We last visited the Deckers Outdoor (DECK) in our article back of March 5, where we noted DECK's solid Q4 but expressed concerns on what appeared to be a back-ended Q4 and an alarming increase in accruals. In our report, which included analysis of the financial statements during the seven quarters ending Dec. 2010, we also cited weakening operating cash flow as interpreted with our dual cash-flow and accrual model.
Investors were in recent months clearly impressed with the non-GAAP and pro forma performance, but we believe they ignored structural shifts in the balance sheet and statement of cash flow. In particular, we noted a nearly 200% increase in accounts payable and accrued expenses between Q1-Q4 2010 and that the push into Europe might potentially exacerbate these issues. We also mentioned the potential impact the transition to a wholesale model might have on DECK's earnings quality in an article published January 27.
Another warning sign we believe could be seen in the adjustments to net cash used/provided by operating activities as these adjustments (payables and accrued expenses) accounted for almost 26% of net cash during Q4 2010.
Although it was obvious that the accrual trends were returning to more normalized levels, the push into international markets and resulting shift of revenue from the fiscal second quarter to Q3 manifested in management's expectation for a larger than expected loss for Q2 2011. Despite nice Y-T-Y revenue growth and earnings which beat estimates by $0.04, investors clearly didn't like this news. DECK shares tumbled almost 9% after hours.
The point here is that, regardless of how sensational the growth story is, or how comfortable and popular the UGG and Teva brands are, fundamentals do matter.
More important, the financial statements will provide plenty of clues as to how effective a company is at managing liquidity and ultimately quality-of earnings. Given the haircut DECK shares took, ignoring these clues was costly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
