Deckers' Wild Ride Creates Interesting Opportunity

Sep.20.12 | About: Deckers Outdoor (DECK)

After falling to roughly $40 per share from its highs over $100 per share achieved last year, Deckers (NYSE:DECK) continues its wild ride. The firm, famous for its Ugg boots and Teva sandals, has fallen out of favor after posting weaker-than-expected performance and slashing guidance, while building up considerable inventory. We think the most important question for investors going forward is whether Uggs were just a fashion fad or if the weak winter results at Deckers were merely a one-time hiccup caused by unseasonably warm weather?

We tend to think Uggs have become a staple of American fashion. Nordstrom (NYSE:JWN) continues to prominently display boots in the women's shoe section next to other hot brands like Sperry, Tory Birch, and Sorel. In fact, we've seen no evidence, other than weaker-than-expected sales, to support the thesis that Uggs aren't in fashion any more. The sheepskin boots are surprisingly practical, providing comfort, warmth, and dryness. Still, such attributes are unnecessary without cold weather and snow. Interestingly, we think there's a chance the mild winter of 2011 will lead to some pent-up demand surfacing through the course of winter 2012. We also see lots of new styles, particularly in leather, that are diversifying away from the classic Ugg fur boot.

Not only does the women's category look strong going into the winter season, but we also believe the men's segment will perform fairly well, too. The classic Ugg boot look simply isn't for most men, so we were excited about the firm's introduction of more masculine styles at elevated price points. Though the firm will have to deal with heavily-entrenched players like Timberland, Red Wing, and the North Face, Deckers' CEO Angel Martinez has noted many times that men like the soft insides of Ugg boots but not the exterior. We're optimistic that cold weather could give sales a meaningful push in the right direction.

We like the recent demand trends within footwear at the moment, specifically the tremendous strength we've seen out of small private brands such as Tory Birch, athletic footwear giant Nike (NYSE:NKE) and Sperry. We like Deckers, as its shares are relatively inexpensive (about 10x forward earnings) versus its more expensive peers like Nike (nearly 19x forward earnings) and VF Corp (nearly 17x forward earnings). We think shares have fantastic upside potential, particularly in the event of a more normal winter. However, we won't consider them for our Best Ideas portfolio until its technical and momentum indicators begin to shape up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.