Is This Stock a Comforting Value or a Sheepish Play?

Shares of Deckers Outdoor (Nasdaq: DECK  ) hit a 52-week low on Wednesday. Let's take a look at how it got there, and see if cloudy skies are still in the forecast.

How it got here
Deckers Outdoor, the company behind the fashionable Ugg brand, as well as the Simple, Teva, and Tsubo shoe brands, has been struggling for months, due to rising input costs and expansion miscues.

The cost of sheepskin, which is a primary component of Ugg boots, has been on the rise, and hurting margins for nearly a year now. A more pressing issue, though, has been Deckers' aggressive expansion into Europe during the height of its sovereign debt crisis. In Deckers most recent quarter, net sales rose 13.1%, but it was definitely a tale of two regions, as domestic sales jumped 37%, while international sales backtracked 14%. Deckers plans to move forward with its international expansion plans nonetheless, and to focus on Asia in the coming years.

However, the nail in the coffin came from an admission by Deckers that it plans to reduce the price of its best-selling Ugg boots in light of rising inventory levels and a weakening retail environment. The move doesn't really come as a surprise given that many of its peers' earnings reports have similarly fallen flat. Nike (NYSE: NKE  ) badly missed its earnings estimates, due to a slowdown in Europe and Asia. Crocs' (Nasdaq: CROX  ) earnings surpassed estimates in the second quarter, but revenue came in about $10 million shy of estimates, due to a 5% decline in sales from Europe. Hush Puppies maker Wolverine World Wide (NYSE: WWW  ) noted earlier this month that it's unlikely to meet its previous sales goals, due to weakness in Europe. Finally, Skechers (NYSE: SKX  ) has produced a loss in three consecutive quarters, due to a demand slowdown.

How it stacks up
Let's see how Deckers Outdoor stacks up next to its peers.

DECK Chart

DECK data by YCharts

Deckers was at one time outperforming its peers by a long shot, but has since been relegated to just a mediocre five-year return.

Company

Price/Book

Price/Cash Flow

Forward P/E

Debt/Equity

Deckers Outdoor 2 10.8 6.7 0%
Nike 4.3 24.1 15.6 3.7%
Crocs 2.7 10.7 9.9 1.9%
Wolverine World Wide 3.4 18.6 13.7 4.5%
Skechers 1.3 7.1 43.6 15.9%
Sources: Morningstar, Yahoo! Finance.

One of the first things that stands out is that none of these retailers carries an exorbitant amount of debt. In fact, Deckers is the lone standout that carries no debt whatsoever.

From an overall valuation perspective, both Deckers and Crocs offer the most intriguing value. Crocs continues to get little respect, and has had trouble escaping the "fad" moniker. Similarly, Deckers has worked on expanding its product reliance beyond that of the Ugg brand, (although Ugg still accounts for more than 60% of total sales, but it, too, suffers from the fad stigma.

Skechers is notably inexpensive based on book value and cash flow, but that has a lot to do with its three consecutive quarterly losses more than anything else.

What's next
Now for the $64,000 question: What's next for Deckers Outdoor? That will depend on whether it can keep its input costs under control, and/or pass along rising costs to consumers, whether it can successfully expand its product lines into high-growth China, and whether it can keep a tighter lid on its inventory levels.

Our very own CAPS community gives the company a three-star rating (out of five), with 85.4% of members expecting it to outperform. Currently, I'm among the minority, boasting a CAPScall of underperform on Deckers that's in the positive by a whopping 82 points. However, it's finally time for me to swap my pessimism for a green thumb on Deckers Outdoor.

Why am I switching to an outperform call now? Frankly, this is the first time management has looked at things from a realistic perspective in a while. A price decrease in its Ugg boots was inevitable, and putting it off was only hurting the company over the short run. I would expect both sheepskin costs to level off, and European sales to stabilize in the coming quarters, as Deckers begins to reap substantial benefits from its investments in Asia. Even though I highly question some of the company's marketing activities -- I still seriously want to know who approved this bonehead idea! -- I expect sales growth to remain in the low single digits as the company focuses on its expansion into Asia, improving its operating efficiency, and better controlling its inventory.

If you want the scoop on three companies ready to rule the retail sector right now, then click here to get your copy of our latest special report from Motley Fool Stock Advisor. Oh yeah, did I mention it's free?

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of Deckers Outdoor and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2012, at 2:40 AM, aupti wrote:

    Finally.

    I thought that if a company can make products cheaper now (due to lower sheep skin costs), and it accordingly reduces price to push sales, this will increase sales and is a positive thing.

    Of course, this is just my stupid rational thinking. I am not an over paid analyst who gets emails from shorts on saturday "alerting" him on a 24 hour 15% sale on shoes just the day after a stock pops 8%.

  • Report this Comment On September 21, 2012, at 2:57 AM, aupti wrote:

    and by the way, with the buy back of 200 million in a company of less than 1.5 billion -> the EPS grew 15% anyway, and the current short interest is way over 40% of float.

    I hear people can't borrow stocks to short.

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