The Cold Winter Is a Big Positive for This Shoe Company

Deckers Outdoor (NYSE: DECK  )  and its top-selling brand, UGGs, have been falling out of favor as warmer-than-normal winters have led to decreasing sales. However, this winter might have been an inflection point for the company.

The more normalized winter, meaning colder weather, is a big positive for Deckers. In addition, the recent snowstorm to hit the South should also further boost demand for Deckers' winter boots.

Growth initiatives beyond just a cold winter
Deckers is working on product innovations and augmenting its stores. Its retail-store sales saw 35% year-over-year growth during the third quarter. The company is planning to boost its store base by 200 by the end of 2015. 

Beyond the U.S., Deckers has an opportunity to expand in Asia. Part of this includes the fact that Deckers is addressing the increase in consumers shopping online, as exhibited by the success of Amazon.com. In 2013, Deckers decided to launch an e-commerce site focused on China.This complemented its already small retail presence in the country.

Yet, Deckers still has a large opportunity to expand its e-commerce business. As of the third quarter of 2013, e-commerce sales made up less than 5% of the company's total revenue. Worth noting is that e-commerce sales were up 12% year over year during the third quarter, primarily driven by the addition of new international websites.

Mixed competition means an opportunity for Deckers
Crocs (NASDAQ: CROX  ) and Wolverine World Wide (NYSE: WWW  ) are two other niche-shoe companies. However, these companies might not have the same success as Deckers. Crocs shoes are lightweight, while Wolverine's staple brand is the casual and outdoor Merrell shoe. Neither of them are as well positioned as Deckers' UGG brand to take advantage of a cold winter.

Even still, Crocs is looking to gather customer support in other ways. This includes launching a new loyalty program in 2014. This is expected to cater to the customers who have purchased more than two pairs of Crocs' footwear within the past year, a number that Crocs believes is 70% of its customers.

On the plus side, Crocs got a "vote of confidence" last year when Blackstone made a $200 million investment in the company. The investment came in the form of non-publicly traded preferred equity. As a result, Crocs announced a $350 million stock-repurchase program that's expected to get under way during the first quarter of 2014.

As for Wolverine, its performance-footwear segment, which includes the Merrell brand, saw a 13.4% jump in revenue year over year for the third quarter. The rise in sales came as the company saw an increase in outdoor-shoe sales across the industry. This is a positive considering Wolverine saw weakness earlier in the year due to a cool spring, which put downward pressure on the number of people buying shoes for outdoor activities.

However, among these three companies Wolverine still has the lowest operating margin and the highest debt-to-equity ratio, at 150%.

Deckers remains the best pick given its impressive upside
Deckers believes it can hit $2.4 billion in sales by 2015. This should be driven by UGG, which is expected to make up $1.8 billion of that $2.4 billion. The 2015 sales expectation is a large jump from the $1.4 billion in fiscal 2012.

In addition, over the last five years Deckers has traded at an average price-to-sales multiple of 2. Assuming that Deckers can maintain its 2 times sales multiple, and using its $2.4 billion sales figure, the stock could hit $150 in 2015. That's more than 100% upside.

Bottom line
Deckers appears to be well positioned for the next few years as this winter continues to get colder and snowier. Trading at 16 times earnings, Deckers is also the cheapest among its major peers. Crocs trades at 18.5 times earnings and Wolverine at 28 times. Thus, investors should snatch up Deckers as an undervalued shoemaker. 

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