Why Deckers Shares Are Rise-and-Fall: The Jefferies Effect

The value of talk is underrated. This morning, Jefferies reiterated its buy rating for Deckers Outdoor (NYSE: DECK  ) , but it also increased its target from $50 to $60. Wow! As expected, Deckers jumped like a person wearing some other company's shoes -- who can jump in Uggs? -- and this morning the stock went up 5%. The move is evidence of the kind of faith that we put in ratings, and how much those little words -- buy, sell, hold, outperform, etc. -- can mean to companies. It's also evidence of how short our memories are. In January last year, Jefferies reiterated its buy rating for Deckers with a price target of $125 -- hope you didn't buy then.

The Jefferies effect
Back in early 2012, the stock was trading around $85 and Jefferies had just had a great meeting with the company's management team. The ratings agency was excited by the huge sales growth potential that came from Deckers' recent acquisition of the Sanuk brand. This year, Jefferies is excited that it's been cold.

In the newest update, Jefferies analysts mentioned that the cold weather was going to help Deckers out. It also said that strong sales around Black Friday show that "the brand is still very relevant (and NOT dead)." Based on the bounce this morning, investors must take it as a strong sign that analysts have to emphasize the fact that a brand isn't dead.

But there's a lesson to be learned here. As much as it's idiotic that the company would jump based on one analyst report -- even when the analyst has shown itself to be bad at predicting the very company it's talking about -- it's also idiotic to take that analysis to prove the opposite of what's true. Deckers should be judged sensibly based on its current sales, income-generating potential, cash flow position, and brand strength. So let's actually look at those, and see what's really in store for Deckers.

Underlying performance
Let's start with sales. In the company's last reported quarter, same-store sales dropped 13%, while total sales fell 9%. That decrease has partially been offset by an increase in selling prices, which the company has had to put in place to offset rising sheepskin prices. In 2012, sheepskin rose 40% in cost on top of a 30% increase in 2011. The good news is that in 2013, prices for sheepskin are locked in, and are 11% lower than 2012's prices. That's going to help the company's gross margin, which fell 7 percentage points last quarter due to those cost pressures.

The combination of sales and costs means that income has been hammered recently. In the last quarter, earnings per share fell 26% to $1.18. Oddly, the company has managed to control its finances a bit, even with the walls weakening around it. Free cash flow has increased over the last year, though it's still running negative.

The value of being trendy
All of these issues are compounded by the fact that Deckers is a one-trick pony right now. For the first nine months of 2012, the company made 84% of all its sales in its Ugg line. The second-closest performer was the company's Teva brand, which made up a mere 9% of sales. This is the same sort of problem that competitors like Crocs (NASDAQ: CROX  ) and Skechers (NYSE: SKX  ) have been facing.

Crocs watched its shares tumble over the last year, though not as far down as Deckers. In response to its trend-driven sales, Crocs has introduced new lines and looks that it hopes will expand the brand's appeal. Investors will see if this worked later in the year when 2013 spring sales figures are released.

On the other end of the success spectrum, Skechers used 2012 to break out of its trendy, one-kind-of-shoe dependence. It helped that the shoe it was trying to distance itself from was the "make you fit while you walk" Shape-ups line, which turned out to violate some consumer protection laws. But it managed to free itself of that past, and 2012 was a banner year for the company. It should certainly help inspire Deckers as it moves into 2013.

The bottom line
Deckers still has a lot of work to do before it's going to be an excellent company. While its cost issue may no longer be a problem, the company still needs to expand beyond its current brand single-mindedness if it's going to be able to weather the next storm. Jefferies may be upbeat on the stock, but that's no reason for investors to jump on board just yet.

To finish on a fun note, here are quotes from two of Deckers' 2012 earnings calls. Guess which one came after the good earnings release.

"[Uggs] is a not a cold weather brand, it is a comfort brand as I said on many occasions."

vs.

"Like the U.S. and Europe, we believe that our stores in Asia were affected by warm weather in the third quarter."

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