DECK » Topics » Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

These excerpts taken from the DECK 10-K filed Mar 2, 2009.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Overview.    In 2008, we had net sales of $689,445 and income from operations of $116,919 compared to net sales of $448,929 and income from operations of $105,553 in 2007. The increase in net sales was primarily due to higher UGG brand net sales. Income from operations increased primarily as a result of the increase in net sales, partially offset by a lower gross margin and higher selling, general and administrative expenses as well as impairment losses recognized during the second and fourth quarters of 2008. Also in May 2008, we acquired the ownership interests of TSUBO, LLC which had a loss from operations as discussed below.

        Net Sales.    Net sales increased by $240,516, or 53.6%, in 2008 compared to 2007 due primarily to:

    increases in UGG brand sales worldwide,

    an increase in the weighted-average wholesale selling price per pair, which increased 22.8% from $34.55 in 2007 to $42.41 in 2008, primarily from an increase in sales of UGG products, which carry higher average selling prices,

    a 24.6% overall increase in the volume of footwear sold from 11.8 million pairs in 2007 to 14.7 million pairs in 2008,

    the continued growth of our eCommerce business and expansion of our retail store business, and

    an increase in full price sales, as we had fewer closeout sales as a percent of total sales, in 2008 compared to 2007.

        Net wholesale sales of UGG products increased by $191,873, or 65.7%, in 2008 compared to 2007 primarily due to an increase in the number of pairs sold as well as an increased weighted-average wholesale selling price per pair.

        Net wholesale sales of Teva products decreased by $1,121, or 1.4%, in 2008 compared to 2007. This decrease was primarily due to a decrease in the number of pairs sold, partially offset by an increase in the weighted-average wholesale selling price per pair.

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        Net wholesale sales of Simple products increased by $2,746, or 24.6%, in 2008 compared to 2007. Simple's performance was driven primarily by an increase in the weighted-average wholesale selling price per pair as well as an increase in the number of pairs sold.

        Net wholesale sales of our TSUBO brand, which we acquired in May 2008, were $3,649 in 2008.

        Net sales of the eCommerce business increased by $23,296, or 51.2%, in 2008 compared to 2007, representing 10.1% of net sales in 2007 and 10.0% of net sales in 2008. In 2007, net sales of the eCommerce business included retail sales of UGG products of $37,880, Teva products of $5,630, and Simple products of $1,963. In 2008, net sales of the eCommerce business included retail sales of UGG products of $60,642, Teva products of $5,219, Simple products of $2,786, and TSUBO products of $122. The increase in net sales of the eCommerce business was driven by greater demand for our UGG products.

        Net sales of the retail store business increased by $20,073, or 109.2%, in 2008 compared to 2007, representing 4.1% of net sales in 2007 and 5.6% of net sales in 2008. In 2007, net sales of the retail store business included sales of UGG products of $17,766, Teva products of $260, and Simple products of $356. In 2008, net sales of the retail store business included sales of UGG products of $37,558, Teva products of $417, and Simple products of $480. The large increase in UGG brand sales is partially attributable to our five new UGG brand concept stores opened in 2008 and the additional stores that were not open for the full year of 2007. However, we cannot assure investors that retail store sales will continue to grow at their recent pace.

        International sales for all of our products increased by $45,597, or 73.1%, in 2008 compared to 2007, representing 13.9% of net sales in 2007 and 15.7% of net sales in 2008. The majority of the international sales growth was due to increases in UGG and Simple brand sales, as well as our retail stores that opened in 2008. The largest increase in international sales comes from our UGG brand sales, led by the European region.

        Gross Profit.    Gross profit increased by $97,847, or 47.2%, in 2008 compared to 2007. As a percentage of net sales, gross margin was 44.3% in 2008 versus 46.2% in 2007. The decline in our gross margin was primarily due to increased factory costs associated with our UGG brand, an increased percentage of international sales, which carry lower gross margins, and increased inventory write-offs.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses, or SG&A, increased by $50,656, or 49.7%, in 2008 compared to 2007. As a percentage of net sales, SG&A decreased from 22.7% in 2007 to 22.1% in 2008. The increase in SG&A in absolute dollars resulted from:

    an increase in personnel costs, including additional stock compensation related to our long-term incentive plan,

    additional costs related to our expanded distribution center,

    higher sales and marketing variable costs related to the increase in sales and six new retail stores that were not open during the full year last year,

    higher fixed selling costs related to new retail stores, including rent expenses,

    increased legal costs due primarily to increased efforts to defend and protect our intellectual property,

    an increase in our bad debt reserve due to higher credit risk in the current economic environment, and

    our portion of the production costs for the documentary IMAX film, "Grand Canyon Adventure, River at Risk," which was sponsored by Teva and was released in IMAX theaters in March 2008.

