Is Deckers Outdoor Still A Growth Story?

| About: Deckers Outdoor (DECK)
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Deckers Outdoor Corp. (DECK) is a California company that designs and sells fashion-oriented footwear in the United States and Internationally. Deckers' main products are Ugg brand luxury sheepskin boots and Teva sport sandals.

Deckers had enjoyed several years of strong, profitable sales growth begin 2010; in the meantime, its stock price rose from from the $20s to reach an all time high of $118 in 2011. However, Deckers showed some operational weakness in its 2011 financial results. Total revenue grew 38% from $1 billion to $1.4 billion, while inventory doubled to $253 million and A/R increased 66% to $193 million in 2011. The inventory and A/R increase far outpaced sales growth; Deckers was piling up goods in its storage facilities. Additionally, the cost of sales increased 40% and the administrative expenses increased 55% in 2011 to outpace sales growth. Deckers' sales are not as healthy as we believed.

Fast forward to 2012, Sam Poser at Sterne Agee issued a September negative report on Deckers' sales. The analyst voiced doubts about Ugg brand boots sales in 2012, citing price discounting and Ugg boots selling at The City Streets chain in New York. Ugg's boots are Deckers' mainstay, which was 87% of Deckers' $1.4 billion sales of 2011. Therefore, I checked websites that sell Ugg boots to find Ugg Classic and other styles are on sale for 15% to 50% off.

Deckers' stock was $35.86 on 8 October 2012, having lost 70% of its value in a year. The stock has a current P/E of 8 and a forward P/E of 7. Deckers' stock seems cheap comparing to its peers, Nike (a forward P/E of 16) and VF Corp (a forward P/E of 15). But Deckers is a declining story, its sales are to go down in 2012. If Deckers' sales decline 10% and while costs remain the same (using 2011's figures), we would get a net income of $118 million or $3.05 per share for 2012. The new per share earning of $3.05 converts to a P/E of 12. The earning figure will continue to shrink until the company reverses the trend.

Furthermore, let's say we take a 50% mark down on Deckers reported inventories of $346 million (as of 30 June 2012), it lowered Deckers book value of $21.75 by $4.47 per share. You are paying a P/E of 12 and 2x book value for a brand that is losing glamour. Alternatively, Deckers sold $1.2 billion UGG boots in 2011, if the price of the boots dropped 50% to an average $150 a pair, the company needs to sell 8 million pairs just to keep up with last year's sales.

Deckers looks to be fully valued at the current price; whether its stock can recover from current level depends on sales trend in the 4th quarter.

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. I have no business relationship with any company whose stock is mentioned in this article.