg sales were $0.4 million compared to $0.3 million.
Otto further commented, “Strong retail response to our core Teva product helped the brand outpace the competition in the sport sandal category. As we approach the fall selling season we are encouraged by our second full line of closed toe product, led by the introduction of the Oraibi model in our Nomadic series of rugged outdoor footwear. Ugg's popularity continues to outperform our expectations and, as we enter the back half of the year, the brand is well positioned to once again deliver another solid performance in 2003. As for Simple, we continue to execute a strategy that we believe will result in a resurgence of the brand in the casual footwear market. To that end, we will be introducing several new styles and categories at the WSA trade show in August, highlighted by several new styles of retro inspired sneakers and the introduction of a Simplegirl line of sandals and thongs for a younger demographic.”
Gross margin for the quarter increased to 48.6% compared to 45.0% in the second quarter of last year, primarily due to the strength of the Euro in the European market, the addition of the higher gross margin Internet and catalog sales and a reduced impact of closeout sales compared to that of the second quarter last year.
Selling, general and administrative expenses decreased by $1,813,000 to $7,154,000 for the second quarter compared to $8,967,000 in the year ago period. The decrease was due to a variety of factors including the favorable impact of the recent Teva acquisition, which eliminated $1,287,000 of Teva royalties and $236,000 of Teva license cost amortization. In addition, selling, general and administrative expenses decreased as a result of the favorable resolution of the anti-dumping duties matter and lower bad debt expense, partially offset by higher sales commissions on the increased sales levels, increased marketing expenditures and the addition of the operating costs of the newly acquired Internet and catalog retailing business.
In June 2003, Deckers made a $2 million early repayment of a portion of its outstanding subordinated debt which was otherwise not due until 2008. In connection with the repayment, Deckers incurred a $100,000 pre-payment fee and recorded an additional $100,000 charge to write off a pro rata share of the related loan costs. These aggregate costs of $200,000 are included in interest expense for the second quarter of 2003. By replacing this debt with a lower interest-bearing advance on its line of credit, the Company estimates it has eliminated annual interest costs of approximately $200,000 to $250,000 for each of the next five years.
During the second quarter, Deckers reduced its outstanding debt by approximately $3.9 million, including the $2 million repayment of subordinated debt described above. While sales increased 9% compared to the same period last year, through improved collections Deckers has reduced its accounts receivable by 9% since June 30, 2002.
Inventories increased $6.2 million compared to those at June 30, 2002, reflecting an increase for Ugg of $4.7 million, an increase for Teva of $2.3 million and a decrease for Simple of $0.8 million. The increase in inventory resulted primarily from a continuing change in the seasonality and nature of the business which includes the increase in Ugg sales in general, and more particularly, the further expansion of Ugg business in the third quarter. In addition, Teva's fall closed toe shoe business is increasing, while retailers are also carrying Teva's basic sport sandal models year round. As a result of these trends, Deckers brought in its fall inventories earlier in the season this year and also increased the depth of inventory for the fall season. Because this shift is in response to fall seasonality, Deckers expects the inventory balances to return to amounts comparable to last year's by December 31, 2003.
Due to the better-than-expected second quarter results, Deckers increased its guidance for fiscal year 2003. Deckers now anticipates sales for fiscal year 2003 to range from $104 million to $108 million and expects diluted earnings per share to range from $0.57 to $0.59, up from the previous guidance of $0.50 to $0.53 per share. Deckers currently expects third quarter 2003 sales to range from $19 million to $20 million and loss per share to range from ($0.04) to ($0.05) per share.
Deckers expects 2003 Teva sales to be $70 million to $72 million, Simple sales to be $9 million to $10 million and Ugg sales to be $25 million to $26 million.
Otto concluded, “We believe our strong performance in the first six months of 2003 bodes well for business throughout the remainder of the year and beyond. We are extremely pleased with our performance during the spring 2003 Teva season, and as it comes to a close we are enthusiastic about the coming transition to the fall season as we continue to roll out our Teva closed toe footwear offering and as we enter the Ugg selling season, which we expect will contribute to another record year for Ugg. Over the past several years we have successfully diversified our brands, product, and distribution to become a well balanced company, both operationally and financially. We move ahead with a powerful platform and a solid management team dedicated to delivering long-term earnings growth.”
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)Three-month period ended Six-month period ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------Net sales $24,342,000 22,369,000 60,444,000 55,628,000
Cost of sales 12,510,000 12,298,000 32,372,000 30,443,000
----------- ----------- ----------- -----------
Gross profit 11,832,000 10,071,000 28,072,000 25,185,000Selling, general
and administrative
expenses 7,154,000 8,967,000 15,307,000 20,367,000
----------- ----------- ----------- -----------
Earnings from
operations 4,678,000 1,104,000 12,765,000 4,818,000Other expense
(income):
Interest, net 1,334,000 (10,000) 2,431,000 (27,000)
Other 1,000 11,000 (14,000) 28,000
----------- ----------- ----------- -----------Income before
income taxes and
cumulative effect
of accounting
change 3,343,000 1,103,000 10,348,000 4,817,000
Income taxes 1,337,000 461,000 4,139,000 2,013,000
----------- ----------- ----------- -----------
Income before
cumulative effect
of accounting
change 2,006,000 642,000 6,209,000 2,804,000
Cumulative effect
of accounting
change, net of
$843,000 income
tax benefit --- --- --- (8,973,000)
----------- ----------- ----------- -----------Net income (loss) $ 2,006,000 642,000 6,209,000 (6,169,000)
=========== =========== =========== ===========Basic income per
common share
before cumulative
effect of
accounting change $ 0.21 0.07 0.65 0.30
Cumulative effect
of accounting
change --- --- --- (0.96)
----------- ----------- ----------- -----------
Basic net income
(loss) per common
share $ 0.21 0.07 0.65 (0.66)
=========== =========== =========== ===========Average basic
common shares 9,536,000 9,307,000 9,545,000 9,326,000
=========== =========== =========== ===========Diluted income per
common share
before cumulative
effect of
accounting change $ 0.17 0.07 0.54 0.29
Cumulative effect
of accounting
change --- --- --- (0.93)
----------- ----------- ----------- -----------
Diluted net income
(loss) per common
share $ 0.17 0.07 0.54 (0.64)
=========== =========== =========== ===========Average diluted
common shares 11,611,000 9,732,000 11,487,000 9,665,000
