Description
Deckers Outdoor Corp. CEO ANGEL R MARTINEZ Pincus bought 10,000 shares on 7-11-2012 at $ 45.9
BUSINESS OVERVIEW
General
Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as handbags and outerwear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products tailored to a variety of activities, seasons, and demographic groups. Virtually all of our products are currently manufactured by independent contractors outside of the United States (US). Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands.
In July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale distribution for the UGG brand in China. The joint venture is owned 51% by Deckers and 49% by Stella International. Stella International is also one of our major manufacturers in China. In May 2008, we acquired 100% of the ownership interest of TSUBO, LLC, a high-end casual footwear brand. In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear brand. In September 2009, we began to reacquire our international distribution rights, beginning in Japan. In January 2010, we acquired certain assets and liabilities, including reacquisition of our distribution rights, from our Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. In September 2010, we purchased a portion of a privately held footwear company as an equity method investment. In January 2011, we acquired certain assets from our UGG, Teva, and Simple brands distributor that sold to retailers in the United Kingdom (UK) and from our UGG and Simple brands distributor that sold to retailers in Benelux and France. The distribution rights in these regions reverted back to us on December 31, 2010 upon the expiration of the distribution agreements. On May 19, 2011, we entered into an asset purchase agreement with Sanuk USA LLC, C&C Partners, Ltd., and the equity holders of both entities (collectively referred to as "Sanuk" or the "Sanuk brand"). On July 1, 2011, we completed the acquisition of the purchased assets and the assumption of the assumed liabilities of the Sanuk brand. Our consolidated financial statements include the operations of Sanuk beginning July 1, 2011.
Products
We market our products primarily under three proprietary brands:
UGG®. UGG Australia is our luxury comfort brand and the category creator for luxury sheepskin footwear. The UGG brand has enjoyed several years of strong growth and positive end-user consumer reception, driven by consistent introductions of new styles in the fall and spring seasons, as well as year-round styles. We have also strategically expanded our geographic distribution as well as our consumer base with more men's products. Additionally, we have broadened the brand into additional product categories beyond footwear, such as handbags, apparel, and cold weather accessories. We carefully manage the distribution of our UGG products within higher-end specialty and department store retailers in order to best reach our target consumers, preserve the UGG brand's retail channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand.
In recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to higher-end retail channels.
Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva product line over time to include open and closed-toe outdoor lifestyle footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious footwear, and rugged outdoor travel shoes.
In recent years, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities such as multi-sport, light hiking, and freestyle mountain bike riding to lessen our overall reliance on sandal sales, while bringing youthfulness back to the brand through contemporary designs, colors, and materials. Throughout 2010 and 2011, we have continued to expand our closed-toe offering in both performance and lifestyle outdoor footwear. This includes a closed-toe line extension of our popular Mush™ flip flop collection, as well as a line of insulated outdoor boots.
Sanuk®. Sanuk is our action sport footwear brand rooted in the surf community. The Sanuk brand's offerings include the patented SIDEWALK SURFERS® shoe which effectively introduced the deconstructed footwear movement, the Fraid Not™ sandal collection, and the Yoga Mat sandal made from yoga mat material. The brand has a history of innovation, product invention, foot-friendly comfort, and clever branding.
In recent years, Sanuk products have been twice recognized at the Surf Industry Manufacturers Association (SIMA) Image Awards as the 2007 and 2010 Footwear Product of the Year. The brand's SIDEWALK SURFERS are marketed through the "THESE ARE NOT SHOES, THEY'RE SANDALS®" campaign, in reference to its patented sandal construction, which allows the consumers feet to bend and flex in natural comfort. We plan to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents.
In addition to our primary brands, our other brands include TSUBO, a line of high-end casual footwear that incorporates style, function, and maximum comfort; Ahnu, a line of outdoor performance and lifestyle footwear; MOZO, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and Simple, a line for which we ceased distribution effective December 31, 2011.
Sales and Distribution
At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives, as well as through employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. Our sales representatives are organized geographically and by brand and visit retail stores to communicate the features, styling, and technology of our products. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures.
Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis.
We distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. All incoming and outgoing shipments must meet our quality inspection process.
Internationally, we distribute our products through independent distributors and retailers in many countries, including countries throughout Europe, Asia Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to international consumers through our websites and our retail stores, including retail stores with our joint venture partner in China. For our wholesale and direct to consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution companies in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. In 2011, we continued to assume the distribution rights from certain international distributors and sold directly to retailers in those regions. We plan to selectively continue distributor conversions in the future.
Our five largest customers accounted for approximately 24.0% of our net sales for 2011, compared to 28.9% for 2010. No single customer accounted for greater than 10% of our consolidated net sales in 2011. One customer, Nordstrom, accounted for greater than 10% of our consolidated net sales in 2010, with the majority of those being related to our UGG segment.
UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's and David Z., and internet customers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products.
Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority as well as on-line retailers such as Zappos.com. We believe these retail channels are the first choice for athletes, outdoor enthusiasts, and adventurers seeking technical and performance-oriented outdoor footwear. Furthermore, we believe that retailers who appreciate and can fully market the technical attributes of our performance products to the consumer are best equipped to sell our Teva footwear.
Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate shops, outdoor retailers such as REI, EMS, and Bass Pro, specialty retailers including Fred Segal and Nordstrom, and larger national chains including Journeys, Dillards, and The Buckle. We believe these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for this brand.
Other brands. Our other brands are sold throughout the world primarily at better department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com.
eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our eCommerce business primarily through the Uggaustralia.com, Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Mozoshoes.com websites. Our websites support the brands' marketing goals and drive offline sales by educating our consumers about our brands and products and also directing consumers to retailers that carry our brands, including our own retail stores. We have expanded our international capabilities by developing sites to service certain international markets. These sites are translated into the local language, provide product through local distribution centers and price the products in the consumers' local currency. In 2011, we launched sites in the UK, Netherlands, France, Japan, and Canada. Our eCommerce business has offices in Flagstaff, Arizona; Richmond, England; and Tokyo, Japan. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distributions centers' operations, order fulfillment is performed by our distribution centers in California, the UK, Canada, and Japan. Products sold through our eCommerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each direct to consumer transaction.
