Is Deckers Outdoor’s Stock Finally a Buy?

As the book closes on one of the warmest years on record, it’s a good time to check up on Deckers Outdoor (NASDAQ:DECK), the purveyor of UGG-branded sheepskin boots. At the current stock price is DECK a BUY, WAIT and SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Technicals on the Stock Chart are Improving

Since the end of October, Deckers has seen its shares rally 23%. Comparatively, the benchmark S&P 500 Index is roughly unchanged (-0.5%) while shares of industry peer Crocs (NASDAQ:CROX) actually lost ground (-2.0%) over the same span.

DECK is within a hair’s breadth of its 50-day moving average. An imminent crossover should result in a good amount of buy-side support from technically oriented traders. Short covering could also provide a decent lift. As of October 31, more than 15.4 million DECK shares (roughly 42% of the entire float) were ‘held short’ and the stock’s latest run up should prompt some short sellers to lock in gains.

C = Catalyst for the Stock’s Movement

There is growing speculation that Deckers could attract buyout interest, either from a strategic acquirer within the soft goods space or a financial entity, such as a private equity firm. The current market valuation (10.5 times expected 2012 earnings) is compelling. So, too, is Deckers’s growing stable of so-called lifestyle brands including Teva (sandals) and Sanuck.

Another potential catalyst is the possibility the all-important holiday season won’t be as weak for Deckers as many bears currently expect. Uggs have reportedly been among the top-selling and/or top-searched brands of late on popular e-tailing sites, including Zappos. The news has helped allay fears that the strength of the company’s key brand is waning. (UGGs represented 85% of Decker’s overall wholesale shipments in 2011.)

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E = Earnings are Increasing Quarter over Quarter?

Earnings at Deckers…

increased at an annualized rate of 45% over the five-year period ended December 31, 2011. But they’ve recently stumbled and are expected to decline by as much as one-third this year (2012), including a drop off of 17% or so during the current December quarter.  A sharp increase in sheepskin costs has hurt profit margins. Chastened consumers have also resisted the company’s recent attempts to recoup higher inputs costs (through price increases). That said, price rollbacks and new sourcing initiatives should support both sales and margins going forward.













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E = Debt to Equity Ratio is Close to Zero

Debt represented a fairly modest 29% of total capital as of September 30. Moreover, the average interest rate on Deckers’s $250 million in overall borrowings is just 2.0%. The manageable debt load and solid cash flow give the company plenty of financial flexibility to buy back shares, invest in existing brands, or pursue additional acquisitions. 


While Deckers’s shares aren’t likely to revisit past years’ highs anytime soon, they’re worth a look — especially by venturesome investors. With the stock trading at a below-market multiple, downside risk seems limited and Decker’s could ultimately become a takeover target. A blast of cold winter weather wouldn’t hurt either. Therefore, based on the analysis above, shares look like an OUTPERFORM in the medium-term.

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