Is Everybody Pursuing the Same Strategies? Deckers’ Year and Quarter

The quarter and year ended March 31^st weren’t great for Deckers.  Mostly, you’ve probably noticed, they haven’t exactly been great for companies I’ve written about in general.  What somehow got my focus as I read Deckers’ 10-K was the continued and, indeed, increasing sameness of what all the public companies are saying.

Let’s start with a review of Deckers’ strategies and goals before we move on to the financial results including a look at Sanuk’s continuing problems as part of Deckers.

Me Too!!

Let me show you a few quotes from Deckers’ 10-K.  Your goal is to identify a statement that couldn’t have been made by most industry companies, public or not.

“We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups.”

“Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management.”

“We believe that our ability to successfully compete depends on our ability to:

• predict and respond to changing consumer preferences and tastes in a timely manner;
• produce products that appeal to consumers;
• produce products that meet our requirements and consumer expectations for quality;
• accurately predict and forecast consumer demand;
• ensure product availability;
• manage the impact of seasonality, including unexpected changes in weather conditions;
• maintain brand loyalty and authenticity;
• price our products in a competitive manner;
• implement our Omni-Channel strategy, including providing a unique customer service experience;
• implement our Business Transformation Project in a cost-effective manner; and
• manage the impact on our business of the rapidly changing retail environment.”

“In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation

of employees.”

“Omni-Channel strategy”

I mean, who could argue with any of those?  Nobody apparently, as everybody is doing them.  I swear, you could cut and paste any of those into a dozen 10-Qs and 10-Ks I’ve reported on in recent months.

It seems to come down to who has the strongest balance sheet and the management team best able to do best all the things everybody is trying to do.  That isn’t the basis for a sustainable competitive advantage.  Certainly, the market has been helping us identify the companies who weren’t doing them well; Quiksilver, Sports Authority, Sport Chalet and PacSun are among the most obvious and recent examples in our industry.

Deckers’ Numbers

For the year ended March 31, Deckers’ total revenues rose 3.2% from $1.817 to $1.875 billion.  They ended the year with 153 stores worldwide.  The order backlog at year was $582 million, down from $609 million a year ago.

About half of Deckers’ revenue comes from UGG wholesale business and totaled $918 million for the year.  Direct to consumer sales for all its brands were $644 million for the year.

The gross profit margin fell from 48.3% to 45.2%.  “The decline in gross margin was driven by a negative impact from foreign currency exchange rate fluctuations of approximately $13,000 caused by the strengthening of the US dollar, greater promotional activity of approximately $13,000, restructuring and other charges of approximately $5,000, and greater closeouts of approximately $4,000, offset, in part, by improved sheepskin costs of approximately $4,000.”

SG&A expense rose 4.7% from $654 to $685 million.  That included advertising, marketing and promotion costs of $110 million in the most current year and $111 million the prior year.  It also included some significant costs (about $25 million) for the restructuring and reorganization programs announced in February.  As you know, one component of that program was moving Sanuk to Deckers’ Goleta, California headquarters.

Deckers’ net income for the year fell 24.4% from $161.8 to $122.3 million.

`On the balance sheet, I’d just note the 25% year over year increase inventory from $239 to $300 million.  Seems significant given the 3.2% sales increase.  They note in the conference call that “…our inventories are elevated relative to a year ago due to lower sales recorded in the third quarter.”

The quarter ended the same date showed a sales increase of 11.5% from $341 to $379 million.  The gross profit margin fell from 44.7% to 40.9%.  Net income in last year’s quarter was $1.4 million.  In this year’s quarter Deckers reported a loss of $23.7 million.

I want to highlight a couple of comments from the conference call before moving on to Sanuk.  Deckers announced last quarter that they were going to “rationalize” their wholesale account base.  They are looking hard at their distribution channels, as they should be.  “The goal of rationalizing our wholesale account is to make sure the breadth and presentation of the UGG product line is being properly represented and to adjust our distribution strategy to be in tune with the ongoing changes in consumer shopping pattern.”

“To this end, we implemented minimum order quantities to improve our product assortment at small independent. To date, we have selectively exited approximately 200 accounts. The goal of rationalizing our wholesale account is to make sure the breadth and presentation of the UGG product line is being properly represented and to adjust our distribution strategy to be in tune with the ongoing changes in consumer shopping pattern.”

I understand the financial reason for taking that step.  It’s many years ago that I acknowledged that big brands can’t move the earnings per share needle even with maximum increases from smaller specialty shops.  I do hope they are still willing to sell Sanuk in those shops though.  Exiting them shouldn’t just be a financial decision.

Sanuk

Sanuk’s wholesale revenues for the year fell 11.7% from $102.7 to $90.7 million.  It’s direct to consumer revenue rose from $12.0 to $15.5 million.  The net revenue decline was $8.5 million, or 7.4%.

“Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold, offset in part by an increase in WASPP [weighted average selling price per pair]. The decrease in the volume of pairs sold had an impact of approximately $13,000 and the increase in WASPP had an impact of approximately $1,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period.”

Operating income from Sanuk’s wholesale business fell 29% or $6.3 million from $21.9 million last year to $15.6 million in the year ended March 31, 2016.

“The decrease in income from operations of our Sanuk brand wholesale from the prior year period was primarily due to a decrease in sales and $3,000 of restructuring charges, partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses was primarily attributable to lower marketing and advertising and lower sales and commission expenses.”

Following March 31, 2016, Deckers paid the sellers of Sanuk their finally contingent payment for the purchase.  That amount was $19.7 million.  It represented 40% of the gross profit earned by Sanuk during calendar year 2015.  A little simple math tells us that Sanuk’s total gross profit during calendar 2015 was $49.25 million.

For the current fiscal year, Deckers’ expects Sanuk’s revenues to be “…down mid single digit…”

I think I can tactfully say that Sanuk has not precisely lived up to Deckers’ expectations when they bought it.  Less tactfully, I’d say that’s largely Deckers’ fault.

You know, I don’t know if branding is now the most important thing in the world because of the lack of meaningful product differentiation or if branding doesn’t matter as much due to the blurring of distribution lines, the decline in the ability of traditional advertising to influence consumers, and the transparency of pricing.

The kinds of quotes and goal statements I started this article with are ubiquitous to the industry.  My recollection is that surf, skate, and snow brands and retailers were all better off when specialty brands were actually perceived to be special.  I’m not here to whine that I’d like things to go back to the way they were.  Okay, I’m going to whine a little, but that’s not going to happen.

The sameness of what most companies seem to be doing doesn’t look promising to me.  But I’ve got confidence that eventually product innovation, an improving economy, and a continued reduction in the number and size of competitors will make things improve.

We’ll see if Deckers is one of the companies that does it right.