Retail Stores. Our retail stores include company-owned stores as well as stores owned with our joint venture partner in China. Our retail store business allows us to directly reach our consumers and meet the growing demand for our products. In addition, our UGG Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry our full line. In 2011, we opened one store in the US and seventeen internationally. As of December 31, 2011, we had a total of 34 UGG Australia concept stores and 11 retail outlet stores worldwide. Products sold through our concept stores are sold at our suggested retail prices, enabling us to capture the full retail margin on each direct to consumer transaction. The outlet stores sell some of our discontinued styles from the previous season, plus products made specifically for the outlet stores. During 2012, we plan to open additional retail stores in the US and internationally.
Product Design and Development
The design and product development staff for each of our brands creates new innovative footwear products that combine our standards of high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff plus outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years.
In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis.
Manufacturing
We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in China. During 2009, we began to diversify our manufacturing locations by outsourcing a limited amount of production to manufacturers in Vietnam, and in 2010 and 2011 increased this production volume while also opening manufacturing locations in 2011 in the US and Latin America. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. Our Supplier Code of Conduct applies to all of our manufacturers, distributors, vendors, and other independent contractors. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines and Restricted Substances policy as a condition of doing business with our company. We require our licensees to demand the same from their contract factories and suppliers. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs.
The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain an on-site supervisory office in Pan Yu City, China that serves as local links to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this local presence provides greater predictability of material availability, product flow and adherence to final design specifications than we could otherwise achieve through an agency arrangement. To ensure the production of high quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers designated by us. Excluding sheepskin, we believe that substantially all the various raw materials and components used in the manufacture of our footwear, including rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers.
At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia, Europe, and the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth.
We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers.
Patents and Trademarks
We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Simple, TSUBO, Ahnu, MOZO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 150 utility and design patent registrations in the US and abroad and have filed more than 15 new patent applications which are currently pending. These patents expire at various times; US patents that are registered this year will remain valid to 2026 for design patents and to 2032 for utility patents. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent is critical to our business, and no group of patents expiring in the same year is critical to our business.
CEO BACKGROUND
Angel R. Martinez
Director Since 2005
Age 56
Mr. Martinez has been President and Chief Executive Officer of the Company since April 2005. In September 2005, Mr. Martinez became a director of the Company and in May 2008, he became Chair of the Board of Directors. Subject to his re-election as a director at the Annual Meeting, Mr. Martinez will remain Chair of the Board of Directors. Mr. Martinez has also served as a director of Tupperware Brands Corporation (NYSE:TUP) since 1998.
Rex A. Licklider
Director Since 1993
Age 68
Mr. Licklider is director, Vice Chair and Chief Executive Officer of The Sports Club Company (OTC Markets: SCYL), a developer and operator of health and fitness clubs, a company he has been involved with since 1994. Mr. Licklider has served as the Chief Executive Officer of The Sports Club Company since March 2004 and as Co-Chief Executive Officer of The Sports Club Company from February 2002 to March 2004.
John M. Gibbons
Director Since 2000
Age 63
Mr. Gibbons is an independent consultant. He has also served as a director and Chair of the Audit Committee of National Technical Systems, Corp., a provider of integrated testing, certification, quality registration and systems evaluation services, since September 2003.
Karyn O. Barsa
Director Since 2008
Age 50
Ms. Barsa has served as Chief Executive Officer of Coyuchi, Inc., a maker of organic cotton bedding, bath and baby products, since April 2009. From February 2008 to April 2009, she served as President and Chief Executive Officer of Investors' Circle, a network of individual and institutional investors focused on sustainable business practices. She serves on the boards of Coyuchi, Inc. and The Directors' Organization Ltd., and the advisory board of Embark Stores, Inc.
Maureen Conners
Director Since 2006
Age 65
Ms. Conners is President of Conners Consulting, which she founded in 1992. Conners Consulting has worked with companies such as Johnson & Johnson, Ralph Lauren Footwear, Rockport, Hewlett Packard, Monster.com, Polaroid, Bausch and Lomb, Southcorp Wines, and Western Union Money Zap, providing a range of services including marketing and strategic planning, new product and new business development, and global brand building.
Michael F. Devine, III
Director Since March, 2011
Age 53
Mr. Devine recently retired as Senior Vice President and Chief Financial Officer from Coach, Inc. (NYSE: COH) in 2011. Currently Mr. Devine serves as a member of the Board of Directors and of the Audit Committee of NutriSystem, Inc. (NASDAQ: NTRI) as well as a member of the Board of Directors and Chair of the Audit Committee of Express, Inc. (NYSE: EXPR). From 2004 to 2007, Mr. Devine served as member of the Board of Directors and Chair of the Audit Committee of Educate (formerly NASDAQ: EEEE), a leading K-12 education service company with solutions such as Sylvan Learning Center.
John G. Perenchio
Director Since 2005
Age 56
Mr. Perenchio is a private investor. Beginning in 1999, he has held controlling interests in and is the principal manager of various music industry companies. Currently he holds controlling interests in and co-manages Fearless Records LLC, an independent rock music label distributed by Sony-BMG, and Fearmore Publishing, LLC, a music publishing company administered by Warner/Chappell Music, Inc. Since late 2009, Mr. Perenchio has been involved in Club Ride Apparel, LLC, a start-up sports apparel company in which he owns a controlling interest.
James Quinn
Director Since September, 2011
Age 60
Mr. Quinn retired as president of Tiffany & Co. [NYSE: TIF] effective January 31, 2012. He was named to Tiffany's board of directors in 1995 and served until 2008. Mr. Quinn also currently serves as a director of Mutual of America Capital Management, Inc.
Lauri Shanahan
Director Since September, 2011
Age 49
Ms. Shanahan is a seasoned retail executive with over 19 years of senior level experience across global, multi-channel, multi-brand enterprises and other specialty retail companies. Ms. Shanahan is also on the board of directors of Charlotte Russe Holding, Inc. a specialty retailer of apparel and accessories with over 500 stores. In addition, Ms. Shanahan is a principal of Maroon Peak Advisors, which provides a broad range of advisory services in the retail and consumer products sector.
