COMPANY NOTE
Company Update
USA | Consumer | Apparel, Footwear & Textiles January 3, 2012
Deckers Outdoor (DECK) Conviction List
EQUITY RESEARCH AMERICAS
BUY
Deep Dive Ahead of 2012 Price target $125.00
Price $75.57
Key Takeaway
While DECK remains a favorite name of ours into 2012, we see a scenario
where management guides initial FY12 EPS up to 50c below consensus but
ultimately reports FY12 EPS well above. Our call is specific to how we see the Financial Summary
company guiding margins. We would be buyers on related (if any) weakness as Book Value (MM): $656.0
management has a history of guiding conservatively and ultimately crushing Book Value/Share: $16.69
expectations. See our 20 page report for details. Net Debt (MM): $21.0
2012 Buy Thesis. Our view continues to be based on upward sales bias from accelerating Return on Avg. Equity: 24.2%
UGG store growth and the Sanuk acquisition. We also see SG&A leverage opportunity from Long-Term Debt (MM): $0.0
the anniversary of one-time expenses. We expect retail growth and Sanuk alone to account LTD/Cap: 0.0%
for 15% sales growth next year. With consensus currently calling for 20% sales growth next
Dividend Yield: 0.0%
year, the implied global wholesale assumption appears very conservative. We think 30%
+ sales growth and SG&A leverage are achievable in FY12 but unlikely to be reflected in Cash & ST Invest. (MM): $90.0
management's initial (conservative) guidance. Market Data
Thoughts on Initial FY12 Guidance. Consistent with our published research, we think 52 Week Range: $118.90 - $71.18
management may guide FY12 below consensus on conservative margin assumptions. We Total Entprs. Value (MM): $2,990.9
provide numerous scenarios for sales & EPS growth in the attached report. The most likely Market Cap. (MM): $2,969.9
case, in our opinion, will be an initial FY12 guide of 15-20% sales growth and 5% EPS
Insider Ownership: 4.2%
growth. This compares to consensus, which is calling for 20% sales growth and 17% EPS
growth. While consensus GM% expectations (down 210 bps) have become more realistic, Institutional Ownership: 100.9%
the operating margin line (down 40 bps) appears too aggressive versus where management Shares Out. (MM): 39.3
may ultimately guide. Recall the 3Q call where the company spoke to investments such as Float (MM): 37.0
new stores and personnel. This, to us, suggests that the initial guide will not call for SG&A Avg. Daily Vol.: 1,427,245
leverage. That said, there is a very strong case to be made for SG&A leverage in FY12.
Three Important EPS Numbers. In forecasting DECK's FY12 initial guidance, there are
three important numbers to consider: consensus ($5.91), potential guidance range ($5.50-
$5.75) and EPS power ($6.50). Our FY12 estimate of $6.10 is at the mid-point of the potential
initial guidance and EPS power figures.
Valuation/Risks
DECK trades at 15x forward EPS and 10x EV/EBITDA. These metrics are a discount to history.
Our PT reflects a premium multiple as justified by a stronger growth profile and upward Taposh Bari, CFA, CPA *
EPS bias. We arrive at $125 using a blended average of 25x P/E and 15.5x EV/EBITDA. Risks Equity Analyst
(212) 708-2712 TBari@jefferies.com
include cost inflation, execution (retail, international), and fashion trends.
* Jefferies & Company, Inc.
USD Prev. 2009A Prev. 2010A Prev. 2011E Prev. 2012E Price Performance
EBITDA (MM) -- 192.0 -- 262.0 -- 309.0 -- 361.0
120
EV/EBITDA 15.6x 11.4x 9.7x 8.3x
Consensus -- -- -- -- -- 4.83 -- 5.86
110
EPS
Mar -- 0.31 -- 0.46 -- 0.49A -- --
100
Jun -- 0.09 -- 0.23 -- (0.19)A -- --
Sep -- 0.86 -- 1.07 -- 1.59A -- --
90
Dec -- 1.74 -- 2.27 -- 3.25 -- --
FY Dec -- 2.98 -- 4.04 -- 5.16 -- 6.10 80
FY P/E 25.4x 18.7x 14.6x 12.4x
70
JAN-11 MAY-11 AUG-11 DEC-11
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 15 to 20 of this report.
