Deckers Outdoor Corporation · NYSE:DECK
Deckers Outdoor — Proxy Contest (November 2017)
59 slides from Deckers Outdoor's proxy contest presentation, Nov 13, 2017
Slide 1: Deckers Outdoor Corporation ISS Presentation November 2017
Deckers Outdoor Corporation ISS Presentation November 2017
Slide 2: Disclaimer
Disclaimer The views expressed in this presentation (the “Presentation”) represent the opinions of Marcato Capital Management LP and/or certain affiliates (“Marcato”) and the investment funds it manages that hold shares in Deckers Outdoor Corporation (the “Company”). This Presentation is for informa
Slide 3: Cautionary Statement Regarding Forward-Looking Statements
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The information herein contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “ma
Slide 4: Certain Information Concerning the Participants
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS Marcato International Master Fund, Ltd. (“Marcato International”), Marcato Capital Management LP (“Marcato”) and the other Participants (as defined below) have filed with the Securities and Exchange Commission (the “SEC”) a definitive proxy statement a
Slide 5: Overview: Deckers Outdoor Corporation (DECK)
Overview: Deckers outdoor corporation (“DECK”) Ticker: “DECK” Recent Stock Price: $65 Source: Company filings, CapitalIQ. Market data as of 11/6/17. See appendix for footnotes. Multi-branded footwear and apparel company: UGG Hoka One One Sanuk Teva Consensus Estimates (FYE 3/31/18E): 2018E EBITDA: $
Slide 6: Deckers brand overview
Deckers brand overview Item UGG Product Type Comfort Shoes & Apparel Running Shoes Casual Shoes Outdoor Shoes & Sandals Revenue FYE 3/31/17 $1,451m ~$115m $92m $118m Growth Profile Mature grower Rapid growth Low growth Low growth (1) Source: Company filings, Marcato estimates. See appendix for footn
Slide 7: Why is change needed at Deckers?
Why is change needed at deckers? Shareholders cannot trust Deckers’ Board and management to deliver on short-term and long-term financial goals Track record of failing to meet targets New targets are incoherent Incumbent Board not qualified due to continued poor oversight and governance behavior Exe
Slide 8: Why is Change Needed?
Why is Change Needed? MARCATO
Slide 9: Deckers' board is responsible for company's unacceptable performance
Deckers’ board is responsible for company’s unacceptable performance Chronic stock price underperformance Missed margin targets Decreased long-term margin targets Missed EPS targets 55% deterioration in EBIT margin from 2011 to 2017 70% increase in SG&A since 2011 32% increase in Corporate Expense s
Slide 10: Deckers shares have underperformed against relevant benchmarks (5 years)
5 Year Total shareholder return Deckers shares have underperformed against relevant benchmarks Source: CapIQ, Bloomberg. See appendix for footnotes. Note: Deckers is shown through its intraday price of $44.37 on 2/8/17, just before the release of Marcato’s 13D filing. Five year period from 2/8/12 to
Slide 11: Deckers shares have underperformed against relevant benchmarks (3 years)
3 Year Total shareholder return Deckers shares have underperformed against relevant benchmarks Deckers has underperformed its proxy peers by 31% over the last 3 years Source: CapIQ, Bloomberg. See appendix for footnotes. Note: Deckers is shown through its intraday price of $44.37 on 2/8/17, just bef
Slide 12: Deckers' share price reacted favorably to Marcato's call for change
Deckers’ share price reacted favorably to marcato’s call for change Source: CapitalIQ. Bloomberg Marcato’s 13D Filing on 2/8/17 13D filed intra-day at $44 Deckers reports FQ3 earnings 2/2/17: EPS:$1.27 actual vs. $4.22 est. Deckers share price Share price declines 16% after FQ3 earnings report Share
Slide 13: Board and management have failed repeatedly to achieve margin targets
board and management have failed repeatedly to achieve margin targets Source: Company transcripts accessed through CapIQ. See appendix for footnotes. Note: Company has no 2014 fiscal year. (1) (2) (3) Margin targets have been consistently missed and lowered. Why should investors trust this Board to
Slide 14: Board and management have failed repeatedly to achieve margin targets
board and management have failed repeatedly to achieve margin targets Source: Company transcripts, accessed through CapIQ Promise Who/When Result “We really focus more on the overall operating margin of 20 or above, low 20s kind of thing is really how we focus anything on 2012 and beyond. So that co
Slide 15: Board and management have failed repeatedly to achieve EPS targets
