Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark one)

For the quarterly period ended June 30, 2008

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)

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 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.

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Table of Contents

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except par value)

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

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.  Our business is seasonal, with the highest percentage of UGG® brand net sales occurring in the third and fourth quarters of each year, the highest percentage of Teva® brand net sales occurring in the first and second quarters while the quarter with the highest percentage of annual net sales for the Simple® brand has varied from year to year.  In May 2008, the Company acquired 100% of the ownership interest of TSUBO®, LLC (see note 13).  The Company does not expect the TSUBO brand to have a significant effect on the seasonality of its net sales in 2008.

As contemplated by the Securities and Exchange Commission (the “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 for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

(b)         Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.  Significant areas requiring the use of management estimates relate to inventory reserves, allowances for bad debts, returns, chargebacks and discounts, impairment assessments and charges, deferred taxes, depreciation and amortization, litigation and other contingency reserves, fair value and probability assessments for share-based awards, fair value of financial instruments, fair value 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 year presentation.

(2)       Stock Compensation

In May 2006, the Company adopted the 2006 Equity Incentive Plan, which was amended by Amendment No. 1 dated May 9, 2007 (as amended, the “2006 Plan”).  The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued progress.  The 2006 Plan provides for 2,000,000 shares of the Company’s common stock that are reserved for issuance to employees, directors, or consultants.  The maximum aggregate number of shares that may be issued under the 2006 Plan through the exercise of incentive stock options is 1,500,000.  The 2006 Plan supersedes the Company’s 1993 Stock Incentive Plan, as amended (the “1993 Plan”), which was subsequently terminated for new grants.

The Company generally grants nonvested stock units (“NSUs”) annually to key personnel.  The NSUs granted pursuant to the 1993 Plan and the 2006 Plan entitle the employee recipients to receive shares of common stock in the Company, which generally vest in quarterly increments between the third and fourth anniversary of the grant.  Many of these awards include vesting that is also subject to achievement of certain performance targets.

In May 2007, the Company’s Board of Directors, upon recommendation of its Compensation Committee, adopted two new types of long-term incentive award agreements under the 2006 Plan for issuance to the Company’s current and future executive officers.  The new award types consist of stock appreciation right (“SAR”) awards and restricted stock unit (“RSU”) awards.  These awards vest subject to certain long-term performance objectives and certain long-term service conditions.  Provided that these conditions are met, one-half of the SAR and RSU awards vest 80% on December 31, 2010 and 20% on December 31, 2011, and one-half of the SAR and RSU awards vest 80% on December 31, 2015 and 20% on December 31, 2016.  In accordance with FASB Statement No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”), the Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives.

4

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

On a quarterly basis, the Company grants 400 fully-vested shares of its common stock to each of its outside directors.  The fair value of such shares is expensed on the date of issuance.

The table below summarizes stock compensation amounts recognized in the condensed consolidated statements of income:

The table below summarizes the total remaining unrecognized compensation cost related to nonvested awards and the weighted-average period over which the cost is expected to be recognized as of June 30, 2008:

During the six months ended June 30, 2008, 86,000 NSUs were granted under the 2006 Plan.  The weighted-average grant-date fair value of these NSUs was $127.77.  Excluded from the table above are additional SARs and RSUs that vest 80% on December 31, 2015 and 20% on December 31, 2016.  As of June 30, 2008, the Company did not believe that the achievement of the performance objectives for the SAR and RSU awards with final vesting dates of December 31, 2016 was probable.  As of June 30, 2008, the additional unrecognized compensation cost related to the SAR and RSU awards with final vesting dates of December 31, 2016 was $8,144 and $1,256, respectively.

(3)       Comprehensive (Loss) Income

Comprehensive (loss) income is the total of net (loss) income and all other non-owner changes in equity. At June 30, 2008 and December 31, 2007, accumulated other comprehensive income of $455 and $282, respectively, consisted of net unrealized (losses) gains on short-term investments and cumulative foreign currency translation adjustment.