DECK
Company Update Deckers Outdoor
January 3, 2012
Buy: $125 Price Target
THE LONG VIEW
Scenarios
Target Investment Thesis Upside Scenario Downside Scenario
Inherent EPS upside to management Better than expected sales driven by UGG Deceleration of the boot cycle would have
guidance and consensus given company’s retail, UGG wholesale and Teva wholesale. an adverse effect on ASP’s and sales.
history of easily exceeding expectations. Margin leverage, particularly in the back Lack of sales upside would disrupt the EPS
Sales growth led by retail expansion, half of 2011, as incremental sales come beat + raise story that is expected and
international growth, men’s initiatives and from accretive international and retail priced into the stock.
apparel & handbags growth. channels. 2011 EPS: $4.90; Target Multiple: 16x
Best in class management team and strong 2011 EPS: $5.35; Target Multiple: 27x; Target Price: $78
net cash balance. Target Price: $145
2011 EPS: $5.16; Target Multiple: 25x P/E,
15x EV/EBITDA; Target Price $125
Long Term Analysis
1 Year Forward P/E Long Term Financial Model Drivers Other Considerations
LT Earnings CAGR 20% DECK has accumulated a significant cash
Organic revenue growth 15% balance that is well in excess of its
Operating Margin Expansion 5% operational needs. The company has
been shopping for a lifestyle brand but
has yet to find one given the stringent set
of criteria. Ultimately, we believe an
increased share repurchase bodes well for
investors and provides a positive signal to
Source: Capital IQ, Jefferies estimates
the market in management’s confidence
behind the core brands’ growth
prospects.
Peer Group
Group P/Es Earnings Growth vs P/E Recommendation / Price Target
Ticker Rec. PT
DECK Buy $125
WWW Hold $40
UA Hold $75
LULU Hold $54
NKE Buy $115
Source: Capital IQ, Jefferies estimates Source: Capital IQ, Jefferies estimates
Catalysts Company Description
February 2012: 4Q11 earnings results Deckers is a leading designer and wholesaler of footwear brands based in Goleta,
California. The company’s portfolio of brands includes UGG, Teva, Sanuk, Simple, Tsubo
February 2012: 2012 preliminary guidance
and Ahnu. UGG accounts for 90% of sales and is the leading driver of the investment story.
UGG is mainly sold at wholesale through a limited distribution network that includes better
department stores (Nordstrom being its largest account), specialty store chains and
independent retailers. Going forward, we view UGG as a brand that represents comfort,
first and foremost, with growth levers that include: 1) U.S. expansion, 2) retail, and 3)
international (which replicates the U.S. model).
page 2 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Laying Out the Parts for 2012 Guidance
Deckers is set to provide initial FY12 guidance with 4Q11 earnings in late February.
Management has a history of guiding conservatively and ultimately crushing
expectations. Despite this pattern, management’s initial FY guidance has rarely been
below consensus with FY09 being a recent exception. We believe a below consensus
guide is possible for FY12 and would use any related weakness as a major buying
opportunity.
4Q, which is still to be reported, will play a key role in the absolute level of FY12 EPS
guidance. Historically, the company’s out-year sales and EPS growth forecasts have been
on the lighter side but more than offset by a strong 4Q beat. The combination of
conservative out-year EPS growth and a strong 4Q has, in most cases, led to above
consensus out-year EPS guidance.
This coming year, we believe the margin headwinds are too strong to be offset by a 4Q
beat. As a result, there is a chance that management’s initial FY12 EPS outlook could fall
below consensus. The last time this happened at Deckers was in 2009 with the stock
declining 22% the following trading day.
We see three important EPS figures to consider ahead of 2012:
1. 2012 consensus EPS = $5.91
2. 2012 potential EPS guidance range = $5.50 - $5.75
3. 2012 EPS power = $6.50
Bottom line, we think management could guide up to $0.50 below consensus but
ultimately report FY12 $1.00 above guidance.
In analyzing consensus estimates, we believe assumptions for gross margin (down 210
bps) and operating margin (down 40 bps), while possible when all said and done, are
above where management will likely guide. Gross margins face ongoing pressure from
product cost inflation and limited pricing power while SG&A faces the ongoing challenge
of ‚investments.‛
Coming out of the 3Q11 call in October, our impression was that gross margins would be
down a few hundred basis points (at least 200, in our opinion) and SG&A will not achieve
leverage. While these assumptions should ultimately prove conservative, we think it’s fair
to assume that management will, at least initially, guide within the confines of its 3Q
commentary.
Although consensus margin expectations appear to be too aggressive (at least versus
where management will initially guide) we strongly believe that consensus sales estimates
are too conservative.
Deckers has a number of highly visible revenue catalysts in 2012 including the opening of
25 new retail stores, full year of the Sanuk acquisition, and global wholesale growth. We
(conservatively) model new retail store openings and Sanuk to contribute around 15% of
revenue growth alone. Consensus is currently forecasting 20% total revenue growth in
2012, which implies global organic wholesale growth of 3-4%. To put this figure in
greater perspective, 2011 year-to-date wholesale growth is >25% (excluding international
transition benefit of $50m) and was 20% in 2010 and 13% in 2009. Bottom line – the
implied 3-4% wholesale growth assumption in consensus estimates appears very
conservative.
page 3 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Scenario Analysis
We believe management’s initial FY12 EPS outlook could fall within the range of $5.50 -
$5.75. The table below details the numerous possible outcomes based on a function of
4Q11 actual results and FY12 sales / EPS growth assumptions. Our estimated range is
based on a ~10% 4Q11 beat vs. guidance (DECK exceeded its last two 4Q guides by 20%,
each) and 5% EPS growth for FY12.
