A Cold Winter Could Take This Company to the Next Level

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

I have been a big fan of Deckers Outdoor Corp (NASDAQ: DECK) for some time now. They produce a great product and have excellent brand recognition, especially with their UGG and Teva brands. However, the last time I wrote about Deckers was in February when shares were trading at just over $40 per share and looked like a screaming buy. Well, it looks like I was right. Fast-forward a few months and Deckers has popped by about 45% and is now trading just shy of $60. What I want to know is whether or not Deckers is still a good buy, or if investors should sell and take profits in this one.

About Decker Outdoor

Deckers was one of the great growth stories of the 2000’s, rising from 42 cents per share in 1998 to a peak of almost $120 in 2011. The company currently manufactures six brands, but is most well-known for UGG and Teva. In fact, UGG boots made up about 84% of Deckers’ revenue in 2012, and have been the company’s flagship product since they became a major fashion trend in the early 2000’s. 

<img alt="" src="http://g.fool.com/editorial/images/59002/deck-revenue_large.png" />

Despite what a glance at the above chart may suggest, Deckers’ sales growth has not necessarily run out of steam over the past few years. The 2011 and 2012 winters were unusually mild, and as UGG boots are cold-weather wear, sales were not as good as they should have been. Generally, retailers order based on sales volume and growth of the year before, so if this winter is relatively cold (as the winters from 2008-2010 were), the growth trend should resume somewhat. 

The company also has begun to place an added emphasis on the Teva business, introducing many new products with a closed-toe design. Deckers’ ultimate goal should be to figure out a way to sell as much footwear during the first and second quarters as they do during the third and fourth each year. 

Additionally, there is plenty of room for international expansion. U.S. sales account for 70% of the company’s total revenue, and the company has begun to invest its resources in opening new stores abroad, particularly in Asia.

The numbers, July 2013

Even though shares have soared lately, Deckers’ still looks cheap. As of my last article on the company, written just before 2012’s numbers were released, the consensus was calling for $3.35 per share, and the actual number beat the estimates by 10 cents, which helped this recent rally tremendously. Even so, shares trade for just 15 times this year’s expected earnings of $3.69, which are expected to increase to $4.33 and $4.54 in 2014 and 2015, respectively. Again, these numbers will be very dependent on the winter weather experienced, and I realize this creates a risk that is out of anyone’s control.

Still, I think shares are worth a look at the current levels. The combination of 15 times earnings and a 10% average annual forward earnings growth rate sounds pretty good to me. Also worth considering is that Deckers has an excellent balance sheet, which features (among other highlights) about $110 million in cash and no long-term debt whatsoever. This sounds good, but before we go jumping in, let’s see what else our investment bucks will buy us.

Alternative plays: cheaper?

As far as other trendy footwear manufacturers go, there are really none that I would consider as an alternative to Deckers. There are, however, other fashion accessories manufactures that may be worth consideration. The best way to figure out plausible alternatives is to think of what else and UGG buyer might shop for.

A good alternative could be Michael Kors (NYSE: KORS), which makes men’s and women’s apparel, and is perhaps most recognizable for its women’s watches, which have become quite a fashion trend. While Kors may seem a bit expensive at 23.9 times this year’s estimated earnings, it is projected to grow more rapidly than Deckers. After all, the trendy products by Kors are generally in an earlier stage of their life cycle than those of Deckers. Kors is projected to grow its earnings by 25% and 19% over the next couple of years, which more than justifies the high price tag.

Another one to take a look at is Coach (NYSE: COH), which is perhaps a more mature company than the other two, but still has room to grow. Coach is currently expanding both in terms of geography (especially Asia) and products (the men’s line is rapidly growing). Coach trades for 15.8 times this year’s earnings, which are expected to grow by about 12% annually going forward. The company also has an excellent balance sheet with $917 million in cash and no debt, and Coach is also the only dividend payer of the group, currently yielding 2.3% annually.

Buy, sell, or hold?

While none of these is a bad choice, Deckers is my current preference of the three, especially before the colder times of the year. I feel that the company’s sales of the past few years do not accurately reflect the potential due to the warmer winters of the past two years. Pay particular attention for buying opportunities as the seasons change if the winter has a cold start this year, as this could catapult sales (and shares) to new highs in 2014.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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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