Comprehensive (loss) income is determined as follows:

5

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 (4)      Income (loss) per Share

Basic net income (loss) per share represents net income (loss) divided by the weighted-average number of common shares outstanding for the period.  Diluted net income per share represents net income divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock.  For the three months ended June 30, 2008, the Company had a net loss and therefore the dilutive impact of potential issuances of common stock was not included in the weighted-average shares used for diluted net loss per share.  For the three months ended June 30, 2007 and the six months ended June 30, 2008 and 2007, the difference between the weighted-average number of shares used in the basic computation and that used in the diluted computation resulted from the dilutive impact of options to purchase common stock and NSUs.

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

The Company excluded 157,000 options and NSUs that are not contingently issuable that are outstanding as of June 30, 2008 from the diluted net loss per share computation for the three months ended June 30, 2008, because they were anti-dilutive due to the net loss for the period.  All options and NSUs that are not contingently issuable that are outstanding as of June 30, 2008 and 2007 were included in the computation of diluted net income per share for the six months ended June 30, 2008 and 2007 and the three months ended June 30, 2007.

The Company excluded 86,000 contingently issuable shares of common stock underlying its NSUs, and all of its SARs and RSUs from the diluted net income per share computation for both the three and six months ended June 30, 2008.  The Company excluded 77,000 contingently issuable shares of common stock underlying its NSUs from the diluted net income per share computation for both the three and six months ended June 30, 2007.  The shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance through June 30, 2008 and 2007.

(5)       Restricted Cash

In January 2007, the Company entered into an escrow agreement by and among Deckers Outdoor Corporation, MacGillivray Freeman Films, Inc., and Comerica Bank.  The escrow agreement was initiated in conjunction with the Company’s purchase obligation with a movie production company for advertising services.  As a result of the agreement, during the six months ended June 30, 2008, the Company paid $250 of the purchase obligation and the Company has $1,000 of restricted cash remaining as of June 30, 2008.  Film production was completed and the movie was released in March 2008. Accordingly, the Company recorded the full $1,250 obligation as advertising expense during the first quarter of 2008.  Of the total restricted cash related to this purchase obligation, $300 is short-term and is included as a current asset, and the remaining $700 is long-term and is included as a noncurrent asset in the Company’s condensed consolidated balance sheet at June 30, 2008.  The escrow agreement contains a disbursement schedule according to when the remaining funds will be disbursed to the production company, which is as follows:

In addition, the Company had $133 of short-term restricted cash as of June 30, 2008 held in trust as a bond for an overseas legal matter.

6

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

(6)       Short-term and Long-term Investments

Short-term investments are classified as available for sale under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, the short-term investments 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.  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 investments are shown in the table below. The Company has determined that the decline in fair values included in the table below are temporary, and therefore the unrealized losses have not been included in the condensed consolidated statements of operations.  As of June 30, 2008, the Company holds $2,250 of auction rate securities that experienced failed auctions during the six months then ended.  Based on current market conditions, it is not known when or if the capital markets will achieve successful auctions or make use of other alternatives such as redemptions or the restructuring of these securities.  Due to these uncertainties, as of June 30, 2008, the Company has reclassified the entire $2,250 of auction rate securities to long-term investments.  The Company has not taken an impairment charge related to these securities during the six months ended June 30, 2008.  The Company based its determination on several factors, including that published market values for these securities were at 100% of par value as of June 30, 2008, although evolving secondary markets have indicated price ranges between 88% and 90% of par value. In addition, there are publicly announced redemption proposals to liquidate these types of securities in 2008 and the Company believes its liquidity position as of June 30, 2008 is sufficient to allow for the time necessary for these securities to be liquidated at par value.