Chart 1: Scenarios Based on 4Q11 Actuals and FY12 Sales, EPS Growth
2012 Sales % / EPS % Growth Scenarios
10% / 0% 15% / 0% 15% / 5% 20% / 5% 20% / 10%
2.85 4.75 4.75 5.00 5.00 5.23
4Q11 EPS Scenarios
2.95 4.85 4.85 5.10 5.10 5.32
guidance 3.02 4.92 4.92 5.17 5.17 5.41
consensus 3.13 5.03 5.03 5.28 5.28 5.58
JEF 3.25 5.15 5.15 5.41 5.72 5.72
3.35 5.25 5.25 5.51 5.51 5.83
3.45 5.35 5.35 5.62 5.62 5.94
3.55 5.45 5.45 5.73 5.73 6.05
consensus FY12 EPS = $5.91
Source: Jefferies estimates
Our assumption throughout this report is that management will guide FY12 to 20%
revenue growth and 5% EPS growth. 20% sales growth would be comparable to FY11’s
initial guide, which comprised 15% organic growth and 5% from the international
transition. FY12 has a similar 5% benefit, this time from the full year benefit of Sanuk.
The lower EPS growth assumption is based on around 300 bps of operating margin
compression. We arrive at this figure using around 250-300 bps of gross margin pressure
and 0-50 bps of SG&A pressure. Again, this is how we expect management to initially
guide FY12 with 4Q11 earnings in late February.
The following table illustrates the different scenarios in a more detailed manner versus the
table above. What’s evident is that even in the case of a strong 4Q11 beat, there is still a
likelihood that FY12 guidance will be below consensus of $5.91.
Our baseline assumption is
Chart 2: FY12 EPS Guidance Scenarios
management initially guiding fiscal 4Q11 JEF Guidance BETTER Case BEST Case consensus
2012 revenues to grow 20% and EPS sales 569 555 577 590 560
5%. sales growth 32.3% 29.0% 34.0% 37.0% 30.2%
margins (30) (185) 40 165 (110)
EPS 3.25 3.02 3.35 3.55 3.12
2011 JEF Guidance BETTER Case BEST Case consensus
sales 1,343 1,329 1,351 1,364 1,336
EPS 5.16 4.93 5.26 5.46 5.01
2012 Initial Guide JEF Off of FY11 Guidance Off of FY11 BETTER Off of FY11 BEST consensus
sales 1,679 1,595 1,621 1,637 1,606
sales growth 25.0% 20.0% 20.0% 20.0% 20%
operating margins (153) (300) (300) (300) (40)
EPS 6.10 5.16 5.51 5.73 5.91
EPS growth, % 18% 5% 5% 5% 18%
Source: Jefferies estimates
page 4 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
DECK Initial FY Guidance History
It is no secret that Deckers management is notorious for guiding conservatively. That said,
the initial fiscal year outlook (with 4Q earnings) is often above consensus as a strong 4Q
beat offsets an initially modest EPS growth rate.
The table below lists guidance statistics for 2009, 2010 and 2011 along with how we
think 2012 could materialize. 2009 stands out as the year which management guided
below consensus with a corresponding 22% decline in the stock on the following day.
Ironically, the company ultimately not only exceeded its initial guidance by 25% but also
the initial consensus estimate by 11%.
We see a similar situation occurring in 2012 with a below-consensus guide and ultimately
a result that is above (original) consensus.
Chart 3: Stock Reaction to Initial FY Guidance
fiscal year report date consensus guidance guide vs. cons stock move actual FY reported actual vs. guide
2009 2/26/09 2.69 2.38 below -22% 2.98 25%
2010 2/25/10 2.79 3.13 above -2% 4.01 28%
2011 2/24/11 4.25 4.44 above 11% $5.03 (consensus) 13%
2012E* 2/1/12 5.91 5.50 - 5.75 below $6.50 (EPS power) 15%
*2012E line based on JEF estimates
Source: Jefferies estimates
The table below illustrates the company’s initial sales and EPS growth forecasts going
back to 2003. The conclusion here is obvious but worth mentioning nonetheless. The
company’s actual results have exceeded management’s initial outlook in every single year
(including the recession years in 2008, 2009).
This further supports our belief that a below-consensus guide combined with a stock sell-
off would create an attractive entry point for investors.
Actual results have exceeded initial
Chart 4: DECK Guidance History
guidance every single year since 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E*
2003, including the recession (2008, out-year initial guide
sales growth, % 3% 7% 5% -2% 15% 25% 8% 11% 20% 20%
2009).
