# Deckers Outdoor Corp: Form 10-Q for the period ended Jun 30, 2011

- Company: [Deckers Outdoor Corp](/companies/deck.md) (CIK 910521)
- Form: 10-Q
- Filed: 2011-08-08
- Accepted by EDGAR: Aug 8, 2011, 20:28 ET
- Period: 2011-06-30
- Accession: 0001104659-11-044870
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/910521/000110465911044870/a11-13837_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/910521/000110465911044870/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-04-01 to 2011-06-30 | $154.2m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 6 months, 2011-01-01 to 2011-06-30 | $359.1m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2011-04-01 to 2011-06-30 | $88.3m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2011-01-01 to 2011-06-30 | $190.7m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2011-04-01 to 2011-06-30 | $65.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2011-01-01 to 2011-06-30 | $168.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-04-01 to 2011-06-30 | $76.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2011-01-01 to 2011-06-30 | $151.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | −$10.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-01-01 to 2011-06-30 | $17.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | −$3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-01-01 to 2011-06-30 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | −$7.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-01-01 to 2011-06-30 | $11.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | $0.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2011-01-01 to 2011-06-30 | $0.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 38,670,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2011-01-01 to 2011-06-30 | 39,304,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | −$78.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-01-01 to 2011-06-30 | $13.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2011-04-01 to 2011-06-30 | $20.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Share repurchases | 6 months, 2011-01-01 to 2011-06-30 | $19.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-06-30 | $325.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-06-30 | $691.7m | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $795.1m | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $133.1m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2011-06-30 | $648.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 61,648 characters.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in this report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:

- our global business, growth, operating and financing strategies;
- our product and geographic mix;
- the success of new products, new brands, and other growth initiatives;
- the impact of seasonality on our operations;
- expectations regarding our net sales and earnings growth and other financial metrics;
- our development of worldwide distribution channels;
- trends affecting our financial condition or results of operations;
- overall global economic trends; and
- reliability of overseas factory production and storage and availability of raw materials.

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in Part II, Item 1A, “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen. You should read this report in its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference in this report with the understanding that our future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements and we assume no obligation to update such forward-looking statements publicly for any reason.

References to “Deckers,” “we,” “us,” “our,” or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the accompanying notes to those statements included elsewhere in this document.

### Overview

We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. We market our products primarily under two proprietary brands:

- UGG®: Premier brand in luxury and comfort footwear and accessories; and
- Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals.

In addition to our primary brands, our other brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle footwear; MOZO®, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and Simple®, a line for which we are planning to cease distribution effective December 31, 2011.

We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce business and our retail stores. Independent third parties manufacture all of our products. In 2010, we converted our Teva business in Belgium, the Netherlands, and Luxemburg (Benelux), and France from a distributor model to a wholesale model. In January 2011, we converted from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the United Kingdom (UK) and Ireland and the UGG and Simple brands in Benelux and France.

Our business has been impacted by several important trends affecting our end markets:

- The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.
- The top grade sheepskin used in certain UGG products is in high demand and limited supply and there have been significant increases in the prices of top grade sheepskin as the demand from competitors for this material has increased.
- The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.
- Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort and high performance attributes they have come to expect from traditional athletic footwear.
- Our customers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.
- Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.
- There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands and companies become more environmentally responsible.

By emphasizing our brands’ images and our focus on comfort, performance and authenticity, we believe we can maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences.

Below is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business.

### UGG Brand Overview

The UGG brand has become well-known throughout the US as well as internationally. Over the past several years, our UGG brand has received increased global media exposure including increased print media in ads and cooperative advertising with our customers, which has contributed to broader public awareness of the brand and significantly increased demand for the collection. We believe that the increased global media focus and demand for UGG products were driven by the following:

- consumer brand loyalty, due to the luxury and comfort of UGG footwear;
- continued innovation of new product categories and styles;
- increased marketing in high-end magazines;
- successful targeting of high-end distribution;
- adoption by high-profile celebrities as a favored footwear brand;
- increased media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to;
- increased exposure to the brand driven by our concept stores which showcase all of our product offerings;
- continued expansion of retail through new UGG Australia stores; and
- continued geographic expansion across the US and internationally.

We believe the luxury and comfort features of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our strategy seeks to prolong the longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. As part of this strategy we have increased our product offering, including a growing spring line, an expanded men’s line, and a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as handbags, cold weather accessories, and outerwear. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on prime twinface sheepskin, which is in high demand and subject to price volatility.

### Teva Brand Overview

Our Teva brand is positioned to be the leading innovative, global, action-outdoor brand, with over 25 years worth of contributions to the outdoor adventure experience. The Teva brand pioneered the water sport sandal category in 1984, and to this day, our brand mission is to inspire spontaneity, camaraderie and adventure on, around, or in water. Leveraging our core performance competencies of traction, hydro and comfort, we are focused on driving growth through innovation in the emerging action-outdoor space through multi-sport, light hiking, freestyle mountain bike riding, action water sports, and other action-outdoor lifestyle products.

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth in 2010. Throughout 2010 and the first half of 2011, our broader range of products demonstrated strong retail sell-through across all channels, and we believe that our retail partners have viewed both our product and marketing innovations as relevant and compelling.

We see an opportunity to grow the Teva brand significantly outside of the US. In January 2010, we converted from a distributor model to a wholesale model in the Benelux region and France, enhancing our marketing and distribution capabilities in the outdoor active Benelux market. In January 2011, we converted our Teva brand international business from an independent distributor to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this important influential market. Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands. Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be successful.