        In 2009, we plan to invest in new marketing campaigns for our brands domestically and internationally, and therefore we expect SG&A to be higher as a percentage of sales compared to 2008.

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        Impairment Loss.    We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets as of December 31, 2008 and 2007. We concluded that the fair value of our Teva trademarks and goodwill were below their respective carrying amounts. In addition, we concluded that the fair value of our TSUBO goodwill was also below its carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of $5,500 on our Teva trademarks and $15,425 on our Teva and TSUBO goodwill. In addition to our annual impairment test, as of June 30, 2008, impairment indicators arose that the Teva goodwill and other intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the Teva goodwill and Teva trademarks. As of June 30, 2008, we concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008. As of December 31, 2007, we concluded there was no impairment of any of our goodwill and nonamortizable intangible assets. For further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below.

        Income from Operations.    Income from operations increased by $11,366, or 10.8%, in 2008 compared to 2007, representing 23.5% of sales in 2007 and 17.0% in 2008. This decrease in percent of sales was due primarily to the lower gross margin, higher selling, general and administrative expenses and the impairment loss during 2008, partially offset by the increase in net sales.

        Income from operations of the UGG brand at wholesale increased by $68,631, or 57.6%, in 2008 compared to 2007. The increase was primarily the result of the higher sales volumes, partially offset by lower gross margins and increased divisional sales expenses, marketing expenses, commissions, bad debt reserves, and research and development expenses.

        We had a loss from operations of the Teva brand at wholesale in 2008 compared to income from operations in 2007, a decline of $39,809, or 188.5%. This decline in performance was largely due to the impairment loss and was also caused by lower sales and gross margins as well as higher divisional expenses.

        Loss from operations of the Simple brand at wholesale increased by $185, or 8.9%, in 2008 compared to 2007. This slight decline in performance was primarily due to higher marketing, product design, and divisional sales expenses, partially offset by higher sales and gross margins due to an increase in the weighted-average wholesale selling price per pair.

        Loss from operations of the TSUBO brand was $4,842 for 2008. This includes an impairment loss of $3,496.

        Income from operations of our eCommerce business increased by $7,862, or 54.2%, in 2008 compared to 2007. This was primarily due to the increase in net sales, partially offset by lower gross margins and increased operating costs.

        Income from operations of our retail store business increased by $3,455, or 108.2%, in 2008 compared to 2007. This was primarily due to higher retail sales, partially offset by the higher operating costs associated with our new retail stores that were not open during the full year last year.

        Unallocated overhead costs increased by $23,746, or 47.1%, in 2008 compared to 2007. The increase resulted primarily from higher corporate payroll costs, including share-based compensation, additional costs related to our expanded distribution center, and increased legal costs related to defense and protection of our intellectual property.

        Other (Income) Expense.    Other (income) expense, net was $(3,583) in 2008 compared to $(4,486) in 2007. Interest income decreased by $1,665, or 34.3%, in 2008, compared to 2007. The decrease resulted primarily from a significant shift in the mix of our cash and cash equivalents and investment balances in 2008 versus 2007 to safer, more liquid, and lower yielding investments as well as lower market interest rates. Interest expense decreased by $910 primarily due to the reversal of interest expense related to

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income tax uncertainties due to settlements during 2008 that were previously accrued, and in 2007, we incurred interest expense related to certain tax matters in the Far East.

        Income Taxes.    In 2007, our effective income tax rate was 39.6% versus an effective income tax rate of 38.7% in 2008. The decrease in the effective tax rate was primarily due to an increase in the Company's international sales as a percentage of total worldwide sales. The Company's average international tax rate is significantly less than the Company's U.S. rate, and therefore a higher ratio of international sales and international pre-tax income decreases the Company's overall effective tax rate. This decrease was partially offset by approximately $6,531 of impairment losses in 2008 attributable to a foreign subsidiary that receives no tax benefit from the charge, as this subsidiary is in a tax free jurisdiction. For 2009, we expect a further reduction in our effective tax rate as a result of the completion of buy-in payments for our intellectual property rights, which were taxable in the U.S. at the higher tax rate. In 2007 and 2008, these buy-in payments resulted in an increase in the Company's U.S. pre-tax income and a decrease in the Company's international pre-tax income. The effective tax rate is subject to ongoing review and evaluation by management and can vary from year to year.

        Minority Interest.    Minority interest in our joint venture with Stella International, which was formed in July 2008, was $77 for 2008.

