Growth With a Nice Kick

02/10/2009 11:17 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says a footwear manufacturer has continued to put up good numbers even in the current recession.

Deckers (Nasdaq: DECK) designs and manufactures footwear. UGG is its largest and most popular brand, having generated 76% of sales for the first nine months of 2008. The brand is famous for its Australian-style sheepskin boots.

Teva produced 19% of sales. This brand specializes in outdoor recreational footwear and accessories. It is best known for its open-toe sandals and water shoes. Teva launched its first line of closed-toe footwear in 2008.

The Simple brand of environmentally friendly footwear accounted for 4% of sales. Its Green Toe, ecoSNEAKS, and PlanetWalkers are made with water-based cements, organic cotton, environmentally friendly leathers, hemp, and recycled car tires. The TSUBO brand of casual footwear, acquired in May 2008, emphasizes ergonomics.

Eighty-eight percent of the company’s sales are made on a wholesale basis to shoe stores, department stores, sporting goods stores, outdoor goods stores, and other specialty retailers. Eight percent of sales are generated through the Internet and catalogs. The remaining 4% come through DECK’s ten retail stores in the US and two in London.

Net sales grew from $121.1 million in 2003 to $448.9 million in 2007. The bulk of the growth is due to the success of the UGG line. UGG wholesale revenues soared from $34.6 million in 2003 to $291.9 million in 2007.

While keen to capitalize on this momentum, management has also been careful to control distribution and inventory to prevent discounting and diluting the brand. Total sales for the first nine months of 2008 surged 51.5% year over year to $385.9 million. Management believes annual revenues could reach $1 billion by 2012.

Net sales for the third quarter grew 52.5% to $197.3 million. Volumes jumped 31.7% to 3.5 million pairs. The average selling price increased 15.9%, but higher raw material costs contracted gross and operating profit margins to 43.26% and 21.84%. Yet net income jumped 34.6% to a better-than-expected $1.97 per share.

Management raised guidance for the full year, projecting 52% net sales gains and 40% [increases in] per share earnings. Still, this did not prevent investors from selling the stock due to concerns about the dismal retail environment.

Initial data suggest interest in UGG boots remained strong during the holiday shopping season. Just [three] weeks ago, management affirmed its previous guidance. The update is reassuring, because half of DECK’s annual sales are generated in the fourth quarter.

Nonetheless, the economy continues to struggle and fashion trends can change suddenly. DECK may have trouble sustaining recent growth rates if its brands, particularly UGG, fall out of favor.

Since the stock is 60% off its 52-week high, we think these risks are already discounted into the stock. While sales may slow in its existing markets, DECK might be able to make a shortfall by expanding into new markets. (The stock closed above $55 Monday—Editor.) 

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