The fair value for each of the assets in the table below, other than auction rate securities, was determined based on quoted prices in active markets for identical assets, categorized as Level 1 inputs under FASB Statement No. 157 (“SFAS 157”), “Fair Value Measurements”.  The fair value for the auction rate securities was determined based on quoted prices in a market that is not active due to the recent failed auctions of those securities.  Therefore, the fair value for the auction rate securities is based on inputs categorized as Level 2 inputs under SFAS 157.

(7)       Credit Facility

The Company’s revolving credit facility with Comerica Bank (the “Facility”) provides for a maximum availability of $20,000.  Up to $10,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the lender’s prime rate (5.00% at June 30, 2008) or, at the Company’s option, at the London Interbank Offered Rate, or LIBOR, (2.46% at June 30, 2008) plus 1.0% to 2.5%, depending on the ratio of liabilities to earnings before interest, taxes, depreciation and amortization, and is secured by substantially all assets. The Facility includes annual commitment fees of $60 per year and expires on June 1, 2010.  At June 30, 2008, the Company had no outstanding borrowings under the Facility and outstanding letters of credit aggregated $605.  As a result, $19,395 was available under the Facility at June 30, 2008.

7

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

The agreements underlying the Facility contain certain financial covenants including a quick ratio requirement, profitability requirements and a tangible net worth requirement, among others, as well as a prohibition on the payment of dividends. Due to the Teva impairment and resulting loss from operations, see Note 12, “Goodwill and Other Intangible Assets,” the Company was in default because it had less than $1,000 of net income for the three months ended June 30, 2008. The Company and Comerica have agreed to execute a waiver through June 30, 2008 of this technical default.

(8)       Income Taxes

Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.  For the three months ended June 30, 2008, the Company recorded an income tax benefit of $2,494, representing an effective income tax rate of 39.5%.  For the three months ended June 30, 2007, the Company recorded an income tax expense of $1,849, representing an effective income tax rate of 44.9%.  For the six months ended June 30, 2008 and 2007, the Company recorded income tax expense of $4,880 and $8,297, respectively, representing an effective income tax rate of 39.5% and 41.5%, respectively.  The decrease in the effective tax rate was primarily due to a greater proportion of overall anticipated annual pre-tax income from international jurisdictions, which have lower income tax rates than the U.S., and was partially offset by $4,470 of impairment loss attributable to a foreign subsidiary that receives no tax benefit from the charge, as this subsidiary is in a tax free jurisdiction.

A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2008 was $2,212. Since the adoption of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” the Company has accounted for interest and penalties generated by income tax contingencies as interest expense in the condensed consolidated statements of operations. There was an insignificant amount of interest expense recognized in the six months ended June 30, 2008.  The amount of interest accrued in the condensed consolidated balance sheet as of June 30, 2008 was $449.

(9)       Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 standardizes the definition and approaches for fair value measurements of financial instruments for those standards which already permit or require the use of fair value. It does not require any new fair value measurements. SFAS 157 defines a hierarchy for valuation techniques and also requires additional disclosures. The provisions of SFAS 157 were effective for the Company as of January 1, 2008. The FASB has deferred the effective date of SFAS 157 only as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not measured at fair value on a recurring basis to fiscal years beginning after December 15, 2008. The Company has only partially applied SFAS 157, and has not applied SFAS 157 to its intangible assets. The adoption of this statement did not have a material effect on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 provides companies the option to measure many financial instruments and certain other items at fair value. This provides companies the opportunity to mitigate volatility in earnings caused by measuring instruments differently without complex hedge accounting provisions. SFAS 159 was effective for the Company beginning January 1, 2008. The adoption of this statement did not have a material effect on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued Statement No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations.” The objective of SFAS 141R is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R requires that all business combinations be accounted for by applying the acquisition method (previously referred to as the purchase method), and most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in business combinations to be recorded at “full fair value.” SFAS 141R also broadens the definition of a business and changes the treatment of direct acquisition-related costs from being included in the purchase price to instead being generally expensed if they are not costs

8

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

associated with issuing debt or equity securities. SFAS 141R is effective for the Company beginning January 1, 2009, and will be applied prospectively to any new business combinations.

