Buying Deckers Outdoor

I bought stock in Deckers Outdoor Corporation (DECK/NASDAQ) on Monday. Deckers designs, manufactures and produces footwear and markets its products under 3 brands: Teva, Ugg and Simple.

The shares closed Monday at $20.92. They were trading as high as $49.12 last December.

Like everything I buy, Deckers has problems. It has reduced financial estimates twice during 2005. Weather was a big issue. The Teva line has relied on "open toe" footwear and unseasonably cold weather killed sales in key markets. Inventory skyrocketed, a bad sign for any company selling retail products. And there are concerns that its products are "fads" -- despite a brand's popularity (and Ugg has been very popular), fashion trends can change quickly.

What's more, Deckers is repositioning its brands under new President and CEO Angel Martinez. Repositioning takes time. And that's when it is successful. Remember, nothing is guaranteed.

I note that LOADS of people must hate this stock. WSJ.com shows short interest as percent of public float is a whopping 64.5%.

For the quarter ending 6/30/05, Deckers' was trading at 1.66 times book value, 1.58 times sales and 9.95 times earnings. The market capitalization is roughly $255 million and there's no dividend. The current ratio is 4.04 and the quick ratio is 1.56.

Deckers reports 3rd quarter results next week. They should give us an indication of things to come.

Sales for Ugg were up 170% the first half of 2005 over the first half of 2004. But the 3rd quarter is the start of the Ugg selling season and the company is carrying a lot of Ugg inventory. How this line performs in the most recent quarter could portend how the rest of the year goes. The company is looking to expand the Ugg product line and increase sales to men.

Teva sales are traditionally weak in the 3rd quarter, so I'm not looking for anything exceptional to be reported next week. Martinez has stated that Teva's sales have been inconsistent over the past few years. This line looks to be his prime repositioning project. The company is spending $2.9 million in media marketing for Teva alone in 2006 -- up from just $800,000 in the past year.

The Simple line seems to be making progress in its year-long turnaround, gaining new accounts such as The Sports Authority.

Martinez and his management team apparently understand the importance of selling global brands. They are expanding their distribution network, investing in new products and spending the marketing bucks to promote them. Will all this kick in and give us a run-up in the stock price?

Time will tell.

NOTE: Deckers only has approximately 12 million shares outstanding. PLEASE, if after doing your own due diligence you decide to buy this stock, please use limit orders.

UPDATE 12/17/05: I sold a third of the position in Deckers Outdoor Corporation Friday morning for $30.08 per share. The stock ended the day at $30.31.

UPDATE 9/25/06: I sold some of my position in Deckers Outdoor Corporation early Monday at $46.80. The stock closed the day at $48.09. With this last sale, I've gotten my original capital out of the investment and Deckers Outdoor becomes a free ride. It remains a full position in the portfolio -- accounting for more than 4% of total assets. I still like the company and its management. But its stock isn't the bargain it was in the Fall of last year.

Comments

[Earvin Johnson]

Not to pat myself on the back, but I did call that one (DECK comment made yesterday).

Anyways, I've spent time on DECK as it scores well on my models. It has a solid balance sheet and is trading at ridiculously low multiples.

Two things scare me though; Ugg boots are very popular. Once the Hollywood set turns there back on Uggs, what does that do to sales? Plus, Ugg knockoffs are everywhere.

Next, the short interest is huge and this increases volatility. I've never done really well in a name that has a substantial short interest -- and this one is SUBSTANTIAL. Why is the short interest so high? I normally find myself waiting for a squeeze that never comes.

There are safer plays in retail that are just as cheap as DECK. Worth a speculative buy, maybe. Would I put my mom in it, probably not. Just my opinion. Good luck.

[John]

Earvin,

I don't know why the short interest is so high. I really have no idea, especially since the balance sheet is so strong.

Thanks for wishing my luck on this pick. Hopefully I won't need it -- but thanks just the same! ;-)

[Duncan]

I suspect that the short interest is high because people have figured out that the Ugg trend has come full circle. I attended that World Shoe Association convention in August and many folks mentioned that the Ugg trend was over. As in, nobody wants to buy/sell/wear them this year, as they suffered from massive overexposure/distribution last year.
So while it may seem cheap looking at trailing numbers, I suspect these earnings will contract substantially in 2006, blowing up your ratios.

[John]

Duncan,

Time will tell. Thanks for reading.

[Geoff]

The thing that scares me senseless, in 2Q04 last year, the company had 9.95 mm of Ugg inventory. This year, as of 2Q05, the company has 55.5 mm of Ugg inventory (page 16, 10-Q). I hope rumors of Ugg's declining popularity aren't true, because mgmt seems to be betting the farm on the success of this brand in Winter 2005. If it fails to deliver, the inventory writedowns and GM effects seen in 2Q05 could be very small in comparison to whats in store this coming winter.

[Earvin Johnson]

DECK is getting slammed after hours. I hate stocks with huge short interests. I have yet to buy a stock with short interest > 30% of the float that didn't give me massive headaches. ESST, MGAM, LF to name a few.

[Matt Hultquist]

Great call on Deckers!!!

What do you think they will earn in the 4th quarter when they report next Tuesday?

Consensus is still at $0.66 yet the company said they would exceed $0.60 to $0.64.

2006 guidance is also key for the future of the stock.