Deckers Outdoor - Solid Revenue Growth Drives Share Recovery

| About: Deckers Outdoor (DECK)

Shares of Deckers Outdoor (DECK) ended the past trading week on a strong note. Shares rallied more than 15% after the company published a strong set of fourth quarter results on Thursday after the market close. Shares added another 2% in Monday's trading session.

Fourth Quarter Results

Deckers Outdoor generated fourth quarter revenues of $617.3 million, up 2.2% on the year before. Sales were driven by a 2.9% increase in UGG revenues, which make up 95% of firmwide sales. Strength in the smaller Sanuk brand was offset by weakness at the Teva brand. Revenues came in just below consensus estimates of $623.0 million.

As a result of the well-documented slowdown in revenues, as well as higher sheepskin input costs, margins are under pressure. Gross margins for the quarter fell by 470 basis points to 46.3%.

Fourth quarter earnings fell by 23% to $98.1 million. At the same time earnings per share fell "merely" 13% to $2.77 per diluted share, as a result of share repurchases. Earnings beat analysts consensus of $2.61 per share.

The company took the opportunity to buy $220.7 million of its own stock in 2012, after shares have fallen significantly. Under its current share repurchase authorization, Deckers Outdoor can repurchase another $79.3 million of its own share. During the past quarter, Deckers slowed down the pace of share repurchases to $36.0 million, or 932,000 of its own shares.

CEO and Chairman Angel Martinez commented on the performance during the holiday period, "There are several aspects of our fourth quarter performance that we believe underscores the health and relevancy of the UGG brand. Our fourth quarter retail store performance improved versus our third quarter trends, while at the same time, weekly sell-through in our domestic wholesale channel accelerated as the fourth quarter progresses culminating in a period of robust full-price selling in late December 2012."


As the company ended the fourth quarter on a positive note, it is looking with confidence into 2013. Full year revenues are expected to increase by approximately 7%. Diluted earnings per share are expected to increase by some 5%, as gross margins will stabilize around 46.5%.

Based on 2012's annual results, Deckers is guiding for full year earnings of $3.62 per share in 2013. This came in slightly below consensus estimates of $3.70 per share. The guidance for full year 2013 revenues of $1.51 billion, beat consensus estimates of $1.48 billion.

For the current first quarter of 2013, Deckers Outdoor expects revenues to come in flat compared to levels in the first quarter of 2012. The company expects to lose approximately $0.12 per share, or $4 million. This compares to a modest profit of $0.20 per share in the first quarter of 2012, and analysts estimates for a $0.06 per share profit.

Martinez commented on the outlook for the business, "We've made modification to the UGG brand footwear collections to broaden accessibility, reduce exposure to sheepskin price fluctuations, and better bridge the summer and holiday selling seasons. We've adjusted receipts and reduced future purchase commitments as we continue to work diligently to better align inventory and sales growth."


Deckers Outdoor ended its fourth quarter with $110.2 million in cash and equivalents. The company operates with $95.2 million in short and long term debt, for a net cash position of roughly $15 million.

For the full year of 2012, Deckers generated annual revenues of $1.41 billion. The company reported a net income of $129.0 million, or $3.45 per diluted share.

Factoring in Friday's large jump, the market values the company at $1.65 billion. This values the firm at approximately 1.2 times annual revenues and 13-14 times earnings. These multiples are expected to come down to 1.1 times annual revenues and 12-13 times annual earnings based on 2013's full year guidance.

Deckers Outdoor does not pay a dividend at the moment.

Some Historical Perspective

Shares of Deckers Outdoor peaked around $118 in October of 2011. Slower revenue growth and high sheepskin costs send shares into turmoil. Shares ended the year of 2011 around $80 per share and fell to lows around $30 in November of 2012. From that point in time, shares have already recovered more than 50%, currently exchanging hands around $47 per share.

Between 2009 and 2012, the company has aggressively grown its business. Annual revenues grew from $813 million to $1.41 billion over the time period, increasing by almost 75%. Earnings grew from $117 million in 2009 to peak around $199 million in 2011, before falling back to $129 million in the past year.

Investment Thesis

The situation at Deckers seems to have stabilized as the deceleration of revenue growth has come to a standstill. Furthermore, lower sheepskin costs will result in flat margins, after gross margins have compressed a lot over the past year.

Positive is furthermore the reduction in the inventory levels, which fell some 38% to $300 million over the past quarter. Other positive lights in the report include a 15.6% increase in international sales, after those sales fell in the third quarter. Retail sales rose 30% to $246.0 million during the quarter, driven by new store openings as same store sales fell by 3.4%. Uggs remain popular on eCommerce websites, being one of the most searched terms on the internet during the holiday season.

Some investors note that the company is burning through a lot of cash over the past year. The net cash position of $15 million is much lower compared to the $263 million net cash position in the final quarter of 2011. The reduction in cash levels were driven by $221 million of share repurchases during the year. Excluding this impact, the net cash position of the firm is roughly flat.

On the back of the solid earnings report, analysts at Jefferies raised their price target for the stock to $65 per share. They furthermore note that the company is well-positioned for 2013 with cleaner inventories and margin tailwinds on lower sheepskin costs. Analysts think that the full year 2013 outlook is conservative and they expect an upward revision to earnings in the coming quarters.

At last, the strong brand awareness and strength, combined with the modest valuation multiples, leaves the possibility of an acquisition. The strong financial position and the modest market capitalization increases the possibility of a deal.

In October last year I took a look at the prospects for Deckers Outdoor after shares fell to lows of $30 at the time. I concluded that shareholders were overreacting at the time. From that point in time, shares have gained almost 60%. At these levels I continue to like the prospects of the shares, although the short term upside is rather limited after the strong recent performance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.