### Other Brands Overview

Our other brands consist of the TSUBO, Ahnu, MOZO, and Simple brands. Our other brands are all sold through most of our distribution channels, with the majority through wholesale channels. We are planning to cease distribution of the Simple brand effective December 31, 2011.

TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers’ unique needs of all-day comfort, innovative style, and superior quality.

The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor activities — whether on trails, beaches, or sidewalks.

The MOZO brand was designed for individuals that spend long hours working on their feet. It combines running shoe technology with work shoe toughness. The brand is currently focused on providing footwear for culinary professionals. We have recently expanded our distribution to include large on-line retailers and intend to expand further in 2011 into the health care worker market.

We expect to leverage our design, marketing and distribution capabilities to grow these brands over the next several years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts will be successful.

### eCommerce Overview

Our eCommerce business, which sells all of our brands, allows us to reinforce our relationship with the consumer. eCommerce enables us to meet the growing demand for our products, sell the products at retail prices and provide significant incremental operating income. The eCommerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands’ promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. In recent years, our eCommerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases.

Managing our eCommerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our eCommerce business through improved website features and performance, increased marketing, more international websites, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow.

### Retail Stores Overview

Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to directly impact our customers’ experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental operating income. In addition, our UGG Australia concept stores allow us to showcase our entire line; whereas, a retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through our UGG Australia outlet stores.

As of June 30, 2011, we had a total of 30 retail stores worldwide. These stores are company-owned and operated and include our China stores, which are owned and operated with our joint venture partner. For 2011, we plan to open additional retail stores in the US and significantly expand our retail presence internationally, primarily in Asia.

### Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters and the highest percentage of Teva brand net sales occurring in the first and second quarters of each year. Our other brands do not have a significant seasonal impact.

|  | 2011 First Quarter | Second Quarter Third Quarter Fourth Quarter |
| --- | ---: | ---: |
| Net sales | $204,851 | $154,222 |
| Income (loss) from operations | $28,195 | $(10,798) |

|  | 2010 First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $155,927 | $137,059 | $277,879 | $430,124 |
| Income from operations | $28,821 | $13,216 | $66,314 | $140,737 |

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part II, Item 1A, “Risk Factors.”

### Results of Operations

### Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

The following table summarizes the Company’s results of operations:

|  | Three Months Ended June 30, 2011 Amount% |  | 2010 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $154,222 | 100.0% | $137,059 | 100.0% | $17,163 | 12.5% |
| Cost of sales | 88,310 | 57.3 | 76,316 | 55.7 | 11,994 | 15.7 |
| Gross profit | 65,912 | 42.7 | 60,743 | 44.3 | 5,169 | 8.5 |
| Selling, general and administrative expenses | 76,710 | 49.7 | 47,527 | 34.7 | 29,183 | 61.4 |
| (Loss) income from operations | (10,798) | (7.0) | 13,216 | 9.6 | (24,014) | (181.7) |
| Other income, net | (43) | — | (497) | (0.4) | 454 | 91.3 |
| (Loss) income before income taxes | (10,755) | (7.0) | 13,713 | 10.0 | (24,468) | (178.4) |
| Income tax (benefit) expense | (3,227) | (2.1) | 4,803 | 3.5 | (8,030) | (167.2) |
| Net (loss) income | (7,528) | (4.9) | 8,910 | 6.5 | (16,438) | (184.5) |
| Net loss attributable to the noncontrolling interest | 189 | 0.1 | 56 | — | 133 | 237.5 |
| Net (loss) income attributable to Deckers Outdoor Corporation | $(7,339) | (4.8)% | $8,966 | 6.5% | $(16,305) | (181.9)% |

***Overview.*** The increase in net sales was primarily due to an increase in Teva and UGG product sales. The loss from operations resulted primarily from the higher selling, general and administrative expenses and decreased gross margin, partially offset by higher net sales.

***Net Sales.*** The following tables summarize net sales by location, brand and distribution channel:

| Net sales by location: | Three Months Ended June 30, 2011 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $82,772 | $65,230 | $17,542 | 26.9% |
| International | 71,450 | 71,829 | (379) | (0.5) |
| Total | $154,222 | $137,059 | $17,163 | 12.5% |
| **Net sales by brand and distribution channel:** |  |  |  |  |
| UGG: |  |  |  |  |
| Wholesale | $85,347 | $88,100 | $(2,753) | (3.1)% |
| eCommerce | 2,969 | 2,458 | 511 | 20.8 |
| Retail stores | 19,950 | 9,647 | 10,303 | 106.8 |
| Total | 108,266 | 100,205 | 8,061 | 8.0 |
| Teva: |  |  |  |  |
| Wholesale | 38,080 | 29,086 | 8,994 | 30.9 |
| eCommerce | 2,089 | 2,077 | 12 | 0.6 |
| Retail stores | 123 | 49 | 74 | 151.0 |
| Total | 40,292 | 31,212 | 9,080 | 29.1 |
| Other: |  |  |  |  |
| Wholesale | 4,963 | 4,744 | 219 | 4.6 |
| eCommerce | 651 | 642 | 9 | 1.4 |
| Retail stores | 50 | 256 | (206) | (80.5) |
| Total | 5,664 | 5,642 | 22 | 0.4 |
| Total | $154,222 | $137,059 | $17,163 | 12.5% |
| Total eCommerce | $5,709 | $5,177 | $532 | 10.3% |
| Total Retail stores | $20,123 | $9,952 | $10,171 | 102.2% |

The increase in net sales was primarily driven by strong sales for the Teva and UGG brands. We experienced an increase in the number of pairs sold primarily through our Teva wholesale channels, partially offset by a decrease in pairs sold in our UGG wholesale segment. This resulted in the overall volume of footwear sold for all brands to remain relatively flat at approximately 3.6 million pairs sold for the three months ended June 30, 2011 and 2010. Our weighted-average wholesale selling price per pair increased to $38.28 for the three months ended June 30, 2011 from $35.41 for the three months ended June 30, 2010.

