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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2010

or

For the transition period from            to

Commission File Number: 0-22446

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)

(805) 967-7611

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Table of Contents

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except par value)

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(amounts in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

(1)                     General

(a)         Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for a fair presentation for each of the periods presented.  The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years.  Deckers Outdoor Corporation strives to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear and accessories, developed for both high performance outdoor activities and everyday casual lifestyle use.  The Company’s business is seasonal, with the highest percentage of UGG® brand net sales occurring in the third and fourth quarters and the highest percentage of Teva® brand net sales occurring in the first and second quarters of each year. The other brands do not have a significant seasonal impact on the Company.  The Company owns 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China.  Stella International is also one of the Company’s major manufacturers in China.  In March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear brand.  In January 2010, the Company acquired certain assets and liabilities, including reacquisition of its distribution rights, from its Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France.  On September 30, 2010, the Company purchased a portion of a privately held footwear company as an equity method investment.

As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company’s annual consolidated financial statements and footnotes thereto.  For further information, refer to the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

On May 28, 2010, the Company announced that the Company’s Board of Directors authorized a three-for-one stock split to be effected in the form of a stock dividend.  Each stockholder of record received two additional shares of common stock for each share held on June 17, 2010, that was paid on July 2, 2010.  All share and related information presented in these condensed consolidated financial statements and notes reflect the increased number of shares resulting from this stock split for all periods presented.

(b)         Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in accordance with US generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes.  Significant areas requiring the use of management estimates relate to inventory reserves, accounts receivable reserves, returns liabilities, stock compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities. Actual results could differ materially from these estimates.

(c)          Reclassifications

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to conform to the current presentation.

(2)                     Stockholders’ Equity

In June 2009, the Company announced that the Board of Directors approved a stock repurchase program to repurchase up to $50,000 of the Company’s 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 the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company’s discretion.  The purchases will be funded from available working capital.  Prior to the stock split, we repurchased shares that were retired; the repurchased shares were not affected by the stock split.  During the three months ended September 30, 2010, the Company

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

repurchased 170,000 shares for approximately $7,400, or an average price of $43.89 per share, under this program.  During the nine months ended September 30, 2010, the Company repurchased 190,000 shares for approximately $10,100, or an average price of $53.05 per share.  As of September 30, 2010, the remaining approved amount for repurchases was approximately $20,000.

In May 2010, the stockholders of the Company approved an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 50,000,000 to 125,000,000 shares.

The following is a reconciliation of the Company’s retained earnings:

(3)                     Comprehensive Income

Comprehensive income is the total of net income and all other non-owner changes in equity. At September 30, 2010 and December 31, 2009, accumulated other comprehensive income of $174 and $494, respectively, consisted of unrealized gains and losses on short-term investments and cumulative foreign currency translation adjustments.

Comprehensive income is determined as follows:

(4)                     Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders

Basic net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of common shares outstanding for the period.  Diluted net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock.  For the three and nine months ended September 30, 2010 and 2009, the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), stock appreciation rights (SARs), and options to purchase common stock.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

The reconciliations of basic to diluted weighted-average common shares outstanding were as follows:

The Company excluded the SARs and RSUs from the diluted net income per share computation for the awards that are expected to vest on December 31, 2011 through December 31, 2016.  SARs and RSUs that are expected to vest on December 31, 2010 are included in the three and nine months ended September 30, 2010, but not included in the three and nine months ended September 30, 2009.  These shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance through September 30, 2010 and 2009, respectively.

(5)                     Fair Value Measurements

The fair values of the Company’s cash and cash equivalents, restricted cash, trade accounts receivable, prepaid expenses and other current assets, trade accounts payable, accrued expenses, and income taxes payable approximate the carrying values due to the relatively short maturities of these instruments.  The fair values of the Company’s long-term liabilities, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.  The fair value of the Company’s derivatives are measured and recorded at fair value on a recurring basis (see footnote 6, “Foreign Currency Exchange Contracts and Hedging,” for further information).

The inputs used in measuring fair value are prioritized into the following hierarchy:

·                  Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

·                  Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

·                  Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The Company has established a nonqualified deferred compensation program with an effective date of February 1, 2010 (referred to as “the Plan”).  The Plan permits a select group of management employees, designated by the Plan Committee, to defer earnings to a future date on a nonqualified basis.  For each plan year, the Board may, but is not required to, contribute any amount it desires to any participant under the Plan. The Company’s contribution will be determined by the Board annually in the fourth quarter. No such contribution has been approved as of September 30, 2010.  All amounts deferred under this plan are presented in long-term liabilities in the condensed consolidated balance sheet.  The value of the deferred compensation is recognized based on the fair value of the participants’ accounts based on Level 1 inputs.  The Company has established a trust as a reserve for the benefits payable under the Plan.  The amounts deferred and the assets in trust related to the Plan were immaterial as of September 30, 2010.

