“Blew out a flip flop…” The words of Jimmy buffet seem applicable to Deckers (DECK) these days. The company built its reputation on their Teva sandals in the 90’s, but has since seen the brand deteriorate. The stock experienced some extreme difficulty surrounding the drop in Teva sales and in 2005, the stock lost nearly 2/3 of its value before it finally found support.
Since then investors have been handsomely rewarded due to the company’s purchase of the Ugg brand which is built around comfortable, sophisticated sheepskin footwear. The original line dealt mostly with boots and was a nice complement to the Teva seasonality as consumers are likely to buy Tevas in the spring and summer and the boots in the fall and winter. DECK was also creative enough to add to the Ugg brand including more traditional shoes that can be worn all year round, but still feature the comfort of sheepskin. While Teva sandals are sold at outdoor type stores such as Bass Pro Shops and Sports Authority, Ugg shoes are available at fashion retail stores such as Sachs Fifth Avenue.
Management has been trying hard to get back to their roots and resurrect the Teva brand. Teva still represents 24.7% of the company’s revenue (according to the 2006 annual report) and the growth in this brand has not been impressive at all. Deckers is hopeful that international expansion will bring more growth, but it is frustrating for investors to see significantly lower margins on international sales. In the second quarter, the overall firm’s gross margins dropped 420 basis points due in a large degree to the international sales. While the company increased its guidance for 2007 and analysts upped their price targets, there appear to be hurdles in the road that will be difficult for Deckers to maneuver around.
One of the new products DECK is rolling out is a green initiative dubbed “Simple.” This new line of shoes is made entirely from recycled or replentishable materials. The company hopes to reach out to environmental end customers who originally were the target market for Teva sandals. The problem is that the company is having trouble selling this new line. Sales were actually down 21% in Q2 which is not at all what you want to see with a new growing brand. While “Simple” does not represent a significant portion of revenue at this point, I would venture to guess that much of the optimism in the stock price is based on the fact that this new brand could drive sales. If Ugg turns out to be a fad, or is duplicated by a competitor, the company may not have such a rising star brand to fall back on.
While I understand that the Ugg platform has outpaced expectations, I am concerned that there is too much optimism in the shares and any hiccup in the sales of Ugg this fall could cause a severe decline in the stock. As mentioned before, I have taken some short positions in consumer stocks such as Coach to hedge against consumer weakness. The next quarter could be very interesting as wall street digests the lack of liquidity and the impact it will have on many different sectors of our economy.
FD: Author has a short position in DECK
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August 21st, 2007 at 9:52 am
Enjoyed your analysis. I have been eaten up shorting Deck but anm still short. Why no comment on the lack of financial clarity announced during last earnings release? The stock seems to perform well considering this news and insiders seem to be holding their positions. This is the worst i have ever done with a stock long or short.
john krieger
August 21st, 2007 at 10:48 am
one indicator you may want to consider is after market pricing on ebay for teva and ugg. crammers mad money highlight when the stock was in the dumps 20s/30s 1+ year ago was that prices on ebay were firm and thus hinted there was less of a saturation risk. also i wonder if crocs near $60 would also be in the same boat, as a high point short play.
August 22nd, 2007 at 7:09 pm
Hi Zach,
You got a few details wrong on the story. Deckers has owned Simple since 1993. My friend, Eric Meyer sold it to them. In 1994 Eric recruited me to help build the brand. By 1996,Simple grew from around 1 million to 23 Million. Simple was a great bet that paid off. Unfortunately, Deckers didn’t know how to manage one of the first and unique action sports skate show brands and skewed its distro to REI and outdoor stores and then brought in people from Reebok who tanked the brand. I also was the PR Director when Deckers acquired UGG. Marshal Cohen of NPD attributed the blowup of UGG to it being seen on Baywatch on Pam Anderson. I did that. I left in 1998 after a run in with the new Rebook posse. I would say that Deckers has had a string of good luck and a string of very bad upper management…it has been a revolving door there..people come to SB…senior executive and get lost in speculating on Real Estate there…It amazing to see the stock at $100…when i cashed out it was 8.00 then tanked to 2.00. Everybody has their eyes on Angel Martinez…maybe he can pull something off…but to date they are riding on UGG and Teva doesen’t seem to be setting the world on Fire…brand such as Chaco, then Keen have redefined this category and it will be hard for Teva to make a difference unless you gut the whole entrenched Deckers mentality. It the manyanna Santa Barbra lifestyle and the senior executive who arrive there after busting their butt in gritty cities like Boston..they get there and are ready for R&R.