board and management have FAILED repeatedly TO achieve eps targets Source: CapIQ, company filings. See appendix for footnotes. Note: Guidance is for GAAP Diluted EPS and is as of Q4 of the previous fiscal year. Company has no 2014 fiscal year. Deckers has missed earnings targets in 3 of the past 5 y
Slide 16: Retail expansion has damaged ROIC and EBIT margins
Retail expansion has damaged ROIC and EBIT margins Source: Company filings. See appendix for footnotes. Note: 2006-2013 are 12/31 fiscal end. 2014-2017 are 3/31 fiscal end. Due to a change in reporting period, the company has no 2014 fiscal year. 2014 is the LTM period through 3/31/14. (3) (4) (4) (
Slide 17: Sell-side analysts recognize Deckers' lack of margin progress
Sell-side analysts recognize Deckers’ lack of margin progress Source: Wall Street research. 2/4/16 Earnings call Research Analyst: “…on the mid-teens operating margin goal for longer term. Can you just give some color on what sort of the drivers are to that? Like how much of it is gross margin versu
Slide 18: SG&A and unallocated overhead have grown significantly faster than revenue
SG&A and Unallocated Overhead have grown significantly faster than revenue SG&A Source: Company filings. See appendix for footnotes. Note: 2011-2013 are 12/31 fiscal end. 2014-2017 are 3/31 fiscal end. Due to a change in reporting period, the company has no 2014 fiscal year. 2014 is the LTM period t
Slide 19: Sell-side research also concerned about increase of SG&A expenses
Sell-side Research also concerned about increase of SG&A expenses Source: Wall Street research. 2/2/17 Earnings Call Research Analyst:“…it looks like if you take out that $7 million of cost savings you're talking about in 4Q, you're still looking at almost 10% SG&A growth in fourth quarter against t
Slide 20: Board's Failed Capital Allocation Strategy
Board’s Failed Capital Allocation Strategy
Slide 21: Poor track record of capital allocation
Poor track record of capital allocation $606m of Total Capex and investment 2011-2017 Market cap & EPS declined Despite spending over $600m of shareholder capital, Deckers’ market cap and EPS have declined dramatically Written down by 60% Includes ~$67m for new headquarters Source: Company filings,
Slide 22: Board has approved an inefficient capital structure
Healthy Free cash flow generation even during the financial crisis board has approved an inefficient capital structure For over 10 years Source: CapIQ, Company filings. See appendix for footnotes. Note: 2005-2013 are 12/31 fiscal end. 2014-2017 are 3/31 fiscal end. Due to a change in reporting perio
Slide 23: Current Board is not Qualified to Oversee Deckers
Current Board is not Qualified to Oversee Deckers
Slide 24: Deckers' board has a poor record of governance
Deckers’ board has a poor record of governance Responsible for a compensation design that is not aligned with shareholders’ interests Changed segment reporting structure, which hides retail weakness Abused change of control provisions to entrench themselves Chairman engaged in mayoral campaign durin
Slide 25: Board has designed a poor compensation plan
Equity incentive awards board has designed a poor compensation plan Source: Company filings Deckers’ Annual Cash incentive Revenue (50%) Operating Income (50%) Time Based RSUs (20%): Vest based on continuing employment Annual PSUs (20%): Vest based on EPS target Non-qualified Stock Options (60%): Ba
Slide 26: E-commerce and retail segments were combined, which hides retail weakness
E-commerce and Retail Segments Were Combined, which Hides Retail Weakness Source: Company filings Note: 2011-2013 are 12/31 fiscal end. 2015 is 3/31/15 fiscal end. Due to a change in reporting period, the company has no 2014 fiscal year. Deckers Same store retail sales DECK consolidates retail and e
Slide 27: E-commerce and retail segments combined: Direct to Consumer EBIT breakdown
E-commerce and Retail Segments Were Combined, which Hides Retail Weakness Direct to Consumer EBIT Breakdown Direct to Consumer EBIT % Margin Source: Company filings, Marcato estimates. See appendix for footnotes. In 2016, Deckers combined its e-commerce and retail segments into a single segment call
Slide 28: Failure to allocate overhead overstates retail profitability
Failure to allocate overhead overstates retail profitability Retail EBIT % Margin Before and After Estimated Corporate Allocation Retail ROA Before and After estimated corporate allocation(4)(5) Source: Company filings, Marcato estimates. See appendix for footnotes. (2)(3) (4) (2)(3) (4) (1) (1) (1)
Slide 29: Board is responsible for lack of transparency
