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LONG – Decker Outdoors (DECK)

Target Price: $119 (86%)

Decker Outdoors Corp (DECK) engages in developing, producing and Stock Price $ 64.03
(as of July 9, 2009)
marketing innovative footwear brands it has acquired. Currently, its portfolio of
brands includes UGG, Teva, Simple and TSUBO. Revenue has tripled since 52 w k low $ 37.24
2004 when UGG sheepskin boots became widely popular for its distinctive and 52 w k high $ 128.48

highly functional design. The wholesale of UGG boots accounts for 70% of the
Shares outstanding 13.1
revenue as of 2008. Investors are worried whether UGG can sustain current sales Market cap 839.8
in the long run, and such doubts sent the stock significantly lower than its Net cash 230.0
Minority interest 0.4
intrinsic value.
Enterprise value 610.2

Key Investment Factors: 1) Is UGG’s revenue sustainable? 2) Is the stock Revenue 726.0
EBIT 155.0
undervalued relative to its peers? 3) When will the stock price pick up?
Operating Margin 21%
EV/EBIT 4.0x
• The major criticism for UGG is that it is a consumer faddish like Crocs, a P/E 11.3x
P/S 1.2x
classic “bubble” story that makes investors wary whether UGG will follow
P/Tangible book 2.2x
the same suit. Crocs Inc. stock price plummeted to $1 from $70 a year ago, Dividend yield n/a
as the funky plastic sandal lost its appeal, while the knockoffs and look-a- Net cash per share $ 17.54
Value of Operation $ 46.49
likes flourish. UGG is subjected to the similar risk, but there are fundamental
differences. UGG commends higher barrier to entry than Crocs. The UGG
brand is one of a kind signifies warmth, comforts, durability and fashion, a Key Assum ptions
Revenue Grow th 26%
leading brand in a niche market. It targets mid-high income female
EBIT Margin 22%
customers, who are unlikely to try knockoffs as a substitute. UGG has low EV/EBIT Multiple 7.0x
sales return while Crocs’ sales return increased by ~200%.
Nomalized EBIT 190.6
EV 1,334.2
• DECK, the company has low fixed cost structure which enables it to survive Net Cash 230.0
the recession. It has superior supply chain management and distribution Market Cap 1,564.2
channel. 80% of the revenue came from wholesale to mid-high end Share outstanding 13.1
Target share price $ 119.27
department stores and boutique specialty footwear stores, which place orders
6-8 month ahead of the season and forecast sales based on last year’s Upside 86%
number. Since UGG was the bestselling winter footwear brand last year,
retailers will make sure having it in stock for the coming season. DECK only
operates 6 retail stores, all opened at premium locations, a big advantage
when compared to traditional retail business, which suffers from lease
obligations and growing numbers of underperforming stores. According to
my research and cost analysis, DECK can sustain the 25% of revenue
decline to breakeven! On the contrary, Crocs has high fixed cost structure,
operating 157 domestic retail stores and 131 international stores, with direct Reveue Grow th Breakdow n
sales efforts in 31 countries. High fixed cost led to a net operating loss of
$185 million when revenue declined 15%. 2008 2009 E
Wholesale
UGG 66% 20%
• DECK has high ROIC and high operating margin since 2002. [See Figure Teva -1% 0%
2&4] In 2008, it wrote down $35.8 million goodwill/intangible, $1.67 Simple 25% 0%
TSUBO n/a 200%
adjusted to non-GAAP earning, and still achieved net income growth of 11%. E-commerce 51% 50%
Writing down goodwill is a sign of confidence and improvement of the Retail 109% 100%
company’s financial position, according to Benjamin Graham in his Total 54% 26%

Interpretation of Financial Statement.

• Management is conservative in earning guidance and capital allocation. For

the fiscal year 2007 and 2008, the actual revenue and profits growth beat
 2
LONG – Decker Outdoors (DECK)
Target Price: $119 (86%)

management forecast by fat margin. [See Figure 1]

• Stock trades at lower multiple than its peer group. The criteria to be chosen as DECK’s comparable is that the
company 1) manages and markets portfolio of brands of apparel/footwear; 2) profits mostly through wholesale,
low exposure to retail operation. The four comparables I choose is Nike (NKE); Ralph Lauren (RL), who sells
polo sports apparel through department stores; Warnaco (WRC), a company manages and licenses Calvin Klein,
and Timberland (TBL), who designs and manufactures footwear, and engages in wholesale business. Despite
the strong growth story, I assigned 7x EV/EBIT multiple to DECK, which is in line with the comparables and
slightly discounted from Nike. [See Figure 5]

• The stock should pick up during the 2H09, as the sales are heavily skewed toward the end of the year. The
consensus of earning per share is $7.36, 9 cents higher than $7.27 per share in 2008. The hurdle is low, since
even the conservative management raised revenue growth to 8-10% from 6-8% after the 1Q09. However, I
believe the normalized revenue can reach $866 million, 26% growth from 2008. The company keeps inventory
and working capital consistently around 20% of sales and increased inventory level by 34%. DECK is getting
ready for a homerun in the 2H09. More free options! DECK has growth opportunities in opening more retail
flagship stores in the US, Europe and Asia. (Flagship store usually earns higher return on invested capital than
stores opened at regional mall, a lesson learned from Abercrombie & Fitch.) Management planned to open 2
domestic stores and 5 international stores.