In December 2007, the FASB issued Statement No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 specifies that noncontrolling interests (previously referred to as minority interests) be reported as a separate component of equity, not as a liability or other item outside of equity, which changes the accounting for transactions with noncontrolling interest holders. SFAS 160 is effective for the Company beginning January 1, 2009, and will be applied prospectively to all noncontrolling interests, including any that arise before that date.

In March 2008, the FASB issued Statement No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.”  The objective of SFAS 161 is to improve the transparency of financial reporting by requiring additional disclosures about an entity’s derivative and hedging activities. This Statement is effective for the Company beginning January 1, 2009, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  The Company will apply this Statement prospectively to any new derivative and hedging activities entered into on or after the effective date.

In May 2008, the FASB issued Statement No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.”  The objective of SFAS 162 is to identify the sources of generally accepted accounting principles (“GAAP”) and provide a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for nongovernmental entities.  This Statement is effective 60 days following the Security and Exchange Commission’s approval of the Public Company Accounting Oversight Board’s related amendments to AU (Auditing Standard) Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”  The Company does not expect the adoption of this Statement to have a material effect on its condensed consolidated financial statements.

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

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 interest, income taxes, non-operating income and expenses or certain unusual items to segments. The Company evaluates segment performance based on net sales and income or loss from operations. The Company’s reportable segments include the strategic business units responsible for the worldwide wholesale operations of each of its 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, marketing, sales, commissions, bad debts, 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 compensation, the international division’s operating expenses, accounting and finance, legal, information technology, credit and collections, human resources  and facilities costs, among others.  The operating income or loss derived from the sales to third parties of the eCommerce segment and the retail store segment is separated into two components:  (i) the wholesale profit is included in the operating income or loss of each of the brands, and (ii) the retail profit is included in the operating income or loss of the eCommerce segment and the retail store segment.

In May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC (see note 13).  The wholesale operations of the TSUBO brand is a new reportable segment presented in the figures below.

In prior years, eCommerce and retail stores were one reportable segment, Consumer Direct.  The figures presented below for the period ended June 30, 2007 show the breakdown of the Consumer Direct segment into the current format of two reportable segments, eCommerce and retail stores.

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

9

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

* Included in Teva loss from operations is an impairment loss of $14,900 during the second quarter of 2008 (see note 11).

Business segment asset information is summarized as follows:

The assets allocable to each reporting segment generally include accounts receivable, inventory, intangible assets and certain other assets, that are specifically identifiable with one of the Company’s segments.   Unallocated corporate assets are the assets not specifically related to one of the segments and generally include the Company’s cash and cash equivalents, short-term and long-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:

The majority of the Company’s sales are to customers throughout the U.S.  The Company also has sales to foreign distributors located in Europe, Canada, Australia, Asia, and Latin America, among other regions.  International sales were 37.3% and 27.8% of the Company’s total net sales for the three months ended June 30, 2008 and 2007, respectively. International sales were 28.0% and 25.2% of the Company’s total net sales for the six months ended June 30, 2008 and 2007, respectively. The

10

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments.

As of June 30, 2008, approximately $7,481of trademarks and $466 of goodwill are held in Bermuda by a subsidiary of the Company.  Substantially all other long-lived assets are held in the U.S.

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% of the Company’s net sales for either the six months ended June 30, 2008 or 2007. As of June 30, 2008, the Company had two customers representing 15.9% and 15.8%, respectively, of net trade accounts receivable and as of December 31, 2007, the Company had one customer representing 34.2 % of net trade accounts receivable.

The Company’s production and sourcing is concentrated in China, New Zealand and Australia, with the majority of its production at six independent contractor factories in China. The Company may change suppliers as circumstances warrant. 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, changes in labor laws, and, in certain parts of the world, political instability.