board is responsible for this Lack of transparency Source: Red Mountain Capital Letter, SEC filings, Wall Street research Masking retail results: “Since the end of fiscal 2015, Deckers has combined the reporting of its retail store and e-commerce performance in a broad direct-to-consumer (“DTC”) cat
Slide 30: Board attempted to use change of control provisions to entrench themselves
Board attempted to use change of control provisions to entrench themselves Best governance practices require a double trigger for accelerating compensation in the event of a change of control; many of Deckers’ outstanding compensation awards contained single trigger provisions The election of Marcat
Slide 31: Timeline of Chairman's mayoral campaign highlights lack of board leadership
Timeline of Chairman’s mayoral campaign highlights lack of board leadership Source: Company filings Date Description Compensation 5/24/16 Mr. Martinez announces retirement as CEO, but remains as consultant and Board Chairman $500k consulting contract $285k board compensation 6/1/16 Mr. Martinez begi
Slide 32: Recently announced capital structure plan is incoherent
Recently announced capital structure plan is incoherent Research Analyst: “Just in terms of the comment about the debt, so is that an ongoing target, like, as you generate cash and EBITDA goes up, then you'll continue to buy back stock to maintain that 1x leverage? Answer from Thomas George (CFO): N
Slide 33: Deckers will fail to achieve Board's stated 1.0x leverage target
Deckers will fail to achieve Board’s stated 1.0x leverage target By 2020 Deckers will still have an estimated net cash position of $335m(1) Source: Company filings, Marcato estimates. See appendix for footnotes. (2)
Slide 34: Action has generally been taken only following significant shareholder pressure
Action has generally been taken only following significant shareholder pressure Source: Company filings. See appendix for footnotes. Date Description 2/4/16 2016 FQ3 Call Deckers’ Promise Close 20 stores $35m SG&A savings “Mid-teens” margin target (1) Failure Stores increase by 17 from 12/31/15 to 1
Slide 35: Board has rejected shareholders' recommendations
Board has rejected shareholders’ recommendations Source: Red Mountain Capital Letter Lack of urgency on cost saving plan: “As you know, we introduced you to a leading global retail consultant in July 2015. We understand that this consultant identified the opportunity to significantly enhance Deckers
Slide 36: Longest tenured directors lack relevant experience and alignment with shareholders
Longest tenured directors lack both relevant experience and alignment with shareholders John Gibbons Chairman of the Board Board Tenure John Perenchio Director 17 Years Shareholder Alignment Source:Company filings, Bloomberg, CapIQ Note:Ownership information and open market purchases as reported by
Slide 37: Other board members lack relevant experience and share responsibility for underperformance
other board members lack relevant experience and share responsibility for underperformance How far back to go for experience? Some relevant history not shown – example Karyn Barsa was COO and CFO of Patagonia Also no distinction for CEO/COO vs legal or other. Lauri Shanahan was chief legal officer a
Slide 38: Open market transactions by current directors
Open Market Transactions Sales Purchases Total Current Directors 8 – Current Directors John Gibbons – John Perenchio 3 – Karyn Barsa 2 – Michael Devine – James Quinn – Lauri Shanahan – Nelson Chan – Bonita Stewart – David Powers 3 – Source:Bloomberg, Company form 4 filings for the 5 year period from
Slide 39: Chairman and former CEO has demonstrated a lack of confidence in the current plan
Chairman and Former CEO has demonstrated a lack of confidence in the current plan Source: SEC Form 4 and Form 144 filings. See appendix for footnotes Mr. Martinez recently sold 43% of his Deckers shares in two days (1) If former Chairman and CEO does not believe in this Board and management, why sho
Slide 40: Marcato's Plan to Create Meaningful Shareholder Value
Marcato’s Plan to Create Meaningful Shareholder Value
Slide 41: Focus on Core UGG Brand, Exit Non-Core Brands
Focus on Core UGG Brand, Exit Non-Core Brands Source: Marcato estimates. See appendix for footnotes. (1)
Slide 42: Rationalize retail footprint to reverse trend of declining margins
Rationalize retail footprint to reverse trend of declining margins Retail stores (Year end) Retail EBIT and Margins (2)(3) Source: Company filings, Marcato estimates. See appendix for footnotes. Δ in Retail Same Store Sales (1) (1) (3.4%) 2.8% NA (8.4%) 6.3% ? ? (3) (3) $3.2 $2.9 $2.9 $2.7 $4.2 Est.
