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1、 FOR INSTITUTIONAL CONSIDERATION ONLY. FOR REQUIRED DISCLOSURES, INCLUDING ANALYST CERTIFICATION, PLEASE REFER TO THE IMPORTANT DISCLOSURES STARTING ON PAGE 20 OF THIS REPORT. Deckers Outdoor (DECK: NNM; $46.93) September 7, 2010 Claire Gallacher / 925-944-0223 / Hold DECK: LOW HANGING FRUIT HAS AL
2、READY BEEN PICKED; INITIATING COVERAGE WITH A HOLD Initiating coverage of Deckers Outdoor with a Hold rating. Our Hold rating is predicated on our belief that DECK shares reflect peak EBIT margins in the near-term. We would wait for a better entry point to initiate a position. DECK manufactures and
3、sells UGG Australia footwear and accessories. UGG accounted for 88% of the companys revenue during 2009. Additionally, DECK manufactures and sells Teva branded footwear (10% of total sales) as well as footwear brands Simple, Tsubo and Ahnu. We believe DECK has the potential for 10-12% annual revenue
4、 growth. With the companys five brands, we believe 10-12% annual topline growth is sustainable. We estimate the UGG brand likely can sustain 10-12% growth through 6-8% domestic sales increases and 25% growth from international markets. Teva and the three smaller brands are projected to increase 15%
5、annually, translating to 10-12% growth on a consolidated basis. EBIT margins are likely at peak levels. We believe that EBIT margins are likely at levels that could be unsustainable in the near-term. As input costs increase during the next 6-12 months and revenue growth slows to a low double digit r
6、ate, we expect EBIT margins could flatten in the current range of 23% or possibly narrow going forward. Due to rising input costs, we are forecasting EBIT margins of 22.5% in 2011 versus our projection of 23.1% in 2010. Balance sheet pristine with cash totaling $8.55 per share. DECK has no debt and
7、$8.55 per share in cash on its balance sheet as of 2Q10. We anticipate cash balances will increase by year end as free cash flow is estimated at more than $100mm annually. Management stated its intention to invest in internal infrastructure for its international growth and looks for appropriate acqu
8、isitions. DECK shares currently trade at 12x our 2011 EPS estimate of $3.81. Our EPS estimate of $3.81 sits below consensus of $3.95 to reflect our belief that margins likely will under pressure going forward. If shares trade at or below $42, we would be more aggressive with DECK. However, we believ
9、e at 12x next years estimate, DECK shares are fully priced. CapStone Investments Trading Desk: 1-858-875-4550 2 Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 805-967-7611 RatingHOLD Target PriceNAEarnings Per Share Normalized to exclude unusual items Ticker SymbolDECKFYE
10、- December200820092010E2011E MarketNASDAQ1Q - March$0.29$0.31$0.46 A$0.53 Stock Price$47.012Q - June$0.13$0.09$0.23 A$0.18 52 wk High$56.173Q - September$0.66$0.86$0.92$0.95 52 wk Low$21.344Q - December$1.35$1.74$1.92$2.15 Year$2.43$2.98$3.54$3.81 Shares Outstanding:39.1 MGrowth44.3%22.4%18.7%7.8% P
11、ublic Market Float:37.6 MP/E19.3X15.8X13.3X12.3X Avg. Daily Volume1,380,000 Market Capitalization:$1,837 MEBITDA$158.8$192.4$228.2$244.4 Institutional Holdings:97.0%EV/EBITDA9.4X7.8X6.5X6.1X Common Ownership Profile Senior ExecutivesShareholderShares (000)% of Total Angel R. MartinezChairman, CEO, P
12、residentFMR4,809 12.3% Thomas A. GeorgeChief Financial OfficerBlackrock2,929 7.5% Zohar ZivChief Operating OfficerRenaissance Technologies1,915 4.9% Constance X. RishwainPresident, UGG AustraliaVanguard Group1,398 3.6% Collin G. ClarkSVP, InternationalDeutsche Asset Mgmt1,128 2.9% Directors/Officers
