Outlook for Deckers Could Get UGGly

Deckers Outdoors Corp (DECK), the maker of the trendy UGG shoes and boots line, is a prime short candidate. I don't expect DECK to be a complete disaster, like Crocs (CROX), however, in my opinion, it is bound to disappoint in a big way.

It's true that the company has lines other than UGGs. Deckers has admirably worked on trying to de-lever its concentration and reliance of the UGG brand, but the brand still accounts for close to 90% of sales. The 52 week high is 160 and 52 week low is 46. Sales for the first 3 quarters of 2008 are 197 million, and EPS for the same period is 1.97 per share. Domestic sales are 162 million, or approximately 83% of sales. UGG sales, for the first 3 quarters, were 178 million or 90% of sales.

As for the balance sheet, the company has 35 million in cash and 32 million in short term investments vs. 54 million cash and 113 million short term investments in the same period in 2007. Receivables are up 55% and inventories are up to 157 million vs. 51 million (probably gearing up for what they expect to be an anticipated strong demand in the 4th quarter).

On October 23rd, the company upped their guidance to +52% revenue vs. the prior year, and +40% EPS vs. 2007. That would have the company doing approximately 680 million sales and 7.20 in EPS.

So with sales apparently booming and EPS guidance being upped, why is DECK a good short candidate? Well, why is the stock down from close to $100 per share from when they made those announcements? Heck, the stock is trading at almost 7x next year’s projected numbers. When a company increases guidance, they had better meet those results and not disappoint. In addition to meeting those results, the company should have forward guidance that at least meets expectation - or watch out below.

In my own household, my wife owns a pair of UGG boats and UGG slippers and my 4 year old daughter owns a pair of UGG boots; heck, I even succumbed to buying a pair of men UGGs winter boots last year. Let me make one thing clear: the footwear is great - no complaints there (but there also aren't any complaints by my kids about their Crocs either...I know that’s a cheap shot); this isn’t an issue about the product, but about a slowdown in spending and a concentration of sales reliant on a single product line. Last year and the year before, UGGS were the “IN” item to purchase in footwear; you had teenagers wearing them in the summer. UGGs were a fad and still are, to a certain extent. But, we all know what happens to fad stocks at the end of the day.

In a normal economic environment, my wife would almost certainly be buying another pair this winter; maybe in another color. But with the economy collapsing, we will not be adding any new UGGs to our household this year. We will be just fine with our models from last year (I imagine we aren’t the only ones). As for consumers looking to purchase new boots, I can’t see them spending $300 on a pair in this market environment. The discretionary income just isn’t there.

With the economy weltering and unemployment rising, and with the increase in layoffs all across the country, could DECK have made a mistake raising their guidance for the 4th quarter and for 2009? Lazard has been bullish on the stock with a $200 price target (then again, they were bullish 50 points ago, too). Piper Jaffray reiterated their buy about 70 points ago. Sterne Agee & Leach had the stock as one of their best picks about 80 points ago. Thomas Weasel initiated an overweight, also 50 points ago. Wedbush was bullish at 89 (although they at least reduced price target to 123 from 157). My guess is that once Deckers misses or lower guidance due to the economic slowdown, most analysts will lower targets and change recommendations. By that time, we will be looking a $20-30 stock.

Disclosure: no positions in DECK stock

Comments

[oldshoedog:]

Wow!

You and your wife and kids own Uggs and you won't buy more this year, therefore the stock is a short!

Awesome intel dude! Get outside much?

And pithy Analysis!

Especially : "When a company increases guidance, they had better meet those results and not disappoint. In addition to meeting those results, the company should have forward guidance that at least meets expectation - or watch out below."

I'll bet you are rich!

2008 Nov 25 07:24 AM

[User 389025:]

uggs is really good. and i find a good sites sell uggs fou high quality and low price as now they are make a promotion for uggs. takeboots.com

Apr 05 12:46 PM