# Deckers Outdoor Corp: Form 10-Q for the period ended Sep 30, 2012

- Company: [Deckers Outdoor Corp](/companies/deck.md) (CIK 910521)
- Form: 10-Q
- Filed: 2012-11-08
- Accepted by EDGAR: Nov 8, 2012, 22:09 ET
- Period: 2012-09-30
- Accession: 0001104659-12-076068
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/910521/000110465912076068/a12-19865_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/910521/000110465912076068/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $376.4m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $797.1m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $217.1m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-01 to 2012-09-30 | $451.0m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $159.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-01 to 2012-09-30 | $346.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $99.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $303.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $59.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $42.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $15.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | $11.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | $43.1m | us-gaap:ProfitLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | $31.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | $1.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | $0.81 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | $1.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-01 to 2012-09-30 | $0.82 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 36,577,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 37,994,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | −$183.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $42.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2012-01-01 to 2012-09-30 | $184.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2012-09-30 | $61.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $890.6m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $1.26bn | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $516.6m | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | at 2012-09-30 | $275.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2012-09-30 | $681.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 68,356 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, and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “see,” “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, investing, and financing strategies;
- our product, distribution channel, 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, results of operations, or cash flows;
- our expectations for expansion of our retail and eCommerce capabilities;
- 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

You should read this report in its entirety, together with our Annual Report on Form 10-K, filed with the Securities Exchange Commission (SEC) on February 29, 2012, and the documents that we file as exhibits to these reports and the documents that we incorporate by reference in these reports.

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

- UGG®: Premier brand in luxury and comfort footwear, handbags, apparel, and cold weather accessories;
- Teva®: High performance, outdoor footwear and sandals; and
- Sanuk®: Innovative action sport footwear rooted in the surf community.

Our financial condition and results of operations include the operations of the Sanuk brand beginning July 1, 2011, the acquisition date. 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 Hoka, a line of footwear for all capacities of runner designed to alleviate fatigue, impact and muscle strain.

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.

We believe that our business has been, and will continue to be, impacted by several important trends affecting our end markets:

- The continued uncertainty surrounding US and global economic conditions has 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 sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant increases in the prices of sheepskin. We expect our sheepskin costs to decrease in 2013 compared to 2012.
- 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.
- We believe that 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.
- We believe that consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.
- We believe that consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.
- We believe that there is an emerging sustainable lifestyle movement happening all around the world, and 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 continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs.

We have experienced cost increases, most significantly with sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production, including in the US from where we have begun sourcing product this year. Also, refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk.

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

### UGG Brand Overview

UGG® Australia has grown to be well-known in the US and internationally in the footwear industry. With loyal consumers around the world, including high-profile celebrities, the UGG brand continually earns media exposure from numerous outlets both organically and from strategic public relations efforts. The UGG brand has invested in paid media creating impactful integrated campaigns across multiple channels (including television, out-of-home (OOH), print, digital and social) that are globally scalable, contributing to broader public awareness of the brand.

We believe the increased global media focus and demand for UGG products has been driven by the following:

- consumer brand loyalty, due to the luxury and comfort of UGG footwear;
- continued innovation of new product categories and styles, including those beyond footwear;
- increased marketing for women and men in targeted high-end print, OOH, digital and social advertising;
- a targeted UGG for Men campaign featuring Tom Brady;
- targeted marketing at prospective consumers through email blasts, new catalogs and direct mail pieces;
- successful targeting of higher-end distribution;
- expanded product assortment purchases from existing accounts;
- 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 that showcase all of our product offerings;
- continued expansion of worldwide retail through new UGG Australia stores;
- continued geographic expansion across the US and internationally; and
- expansion of our shop-in-shop program worldwide.

We believe the luxurious comfort 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 apparel. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth.

### Teva Brand Overview

The Teva brand is a leading innovative, global, outdoor adventure brand, with 30 years of contributions to the outdoor experience. The Teva brand pioneered the water sport sandal category in 1984, and today our brand mission is to inspire better stories through outdoor adventure. Leveraging our core performance competencies in footwear and delivering our brand promise to help our consumers *Live Better Stories™*, we are focused on driving growth through innovation in the growing outdoor space through our heritage sandals, off-road trail activities, freestyle mountain bike riding, action water sports, and other outdoor lifestyle products.

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth over the past few years. Additionally, our broader range of footwear 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 2013, we plan to further our Teva brand’s global expansion in Asia and Latin America. 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. We continue to see strong sandal sales and growth in our closed-toe offerings. 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.

### Sanuk Brand Overview

The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a global presence. The Sanuk brand’s use of unexpected materials and unconventional constructions has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities within the action sports market, as well as other domestic and global markets and channels in which Deckers is already established.

### Other Brands Overview

Our other brands consist of TSUBO, Ahnu, MOZO, and Hoka. Our other brands are all sold through most of our distribution channels, with the majority sold through wholesale channels.

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 strives to deliver revolutionary footwear for creative, passionate, and talented professionals who spend long hours working on their feet. Our high-performance footwear is designed to the standards of these professionals, not just their workplace. In 2011, MOZO introduced The Chef Signature Collection: footwear inspired by global style icon Marcus Samuelsson, recently-appointed head chef for the House of Blues group, Aaron Sanchez, and current Top Chef Masters winner, Chris Cosentino. This collection put the MOZO brand in the media for the first time and allowed the brand to open up new distribution opportunities. This year the brand signed the only female Iron Chef winner, Cat Cora, to design a collection built for women to wear in the home kitchen and anywhere else their busy lives take them. Current distribution includes culinary trade wholesale, national on-line retailers and the health care worker market.