        Net Income.    Our net income increased $7,511, or 11.3%, primarily as a result of higher net sales and higher gross profit dollars in 2008, partially offset by higher SG&A and the impairment loss. Our earnings per diluted share increased 10.7% from $5.06 in 2007 to $5.60 in 2008 primarily as a result of the increase in net income. We do not expect these growth rates to continue.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2008

        Overview.    In 2008, we had net sales of $689,445 and income from operations of $116,919 compared to net sales of $448,929 and income from operations of $105,553 in 2007. The increase in net sales was primarily due to higher UGG brand net sales. Income from operations increased primarily as a result of the increase in net sales, partially offset by a lower gross margin and higher selling, general and administrative expenses as well as impairment losses recognized during the second and fourth quarters of 2008. Also in May 2008, we acquired the ownership interests of TSUBO, LLC which had a loss from operations as discussed below.

        Net Sales.    Net sales increased by $240,516, or 53.6%, in 2008 compared to 2007 due primarily to:

    increases in UGG brand sales worldwide,

    an increase in the weighted-average wholesale selling price per pair, which increased 22.8% from $34.55 in 2007 to $42.41 in 2008, primarily from an increase in sales of UGG products, which carry higher average selling prices,

    a 24.6% overall increase in the volume of footwear sold from 11.8 million pairs in 2007 to 14.7 million pairs in 2008,

    the continued growth of our eCommerce business and expansion of our retail store business, and

    an increase in full price sales, as we had fewer closeout sales as a percent of total sales, in 2008 compared to 2007.

        Net wholesale sales of UGG products increased by $191,873, or 65.7%, in 2008 compared to 2007 primarily due to an increase in the number of pairs sold as well as an increased weighted-average wholesale selling price per pair.

        Net wholesale sales of Teva products decreased by $1,121, or 1.4%, in 2008 compared to 2007. This decrease was primarily due to a decrease in the number of pairs sold, partially offset by an increase in the weighted-average wholesale selling price per pair.

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        Net wholesale sales of Simple products increased by $2,746, or 24.6%, in 2008 compared to 2007. Simple's performance was driven primarily by an increase in the weighted-average wholesale selling price per pair as well as an increase in the number of pairs sold.

        Net wholesale sales of our TSUBO brand, which we acquired in May 2008, were $3,649 in 2008.

        Net sales of the eCommerce business increased by $23,296, or 51.2%, in 2008 compared to 2007, representing 10.1% of net sales in 2007 and 10.0% of net sales in 2008. In 2007, net sales of the eCommerce business included retail sales of UGG products of $37,880, Teva products of $5,630, and Simple products of $1,963. In 2008, net sales of the eCommerce business included retail sales of UGG products of $60,642, Teva products of $5,219, Simple products of $2,786, and TSUBO products of $122. The increase in net sales of the eCommerce business was driven by greater demand for our UGG products.

        Net sales of the retail store business increased by $20,073, or 109.2%, in 2008 compared to 2007, representing 4.1% of net sales in 2007 and 5.6% of net sales in 2008. In 2007, net sales of the retail store business included sales of UGG products of $17,766, Teva products of $260, and Simple products of $356. In 2008, net sales of the retail store business included sales of UGG products of $37,558, Teva products of $417, and Simple products of $480. The large increase in UGG brand sales is partially attributable to our five new UGG brand concept stores opened in 2008 and the additional stores that were not open for the full year of 2007. However, we cannot assure investors that retail store sales will continue to grow at their recent pace.

        International sales for all of our products increased by $45,597, or 73.1%, in 2008 compared to 2007, representing 13.9% of net sales in 2007 and 15.7% of net sales in 2008. The majority of the international sales growth was due to increases in UGG and Simple brand sales, as well as our retail stores that opened in 2008. The largest increase in international sales comes from our UGG brand sales, led by the European region.

        Gross Profit.    Gross profit increased by $97,847, or 47.2%, in 2008 compared to 2007. As a percentage of net sales, gross margin was 44.3% in 2008 versus 46.2% in 2007. The decline in our gross margin was primarily due to increased factory costs associated with our UGG brand, an increased percentage of international sales, which carry lower gross margins, and increased inventory write-offs.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses, or SG&A, increased by $50,656, or 49.7%, in 2008 compared to 2007. As a percentage of net sales, SG&A decreased from 22.7% in 2007 to 22.1% in 2008. The increase in SG&A in absolute dollars resulted from:

    an increase in personnel costs, including additional stock compensation related to our long-term incentive plan,

    additional costs related to our expanded distribution center,

    higher sales and marketing variable costs related to the increase in sales and six new retail stores that were not open during the full year last year,

    higher fixed selling costs related to new retail stores, including rent expenses,

    increased legal costs due primarily to increased efforts to defend and protect our intellectual property,

    an increase in our bad debt reserve due to higher credit risk in the current economic environment, and

    our portion of the production costs for the documentary IMAX film, "Grand Canyon Adventure, River at Risk," which was sponsored by Teva and was released in IMAX theaters in March 2008.

        In 2009, we plan to invest in new marketing campaigns for our brands domestically and internationally, and therefore we expect SG&A to be higher as a percentage of sales compared to 2008.

