Deckers Outdoor - Exaggerated Sell-Off Provides Long-Term Investors With Entry Opportunity

Apr.30.12 | About: Deckers Outdoor (DECK)

Shares of Deckers Outdoor (NASDAQ:DECK) tumbled on Friday after first quarter results missed expectations. The designer and producer of footwear, apparel and accessories saw it shares close 25% lower to $52 a share.

First Quarter Results

Deckers Outdoor reported a 20% sales increase for the first quarter to $246.3 million. Diluted earnings per share fell from $0.49 last year to $0.20 for this year's first quarter. The results fell short of analysts expectations for a profit of $0.25 per share on expected revenue of $247 million.


UGG brand sales, the major division of the company, increased 6.5% to $158.1 million, driven by strong sales at company-owned stores. Teva brand sales fell 1.1% to $49.8 million. Sanuk which was acquired in July 2011 reported first quarter revenues of $32.4 million. The company opened 19 new stores during the quarter which led to a 30% revenue increase to $46.2 million in the first three months.


Gross margins fell some 400 basis points to 46.0%. The difference in the channel mix and higher close-outs for Teva explain the pressure on gross margins on top of the higher product costs which were foreseen earlier.

"Our first quarter performance was mixed versus our expectations," according to CEO Martinez. "Sales growth was driven by the addition of the Sanuk brand combined with increased demand for the UGG brand spring line, partially offset by softness in boots due to the unusually warm weather. The


The company negatively revised its full year 2012 outlook on the back of the first quarter results. Deckers now expects sales growth of approximately 14% vs. 15% predicted earlier. Diluted earnings per share are expected to fall 9-10% compared to a flat guidance earlier. Gross margins are expected to fall 250 basis points vs. an earlier prediction of 200 basis points.

For the second quarter the company expects a 8% revenue increase and a diluted earnings per share of $0.60 compared to a loss of $0.19 last year. Gross margins will contract further to 43.0% as a result of higher overhead from newly opened retail stores.


Deckers Outdoor ended its first quarter with $229 million in cash and equivalents. It has $52 million in long term liabilities outstanding for a net cash position of $177 million. After Friday's fall shares are valued at merely $2.0 billion or roughly $1.8 billion for operating assets given the net cash position of the company. This values the company at 1.3 times annual revenues and roughly 9 times 2011's annual earnings.

The revenue multiple compares to a valuation of 1.8 times for Crocs (NASDAQ:CROX), 2.0 times for Steve Madden (NASDAQ:SHOO) and 1.3 times for Wolverine World Wide (NYSE:WWW).

Currently the company does not pay a dividend.

Investment Thesis

Shares have roughly halved in a period of six months. Shares peaked at $118 per share at the end of October and have fallen significantly after the company negatively revised its outlook two times in a row.

Slower revenue growth, short term expenses related to the opening of retail stores and an expensive acquisition of Sanuk are the main forces behind the recent declines in the share price. The company expects to take a $13 million amortization and accretion expense for the entire year of 2012. Another worrying sign is the 95% increase in inventories to $209 million driven by an increase in UGG inventories, which is only partially justified by the retail expansion.

Long term shareholders in Deckers Outdoor have seen great returns over the long run but have seen their holdings roughly half in merely six months. The company has seen years of significant revenue growth accompanied by a fat profit margins. Slower revenue growth and margin compression have scared off investors. The company still has a strong financial position and trades at reasonable valuation multiples. Investors who are not scared for short term volatility could pick up some shares for the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.