This Apparel Maker Offers Long Term Value Amidst Short Term Headwinds

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Deckers Outdoor (NASDAQ: DECK) has surprised investors one more time by the sudden daily increase of as much as 9.3% to close the most recent trading day at $38.11 per share. Standpoint’s analyst Ronnie Moas sent his bullish feeling about Deckers by noting that its sheepskin products, UGG outpaced Kindle and iPad to be the number one researched item. I have written about this shoemaker several times in the past, calling it a good stock to hold for the long run. What about now, along with the bullish sentiment and recent surge in its stock price?

Tied Closely to UGG

Many people think about Deckers as an UGG maker. Indeed, the majority of Deckers's revenues has been derived from UGG’s sales alone. In 2011, UGG generated $915.2 million in sales, accounting for nearly 66.5% of total revenues, whereas the second biggest brand, Teva, generated around $118.7 million. Over the last 5 years, UGG’s revenue has increased significantly, from only $219.9 million in 2007, to $915.2 million in 2011, sporting an annualized growth rate of 33%. The UGG brand has been positioned to be luxurious and comfortable footwear, handbags and other accessories. Thus, Deckers’ future seems to tie closely with UGG brands.

Worst Performer Last Year

Deckers is the most volatile and fragile stock, compared to its peers including Nike (NYSE: NKE) and Crocs (NASDAQ: CROX). Deckers has lost more than 50% of its total value since the beginning of last year, whereas Crocs lost nearly 10.4%. Nike was the best performing stock among the three, with an increase of nearly 7%. 

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Deckers has been growing its net income and EPS over time. The net income has risen from $19 million to as high as $285 million in 2011, along with the rise in the EPS from $0.26 to $5.07.

Sluggish Q3 Results

However, the recent third quarter earnings results disappointed investors, with a 10% decrease in revenue, which missed the analysts’ estimates. In addition, its third quarter net income declined significantly by 47% year-over-year, to only $43.06 million. Deckers also expected a year-over-year drop of 14% in EPS for the fourth quarter. Angel Martinez, the company’s Chairman and CEO said that the 80% increase in sheepskin and raw material costs impact had been mitigated by price rises. In addition, the warmer weather has also impacted negatively on UGG boot sales, as UGG was fashionable mainly in the winter time.  Thus, it’s all about the weather. On the conference call, the CEO commented on the Q3 conference call:

“If we're sitting here in mid-November, early December, and it's 75 degrees in New York City, we're going to be over-inventoried in the channel, I can guarantee you that. So I think retailer have brought in the appropriate amount of inventory based on last year, which was not a good year for weather. So we're kind of just sitting here waiting on cold weather. I mean I hate the -- that's what drives me nuts, it's just sitting here with this, watching the weather report everyday."

Indeed, the inventory level of Deckers has risen from $357 million in the third quarter 2011 to $486 million in the third quarter 2012. Valuation-wise, Deckers is valued at a bit more than 6x EV multiples. Crocs is the cheapest at only 4.88x EV/EBITDA, and Nike is the most expensive at 12.56x EV/EBITDA.

Foolish Bottom Line

Weather, weather, weather! The cold weather is the best condition for UGG boots to be popular. In addition, Deckers might have other options to diversify into other fashion lines, rather than just focusing solely on UGG. That would make the company less volatile. However, UGG is still considered the highest quality luxury brand compared to Bear Paw and Emu. The fur on UGG is thought to be much softer and warmer. With the low valuation, I think Deckers will offers a lot of value for shareholders in the long run. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Crocs and Nike. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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