Shares of footwear retailer Deckers Outdoor (NYSE:DECK) have plummeted since hitting a high near $119 in October of 2011. Since then, a series of revenue and earnings warnings has taken the stock down. On Friday, Deckers closed at $47, just about $5 off the recent low near $42. When Deckers reports its second-quarter earnings, date yet to be determined, all eyes will be looking to see if the company can rebound. When viewed on a price-to-earnings basis, this company seems cheap to many. But the only way Deckers will rally is if guidance is good. Let's look at the current situation.
Reason for the fall
I've compiled the fall of Deckers in a series of articles below:
- Is Deckers Outdoor A Short Candidate? - My first view that this company was in trouble back in December.
- Footwear Retailers Drop on Disappointing Guidance - Deckers fell after 2012 guidance at the Q4 report was below expectations.
- Deckers: The Latest High Growth Story to Collapse - Deckers again falls after a bad Q1 and guidance lowered again.
When I first wrote about Deckers in December, analysts were expecting 2012 revenue growth to be 20.5% and earnings per share growth to be 17.5%.
Deckers' initial 2012 guidance was lower than expected, and the guidance was lowered at the Q1 report, where Deckers reduced the revenue forecast from 15% growth to 14% growth. Right now, analysts are even more bearish, only expecting a 13.1% increase this year. So if Deckers just maintains its 14% revenue forecast for the year, that will be ahead of estimates (more on that later).
On the earnings front, Deckers analysts were expecting around $5.80 in earnings this year when 2012 started. After the guidance in February, estimates were cut to around the $5.13 mark. When Deckers cut again, estimates came down to $4.53. They now stand at $4.51. Deckers' latest guidance was for earnings per share to fall by 9% to 10% this year. The midpoint of that, a 9.5% decline, is about $4.59 based on last year's $5.07 in earnings per share.
Deckers' business is a seasonal one. That means that it derives a large share of its business in certain quarters, as you can see from the following table, which shows the percentage of revenue per quarter (some totals may not add to 100% due to rounding).
Depending on the year, Deckers gets between 70%-75% of its revenue in the second half of the year. In fact, the current quarter (Q2) is the slowest in terms of sales. Current Q2 estimates of $166.74 million represent just 10.7% of the $1.56 billion expected this year. Should Deckers beat or miss by just a small amount, it probably won't matter. Everyone will be waiting to hear the Q3 and full-year guidance.
Is Their Hope?
Deckers has two main problems that have been hurting the company over the last year. First, a mild winter led to sales being much lower than expected. Secondly, prices of sheepskin were soaring, and sheepskin is one of the main inputs into those UGG branded boots. Deckers also has a lot of selling and general costs, and those have increased in recent quarters as the company pushes into its own stores. Over time, the selling costs should come down a little.
Now, the mild winter led to some troubles for Deckers. However, there are rumors that those problems have led to falling sheepskin costs. If sheepskin costs do come down, Deckers will be able to substantially improve margins. That will definitely help the bottom line. Deckers may also decide to pass on some of those savings to consumers in an effort to boost overall sales.
But the impact for Deckers this year will all depend on the timing of those price decreases. If the prices didn't decline until after Deckers built up all of the inventory for the rest of this year, then we won't see any help until 2013. But if prices came down and Deckers saved those costs on the inventory that will be sold this year, the second half of this year could see great improvement.
Industry and Comparisons
Deckers is a specialty footwear retailer. Generally, when people look for competitors, they compare it with Crocs (NASDAQ:CROX) and even Nike (NYSE:NKE). But because it has been a high growth, momentum name, some investors also compare it to Lululemon (NASDAQ:LULU) and Under Armour (NYSE:UA). I'll show you why those latest two comparisons don't make sense.
I have two tables to present today. The first table shows the expected revenue and earnings growth for these five names, for this fiscal year and the next. Now, there are slight differences in the fiscal years. Deckers, Crocs, and Under Armour all use calendar years. Lululemon's fiscal year ends in January, so its "current year" ends in January 2013. Nike uses May for its fiscal year, so its "current year" ends in May of 2013. Here are the expected growth numbers.
|Revs (Current Year)||13.10%||16.90%||5.00%||35.30%||22.80%|
|Revs (Next Year)||12.30%||13.90%||7.30%||24.20%||21.80%|
|EPS (Current Year)||-11.05%||18.55%||10.15%||28.57%||26.88%|
|EPS (Next Year)||20.62%||18.37%||13.44%||27.78%||27.97%|
As you can see, Deckers is more comparable with Crocs and Nike at this point. Now remember, before 2012 started it was expected to grow revenue by more than 20% and earnings by more than 17%. At that point, the growth expectations were close to those of Under Armour. But the latest growth forecast warnings really have knocked it to a different class of names. Deckers expects to see an earnings rebound next year, but we'll see what happens in the 2nd half of this year first.
The next table shows the valuations of these names, both the price-to-sales and price-to-earnings ratios based on the current expectations for the two-year periods.
|P/S (Current Year)||1.16||1.14||1.70||5.99||2.73|
|P/S (Next Year)||1.03||1.00||1.58||4.81||2.25|
|P/E (Current Year)||10.42||10.05||18.04||34.66||40.17|
|P/E (Next Year)||8.64||8.49||15.90||27.13||31.39|
Sure, if you valued Deckers or Crocs like Lululemon or Under Armour, the stocks would be much higher. But even if you compare Deckers with Nike, you see that Deckers is growing faster, but has a much lower valuation. The stock has been beat up with these warnings. Any positive news will help this stock rebound.
Conclusion - It all comes down to guidance
When Deckers reports its second quarter, probably sometime in early August, all eyes will be on the guidance. If it maintains, or even raises the forecast, you should expect to see a large rally in this stock. We've already seen shares wanting to pop after the CEO purchased some shares. Deckers will lose money this quarter, and that is something that everyone already knows; it has happened before in the second quarter. So don't be worried when it reports a loss. Now, if it takes down the guidance again, this stock will get hit hard. The $40 level will probably be taken out. But if Deckers can give somewhat decent guidance, look for this name to rally. It has been beaten down tremendously, and positive news should lead to a nice rally and potential short squeeze.