MANAGEMENT DISCUSSION FROM LATEST 10K
Teva Brand Overview
Our Teva brand is positioned to be a leading innovative, global, action-outdoor brand, with over 25 years worth of contributions to the outdoor adventure experience. The Teva brand pioneered the water sport sandal category in 1984, and to this day, our brand mission is to inspire spontaneity, camaraderie, and adventure on, around, or in water. Leveraging our core performance competencies of traction, hydro, and comfort footwear, we are focused on driving growth through innovation in the emerging action-outdoor space through multi-sport, light hiking, freestyle mountain bike riding, action water sports, and other action-outdoor lifestyle products.
Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth in 2010 and 2011. Throughout the past few years, 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 January 2010, we converted from a distributor model to a wholesale model in the Benelux region and France, enhancing our marketing and distribution capabilities in the outdoor active Benelux market. In January 2011, we converted our Teva brand international business from an independent distributor to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this influential market. In 2012, our Teva brand will be re-launched in the Japanese market by our Japan subsidiary. Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty, and sporting goods, as our product assortment evolves and expands. Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be successful.
Sanuk Brand Overview
On July 1, 2011 we acquired the Sanuk brand, a dynamic action sport footwear brand rooted in surf, known for its original sandals and shoes and irreverent marketing. The brand has a history of innovation, product invention, foot-friendly comfort, and clever branding. Sanuk is currently available in more than 1,700 retailers in 40 countries and at Sanuk.com.
We believe that the Sanuk brand is an ideal addition to the Deckers family of brands and that each of our brands can leverage off each others' distribution channels. The Sanuk business is a profitable, well-run business that we believe provides for substantial growth opportunities within the action sports market, as well as other markets and channels in which Deckers is already established. In the 14 years since its inception, the Sanuk brand has consistently brought creativity, fun, and comfort to the line of sandals and shoes for men, women, and children. We plan to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents.
Other Brands Overview
Our other brands consist of TSUBO, Ahnu, MOZO, and Simple. Our other brands are all sold through most of our distribution channels, with the majority through wholesale channels. We ceased distribution of the Simple brand effective December 31, 2011.
TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers' unique needs of all-day comfort, innovative style, and superior quality.
The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor activities — whether on trails, beaches, or sidewalks.
The MOZO brand strives to deliver revolutionary footwear for creative, passionate, and talented professionals that 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 designed by Marcus Samuelsson, Aaron Sanchez, and Chris Cosentino. This collection has put the MOZO brand in the press for the first time and allowed the brand to open up new distribution opportunities. We have recently expanded our distribution to include large on-line retailers and into the health care worker market.
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 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 provide us with incremental operating income. In addition, our UGG Australia concept stores allow us to showcase our entire line; whereas, a retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through our UGG Australia outlet stores.
As of December 31, 2011, we had a total of 45 retail stores worldwide. These stores are company-owned and operated and include our China stores, which are owned and operated with our joint venture partner. During 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, and we intend to continue opening more retail stores worldwide beyond 2012.
Gross Profit. As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs as well as increased factory costs. Our sheepskin costs in 2011 were 27% higher than 2010 costs, partially offset by increased sales prices. In addition, we received approximately $7,000 in duty refunds during the year ended December 31, 2010, which did not recur in 2011. The decrease was partially offset by a higher percentage mix of retail sales and higher average selling prices. We began realizing the benefit of the direct wholesale model, versus distributor margins, in the UK for our UGG and Teva brands and in Benelux for our UGG brand starting in January 2011. Our gross margins fluctuate based on several factors, and we expect our gross margin to decrease for the full year 2012 compared to 2011. We expect product costs to be approximately 10% higher in 2012, primarily due to further increasing sheepskin costs of 40%. We intend to mitigate these increases through selective price increases, higher margins from a full year of our Sanuk brand, and a higher retail mix.
Cash from Operating Activities. Net cash provided by operating activities decreased primarily due to greater increases in inventory, other current assets, and accounts receivable in 2011 versus the increases in 2010. The larger increase in inventories was primarily due to higher material costs, a larger spring 2012 assortment for the UGG brand, early delivery of spring inventory for the UGG and Teva brands, the additional inventory associated with the Sanuk brand, and increased retail store inventory due to the 18 new stores. The larger increase in other current assets was primarily due to deposits with respect to purchase commitments made pursuant to our sheepskin contracts with a supplier. The larger increase in accounts receivable was primarily due to increased sales and our new wholesale European business. These decreases in operating cash flows were partially offset by a significant increase in accounts payable, which increased more in the year ended December 31, 2011 versus 2010. Accounts payable increased primarily due to our increased inventory purchases. Net working capital increased as of December 31, 2011 from December 31, 2010, primarily as a result of increased inventory, other current assets, and accounts receivable. The increase in working capital was partially offset by lower cash and cash equivalents primarily due to cash paid for our Sanuk acquisition, the higher trade accounts payable, and higher other accrued expenses primarily attributable to the Sanuk contingent consideration. Changes in working capital are dueto the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments.
Wholesale accounts receivable turnover decreased to 7.5 times in the twelve months ended December 31, 2011 from 8.3 times for the twelve months ended December 31, 2010, primarily due to higher average accounts receivable balances, partially offset by increased cash collections for the twelve months ended December 31, 2011 compared to the twelve months ended December 31, 2010. The higher accounts receivable balances were primarily attributed to increased sales, including the conversion to our European wholesale operations, which provides us higher selling prices.
Inventory turnover decreased to 3.3 times for the twelve months ended December 31, 2011 compared to 4.2 times for the twelve months ended December 31, 2010, primarily due to higher average inventory levels during the twelve months ended December 31, 2011 compared to the twelve months ended December 31, 2010, partially offset by increased sales. The higher inventory balances were primarily attributed to our actual and projected increased sales, increased international inventory, new retail locations, and increased costs of materials and factories.