The Hoka brand focuses on designing shoes that alleviate fatigue, impact and muscle strain. Runners from around the world are experiencing the benefits of the Hoka brand products. These shoes are used by marathon winners, and even ultra-marathon runners as well as every day runners to enjoy running, maintain top physical performance, and protect against shocks, jolts and injuries.

We expect to leverage our design, marketing, and distribution capabilities to grow our other 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 to grow these brands 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. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. 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, expansion into more international markets, 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 generate strong annual operating income. In addition, our UGG Australia concept stores allow us to showcase our entire product line including footwear, accessories, handbags, and outerwear; whereas, a wholesale account may not represent all of these categories. 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 limited outlet locations.

As of September 30, 2012, we had a total of 68 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During the remainder of 2012, we plan to open additional retail stores, with the majority in international locations, with the total being more than the number of stores we opened in 2011. We intend to continue opening more retail stores worldwide beyond 2012.

### Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a significant seasonal impact.

|  | 2012 First Quarter | Second Quarter | Third Quarter Fourth Quarter |
| --- | ---: | ---: | ---: |
| Net sales | $246,306 | $174,436 | $376,392 |
| Income (loss) from operations | $11,933 | $(28,708) | $59,609 |

|  | 2011 First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $204,851 | $154,222 | $414,358 | $603,852 |
| Income (loss) from operations | $28,195 | $(10,798) | $90,661 | $176,780 |

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded net sales for the first half of the year. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties.

### Results of Operations

### Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

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

|  | Three Months Ended September 30, 2012 Amount% |  | 2011 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $376,392 | 100.0% | $414,358 | 100.0% | $(37,966) | (9.2)% |
| Cost of sales | 217,099 | 57.7 | 211,505 | 51.0 | 5,594 | 2.6 |
| Gross profit | 159,293 | 42.3 | 202,853 | 49.0 | (43,560) | (21.5) |
| Selling, general and administrative expenses | 99,684 | 26.5 | 112,192 | 27.1 | (12,508) | (11.1) |
| Income from operations | 59,609 | 15.8 | 90,661 | 21.9 | (31,052) | (34.3) |
| Other expense, net | 607 | 0.2 | 50 | — | 557 | \* |
| Income before income taxes | 59,002 | 15.7 | 90,611 | 21.9 | (31,609) | (34.9) |
| Income tax expense | 15,941 | 4.2 | 28,266 | 6.8 | (12,325) | (43.6) |
| Net income | 43,061 | 11.4 | 62,345 | 15.0 | (19,284) | (30.9) |
| Net loss attributable to the noncontrolling interest | — | — | 139 | — | (139) | (100.0) |
| Net income attributable to Deckers Outdoor Corporation | $43,061 | 11.4% | $62,484 | 15.1% | $(19,423) | (31.1)% |

\* Calculation of percentage change is not meaningful.

***Overview.*** The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011. The decrease in net sales was primarily due to a decrease in UGG wholesale sales, partially offset by an increase in UGG retail and eCommerce sales, and Teva and Sanuk wholesale sales. The decrease in income from operations resulted primarily from a decrease in gross profit, partially offset by a decrease in selling, general and administrative expenses.

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

| Net sales by location: | Three Months Ended September 30, 2012 | 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $242,230 | $257,934 | $(15,704) | (6.1)% |
| International | 134,162 | 156,424 | (22,262) | (14.2) |
| Total | $376,392 | $414,358 | $(37,966) | (9.2)% |
| **Net sales by brand and distribution channel:** |  |  |  |  |
| UGG: |  |  |  |  |
| Wholesale | $284,075 | $334,308 | $(50,233) | (15.0)% |
| eCommerce | 9,726 | 7,844 | 1,882 | 24.0 |
| Retail stores | 39,007 | 34,523 | 4,484 | 13.0 |
| Total | 332,808 | 376,675 | (43,867) | (11.6) |
| Teva: |  |  |  |  |
| Wholesale | 15,922 | 12,879 | 3,043 | 23.6 |
| eCommerce | 1,946 | 1,674 | 272 | 16.2 |
| Retail stores | 73 | 140 | (67) | (47.9) |
| Total | 17,941 | 14,693 | 3,248 | 22.1 |
| Sanuk: |  |  |  |  |
| Wholesale | 17,008 | 15,350 | 1,658 | 10.8 |
| eCommerce | 1,307 | 228 | 1,079 | 473.2 |
| Retail stores | — | — | — | \* |
| Total | 18,315 | 15,578 | 2,737 | 17.6 |
| Other: |  |  |  |  |
| Wholesale | 6,991 | 6,866 | 125 | 1.8 |
| eCommerce | 284 | 508 | (224) | (44.1) |
| Retail stores | 53 | 38 | 15 | 39.5 |
| Total | 7,328 | 7,412 | (84) | (1.1) |
| Total | $376,392 | $414,358 | $(37,966) | (9.2)% |
| Total eCommerce | $13,263 | $10,254 | $3,009 | 29.3% |
| Total Retail stores | $39,133 | $34,701 | $4,432 | 12.8% |

\* Calculation of percentage change is not meaningful.

