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Deckers Outdoor: Sold at 40% Discount

August 14, 2012 | About:
Magic Diligence

Magic Diligence

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Deckers Outdoor (DECK) is a seller of niche, luxury footwear. Deckers has 3 main product brands. The most important is UGG Australia, the well known (and expensive) luxury sheepskin footwear. UGGs provide about 62% of Decker's total sales. The second brand is Teva, an outdoor performance footwear brand that started as a sandal label and has been expanded into sports, hiking, and outdoor footwear as well. Teva is around 20% of sales. The third primary product line is Sanuk, a line of sandals and footwear focused on the surfing community. Sanuk was just acquired by Deckers in July of last year and currently is generating 16% of revenues. The remaining few percent are from Decker's "other" brands, including TSUBO (high-end casual footwear) and the since-shuttered Simple line (sustainable footwear, whatever that means), as well as brand licensing for other merchandise like handbags and apparel. Fast growing, upscale consumer brands can make for great investments - just look at the gains in Apple (AAPL) and Coach (COH) over the last several years. Decker's has clearly fallen into this category. UGGs have been pimped by all kinds of A-list celebrities ranging from Oprah Winfrey to Britney Spears to Tom Brady! Celebrity cache has been a big driver behind Decker's compound annual revenue growth of 26% since 2007. The brand has been so strong that sales still rose 18% during the deep recession year of 2009! Decker's stock soared from below $30 in 2007 to a high of over $115 just last October. The company was on a roll.

This year, however, the good times have slowed down considerably. Decker's stock has seen its value almost cut in half since the beginning of the year. The last 2 quarters in particular have been difficult. UGGs brand, after years of 20-30% year-over-year growth, saw an ever-so-slight sales decline in the most recent quarter. Teva fell into a free fall, with a 17% sales decline. While Decker's top line looked okay (+13% sales growth in Q2), the fact is that without the Sanuk acquisition, sales would have declined 5%!

I believe the best way to approach a prospective investment in Decker's is to determine if the UGGs (and, to a lesser extent, Teva and Sanuk) concepts are styles, fashions, or fads. We've seen examples of all 3 in Magic Formula® Investing (MFI), and the results have been widely disparate.

A primarily "style" product line, like PVH Corp. (PVH), can lead to great investment results when bought at the low valuations MFI uncovers. PVH last showed up in MFI in late 2009 at under $17. One year later, it traded over $42. Today it's near $85!

A "fad" product, on the other hand, can be devastating. Consider the sad story of Heely's (HLYS), the roller-shoe maker. Showing up in MFI during 2008 at prices near $6, this fad product predictably tumbled to under $2, a level it still sits at today.

In my opinion, Decker's falls into a couple categories. UGGs seem like a fashion product, one that is close to a peak but still holds enough appeal to wither gracefully. Teva and especially Sanuk seem to fall more into the "style" category, filling particular niches that are brand sustaining. It does appear that Decker's might have made a mistake diluting the Teva brand into too broad a category range, however.

So, where does this put us? The stock itself, quantitatively, is a cheap one, with a P/E ratio of about 10 and an EBIT/EV earnings yield ratio of 15.6%. Decker's is debt free with nearly $115 million of cash on the balance sheet.

Sales growth is the biggest determinant of success here. If UGG can get back to double-digit growth, Teva levels out, and Sanuk continues to perform well, Decker's is clearly underpriced. Despite last quarter's performance, there is reason to think sales growth can rebound. Domestic sales were up 37% last quarter... it was Europe that killed here, with international sales falling 15%. Although it seems never-ending, at some point I expect that the situation there will bottom and start to rebound. Decker's would benefit materially.

Modeling for a good rebound in 2013, followed by modest growth from there forward, I see Decker's worth about $63, a solid 40% gain from current levels.

Steve owns no position in any stocks discussed in this article.

About the author:

Magic Diligence
GuruFocus - Stock Picks and Market Insight of Gurus

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Comments

ttran86hcm
Ttran86hcm - 1 year ago
I really like your thesis, i am a complete newbie and trying to learn from veteran like you, if possible could you please send me your excel model of this company, i really love to see how your thesis panned out through financial model. My email address is ttran86hcm@yahoo.com. I really appreciate your help sir

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