(11)     Goodwill and Other Intangible Assets

In accordance with SFAS 142, the Company performed its annual impairment test of nonamortizable intangible assets using market value approaches and valuation techniques as of December 31, 2007, and determined that there was no impairment of goodwill or other intangible assets.  As of June 30, 2008, the Company’s inability to reach its 2008 Teva brand period to date sales targets along with a reduced long-term forecast for Teva brand sales growth were indicators that the Teva goodwill and other intangible assets were possibly impaired.  As a result, the Company conducted an interim impairment evaluation of the Teva goodwill and other intangible assets using market value approaches and valuation techniques as of June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, the Company recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008.  The method used to determine the fair value of the trademarks was a royalty relief method using discounted cash flows to determine future royalty revenue and expenses.  The impairment loss recorded in the period ended June 30, 2008 is included in a separate line item within income (loss) from operations, and as a part of the Teva reportable segment. The determination of fair value involves significant judgment and estimates, including forecasted revenues, discount rates, market multiples, royalty rates and probability assessments, among others. Accordingly, changes to such judgments and estimates could result in impairments in future periods. As of June 30, 2008, the Company had $11,900 and $20,800 of Teva related goodwill and trademarks, respectively.

In May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC (see note 13).  The preliminary purchase price allocation, subject to a one year adjustment period, resulted in the recognition of goodwill of $3,436, nonamortizable intangible assets of $1,970 related to the TSUBO trademarks and trade name, as well as $470 of amortizable intangible assets related to TSUBO brand distributor relationships.  The amortizable intangible assets are being amortized over four years, and the remaining balance, net of accumulated amortization, was $450 as of June 30, 2008.  As of June 30, 2008 and December 31, 2007, the Company had total goodwill of $21,466 and $18,030, respectively.

(12)     Contingencies

As disclosed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006, the Company has certain tax obligations to authorities in China for one of the Company’s foreign subsidiaries, Holbrook Limited, a Hong Kong company. The Company has paid certain amounts against these obligations and has also negotiated certain reductions of previously accrued amounts. In accordance with SFAS No. 5, “Accounting for Contingencies,” as of June 30, 2008, management has determined the remaining liability for such matters to be approximately $1,600, and has accrued this amount in current liabilities. The remaining liability may continue to change in future periods as a result of negotiations with the taxing authorities and the accrual of interest charges that may continue to be incurred through settlement. Because these matters relate in part to employment related tax matters, there is a level of subjectivity utilized in the interpretation of the application of tax and employment related laws and regulations. Accordingly, the amounts as ultimately negotiated and settled may differ from the Company’s estimates.

The Company is currently involved in various legal claims arising from the ordinary course of its business.  Management does not believe that the disposition of these matters will have a material effect on the Company’s consolidated financial position or results of operations.  The Company indemnifies its licensees, distributors and certain promotional partners in connection with claims alleging use of the Company’s licensed intellectual property.  The terms of the agreements range up to five years initially and 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 is not currently involved in any indemnification matters in regards to its intellectual property.

11

Table of Contents

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

(13)     Business Combinations

In May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC.  The purchase price was $5,876 in cash plus a potential future earn-out, subject to customary working capital adjustments.  The potential earn-out is based on the amount, if any, that revenue from sales of TSUBO brand products exceed certain base revenue levels for each year from 2008 to 2012.  There is no maximum to this potential earn-out.   The earn-out for each year, if any, will be payable within sixty days after the end of each year.  In accordance with FASB Statement No. 141, “Business Combinations,” the potential earn-out is contingent consideration and any earn-outs will be recognized when the contingency is resolved and the consideration becomes payable for a given year.  The substance of this earn-out is to provide compensation for services, and therefore will be recognized as expense of the appropriate periods.  The results of operations of TSUBO, LLC from May 6, 2008 through June 30, 2008 are included in the Company’s condensed consolidated financial statements.