Cash from Investing Activities. Net cash used in investing activities for the year ended December 31, 2011 resulted primarily from our acquisition of the Sanuk brand (see Note 9 to our accompanying consolidated financial statements) and purchases of property and equipment. Our larger capital expenditures included the purchase of land for our new corporate headquarters and new retail stores. In November 2011, we made a cash payment of approximately $20,000 for approximately fourteen acres of land for our new headquarters facility in Goleta, California.
For the year ended December 31, 2010, net cash used in investing activities resulted primarily from purchases of property and equipment and acquisitions of businesses, partially offset by sales of short-term investments. Our larger capital expenditures were related to the build out of new retail stores and computer hardware and software. In addition, we did not purchase short-term investments in 2010, as we shifted our investments to cash and cash equivalents.
As of December 31, 2011, we had no material commitments for future capital expenditures but estimate that the capital expenditures for 2012 will range from approximately $90,000 to $95,000. We anticipate these expenditures will primarily include the initial design and construction costs of our new headquarters and new retail stores, more than the number of stores we opened in 2011. The actual amount of capital expenditures for 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, including design and construction of the new headquarters.
Cash from Financing Activities. For the year ended December 31, 2011, net cash used in financing activities was comprised primarily of repayments of short-term borrowings, cash used for shares withheld for taxes from employee stock unit vesting and for repurchases of our common stock. The cash used was partially offset by cash from of our short-term borrowings, leaving a zero balance for borrowings as of December 31, 2011, and excess tax benefits from stock compensation. The excess tax benefits from stock compensation changes were larger than the prior period primarily due to the issuance of stock in relation to our long-term incentive program.
For the year ended December 31, 2010, net cash used in financing activities was comprised primarily of cash used for repurchases of our common stock and for shares withheld for taxes from employee stock unit vesting, partially offset by excess tax benefits from stock compensation.
In June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors. The program did not obligate us to acquire any particular amount of common stock and the program could be suspended at any time at our discretion. As of June 30, 2011, we had repurchased the full amount authorized under this program. During the year ended December 31, 2011, we repurchased approximately 245,000 shares for approximately $20,000, or an average price of $81.22 per share.
On February 23, 2012, our Board of Directors approved a new 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 does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. The purchases will be funded from available working capital.
On August 30, 2011, we entered into a Credit Agreement (the "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. The Credit Agreement is a five-year, $200,000 secured revolving credit facility which contains a $50,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and replaces the Previous Credit Agreement. Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $100,000, resulting in a maximum available principal amount of $300,000. None of the lenders under the Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments. At our option, revolving loans issued under the Credit Agreement will bear interest at either adjusted LIBOR for 30 days (0.30% at December 31, 2011) plus 1.25% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 1.50% per annum (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 0.50% per annum), based upon our total adjusted leverage ratio at such time. In addition, we will initially be required to pay fees of 0.20% per annum on the daily unused amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.20% and 0.30% per annum, based upon our total adjusted leverage ratio. At December 31, 2011, we had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $553. As a result, $199,447 was available under the Credit Agreement at December 31, 2011.
Our obligations under the Credit Agreement are guaranteed by our existing and future domestic subsidiaries other than certain immaterial subsidiaries and foreign subsidiaries (the "Guarantors"), and is secured by a first-priority security interest in substantially all of our assets and the Guarantors', including all or a portion of the equity interests of certain of our domestic and foreign subsidiaries.
The Credit Agreement contains financial covenants which include: our asset coverage ratio must be greater than 1.10 to 1.00; and the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00; and other customary limitations. The Credit Agreement contains certain other covenants which include: a maximum additional secured debt related to a capital asset not to exceed $20,000, maximum additional unsecured debt not to exceed $200,000; maximum secured debt not related to a capital asset not to exceed $5,000, maximum judgment of $10,000; maximum ERISA event of $10,000 in one year, $20,000 in all years; we may not have a change of control; there is no limit on acquisitions, if the total adjusted leverage ratio does not exceed 2.75 to 1.00 and we must have a minimum amount of cash plus unused credit of $75,000; and there is no restriction on dividends or share repurchases, if the minimum amount of cash plus unused credit is $75,000. As of December 31, 2011, we were in compliance with all covenants and remain so as of the date of this report.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
You should read this report in its entirety, together with our Annual Report on Form 10-K, filed with the 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, action-outdoor footwear and sandals; and
• Sanuk®: Innovative action sport footwear brand 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; and MOZO®, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet.
We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce business and our retail stores. Independent third parties manufacture all of our products. In January 2011, we converted from a distributor model to a wholesale model for the UGG and Teva brands in the United Kingdom (UK) and Ireland and the UGG brand in Benelux and France. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary has been and will continue to be consolidated with our operations.
Teva Brand Overview
We believe that our Teva brand is positioned to be a leading innovative, global, action-outdoor brand, with over 25 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 revolutionize the outdoors. 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 emerging action-outdoor space through off-road trail activities, freestyle mountain bike riding, action water sports, and other action-outdoor lifestyle products.
Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth 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 January 2011, we converted our Teva brand international business from an independent distributor to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this influential market. This year, our Teva brand was re-launched in the Japanese market with strong results in the first quarter. 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
We believe that the Sanuk brand is an ideal addition to the Deckers family of brands and that each of our brands can leverage off each others’ distribution channels. The Sanuk business is a profitable business that we believe provides for substantial growth opportunities within the action sports market, as well as other markets and channels in which Deckers is already established, including retailers such as Dillard’s, Journey’s, Nordstrom, Zappos.com, and REI. In the 14 years since its inception, the Sanuk brand has consistently brought creativity, fun, and comfort to the line of sandals and shoes for men, women, and children. We plan to continue to build on the Sanuk brand’s authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents.
Other Brands Overview
Our other brands consist of TSUBO, Ahnu, and MOZO. Our other brands are all sold through most of our distribution channels, with the majority 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 that 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 designed by Marcus Samuelsson, Aaron Sanchez, and Chris Cosentino. This collection put the MOZO brand in the press for the first time and allowed the brand to open up new distribution opportunities. We have recently expanded our distribution to include large on-line retailers and the health care worker market.
