Has The Other Shoe Dropped?

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

A fad can last longer than you think and it can crash faster than you can imagine. Object lesson, three shoe stocks. Maybe you can already guess: Crocs, Inc (NASDAQ: CROX), Skechers USA Inc (NYSE: SKX) and the most recently downgraded Deckers Outdoors Corp (NASDAQ: DECK).

Deckers, which makes UGG Australian boots, has fallen from its October 2011 high of $118.90 to just a few percentage points above its 52 week low of $34.59. UGG Australia boots were its premier brand which brought in two thirds of its revenue although it also owns brands Simple, Teva Sandals, Tsubo, Mozo, and Sanah.

The Other Shoe Drops

Deckers had been hit with a one-two punch with rising sheepskin prices and analyst downgrades most recently by Baird but most significantly by Sterne Agee’s Sam Poser who had been downgrading it since 2011 and then again on September 25. Why is Poser even less sanguine about Deckers now? The company has started to discount the UGG merchandise, July and August sales were weak, and he says it is showing up in more “schlocky” stores in addition to its higher-end Nordstroms and Lord & Taylors.

He didn’t mention all the knockoffs that are available. Just yesterday there were UGG lookalikes for sale for $14.99 at my local CVS store. Same day, I received a daily deal to buy one of the more expensive knockoffs for 83% off at $22.00. Not to mention the problems Deckers has had with counterfeits that many other name brands like Coach are fighting along with law enforcement.

As it is Deckers is trading at an 8.11 P/E with a forward P/E of 7.37. The company has no debt. CEO Angel Martinez bought approximately 15,000 shares in June and July in the mid $40s.

Deckers has these other brands that so far haven’t staved off its decline. Tsubo, is a newer line for them marketed as “comfortably metropolitan” with platform shoes, traditional boots and men’s street shoes priced between $100-$300. Ahnu is a newer brand as of 2009 and is characterized as “yoga-chic’ with hiking and walking shoes and advertised in Yoga Journal. Mozo is a line designed by chefs for culinary professionals for people who work on their feet all day. Sanah is a line of slip-ons, sandals, and boots and then there is Teva, consisting mostly of sandals  with water shoes, boots, and sneakers. Mostly these lines overlap to some degree. Tsubo even overlaps with UGGs as Uggs introduced a line of Italian leather boots not at all UGGly, with pricing between the mid-$500 to $795.

Deckers is a company with an arid moat. Copycats and counterfeits aren’t the only problem. Their newer brands need to gain traction (pun intended). Tsubo, the likeliest candidate for fashion forward adoption has many competitors. Nine West, Nasty Gal and Steven Madden are only a few. Their men’s UGGS have not gotten the lift they expected from a Tom Brady endorsement and placing a huge ad of him in Times Square was apparently a major faux pas. Maybe at 4x earnings Deckers is a buy, but there is just too much competition in the shoe biz.

Can Skechers Shape Up?

Skechers, makers of performance footwear, competes with Deckers across several lines although their most direct competitor would be Nike. Skechers has a negative P/E of -1.12. In 2009 the share price fell below $8.00 to a high of over $40 in 2010. It dived again to a low of $11.21 this January. Like Deckers it had a problem with copycats of its hot line Shape Ups that purported to shape your legs as you walked. But then Skechers was hit with a class action lawsuit claiming false advertising; it seems the Shape Ups didn’t give you legs like a Rockette. People just weren’t going to pay over $80 for a shoe that didn’t give them great legs after all.

Lately, the stock has been moving up. Their last Q2 report heartened Wall Street with a less than expected loss of only $0.04 a share. Analysts now think they could show a profit of $0.84-$1.07 a share in 2013.

Their most promising product now is their BOBS line of slip on espadrilles, very similar to TOMS, a privately held company shoe company. When is homage a knockoff? I don’t know but right now it does seem to be working for Skechers. One other interesting line is a new sneaker with a built in three inch wedge so shorties can look taller when they work out. I don’t know how comfortable they would be but I’m certain there are fashionable petites that would buy them.

Skechers reports again on October 24.

Is Crocs All It’s Cracked Up to Be?

Like Nike and Deckers Crocs has seen a decline in European sales. Crocs now has an 11.72 P/E and a forward P/E of 9.32. The PEG is .62. The stock is down 26.32% over 52 weeks.

Crocs doesn’t have much total debt, only $11.26 million to total cash of $278.83 million. It has been moving away from its signature Crocs shoe into boots and slippers and street shoes for some time.

Crocs has been becoming more popular overseas, already in 90 countries. Some analyst have called Crocs products weather dependent but as I mentioned they also carry warm slippers and boots (and at a much lower price point than UGGs) so I think that particular argument is moot.

Their expected EPS growth rate is much higher than Skechers and Deckers and should remain in the double digits for several years. Crocs also reports on October 24.

Fad  versus Fashion

These names have all received serious poundings of late and are just beginning to rebound. The problem is and will be how much are they fad or are they fashion and wearable for the long term. All I can say is they are now at P/Es where they should have been all along.

 


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Crocs and SKECHERS USA. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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