The decrease in net sales was primarily due to a decrease in UGG wholesale sales, partially offset by an increase in UGG retail and eCommerce sales, and Teva and Sanuk wholesale sales. We experienced a decrease in the number of pairs sold in our UGG, other brands and Sanuk wholesale segments, partially offset by an increase in pairs sold in our Teva wholesale, retail stores and eCommerce segments. This resulted in a decrease in the overall volume of footwear sold for all brands of 9.7% to approximately 5.6 million pairs sold for the three months ended September 30, 2012 from 6.2 million pairs for the three months ended September 30, 2011. Our weighted-average wholesale selling price per pair decreased to $62.89 for the three months ended September 30, 2012 from $63.99 for the three months ended September 30, 2011. The decreased average selling price was primarily due to discounted UGG sales in Europe, partially offset by increases in average selling price for UGG sales in the US as well as the Sanuk and Teva brands.

Wholesale net sales of our UGG brand decreased primarily due to a decrease in the volume of pairs sold, as well as a decrease in the average selling price. The decrease in volume was primarily to our wholesale customers in the US, as well as our distributors and wholesale customers in Europe and distributors in Asia, partially offset by an increase in volume to our wholesale customers in Asia. We believe the decline was partially due to reduced orders for the fall season caused by our customers’ increased carryover inventory levels resulting from the warm winter in the prior year, a new trend of on-demand purchasing whereby consumers shift the timing of their purchases to later in the season, as well as continued warm weather in the current year and the recessionary conditions in Europe.

Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, as well as an increase in the average selling price. The increase in volume was primarily in the Asian and European distributor markets, with smaller volume increases in all wholesale markets.

Wholesale net sales of our Sanuk brand increased primarily due to an increase in the average selling price, partially offset by a decrease in the volume of pairs sold. The increase in average selling price was primarily due to a shift in product mix, as well as the introduction of a new line of shoes and boots which generally carry a higher price point.

Wholesale net sales of our other brands increased due to an increase in average selling price, partially offset by a decrease in the volume of pairs sold. The increase in selling price was primarily due to the prior year period’s low selling prices of the Simple brand’s products. The decrease in volume of pairs sold was due to ceasing distribution of the Simple brand as of December 31, 2011. Excluding the Simple brand, our other brands experienced an increase in volume of pairs sold, partially offset by a decrease in average selling price.

Net sales of our eCommerce business increased due to an increase in the number of pairs sold as well as an increase in the average selling price. The increase in number of pairs sold was primarily in the US, as well as Europe.

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 29 new stores opened since September 30, 2011. For the thirteen weeks ended September 30, 2012 compared to October 2, 2011, same store sales decreased by 13.1%. All stores not included in same store sales contributed approximately $13,200 of retail sales during the thirteen weeks ended September 30, 2012. As we continue to increase the number of our stores, each new store will have less proportional impact on our growth rate. Previously, we calculated our same store sales using full calendar quarters and adjustments to reflect foreign exchange impacts, and included all stores that were open for the full quarter or year-to-date periods, respectively. Beginning the three months ended March 31, 2012, we changed the method of our calculation to a traditional retail weekly calendar, excluded adjustments to reflect foreign exchange impacts, and excluded other items such as stores under relocation or remodel to more accurately reflect comparable store sales. This calculation is more consistent with how management views the business and we believe it is more consistent with financial measures used in the retail industry.

International sales, which are included in the segment sales above, for all of our products combined represented 35.6% and 37.8% of worldwide net sales for the three months ended September 30, 2012 and 2011, respectively. The decrease in international sales was largely due to decreased sales for our UGG wholesale channel, primarily in the European region, partially offset by increased sales in our retail and eCommerce channels.

***Gross Profit.*** As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs as well as an increased impact of discounted sales in Europe. We expect to experience continued pressure on gross profit, primarily due to the increased sheepskin costs, for the full fiscal 2012 year.

***Selling, General and Administrative Expenses (SG&A).*** The change in SG&A was primarily due to:

- decreased performance-based compensation of approximately $9,200;
- decreased international expenses of approximately $5,700, primarily related to the positive impact of foreign currency rate fluctuations;
- decreased legal expenses of approximately $3,500, due to having fewer costs related to litigations in the current year, decreased anti-counterfeiting expenses, as well as receiving increased judgments and collections in the current year from our website litigations; partially offset by
- increased retail costs of approximately $6,900, largely related to 29 new retail stores that were not open as of September 30, 2011.

***Income from Operations.*** Refer to Note 9 to our accompanying condensed consolidated financial statements for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment:

|  | Three Months Ended September 30, 2012 | 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG wholesale | $98,548 | $143,999 | $(45,451) | (31.6)% |
| Teva wholesale | (1,090) | (1,389) | 299 | 21.5 |
| Sanuk wholesale | 3,217 | 1,459 | 1,758 | 120.5 |
| Other wholesale | 58 | (2,969) | 3,027 | 102.0 |
| eCommerce | 769 | 483 | 286 | 59.2 |
| Retail stores | (6,264) | (545) | (5,719) | (1,049.4) |
| Unallocated overhead costs | (35,629) | (50,377) | 14,748 | 29.3 |
| Total | $59,609 | $90,661 | $(31,052) | (34.3)% |

Income from operations decreased primarily due to the decreases in net sales and gross margin, partially offset by the decrease in SG&A expenses.