13、351 0.9% Capitalization Market Value Basis (millions)9/7/2010% Long-Term Debt$00.0% Market Value of Equity1,837122.9% Less: Cash34322.9% Enterprise Value$1,495100.0% Book Value Basis (millions)6/30/2010% Long-Term Debt$00.0% Other Liabilities11217.6% Book Value of Equity52282.4% Total Capital$634100
14、.0% Source: Company reports, Metastock and CapStone Investments estimates. Company Description Deckers Outdoor Corporation designs, produces, and markets footwear and accessories. The company sells its products, including accessories, through domestic retailers and international distributors and dir
15、ectly to the consumers through its websites, call centers, retail concept stores and retail outlet stores. DECK sells its products under five brands: UGG, Teva and Simple, Tsubo and Ahnu. Technical Commentary DECK shares appear to have set up a head and shoulders pattern which is normally a reversal
16、 signal. Should the shares break down below the $44 neckline, the price target would be $32 which would close the gap which opened in late February. CapStone Investments Trading Desk: 1-858-875-4550 3 Great Company But Low Hanging Fruit Has Already Been Picked We are initiating coverage of Deckers O
17、utdoor with a Hold rating. DECK is a manufacturer and retailer of five different footwear brands, including UGG Australia, Teva, Simple, Tsubo and Ahnu. Although DECK has multiple brands in its portfolio umbrella, UGG Australia accounts for more than 85% of the companys sales. DECKs UGG brand is inn
18、ovative and in many cases defines the premium choice for consumer sheepskin boot purchases. DECK acquired UGG Australia in 2005 and in the years since the acquisition, DECK successfully increased UGG sales to $712mm in 2009 from $172mm in 2005, representing a 43% compound annual growth rate. In the
19、past several years, management has taken steps to improve Tevas positioning in the outdoor footwear industry, in an attempt for Teva to enjoy the same premium status it boasted in the early 1990s. Simple, Tsubo and Ahnu combined represent a small portion of the companys total revenue, at approximate
20、ly 3% of sales. UGG Australia: A Home Run by All Accounts DECKs acquisition of UGG and the subsequent 43% CAGR in revenue is difficult to ignore. Consumers, primarily women, responded well to the brand, its styles and premium price points. Competitors attempted to imitate style and design but many c
21、onsumers remained loyal to the brand over the years. UGGs opportunities going forward include diversification of its product line to include different boot styles, slippers, sneakers and other sheepskin lined footwear. Additionally, the company has the opportunity to distribute UGG footwear more mea
22、ningfully overseas. UGG branded retail stores, both inline and outlet stores, are an additional opportunity to distribute product in the U.S. However, we believe the initial department store and specialty store distribution opportunities are more limited given the staggering growth rate the brand en
23、joyed for the past 4-5 years. Domestically, we expect the UGG brand likely will sustain 6-8% annual growth supplemented with 25% gains from international markets, leading to what we believe will be 10-12% annual growth going forward. Margin Compression Likely DECK enjoyed notable gross margin expans
24、ion during 1H10, much like other footwear manufacturers. Clean inventory levels and trend right product led to very little closeout merchandise in the past several quarters. In addition, input costs like freight, labor and sheepskin were favorable thereby further bolstering gross margins. We project
25、 strong gross margin trends to continue into 2H10; however we do expect this trend could reverse in 2011 leading to some EBIT margin degradation. Much of this gross margin reversal is expected to result from external forces; however we do expect narrowing margins for the next 1-2 years. CapStone Inv