Forecast / Actual Analysis 2007 2008 2009

Com pany Com pany Com pany My
Forecast Actual Variance Forecast Actual Variance Forecast Estim ate Variance

Revenue, in m illions 350.1 448.9 98.8 561.2 689.4 128.3 737.7 866.3 128.6
Revenue grow th 15% 47% 32% 25% 54% 29% 7.0% 26% 19.00%

Diluted EPS, non-GAAP $ 3.47 $ 5.06 $ 1.60 $ 6.07 $ 7.27 $ 1.20 $ 7.74 $ 9.01 $ 1.27
Diluted EPS grow th 5% 53% 48% 20% 44% 24% 7% 24% 17%

Gross margin 44% 46% 2% 45% 44% -1% 45% 45% 0%

SG&A margin, (SG&A/Sales) 25% 23% -2% 25% 22% -3% 25.00% 23% -2%

Capital expenditure, m m 5.0 5.5 0.5 20.0 28.3 8.3 20.0 25.0 5.0  
Figure 1: Company Forecast – Always Under Promise and Over Deliver
 

80% 250%

70%
200%
60%
150%
50%

40% 100%

30% 50%
20%
0%
10% 2002 2003 2004 2005 2006 2007 2008 2009 E
0% -50%
2001 2002 2003 2004 2005 2006 2007 2008 2009 E UGG   Teva Simple
 
Figure 2: ROIC Trend Figure 3: Segment Revenue Growth
 3
LONG – Decker Outdoors (DECK)
Target Price: $119 (86%)

25%

20%

15%

10%

5%

0%
2002 2003 2004 2005 2006 2007 2008 2009 E
 
Figure 4: Operating Margin Trend
 
 
Com parables Mkt Cap EV Revenue OP Margin EBIT EPS EV/EBIT P/E P/S
(Revenue and EBIT in billions)
Nike (NKE) 24.75 22.33 19.18 12.8% 2.46 3.03 9.1x 16.9x 1.3x
Ralph Lauran (RL) 4.98 4.68 5.02 13.5% 0.68 4.01 6.9x 12.6x 1.0x
Warnaco (WRC) 1.41 1.60 2.04 8.5% 0.17 1.44 9.3x 21.4x 0.7x
Decker Outdoors (DECK) 0.84 0.62 0.73 21.4% 0.16 5.68 4.0x 11.3x 1.2x
Timberland (TBL) 0.72 0.55 1.32 4.9% 0.07 0.70 8.4x 18.0x 0.5x  
Figure 5: Comp Analysis
 

Balance Sheet 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09
(in millions)
Cash and equivalent 54.5 81.1 79.6 35.1 176.8 179.1
Short term investment 113.6 102.3 45.2 32.9 18.0 50.9
Trade receivable 72.2 40.7 54.7 113.0 108.1 56.3
Inventories 51.8 49.4 112.8 157.9 92.7 66.4
Deferred tax assets 6.0 6.0 4.8 6.0 13.3 13.3
Income tax receivable 4.3 - - -
Prepaid expenses 3.3 5.7 6.0 5.2 3.7 5.0
Restricted cash 0.3 0.4 0.4 0.4 0.3 0.3
Current assets 301.6 285.6 307.8 350.4 413.0 371.4

Restricted cash 1.0 0.7 0.7 0.7 0.7 0.4

Long term investment 2.3
PP&E, net 10.6 15.8 19.1 25.4 28.3 30.1
Deferred tax assets 2.7 2.7 2.7 2.7 17.4 17.5
Goodw ill and Intangibles 54.1 54.1 45.0 44.9 24.0 26.2
Other assets 0.1 0.1 0.1 0.1 0.3 0.4
Total Assets 370.0 359.0 377.6 424.1 483.7 446.0

Account payable 36.2 25.4 50.5 48.3 43.0 19.5

Accrued expenses 17.6 11.4 12.3 18.0 27.7 15.4
Income tax payable 17.5 7.1 - 11.8 24.6 7.9
Current liability 71.4 43.9 62.7 78.1 95.2 42.8
Long term liability - 2.5 2.6 3.9 4.3 3.7
Total Liability 71.4 46.4 65.4 82.1 99.5 46.5

Shareholder Equity 298.6 312.6 312.3 342.1 384.3 399.5

Tangible Book Value 244.5 258.5 267.3 297.2 360.2 373.3

Share outstanding 13.0 13.0 13.1 13.1 13.1 13.1
Tangible Book Value Per share $ 18.80 $ 19.82 $ 20.47 $ 22.74 $ 27.56 $ 28.46

Revenue, LTM 448.9 473.9 512.3 580.2 689.4 726.1

COGS, LTM 241.5 253.7 277.4 318.7 384.1 408.1
Gross margin 46% 46% 46% 45% 44% 44%
Inventory turnover 4.7x 5.1x 2.5x 2.0x 4.1x 6.1x