|Shares Out. (in M):||13||P/E||9.5x||8.1x|
|Market Cap (in $M):||890||P/FCF||10.9x||9.2x|
|Net Debt (in $M):||-230||EBIT||155||180|
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DECK is currently trading at less than 4.1x EBITDA, 11x Free cash flow, and 9x P/E despite having superior growth opportunities, high returns on capital and no debt. Since new management took over in 2005, DECK has transformed itself from just a seller of shoes to a manager of lifestyle brands. The Ugg brand is the primary driver of the business and is still in its nascent growth phase as it expands into other product categories and increases distribution both international and domestically. For a company growing its topline double digits, the company should trade at a minimum of 8x ebitda, 15x FCF, or 15x P/E, which is over 50% upside from here. Looking out a few years, they should end this year with close to $24/share and two years from now close to $40/share in cash. Should growth continue at its current trajectory, DECK would be trading at approximately 2.8x FCF after subtracting out $40/share in cash (stock currently at $67.40/share).
Deckers Outdoor Corporation engages in the design, production, and brand management of footwear for outdoor activities and casual lifestyle use. It offers casual open-toe and closed-toe footwear, including adventure travel shoes, outdoor multi-sport shoes, trail running shoes, amphibious footwear, light hiking shoes and boots, sheepskin boots and slippers, rugged closed-toe footwear, sneakers, sustainable footwear, and sandals under various styles for men, women, and kids. The company also offers various accessories, including handbags, headwear, packs, and outerwear. It markets its products under the Teva, UGG, Simple, TSUBO and Ahnu brand names. For now, the vast majority of sales are to women (90% for Ugg) but the kids and men's businesses are growing rapidly.
Through the wholesale channel, the company sells its products primarily to specialty retailers, department stores (Nordstrom's is a 10% customer), outdoor retailers, sporting goods retailers, shoe stores, and online retailers. The growth in this channel is coming from: 1) adding new wholesale accounts internationally; 2) increasing shelf space for Ugg products within it current distribution footprint by expanding categories by gender, age, and season; 3) adding shop within shops which is mostly in specialty retail (e.g. 90 new stores this year on top of 69 last year).
Through the direct channel, Deckers sells its products through its Web sites, catalogs, and full-priced retail and outlet stores. It has joint venture with Stella International Holdings Limited for the opening of retail stores and wholesale distribution for the UGG brand in China. The company has 12 stores now primarily in major metropolitan areas and will have 18 by the end of year. These stores are comping over 25% even in this environment. The company will have 30 stores in the US and 100 internationally.
One of the key reasons to the company's success has been through tight distribution and inventory management. The company will not sell to demand but rather keep stock limited across the channel and within accounts. This "limited" distribution strategy ensures the products remain fresh at all times.
Strong and Experienced Management Team
Angel Martinez, joined Deckers in 2005 as CEO, after spending 21 years at Reebok. He is known for turning around the Rockport division and diversifying the company's product offering by introducing the aerobic shoe, tennis shoes, walking shoes, and basketball shoes, as well as creating the Reebok "Classic" line of footwear and apparel. He was the third employee at Reebok and spent a lot of time on brand building and marketing. He was sought to eventually takeover as CEO but had resigned to be closer to his family back to California. He then co-founded Keen Footwear in 2003 and grew it to be a formidable competitor to Teva in just 2 years. He left Keen in 2005 to take the CEO position at Deckers. Since he joined in 2005, the company has been on a rapid growth trajectory driven by the Ugg brand. He has intentionally limited distribution of the product to maintain its wide spread appeal and has diversified the extended the brand into other product categories similar to what he did at Reebok. Given his strength in brand building and marketing, Angel has built Ugg to be the premier brand for accessible luxury and comfort, which is why other categories (e.g. apparel, accessories, etc.) and other shoe products (e.g. sandals, slippers, boots, etc.) have been selling well.
Numerous growth opportunities still exist for Ugg
Despite growing the Ugg brand from $24MM in sales in 2002 to $582MM by 2008, Ugg is gaining momentum as a high quality luxury brand known for comfort and affordability with core products selling for $140-$150.
The company projects sales for Ugg to be $750MM by 2012 (note: total sales are expected to reach $1bn) and this could prove conservative given the opportunity set:
Significant opportunity for brand extensions:
Other Brand Optionality
Given the strength of this management team in brand building and marketing, there is optionality in their ability to profitably grow the Teva, Simple, TSUBO and Ahnu brands. The company believes they should achieve sales for Teva of $110MM, Simple of $80MM, TSUBO of $40MM and Ahnu of $20MM by 2012.
Margin expansion opportunity
The company already has maintained gross margins in the 43-45% range but should improve that over time due to growth of the retail and internet businesses. Additionally, international gross margins are lower due to the fact that they have to go through distributors. Internationally, as markets get to a certain size, the company will drop the distributor and take over distribution thus capturing the incremental margins. Note that SG&A would be higher initially to create the infrastructure but over time as the brand grows, operating margins should grow. Historically, the company operated SG&A at 22-23% of sales while the company's guidance for 2009 is 25% of sales. Some of this is due to the growth of its retail store base but as sales grows, the company should be able to get SG&A leverage and get back to 22-23% longer term.
At $67.40/share, with 13.2MM diluted shares, the market cap is $890MM and with $230MM in cash and no debt, the EV is $659MM. The company has about $17.50/share in cash and will another $6.50/share by the end of the year to end the year with $24/share in cash. Assuming the company can generate another $200MM in free cash flow over the following 2 years, the company will have just under $40/share by the end of 2011. At that point in time, excluding the $40/share in cash you have company trading at $27.40/share with a forward multiple of under 2.7x FCF. This should trade for a minimum of 15x 2012 FCF which is 175% upside from here.
|Revenue Growth Rate||47.5%||53.6%||14.1%||13.0%||13.3%||12.1%||11.8%|
|Fully Diluted Shares||12,882||13,129||13,195||13,201||13,201||13,201||13,451||13,851|
The market is concerned that the Ugg brand is not a brand that espouses comfort and affordable luxury but just a one hit wonder that will eventually die off. We are comforted by a few observations: 1) Angel has done this before in his career with Reebok in terms of developing and diversifying a brand; 2) Our channel checks at the department stores, specialty stores and the retail outlets have been consistent with increasing demand for all Ugg products; 3) the shop in shops and retail outlets showcase the brand in many more categories outside of just the famous sheepskin boots and are comping over 25%. Additionally, the market is concerned that the CFO, Thomas Hillebrandt, recently resigned after less than a year of being hired. We have spoken with management about his departure and are comfortable that it had nothing to do with the company's performance or financial credibility but rather fit and culture. Finally, the market is concerned about the macro environment and in particular consumer spending for luxury goods. The good news is the fall product line is already presold and the brand is given significant support at retail because it is a traffic driver. What gives us comfort is that the company is not going after the ultra luxury category but rather affordable luxury and is focused on comfort.
- Risk to Visibility/Backlog
- Fashion Risk
- Dependence on select large customers
- Inventory risk in other brands
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