EPS growth, % 15% 20% 5% -15% 5% 20% -1% 5% 10% 5%
actual results
sales growth, % 22% 77% 23% 15% 48% 54% 18% 23% 34% 30%
EPS growth, % 118% 175% 23% 32% 56% 43% 23% 35% 29% 25%
Beat
sales growth, % 19% 70% 18% 17% 33% 29% 10% 12% 14% 10%
EPS growth, % 103% 155% 18% 47% 51% 23% 24% 30% 19% 20%
*2012E b ased on JEF estimates
Source: Jefferies estimates
page 5 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Revenue Growth
Our 2012 outlook assumes a robust and visible sales outlook. Anchoring this forecast is
retail store acceleration with 25 new stores planned for 2012 (from 17 new stores in
2011). We model these new stores to add about $120 million in sales next year. Sanuk is
another visible sales driver next year as DECK records its first spring/summer season for
the newly acquired brand. This represents another $60 million of revenues. Combined,
we model retail and Sanuk to contribute 15% to DECK’s fiscal 2012 sales growth.
Additionally, we also model wholesale to grow 15% globally. This equates to 11%
contribution to net sales growth (wholesale = 2/3 of sales). The table below illustrates the
aforementioned sales levers and their collective contribution to our 25% revenue growth
forecast for 2012.
Retail and Sanuk alone should
Chart 5: (Visual) 2012 Revenue Growth Levers
contribute 15% points of sales
1% 25%
growth in 2012. Consensus is 350 5%
currently forecasting 20% growth, 300
implying that global wholesale will 5%
2012 Sales Growth, $m
grow 3-4% in 2012 (we think this is 250
too low). 200
6%
150 9%
100
50
0
retail wholesale (int'l) wholesale (U.S.) Sanuk e-commerce 2012 sales
Source: Jefferies estimates
The following table outlines Deckers’ 2012 revenue growth drivers numerically. The
important take-away from this presentation: our modeled 25% revenue forecast for fiscal
2012 is above consensus’ 20% but still implies conservative assumptions around global
wholesale. Specifically, we are modeling global wholesale to grow 15% (9% U.S.). For
context, Deckers’ wholesale division is up 25% year-to-date (after excluding the $50
million benefit from the international transition) and grew 31% and 19% in 2010 and
2009, respectively.
We think a 15% global wholesale growth rate in 2012 is fair given the distribution
opportunities the recent UK / Benelux investments created. Meanwhile, our 9% modeled
U.S. wholesale growth rate compares to a business that is up 20% year-to-date.
Our 25% sales growth assumption
Chart 6: (Numerical) 2012 Revenue Growth Levers
for FY12 assumes global wholesale
2012 growth
growth of 15% vs. consensus of 3-
% of sales dollars, $m percent, % growth contribution
4%.
retail 20% 121 57% 9%
2011 YTD organic wholesale growth wholesale (int'l) 22% 75 25% 6%
is running up 25%+. wholesale (U.S.) 46% 66 9% 5%
Sanuk 5% 61 25% 5%
e-commerce 7% 16 15% 1%
100% 338 25% 25%
Source: Jefferies estimates
page 6 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Retail Growth
One of the core pillars of our Buy thesis is DECK’s positively inflecting retail store
trajectory. We find that investors typically gravitate towards these types of stories that
often provide highly visible and tangible growth.
In 2012, we expect the company to open 25 new UGG stores, increasing the total from
44 in 2011 to 69 by year-end.
A margin accretive UGG retail Chart 7: Retail Growth Forecast
strategy is just now beginning to 150
accelerate for DECK.
125
2011 = retail growth inflection
100
Stores 75
50
25
0
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Store Base New Stores
Source: Jefferies, company data
The following table outlines the math behind our retail assumptions. Simply put, we
applied last year’s same sales/average store productivity to the 2012 average store count.
Our model yields $121 million of new store sales associated with the 25 new store
growth. This represents around 9% sales growth contribution on 2011’s base.
Chart 8: Retail Model
(in millions, $) 2007 2008 2009 2010 2011E 2012E
retail sales $18 $38 $79 $126 $212 $332
change 20 40 47 86 121
retail stores 7 10 17 27 44 69
new stores 2 3 7 10 17 25
average # of stores 6 9 14 22 36 57
sales per average store 3.1 4.5 5.8 5.7 6.0 5.9
Source: Jefferies, company data
Our assumptions for 2012 also include 15% organic e-commerce growth.
page 7 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Sanuk Acquisition
Deckers acquired Sanuk on July 1, 2011, the first day of its fiscal 3Q11. As a result, it did
not report Sanuk operations in its 1H11 financial statements. 1H is Sanuk’s higher
volume, more profitable selling season and will be nicely accretive to sales and EPS in
2012.
