The strong demand for the UGG brand product line, new product introductions, and in-demand inventory have helped Deckers Outdoor Corporation (DECK) to achieve robust growth.
The company’s top line has increased at a CAGR of 32% in the last five fiscal years. Deckers’ long-term target is to achieve $1.1 billion in sales by 2012, including UGG sales of $900 million, Teva sales of $120 million and sales from other brands of $80 million.
The international markets provide a significant growth opportunity. Deckers’ international sales soared 54.8% in second-quarter 2010. Internationally, the company distributes its products throughout Europe, Asia Pacific, Canada, and Latin America.
Following the expiration of existing distribution agreements, Deckers, effective January 2011, will manage the distribution of UGG, Teva and Simple brands in the U.K. and the UGG and Simple brands in the Benelux region and France. This will help capture incremental sales and margins by selling directly to wholesale customers.
Deckers portrays a healthy balance sheet with cash and cash equivalents of $333.7 million and no debt at the end of second-quarter 2010. Ample liquidity positions it to capitalize on future growth opportunities. Riding on the back of robust results, Deckers raised its fiscal 2010 outlook. Management expects total revenues to increase by 14%, and earnings per share to rise by 16%.
However, we observe that the company’s over-reliance on the UGG brand is a matter of concern. In the event of stagnation or decline of UGG sales growth, Deckers’ overall results will be affected adversely. This is because the percentage of contribution from the company’s other brands are too small to offset any slowdown in UGG sales.
Moreover, Deckers faces intense competition in the footwear industry from other big guns such as Nike Inc. (NKE) on several attributes such as style, price, quality, comfort and brand strength. This may dent the company’s sales and margins.
Currently, we prefer to be Neutral on the stock. Deckers maintains a Zacks #4 Rank, which translates into a short-term Sell recommendation.