Quick Pitch: Deckers Outdoors (Nasdaq: DECK)

By: SumZero Staff | Published: September 11, 2012 | Be the First to Comment

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(The following is an abbreviated pitch pulled from the SumZero community)

Source: Eden Chen
Firm: Lightmark Capital
Type: Hedge Fund
Location: Los Angeles, CA

Recommendation: Long
Recent Price: $68.66
Target Price: $95.00
Timeframe: 6 Months to 1 Year

Quick Thesis
At current prices, the stock seems priced for failure and is extremely cheap for a company that has historically surpassed estimates and expectations, and managed their brands well. There is no stock in the retail space right now with this growth profile that trades at this multiple.

On average for the last 8 years, management beaten their initial full year projections by 32%, and only missed once barely in 2005 (and that may not even be relevant given the management team is not even the same). Clearly, these guys are VERY conservative in their initial full year guide, so when they say their full year 2012 EPS is going to be flat in 2012 (from 2011 levels), I think there is a very high likelihood that their initial guide is extremely conservative. The last time there was macro uncertainty the company projected flat YOY EPS growth (both 2007 and 2008) and they ended up doing 120% and 75% growth, respectively.

Over the last 9 years, the company has traded around 17-18x EPS, and just above 10.5x EBITDA. Given the fact that Deckers grew sales at almost 40% for all of 2011 and are projecting 15% revenue growth in 2012, prevailing multiples seem just completely ridiculous. Deckers is already trading at 13x trailing estimates (assuming 0 growth for 2012) which is near trough multiples for this company outside of most of 2009 (when all stocks were near trough multiples if they were making any money).

Inventory Management
Much is made of the company's rising inventories. In 2011, lululemon (Nasda: LULU) and Under Armour (NYSE: UA) both saw large falls in their stock prices because of large inventory buildups and the stocks are both up a huge amount since they fell on earnings. Inventory buildups can be a healthy sign of a growing business.

If you just look at the balance sheet, it looks like inventory increased 102.6% YOY, but this doesn’t take into account ~$25mm for the Sanuk acquisition, ~$25mm for increased input costs and ~25mm for the UK/France conversion. Take $75mm off the $253.3mm in inventory and you get a 43% increase, almost in line with their revenue growth.

Clearly, there was a unhealthy amount of inventory build during the quarter because of the weather, but this is a seasonal business. During 2008 – 2010 DECK operated at a much higher inventory turnover (I get to around 4.5x), and now they are running at 3.7x, in line with traditional footwear companies that run at 3.5-4.5x. They seem pretty comfortable with this inventory turnover ratio and this is by no means alarming.

Brand Strength
The financials show no real sign of deterioration on the top line, meaning demand for the product from a financial stand point still looks strong. DECK is also expanding internationally (31% of revenue) quickly so even though their legacy markets may weaken, they are developing the brand in Italy, Germany, Switzerland, Canada, Japan and China. DECK’s current management team has some of the most respected players in retail that took UGG from a non player to what it is today. They also turned Teva around when the brand was close to dying. They explained the weak quarter on the weather, which affects the buying patterns of their distributors, and they still see no slowdown in the end demand of their products.

Conclusion
Even assuming they keep their EPS completely flat, which is highly unlikely, they are still trading at 13.3x, cheaper than almost any other retailers outside of Hanesbrands (NYSE: HBI) and the Jones Group (NYSE: JNY) both terrible companies with nowhere near the growth rates that DECK has seen. If you take a more reasonable EPS number they trade under 11x EPS.

 

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