Short-term investments are classified as available for sale and are reported at fair value, with any unrealized gains and losses included as a separate component of stockholders’ equity. Interest and dividends are included in interest income in the condensed consolidated statements of income.  The cost of securities sold is based on the specific identification method.  Securities with original maturities of three months or less are classified as cash equivalents. Those that mature over three months from their original date and in less than one year are classified as short-term investments, as the funds are used for working capital requirements. The fair values of the Company’s short-term investments are shown in the table below and were determined based on Level 1 inputs.  The Company had no short-term investments at September 30, 2010.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

Proceeds from sales of available for sale securities were as follows:

(6)                     Foreign Currency Exchange Contracts and Hedging

The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies.  In addition, the Company utilizes foreign exchange forward or option contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances.  The Company does not use foreign currency contracts for speculative or trading purposes.

Some foreign exchange contracts are not designated as hedging instruments for financial accounting purposes. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in selling, general and administrative expenses in the condensed consolidated statements of income. The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in selling, general and administrative expenses.

The Company has factored into the fair value measurements the nonperformance risk of the Company and the counterparty and it did not have a material impact on the fair value of the derivatives.  As of September 30, 2010, the fair value of the Company’s designated and non-designated derivatives was not significant.  For the nine months ended September 30, 2010, gains and losses on the Company’s designated option contracts were not significant, and the loss on the non-designated derivatives was $571.  As of September 30, 2010, our hedging contracts totaled approximately $10,000.  Subsequent to September 30, 2010, we entered into several new hedging contracts totaling approximately $61,000.

(7)                     Credit Agreement

In May 2010, the Company and its subsidiary, TSUBO, LLC, entered into the Second Amended and Restated Credit Agreement with Comerica Bank (the “Credit Agreement”).  The Credit Agreement provides for a maximum availability of $20,000.  Up to $12,500 of borrowings may be in the form of letters of credit.  Amounts borrowed under the Credit Agreement bear interest at the lender’s prime rate or, at the Company’s option, at the London Interbank Offered Rate, or LIBOR, plus 1.0%, and is secured by substantially all of the Company’s assets.  The Credit Agreement includes annual commitment fees of $60 per year, which can be waived if the Company deposits $10,000 in non-interest bearing new deposits with Comerica Bank; provided that such deposits may be removed by the Company at any time, subject to paying a pro-rated annual commitment fee.  The Credit Agreement expires on June 1, 2012.  At September 30, 2010, the Company had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $830.  As a result, $19,170 was available under the Credit Agreement at September 30, 2010.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

The Credit Agreement contains certain financial covenants.  The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000, maximum loans to employees of $200, and maximum loans to subsidiaries who are not parties to the Credit Agreement of $25,000. The Credit Agreement contains certain financial covenants if the outstanding obligations exceed $2,000, including a minimum tangible net worth requirement of $294,891 commencing with the fiscal year ended December 31, 2010 plus 75% of consolidated net profit on a cumulative basis, no consolidated net loss for two or more consecutive fiscal quarters and maximum acquisitions of $25,000 per calendar year.

(8)                     Business Segments, Concentration of Business, and Credit Risk and Significant Customers

In the first quarter of fiscal 2010, as part of a refinement of its business strategy, the Company combined its Simple® wholesale reportable segment into the other wholesale reportable segment.  None of the brands included in the other wholesale reportable segment met the quantitative thresholds for individual segment reporting, and they share a majority of the aggregation criteria, thus permitting the Company to aggregate these brands for segment reporting purposes.  This change in segment reporting did not have a material impact on the Company’s condensed consolidated financial statements for any periods. The segment information for the three and nine months ended September 30, 2009 and as of December 31, 2009 has been adjusted retrospectively to conform to the current period presentation.

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies, except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The Company’s reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, and its other brands (including the Simple, TSUBO®, and Ahnu® brands), its eCommerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing and sales strategies. The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, selling and marketing, depreciation, amortization and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs are the shared costs of the organization and include the following: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources and facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce and retail stores segments for the US is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

Net sales and operating income (loss) by business segment are summarized as follows:

Business segment asset information is summarized as follows:

The assets allocable to each reporting segment generally include accounts receivable, inventory, fixed assets, intangible assets and certain other assets that are specifically identifiable with one of the Company’s segments. Unallocated assets are the assets not specifically related to the segments and generally include cash and cash equivalents, short-term investments, deferred tax assets, and various other assets shared by the Company’s segments. Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets are as follows:

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

At September 30, 2010, the Company had cash and cash equivalents of $250,536. A portion of these are held as cash in operating accounts that are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of September 30, 2010, the Company had experienced no loss or lack of access to cash in its operating accounts.