Wholesale net sales of our UGG brand decreased primarily due to a decrease in international sales, mainly in the European region. This decrease was related to our conversion from a distributor model to a direct wholesale model, causing a shift in sales of our fall products to later in the year in 2011 versus 2010. We also experienced a decrease in the overall volume of pairs sold. The decrease was partially offset by an increase in domestic sales, including an increase in the average selling price. We cannot assure investors that UGG brand sales will continue to grow at their past pace.

Wholesale net sales of our Teva brand increased due to both an increase in the volume of pairs sold and an increase in the average selling price.

Wholesale net sales of our other brands increased due to an increase in pairs sold, partially offset by a decrease in the average selling price.

Net sales of our eCommerce business increased due to both an increase in the average selling price and a slight increase in the number of pairs sold.

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of eleven new stores opened since June 30, 2010. New stores that were not open during the full three months ended June 30, 2010 contributed approximately $8,000 of retail sales for three months ended June 30, 2011. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For those stores that were open during the full second quarter of 2011 and 2010, same store sales grew by 23.6%. Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point decline.

International sales, which are included in the segment sales above, for all of our products combined represented 46.3% and 52.4% of worldwide net sales for the three months ended June 30, 2011 and 2010, respectively. The decrease in international sales was largely due to decreased sales for our UGG wholesale channel, primarily in the European region, related to our conversion to a direct wholesale model. This decrease was partially offset by increases in our Teva wholesale channel in the European region, as well as our retail store business in the Asian region.

***Gross Profit.*** As a percentage of net sales, gross margin decreased primarily due to approximately $3,100 of duty refunds in the second quarter of 2010 that did not recur in the second quarter of 2011. In addition, in the second quarter of 2011, we experienced increased production costs for all brands, as well as an increased impact of closeout sales and increased inventory write-downs, primarily related to our Simple brand. The decrease was partially offset by an increased mix of retail sales, which generally carry higher margins.

***Selling, General and Administrative Expenses (SG&A).*** As a percentage of net sales, SG&A increased primarily from:

- increased retail costs of approximately $6,000, largely related to eleven new retail stores that were not open as of June 30, 2010;
- increased divisional brand expenses of approximately $4,000 in support of our continued growth;
- increased international division expenses of approximately $3,000 in support of our continued international expansion and our distributor conversions to the wholesale model;
- increased marketing expenses of approximately $3,000; and
- increased legal expenses of approximately $2,000.

SG&A expenses as a percentage of sales were unusually high during this period primarily due to the items discussed above as well as our second quarter generally being our lowest volume selling season. However, we expect SG&A as a percentage of sales for the full year 2011 to be closer to that of the full year 2010.

***(Loss) Income from Operations.*** The gross profit derived from the sales to third parties of the eCommerce and retail store segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and retail stores segments. The following table summarizes operating (loss) income by segment:

|  | Three Months Ended June 30, 2011 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG wholesale | $23,432 | $33,776 | $(10,344) | (30.6)% |
| Teva wholesale | 7,678 | 7,556 | 122 | 1.6 |
| Other wholesale | (2,682) | (1,496) | (1,186) | (79.3) |
| eCommerce | (390) | (69) | (321) | (465.2) |
| Retail stores | (3,005) | (1,549) | (1,456) | (94.0) |
| Unallocated overhead costs | (35,831) | (25,002) | (10,829) | (43.3) |
| Total | $(10,798) | $13,216 | $(24,014) | (181.7)% |

We incurred a loss from operations versus income due to the increase in SG&A expenses and cost of sales, partially offset by an increase in net sales.

The decrease in income from operations of UGG brand wholesale was primarily the result of decreased international sales of approximately $10,000 and higher marketing and promotional and divisional expenses of approximately $5,000. The decrease was partially offset by an increase in domestic sales of approximately $7,000.

The slight increase in income from operations of Teva brand wholesale was primarily due to the increased sales, partially offset by a decrease of 3.7 gross margin percentage points primarily due to higher inventory write-downs and an increased impact of closeout sales.

The loss from operations of our other brands wholesale increased primarily due to an 18.6 percentage point decrease in gross margin largely due to increased inventory write-downs and an increased impact of closeout sales. As we are ceasing distribution of the

Simple brand, we experienced negative margins on Simple brand closeout sales and also recorded additional inventory write-downs. These results were partially offset by the increased sales and decreased divisional expenses.

Loss from operations of our eCommerce business increased slightly.

The increase in loss from operations of our retail store business was primarily due to approximately $6,000 of higher operating expenses primarily related to our new store openings. These results were partially offset by increased sales and a 0.6 percentage point increase in gross margin.

The increase in unallocated overhead costs resulted most significantly from an increase of approximately $3,000 related to international infrastructure costs primarily to support our conversions from distributor models to direct wholesale models, as well as increased legal expenses of approximately $2,000 primarily related to the protection of our intellectual property including our trademarks.

