Deckers Outdoor Corporation: Too Much Optimism?

“Blew out a flip flop…” The words of Jimmy Buffet seem applicable to Deckers (DECK) these days. The company built its reputation on their Teva sandals in the 90’s, but has since seen the brand deteriorate. The stock experienced some extreme difficulty surrounding the drop in Teva sales and in 2005, the stock lost nearly 2/3 of its value before it finally found support.

Since then investors have been handsomely rewarded due to the company’s purchase of the Ugg brand which is built around comfortable, sophisticated sheepskin footwear. The original line dealt mostly with boots and was a nice complement to the Teva seasonality as consumers are likely to buy Tevas in the spring and summer and the boots in the fall and winter. DECK was also creative enough to add to the Ugg brand including more traditional shoes that can be worn all year round, but still feature the comfort of sheepskin. While Teva sandals are sold at outdoor type stores such as Bass Pro Shops and Sports Authority, Ugg shoes are available at fashion retail stores such as Sachs Fifth Avenue.

Management has been trying hard to get back to their roots and resurrect the Teva brand. Teva still represents 24.7% of the company’s revenue (according to the 2006 annual report) and the growth in this brand has not been impressive at all. Deckers is hopeful that international expansion will bring more growth, but it is frustrating for investors to see significantly lower margins on international sales. In the second quarter, the overall firm’s gross margins dropped 420 basis points due in a large degree to the international sales. While the company increased its guidance for 2007 and analysts upped their price targets, there appear to be hurdles in the road that will be difficult for Deckers to maneuver around.

One of the new products DECK is rolling out is a green initiative dubbed “Simple.” This new line of shoes is made entirely from recycled or replenishable materials. The company hopes to reach out to environmental end customers who originally were the target market for Teva sandals. The problem is that the company is having trouble selling this new line. Sales were actually down 21% in Q2 which is not at all what you want to see with a new growing brand. While “Simple” does not represent a significant portion of revenue at this point, I would venture to guess that much of the optimism in the stock price is based on the fact that this new brand could drive sales. If Ugg turns out to be a fad, or is duplicated by a competitor, the company may not have such a rising star brand to fall back on.

While I understand that the Ugg platform has outpaced expectations, I am concerned that there is too much optimism in the shares and any hiccup in the sales of Ugg this fall could cause a severe decline in the stock. As mentioned before, I have taken some short positions in consumer stocks such as Coach to hedge against consumer weakness. The next quarter could be very interesting as wall street digests the lack of liquidity and the impact it will have on many different sectors of our economy.

Disclosure: Author has a short position in DECK

DECK 1-yr chart

Comments

[Jim Glazen:]

you sound like another desperate short who has lost his ass. posting negative articles on seeking alpha likely won't help you out of your predicament.

2007 Aug 22 07:42 PM