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Table of Contents

        Impairment Loss.    We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets as of December 31, 2008 and 2007. We concluded that the fair value of our Teva trademarks and goodwill were below their respective carrying amounts. In addition, we concluded that the fair value of our TSUBO goodwill was also below its carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of $5,500 on our Teva trademarks and $15,425 on our Teva and TSUBO goodwill. In addition to our annual impairment test, as of June 30, 2008, impairment indicators arose that the Teva goodwill and other intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the Teva goodwill and Teva trademarks. As of June 30, 2008, we concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008. As of December 31, 2007, we concluded there was no impairment of any of our goodwill and nonamortizable intangible assets. For further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below.

        Income from Operations.    Income from operations increased by $11,366, or 10.8%, in 2008 compared to 2007, representing 23.5% of sales in 2007 and 17.0% in 2008. This decrease in percent of sales was due primarily to the lower gross margin, higher selling, general and administrative expenses and the impairment loss during 2008, partially offset by the increase in net sales.

        Income from operations of the UGG brand at wholesale increased by $68,631, or 57.6%, in 2008 compared to 2007. The increase was primarily the result of the higher sales volumes, partially offset by lower gross margins and increased divisional sales expenses, marketing expenses, commissions, bad debt reserves, and research and development expenses.

        We had a loss from operations of the Teva brand at wholesale in 2008 compared to income from operations in 2007, a decline of $39,809, or 188.5%. This decline in performance was largely due to the impairment loss and was also caused by lower sales and gross margins as well as higher divisional expenses.

        Loss from operations of the Simple brand at wholesale increased by $185, or 8.9%, in 2008 compared to 2007. This slight decline in performance was primarily due to higher marketing, product design, and divisional sales expenses, partially offset by higher sales and gross margins due to an increase in the weighted-average wholesale selling price per pair.

        Loss from operations of the TSUBO brand was $4,842 for 2008. This includes an impairment loss of $3,496.

        Income from operations of our eCommerce business increased by $7,862, or 54.2%, in 2008 compared to 2007. This was primarily due to the increase in net sales, partially offset by lower gross margins and increased operating costs.

        Income from operations of our retail store business increased by $3,455, or 108.2%, in 2008 compared to 2007. This was primarily due to higher retail sales, partially offset by the higher operating costs associated with our new retail stores that were not open during the full year last year.

        Unallocated overhead costs increased by $23,746, or 47.1%, in 2008 compared to 2007. The increase resulted primarily from higher corporate payroll costs, including share-based compensation, additional costs related to our expanded distribution center, and increased legal costs related to defense and protection of our intellectual property.

        Other (Income) Expense.    Other (income) expense, net was $(3,583) in 2008 compared to $(4,486) in 2007. Interest income decreased by $1,665, or 34.3%, in 2008, compared to 2007. The decrease resulted primarily from a significant shift in the mix of our cash and cash equivalents and investment balances in 2008 versus 2007 to safer, more liquid, and lower yielding investments as well as lower market interest rates. Interest expense decreased by $910 primarily due to the reversal of interest expense related to

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income tax uncertainties due to settlements during 2008 that were previously accrued, and in 2007, we incurred interest expense related to certain tax matters in the Far East.

        Income Taxes.    In 2007, our effective income tax rate was 39.6% versus an effective income tax rate of 38.7% in 2008. The decrease in the effective tax rate was primarily due to an increase in the Company's international sales as a percentage of total worldwide sales. The Company's average international tax rate is significantly less than the Company's U.S. rate, and therefore a higher ratio of international sales and international pre-tax income decreases the Company's overall effective tax rate. This decrease was partially offset by approximately $6,531 of impairment losses in 2008 attributable to a foreign subsidiary that receives no tax benefit from the charge, as this subsidiary is in a tax free jurisdiction. For 2009, we expect a further reduction in our effective tax rate as a result of the completion of buy-in payments for our intellectual property rights, which were taxable in the U.S. at the higher tax rate. In 2007 and 2008, these buy-in payments resulted in an increase in the Company's U.S. pre-tax income and a decrease in the Company's international pre-tax income. The effective tax rate is subject to ongoing review and evaluation by management and can vary from year to year.

        Minority Interest.    Minority interest in our joint venture with Stella International, which was formed in July 2008, was $77 for 2008.

        Net Income.    Our net income increased $7,511, or 11.3%, primarily as a result of higher net sales and higher gross profit dollars in 2008, partially offset by higher SG&A and the impairment loss. Our earnings per diluted share increased 10.7% from $5.06 in 2007 to $5.60 in 2008 primarily as a result of the increase in net income. We do not expect these growth rates to continue.

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 2, 2009

RELATED TOPICS for DECK:

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