Lately there has been a lot of debate about whether or not Deckers Outdoors (DECK) is a buyout candidate. While not explicitly stating it is a buyout target, Randal Konik at Jefferies & Co stated not only is the UGGs brand "not dead" but that "UGG continues to be prominently displayed in department and independent stores, and is consistently touted as a winter 'must have' accessory." He went on to state that his study of online social media trends, department store sales, Deckers websites and the company's independent wholesale channels all point to a brand that's "still very much alive."
Wedbush Securities Initiated Deckers at an Outperform rating on 11/19 and stated "We find current valuation very compelling and believe little additional headline risk in the stock remains for the balance of 2012."
I've followed the Deckers story for 8 years and actually just recently purchased a stake in the company on the merits of relative valuation. I have held off on buying the stock until it dipped to $31 last week in large part because of the deal VF Corp (VFC) did with Timberland a year ago. I will discuss the details of this later on but this deal was a good litmus test for the valuation of DECK in my opinion.
Additionally, last week Nike (NKE) sold its Cole Haan handbag and shoes brand to a private equity firm for $570 Million in what was its second sale of a brand in the past month. Nike previously sold Umbro, a popular soccer brand, to Iconix Brand Group (ICON) for $225 Million.
In their press release, CEO Mark Parker stated "It is a difficult decision to divest any business but this action will enable us to focus on our highest-potential growth opportunities". Combined, these two sales raised about $795 Million in cash for Nike.
While Nike could be focusing on its core brands, I believe there is a case to be made that Nike or some other company is setting itself up to purchase Deckers. The primary reason is valuation. Deckers is extremely cheap relative to these three aforementioned buyouts as shown below.
Sales: $518 Million; marginal profit
Valuation: $570 Million or 1.1 times sales
2011 Sales of $224 Million (declined from $276 Million in 2006); not profitable
Valuation: $225 Million or 1.0 times sales
This is the only one that is actually generating profits out of the three examples I cite so let's look at EBITDA as well as sales:
Sales: Approximately $1.5 Billion
EBITDA: $215 Million
Valution: $2 Billion or 9.3 times EV/EBITDA and 1.33 times Sales
By comparison, DECK trades at about 0.8 times sales and they are generating $150 to $200 Million in net income. EBITDA is roughly $240 Million for 2012 so DECK is trading at a EV / EBITDA of 5.40.
If you were to assign a blended rate of these buyouts to the valuation of DECK you would arrive at the following:
Price to Sales: 1.15 times or $47/share
EV / EBITDA: 7.9 Times** or $48/share
**I assumed a 15% discount to the purchase price of Timberland to be conservative
The primary concern about DECK has been that its UGGs brand, which continues to generate a bulk of the company's sales, is a dying brand. People contest that it is losing its popularity. While this might be true to a certain extent, a good deal of this slowdown appears to be due to two very harsh temporary events:
(1) Rapid rise in sheepskin costs, their main input cost in the production of their UGG boots, which should eventually reverse itself
(2) Abnormally warm weather in 2011, which reduces the demand for UGG winter boots.
It appears that the excessive pessimism surrounding DECK may have created a unique opportunity to buy the stock for a 50%+ upside run. Valuation relative to the three recent buyouts I mentioned above is very cheap. Two of the brands above are not profitable yet were purchased for significant premiums over the current valuation of DECK.
Should sheepskin costs fall more in line with historical norms and should the weather return to a more normal pattern (which it appears to be doing this year so far), DECK may be able to fetch an even higher multiple more in line with the VFC Corp's acquisition of Timberland (or roughly $60/share). Even if a buyout doesn't occur DECK should naturally levitate to the same valuation as companies within its industry.