***Other (Income) Expense, Net.*** Interest expense decreased primarily due to the reversal of a prior year income tax related accrual. Other income, net decreased primarily due to a one-time foreign sales tax exemption recognized in the prior year.

***Income Taxes.*** Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management and can vary from quarter to quarter. Income tax (benefit) expense and effective income tax rates were as follows:

|  | Three Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: |
| Income tax (benefit) expense | $(3,227) | $4,803 |
| Effective income tax rate | 30.0% | 35.0% |

The decrease in the effective tax rate was primarily due to the increase in our projected annual foreign pre-tax income as a percentage of worldwide pre-tax income, as income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions. We anticipate our effective tax rate for the full year 2011 to be significantly lower than the full year rate of 35.9% in 2010.

***Net Loss Attributable to the Noncontrolling Interest.*** Net loss attributable to the noncontrolling interest in our joint venture with Stella International was $189 and $56 for the three months ended June 30, 2011 and 2010, respectively.

***Net (Loss) Income Attributable to Deckers Outdoor Corporation.*** We incurred a net loss versus income as a result of the items discussed above. The change in diluted net (loss) income per share resulted primarily from the change in net (loss) income for the three months ended June 30, 2011 versus 2010.

### Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

The following table summarizes the Company’s results of operations:

|  | Six Months Ended June 30, 2011 Amount% |  | 2010 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $359,073 | 100.0% | $292,986 | 100.0% | $66,087 | 22.6% |
| Cost of sales | 190,683 | 53.1 | 154,336 | 52.7 | 36,347 | 23.6 |
| Gross profit | 168,390 | 46.9 | 138,650 | 47.3 | 29,740 | 21.4 |
| Selling, general and administrative expenses | 150,993 | 42.1 | 96,613 | 33.0 | 54,380 | 56.3 |
| Income from operations | 17,397 | 4.8 | 42,037 | 14.3 | (24,640) | (58.6) |
| Other income, net | (181) | (0.1) | (562) | (0.2) | 381 | 67.8 |
| Income before income taxes | 17,578 | 4.9 | 42,599 | 14.5 | (25,021) | (58.7) |
| Income taxes | 5,273 | 1.5 | 15,549 | 5.3 | (10,276) | (66.1) |
| Net income | 12,305 | 3.4 | 27,050 | 9.2 | (14,745) | (54.5) |
| Net income attributable to the noncontrolling interest | (466) | (0.1) | (189) | — | (277) | (146.6) |
| Net income attributable to Deckers Outdoor Corporation | $11,839 | 3.3% | $26,861 | 9.2% | $(15,022) | (55.9)% |

21

***Overview.*** The increase in net sales was primarily due to an increase in UGG product sales, as well as an increase in Teva product sales. The decrease in income from operations resulted from higher SG&A expenses as well as a slightly lower gross margin, partially offset by the higher sales.

***Net Sales.*** The following table summarizes net sales by location and net sales by brand and distribution channel:

| Net sales by location: | Six Months Ended June 30, 2011 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $230,894 | $182,235 | $48,659 | 26.7% |
| International | 128,179 | 110,751 | 17,428 | 15.7 |
| Total | $359,073 | $292,986 | $66,087 | 22.6% |
| **Net sales by brand and distribution channel:** |  |  |  |  |
| UGG: |  |  |  |  |
| Wholesale | $176,431 | $152,600 | $23,831 | 15.6% |
| eCommerce | 25,057 | 19,396 | 5,661 | 29.2 |
| Retail stores | 55,205 | 32,582 | 22,623 | 69.4 |
| Total | 256,693 | 204,578 | 52,115 | 25.5 |
| Teva: |  |  |  |  |
| Wholesale | 87,566 | 71,323 | 16,243 | 22.8 |
| eCommerce | 2,941 | 2,969 | (28) | (0.9) |
| Retail stores | 194 | 89 | 105 | 118.0 |
| Total | 90,701 | 74,381 | 16,320 | 21.9 |
| Other: |  |  |  |  |
| Wholesale | 10,415 | 12,368 | (1,953) | (15.8) |
| eCommerce | 1,171 | 1,234 | (63) | (5.1) |
| Retail stores | 93 | 425 | (332) | (78.1) |
| Total | 11,679 | 14,027 | (2,348) | (16.7) |
| Total | $359,073 | $292,986 | $66,087 | 22.6% |
| Total eCommerce | $29,169 | $23,599 | $5,570 | 23.6% |
| Total Retail stores | $55,492 | $33,096 | $22,396 | 67.7% |

The increase in net sales was primarily driven by strong sales for the UGG and Teva brands. We experienced an increase in the number of pairs sold primarily through our Teva wholesale and retail channels, partially offset by a decrease in pairs sold in our other brands. This resulted in a 9.2% overall increase in the volume of footwear sold for all brands to approximately 8.3 million pairs for the six months ended June 30, 2011 compared to approximately 7.6 million pairs for the six months ended June 30, 2010. Our weighted-average wholesale selling price per pair increased to $35.94 for the six months ended June 30, 2011 from $32.97 for the six months ended June 30, 2010.

Wholesale net sales of our UGG brand increased primarily due to an increase in the average selling price, which was partially a result of decreased closeout sales. The increase was partially offset by a shift in sales in our European region for our fall products to later in the year in 2011 versus 2010. This shift was related to our conversion from a distributor model to a direct wholesale model. We cannot assure investors that UGG brand sales will continue to grow at their past pace.

