Does Your Portfolio Need a New Pair of Shoes?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Per a 13G filing this week, Janus Capital Management announced it was upping its stake of the shoemaker Deckers Outdoor (NASDAQ: DECK). Janus now owns 3.6 million shares after increasing its position by 80%, and holds around 10% of Deckers’ common stock outstanding. Janus Capital Management is part of the publicly owned investment firm Janus Capital Group, and provides various investment strategies that utilize both equities and fixed income securities. Janus Capital has over $158 billion in assets under management cumulatively. Billionaire investor Ken Griffin – founder of Citadel Investment Group - is also a fan of Deckers, having increased his stake by 40% last quarter (check out Ken Griffin’s newest picks here).
Industry-wide U.S. footwear sales were up almost 5% in 2011 and should be positive over the next two years, on the back of growing discretionary spending. The transition of individuals to a more active and health conscious lifestyle will lead to increases in the performance and outdoor footwear segments. Also, assuming a return to a more normal winter, cold-weather footwear should see a boost on a year over year basis. Deckers is looking to execute in all of these high-growth industries.
Now, it's worth mentioning that warmer-than-usual temperatures have hurt sales of the company's UGG boots and Teva line, helping drive the stock down almost 50% year to date. These declines have also led to an inventory buildup that will likely force retailers to engage in price reductions this holiday season. A resurgence of value shoppers should help drive the purchasing demand for Deckers’ products, not to mention potential growth opportunities in Asia. Deckers expects to post a sales increase of 4.5% in 2012 and 8% in 2013.
Other top Deckers competitors include Crocs (NASDAQ: CROX), Steven Madden (NASDAQ: SHOO), Wolverine World Wide (NYSE: WWW) and Nike (NYSE: NKE). Crocs produces unique resin-based shoe wear that offers superior comfort. Earnings for 3Q came in at $0.37 compared to $0.33 (yoy) and consensus of $0.43, and weakness in Asia is also hurting the company's top line. The plus for Crocs is its ability to generate solid cash flow, having grown its cash position by over 40% during the last twelve months to $312 million.
In 2012 thus far, Steven Madden has seen an up-and-down year with respect to its stock price. On the whole, the shoemaker is up 25% year to date, and the sell-side expects EPS to be up 12% in 2013. For the first half of 2012, Madden saw U.S. revenues up 47%, while its foreign segment was up 58% from the same period last year. Billionaire Steve Cohen – SAC Capital founder – upped his Steven Madden stake by almost 600% last quarter (see Steven Cohen’s other key moves).
Nike made plans earlier this year to divest its Cole Haan and Umbro businesses, and expects to see 2013 growth driven by North America, but longer-term growth driven from emerging markets. Weak consumer spending in Europe and a slowing Chinese economy have driven the stock down 7.5% over the past six months. Billionaire investor and founder of Renaissance Technologies – Jim Simons – is one of the top fund managers in Nike (see Jim Simons’ top picks).
Wolverine, much like the other shoemakers, has seen interim weakness and recently guided down its 4Q earnings. This move has pressured the stock down 5% since mid-September. Wolverine recently partnered with Golden Gate Capital and Blum Capital to acquire Collective Brands for $21.75. The contribution from the Collective brands is expected to dilute earnings by about 5 cents over the next calendar year.
Deckers has a lot riding on this winter season; its UGG brand is well positioned in the U.S, and its product diversification will help boost international sales, which include closed-toe shoes (Teva), and action sportswear, via its recent acquisition of Sanuk. From a valuation standpoint, Crocs and Deckers are by far the cheapest of the stocks we've discussed, as both trade at 9-10 times trailing earnings. This is far above the likes of Steve Madden (17x), Wolverine (19x) and Nike (22x). We believe that Deckers has better growth prospects than Crocs, based on the investment thesis that the latter's business model is more dependable on fashion fads. Deckers, meanwhile, has greater diversity in its product portfolio.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. 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!