Founded in 1998 and headquartered in Carlsbad, California, TSUBO is a high-end casual footwear brand with products for men and women.  The brand focuses on 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. The TSUBO brand utilizes a proprietary bubble outsole design as well as environmentally friendly materials in the design and manufacturing process in order to achieve their distinct look and feel. TSUBO products are sold throughout the United States primarily at department stores and independent shoe stores, as well as in more than a dozen countries worldwide.

The Company made this acquisition because it believes that the TSUBO brand complements its existing portfolio of lifestyle brands, and that the TSUBO brand’s target consumer, product selection, industry niche and relative under-penetration in the marketplace make it a good fit for the Company. The preliminary purchase price allocation, subject to a one year adjustment period, resulted in the recognition of $3,436 of goodwill, and was determined, in part, based on the Company’s expectation that it can leverage its design, marketing and distribution capabilities to grow the TSUBO brand into a meaningful business over the next few years, consistent with the Company’s mission to build niche brands into global market leaders.

(14)     Subsequent Events

In July 2008, the Company entered into a joint venture with Stella International Holdings Limited for the opening of retail stores and wholesale distribution for the UGG brand in China.  The joint venture is owned 51% by the Company and 49% by Stella International.  The initial investment in the joint venture is $1,000 contributed by each party in proportion to their respective ownership in the joint venture. The estimated total investment amount for the joint venture by the Company and Stella International is approximately $5,000.

12

Table of Contents

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

Forward-Looking Statements

The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report that are not historical are 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,” “plan,” “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 business, growth, operating and financing strategies;

·        our product mix;

·        the success of new products;

·        our licensing strategy;

·        the impact of seasonality and weather on our operations;

·        expectations regarding our net sales and earnings growth;

·        expectations regarding our liquidity;

·        our future financing plans; and

·        trends affecting our financial condition or results of operations.

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 our Annual Report for the year ended December 31, 2007 on Form 10-K under Item 1A. Risk Factors and in this Quarterly Report on Form 10-Q under Item 1A. 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 completely as well as 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 “Deckers,” “UGG,” “Teva,” “Simple,” and “TSUBO” 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 dollar amounts herein are expressed in thousands, except for share quantity, per share data, and weighted-average wholesale prices per pair.

Overview

We are a leading designer, producer and brand manager of innovative, high-quality footwear and the category creator in the luxury sheepskin, sport sandal and sustainable footwear segments. We market our products primarily under four proprietary brands:

·      UGG®: Authentic luxury sheepskin boots and a full line of luxury and comfort footwear and accessories;

·      Teva®: High performance sport shoes and rugged outdoor footwear;

13

Table of Contents

We sell our brands through our quality domestic retailers and international distributors and directly to our end-user consumers through our eCommerce business and our retail stores. We sell our footwear in both the domestic market and in international markets.  Independent third parties manufacture all of our products.

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

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

We believe the luxury and comfort features of UGG brand products will continue to drive long-term consumer demand.  Recognizing that there is a significant fashion element to UGG brand footwear and that footwear fashions fluctuate, our strategy seeks to prolong

14

Table of Contents

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, as well as a Fall line that consists of a range of luxurious collections for both genders.  These collections include: new fashion collections, a variety of casual comfort collections, cold weather offerings, as well as our Classic, Ultra, Ultimate and Slippers collections.

For the first and second quarters of 2008, the UGG brand’s wholesale net sales increased 75.6% and 135.9%, respectively, and the UGG brand’s net sales including wholesale, eCommerce and retail store sales increased by approximately 83.6% and 130.6%, respectively, compared to the same periods in 2007.  Nevertheless, we cannot assure investors that UGG brand sales will continue to grow at their recent pace or that revenue from UGG products will not at some point decline.