26、estments Trading Desk: 1-858-875-4550 4 What Do We Recommend? Wait for a Better Entry Point We believe DECK is a high quality company with one of the most desirable consumer brands in its portfolio. However, given what we believe is more limited growth going forward and the potential for margin cont
27、raction in 2011-2012, we would wait for shares to pullback and find a better entry point to initiate a position. As shown by the following valuation table, DECK shares currently trade at 12x our 2011 EPS estimate of $3.81. We believe investors likely will have a more attractive entry point. Our 2011
28、 EPS estimate of $3.81 sits below consensus of $3.95 and we believe next years numbers do not reflect the high likelihood of gross margin contraction. As consensus estimates for 2011 pare down closer to our $3.81 EPS estimate, we believe shares could retreat. At or below $42, we recommend initiating
29、 or adding to positions. Bull Case UGG product demand is high Competition has not replicated the same high quality product Strong EBIT margins Clean balance sheet with $340mm in cash and $100mm+ in annual free cash flow Bear Case Full valuation Rising costs pressuring margins Discretionary goods in
30、an uncertain economic environment CapStone Investments Trading Desk: 1-858-875-4550 5 Figure 1: DECK Fairly Valued vs the Group ($millions) 09/07/10MarketPrice to RatingPricecapEV20092010E2011E20092010E2011EBook20092010E2011E Big Five Sporting (BGFV)Not Rated$12.38$270$323$1.04$1.09$1.2411.9x11.4x10
31、.0x2.3x5.5x5.1x4.7x Cabelas (CAB)Not Rated$17.08$1,159$925$1.27$1.60$1.6713.4x10.7x10.2x1.2x4.3x4.1x3.8x Collective Brands (PSS)HOLD$13.14$829$1,278$1.28$1.55$1.7010.3x8.5x7.7x1.8x4.2x4.0x3.7x Columbia Sportswear (COLM)BUY$51.63$1,746$1,337$1.98$2.30$2.7726.1x22.4x18.7x1.9x11.6x9.7x8.3x Crocs (CROX)
32、Not Rated$13.41$1,162$1,085($0.49)$0.68$0.86NM19.7x15.6x4.7xNMNM12.8x Deckers (DECK)HOLD$46.85$1,812$1,469$2.98$3.54$3.8115.7x13.2x12.3x3.9x7.6x6.4x6.0x Dicks Sporting Goods (DKS)Not Rated$25.95$2,357$2,273$1.19$1.48$1.7121.8x17.5x15.2x2.9x7.1x5.7x5.1x Heelys (HLYS)Not Rated$2.25$62-$4($0.19)$0.08$0
33、.33NMNM6.8x0.8x0.7x-1.8x-0.5x Hibbett (HIBB)Not Rated$23.99$692$667$1.12$1.53$1.6821.4x15.7x14.3x5.1x11.7x8.8x7.8x lululemon athletica (LULU)BUY$35.24$2,467$2,160$0.82$1.12$1.3643.1x31.3x25.8x7.4x20.1x13.8x11.9x Nike, Inc. (NKE)*HOLD$74.00$36,371$33,728$3.79$4.00$4.4819.5x18.5x16.5x4.3x12.3x11.6x11.
34、1x Quiksilver (ZQK)BUY$3.55$454$1,341$0.04$0.22$0.30NM15.8x11.8x1.0x8.2x6.8x6.4x Skechers (SKX)BUY$26.97$1,303$1,025$1.16$3.82$4.1523.2x7.1x6.5x1.7x10.9x3.4x3.1x Steve Madden (SHOO)BUY$36.63$1,033$946$1.82$2.57$2.8020.1x14.3x13.1x2.7x10.9x8.9x7.8x Under Armour (UA)BUY$38.82$1,964$1,797$0.92$1.14$1.4
35、342.0x34.0x27.1x4.9x15.8x13.3x11.8x VF Corp (VFC)Not Rated$75.17$8,119$8,574$5.16$6.16$6.6714.6x12.2x11.3x2.2x8.7x7.8x7.5x Volcom (VLCM)HOLD$16.77$409$298$0.89$0.93$1.0818.8x18.0x15.5x1.9x8.2x7.6x6.8x Average21.6x16.9x14.0x3.0x9.2x7.2x7.0x S however management has noted lack of visibility for the se
36、cond half of 2011. Closeouts likely increasing to more normalized levels. Product demand is uncertain going forward, however we do expect as DECK invests in new diversified product lines that inventory levels could tick up slightly and levels of close outs likely will increase. As a point of note, c
37、loseout merchandise was essentially immaterial in the marketplace during 1H10, leading to very favorable gross margins. Figure 5: Gross Margins Likely Retreating in 2011 38.0% 40.0% 42.0% 44.0% 46.0% 48.0% 50.0% 200520062007200820092010E2011E likely sustainable gross margin range = 44-47% Source: Co
