Shares of footwear and fashion retailer Deckers Outdoor (DECK) traded lower on Monday after an analyst stated that sales trends were not looking good. Shares ended off their lows, but finished down nearly 2% for the day. While this is just one analyst's opinion, it is the same analyst (Sam Poser at Sterne Agee) whose similar call late last year led me to initiate a short call on DECK, which has been one of my best calls over the past year.
Before I get into today's news, here's a brief history of my history with Deckers. In late December, Poser downgraded Deckers to Underperform from Buy, and cut his price target from $130 to $72. His reasoning was that channel checks showed that Deckers sales were disappointing. With warm weather and high sheepskin prices, Deckers appeared to be in a tough position.
At that time, I recommended a short position on Deckers in the low $90s. When Deckers fell quickly into the mid $70s, I said to cover the short position and go long again for a quick trade. Deckers rallied back to the low $90s, where I stated to short again. I continued recommending short positions after Deckers's disappointing first and second quarter guidance. Deckers dropped to around $40, and I stated that shares would rally if guidance (at the second quarter report) was good. Guidance wasn't good, but it wasn't terrible, and shares rose back above $50. At that time, I continued to recommend shorting Deckers on pops, as that had been the successful trade for some time. You can review all of my Deckers focused articles here.
So when Poser came out with a research note on Monday, I was quick to listen to what he said. Here is the most concerning point:
"Beyondtherack.com apparently has broken the ice with a flash sale for this past weekend (September 15th & 16th) where, for the first time, we have seen Classic UGG styles, including the Classic Tall and Short, The Bailey Button, and the Triplet and other styles including the cold weather Adirondack boot on sale for 15% to 50% off regular prices" the analyst notes. "Basic colors and fashion colors were available in all styles."
Poser noted that channel checks remained very weak and that it appeared that the UGG brand was fading. This appeared to be the first time that UGG Classics appeared on a flash sales site, implying Deckers is having a hard time selling product. Poser now questions whether Deckers' sales are more weather-related, or just fashion-related. Remember, Deckers' management, and bullish investors, have used the "warm winter" excuse for the past year.
Poser stated that the Deckers (and UGG) brand remains at risk, and that second half guidance could be an issue. Remember, Deckers has essentially warned for the current quarter three straight times. Poser reiterated his underperform rating and $38 price target. That implies about 20% downside from current levels.
The problem for Deckers is that many perceive it as a high-growth company, and the growth has slowed tremendously. From 2009-2011, the yearly growth in sales was 18%, 23%, and 37.6%, respectively. Coming into this year, analysts were looking for a little more than 20% growth. Right now, analysts are expecting just 12.6% growth for this year and 11% for next year. Remember, Deckers has taken down its forecasts three straight quarters, which is why analysts currently have lower expectations than Deckers' guidance for 14% revenue growth this year.
The following table shows the growth issue for Deckers, as compared to other names in this space, including Crocs (CROX), Nike (NKE), and lululemon (LULU). Now for each below I've provided the current analyst estimates for each company's current and next fiscal years. Deckers and Crocs use calendar years, lululemon's current fiscal year ends in January 2013, and Nike's current fiscal year ends in May 2013.
Deckers isn't the high growth company it used to be. Nike is the most established of these names, and investors are buying it for its dividend and stability. But I included it because if Deckers sales are truly struggling, it may only be growing at Nike levels, and that is not good. Crocs is a good comparison. It was a high-growth company, then became a fad, and shares plummeted. Crocs has struggled to regain its footing, but it is still growing faster than Deckers, and that may surprise some. I put in lululemon to show what a high growth name in this space should look like, and because it is my top pick in this space now. Lululemon is used to providing low guidance and beating it; the problem for Deckers is that it provides really low guidance and barely beats it.
But the lack of growth is even more dramatic when looking at the key Deckers brands, mainly UGG and TEVA. Current estimates for this year call for revenues of about $1.55 billion, compared to $1.38 billion last year. But from that $0.17 billion, or $170 million growth, about $70 million will come from the Sanuk brand. Sanuk was an acquisition Deckers made that closed in the third quarter of 2011. Deckers reported $26.6 million in Sanuk sales in 2011, and guided to $95 million for this year. That adds fuel to the fire that the UGG brand is really fading.
With Deckers's growth slowing, it would appear that another acquisition may be the best course of action. But I'm not sure it has the flexibility to do one at the moment. At the end of the second quarter, Deckers balance sheet had $1.025 billion in assets against $305 million in liabilities. But of those assets, $210 million were goodwill or other intangibles. Roughly $350 million was in inventory, which should be sold eventually. Deckers should have more cash by the end of the year, since the second half of the year is when it does the majority of its business, but it has also allocated $200 million to a new stock buyback. That doesn't allow too much wiggle room for an acquisition, and right now, I think one is desperately needed.
Monday's news should be a little concerning for investors. While on the face of it we just saw one analyst's opinion, this is the guy that got it right last year, and I've followed this company's extensive fall since then. Deckers has a growth problem right now, but the question is that do shares accurately reflect that? The following table, comparing the P/E values for the above mentioned names show investors aren't willing to pay that much for Deckers (based on earnings expectations for each names' current and next fiscal years).
Some investors may argue that Deckers is undervalued. I personally think it is fairly valued, because as I've detailed in the past, Deckers has traded for between 5 and 15 times earnings in recent years. I believe that this valuation represents a good price based on current expectations, given the plunge in earnings this year. That being said, if we listen to the analyst note, sluggish sales will lead to expectations coming down. For those that don't believe there is much downside left to the name, just see what happens with the earnings. If Deckers takes down expectations again, the analyst's $38 price target may in fact be too high because Deckers will probably drop into the low to mid $30s.