The decrease in income from operations of UGG brand wholesale was primarily the result of a 8.1 percentage point decrease in gross margin, primarily attributable to higher sheepskin and other material costs, as well as an increased impact of discounted sales in Europe. The decrease in income was partially offset by lower marketing and promotional expenses of approximately $1,400 and lower commissions of $1,200 due to the decrease in sales.

The decrease in loss from operations of Teva brand wholesale was primarily the result of approximately a $400 reduction in operating expenses, partially offset by a $100 reduction in gross profit.

The increase in income from operations of Sanuk brand wholesale was primarily the result of a $1,400 reduction in accretion expense related to the contingent consideration liability from the Company’s purchase of the brand, a $900 reduction in amortization expense largely related to an order book that was fully amortized in 2011, and $500 of increased gross profit, partially offset by approximately $600 of increased marketing and promotional expenses.

Income from operations of our other brands wholesale for the three months ended September 30, 2012 was $58, compared to a loss from operations for the three months ended September 30, 2011 of $2,969. The increase was primarily the result of an increase in gross profit of approximately $1,700, as well as a reduction in operating expenses of approximately $1,300.

The increase in income from operations of our eCommerce business was primarily due to an increase in gross profit of approximately $1,300, partially offset by an increase in operating expenses of approximately $1,100.

The increase in loss from operations of our retail store business, which primarily relates to the UGG brand, was primarily due to approximately $6,900 of higher operating expenses largely related to our new store openings. These results were partially offset by increased gross profit of approximately $1,100.

The decrease in unallocated overhead costs resulted most significantly from a decrease of approximately $5,400 related to the positive impact of foreign currency rate fluctuations in the current period compared to a negative impact in the prior period, a $4,300 decrease in performance-based compensation, as well as approximately $3,500 in reduced legal expenses.

***Other Expense, Net.*** Other expense, net increased primarily due to interest expense on our short-term borrowings.

***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:

|  | Three Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: |
| Income tax expense | $15,941 | $28,266 |
| Effective income tax rate | 27.0% | 31.2% |

23

The decrease in the effective tax rate was primarily due to an overall discrete tax benefit of approximately $2,100 largely due to US federal, state and United Kingdom (UK) tax adjustments. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of September 30, 2012, we did not have a material amount of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We anticipate our effective tax rate for the full year 2012 to be consistent with the full year rate of 29.2% in 2011.

***Net Loss Attributable to the Noncontrolling Interest.*** On April 2, 2012, we purchased the remaining 49% noncontrolling interest in our joint venture with Stella International. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations.

***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 primarily as a result of the decrease in net income, partially offset by a reduction in the diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding was the result of our share repurchases since September 30, 2011. The weighted-average impact of the share repurchases was a reduction of approximately 2,700,000 shares.

### Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

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

|  | Nine Months Ended September 30, 2012 Amount% |  | 2011 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $797,134 | 100.0% | $773,431 | 100.0% | $23,703 | 3.1% |
| Cost of sales | 450,974 | 56.6 | 402,188 | 52.0 | 48,786 | 12.1 |
| Gross profit | 346,160 | 43.4 | 371,243 | 48.0 | (25,083) | (6.8) |
| Selling, general and administrative expenses | 303,326 | 38.1 | 263,185 | 34.0 | 40,141 | 15.3 |
| Income from operations | 42,834 | 5.4 | 108,058 | 14.0 | (65,224) | (60.4) |
| Other expense (income), net | 27 | 0.0 | (131) | (0.0) | 158 | 120.6 |
| Income before income taxes | 42,807 | 5.4 | 108,189 | 14.0 | (65,382) | (60.4) |
| Income tax expense | 11,850 | 1.5 | 33,539 | 4.3 | (21,689) | (64.7) |
| Net income | 30,957 | 3.9 | 74,650 | 9.7 | (43,693) | (58.5) |
| Net income attributable to the noncontrolling interest | (148) | — | (327) | — | 179 | 54.7 |
| Net income attributable to Deckers Outdoor Corporation | $30,809 | 3.9% | $74,323 | 9.6% | $(43,514) | (58.5)% |

***Overview.*** The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011. The increase in net sales was primarily due to the addition of Sanuk product sales for the full nine months ended September 30, 2012 compared to Sanuk brand sales for only the three months ended September 30, 2011, as well as an increase in UGG sales in our retail sales and wholesale sales in Asia, partially offset by a reduction in UGG wholesale sales in Europe and the US, and Teva wholesale sales in Europe. The decrease in income from operations resulted primarily from higher selling, general and administrative expenses and a 4.6 percentage point decrease in gross margin, partially offset by the increase in net sales.