Assuming Sanuk grows 25% in 2012, we arrive at $61 million of incremental sales for
DECK. This includes $43 million of unrecorded 1H11 sales and $18 million of organic
growth.
At $61 million, Sanuk contributes another 5% to DECK’s sales growth profile for 2012.
Chart 9: Sanuk Revenue Model
(in millions, $m) 2010 2011E 2012E
1H sales -- 43 54
2H sales -- 28* 35
Sanuk full year sales $48 $71 $89
growth, % 48% 25%
Sanuk sales reported by DECK $0 $28 $89
change, $m $28 $61
*DECK acquired Sanuk on July 1, 2011.
Source: Jefferies estimates
Wholesale Growth
Wholesale accounts for 70% of Deckers’ business and is one of the least visible channels
for investors. There is a perennial fear that this channel, especially in the U.S., is saturated
and lacks the catalysts to grow further.
In 2012, we believe international wholesale has an opportunity to surprise (positively)
with the company now directly operating its two largest markets, the UK and Benelux.
Currency and macro headwinds constrain the upside, but we still think a 25% growth rate
is achievable outside the U.S.
Domestically, we are modeling 9% organic growth (excluding Sanuk). This compares to
an implied consensus estimate of 3-4%, at most (this is the global growth estimate). Year-
to-date, DECK’s U.S. wholesale business is running up 20%.
In aggregate, we think 14% global wholesale growth is achievable for DECK in 2012.
Our $141 million incremental revenue growth represents an 11% contribution to revenue
2012 growth.
Chart 10: Wholesale Model
2011E Sanuk reported organic organic 2012E
(in millions, $) % of sales sales growth ($) growth ($) growth (%) sales
United States 70% 716 61 66 9% 842
International 30% 307 -- 75 25% 382
Total 1,023 61 141 14% 1,225
Source: Jefferies estimates
page 8 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Gross Margin Contraction
Deckers’ 3Q11 earnings call (late October 2011) suggested continued pressure from
product costs. Sheepskin costs, in particular, are set to increase 40% in 2012 after rising
30% in 2011. In net, Deckers’ cost of goods will grow another 10% (after a 10% increase
in 2011).
Importantly, management has made it clear that investors should not expect the entire
COGS headwind to be offset like it was in 2011. This is because 2011’s gross margins had
the one-time benefit of Deckers taking over its higher gross margin UK/Benelux owned
wholesale businesses. The positive gross margin accretion from this event fully offset what
should have been around 400 bps of cost-related gross margin compression.
2012 gross margins: Looking out to 2012, the company’s gross margins will face the same amount of
- -500 bps = 10% COGS growth inflationary pressure as in 2011 but without the offsetting one-time benefit. As a result,
- +100 bps = retail mix we expect to see a more meaningful contraction to gross margins. As we explain in the
- +50 bps = price increases SG&A section that follows, there should also be a corresponding leveraging benefit.
- +100 bps = other (brand,
product mix) The following are important considerations in modeling gross margins for 2012. Our
existing outlook of 250 bps of contraction incorporates -500 bps of COGS inflation offset
by +50 bps from price increases, +100 bps from retail mix and 100 bps from other factors
like Sanuk, international and product mix.
10% COGS Inflation (-500 bps). Management’s 10% COGS inflation
outlook for 2012 should itself drive 400-500 bps of gross margin compression
(calculated as a 10% discount to 50% gross margin in 2011). This actually took
place in 2011 as well, but was obscured by an offsetting benefit of ~425 bps
from the integration of the gross margin accretive UK/Benelux wholesale
businesses. This benefit will not repeat in 2012.
Retail Mix (+100 bps). DECK is deploying an aggressive store growth
strategy with the roll-out of UGG stores worldwide. These stores carry a much
higher gross margin than the wholesale business. We model the spread to be
about 25 points (75% retail vs. 50% wholesale). We expect DECK’s direct-to-
consumer (retail + e-commerce) sales mix to grow 300-400 basis points in 2012.
The resulting mix benefit is around 75-100 bps to DECK’s 2012 gross margins.
Price Increases (+50 bps). The company will have to balance price increases
carefully next year as it looks to retain its accessible price points and compete
with lower-priced competition. As a result, the benefit to gross margins will only
partially offset the inflationary pressure. Our 50 bps assumption is in-line with
what we believe to have been the benefit in 2011.
Other Mix (+100 bps). Having good visibility into the aforementioned gross
margin variables, this will be the ‘wild card’ for 2012. There is a host of other
potential mix benefits like brand mix (Sanuk’s 1H is margin accretive), product
mix (shift away from sheepskin), international mix, etc. In aggregate, we model
this benefit to account for +100 bps to Deckers’ 2012 gross margins.
page 9 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
SG&A: Should Lever but Probably not in Guidance
In light of the cost pressure expected in 2012, there is a view that DECK should be able to
offset gross margin contraction with SG&A leverage. We agree and make a strong case in
the following bullets. However, management, on the 3Q11 earnings call, explicitly stated
that they will not compromise the long-term strategy by trying to manage to a single
year’s earnings estimate. As such, we expect the company to initially guide to some SG&A
de-leverage but ultimately exceed that plan and post SG&A leverage.
