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  • Deckers Outdoor: Don't Get Hurt Riding This 'One-Trick Pony' 0 comments
    Sep 30, 2009 4:39 PM | about stocks: DECK, COLM, WWW, TBL

    With a 21% trailing EBIT-to-EV yield and high historic returns on capital, it is no surprise Deckers is a Greenblatt-style "magic formula" stock. While we cannot divine the future prospects of the company's flagship UGG brand, we are skeptical Deckers can continue reinvesting capital at exceptional returns. As the footwear industry is notoriously fickle, we prefer not to jump on this "one-trick pony."/p>

    The following profile of Deckers Outdoor is excerpted from the latest issue of Portfolio Manager's Review. To view PDF version of the following write-up, click here.

    BUSINESS OVERVIEW

    Deckers produces and markets footwear under owned brands UGG, Teva, Simple, TSUBO, Ahnu, and Deckers.
     
    INVESTMENT HIGHLIGHTS
    • Owns UGG and Teva brands, which accounted for 84% and 13% of 2008 sales. The sheepskin UGG boots and other footwear emphasize luxury and comfort. Teva targets active outdoor customers. Deckers outsources manufacturing, with most products made at six contractor factories in China.
    • Wholesale distribution was 84% of sales in 2008. Online and direct retail sales (14 stores) represent less than 20% of sales. Average wholesale price per pair increased 16% to $31 in 1H09, due to higher UGG sales. Volume rose 6% to 6.6 million pairs.
    • Guiding for 2009 EPS to be “flat to up slightly” from $7.27in 2008. Sales should rise 9-10%, with gross and SG&A margins of 44.5% and 24.5%.
    • Chairman and CEO Angel Martinez worked at Reebok and Keen before joining Deckers in 2005.
    • Strong balance sheet, with $108 million of cash, $67 million of short-term investments and no debt.
    • Repurchased 150,000 shares for $10 million in 3Q09 ($67 per share). Deckers approved a $50 million stock repurchase program in June 2009.
    • Shares trade at 14% trailing EBIT-to-EV yield.
    INVESTMENT RISKS & CONCERNS
    • Dependence on UGG brand for majority of sales. TheUGG brand has grown in sales from $24 million in 2002 to $582 million in 2008. Changing fashion styles are a big risk.
    • Highly competitive industry with low barriers to entry. Footwear competitors include established companies as well as thousands of start-up brands.
    • Universal strapping system patent used in Teva sandals expired in 2007. While this could lead to increased competition from companies copying Teva’s designs, Deckers is generally at risk of knock-off products selling at lower price points.
    • Increased authorized number of shares from 20 million to 50 million at AGM in May.
    MAJOR HOLDERS
    Insiders 3% | Barclays 7% | Apex 5% | Turner 5% | Vanguard 5% | Buckingham 4% | Perry 3% | RenTech 3% | FMR 3%
     
    COMPARABLE PUBLIC COMPANY ANALYSIS
     
    MV ($mn)
    EV ($mn)
    EV / Rev.
    P / T. Book
    This FY P/E
    Next FY P/E
    COLM
    1,420
    1,100
    .9x
    1.6x
    28x
    23x
    WWW
    1,220
    1,180
    1.0x
    3.2x
    15x
    13x
    TBL
    790
    610
    .5x
    1.7x
    21x
    20x
    DECK
    1,050
    870
    1.2x
    2.8x
    11x
    10x
     
    SELECTED OPERATING DATA
    Deckers Outdoor DECK financials
    Source: Company filings, Manual of Ideas analysis.
    1 Deckers’ business is seasonal, primarily owing to higher UGG sales in the fall. 44% and 29% of 2008 net sales occurred in the fourth and third quarters, respectively, while the first and second quarter each represented about 14%.
    2 Other wholesale includes mainly TSUBO and Ahnu brands, which were acquired in May 2008 and March 2009, respectively.
    3 The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. >95% of eCommerce and retail store sales relate to UGG and Teva.
    4 EBIT figures exclude impairment losses.
    5 Ratios are based on average tangible equity and average tangible assets.

    View PDF version of the above company profile of Deckers Outdoor.

    Disclosure: No positions.
    Stocks: DECK, COLM, WWW, TBL
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