Is Deckers Outdoor Corp Destined for Greatness?

Let's see what the numbers say about Deckers.

May 29, 2014 at 12:01PM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Deckers Outdoor Corp (NYSE:DECK) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Deckers' story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Deckers' key statistics:

DECK Total Return Price Chart

DECK Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

51.2%

Pass

Improving profit margin

(41.1%)

Fail

Free cash flow growth > Net income growth

117.9% vs. (11%)

Pass

Improving EPS

(0.1%)

Fail

Stock growth (+ 15%) < EPS growth

(8.1%) vs. (0.1%)

Pass

Source: YCharts. * Period begins at end of Q1 2011.

DECK Return on Equity (TTM) Chart

DECK Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(34.9%)

Fail

Declining debt to equity

(88.1%)

Pass

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
We looked at Deckers last year, and it has since earned one more passing grade to finish with a modest four out of seven possible passing grades in today's assessment. The company's bottom line has been moving in the wrong direction due to well-known material cost problems, but it's missed out on passing its EPS test by the narrowest possible margin. Will the footwear specialist be able to push its bottom line into positive territory and earn a rare perfect score when we look at it next time? Let's dig a little deeper to find out.

Deckers' first-quarter results were better than expected, as its net loss narrowed to $0.08 per share. Earlier this year, Deckers disappointed shareholders by forecasting higher losses for that quarter, blaming the costs of opening new stores and increased promotional activities, as well as weaker retail traffic in harsh winter weather, for its low estimate -- which proved too modest, as shareholders found out last month. Despite this uncertainty, Deckers' stock has more than doubled over the past year and a half following a dreadful stumble in 2012. Deckers' Sanuk and UGG brands continue to drive its top line, but the line of HOKA running shoes it acquired last year could become a $100 million brand within the next two years, according to a Piper Jaffray survey of elite runners.

Analysts at Credit Suisse also upgraded  Deckers Outdoor to Hold from Sell recently, based on the belief that the company's investments in domestic and international markets are now expected to generate higher returns than first anticipated over the next few years. Quite recently, Deckers also launched its first Brand Showcase store in Goleta, California, which appears to combine a massive bricks-and-mortar retail offering with a robust online storefront. The company continues to expand UGG in Asia, especially in China, Japan and Taiwan, which should help fuel top-line growth. My fellow Fool Prabhat Sandheliya notes that the increasing spending power of the emerging-market middle class, coupled with a growing consideration for personal health, should bode well for the global footwear industry. According to Transparency Market Research, the global footwear market is projected to be worth $211.5 billion by the end of 2018.

Going forward, Deckers plans to switch its focus from a wholesale-centric business model to an omni-channel platform, which caters to consumers in stores and online, both in branded locations and with other companies. Deckers has been expanding its direct-to-consumer (DTC) channel under the DTC 360 program in China and Japan, as the Asia-Pacific region is expected to generate 30% of global footwear revenue by 2018. However, Deckers could face stiff competition from Steven Madden (NASDAQ:SHOO), Skechers (NYSE:SKX), and Wolverine World Wide (NYSE:WWW), as these competitors are all engaging in muscular worldwide expansion plans at the same time. Steven Madden plans to open 50 to 60 stores, both free standing and outlets stores, and add 15-20 international distributors by the end of the year, and Wolverine has collaborated with Taylor Swift and Kate Spade to boost sales of its Keds sneaker line. Skechers has extremely ambitious plans to open around 600 Skechers licensed stores worldwide this year alone, and is also pushing its Go Walk athletic line hard.

Putting the pieces together
Today, Deckers Outdoor has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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