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

| Net sales by location: | Nine Months Ended September 30, 2012 | 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $526,268 | $488,828 | $37,440 | 7.7% |
| International | 270,866 | 284,603 | (13,737) | (4.8) |
| Total | $797,134 | $773,431 | $23,703 | 3.1% |
| **Net sales by brand and distribution channel:** |  |  |  |  |
| UGG: |  |  |  |  |
| Wholesale | $454,652 | $510,739 | $(56,087) | (11.0)% |
| eCommerce | 34,054 | 32,901 | 1,153 | 3.5 |
| Retail stores | 110,066 | 89,728 | 20,338 | 22.7 |
| Total | 598,772 | 633,368 | (34,596) | (5.5) |
| Teva: |  |  |  |  |
| Wholesale | 96,087 | 100,445 | (4,358) | (4.3) |
| eCommerce | 5,500 | 4,615 | 885 | 19.2 |
| Retail stores | 276 | 333 | (57) | (17.1) |
| Total | 101,863 | 105,393 | (3,530) | (3.3) |
| Sanuk: |  |  |  |  |
| Wholesale | 76,003 | 15,350 | 60,653 | 395.1 |
| eCommerce | 2,678 | 228 | 2,450 | 1,074.6 |
| Retail stores | — | — | — | \* |
| Total | 78,681 | 15,578 | 63,103 | 405.1 |
| Other: |  |  |  |  |
| Wholesale | 16,933 | 17,281 | (348) | (2.0) |
| eCommerce | 736 | 1,679 | (943) | (56.2) |
| Retail stores | 149 | 132 | 17 | 12.9 |
| Total | 17,818 | 19,092 | (1,274) | (6.7) |
| Total | $797,134 | $773,431 | $23,703 | 3.1% |
| Total eCommerce | $42,968 | $39,423 | $3,545 | 9.0% |
| Total Retail stores | $110,491 | $90,193 | $20,298 | 22.5% |

\* Calculation of percentage is not meaningful.

The increase in net sales was primarily driven by the additional Sanuk brand sales and increased UGG sales in our retail sales and wholesale sales in Asia, partially offset by a reduction in UGG wholesale sales in Europe and the US, and Teva wholesale sales in Europe. We experienced an increase in the number of pairs sold through the addition of our Sanuk wholesale segment and continued retail and eCommerce growth, partially offset by a decrease in pairs sold in our UGG, Teva, and other brands wholesale segments. This resulted in an increase in the overall volume of footwear sold for all brands of 11.0% to approximately 16.1 million pairs sold for the nine months ended September 30, 2012 from 14.5 million pairs for the nine months ended September 30, 2011. Our weighted-average wholesale selling price per pair decreased to $43.43 for the nine months ended September 30, 2012 from $48.08 for the nine months ended September 30, 2011. The decreased average selling price was primarily due to the addition of our Sanuk wholesale segment, which has lower overall average selling prices due to the nature of the brand, for the full nine months ended September 30, 2012 compared to only the three months ended September 30, 2011, partially offset by increases in all other segments excluding eCommerce.

Wholesale net sales of our UGG brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price. The decrease in volume was primarily to our distributors and wholesale customers in Europe, as well as our wholesale customers in the US. We believe the decline was partially due to reduced orders for the fall season caused by our customers’ increased carryover inventory levels resulting from the warm winter in the prior year, a new trend of on-demand purchasing whereby consumers shift the timing of their purchases to later in the season, as well as continued warm weather in the current year and the recessionary conditions in Europe.

Wholesale net sales of our Teva brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price. The decrease in volume was primarily to our distributors and wholesale customers in Europe, as well as our wholesale customers in the US. The US and Asia each had a slight increase in sales due to increased average selling prices, despite the decrease in the volume of pairs sold. We believe the decrease in Europe was partially due to a tightening in consumer spending as a result of the weakening economy, leading retailers to be similarly cautious.

Wholesale net sales of our Sanuk brand, which we acquired in July 2011, were $76,003.

Wholesale net sales of our other brands decreased due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price. The decreases in net sales and volume of pairs sold were due to ceasing distribution of the Simple brand as of December 31, 2011. Excluding the Simple brand, our other brands experienced an increase in both net sales and volume of pairs sold.

Net sales of our eCommerce business increased due to an increase in the number of pairs sold, partially offset by a decrease in the average selling price. The decrease in the average selling price was primarily due to the addition of Sanuk brand sales, which carry lower average selling prices, increased Teva sales, which carry lower average selling prices, and lower average selling prices for the UGG brand due to a shift in product mix.

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 29 new stores opened since September 30, 2011. For the thirty-nine weeks ended September 30, 2012 compared to October 2, 2011, same store sales decreased by 2.9%. All stores not included in same store sales contributed approximately $40,600 of retail sales during the thirty-nine weeks ended September 30, 2012. As we continue to increase the number of our stores, each new store will have less proportional impact on our growth rate. Previously, we calculated our same store sales using full calendar quarters and adjustments to reflect foreign exchange impacts, and included all stores that were open for the full quarter or year-to-date periods, respectively. Beginning the three months ended March 31, 2012, we changed the method of our calculation to a traditional retail weekly calendar, excluded adjustments to reflect foreign exchange impacts, and excluded other items such as stores under relocation or remodel to more accurately reflect comparable store sales. This calculation is more consistent with how management views the business and we believe it is more consistent with financial measures used in the retail industry.

International sales, which are included in the segment sales above, for all of our products combined represented 34.0% and 36.8% of worldwide net sales for the nine months ended September 30, 2012 and 2011, respectively. The decrease in international sales was largely due to decreased sales for our UGG and Teva wholesale and distributor channels in Europe, partially offset by increased sales in our retail, eCommerce and Asia wholesale channels.

