UGGs Aren't Cheap, but Deckers' Stock Is

 | Dec 21, 2012 | 11:00 AM EST  | Comments
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I have been buying shares of Deckers Outdoor (DECK) for my clients this fall.

Deckers is best known as the maker of UGG brand boots. Indeed, UGGs provide about 88% of the Goleta, Calif.-based company's revenue. Teva sandals chip in another 9% or so.

On Oct. 25, Deckers announced that sales of UGGs had fallen 12% in the third quarter.  Compounding the damage, Deckers estimated that 2012 revenue would be up 5%, not 14% as it had previously suggested.

All heck broke loose. Deckers shares, which were at about $37 before the announcement, fell 23% within a week, hitting a low of less than $29 on Oct. 31.

I thought the panic was overdone, and I did a lot of buying in November. And I wasn't the only one. The shares have bounced back to about $35, within $2 of the price before the announcement.

I believe the stock represents good value at $35. Deckers is debt-free, a rare quality these days.  The stock's price is less than 9x earnings and less than 1.0x sales -- bargain levels, in my book.

Focus for a moment on that disappointing announcement. Angel Martinez, the CEO, blamed consumer resistance to a price increase for UGG boots, which he said was due to Deckers passing on rising prices for sheepskin and other raw materials in 2012.  

Martinez added that the company has been negotiating supply contracts for 2013 and will get better prices next year than in 2012.  It certainly should. The wholesale price of a sheep has dropped about 23% in the past year, and the price of sheepskin has fallen more steeply.

Yesterday, men's and women's boots were shown on the Deckers website for prices from about $130 to $260.  These are upper-end boots. If the U.S. economy continues to improve in 2013, that will bode well for Deckers.

Some smart people take a dimmer view. Short sales were equal to more than 40% of outstanding shares at last count.

But I think it's revealing that Deckers bought back more than 1.8 million of its own shares in the third quarter, at an average price of about $46 a share. Companies rarely do that unless they believe their shares are worth more than the buyback price. And the buyback price was more than $10 above today's market price.

The median price-to-earnings ratio for Deckers the past 10 years has been 18. Today it's 9. Suppose for a minute that the right multiple is 14, which I think is about right. That suggests there's room for a 55% gain in the stock in a year or two.

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