Deckers Outdoor (DECK) - We are buyers of DECK shares ahead of its F2Q (July) earnings release. We believe Deckers can exceed our 2Q EPS estimate of $0.07 (consensus is $0.05), representing the third consecutive quarterly upside surprise. Given current trends, we think Street numbers for 2006 and 2007 are too low. Teva is in the early stages of a recovery, channel checks indicate positive spring UGG sell-throughs, and Simple is generating strong double-digit growth, with its environmentally correct Green Toe line likely a major future driver.
Strong spring sales and fall bookings. According to our checks, UGG brand’s spring assortment, featuring driving mocs and its “Layback” and “Spinner” sandals, has performed extremely well. In addition, Teva has gained traction at Nordstrom’s with more favorable placement, following strong spring sell-through, and is up against very easy comparisons (a 27% decline in operating income and a nearly 700 bp contraction in EBIT margin). In light of favorable spring results, fall bookings should accelerate, leading to potential EPS upside (in 3Q) for the fourth consecutive quarter.
Expect upside to 2Q results. We believe Deckers can beat our Street-high 2Q EPS estimate of $0.07 (2Q results to be reported at the end of July). UGG’s spring product has resonated with consumers, while the relaunch of Teva should prove more profitable than was the case last year.
Simple the sleeper. Simple and its all-natural cousin, “Green Toe,” have the potential to deliver strong double-digit growth for quite some time. We see Green Toe becoming the leader in environmentally correct footwear, especially given its opportunity in the health food store distribution channel following a positive test launch in Whole Foods.
Risks. Weather, consumer slowdown, and failure to execute a Teva turnaround.
Our price target is $57, based on 20x our 2007 EPS forecast of $2.70. Our target multiple of 20x represents a premium to the group, warranted, in our opinion, given the increased visibility and growth prospects at all three brands and potential upside to consensus numbers over the next few quarters.