***Gross Profit.*** As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs as well as an increased impact of discounted and closeout sales in Europe for our UGG and Teva brands. The decrease was partially offset by the contribution of the Sanuk brand, which generally carries higher margins, and increased margins for our eCommerce and retail stores segments. We expect to experience continued pressure on gross profit, primarily due to the increased sheepskin costs, for the full year 2012.

***Selling, General and Administrative Expenses (SG&A).*** The change in SG&A was primarily due to:

- increased retail costs of approximately $24,000, largely related to 29 new retail stores that were not open as of September 30, 2011;
- approximately $22,000 of expenses for our Sanuk brand, including an increase to the fair value of the contingent consideration liability from the Company’s purchase of the brand of approximately $ 6,000;
- increased marketing expenses of approximately $10,000, largely related to our new UGG women’s prospects, UGG men’s and Classic campaigns;
- decreased legal expense of approximately $7,000, due to having fewer costs related to litigations in the current year, decreased anti-counterfeiting expenses, as well as receiving increased judgments and collections in the current year from our website litigations;
- decreased amortization expense of approximately $4,000 due to an acquired order book being fully amortized during the first six months of 2011; and
- decreased commissions of approximately $3,000.

***Income (Loss) from Operations.*** Refer to Note 9 to our accompanying condensed consolidated financial statements for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment:

|  | Nine Months Ended September 30, 2012 | 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG wholesale | $137,649 | $206,208 | $(68,559) | (33.2)% |
| Teva wholesale | 12,717 | 20,576 | (7,859) | (38.2) |
| Sanuk wholesale | 16,895 | 1,459 | 15,436 | 1,058.0 |
| Other wholesale | (1,876) | (7,577) | 5,701 | 75.2 |
| eCommerce | 5,021 | 5,767 | (746) | (12.9) |
| Retail stores | (10,698) | 1,631 | (12,329) | (755.9) |
| Unallocated overhead costs | (116,874) | (120,006) | 3,132 | 2.6 |
| Total | $42,834 | $108,058 | $(65,224) | (60.4)% |

Income from operations decreased primarily due to the increase in SG&A expenses and the 4.6 percentage point reduction in gross margin, partially offset by the increase in net sales.

The decrease in income from operations of UGG brand wholesale was primarily the result of a 8.5 percentage point decrease in gross margin, largely attributable to higher sheepskin and other material costs, as well as an increase in the impact of discounted sales in Europe, partially offset by an increase in sales in Asia. The decrease in income was also due to an increase in marketing and promotional expenses of approximately $6,000. These decreases to income were partially offset by approximately $5,000 in decreased commissions and approximately $4,000 in decreased amortization expenses, due to an acquired order book being fully amortized during the first six months of 2011.

The decrease in income from operations of Teva brand wholesale was mostly attributable to the decrease in net sales and a 4.7 percentage point decrease in gross margin, primarily due to an increased impact of discounted sales as well as a change in the product mix with more closed-toe product which carries lower margins.

The income from operations from our Sanuk brand, which we acquired in July 2011, was $16,895.

The decrease in loss from operations of our other brands wholesale was primarily the result of an increase in gross profit of approximately $2,900, as well as a decrease in operating expenses of approximately $2,800.

The decrease in income from operations of our eCommerce business was primarily due to an increase in operating expenses of approximately $3,000, partially offset by the increase in sales and a 1.6 percentage point increase in gross margin.

Loss from operations of our retail store business for the nine months ended September 30, 2012 was $10,698 compared to income from operations for the nine months ended September 30, 2011 of $1,631. The loss was primarily due to approximately $24,000 of higher operating expenses largely related to our new store openings, as well as infrastructure to support an expanded global store rollout. These results were partially offset by increased net sales and a 0.8 percentage point increase in gross margin, primarily due to an increased mix of international sales which generally carry higher margins.

The decrease in unallocated overhead costs resulted most significantly from a decrease in legal expenses of approximately $7,000 and a $5,000 decrease in performance-based compensation, partially offset by approximately $3,000 of expenses related to international infrastructure costs to support our expansion as well as approximately $6,000 of other costs that are not individually significant.

***Other Expense (Income), Net.*** Other expense, net for the nine months ended September 30, 2012 was $27 compared to other income, net for the nine months ended September 30, 2011 of $131. The expense was due to an increase in interest expense related to our short-term borrowings, partially offset by income primarily related to expired eCommerce website customer credits and royalty income.

***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:

|  | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: |
| Income tax expense | $11,850 | $33,539 |
| Effective income tax rate | 27.7% | 31.0% |

The decrease in the effective tax rate was primarily due to an overall discrete tax benefit of approximately $900 largely due to US federal, state and UK tax adjustments, as well as a research and development tax credit of approximately $300, partially offset by discrete tax expense associated with our operations in China. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of September 30, 2012, we did not have a material amount of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We anticipate our effective tax rate for the full year 2012 to be consistent with the full year rate of 29.2% in 2011.

***Net Income Attributable to the Noncontrolling Interest.*** On April 2, 2012, we purchased the remaining 49% noncontrolling interest in our joint venture with Stella International. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations. For the nine months ended September 30, 2012, net income attributable to the noncontrolling interest was $148, which represents the noncontrolling interest’s share of income prior to April 2, 2012.

