DECK: On Firm Footing

03/18/2005 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Not to be confused with the generic drug firm, Teva is also a brand of shoes made by Deckers Outdoor. While possibly lacking the pizzazz of a high-tech firm, Vahan Janjigian sees the stock as an opportunity to invest in a company that is on "firm footing."

"Deckers Outdoor (DECK NASDAQ) designs footwear including shoes, sandals, slippers, sneakers, flip-flops, and boots. Its products are sold to specialty retailers and department stores in the US and abroad. DECK also sells footwear directly to consumers through its Web sites and catalogs. Its brands include Teva, UGG, and Simple. The company targets trendsetters as well as those with more utilitarian tastes who eschew the latest fashions.

"The Teva brand consists of rugged shoes for outdoor activities. They are built to endure the wear and tear of hiking, trail running, bouldering, kayaking, kite boarding, and whitewater rafting. The Teva line ranges in price from $20 to $120 and accounted for 41% of 2004 revenues. DECK estimates that the US rugged outdoor market is worth approximately $2 billion. UGG boots and slippers are luxury brand footwear priced at $50 to $275 and are found in specialty retail stores such as Fred Segal and David Z., as well as in high-end department stores such as Nordstrom and Neiman Marcus.

"DECK recently signed licensing agreements with several designers to distribute UGG-branded outerwear and accessories, which has enhanced UGG brand recognition. UGG sales represented 54% of 2004 revenues. Finally, the Simple line features sneakers, clogs, sandals, and fleece-lined boots with suede uppers. Simple targets the no-nonsense consumer between the ages of 17 and 30 who desires functional and moderately priced footwear. Products in this line sell for $40 to $88. Simple contributed 5% to 2004 revenues.

"DECK is thriving despite competition from the likes of Timberland, Nike, Adidas-Salomon, and Sketchers. Indeed, Fourth quarter sales more than doubled year-over-year to $74.2 million. Gains are due to strong demand, improved deliveries, and strong retail sell-throughs. Fourth quarter net income almost quadrupled to 72 cents per share, beating the consensus estimate by 20 cents. Full-year sales improved 77% to $215 million. Backlog is growing for all three brands.

"The company plans to introduce several new models. The amphibious trail runner already has great bookings. UGG has posted seven straight years of double-digit revenue growth and international sales are gaining strength. The Classic and Ultra boots, as well as the slippers, have been selling extremely well. The company is making plans to increase the cachet of the UGG line. The Simple line is coming out with products that should help boost sales. Management has been raising sales and earnings projections. DECK is on firm footing. We added DECK to the Top 50 portfolio, and we think it makes sense to establish a position in this high-growth footwear designer at this time."

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