Thursday, November 8, 2012

This Sheepskin Shoe Maker is Cheap Now!

Investors who love to own a piece of UGG sheepskin footwear business would be disappointed again, when Deckers Outdoor (NASDAQ: DECK), the owner of the UGG brand, plunged heavily in a previous trading day. Shares tumbled 17% in a day, from $35.49 to $29.48, the lowest price in the last 3 years. 2012 doesn’t seem to be a good year for DECK, as its shares has been heading south continuously. DECK has lost more than 60% of its value compared to the beginning of the year.
Many investors are still bullish about DECK, while others are scared and staying away. So what should investors do? Let’s look at the fundamentals to determine whether we should be bull or bear on this stock. 
Why Are Shares Tumbling?
DECK’s third quarter results were disappointing. Net sales were $376.4 million, 10% lower than the same period last year, of $414.4 million. It also missed analysts’ sales estimates of $413.46 million for the quarter. Q3 net income plunged nearly 47% year-over-year, from $62.35 million last year to $43.06 million this year. EPS was $1.18, lower than $1.59 EPS in Q3 2011. In addition, the firm expected that Q4 2012 would experience a 14% dropin EPS compared to Q4 last year, quite a big gap from the previous guidance of a 22% increase. For the full year, 2012 EPS was estimated to decrease as much as 33% year-over-year. Angel Martinez, the President, CEO, and Chairman commented: “Over the past two years, we have raised prices on selective key styles to help mitigate the impact of an 80% increase in our sheepskin and raw material costs over this same period. We believe that these selective price increases, particularly during a period of one of the warmest years on record, has pushed us above the consumer’s price-value expectations for the UGG brand. We also believe that this has resulted in softer than expected third quarter sell-through trends in our company-owned stores, and has pushed back the start of the brand’s key selling season at retail this year.” 
Balance Sheet Strength
DECK has a solid balance sheet, but it tends to be weaker over time. As of September, the stockholder’s equity was $682 million. The cash on hand was $61.1 million, lower than in September 2011, when DECK had $90.4 million in cash. The accounts receivable increased 5% and inventories jumped 36.2% compared to the same period last year. In addition, DECK increased its outstanding borrowings from $45 million in September 2011 to $275 million. The decrease in cash and increase in borrowings was used for retail expansion, stock repurchases, and other capital expenditures. Within a year, DECK has used $184.7 million to repurchase shares. And it still has $115.3 million remaining from a total $200 million buyback program announced in July 2012.
Industry Peers
Compared to its peers including Nike (NYSE: NKE) and Wolverine World Wide (NYSE:WWW), DECK seems to be the most attractive stock.

Net margin (%)
ROIC (%)
Dividend yield (%)
The company has the highest trailing twelve months net margin and return on invested capital, 12% and 25.2%. Besides, it was selling for the cheapest at a single-digit P/E and P/CF. The market is valuing DECK for only a third of Nike’s and Wolverine’s P/E valuation. The only negative point is that DECK is not paying any dividends, whereas Nike and Wolverine are paying a 1.6% and 1.2% dividend yield, respectively.
Foolish Bottom Line
Personally, even with the sluggish third quarter performance and a weak Q4 guidance, I think DECK is worth investors’ consideration, as it has top-notch operating figures with a high return on invested capital, and it is cheap with a single-digit valuation in the marketplace. 

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