The following table summarizes our SG&A view into 2012. It is important to note that
while the company is likely to de-lever SG&A by around 350 bps in 2011 (management
guidance), this entire amount is being driven by the company’s UK/Benelux wholesale
business transition. In fact, if we were to exclude that event and the Sanuk banker fees
($4.1 million), Deckers would have actually achieved 96 basis points of SG&A leverage in
2011. This is before adjusting for an $11 million increase in marketing spend, $7m legal
and 17 new stores.
This tells us that the company should be able to achieve leverage in 2012.
After normalizing 2011’s one-time
Chart 11: SG&A Summary
charges and mix shifts, it becomes 2006 2007 2008 2009 2010 2011E 2012E
evident that DECK would have SG&A 24.3% 22.7% 22.1% 23.2% 25.4% 28.9% 27.9%
achieved around 100 bps leverage reported change (bps) 192 (160) (57) 109 214 354 (100)
on SG&A.
2011 factors (bps):
higher SG&A UK/Benelux business model (350)
$9m international transition (70)
$4.1m Sanuk transaction fees (30)
2011 change (adjusted) (96)
2012 factors (bps):
$3 million less legal spend (20)
no repeat of $9m international transition (55)
no repeat of Sanuk transaction fees (25)
25 new retail stores 50
Sanuk earn-out & amortization 25
organic leverage on 25% sales growth (75)
2012 change (expected) (100)
Source: Jefferies estimates
Impact from UK / Benelux Ownership in 2011
A lot has been made of DECK’s international transition mix helping consolidated GM% by
425 bps in 2011. This amount, which offset the 10% COGS inflation in 2011, will not
anniversary in 2012. As such, DECK’s repeated 10% COGS inflation in 2012 will be fully
exposed and likely result in a significant GM% contraction versus 2011.
There is a corresponding SG&A moving piece, however, that the company has been less
vocal about. Recall that the UK/Benelux business, which DECK took over in 2011, is
margin accretive. As such, if this business helped GM% by 425 bps in 2011, it should have
elevated SG&A by somewhere near that figure (we estimate 350 bps). This excludes the
one-time $9m transition fees the company paid to the former operators. As a result, we
think it’s fair to imply that the 350 bps of de-leverage in 2011 is being driven by this
event. After backing out the $9 million one-time transition charge and $4.1 million Sanuk
banker fees, we find that DECK would have actually levered SG&A in 2011. This despite
$11 million more marketing spend, $7 million more legal spend and new store growth.
page 10 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Anniversary of One-Time Expenses
2011 was an investment year for DECK with the tuck-in of the UK/Benelux wholesale UGG
business and Sanuk acquisition. The expenses associated with these events were included
in management guidance and consensus estimates for 2011. As we enter 2012, we do
not expect any significant investments to play a materially de-leveraging role in SG&A.
That said, the company did say on its 3Q11 call that there will be an ongoing
commitment to marketing (more on this below) and international personnel.
Specific expenses to consider include:
$9 million international transition. This was a fee that DECK paid the
incumbent distributors of the UK and Benelux businesses in 1Q and 2Q of 2011.
This expense will not recur in 2012.
$4.1 million Sanuk transaction fee. DECK’s 2011 EPS includes $4.1 million
of fees related to the Sanuk transaction. These were one-time in nature and will
not repeat in 2012.
$3 million less legal spend. DECK’s legal expenses increased $7 million in
2011. This expense is set to decline in 2012 by around $3 million.
Simple closure. By discontinuing the Simple brand, the company will relieve
itself of a $2 million operating loss. Part of that is likely to benefit SG&A in 2012.
Sanuk Accretion
As we outlined earlier, the acquisition of Sanuk in 3Q11 creates an accretive revenue
event in the first half of 2012. This brand is also set to make a strong (organic) EBIT
contribution as it makes most of its money in the first half of the year. Earn-out and
amortization charges should be considered, however, as they cut into the accretion by
around 21c.
Sanuk considerations in 2012:
$43 million acquisitive sales at a high margin. 1H12 sales will include a
baseline of $43 million in Sanuk sales, which is what the company made in
1H11. Assuming a 35% 1H operating margin, this equates to a 30c EPS
contribution.
25% organic sales growth. Under this assumption (and 25% operating
margins, flat to last year), we expect another 10c of organic EPS growth from
Sanuk.
Earn-out and amortization. The terms of the Sanuk deal include an earn-out
to management over the next five years and are outlined in DECK’s 3Q 10Q.
