IntroductionDeckers Outdoor Corporation (NYSE:DECK) is a global footwear provider of niche brand name shoes. The company owns six brands, with the most business coming from UGG,
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What is Good About Good Friday, and Sanuk. Other segments of the business include ‘Other Wholesale,’ which is the other three brands, ‘eCommerce’, and ‘Retail Stores.’ Based on proprietary discounted cash flow analysis done by the Oxen group,
6041, DECK shares are a solid HOLD with a price target at $40.
The knock on DECK has been that their revenue makeup is based too much in it UGG products, make up 88% of revenues. The company will need to improve their lineup diversification in order to be more appealing in the future. From a quantitative prospective, DECK shares trade at about 10.8x trailing EPS and more importantly 13.3x forward EPS, a discount to the market and its peers. The key to DECK is the success of diversifying its portfolio as well as the continued popularity/success of UGGs, which is developing into a diversified line itself. The introductions of new styles in the fall and spring seasons have improved the brand and decreased its seasonality,
spots on cervix, yet the firm still derives most of its EPS in Q4 (or the holiday quarter) and from winter boots. The UGG brand is very valuable, the brand’s position as a mid to upper price luxury staple is at the core of DECK’s future success.
ProfileDeckers Outdoor Corporation, founded in 1975, strives to be the premier lifestyle niche brand in the world. The company sells products including accessories, bags, outerwear, and footwear for casual and high performance use. The firm seeks to differentiate their products by offering,
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Starter library for 1, functionality, quality, and comfort and products tailored to a variety of activities, seasons, and demographic groups." The company’s main brand UGG Australia is a luxury/comfort brand and a pioneer in sheepskin footwear space.
ThesisValuation DECK trades with similar footwear companies in the consumer cyclical space. The average forward multiple in this sector is roughly 14.8x and the median is about 13.9x. DECK’s 13.3x forward multiple trades below its industry average and median forward multiple. Due to the company’s strength in one line and lack of diversification worries investors about future growth. Additionally, the company has shown waning popularity for their UGG shoes. UGGs made $1B in 2011. In 2012,
Foot Warmer Tutorial, that number will likely decline. Revenue from UGGs dropped 11% in Q3 2012 and 0.5% in Q2 2012. The trend down is not positive and is the reason for a lot of the weakness in shares. The question now is,
8727, are shares cheap even if the business is not as strong or is more downside on the way.
One positive for the company is that it executes at a better rate than competition. In net margins,
Character Collage Puppets, DECK outperforms its peers by a healthy ‘margin.’ The average and median net margins for DECK’s peer group are 7.5% and 7.4% respectively. DECK beats these metrics at 11.4%. Similar companies are Crocs (NASDAQ:CROX), Steve Madden (NASDAQ:SHOO), and Wolverine Worldwide (NYSE:WWW). The three operate with net margins at 12.8%, 9.1%, and 7.7%,
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Additionally, DECK’s operating margins are better than 84% of it peers at 15.7%. CROX, SHOO, and WWW operate at 14.6%, 13.9%, and 9.8%. Once again, DECK executes at top of the line and has solid pricing power.
DECK’s management also outperforms the competition. The firm’s ROE is better than 83% of the footwear industry at 22%. What we can see, therefore,
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The problem is two fold. The company is not well diversified and top product is looking weaker,
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Catalyst
There are upside potential catalysts for DECK as well as downside catalysts,
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The upside argument for DECK is that the company sees solid growth in Sanuks, Tevas,
How to Find a White Dress, and other brands. Further, the company has to be able to convince shoppers that they are more than a winter boot company that is popular with a small sect of the female population. Recent results in Teva and Sanuk are promising. Teva saw 22% increase in sales in Q3 of 2012 and Sanuk saw an increase at 18%. Both brands are still a tiny portion of the company’s sales. Therefore, for the next one to two years, the company will need to diversify its UGG lineup. The jury is still out on this, and therefore, we are not sure if they have an upside catalyst. Our take is that UGGs have lost some fashion appeal but some of that lost appeal has been made up for with new buyers from males and other products outside of winter boots.
Economic Moat DECK’s business basically revolves around UGG. The UGG brand name, and the quality that backs it up is DECK’s only economic moat. UGG wholesale makes up 75% of all sales, while ecommerce and retail stores make up the remaining 13% of total UGG sales. 64% of revenues are derived from the USA as well. The company operates in a very fickle market of fashion, which worries us and gives little economic moat. Diversification in markets and products further shows a lack of moat. As an investor,
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DECK’s brand loyalty is small due to its short term success.
One issue to its moat is counterfeiting shoes. In 2009, US Customs seized over 60,
Sewing Embroidery,000 fake shoes, shut down thousands of fake shoe peddling websites, and took down tens of thousands of fraudulent eBay posts. These customers may not actually translate into sale, but it is important that DECK keeps its brand synonymous with quality and luxury and stays vigilant against criminals.
Revenue and EPS Outlook Revenue trends may be a catalyst that could push shares down to our price target. DECK’s Q3 year/year revenue was down over 10%, but to balance that out, Q1 and Q2 year/year revenue growth was up 13% and 20.5%. The issue for DECK is that the company is in no way a fundamental staple. It’s a growth stock that needs growth to stay relevant and show upside.
The eCommerce section of the business has positively affected revenue. In Q3, eCommerce increased 29.3% in sales and retail sales increased 12.8%. The company is expected,
Polar F11, by The Street, to double the number of retail locations and add more outlet locations. DECK provides good reason for these efforts in SEC filings.
"Through our outlet stores,
Fashion Deals on Cyber Monday, 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."
The ecommerce section of sales is doing great. Across DECK’s various brands,
The Key To A Dazzling Mad Hatter Costume, the eCommerce section of sales grew 12.6% on average and for the UGG section grew 15% in the last quarter.
And on a final note, it is interesting to point out that investment bank Credit Suisse is expecting sheepskin costs to come down 11% and help gross margins, when in prior years it was indeed a drag on EPS.
Revenue growth could bounce back in 2013, but we do not expect a big comeback until 2014. 2013 could be a flat year before a strong comeback in 2014.
Price Target AnalysisThe following price target was configured through a 5 year projected discounted cash flow analysis. The model projects operating income,
La Sportiva Vertical K shoe review, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices. Calculate cash flow available by taking operating income taxes + depreciation capital expenditures working capital.
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