Wholesale net sales of our Teva brand increased due to both an increase in the volume of pairs sold, as well as an increase in the average selling price.

Wholesale net sales of our other brands decreased due to a decrease in pairs sold, partially offset by an increase in the average selling price.

Net sales of our eCommerce business increased due to both an increase in the average selling price and an increase in the number of pairs sold.

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of eleven new stores opened since June 30, 2010. New stores that were not open during the full six months ended June 30, 2010 contributed approximately $19,000 of retail sales for six months ended June 30, 2011. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For those stores that were open during the full six months ended June 30, 2011 and 2010, same store sales grew by 8.9%. Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point decline.

International sales, which are included in the segment sales above, for all of our products combined represented 35.7% and 37.8% of worldwide net sales for the six months ended June 30, 2011 and 2010, respectively. The reduced percentage of worldwide sales was attributed primarily to a larger increase of domestic sales than international sales. The international sales growth in absolute dollars was led by the Teva and UGG brands in the European region.

***Gross Profit.*** As a percentage of net sales, gross margin decreased primarily due to approximately $5,500 of duty refunds in the first half of 2010 that did not recur in the first half of 2011, as well as an increased impact of closeout sales and increased inventory write-downs, primarily related to our Simple brand. The decrease in gross margin was partially offset by an increased mix of retail sales, which generally carry higher margins, as we capture the full retail margin versus a distributor or wholesale margin.

***Selling, General and Administrative Expenses (SG&A).*** As a percentage of net sales, SG&A increased primarily due to:

- increased retail costs of approximately $12,000 largely related to eleven new retail stores that were not open as of June 30, 2010;
- increased international division expenses of approximately $8,000 in support of our international expansion and our distributor conversions to the wholesale model;
- increased divisional brand expenses of approximately $6,000 in support of our growth; and
- increased marketing expenses of approximately $6,000 primarily related to our UGG brand.

SG&A expenses as a percentage of sales were unusually high during this period primarily due to the items discussed above as well as our first half of the year generally being our lowest volume selling season. However, we expect SG&A as a percentage of sales for the full year 2011 to be closer to that of the full year 2010.

***Income from Operations.*** The gross profit derived from the sales to third parties of the eCommerce and retail store segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and retail stores segments. The following table summarizes operating income (loss) by segment:

|  | Six Months Ended June 30, 2011 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG wholesale | $62,095 | $66,811 | $(4,716) | (7.1)% |
| Teva wholesale | 21,963 | 18,741 | 3,222 | 17.2 |
| Other wholesale | (4,608) | (2,311) | (2,297) | (99.4) |
| eCommerce | 5,284 | 4,633 | 651 | 14.1 |
| Retail stores | 2,570 | 2,359 | 211 | 8.9 |
| Unallocated overhead costs | (69,907) | (48,196) | (21,711) | (45.0) |
| Total | $17,397 | $42,037 | $(24,640) | (58.6)% |

Income from operations decreased due to the higher SG&A expenses and lower gross margin, partially offset by the increase in sales.

The decrease in income from operations of UGG brand wholesale was primarily the result of higher marketing and promotional expenses, higher amortization expenses primarily related to order books we acquired from our distributor conversions in Europe, and increased sales commissions totaling approximately $12,000. These decreases to income were partially offset by the increase in net sales.

The increase in income from operations of Teva brand wholesale was largely due to increased sales and decreased amortization of approximately $2,000, partially offset by a 1.5 percentage point decrease in gross margin, primarily due to higher inventory write- downs and an increased impact of closeout sales. In addition, we recognized increased divisional sales expenses and increased marketing and promotional expenses totaling approximately $3,000.

The loss from operations of our other brands wholesale increased primarily due to a 14.0 percentage point decrease in gross margin as well as the decreased sales. We recognized increased inventory write-downs, primarily related to the Simple brand, as well as negative margins on Simple brand closeout sales.

Income from operations of our eCommerce business increased primarily due to the increased sales, partially offset by an increase in total expenses of approximately $2,000.

The slight increase in income from operations of our retail store business was primarily due to increased sales as well as a 0.5 percentage point increase in gross margin. The increase was partially offset by approximately $11,000 of higher operating expenses primarily related to our new store openings.

The increase in unallocated overhead costs resulted most significantly from an increase of approximately $8,000 related to international infrastructure costs primarily to support our conversions from distributor models to direct wholesale models, as well as increased legal expenses of approximately $5,000 primarily related to the protection of our intellectual property including our trademarks.

***Other (Income) Expense, Net.*** Other income, net decreased primarily due to a one-time foreign sales tax exemption recognized in the prior year, partially offset by negative interest expense in the current year resulting from a reversal of a prior year income tax related accrual.

***Income Taxes.*** Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management and can vary from quarter to quarter. Income tax expense and effective income tax rates were as follows:

|  | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: |
| Income tax expense | $5,273 | $15,549 |
| Effective income tax rate | 30.0% | 36.5% |

The decrease in the effective tax rate was primarily due to the increase in our projected annual international pre-tax income as a percentage of worldwide pre-tax income, as income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions. We anticipate our effective tax rate for the full year 2011 to be significantly lower than the full year rate of 35.9% in 2010.

***Net Income Attributable to the Noncontrolling Interest.*** Net income attributable to the noncontrolling interest in our joint venture with Stella International was $466 and $189 for the six months ended June 30, 2011 and 2010, respectively.