There is also a component of goodwill amortization that will be incurred as well
(i.e. purchase accounting). In sum, management is guiding 2012 earn-out and
amortization to be around $12 million. This is a $4.3 million increase to the $7.7
million to be recorded in 2011 (all in the second half). Bottom line: the 40c of
EPS accretion from Sanuk needs to be offset by 21c of earn-out and accretion
charges.
page 11 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Marketing
A lot has been made of DECK’s marketing spend in 2011 between the Tom Brady men’s
campaign and efforts to broaden UGG awareness into a lifestyle brand. At the beginning
of 2011, management originally guided marketing to increase by $11-12 million, which
based on 15% sales growth implied around 50 bps of de-leverage to SG&A. Management
alluded that this ‘one-time’ ramp in marketing would ultimately stabilize at a higher
percentage of sales as UGG has historically under-spent on marketing versus its peers.
If we fast forward a year and look back at 2011, there are some interesting observations to
be made. First, and most important – marketing expense will not increase as a percent of
sales in 2011. The $11.5 million increase in marketing spend implies 35% growth YoY,
which is the same as our forecasted revenue growth. This suggests that marketing will be
flat to sales in 2011 at 3.3% (same as 2010).
In fact, throughout 2011, DECK managed to hold its advertising budget while its sales
growth expanded (originally guided up 20%, will ultimately be up 35%).
As we enter 2012, we expect marketing to again be an area of focus. However, it is hard
to expect a scenario where it grows more than the 35% we saw in 2011. In fact, we think
management grows marketing closer to 20-25% next year and ultimately achieves
leverage on that expense (by growing sales >25%).
25 New Retail Stores
DECK’s retail growth strategy is set to inflect further in 2012 with the opening of 25 new
retail stores, an increase from 17 new stores in 2011. As with the international wholesale
operations, retail is a business that carries higher GM% (about 25% points more than
wholesale) and SG&A. In net, it is accretive to operating margins by around 10% (our
estimate). This means that SG&A is around 15% higher for retail versus wholesale.
Assuming this math, we model new retail store openings to dilute DECK’s SG&A line by
around 50-60 bps in 2012. This assumes retail sales mix increasing by 400 bps (from 16%
to 20%) and a 15% point spread in SG&A between wholesale and retail.
As we stated in the previous GM% section, there is an associated benefit to the gross
margin line that more than offsets the SG&A de-leverage.
page 12 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Chart 12: Income Statement
($ Millions, except per share amounts) 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales $813 $1,001 $1,343 $1,681 $156 $137 $278 $430 $205 $154 $414 $569
Cost of Goods Sold 442 499 662 872 78 76 148 197 102 88 212 260
Gross Profit 371 502 680 809 78 61 130 233 102 66 203 309
SG&A 189 254 388 469 49 48 65 93 74 77 112 125
Operating Income 182 248 293 341 29 13 65 141 28 (11) 91 184
Other (income) expense, net (2.0) (1.0) (0.2) (0.8) (0.1) (0.5) (0.2) (0.2) (0.1) (0.0) 0.1 (0.1)
Pretax Income 184 249 293 341 29 14 66 141 28 (11) 91 185
Income Taxes 67 90 91 102 11 5 25 50 9 (3) 28 57
Net Income 118 159 202 239 18 9 41 91 20 (7) 62 127
minority interest (0) (2) (0) 0 (0) 0 0 (2) (1) 0 0 0
Fully Diluted EPS $2.98 $4.01 $5.16 $6.10 $0.46 $0.23 $1.05 $2.27 $0.49 ($0.19) $1.59 $3.25
Fully Diluted Shares Outstanding 39.4 39.2 39.1 39.2 39.1 39.1 39.2 39.3 39.4 38.7 39.2 39.2
% of Sales 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit 45.6% 50.1% 50.7% 48.1% 50.0% 44.3% 46.8% 54.2% 50.0% 42.8% 49.0% 54.3%
SG&A 23.2% 25.4% 28.9% 27.9% 31.5% 34.7% 23.3% 21.5% 36.3% 49.7% 27.1% 21.9%
Operating Income 22.4% 24.8% 21.8% 20.3% 18.5% 9.6% 23.5% 32.7% 13.7% -6.9% 21.9% 32.4%
Tax Rate (% of Pretax) 36.2% 36.0% 31.0% 30.0% 37.2% 35.0% 37.5% 35.2% 30.1% 30.2% 31.2% 31.0%
% Growth, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Sales 17.9% 23.1% 34.1% 25.2% 16.2% 33.7% 21.7% 23.6% 31.3% 12.6% 49.1% 32.3%
Gross Profit 21.5% 35.3% 35.5% 19.0% 32% 49% 33% 35% 31% 9% 56% 32%
SG&A 23.8% 34.4% 52.7% 20.9% 24% 30% 44% 37% 51% 61% 74% 34%
Operating Income 19.3% 36.1% 17.9% 16.4% 49% 213% 23% 33% -2% -181% 39% 31%
