When I was in elementary school, my parents believed in letting my brothers and me decide what to wear. I wish they hadn't. During third grade, we thought it would be cool to grow rat-tails and wear biking shorts to school. To this day, my mom has the ultimate blackmail card in her back pocket: pictures from the family album.
It goes without saying that I don't consider myself a fashion expert. I rarely venture into the retail-clothing world at all as a shopper and even less as an investor. This past summer, however, I discovered a retail stock that has since gone up more than 60%. After recently re-evaluating its story, I've bought in again. That company is Deckers Outdoor (Nasdaq: DECK).
Why I'm buying in again
Deckers owns several brands of shoes and clothing, but its two largest products are the UGG (accounting for 92% of revenue) and Teva (5% of total revenue) lines of shoes.
I've got three big reasons to be excited to own more Deckers, even if its price is significantly higher.
1. It's the final product, stupid!
Before we start the numbers game, let's take a second to evaluate the final product. A friend who shuns the latest fashion trends couldn't say enough terrible things about UGGs -- until she tried them. You can't deny comfort, and now she swears by them.
Deckers is acutely aware that comfort is what separates UGGs from their competitors. CFO Tom George recently said, "One thing ... that we refuse to do, we won't do, is to lower the quality of the sheepskin that we select for production. ... Our customer deserves a lot more than that."
2. There's lots of room for growth
For starters, Deckers is diversifying its offerings. Traditionally, UGGs were solely wintertime apparel, while open-toed Tevas were summer-wear. This fall's line of products changed that.
Teva is looking to take market share away from Timberland (NYSE: TBL) with its own closed-toed hiking shoes. UGGs, on the other hand, have come out with classic, knit, cold-weather, casual, and fashion boots as well as a range of slippers, wood-bottom clogs, and sneakers. If the momentum continues, companies like Nike (NYSE: NKE), Crocs (Nasdaq: CROX), and Skechers (NYSE: SKX) could all find themselves losing market share.
Adding fuel to the growth fire, international sales have been booming in the past quarter, increasing 48.2% from last year.
But I believe the hidden germ for growth lies in Deckers opening up its own retail stores. With only its 24 stores worldwide focused exclusively on its products, and the aforementioned international demand, there are many more stores to open before the market becomes saturated.
3. Fundamentals
Make no mistake about it; this company isn't as cheap as it was earlier this year. As investors have caught on to this story, the P/E has gone from a mouth-watering 14 in September to a more modest 23 today.
But consider the following:
- The forward P/E for Deckers is 19.8.
- The PEG is at 0.9.
- The three-year average annual EPS growth rate rests at 47%.
What this all means is that while Deckers isn't cheap, you aren't paying too hefty a premium for a company with such a solid outlook. And Motley Fool co-founder David Gardner argues not to be afraid of a high P/E when it comes to great companies.
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