By now, most of us know that Deckers Outdoor Corporation (NASDAQ:DECK) is well known for its UGG boot line, which at times can produce up to 90% of company profits. It should be obvious that 90% is risky, and Deckers is looking to shed that risk with two of its latest brand acquisitions - Sanuk and Hoka One One.
At first glace, both Sanuk and Hoka One One are tiny in comparison to UGG. That's true, but you have to imagine their potential through the right eyes, Deckers' eyes. Deckers purchased both companies with agreements in place:
In July 2011, the company acquired the Sanuk brand, and the total purchase price included contingent consideration payments. As of December 31, 2012, the remaining contingent consideration payments, which have no maximum, are as follows:
• 51.8% of the Sanuk brand gross profit in 2012, which was $25,450,
•36.0% of the Sanuk brand gross profit in 2013, and
•40.0% of the Sanuk brand gross profit in 2015.
Hoka One One Agreement
The purchase price for the Hoka brand also includes contingent consideration through 2017, with a maximum of $2,000.
Deckers goes into less detail about how the contingent consideration is calculated for Hoka One One. However, it maxes out at $2,000,000 per year unlike no limit on the Sanuk agreement.
While the greater incentive lies with Hoka One One based on limited profit sharing, the Sanuk agreement massively hurts Deckers until the end of 2015. 2016 will allow for Deckers to increase its earnings from the Sanuk brand substantially just from the ending of that agreement.
The ending of the Sanuk agreement works two-fold. One, Deckers will be keeping all of Sanuk's gross profit and two, Deckers' incentive to increase sales works 100% in its favor instead of working 36%-51.8% in the other guy's favor. Where's the motivation for Deckers to substantially increase sales when it is doing much of the work for someone else?
Once the Sanuk and Hoka One One profit-sharing agreements have expired, Deckers will be highly motivated to increase sales for both brands. In turn, Deckers will generate substantial profits and also mitigate the risk of relying on the UGG brand for the majority of profits.
Disclosure: I am long DECK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.