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 provide us with incremental 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 retailer 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 our UGG Australia outlet stores.
As of March 31, 2012, we had a total of 46 retail stores worldwide. These stores are company-owned and operated and include our China stores, which were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During 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.
Liquidity and Capital Resources
We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing credit. Such failures may impact our working capital reserves and have a material adverse effect on our business.
Our cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivables. As a result, our working capital requirements begin when we purchase, 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 begin to 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.
Cash from Operating Activities. Net cash provided by operating activities increased primarily due to decreases in trade accounts receivable and inventories, which both decreased more in the three months ended March 31, 2012 versus 2011. The larger decrease in trade accounts receivable was primarily due to higher cash collections in the first three months of 2012 versus 2011. The larger decrease in inventories was primarily due to sell through of the UGG brand’s spring inventory and closeout product. These increases in operating cash flows were partially offset by a significant decrease in accounts payable, which decreased more in the three months ended March 31, 2012 versus 2011. Accounts payable decreased primarily due to the timing of our inventory purchases and payments. Net working capital decreased as of March 31, 2012 from December 31, 2011, primarily as a result of the lower accounts receivable and inventories, as well as lower cash and cash equivalents. This decreased working capital was partially offset by lower accounts payable and other current liabilities. The reduction in other current liabilities was primarily due to payments of income taxes and bonuses. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments.
Wholesale accounts receivable turnover decreased to 7.8 times in the twelve months ended March 31, 2012 from 8.6 times for the twelve months ended March 31, 2011, primarily due to higher average accounts receivable balances, partially offset by increased cash collections for the twelve months ended March 31, 2012 compared to the twelve months ended March 31, 2011. The higher accounts receivable balances were primarily attributed to increased sales, including the impact of our conversion to wholesale operations in certain European regions at the beginning of 2011, which provides us higher selling prices, as well as the addition of our Sanuk brand.
Inventory turnover decreased to 3.2 times for the twelve months ended March 31, 2012 compared to 4.2 times for the twelve months ended March 31, 2011, primarily due to higher average inventory levels during the twelve months ended March 31, 2012 compared to the twelve months ended March 31, 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 three months ended March 31, 2012 resulted from purchases of property and equipment; the larger capital expenditures included the build out of new retail stores and corporate facilities. For the three months ended March 31, 2011, net cash used in investing activities resulted from purchases of property and equipment and purchases of intangible assets. Our larger capital expenditures were miscellaneous computer hardware and software and the build out of new retail stores. The purchased intangible assets included order books from our international distributor conversions.
As of March 31, 2012, we had approximately $8,000 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 $70,000 to $75,000. We anticipate these expenditures will primarily include the initial construction costs of our new headquarters and new retail stores. The actual amount of capital expenditures for the remainder of the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures.
Subsequent to March 31, 2012, we purchased the remaining 49% interest in our Chinese joint venture for a total purchase price of $20,000.
Cash from Financing Activities. For the three months ended March 31, 2012, net cash used in financing activities was comprised primarily of contingent consideration paid related to our Sanuk acquisition, as well as cash used for repurchases of our common stock. For the three months ended March 31, 2011, net cash used in financing activities was comprised primarily of cash used for shares withheld for taxes from employee stock unit vestings, partially offset by excess tax benefits from stock compensation.
On February 23, 2012, our Board of Directors approved a new 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 does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. The purchases will be funded from available working capital. During the three months ended March 31, 2012, the Company repurchased approximately 274,000 shares for approximately $20,000, or an average price of $72.96 per share. Subsequent to March 31, 2012, we repurchased an additional 276,000 shares for approximately $14,700, or an average price of $53.40, leaving the remaining approved amount at $65,300.
In August 2011, we entered into a Credit Agreement (the “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. Refer to Note 8 to our accompanying condensed consolidated financial statements for further information on our Credit Agreement. At March 31, 2012, we had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $189, leaving $199,811 available under the Credit Agreement. As of March 31, 2012, we were in compliance with all covenants and remain so as of the date of this report.
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.
CONF CALL
Angel R. Martinez
Well, thank you to everyone for joining us today. With me on the call are Chief Operating Officer, Zohar Ziv; and Chief Financial Officer, Tom George. Our first quarter performance reflects the evolution of our business model and the external factors that we believe have pressured both sales growth and margins, particularly the differences in weather and sheepskin prices versus the same period a year ago.
The Sanuk brand, the newest addition to our portfolio, started the year off very well. Strong sell-in of the spring line has been followed by equally strong sell-through at retail in March and April. At the same time, wholesale orders for the UGG brand spring styles were up meaningfully versus a year ago as was sell-through in our domestic stores. Sales of the Teva brand expanded close -- Teva brand expanded closed-toe offering also delivered solid gains. Unfortunately, very mild temperatures, along with a tough comparison created by the cold and snowy conditions across much of the U.S. at the same time last year, had a noticeable impact on boot sales during the first quarter. Despite these challenging conditions, we believe that we've done a good job managing inventory and adjusting our purchase orders. We expect to enter the fall selling season in good shape with relatively clean channels.
In terms of our bottom line performance, earnings were down approximately 59% versus a year ago, which is primarily attributable to the increase in sheepskin prices, together with the increase in operating expense from our growing retail organization. As we have previously indicated, sheepskin prices are up 40% in 2012 from 2011. Zohar will speak more specifically about the outlook for sheepskin prices in a moment, but they do appear to be coming down from their historic highs, which should provide relief beginning in 2013. And we do expect to get better leverage on our retail expense over the full year driven by the fourth quarter, when that channel typically generates more than 50% of its annual revenue and more than 90% of its operating income.
So let's look at each brand's performance in more detail. For the UGG brand, as I mentioned, we believe that the extended period of warm weather throughout the first quarter has adversely impacted cold-weather UGG brand boot sales. However, we also believe that the UGG brand continues to make important inroads, developing a more meaningful spring season business. I think it's helpful to look at the Q1 performance of our casual spring footwear in boots separately from our cold-weather boots, as there was a meaningful difference between the 2 categories. Our expanded spring line of sandals, sneakers, wedges, fabric boots and Mini Bailey Button did very well across each of our channels, including wholesale, where our spring styles were up close to 20% and have continued to gain important shelf space.
