Deckers -- The Long-Term View
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Deckers (NASDAQ: DECK) recently reported earnings that beat expectations, but their forecasts fell short of what the market was expecting. I read an article by Sean Williams on The Motley Fool, where he outlined three reasons that he is “still not buying this stock.” I believe that Sean, and the market, have taken the short-term view of Deckers. If you look at the company's long-term prospects, there is a lot to like about this stock.
The first reason Sean said he is not buying Deckers is they are heavily reliant on the UGG brand. Let me just point out that the UGG brand came to the U.S. in 1979 and has been registered by Deckers since 1999. This is a brand with 33 years of U.S. experience and 12+ years under Deckers management. Reliance on one brand is not a bad thing. What would companies like Nike, Coca-Cola, Pepsi, and others be without their main brand? These are single name brands that have branched out and created sub-products from one main product. Brand recognition is the core tenet of many companies, and wouldn't appear to be a great reason to avoid Deckers.
The second reason Sean gives is Deckers has “uncontrollable costs.” He says that their expansion into Europe has occasionally cut into forward guidance. I might point out, when other companies cut their guidance due to expansion plans, this is usually applauded. Note the expansion of Amazon.com (NASDAQ: AMZN) as they built out their U.S. distribution. Amazon.com was an earnings-negative company for several years while they built up their distribution centers and product mix. The company was taking the long-term view, and is now seen as the dominant online retailer. The up-front costs of expanding internationally for Deckers is a short-term issue. Longer term, this extends the life of a company's growth and diversifies earnings.
The second portion of Sean's uncontrollable costs argument is specific to input costs like sheepskin. Deckers management realizes that this input cost is a challenge. In response they are launching, “long-term programs to increase the mix of non-sheepskin merchandise.” The purchase of the Sanuk brand and expansion of the Teva brand should lead to less reliance on sheepskin pricing. There are two other items to keep in mind. First, management said that the rise in sheepskin prices “could hurt the bottom line by up to $1.40 per share.” This is management guidance, not fact. Their expectations may or may not be right on. Given that Deckers has a history of beating earnings estimates, it could be management is guiding lower to continue this streak. Deckers beat earnings expectations in each of the last four quarters by over 11% on average. Second, the company said it expects this input cost issue to dissipate by 2013. A one-year occurrence is not a reason to avoid a company.
The third issue Sean raises is that UGG could be a fad. Let me put that to rest by one fact. The UGG traditional boot has roots in Australia since the 1920s. If this is a fad, it's the longest running fad possibly the world has ever known. The Deckers version of UGG boots have been popular for over 12 years. In addition, a visit to the UGG web site makes clear that UGG sells sandals, boots, shoes, slippers, handbags, and apparel, to men, women, and kids. This is not a brand of one kind of boots.
Taking the longer-term view, what can we expect from the company? According to management, 15% longer term compound annual growth. They also approved a $100 million share repurchase program. Analysts expect a slight increase in earnings for 2012 of about 4%, and then a jump of over 18% in 2013. The stock has taken a hit since releasing earnings and currently trades at about $75.05, which gives the stock a forward P/E of 14.26. This is the P/E if they meet their revised lower guidance. Looking out to 2013 their P/E would fall to just over 12. If sheepskin prices don't have as dramatic of an impact on the bottom line, analysts could be left in the dust again. I already have a five-year outperform call on Deckers on my CAPS page, I also have real money invested in the stock. I'm willing to be patient and I know that my patience will be rewarded.
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