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A 70% Stock Price Drop Represents Opportunity for Long-Term Investors

October 05, 2012 | About:
Recently, some of my friends have asked me about Deckers Outdoor (DECK). I looked at it and found it quite interesting.

2132382011.jpg

Over the years, DECK’s stock price had wild runs in both two opposite directions. It was $13.3 per share in March 2009, and then it reached nearly $118 in October 2011. At the time of writing, it closed at $37.7. So in just a year, the company lost nearly 70% of its all-time high.

Business

DECK is the designer and manufacturer of footwear, apparel and accessories. It has three main brands: UCG, Teva and Sanuk. Over the years, a large chunk of DECK’s revenue has come from UCG brand. In fiscal 2011, UCG accounted for more than 87% of total sales. With UCG, 76% of its revenue was from wholesale channel, whereas 16% was from retail stores.

Seasonality

It is a seasonal business. The majority of revenue is normally in the third and the fourth quarter of the year.

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Balance Sheet Strength

DECK seems to have a strong balance sheet. As of June 2012, it had $720 million in shareholders’ equity, and no debt. The total liabilities were $305 million. The main item in liabilities was the accounts payable, of $192 million. Its cash on hand was $114 million, enough to cover $120 million goodwill in case of impairment.

Historical Operating Performance

For historical operating results, DECK has performed extremely well.

% 2003 2004 2005 2006 20072008200920102011
Net margin 7.211.8912.0310.3514.810.7314.36 15.81 14.45
ROE 13.38 24.15 19.99 16.09 25.91 21.66 26.68 27.66 26.74
ROA 7.16 17.16 16.49 13.72 21.43 17.32 21.57 22.48 20.36


In the last nine years, DECK consistently had double-digit returns on equity. Eight out of nine years had double-digit returns on assets and net margin. The business seems to have good and stable returns.

Recent Glitch

DECK’s reported a loss of 53 cents per share in second quarter 2012. Even though it was better than Zacks Consensus Estimate of 59 cents, the loss was much higher than a loss of 19 cents a year ago. The widened loss was due to the weak market in Europe. Because of the increase in sheepskin and higher closeout sales level in 2012, DECK expected the margin contraction of 250 basis points for the year.

In the second quarter 2012, DECK experienced a decrease in wholesale net sales of UCG brand. The volume of pairs sold decreased, but average selling price increased. The volume decrease was mainly to distributors in Europe, as well as wholesale customers in Europe.

The main item that contributed to the loss of the quarter was the increase in SG&A expenses.

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The increases in SG&A expenses were due to $15 million SG&A expenses for Sanuk brand, which was acquired by the company in 2011, $8 million increase in retail costs, $4 million increase in marketing expenses for new UGG men’s and Classic campaign, $4 million in international expansion expenses, and other expenses such as amortization expenses and legal expenses.

However, in the second quarter of 2012, DECK’s operating cash flow was positive, due to the decrease in account receivable, prepaid expense and the increase in account payable. While second quarter net loss was $12 million, the operating cash flow was $31 million.

Valuation

Currently, DECK’s share price is $37.7. The market capitalization is $1.4 billion; and the enterprise value was $1.28 billion. The market is valuing DECK at 8.3x P/E, 1.9x P/B, 10.5x P/CF and only 4.4x EV/EBITDA.

Compared to its peers, DECK looks cheap:

Valuation P/E P/B P/CF EV/EBITDA
Nike (NKE) 19.8 4.1 23.2 12.1
Adidas AG (ADDDF) 1

7.5
2.4 12.9 9.7
Crocs (CROX) 11.6 2.5 9.8 6.4
Wolverine World Wide (WWW) 18.2 3.4 18.4 11.9
Deckers outdoor (DECK) 8.3 1.9 10.5 4.4


Conclusion

In the recent overall economic outlook, DECK might not see any improvements in business results for this year. However, DECK has proven to deliver strong returns for its shareholders. With current cheap valuation, investors can consider DECK as a long-term position in their diversified portfolios.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.7/5 (24 votes)

Comments

jayb718
Jayb718 - 2 years ago
To me a big concern with a company like this is the trendiness of its main product.

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