***Net Income Attributable to Deckers Outdoor Corporation.*** Our net income decreased as a result of the items discussed above. Our diluted earnings per share decreased by 56.5% to $0.30 for the six months ended June 30, 2011 compared to $0.69 in the same period of 2010, primarily as a result of the decrease in net income.

### Off-Balance Sheet Arrangements

We have off-balance sheet arrangements consisting of operating lease obligations and purchase obligations. See “Contractual Obligations” below.

### Liquidity and Capital Resources

We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations and, as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing credit. Such failures may impact our working capital reserves and have a material adverse effect on our business.

Our cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivables. As a result, our working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the second and third quarters to support sales for the UGG brand’s major selling seasons, which historically occur during the third and fourth quarters; whereas, the Teva brand generally begins to build its inventory levels beginning in the fourth and first quarters in anticipation of the spring selling season that occurs in the first and second quarters. Given the seasonality of our UGG and Teva brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has been provided using our internal cash flows. If necessary, we may borrow funds under our credit agreement. During 2010 and the six months ended June 30, 2011, we did not borrow funds under our credit agreement.

The following table summarizes the Company’s cash flows and working capital:

|  | Six Months Ended June 30, 2011 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Net cash (used in) provided by operating activities | $(78,379) | $4,174 | $(82,553) | \* |
| Net cash (used in) provided by investing activities | $(18,368) | $16,156 | $(34,524) | 213.7% |
| Net cash used in financing activities | $(23,959) | $(2,489) | $(21,470) | 862.6% |

|  | June 30, 2011 | December 31, 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $325,170 | $445,226 | $(120,056) | (27.0)% |
| Trade accounts receivable | 106,952 | 116,663 | (9,711) | (8.3) |
| Inventories | 210,044 | 124,995 | 85,049 | 68.0 |
| Other current assets | 49,571 | 28,848 | 20,723 | 71.8 |
| Total current assets | $691,737 | $715,732 | $(23,995) | (3.4)% |
| Trade accounts payable | $107,375 | $67,073 | $40,302 | 60.1% |
| Other current liabilities | 25,678 | 77,790 | (52,112) | (67.0) |
| Total current liabilities | $133,053 | $144,863 | $(11,810) | (8.2)% |
| Net working capital | $558,684 | $570,869 | $(12,185) | (2.1)% |

\* Calculation of percentage change is not meaningful.

***Cash from Operating Activities.*** We recognized net cash used in operating activities versus net cash provided by operating activities in the six months ended June 30, 2011 versus 2010. The decreased cash from operating activities was primarily due to inventories increasing more in the six months ended June 30, 2011 versus 2010, an income tax receivable in 2011 that we did not recognize in the prior year period, and accrued expenses decreasing more in the six months ended June 30, 2011 versus 2010. The larger increase in inventories was primarily due to higher projected sales in the second half of 2011 versus 2010, increased international inventory, and eleven new retail stores. The income tax receivable was partially related to our net loss for the quarter ended June 30, 2011. The larger decrease in accrued expenses was primarily due to a higher accrued payroll payment related to our increased company performance in 2010 versus 2009. These changes were partially offset by trade accounts receivable decreasing in the six months ended June 30, 2011 versus increasing in the six months ended June 30, 2010. The decrease in trade accounts receivable was primarily due to increased cash collections. Net working capital decreased as of June 30, 2011 from December 31, 2010, primarily as a result of lower cash and cash equivalents and higher trade accounts payable due to increased inventory purchases and increased capital expenditures. These decreases to working capital were partially offset by the increased inventory and the decreased accrued expenses. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments.

Wholesale accounts receivable turnover decreased to 7.8 times in the twelve months ended June 30, 2011 from 8.9 times for the twelve months ended June 30, 2010, primarily due to higher average accounts receivable balances, partially offset by increased cash collections for the twelve months ended June 30, 2011 compared to the twelve months ended June 30, 2010. The higher accounts receivable balances were primarily attributed to increased sales, including the conversion to our European wholesale operations, which provides us higher selling prices.

Inventory turnover decreased slightly to 3.5 times for the twelve months ended June 30, 2011 compared to 3.8 times for the twelve months ended June 30, 2010, primarily due to higher average inventory levels during the twelve months ended June 30, 2011 compared to the twelve months ended June 30, 2010, partially offset by increased sales. The higher inventory balances were primarily attributed to our projected increased sales and retail locations for the second half of the year.

***Cash from Investing Activities.*** Net cash used in investing activities for the six months ended June 30, 2011 resulted from purchases of property and equipment and purchases of intangible assets. Our larger capital expenditures included computer hardware and software and the build out of new retail stores. The purchased intangible assets included order books from our international distributor conversions. For the six months ended June 30, 2010, net cash provided by investing activities resulted primarily from sales of short-term investments, partially offset by purchases of property and equipment and acquisitions of businesses. In addition, we did not purchase short-term investments in the six months ended June 30, 2010 or subsequently, as we shifted our investments to highly liquid cash equivalents.

As of June 30, 2011, we had no material commitments for future capital expenditures but estimate that the remaining capital expenditures for 2011 will range from approximately $40,000 to $45,000. We anticipate these expenditures will primarily include the build-out of our corporate and regional offices and new retail stores. The actual amount of capital expenditures for the remainder of the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures.

On July 1, 2011, we made a cash payment of approximately $126,600 related to our acquisition of the Sanuk® brand, which is subject to certain post-closing adjustments. The purchase price, which has not yet been determined, also includes future contingent consideration based upon performance over the next five years. We believe the amount of contingent consideration, goodwill, and other intangible assets we will recognize will each be significant; however, due to the timing of the close of the acquisition, we did not have sufficient time to complete the valuation to determine these amounts. For further information related to the Sanuk acquisition, see Note 10 to our condensed consolidated financial statements.