Slide 43: Further retail consolidation is accretive to profitability
further retail consolidation is accretive to profitability Source: Marcato and consulting firm estimates $11m of EBIT retail lost from closing company owned retail stores 50% of lost revenue recaptured with new partnerships, US wholesale customers and e-commerce channels E-commerce and wholesale mar
Slide 44: Eliminate undisciplined frameworks for evaluating store economics
Eliminate undisciplined frameworks for evaluating store economics Source: FierceRetail, Footwearnews.com Location: Disney Springs, Orange County, Florida Date opened: 2016 Size: 2,800 Square feet “The purpose of these stores has shifted slightly so it's not strictly about maximizing sales; it's abou
Slide 45: Deckers' current profit improvement goals are misleading
“…we are pleased to share that $150 million announced cumulative savings will drive a $100 million improvement in operating profit for the fiscal year 2020 [relative to 2017]. With these savings, along with modest low single-digit revenue growth, we believe we can achieve an operating margin of 13%
Slide 46: Retail experts estimate true savings opportunity of $150-$200M
Retail experts Estimate true Savings Opportunity of $150-$200M Best-in-class consultant that has worked with leading footwear and apparel companies including Nike, Adidas, Timberland and Wolverine Worldwide has identified $150-$200m of savings potential Source: External consulting firm estimates Ite
Slide 47: Deckers shares have opportunity to double over next years
Deckers shares have opportunity to double over next 3 years Source: Company filings, Marcato estimates. See appendix for footnotes. Note: Company’s fiscal year ends 3/31 20% 26% 31% ROIC(1) EPS 7.0x 7.5x EV/EBITDA 24 17 15 Ending Shares Outstanding FY2018E FY2019E FY2020E Marcato Proposal (Margin im
Slide 48: Sell-side analysts recognize value of Marcato's involvement
Sell-side analysts recognize value of Marcato’s involvement Source: Wall Street research. “…with Marcato establishing a 6% position in the stock, we think it is likely that 1) management will be under pressure to realize a more meaningful portion of the cost savings to EPS versus potential reinvestm
Slide 49: Sell-side analysts recognize value of Marcato's involvement
Sell-side analysts recognize value of Marcato’s involvement “We see these estimates (Marcato’s) as ambitious but plausible in the context of international opportunities, potential in other categories helped by improved segmentation (to begin Spring ’18), and revenue recapture from closed stores… …Co
Slide 50: Proxy peer Wolverine Worldwide has executed against its plan
Proxy peer Wolverine Worldwide (WWW) has executed against its plan WWW One-year Share price performance Source: Company Filings, Wall Street research. See appendix for footnotes. Tracking to achieve 2018 targets As of 11/2/17 run rate margins are 11.7% vs. 12% target Improved margins by X% from X% i
Slide 51: Marcato Has the Right Nominees to Improve Deckers
Marcato Has the Right Nominees to Improve Deckers
Slide 52: We have the right nominees to improve Deckers
We have the right nominees to Improve deckers Built brands Led direct-to-consumer apparel businesses Restructured and reduced physical retail store networks Reduced bloated corporate cost centers Managed and advised retail and apparel companies on: Capital structure Capital allocation Acquisitions,
Slide 53: Nominees: Deborah Derby, Kirsten Feldman, Steve Fuller
We have the right nominees to improve deckers Deborah M. Derby Proven operator with successful cost reduction experience that will add value to Deckers’ cost savings initiative Helped deliver significant expense reductions as the Executive Vice Chairman of Toys “R” Us Consulted for Kenneth Cole, fou
Slide 54: Nominees: Robert Huth, Jan Kniffen
We have the right nominees to improve deckers Robert D. Huth Veteran retail executive with brand building experience important to a refocused strategy at Deckers President and Chief Executive Officer of David's Bridal, Inc. from 1999 until March 2013 Board member of David’s Bridal Served as Executiv
Slide 55: Nominees: Nathaniel Lipman, Anne Waterman, Mitchell Kosh
We have the right nominees to improve deckers Nathaniel J. Lipman Experienced CEO with knowledge of consumer insights and owner orientation President and Chief Executive Officer of Affinion from October 2005 until 2012 Chairman of Affinion from September 2012 until his retirement in November 2015 Se
Slide 56: Appendix: Footnotes
Appendix: Footnotes MARCATO
Slide 57: Appendix: Footnotes
Appendix: Footnotes Page 4 Based on estimated 3/31/18 enterprise value (PF for est. FQ3 and FQ4 cash flow). Following the latest quarter (FQ2) the company has elevated short term debt and inventory levels , as it prepares for the winter season Page 5 Marcato estimate based on FY2017 “Other Brands” r
Slide 58: Appendix: Footnotes
Appendix: Footnotes Page 26 Adjusted to exclude $11m of retail fleet restructuring expense and $10m of other retail related impairment charges Retail EBIT reporting methodology was changed in 2013. The 2012 and 2011 EBIT numbers are pro forma for the reporting change Adjusted for unusual items. Marg
Slide 59: Appendix: Footnotes
Appendix: Footnotes Page 46 ROIC Defined as (EBIT*(1-Tax Rate)/ (Average period net PPE + Working capital) 2017 ROIC Based on adjusted EBIT (ex. restructuring) of $166m and an assumed normalized tax rate of 27% Adjusted EBIT % margin EPS ex. restructuring items Page 49 Based on 2015 EBIT ex. restruc