Teva Brand Overview

In 2006 and 2007, we began repositioning the Teva brand to a younger target consumer, and dedicated significantly greater resources to product planning, design, and development, as well as to aggressive marketing.  These efforts led to an increase of approximately 9.2% in net sales of Teva products, including wholesale, eCommerce and retail store sales in fiscal 2007 compared to fiscal 2006.  However, for the first quarter of 2008, wholesale net sales of Teva products decreased by approximately 2.4%, and net sales of Teva products including wholesale, eCommerce and retail store sales decreased by approximately 2.6%, compared to the same period in 2007.  During the second quarter of 2008, wholesale net sales of Teva products increased by approximately 5.5%, and net sales of Teva products including wholesale, eCommerce and retail store sales increased by approximately 4.8%, compared to the same period in 2007.  We believe a sluggish domestic economy curtailed our Teva growth during this period.

As of June 30, 2008, our inability to reach our 2008 Teva brand period to date sales targets along with a reduced long-term forecast for Teva brand sales growth were indicators that the Teva goodwill and other intangible assets were possibly impaired.  As a result, we  conducted an interim impairment evaluation of the Teva goodwill and other intangible assets using market value approaches and valuation techniques as of June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008.  See Note 11, “Goodwill and Other Intangible Assets,” to the condensed consolidated financial statements.

We continue to see a significant shift in consumer preferences and lifestyles to include more outdoor recreational activities.  The Teva brand has remained popular among professional and amateur outdoor enthusiasts, who consider the brand authentic and performance oriented.  Our Spring and Fall 2008 product lines include new product introductions. Beginning with our Spring 2009 product line, we expect to significantly increase our efforts in the closed shoe arena, thus reducing our reliance on sandals and warm weather.

We intend to continue to explore opportunities to broaden the Teva brand’s distribution with quality, image-enhancing retailers both within and beyond the core outdoor specialty and sporting goods channels. Through effective channel management and product line segmentation, we plan to expand into new distribution channels without diluting our outdoor heritage and our appeal to outdoor enthusiasts.  Through appropriate channel product line expansion, we plan to broaden our product offerings to meet the performance and lifestyle needs of today’s outdoor consumer. However, we cannot assure investors that these efforts will be successful.

Simple Brand Overview

Simple Shoes is committed to innovation and bringing sustainable products to the market, growing the brand’s business while at the same time bringing environmental awareness and creating meaningful, environmentally friendly products for a global market.

The Simple brand is a world leader in sustainable footwear and accessories.  We feel that how we make Simple products is just as important as why we make them.  That means our goal is to find more sustainable and innovative ways of doing business.  We are committed to our goal of making Simple products 100% sustainable; thus, minimizing the ecological footprint left on the planet.  Beginning in Fall 2005, as a response to the massive amount of waste produced by the footwear industry, the Simple brand launched a new collection of sustainable footwear called Green Toe®. Green Toe represents a revolutionary shift in thinking about footwear by building a shoe from the inside out using sustainable materials and processes.

The progress in Green Toe has influenced the rest of the Simple product line, which has led to the development of additional product platforms, including ecoSNEAKS™ and PlanetWalkers®.  These new product collections also use sustainable materials such as water-based cements, organic cotton, British Leather Consortium (BLC) and International Standards Organization (ISO) 14001 leathers, hemp, and outsoles made from recycled car tires.  We promote our Simple brand by emphasizing that we make fun, casual, comfortable and sustainable footwear.  Our goal is to create a dialogue with the consumer through all communication vehicles and to show people that sustainability is an emerging lifestyle for everyone, not just

15

Table of Contents

environmentally conscious individuals.  Our print advertising campaigns include national publications and alternative weekly publications in select cities around the world.  Our online advertising campaign reaches consumers through websites that focus on sustainability as well as pop culture.  Additionally, we sponsor environmental-themed concerts, film festivals and green expos to showcase and tell the sustainable lifestyle brand story.

