It's been a wild 12 months for Deckers Outdoor (NYSE:DECK), the shoemaker behind iconic brands such as UGG, Teva, and Sanuk. A very richly valued stock for much of its time on the public markets, Deckers plummeted in the second half of last year as soft sales sent analysts running for the "sell" button. As usual, where there is panic, there is opportunity. Since its dip, Deckers has come back in a big way -- nearly 90% since November. But with some fresh interest from a legendary value investor, is the company still trading at a discount to its intrinsic value?
Deckers reported its first-quarter earnings last week, and while the bottom line and guidance disappointed, there was plenty to celebrate. Net sales hit a record high of $263.8 million -- up more than 7% from the prior year's numbers. Gross margins increased nearly 1 point to 46.8%. Retail sales increased 37.6% to $63.6 million, while same-store sales were up 6.6%. Internet sales were up 22.6% to $26.6 million.
On the bottom line, EPS came in at a $0.03, compared with $0.20 in the year-ago quarter. Looking ahead to the next quarter, management expects a loss of $1.10 per share. What investors need to keep in mind is that the company opened 24 new stores in the latter half of the year, and those earnings won't necessarily show up until the back half of this year. So there's a large upfront expense for the company that isn't being immediately matched with new earnings. Additionally, sales are historically soft in these early months for the company.
Some analysts argue that SG&A costs will hinder margins and prevent growth, especially in the much-needed international space (the company is opening 30 new stores, mainly in Asia), but I believe this a myopic view of the company. For evidence, let's look at Whitney Tilson's recent comments on the stock.
One consistent problem facing Deckers is that many believe UGGs are a fad product. But in a recent survey conducted by Tilson, the product is far from it. For one thing, many UGG owners have been UGG owners for quite some time, own more than one pair, and haven't changed their views of the brand in the past 12 months. Fads are in and out -- and this data doesn't support that trend.
Furthermore, when asked whether they view their UGGs as a fashion product or a utilitarian product, 74% chose the latter. Investors need to realize that UGGs aren't simply an accessory for college girls -- it's an enduring brand that was born in the California surf scene in the 1970s.
As Deckers builds out more stores and resumes attractive growth in Asian markets (arguably where most of the growth will come from), expect valuations to tick upwards. The stock currently trades at 12 times forward earnings, which is very reasonable given the potential to retrack toward growth. For reference, Nike (NYSE:NKE) trades at 21.5 times forward earnings, and Wolverine World Wide (NYSE:WWW), purveyor of many brands from Sperry to Saucony, trades at 16 times forward earnings. Even a modest correction for Deckers would send the stock up a material amount, with a protected downside at today's price.
Though the stock has risen substantially in recent months, Deckers may still offer value to investors interested in the company.