DECK Decker Outdoor Analysis

Decker Outdoor is changing the structure of its product distribution model by adding company owned retail stores to its distribution model.  Since building out retail stores is a capital intensive process, I think sales revenue and fcf are the best tools to access a company’s success in the short term. My analysis will focus on revenue comps and product distribution comps to show everyone that Decker Outdoor is going to continue having challenges with shifting the business.  These challenges will have huge impacts on EPS and operation capital requirements because the company’s core product, Ugg Boots, is experiencing a sharp decline in sales. 

In August 2011 I was noticed a shift in women’s fashion:  Riding boots were the new trend.  I wish Frye was a publicly traded company.  http://www.thefryecompany.com/

From a fashion standpoint, trendy women don’t wear Uggs anymore, and there are knockoff brands sold at WMT as well as many other large retailers for a fraction of the price.

http://www.walmart.com/ip/Brinley-Co.-Women-s-12-Inch-Faux-Suede-Boots/17420493

In fiscal 2011, sales from Ugg Boots accounted for 87% of Decker Outdoor’s revenue.  The company is forecasting 14% eps growth for 2012, but the revenue in 1q12 vs 1q11 for Uggs in the ecommerce channel was (9.2)%.  Think of the shopper-demographic of Ugg boots... don’t you think this shopper would buy online more times than not?  In addition, think of all the women that bought Uggs in 2004 through 2011… wouldn’t those women already know the exact size that she would wear?  To me, having negative ecommerce numbers is a much larger “tell” than the performance of any other sales channel and I see it as the canary in the coal mine.

Wholesale and retail revenue comps were .9% and 30.7% for 1q12, but those two comps combine to make up a revenue comp of 9.2% (it is purely coincidence that the combined comps are the absolute value of the ecommerce comp).   I would imagine that Decker did due diligence of vertical mergers, deciding that building company owned retail stores was the best way to increase revenue and maximize profits.  I would imagine that building its own retail stores is a cheaper alternative, but I feel that the timing of this decision to start building stores is a grave mistake (no pun intended).

Uggs revenue comps as a whole (ecommerce, retail, and wholesale) are only up 6.5% for 1q12.  Obviously, the company is shifting sales from wholesale to retail stores, but revenue gains in retail are far greater than wholesale on a per unit basis, right?  If that is the case, every sale that is lost from wholesale to retail would generate more revenue per sale, not less.   

In my opinion, shifting to a retail model should have been done earlier in the fashion trend cycle in order to take advantage of accelerating sales growth, but shifting to a retail model at this time simply means that more operating capital is required to run the business.   This shift will rapidly deteriorate earnings growth and magnify losses if the planned shift from wholesale to retail doesn't work [It won't].

What are Decker Outdoor's other brands and how are those brands growing you ask?

·         Brand: YOY quarterly Rev Growth

·         Teva: (1.1)%

·         Sanuk: (recently acquired, but less than 15% of total rev)

·         Other: 0.2%

What was Decker Outdoor's revenue growth and eps growth for 2011 vs 2010?

·         38% rev and 25.8% eps growth.

Those numbers are starkly different when compared to the 1q12 comps.  I wouldn't be surprised if this stock trades down to $30/share by January of next year.  The only catalyst preventing this decline would be a new fashion trend, but time will tell that story.