38、mpany reports and CapStone Investments estimates SG however we do believe the company could maintain EBIT margins in the 22-24% over the long term. However, in 2011 we believe gross margins likely narrow from rising costs and as the company invests in retail stores and international infrastructure,
39、EBIT margins could drop to the low end of this range. Figure 6: EBIT Margins Likely at Peak Levels 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 24.0% 25.0% 200520062007200820092010E2011E likely sustainable EBIT margin range = 22-24% Source: Company reports and CapStone Investments estimates UGG Australia: Th
40、e Heart of the Company UGG Australia is the companys luxury comfort brand and is one of the category creators for luxury sheepskin footwear. The UGG brand enjoyed several years of strong growth and positive consumer reception, driven by introductions of new styles and distribution expansion. UGG dis
41、tribution targets high-end specialty and department store retailers in order to best reach target consumers and maintain the brands position as a mid- to upper-price luxury brand. Accounting for $712mm in total sales last year, UGG is DECKs largest brand. Sales for UGG increased 22% in 2009 and acco
42、unted for 88% of the companys total revenue. By distribution channel, UGG wholesale increased 17%, to $567mm last year, or 80% of UGGs revenue. Ecommerce and retail sales increased 10% and 108%, respectively during 2009. Ecommerce, at $67mm accounted for 9% of UGG sales, while retail at $78mm repres
43、ented 11% of revenue. CapStone Investments Trading Desk: 1-858-875-4550 10 Figure 7: UGG Sales Trends Likely Slowing Following Robust Growth ($millions) 200520062007200820092010E2011E UGG Wholesale150.3182.4291.9483.8567.0636.2699.3 UGG ecommerce20.322.637.960.666.971.276.7 UGG Retail1.16.517.837.67
44、7.9106.3127.5 Total UGG$171.6$211.5$347.6$582.0$711.8$813.6$903.6 Percent Change UGG Wholesale21%60%66%17%12%10% UGG ecommerce12%67%60%10%6%8% UGG Retail495%175%111%108%36%20% Total UGG23%64%67%22%14%11% Source: Company reports and CapStone Investments estimates We expect UGG likely will fuel DECKs
45、growth going forward, given the companys large revenue concentration within the brand. We expect sales in the U.S. could increase at a 6-8% annual rate as the company offers new diversified products that do not cannibalize existing purchases. International growth is likely to increase at a 25% rate
46、as UGG distribution includes newer markets in relatively cold climates. On a blended basis, we expect UGG could maintain a 10-12% growth rate over the next several years. Figure 8: Signature Classic Short Button Source: Company reports. Figure 9: Signature Bailey Button Opportunities to sustain 10-1
47、2% growth within the UGG brand include: Diversify product line. Diversity of the product line likely will include multiple categories to keep the brand fresh and attempt to appeal to a broader audience. We expect category expansion could include a deeper cold weather collection beyond its current si
48、gnature boot. Boot styles with signature UGG comfort but with more fashionable designs are currently being rolled out. Diversification efforts include the knit collection (crochet boot), slippers and sneakers. Sneakers were rolled out on a limited basis during spring 2010. A larger assortment is exp
49、ected in fall 2010, with more styles and colors available in 2011 given what we believe was a successful launch this year. CapStone Investments Trading Desk: 1-858-875-4550 11 Figure 10: Newer Knit: Classic Argyle Source: Company reports. Figure 11: Newer Knit: Classic Cardy Figure 12: New Product: UGG Sneaker Source: Company reports. Figure 13: New Product: UGG Slipper Further development of mens and kids selection. Womens products account for the majority of UG