***Cash from Financing Activities.*** For the six months ended June 30, 2011, net cash used in financing activities was comprised primarily of cash used for repurchases of our common stock, as well as cash used for shares withheld for taxes from employee stock unit vestings and exercises of employee stock appreciation rights, partially offset by excess tax benefits from stock compensation. The latter changes were larger than the prior period primarily due to the issuance of stock in relation to our long-term incentive program. For the six months ended June 30, 2010, net cash used in financing activities was comprised primarily of cash used for repurchases of our common stock and for shares withheld for taxes from employee stock unit vestings, partially offset by excess tax benefits from stock compensation.

In June 2009, we announced that our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. During both the three and six months ended June 30, 2011, we repurchased approximately 245,000 shares of our common stock under this program for approximately $20,000, or an average of $81.22 per share. As of June 30, 2011, there was no remaining approved amount for repurchases.

In May 2010, we entered into the Second Amended and Restated Credit Agreement with Comerica Bank, or the Credit Agreement. The Credit Agreement provides for a maximum availability of $20,000. Up to $12,500 of borrowings may be in the form of letters of credit. The Credit Agreement bears interest at the lender’s prime rate (3.25% at June 30, 2011) or, at our option, at the London Interbank Offered Rate, or LIBOR, (0.19% at June 30, 2011) plus 1.0%, and is secured by substantially all of our assets. The Credit Agreement includes annual commitment fees of $60 per year which can be waived if we deposit $10,000 in non-interest bearing new deposits with Comerica Bank, provided that such deposits may be removed by us at any time, subject to paying a pro-rated annual commitment fee. The Credit Agreement expires on June 1, 2012. We are currently in the process of negotiating a syndicated credit facility, which we expect to complete in the third quarter of 2011. We anticipate entering into a significantly higher revolving line of credit with terms that are customary for this type of credit facility. We believe this syndicated credit facility will sufficiently cover our liquidity needs for at least the next 12 months. At June 30, 2011, we had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $724. As a result, $19,276 was available under the Credit Agreement at June 30, 2011.

The Credit Agreement contains certain financial covenants. The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000 and maximum loans to employees of $200. On June 27, 2011, we entered into Amendment Number One to the Credit Agreement. This amendment increased the maximum net loans to subsidiaries who are not parties to the Credit Agreement to $50,000 in the aggregate per calendar year. As of June 30, 2011, we were in compliance with all covenants and remain so as of the date of this report. The agreements underlying the Credit Agreement also contain certain additional financial covenants, if outstanding obligations exceed

$2,000, including a minimum tangible net worth requirement of $294,891 plus 75% of the consolidated net profit on a cumulative basis, commencing with the fiscal year ended December 31, 2010, no consolidated net loss for two or more consecutive fiscal quarters and maximum acquisitions of $25,000 per calendar year. At June 30, 2011, these additional covenants were not in effect because our balance did not exceed $2,000. Because our outstanding obligations were less than $2,000 at the time of our Sanuk acquisition, we are still in compliance with this financial covenant and are not restricted to $2,000 in borrowings in this calendar year; we still have the ability to borrow the full remaining available amount.

**Contractual Obligations.** The following table summarizes our contractual obligations at June 30, 2011, and the effects such obligations are expected to have on liquidity and cash flow in future periods.

|  | Payments Due by Period Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations(1) | $131,782 | $24,956 | $37,358 | $29,834 | $39,634 |
| Purchase obligations(2) | 383,508 | 380,032 | 2,876 | 600 | — |
| Unrecognized tax benefits(3) | 3,271 | — | 3,271 | — | — |
| Total | $518,561 | $404,988 | $43,505 | $30,434 | $39,634 |

(1) Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and corporate and regional offices. The majority of other long-term liabilities on our condensed consolidated balance sheets are deferred rents, of which the cash lease payments are included in operating lease obligations in this table.

(2) Our purchase obligations consist largely of open purchase orders. They also include promotional expenses and service contracts. Outstanding purchase orders are primarily with our third party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and service contracts are due periodically through 2015. In March 2011, we entered into contracts requiring minimum purchase commitments of sheepskin with a remaining commitment of approximately $19,000 as of June 30, 2011 that Deckers’ affiliates, manufacturers, factories and other agents (each or collectively, a “Buyer”) must make on or before July 31, 2011. We have included the remaining amount as of June 30, 2011 in this table. These contracts may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before July 31, 2011, Deckers is required to make a deposit for the remaining amounts, plus cash not yet received from a Buyer on pending orders, on or before July 31, 2011. Such deposit shall be refundable upon receipt of payment by Buyers for such amounts. We expect our sheepskin purchases by third party factories supplying UGG product to us will eventually exceed these levels; however, subsequent to June 30, 2011, we believe we will be required to make a deposit for the remaining commitment, plus cash not yet received from a Buyer on pending orders, of approximately $23,000 under this contractual arrangement. We believe this deposit will become fully refundable, and therefore, we believe this will not materially affect our results of operations, as it is in the normal course of our business.

(3) The unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate or additional paid-in capital, if recognized. See note 9 to our accompanying condensed consolidated financial statements.