Net Income 22.6% 35.6% 26.8% 18.3% 47% 163% 21% 34% 9% -184% 52% 39%
Diluted EPS 23.0% 34.5% 28.5% 18.2% 47% 160% 22% 31% 6% -182% 52% 43%
BPs Change, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit 135 451 53 (253) 607 455 388 440 5 (155) 219 5
SG&A 109 214 352 (100) 199 (98) 362 204 479 1,504 381 35
Operating Income 26 237 (299) (153) 409 552 27 237 (474) (1,659) (162) (30)
Marketing expense 2009 2010 2011E 2012E
Marketing expense 29 33 45 56
% of revenues 3.5% 3.3% 3.3% 3.3%
% growth 15.5% 15.2% 34.7% 25%
% of SG&A 15.2% 13.0% 11.5% 11.9%
Source: Jefferies estimates, company data
page 13 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Chart 13: Segment Details
Sales by Category 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 813 1,049 1,343 1,681 156 137 278 430 205 154 414 569
Ugg 712 873 1,170 1,430 104 100 256 413 148 108 377 537
Teva 78 101 122 140 43 31 14 13 50 40 15 17
Sanuk -- 48 27 87 -- -- -- -- -- -- 16 11
Other 24 26 24 24 8 6 8 4 6 6 7 5
Sales Growth, % 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 18% 29% 28% 25% 16% 34% 22% 24% 31% 13% 49% 32%
Ugg 22% 23% 34% 22% 14% 35% 20% 24% 42% 8% 47% 30%
Teva -10% 31% 20% 15% 21% 38% 52% 26% 17% 29% 7% 25%
Sanuk -- -- 20% 15% -- -- -- -- -- -- -- --
Other 13% 12% -10% 0% 15% 1% 26% -4% -28% 1% -12% 20%
other metrics 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Same-store sales, % 27.6% 16.6% 28.2% 19.2% 17.9% 11.6% 2.6% 23.6% 15.4%
Retail: Sales per average store 5.3 5.6
weighted avg selling price / pair, $ 45.80 47.71 30.71 35.41 58.61 34.24 38.28
change, % 8% 4% 7.0% 1.8% 0.1% #DIV/0! 11.5% 8.1% -100.0% #DIV/0!
footwear volume (million pairs) 15.7 18.0 4.0 3.6 4.5 5.9 4.7 3.6
change, % 6.8% 14.6% 5.3% 28.6% 18.4% 7.3% 17.5% 0.0% -100.0% -100.0%
Stores 18 27 44 69 18 19 24 27 27 30 37 44
UGG retail (U.S.) 6 10
Outlet (U.S.) 7 9
UGG (International) 5 8
new stores (YoY) 6 9 17 25 1 1 5 3 0 3 7 7
sales / average store 1.3 0.5 0.9 2.8 1.3 0.7 1.0 2.8
Sales by Region 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 813 1,001 156 137 278 430 206 154 414 569
U.S. 646 764 117 65 205 377 149 83 258 471
International 167 237 39 72 73 53 57 72 156 98
Sales Mix, % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
U.S. 79% 76% 75% 48% 74% 88% 72% 54% 62% 83%
International 21% 24% 25% 52% 26% 12% 28% 46% 38% 17%
Sales Growth, % 18% 23% 16% 34% 22% 24% 32% 13% 49% 32%
U.S. 11% 18% 15% 16% 14% 22% 27% 27% 26% 25%
International 55% 42% 21% 55% 48% 35% 46% 0% 114% 85%
Source: Jefferies estimates, company data
page 14 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Company Description
Deckers is a leading designer and wholesaler of footwear brands based in Goleta, California. The company's portfolio of brands includes
UGG, Teva, Simple, Tsubo and Ahnu.
Analyst Certification
I, Taposh Bari, CFA, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
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Jefferies & Company, Inc makes a market in the securities or ADRs of Deckers Outdoor.
Jefferies & Company, Inc makes a market in the securities or ADRs of Lululemon Athletica.
Meanings of Jefferies Ratings
Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
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The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within
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7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.
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9. Transaction fees are not included
page 15 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
10. All corporate actions are taken into account.
Risk which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
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Other Companies Mentioned in This Report
• Lululemon Athletica (LULU: $46.66, HOLD)
• Nike (NKE: $96.37, BUY)
• Under Armour (UA: $71.79, HOLD)
• Wolverine World Wide (WWW: $35.64, HOLD)
page 16 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
page 17 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 762 53.00% 107 14.04%
HOLD 579 40.30% 58 10.02%
UNDERPERFORM 96 6.70% 2 2.08%
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page 18 of 20 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 15 - 20 of this report.
DECK
Company Update
January 3, 2012
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DECK
Company Update
January 3, 2012
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