***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 primarily as a result of the decrease in net income.

### Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than our guarantee contracts. 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, our cash generated from operations may decline, and 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. These factors 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, or make deposits on, 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 and Sanuk brands build 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, Teva, and Sanuk 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 and short-term borrowings. As needed, we borrow funds under our credit agreement.

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

|  | Nine Months Ended September 30, 2012 | 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Net cash used in operating activities | $(183,385) | $(222,258) | $38,873 | 17.5% |
| Net cash used in investing activities | $(54,816) | $(152,322) | $97,506 | 64.0% |
| Net cash provided by financing activities | $35,908 | $19,053 | $16,855 | 88.5% |

|  | September 30, 2012 | December 31, 2011 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $61,636 | $263,606 | $(201,970) | (76.6)% |
| Trade accounts receivable | 239,259 | 193,375 | 45,884 | 23.7 |
| Inventories | 486,168 | 253,270 | 232,898 | 92.0 |
| Other current assets | 103,584 | 107,651 | (4,067) | (3.8) |
| Total current assets | 890,647 | 817,902 | 72,745 | 8.9 |
| Short-term borrowings | 275,000 | — | 275,000 | \* |
| Trade accounts payable | 167,957 | 110,853 | 57,104 | 51.5 |
| Other current liabilities | 73,661 | 121,226 | (47,565) | (39.2) |
| Total current liabilities | 516,618 | 232,079 | 284,539 | 122.6 |
| Net working capital | $374,029 | $585,823 | $(211,794) | (36.2)% |

\* Calculation of percentage change is not meaningful.

***Cash from Operating Activities.*** We used less cash in operating activities in the nine months ended September 30, 2012 versus 2011. The decreased cash used in operating activities was primarily due to other current assets decreasing more and trade accounts receivable increasing less in the nine months ended September 30, 2012 versus 2011, partially offset by accrued expenses decreasing more during the same period. The larger decrease in other current assets was due to refunds of deposits received in accordance with our contracts to purchase sheepskin in the nine months ended September 30, 2012 compared to deposits paid in the nine months ended September 30, 2011. The smaller increase in trade accounts receivable was primarily due to higher cash collections in the first nine months of 2012 versus 2011. The larger decrease in accrued expenses was primarily related to a reduction in performance-based compensation accruals, as well as a smaller increase in the amount of VAT accrued in the nine months ended September 30, 2012 versus 2011. Net working capital decreased as of September 30, 2012 from December 31, 2011, primarily as a result of higher other current liabilities, lower cash and cash equivalents, and higher trade accounts payable. These decreases to working capital were partially offset by the increases to inventory and trade accounts receivable. The increase in total current liabilities was primarily due to short-term borrowings against our line of credit. 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 6.1 times in the twelve months ended September 30, 2012 from 7.0 times for the twelve months ended September 30, 2011, primarily due to higher average accounts receivable balances, partially offset by increased cash collections for the twelve months ended September 30, 2012 compared to the twelve months ended September 30, 2011.

Inventory turnover decreased to 2.4 times for the twelve months ended September 30, 2012 compared to 3.0 times for the twelve months ended September 30, 2011, primarily due to higher average inventory levels during the twelve months ended September 30, 2012 compared to the twelve months ended September 30, 2011, partially offset by increased sales. The higher inventory balances were primarily attributed to our projected increased sales, carryover product from the 2011 holiday period of predominantly continuing styles, the addition of our Sanuk brand, increased international inventory, additional retail locations, and increased materials and factory costs.

***Cash from Investing Activities.*** Net cash used in investing activities for the nine months ended September 30, 2012 resulted from the purchases of property and equipment, as well as our acquisitions of the Hoka brand and an intangible asset for lease rights for a retail store location in France. The larger capital expenditures included the build out of 29 new retail stores versus 13 new retail stores for the nine months ended September 30, 2012 versus 2011, respectively, and corporate facilities. For the nine months ended September 30, 2011, net cash used in investing activities resulted primarily from the acquisition of the Sanuk brand and purchases of property and equipment.

As of September 30, 2012, we had approximately $9,000 of commitments for future capital expenditures primarily related to the build out of new retail stores. We estimate that the remaining capital expenditures for 2012 including the aforementioned commitments, will range from approximately $25,000 to $30,000. We anticipate these expenditures will primarily include the construction costs of new retail stores and new corporate facilities. 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.

***Cash from Financing Activities.*** For the nine months ended September 30, 2012, net cash provided by financing activities was comprised primarily of short-term borrowings of $275,000, partially offset by cash used for repurchases of our common stock, contingent consideration paid related to our Sanuk acquisition, and the $20,000 purchase of the remaining 49% noncontrolling interest in our joint venture with Stella International. Our decision to borrow $275,000 was largely due to our repurchases of $185,000 of our common stock. For the nine months ended September 30, 2011, net cash provided by financing activities was comprised primarily of short-term borrowings, as well as excess tax benefits from stock compensation, partially offset by cash used for repurchases of our common stock and for shares withheld for taxes from employee stock unit vestings.

In February 2012, our Board of Directors approved a stock repurchase program to repurchase up to $100,000 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 did not obligate us to acquire any particular amount of common stock and the program could have been suspended at any time at our discretion. As of June 30, 2012, the Company had repurchased approximately 1,749,000 shares under this program, for approximately $100,000, or an average price of $57.19. As of June 30, 2012, we had repurchased the full amount authorized under this program. The purchases were funded from available working capital.