Speaking specifically about the domestic wholesale channel, the growth in spring styles and men's was offset by a decline in cold-weather boot sales. January and February are typically big boot months at retail, but as a result of the mild temperatures in many parts of the country, boot orders were down year-over-year. With regard to fall, we are close to completing the pre-book period, and overall, we are pleased with the current level of commitments from our domestic wholesale accounts. Slippers, classics, fashion, casual boots, sneakers and casuals all booked well. Coming off of warm winter, retailers in general typically take a cautious approach to next season at this point in the year. So while the open-to-buy dollar pool has contracted a bit, based on conversations with our retailers, we believe the UGG brand's percentage of the total open-to-buy dollar pool has not diminished and that the brand, especially in the back half of the year, remains as important, if not more important, to the retailers with whom we do business.
Consumers will get their first glimpse of the fall collection at retail as early as June and July, which will include the first fall styles of new sneakers, casuals and boots. But as a reminder, the UGG brand's primary selling season at retail typically doesn't get underway until later in the year, hitting peak velocity in November and December.
In terms of wholesale distribution for this year, not a lot has changed. We continue to deploy the same strategy that we have in the past, which is to selectively add accounts that we believe makes sense for the brand at this point in its growth cycle, with a particular focus on areas where the brand is underpenetrated. At the same time, we are closing accounts that are unable to merchandise our broader offering and support the brand's lifestyle position. In 2011, we increased our net independent door counts by about 1% of the total door count, 2/3 of which were opened in the South and Midwest where we are underpenetrated, and approximately 1/3 of them were either men's or kids-only accounts.
For 2012, our domestic independent door count is expected to be up at a lesser rate. Outside the U.S., the UGG brand sales in Europe were slightly lower than expected. The economic conditions in the U.K., which is our biggest international market, remained challenging, and weather for the most part has not been conducive to boot sales. While we believe that the Summer Olympics and the year-long Queen's Jubilee celebration will provide a boost to the U.K. economy, this is not incorporated into our planning and we remain cautious on our outlook until there are more concrete signs of a prolonged recovery.
We're pleased with how the transition to a wholesale model continues to unfold. The U.K. market in the past has been dependent primarily on classics and knit boots. After rationalizing our account base, we've been working directly with these retailers to expand their assortments beyond our core Classic Collection and develop a sustainable business. Part of this multiyear process involves marketing investments to increase awareness of the broader product line and enhance the consumer perception of the brand. We see long-term opportunity to steadily grow the business by increasing wholesale shelf space through new product introduction and the continued rollout of our own retail stores. The goal is to develop slippers, cold-weather, casuals, men's and kids businesses much like we have in the U.S.
While not immune to some of the same issues as the U.K., particularly the warm weather, Benelux, our second largest international market, had a very good first quarter. Difference in performance between these 2 key markets lies in the approach our former distributors took to growing their business. The bottom line is the UGG brand is more evolved in Benelux, thanks to a much wider selection of products, including a broader offering of spring styles.
The rest of Western Europe is facing similar economic challenges. In addition, it also experienced a warmer-than-usual winter, so it's not a surprise that we're seeing some conservatism from the European distributors, which is reflected in our second quarter guidance. We still view Europe, particularly Northern Europe, as having an ideal year-round climate for UGG brand products and believe the current softness is more macro-related and not indicative of the brand's appeal and long-term growth prospects.
Meanwhile, our UGG brand business in Asia grew at a fairly rapid pace during the first quarter. Our wholesale performance in Japan has continued to rebound following last spring's earthquake and tsunami, and we're making good headway broadening the assortment of product available at retail.
With regard to China, we're pleased to announce that we recently acquired a minority interest in our joint venture in order to capitalize on the significant opportunities there. Our partner has been tremendously helpful in assisting with the successful launch of the brand in this very important market and we'll obviously maintain a close relationship with them going forward as they're one of our key manufacturing partners.
Shifting channels now, we believe that the sell-through results in our Consumer Direct division build a strong correlation to the temperature. We saw increased demand for our UGG brand spring styles in stores -- in our stores, while boot sales were mixed depending on the location. Comp store sales were flat versus a year ago, with a high single-digit comp gain in the U.S., which comes on top of a double-digit comp in Q1 of last year, offset by softness in our international comp store sales.
Performance in the U.S. differed by region. In the Northeast, where the weather was unseasonably warm, our stores have not performed as well, while stores in locations experiencing more normal weather patterns did better. In Asia, comps were impacted by weather, as well as some cannibalization from new store openings and also due to the Chinese New Year that was one month earlier this year, which impacts the buying cycle there. In the U.K., it was a mix of weather and the challenging retail environment.
eCommerce sales in total were down 7.5%, with a strong gain in Teva brand sales offset by high single-digit decline in UGG brand sales. For the UGG brand, we experienced a decline in traffic partially offset by an increase in conversion rates. In terms of top performers, our men's business did very well, led by triple-digit increases in sneakers and casuals, followed by strong gains in sandals and slippers. Our kids business also performed nicely across the board. With regard to women's, increased sales in fashion, sandals, slippers, fabric boots and handbags were offset by softness in cold-weather boots and classics. It's worth noting that we were up against a tough comparison from last January and we filled a large amount of back orders for the Classic Short Sparkles, following the style's inclusion in Oprah's final Favorite Things episode in December of 2010.
Throughout the quarter, we did see spikes in boot sales on days when temperatures were more seasonal. Unfortunately, those days were few and far between during the first 3 months of the year.
Now to the Sanuk brand, which continued its rapid growth trajectory in the first quarter, driven by increased demand for its expanded line of men's and women's shoes and sandals. In addition to healthy growth within its core channel, the brand has made good progress building distribution with several marquee retailers, including Nordstrom, Zappos, Journeys and Dillard's, to name a few. The product is resonating very well with a broader cross-section of consumers and we're also excited about the rapid growth trajectory.