The remainder of the Company’s cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. Investment risk has been and may further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of September 30, 2010, the Company had experienced no loss or lack of access to its cash and cash equivalents.

The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions.  International sales were 26.3% and 21.6% of the Company’s total net sales for the three months ended September 30, 2010 and 2009, respectively.  International sales were 32.2% and 27.5% of the Company’s total net sales for the nine months ended September 30, 2010 and 2009, respectively.  The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments.

Long-lived assets, which consist of property and equipment, by major country were as follows:

*                 No other country’s long-lived assets comprised more than 10% of total long-lived assets as of September 30, 2010 or December 31, 2009.

Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations.  No single customer accounted for more than 10.0% of the Company’s net sales for the nine months ended September 30, 2010 or 2009.  As of September 30, 2010 and December 31, 2009, the Company had one customer representing 11.6% and 28.0% of net trade accounts receivable, respectively.

The Company’s production is concentrated at a limited number of independent contractor factories in China. The Company’s sourcing is concentrated in Australia and China.  The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.

(9)                      Commitments and Contingencies

The Company has a contract requiring minimum purchase commitments of sheepskin that Deckers’ affiliates, manufacturers, factories and other agents (each or collectively, a “Buyer”) must make on or before December 31, 2010. As of September 30, 2010 the remaining commitment is approximately $5,500. This contract may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before December 31, 2010, the Company is required to purchase any remaining amounts on or before December 31, 2010. The contract does not permit net settlement. As of September 30, 2010 the Company believes it is likely that it will need to purchase most of the remaining $5,500 of sheepskin.  The Company believes it will use the sheepskin in the ordinary course of business, and therefore not incur any material losses or have a material effect on the Company’s condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

The Company agreed to make loans to its joint venture with Stella International, should the need arise. As of September 30, 2010, the estimated remaining loans by Deckers were expected to be approximately $1,000. The Company owns 51% of the joint venture. The Company also entered into or amended agreements with certain of its international distributors to assume control of the distribution rights in those regions. Under one of these agreements, the Company is obligated to make total payments of approximately $1,600 from October 1, 2010 through the second quarter of 2011. The payments include consideration for the purchase of certain assets and services.

In 2009, the Internal Revenue Service (IRS) selected the Company’s US federal income tax return for the year ended December 31, 2007 for examination and has since expanded the audit period to include the years ending December 31, 2006 through 2009.  The Company does not know the timing of completion of the examination or if the examination will result in a material effect to the Company’s financial statements.  It is reasonably possible that the Company’s unrecognized tax benefit could change, and the Company cannot determine if any such change will be material.  The Company believes its unrecognized tax benefits are appropriately reported.

The Company has on-going income tax examinations under various state tax jurisdictions.  It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s condensed consolidated financial statements.

The Company is currently involved in various legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in connection with claims related to the use of the Company’s intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property.

(10)                Other Intangible Assets

As of June 30, 2009, the Company did not reach its 2009 TSUBO brand period-to-date sales targets and reduced its long-term forecast for TSUBO brand sales.  These factors were indicators that the TSUBO intangible assets were possibly impaired.  As a result, the Company conducted an interim impairment evaluation of the TSUBO intangible assets as of June 30, 2009 and concluded that the fair value of the TSUBO trademarks was lower than the carrying amount.  Therefore, the Company recognized an impairment loss of $1,000 on the TSUBO trademarks during the nine months ended September 30, 2009.  The impairment loss is included as a part of the other wholesale reportable segment.  The Company’s other intangible assets, net are summarized as follows:

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

·                  our global business, growth, operating and financing strategies;

·                  our product and geographic mix;

·                  the success of new products and growth initiatives;

·                  the impact of seasonality on our operations;

·                  expectations regarding our net sales and earnings growth and other financial metrics;

·                  our development of worldwide distribution channels;

·                  trends affecting our financial condition or results of operations;

·                  overall global economic trends; and

·                  reliability of overseas factory production and storage and availability of raw materials.

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in Part II, Item 1A, and “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen.

You should read this report in its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference in this report with the understanding that our future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements and we assume no obligation to update such forward-looking statements publicly for any reason.

The “UGG,” “Teva,” “Simple,” “TSUBO,” and “Ahnu” families of related marks, images and symbols are our trademarks and intellectual property.  Other trademarks, trade names and service marks appearing in this report are the property of their respective holders.  References to “Deckers,” “we,” “us,” “our,” or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries.  Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices.  All share and related information presented herein reflects the increased number of shares resulting from the three-for-one stock split effected on June 17, 2010.

Overview

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

·                  UGG®: Premier brand in luxury and comfort footwear and accessories; and

·                  Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals.

In addition to our primary brands, our other brands include Simple®, a line of casual and sustainable-lifestyle sneakers and accessories; TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; and Ahnu®, a line of outdoor performance and lifestyle footwear.