On June 13, 2012, our Board of Directors approved a stock repurchase program to repurchase up to $200,000 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. As of September 30, 2012, we repurchased approximately 1,833,000 shares under this new program, for approximately $84,700, or an average price of $46.24. As of September 30, 2012, the remaining approved amount was approximately $115,300.

In August 2011, we entered into a Credit Agreement (Credit Agreement) with JPMorgan Chase Bank, National Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association, as syndication agents, and the lenders party thereto. In August 2012 we amended and restated in its entirety the Credit Agreement (Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit facility. Refer to Note 8 to our accompanying condensed consolidated financial statements for further information on our Amended and Restated Credit Agreement. At September 30, 2012, we had approximately $275,000 of outstanding borrowings under the Amended and Restated Credit Agreement and outstanding letters of credit of $189, leaving $124,811 available under the Amended and Restated Credit Agreement. As of September 30, 2012, we were in compliance with all covenants and we remain in compliance as of the date of this report. Subsequent to September 30, 2012, we borrowed $32,000 and repaid $7,000, resulting in a remaining outstanding balance of $300,000 under the Amended and Restated Credit Agreement through the date of this report. We believe this syndicated credit facility will sufficiently cover our liquidity needs for at least the next 12 months.

**Contractual Obligations.** The following table summarizes our contractual obligations at September 30, 2012, 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) | $216,756 | $39,542 | $66,268 | $52,803 | $58,143 |
| Purchase obligations(2) | 275,192 | 273,430 | 1,762 | — | — |
| Unrecognized tax benefits(3) | 3,271 | 3,271 | — | — | — |
| Total | $495,219 | $316,243 | $68,030 | $52,803 | $58,143 |

(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, with the exception of our Sanuk contingent consideration liability discussed below, are related to deferred rents, of which the cash lease payments are included in operating lease obligations in this table.

(2) Our purchase obligations consist mostly 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.

We also entered into minimum purchase commitments (see Note 10 to our accompanying condensed consolidated financial statements). We have included the total remaining cash commitments, net of deposits, as of September 30, 2012 in this table. We expect our sheepskin purchases by third party factories supplying UGG product to us will eventually exceed the minimum commitment levels; therefore we believe the deposits will become fully refundable, and thus, 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 10 to our accompanying condensed consolidated financial statements.

The purchase price for the Sanuk brand also includes contingent consideration over the next four years as follows:

- 51.8% of the Sanuk brand gross profit in 2012,
- 36.0% of the Sanuk brand gross profit in 2013, and
- 40.0% of the Sanuk brand gross profit in 2015.

There is no maximum to the Sanuk contingent consideration payments for 2012, 2013, and 2015. These payments were excluded from the table above as the amounts are not yet determinable. Estimated contingent consideration payments of $69,024 are included within other accrued expenses and long-term liabilities in the condensed consolidated balance sheet as of September 30, 2012. See Note 6 to our accompanying condensed consolidated financial statements.

The purchase price for the Hoka brand also includes contingent consideration through 2017, with a maximum of $2,000. These payments were excluded from the table above as the amounts are not yet determinable. Estimated contingent consideration payments of $1,100 are included within other accrued expenses and long-term liabilities in the condensed consolidated balance sheet as of September 30, 2012. See Note 6 to our accompanying condensed consolidated financial statements.

We believe that internally generated funds, the available borrowings under our existing Amended and Restated 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, the impact of commodity costs including for sheepskin, 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, 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 Amended and Restated Credit Agreement. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness could further result in incurring additional debt service obligations and could result in additional 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, 2011.

## Market risk

As filed, 5,127 characters.

***Commodity Price Risk.*** We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of 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 sheepskin in recent years as the demand from our competitors, as well as the demand from our customers, 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, pricing arrangements, and refundable deposits 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 will likely not be able to adjust our selling prices sufficiently to mitigate the impact on our margins.

***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. 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 may 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, these 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 $164,000, or 20.6%, of our total net sales for the nine months ended September 30, 2012 were denominated in foreign currencies. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of remeasuring the financial positions held in foreign currencies into US dollars. We remeasure 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, and we translate those subsidiaries’ assets and liabilities into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income. 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, and retailers, which may have a negative impact on our net sales and gross margins. As of September 30, 2012, our hedging contracts had notional amounts totaling approximately $53,000. Based upon sensitivity analysis as of September 30, 2012, a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $3,000.

***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 London Interbank Offered Rate (LIBOR). Our Amended and Restated Credit Agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At September 30, 2012, we had outstanding borrowings of approximately $275,000 under the Amended and Restated Credit Agreement. A 1.0% increase in interest rates on our current borrowings would not have a material impact on income before income taxes.

## Controls and procedures

As filed, 2,801 characters.

### Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’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. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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, 2012 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 were effective at the reasonable assurance level as of the end of the period covered by this report to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 217 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, 2011, filed with the SEC on February 29, 2012.

Filed Nov 8, 2012.
Source: SEC EDGAR, the filing index for accession 0001104659-12-076068. Last ingested by Listed: Oct 29, 2026, 13:00 ET. No prices; not investment advice.