Boots on the Ground Means More Money for You

Macy's, bellwether for the middle income consumer, took a hit after lowering guidance, sending the market down. On their conference call, Macy's stressed they would push boots aggressively and a good boot season was of utmost importance.

Boot demand also matters for shoe makers Deckers Outdoor (DECK +0.01%), Steve Madden (NASDAQ: SHOO), and Crocs (CROX +0.00%). Deckers and Crocs have been labeled as fad stocks for years. Deckers make the Uggs sheepskin boots, once so popular that the stock rose to a high near $120, only to hurtle to $28.63. Crocs, known for its non-stink clogs, surged to the high $70s in 2007 only to crash under $1.00.

CROX Total Return Price data by YCharts

Deckers has struggled with declining sales and higher sheepskin costs. The company has several shoe lines: Ahnu, MOZO, TSUBO, and Moka One One, but UGG Australia is their main line.

Deckers' second quarter earnings release disappointed analysts again. Gross margin contracted by 112 bp to 41.06%. Deckers did beat on EPS, but revenue disappointed at $170.09 million, $9.05 million shy of analysts' expectations. Teva sandals and Sanuk brands didn't sell due to weather, an excuse that for once was valid, as Macy's claimed cooler weather hurt sales of sandals and summerwear lines.

To be fair Deckers' revenues historically come in much higher in the back half of the year. (chart from Fool.com)

REVENUE (Trailing 12 Quarters)

But the EPS trend with a loss of $0.85 in the second quarter tells a sorrier tale, with the company unlikely to beat that $3.53 in EPS for full year 2012. The total return for Deckers Outdoor has been high since its debut, and some might be tempted by a trailing P/E of 18.80 and other numbers like price/sales at 1.36 that are lower than the industry average.

The EPS chart is worrying. Deckers noted that sheepskin won't cost as much going forward after locking in prices, but store opening costs and SG&A expenses are expected to climb. SG&A expenses have risen from $40 million in 2009 to $112 million in 2013. Capital spending at a ratio of 69.88% is much higher than the industry average of 10.98%.

EARNINGS PER SHARE (Trailing 12 Quarters)

The National Oceanic and Atmospheric Administration (NOAA) doesn't have a handle yet since their June 30 prediction for Winter 2014 came out so fingers crossed, if you're a Deckers shareholder, for a cold one. Still, looking at the charts and the company's spending spree for a 70% increase in square footage with new stores, this isn't a buy.

Crocs branched out considerably from clogs with boots, flats, wedges, and athletic shoes for men, women, and children. While past investors received some sweet returns, the stock is down 23.51% over the last year.

Crocs does have a reasonable debt ratio of 1.49, short interest is decreasing, price to sales is 1.01, and trailing P/E of 11.35 is much lower than the industry average. Crocs also has $3.16 in cash per share, not bad since it's trading at $13 and change.

EARNINGS PER SHARE (Trailing 12 Quarters)

Second quarter earnings missing EPS estimates of $0.60 by $0.20 were partly to blame for a Sterne Agee downgrade to Underperform. The chart implies that the company may have trouble bringing up EPS in the back half of the year. The company offered markdowns because of the weather, which made revenues look better but hit gross margin much like Deckers. Gross margin dropped from 59.3% to 55.2%.

REVENUE (Trailing 12 Quarters)

Steve Madden is expanding into accessories, apparel, and luggage with its breakout Betsey Johnson brand. Deckers' Tsubo and Uggs compete with Steven Madden on dress shoes and boots. But Steve Madden boots are leather, more fashion forward.

The company owns 113 stores, three of them e-commerce focused. The other 85% of the business is direct-to-merchants like JW Nordstrom, Macy's, and Neiman Marcus. The company has $290.13 million in cash and no debt.

Their revenue chart looks in line to beat last year's numbers as does the EPS chart. The trailing P/E is extended at 18.93 after several quarters of good news, more expensive than Deckers and Crocs.  Price to sales is higher at 1.85 but it has $6.68 cash per share, no debt, and offers special dividends every so often.

REVENUE (Trailing 12 Quarters)

The company reported second quarter results on August 1 highlighting a 110 basis point gain in gross margin to 37.2%, net income up 8%, and opening new stores. Fewer markdowns and tight inventory control helped earn them a Goldman Sachs upgrade from Sell to Buy.

The Foolish takeaway
Deckers needs a cold winter and plenty of boot sales to offset decelerating EPS growth. Crocs is in a better position. Steve Madden can continue its positive momentum by putting more boots on the ground than their rivals.