The Teva brand had record domestic wholesale and growth in domestic eCommerce sales that were offset by a decline in international wholesale sales. The brand showed further evidence of its successful evolution to a year-round adventure brand during the first quarter, as sales of closed-toe footwear increased 38%. Another highlight was the launch of the Teva brand into Japan through our existing subsidiary. Retail and consumer reception for the brand and product line has been very positive. Unfortunately, the overhang from a wet summer in Europe and a mild winter in both the U.S. and Europe, along with a struggling EU economy, has left many of our retail partners with more goods than usual for this time of the year, which is impacting current open-to-buy dollars. So while sell-through for the Teva brand has been good, we aren't yet fully seeing that translate into reorders in the near term.
It has also had a meaningful impact on fall demand. For the first time in a long time, outdoor retailers packed up their fall '11 goods to hold for next season with only the top-performing SKUs receiving commitments at this point. So despite being named Gear of the Show at Outdoor Retailer in January, the current selling environment has forced us to reduce the Teva brand's projections for the year.
With that, I will now turn it over to Zohar.
Zohar Ziv
Thanks, Angel. Regarding sheepskin prices, in recent discussions with our suppliers, we continue to hear that prices are coming down from their historic highs. However, we will not know to what extent our full year 2013 product costs will look like compared to 2012 until we lock in prices for the fall 2013 line, which will be in October around the time we report our third quarter results. At this point, we think it would be helpful to briefly discuss the dynamics of our sheepskin supply chain and outline what has been impacting the price.
To start, sheepskin is a byproduct of the meat industry, and in addition, there are different grades of sheepskin. We primarily use premium sheepskin sourced from Australia in the production of our Classic Collection with a modest amount coming from the U.K. and U.S. Unfortunately, not all sheep are created equal. The quality of skins from most other countries does not meet our high standards and therefore cannot be utilized.
There are a number of things that impact the price of sheepskin. We believe a big reason for the recent spike has been increased demand for this limited commodity, something to which we have certainly contributed. A decline in herd sizes has also driven up the price, as worldwide consumption of lamb has been on the decline for many years. Droughts in Australia in recent years have also been a factor in herd decline, and the price of wool is also part of the story. When that commodity appreciates, farmers are more likely to keep their sheep in order to harvest the wool. Finally, changes in the strength of the Australian dollar versus the U.S. dollar also impact our cost.
As I mentioned, a moment ago, sheepskin prices have started to decline. We think many of the other players that were utilizing sheepskin in their product line have exited the market due to the rising price. It also appears that herd sizes are starting to grow again as the result of the recent wet winter in Australia. While the decline of the sheepskin price is no doubt a positive for our future results, it is important to note that the ratio between the changes in the published price of sheepskin and what we ultimately pay is not a one-to-one. There are 2 reasons for that, the first being the different grades of sheepskin. As I said before, we primarily use premium sheepskin, the price of which has appreciated faster than the lower grade sheepskin that are also bought and sold in the open market. This means not all sheepskin prices move in direct correlation with one another.
Secondly, while our skins are sourced from Australia, and to a lesser extent, the U.S. and the U.K., they're all treated at tanneries in China, and it's from the tanneries that we actually purchase our raw materials. There are additional costs that go into the processing of the skin, as well the profit built in by the tannery. So a 10% decrease in raw sheepskin prices does not necessarily mean a 10% decrease in our cost.
As we have discussed before, we have also implemented long-term programs to help further mitigate the impact from higher sheepskin and raw material costs. This includes increasing the mix of non-sheepskin product, new footwear materials and new production technologies, increasing direct shipments to retailers and taking advantage of lower cost sourcing in areas like Vietnam, El Salvador, central China, as well as the U.S.
Tom will now go through the Q1 financials and our updated guidance. Tom?
Thomas A. George
Thanks, Zohar. Before I get into that, I wanted to clarify a typo in the press release. Under second quarter outlook, our sales earnings margin guidance is, in that press release, are correct, but the SG&A rate is incorrect. The SG&A rate should be 63% versus the 37% in the press release.
And regarding the rest of my discussion today, the release contains a good amount of detail about our first quarter sales and earnings, including sales by brand, channel and geography. Therefore, I'm going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance, as well as some additional commentary on our retail division.
Regarding gross margin, for the first quarter, it was 46% compared to 50% in the first quarter last year. Of the 400 basis point decline, approximately 300 basis points are attributable to an increase in product costs, while higher closeout sales, markdowns, discounts and direct-to-consumer mix contributed approximately 200 basis points to the decline. This was partially offset by the contribution of Sanuk brand and increased pricing. Increased closeouts relative to the prior year were primarily attributable to discontinued spring and fall styles. As to the shortfall versus our guidance, this is mostly due to lower margins on the Teva brand and the other brands, driven by increased closeouts, as well as increased closeouts -- increased UGG brand closeouts.
Sanuk brand margins were ahead of expectations. Total SG&A expense for the quarter was $101.4 million or 41.2% of net sales compared to $74.3 million or 36.3% of net sales a year ago. SG&A increased primarily due to the additional expenses of owning and operating the Sanuk brand, including $8.7 million of operating expenses, which includes $3.1 million in amortization of intangible assets and purchase price accounting tied to the Sanuk brand earn-out payment.
SG&A is also up approximately $8.5 million due to the growth of our retail organization. In addition to having 19 new retail stores that were not open during the first quarter last year, we are investing in personnel and infrastructure to support a more aggressive store rollout plan as we plan to build towards the base of approximately 200 stores by the end of 2015.
In addition, we had an increase of approximately $4.7 million in marketing, primarily related to the UGG men's and Classic campaigns. With 46 stores now open and our plans for 70 by year end, we want to provide some more insight into our store operations and share some additional metrics.
We'll start with the comp base. In the first quarter, the comp base has consisted of 27 stores, up from 24 in Q4, after adding Madison Avenue, Las Vegas and Los Angeles. Of the 27 stores in the comp, 18 are in the U.S. Boston is the only U.S. store that isn't in there; 4 are in the U.K.; 4 are in China; and 1 is in Japan.