August 22nd, 2007 at 7:59 pm
Daniel – very interesting! thanks for some colorful background information. That helps put some of the reports I have been reading into perspective and more on a personal level.
So what are you doing now? Are you still in PR?
August 27th, 2007 at 9:06 pm
Dude, you will be dead when CTSH turns around. You cover 100 shares of your CTSH soon. Good luck!!!
September 9th, 2007 at 2:04 am
I have had many discussions on this stock as i have a history in the shoe business and have dealt with all of these produts first hand. Firstly, regarding your opinion on the hurdles that deckers has in the future, (while certainly a visable concern) i must say those concerns have been addressed in the past 4 reported quarters. (in my opinion) While it is true that teva has been a cereal dissapoint consistanly, and margins have been contracting as a result of increased competition in the outdoor footwear space due to keene and others, the teva brand still controls a good portion of the market share and will continue to generate solid earnings for deckers. While there may be 1% to 5% increases and decreases in the sales of teva, i see these flucuations as sustainable. And while teva does represent 24% of the company’s earnings, i believe that as long the production development department can continue to come up with ideas to synergize simple and ugg with the struggling teva brand, this will only help it out. Moreover, moving on the the important part of the business which is ugg sales. From what the company projects it seems like people are only getting more and more interested in uggs this year. Many more styles are available this year and the margins on their new luxury style uggs will surely offset and decreased margins in teva. Also, the international markup for uggs will offset this as well. Remember, alot of foreigners by uggs in the states just because they are cheaper here. And the growth prospects abroad are astounding. One thing that may resound as concerning is a large part of ugg sales revolve around selling the classic short and classic tall boot. If a new style doesn’t show residual soundness the the next year it maybe an indicator that the fashion that the company is producing is in the latter stages. However that is anything but the case right now as new style interest is improving. So i do see 35% increase in sales due to increasing demand in uggs this year, no problem. (even if i have to wait to 3q and 4q. lol) My favorite part of the business is the simple side. Off to a slower start in capturing the general public, this brand in my opinion has the greatest potential and if these even pick up a bit, look out, their earnings will go through the roof, and i truly believe this brand will be the next big lifestyle brand in footwear. and the price point is right for any economic environment. disclosure: i have been bearish on this stock but i have done my dd and i cant help but be bullish, even if the chart is showing weakness recently with a “technical broken uptrend” this very well could be another opportunity.
September 9th, 2007 at 6:47 pm
Thanks Vince,
You may be right about DECK outperforming expectations. At this point, I am very uncomfortable with the US consumer – and a bit worried about international consumers as well. I respect being open minded enough to change your opinion after further review. I will continue to monitor both the stock movement and the fundamental story. Both are important. Will definitely be an interesting fall for both this name and the overall market.
September 13th, 2007 at 12:09 pm
I agree with your short position based on TA. Through the growth that started in Dec 05 EMA 10 on the weekly chart (EMA 50 on daily) served as a solid support, now it turned into resistance. RSI, MACD, STO, CMF, STO indicate sinking too.
September 14th, 2007 at 4:57 am
I manage a family fund … around $1Mil in funds and I run it like a hedge fund. I have longs and shorts, use options (short & leaps) even have euro denominated zero’s to hedge the real potential for a dollar tank. I have made a ton of money long CROX since may and began short DECK when it hit $90 … built the position up as it went higher and reduced the position as it went lower. I’m still short 800 @ around 93 and sold some sep 90 puts @ 2 for a hedge. I’m also making good money short AZO as the credit crunch & high energy will hurt them + Eddie Lampert dumped a chunk (margin call maybe) I’m toying with FRE & FNM on the short side. If you want a couple of longs that are on noones radar. Check out PRCP & VRML. PRCP has made a nice move recently but I think it goes to $20 in 1-2 years… VRML is a speculative play but I own 100K shares below $1. Go to their website and listen to the CEO give a 20 minute webcast presentation. DGX is investing in VRML in a BIG WAY!
Aloha
Edward
October 26th, 2007 at 2:23 pm
how are you feeling about shorting DECK now? i am in the footwear business. i am surprised that UGGS has continued such strong growth, but i think there is still strong upside with Teva and Simple. Teva has a new president (one year+) that is getting their act together. they have a strong name but old styles, he is refreshing for a younger customer. i bought at 70, sold half at 90 and wish i hadn’t.