Will Deckers Stock Rebound to Above $100?

Palwasha 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), owner of UGG, Teva and Sanuk footwear brands, has been one of the most disappointing stocks for investors this year--down 68% from its 52 week high of $118. Two other classic examples of equally disappointing investments this year, that come to my mind right now, are Research in Motion and Netflix--down about 70% and 50%, respectively, from their 52 week highs. However, with over 38.5% of its float short, Deckers has seen sell-off pressure like no other--Netflix has about 29% of its floated shares that are short while RIM has only about 19%.

Now, the problem with Deckers' stock is not changing trends, declining demand, market irrelevance, competitive substitutes or worse, bankruptcy. The reason of its stock price slump is the company's transition from a very high growth phase to a more stable growth phase. It's true, Deckers may not be an exceptional growth story anymore. It is just another stock now. It makes sense that this highly seasonal stock has fallen from its ridiculously high price to a more reasonable bargain. Should you buy? Let's analyze.

Despite the fact that Deckers has higher UGG brand sales during the fall season and higher Sanuk and Teva sales during the spring, when we take the absolute values of revenues, UGG still accounts for a much higher sales revenue than do any of the other brands, be it any part of the year. For instance, the UGG winter-wear brand accounted for about 62% of Deckers' total sales in the latest summer quarter, Q2. This is why discussing the UGG brand in fair detail becomes more relevant here. 

Much of the recent fall in DECK came after Sam Poser's bearish call, who is a prominent analyst of the footwear industry and has been very vocal about Deckers' unreasonably high priced stock for over a year. He's of the view that Deckers' UGG brand is losing its appeal. While I may not fully agree with the appeal factor because I see the UGG boots still in vogue, yet it doesn't go without noticing that the company is definitely facing trouble selling inventory. This is probably why you can see Deckers' premium UGG branded shoes up on sale on Nordstrom and some other online stores.

Days Inventory Outstanding (DIO) is a ratio that tells us how long (in days) it takes for a company to sell its inventory. A high ratio is obviously a red signal. For comparison purposes, I've used Crocs because of the similarity between the two businesses. Also, like Deckers, CROX became a fad within a year (Oct 2007-Oct 2008) when it tanked from $68 to $1 (though, it has regained its fall over the following years).

While Crocs' DIO has remained relatively stable over the past 6 quarters, Deckers' has greatly increased. The recent quarter DIO is insanely high at about 1004 days (Crocs is at about 453 days) which means it took almost 3 years for Deckers to sell that inventory. It can be argued that Deckers has a seasonal business and so the June and September quarters will naturally have higher DIO, but notice how it has hiked from the same quarters last year. It's alarming!

In terms of fundamentals, Deckers is relatively difficult to compare with industry peers, Crocs (NASDAQ: CROX), Wolverine Worldwide (NYSE: WWW) and Nike (NYSE: NKE). Because of high seasonality of its revenues, it'll be unfair to compare present margins. However, its Free Cash Flows (FCF) are the lowest amongst the four. With a beta of 2.36, the investment is riskier than twice the average market risk. Crocs, Wolverine Worldwide and Nike have lower betas of 1.89, 0.43 and 0.75, respectively. Another concern is its goodwill account. For three years 2008-2010, Deckers had only $6-$6.5 million in goodwill. By the end of 2011, it had taken a huge jump to $120 million. For the last four quarters, no impairment has been charged. The company warns in its filings of the same. A future charge could mean an even lower EPS going forward.

Additionally, CEO Angel Martinez, whose insider buying of 10,000 shares three months ago pushed the stock price up, liquidated half of his purchase at the beginning of this month (@ $36.64). Deckers' CFO and COO also liquidated a portion of their holdings.

Positives

One positive aspect of Deckers is its strong balance sheet. With no burden of long term debt (zero debt/equity and zero interest expense), very low current liabilities and current assets almost three times the liabilities (current ratio is 2.74) and cash and equivalents of more than $114 million, I don't see any liquidity or solvency troubles at the company. Also, the company is in good hands. CEO Martinez has more than 30 years of footwear industry experience, including Reebok, Keen Footwear and Rockport Co. (where, as President, he acquired Ralph Lauren footwear). Deckers' forward P/E is 9.2, against Crocs' 10.78, Wolverine's 21.43 and Nike's 18.44.

Also, the reason the company cited for lower margins earlier this year was high sheepskin prices, the most important input of its UGG boots. However, high current inventory levels and the company's declining demand for the raw material has caused its prices to decline. Lower input prices will help boost future margins. The footwear company doesn't pay dividends but rewards its shareholders through share buybacks. Another round of $200 millon worth in share buybacks has been announced.

Making the Call

There's no denying the fact that Deckers is a good company led by a reliable management. It has a strong balance sheet and holds a wide portfolio of strong brands. But will it rebound to $100? No. Not anytime soon. NASDAQ's consensus FY12 earnings estimate of $4.03 and a forward P/E of 9.2 sets the stock's price at $37.08--the price at which it closed on Friday. Its stock has tumbled to a more stable close-to-fair-value bargain now and I'd recommend a limit order for $32-$33 as a reasonable entry point for a long position.


PalwashaS 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.If you have questions about this post or the Fool’s blog network, click here for information.

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