With regard to the 19 non-comp stores, many of these are in Asia where the locations are typically 1/3 smaller than our U.S. and European stores and therefore, sales per store are lower. We believe that this, along with investments in infrastructure to support the larger store rollout, is the reason our reported retail segment estimated new store productivity appears to be declining. However, in aggregate, sales per square foot and four-wall margins for our Asia stores are on par with the company's very high average.
Looking over the rest of the year, our plan calls for approximately 24 new store openings with a few in Q2 and the remainder broken down fairly evenly between Q3 and Q4. Roughly 4 will be in the U.S., with approximately 10 each in Europe and Asia, and includes some notable shopping destinations such as A la Mere in Paris, Piccadilly in London and New York's Meatpacking District. We're also doubling the size of the Madison Avenue store to accommodate more women's product, as well as the build out of our first-ever men's only store. The majority will be concept stores along with a handful of boutiques and outlets.
Back to our results. Operating income for the first quarter was $11.9 million or 4.8% of sales compared to operating income of $28.2 million or 13.8% of sales last year. The decline in operating margin was the result of the lower gross margins and the aforementioned expenses for the expansion of our retail and international organizations. Our effective income tax rate for the first quarter was 34.9% compared to 30% in the first quarter last year. The higher tax rate was due to a onetime tax expense associated with our joint venture in China, and to a lesser extent, a higher concentration domestic pretax profits versus a year ago.
As reported in our release, first quarter diluted earnings per share were $0.20. The shortfall relative to our guidance was $0.04, with $0.01 due to taxes and the remaining $0.03 attributable to the negative margin effect from the increased closeouts and channel mix being partially offset by lower operating expenses and leverage from higher sales versus our projections.
Now turning to the balance sheet. At March 31, 2012, inventory increased 94.6% to $208.5 million from $107.1 million at March 31, 2011, and decreased 17.7% from $253.3 million at December 31, 2011.
By brand, compared to March 31, 2011, UGG brand inventory increased $90.1 million to $159 million; Teva brand inventory increased $0.1 million to $30.8 million; and our other brands' inventory decreased $0.9 million to $6.6 million. Sanuk brand inventory was $12.1 million at March 31, 2012.
The $101.4 million increase in inventory is primarily attributed to the growth of fall 2012 UGG brand inventory, including the growth of our Consumer Direct division, carryover product from the 2011 holiday period, which was utilized to fulfill orders during 2012 and the increase in product cost and addition of the Sanuk brand.
I would like to provide more detail regarding our comfort with the quality of our UGG brand inventory. At March 31, 2012, current fall inventory represented approximately 65% of the total inventory, up from 57% a year ago. And although absolute increase in fall inventory is approximately $65 million, approximately $50 million of the increase is in Classics and slippers for which we have orders to sell at full price. In addition, we have approximately $10 million increase in cold weather product which has been sold for delivery in later quarters.
Another perspective to review the $90 million UGG inventory increase is as follows: approximately $40 million being attributable to product cost increases and carryover inventory from 2011, approximately $20 million of increased European inventory to support the direct business, approximately $20 million of spring and other inventory with the balance of increase of approximately $10 million of additional retail store inventory to support the newly opened stores.
We still anticipate year-over-year inventory growth to decline, mostly in the back half of the year as we sell the carryover inventory. During the quarter, we repurchased approximately 274,000 shares of the company's common stock for a total of $20 million. As of March 31, 2012, we have $80 million available under the $100 million stock repurchase program authorized by the Board of Directors this past February. Taking into account the stock repurchase program and our projected capital expenditures, we anticipate ending 2012 with a strong cash position, driven primarily by cash flow generated from operations.
Now moving on to our outlook. Based on the first quarter results and current visibility, which now includes lower projections for our international wholesale operations, as well as reduction in Teva brand domestic sales, we now expect 2012 revenues to increase approximately 14% over 2011 levels compared to our previous expectation of 15%. For the full year, we now expect UGG brand sales to increase by approximately 10% versus our previous guidance of approximately 11% due to a low international wholesale and distributor contribution. Teva brand sales are now expected to grow in the low to mid single-digit range compared to prior guidance of approximately 10%. Combined sales of our other brands are expected to be down approximately 15%. Sanuk brand sales are still expected to be approximately $90 million.
With regard to earnings, we now expect diluted earnings per share to decrease approximately 9% to 10% below 2011 compared to our previous guidance of approximately flat. Our forecast is now based on a full year gross profit margin decline of approximately 250 basis points in 2011 compared to our prior guidance, which assumed a decline of 200 basis points. The additional decline is due to lower international sales and increasing Q1 closeouts.
SG&A as a percentage of sales is expected to be approximately 30% versus the earlier guidance at 29% due to lower sales, where our tax rate is still forecasted to be approximately 31%. As a reminder, SG&A projection includes $13 million or $0.23 per diluted share associated with the amortization and accretion expenses related to the Sanuk acquisition.
For the year, we expect capital expenditures to be around $80 million compared to the prior projection of $90 million with roughly $32 million allocated to the construction of our new headquarters, $26 million for the new store openings, as well as store and showroom remodels, $10 million going to IT and maintenance projects, $4 million to upgrade our retail operating system and the remaining $8 million for additional corporate infrastructure.
For the second quarter of 2012, with the reduction in European distributor sales, we expect revenues to increase approximately 8% over second quarter 2011 levels with a diluted loss per share of approximately $0.60. This guidance assumes a gross margin of approximately 43% and SG&A as a percentage of sales of approximately 63%. Included in our SG&A projection is roughly $3.5 million or $0.06 per diluted share in expenses related to the amortization and accretion expenses related to the Sanuk brand acquisition.
I will now turn the call back over to Angel.
Angel R. Martinez
Thanks, Tom. Well, in light of the many challenges we faced, I'm pleased with how our teams executed during the first quarter. We're managing this business for the long term, and I'm very confident that the growth strategies we've developed for our brand portfolio are intact and will continue to deliver consistent sales and earnings improvement over the years ahead. Operator, we're now ready to open the call up for questions.
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