Subsequent to June 30, 2011, we entered into a new sheepskin purchase agreement for a total minimum commitment of approximately $40,000, whereby we will make an advance deposit of $20,000, for purchases targeted to be made by a Buyer between July 1, 2011 and January 31, 2012 under this contract. The advance deposit shall be repaid to us as Buyers purchase goods under the terms of this agreement. This agreement may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments, we shall be responsible for compliance with any and all minimum purchase commitments under this contract. We expect sheepskin purchases by third party factories supplying UGG product to us will eventually exceed the contract levels. Therefore, we do not anticipate having to make any non-performance payments under this contractual arrangement. We are not able to reasonably estimate when or if non-performance cash payments will occur. We believe this will not materially affect our results of operations, as it is in the normal course of our business.

Also subsequent to June 30, 2011, we assumed several off balance sheet obligations in relation to our acquisition of the Sanuk brand. Due to the timing of the close of the acquisition, we did not have sufficient time to finalize the details of the contractual obligations. However, based on an initial estimate as of July 1, 2011, we believe the contractual obligations total approximately $12,000, primarily being open purchase orders.

The purchase price for the Sanuk brand also includes participation payments over the next five years as follows:

- 2011 earnings before interest, taxes, depreciation, and amortization (EBITDA) multiplied by ten, less the closing payment, up to maximum of $30,000;
- 51.8% of the gross profit in 2012, defined as total sales less the cost of sales for the business of the sellers;
- 36.0% of gross profit in 2013;
- 8.0% of the product of gross profit in 2015 multiplied by five.

There is no maximum to the contingent consideration payments for 2012, 2013, and 2015.

We believe that internally generated funds, the available borrowings under our existing Credit Agreement or a new credit agreement, and our cash and cash equivalents will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. However, risks and uncertainties that could impact our ability to maintain our cash position include our growth rate, the continued strength of our brands, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories, our ability to generate returns on our acquisitions of businesses, the availability of short-term credit, and market volatility, among others. See Part II, Item 1A, “Risk Factors” for a discussion of additional factors that may affect our working capital position. Furthermore, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a new credit agreement or draw on our existing Credit Agreement. We are currently in the process of negotiating a syndicated credit facility, which we expect to complete in the third quarter of 2011. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands.

### Critical Accounting Policies and Estimates

For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” contained in our annual report on Form 10-K for the year ended December 31, 2010.

### Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU), *Presentation of Comprehensive Income*, an amendment to Accounting Standards Codification Topic 220, *Comprehensive Income*, that brings US Generally Accepted Accounting Principles (GAAP) into alignment with International Financial Reporting Standards for the presentation of other comprehensive income (OCI). Effective with our annual reporting period ending December 31, 2011, the option in current GAAP that permits the presentation of OCI in the statement of changes in equity has been eliminated. The provisions of the update provide that an entity that reports items of OCI has two options: (1) a single statement must present the components of net income, total net income, the components of OCI, total OCI, and total comprehensive income; or (2) a two-statement approach whereby an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of OCI, a total for OCI, and a total for comprehensive income. The adoption of this ASU will only change the presentation of OCI on our consolidated financial statements beginning with our 2011 annual report.

## Market risk

As filed, 5,142 characters.

***Interest Rate Risk.*** Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the US and changes in LIBOR. Our credit agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At June 30, 2011, we had no outstanding borrowings under the credit agreement. A 1.0% increase in interest rates on our current borrowings would have no impact on (loss) income before income taxes.

***Foreign Currency Exchange Rate Risk.*** We face market risk to the extent that changes in foreign currency exchange rates affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities, compared to the six months ended June 30, 2010 when we did not utilize a significant amount of derivative instruments to hedge foreign currency exchange rate risk. Other than an increasing amount of sales, expenses, and financial positions denominated in foreign currencies, as discussed above, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. As of the date of this Quarterly Report on Form 10-Q, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term.

We currently utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect to purchase and sell in foreign currencies. As our international operations grow and we increase purchases and sales in foreign currencies, we will evaluate and utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes.

Although the majority of our sales and inventory purchases are denominated in US currency, our sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our Asian and European operations. Approximately $65,000, or 18.2%, of our total net sales during the six months ended June 30, 2011 were denominated in foreign currencies. As we begin to hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement translation gains and losses as a result of translating the operating results and financial positions held in foreign currencies into US dollars. We translate monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries’ local currency is their designated functional currency. Accordingly, we translate those monetary assets and liabilities denominated in US dollars into their local currencies using the exchange rate as of the end of the reporting period, which also results in financial statement translation gains and losses. Changes in foreign exchange rates affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, which may have a negative impact on our net sales and gross margins. As of June 30, 2011, our hedging contracts had notional amounts totaling approximately $57,000. Based upon sensitivity analysis as of June 30, 2011, a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $5,800.

***Commodity Price Risk.*** We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of top grade sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. There have been significant increases in the price of top grade sheepskin in recent years as the demand from our competitors for this commodity has increased. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, global economic conditions, and other factors which are not considered predictable or within our control. We use purchasing contracts or pricing arrangements to attempt to reduce the impact of price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our condensed consolidated balance sheets. In the event of significant commodity cost increases, we may not be able to adjust our selling prices sufficiently to mitigate the impact on our margins.

## Controls and procedures

As filed, 1,810 characters.

### Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this report.

### Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 200 characters.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 1, 2011.

Filed Aug 8, 2011.
Source: SEC EDGAR, the filing index for accession 0001104659-11-044870. Last ingested by Listed: Oct 29, 2026, 13:00 ET. No prices; not investment advice.