For the first and second quarters of 2008, wholesale net sales of Simple products increased by approximately 21.1% and 99.9%, respectively, and net sales of Simple products including wholesale, eCommerce and retail store sales increased by approximately 25.2% and 94.0%, respectively, compared to the same periods in 2007.  We expect Simple brand net sales growth including wholesale, eCommerce and retail store sales, to be higher year over year in 2008 compared to 2007.

TSUBO Brand Overview

In May 2008, we acquired 100% of the ownership interest of TSUBO, LLC.  The purchase price was $5,876 in cash plus a potential future earn-out, subject to customary working capital adjustments.

TSUBO, meaning pressure point in Japanese, was a company co-founded by British designer Nick O’Rorke in 1998.  The TSUBO brand was marketed as a high-end casual footwear company with products 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.  The product utilizes a proprietary bubble outsole design as well as environmentally friendly materials in the design and manufacturing process to achieve their distinct look and feel. TSUBO products are sold throughout the United States primarily at department stores and independent shoe stores, as well as in more than a dozen countries worldwide, including the United Kingdom, Canada, France, Belgium, Holland, Austria, Japan, Hong Kong, and Korea.

We believe that the TSUBO brand represents an ideal complement to our existing portfolio of lifestyle brands.  The TSUBO brand’s target consumer, product selection, industry niche and relative under-penetration in the marketplace make it a good fit for our business model.  In addition, the TSUBO brand’s commitment to quality distribution and its unique performance comfort platform allow us to develop a compelling brand story for the global marketplace.  We intend to leverage our design, marketing and distribution capabilities to grow the TSUBO brand into a meaningful business over the next few years, consistent with our mission to build niche brands into global market leaders.

eCommerce Overview

We acquired our eCommerce retailing business in November 2002.  Our eCommerce business, which sells all of our brands, enables us to meet the growing demand for these products, to sell the products at retail prices and to provide us with significant incremental operating income. From the time we initiated our eCommerce business through the end of 2007, we have had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers have continued to increase reliance on the internet for footwear and other purchases.  For the first and second quarters of 2008, net sales of the eCommerce business increased by approximately 75.4% and 31.7%, respectively, compared to the same periods in 2007.  As our eCommerce sales have continued to increase, we do not expect these growth rates to continue.

Our eCommerce business consists of internet and catalog sales.  Managing our internet business requires us to focus on generating 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 internet business through improved website features and performance, increased marketing and international websites. Overall, our eCommerce business benefits from the strength of our brands and, as we grow our brands over time, we expect this division to continue to be an important segment of our business.

Retail Stores Overview

Based upon the success of our existing concept stores in Chicago and the SoHo area of New York City, we plan to open two additional UGG brand concept stores in 2008.  Our first west coast UGG brand concept store is expected to open in August in San Francisco near Union Square and our second New York City UGG brand concept store is expected to open near Lincoln Square in October.  In addition, we intend to open our sixth retail outlet store in New Jersey in November. In the United Kingdom, we plan to open two Deckers’ owned UGG brand stores in London in the fourth quarter of 2008.

In July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited for the opening of retail stores and wholesale distribution for the UGG brand in China.  Initial plans call for the opening of one to two stores in 2008. The joint venture is owned 51% by Deckers and 49% by Stella International. The total initial investment in the joint venture is $1,000

16

Table of Contents

contributed by both parties in proportion to their respective ownership in the joint venture. The estimated total investment amount by Deckers and Stella International for the joint venture is approximately $5,000.

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. Net sales of our retail store business increased 145.4% and 143.2% in the first and second quarters of 2008, respectively, compared to the same periods in 2007.  For those stores that were open during the first and second quarters of last year, same store sales grew by 46.1% and 59.4% when compared to the same period last year. We do not expect these growth rates to continue because as we increase the number of our stores, each new store is likely to have a reduced impact on our growth rate.

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters of each year and the highest percentage of Teva brand net sales occurring in the first and second quarters.  To date, the Simple and TSUBO brands have not had a seasonal impact on the Company.