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 2011, we will convert from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the UK and the UGG and Simple brands in the Benelux region.

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

·                  The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.

·                  The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.

·                  Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort and high performance attributes they have come to expect from traditional athletic footwear.

·                  Our customers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.

·                  Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.

·                  There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands and companies take a more responsible approach when it comes to protecting the environment.

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

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

UGG Brand Overview

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

·                  consumer brand loyalty, due to the luxury and comfort of UGG footwear;

·                  continued innovation of new product categories and styles;

·                  increased marketing in high-end magazines;

·                  successful targeting of high-end distribution;

·                  adoption by high-profile celebrities as a favored footwear brand;

·                  increased media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to;

·                  increased exposure to the brand driven by our concept stores which showcase all of our product offerings; and

·                  continued geographic expansion across the US and internationally.

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

Teva Brand Overview

Our Teva brand is positioned to be the innovative global adventure brand, with a 25-year track record of contributing to the outdoor experience.  We pioneered the water sport sandal category in 1984, and heading into 2011, our brand mission is to inspire spontaneity, camaraderie and adventure on, around, or in water.  Leveraging our core performance competencies of traction, hydro and comfort, we are focused on driving growth through innovation in the growing closed toe markets of multi-sport and light hiking, while maintaining our stronghold in the sandal market.

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Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, have contributed to the significant revenue growth in 2010.  Throughout 2010, our broader range of products has shown 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 2010, we converted from a distributor model to a direct subsidiary model in the Benelux region and France, enhancing our marketing and distribution capabilities in the outdoor active Belgium, Netherlands and Luxembourg markets.  Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands.  Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels.  However, we cannot assure investors that these efforts will be successful.

Other Brands Overview

Our other brands consist primarily of the Simple, TSUBO, and Ahnu brands.  The Simple brand is our casual sneaker brand recognized by its name.  We feel the strength of the brand includes our limited distribution to specialty retailers and select department stores.  We believe that we have expertise and a reputation of leadership in sustainable footwear.  Since 2005, sustainability has been the primary marketing focus.  Beginning in 2011, we are expanding the brand’s positioning to deliver on a broader brand promise of “less is more.”  Sustainability will remain a very important brand attribute, but equal emphasis will be placed on style, comfort, quality, and the price to value relationship.  We intend to make Simple sneakers timeless and versatile, and we plan to selectively increase our distribution.

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 that are constructed to provide consumers with contemporary footwear that incorporates style, function and maximum comfort.  The TSUBO brand has a rich heritage with consumers in major cities around the world who appreciate design, pay attention to detail, and will not sacrifice comfort.  We are building on this heritage, positioning the TSUBO brand as the premium footwear solution for people in the city, providing all day comfort, style and quality.  We are continuing to create products to address consumers’ unique needs: all-day comfort, innovative style and superior quality.  At the same time, we are marketing to the TSUBO brand consumers where they live, emphasizing regional advertising and in-market grass roots, product placement and public relations efforts.

In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc.  The Ahnu brand is an outdoor performance and lifestyle footwear brand with products for men, women and children.  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.  Ahnu products are sold throughout the US, primarily at outdoor specialty stores and independent shoe stores, as well as certain regions internationally.

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

eCommerce Overview

Our eCommerce business, which sells most of our brands, allows us to reinforce our relationship with the consumer.  eCommerce enables us to meet the growing demand for our products, sell the products at retail prices and provide significant incremental operating income.  The eCommerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands’ promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments.  In recent years, our eCommerce business has had strong revenue growth, much of which occurred as the UGG brand gained global 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 including a new eCommerce platform, increased marketing and more international websites.  Nevertheless, we cannot assure investors that revenue from our eCommerce business will not decline.

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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 UGG product line; whereas, our retailers 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.  During the third quarter, we opened five new retail stores globally.  We opened two UGG Australia concept stores in Shanghai, China with our joint venture partner.  Domestically, we opened one UGG Australia outlet store in Orlando, Florida and two UGG Australia concept stores, one in Miami’s historical South Beach area and one in Georgetown, Washington, DC.  As of September 30, 2010, we had a total of 24 retail stores worldwide.  For the remainder of 2010, we plan to continue expanding our retail stores business through opening additional stores in the US.

Seasonality

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

*       Included in income (loss) from operations in the second quarter of 2008 is a $14,900 impairment loss on our Teva trademarks.  Included in the fourth quarter of 2008 is a $20,925 impairment loss on our Teva trademarks, Teva goodwill, and TSUBO goodwill.  Included in the second quarter of 2009 is a $1,000 impairment loss on our TSUBO trademarks.

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

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Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

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

Overview.  The increase in net sales was primarily due to an increase in UGG product sales.  The increase in income from operations resulted primarily from the higher net sales and increased gross margin, partially offset by higher selling, general and administrative expenses, or SG&A.

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