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Flash Note September 17, 2012 Deckers Outdoor Corp. Underperform Diverted UGG Classics in basic colors appear on flash sale DECK site for first time. UGG sales off to slow start to season. Price $48.92 Our Call Price Target $38.00 Promotional activity of in line UGG Classic boots on flash sale website bodes poorly for fall sales. The health and growth opportunities for the UGG brand Footwear & Apparel remain at risk, as well as DECK 2H12 guidance. 32 UGG Classic and 37 other UGG styles appear on flash sale website: Sam Poser Beyondtherack.com apparently has broken the ice with a flash sale for this past (212) 763-8226 weekend (September 15th & 16th) where, for the first time, we have seen Classic email@example.com UGG styles, including the Classic Tall and Short, The Bailey Button, and the Ben Shamsian Triplet and other styles including the cold weather Adirondack boot on sale for (212) 338-4721 15% to 50% off regular prices. Basic colors and fashion colors were available in firstname.lastname@example.org all styles. The website is not an authorized UGG dealer. We spoke to Beyond the Rack and they said that they likely bought the goods from an existing UGG retailer, Company Data in other words, from a diverter rather than directly from UGG, and they guaranteed 52-Week Range $39.90 - $118.90 the authenticity. Given the breadth of product advertised, including some spring Market Capitalization (M) $1,689.9 Shares Outstanding (M) 37.1 wedges, we believe that the product is authentic. Avg. Daily Vol. (000) 1,798.0 Early reads on UGG sales are not promising: Based on our channel checks, early UGG sales are very disappointing. It is clear to us that the UGG “fashion trend” has faded. The question remains as to how much of the UGG business is weather related and how much is fashion related in the fall season. We expect to get an accurate look as to what UGG sales will look like this fall beginning the last week of September through mid-October. Our concern and our unfortunate expectation is that UGG prices will begin to revert to 2011 levels by mid- to late-October, which will then negatively impact 4Q results for DECK. Stickiness of orders at risk and inventory level remains a concern: In years past retailers brought in approximately 70% of their 4Q orders in October & November because they were nervous that they would not be able to adequately keep up with demand. This year, based on channel checks, the retailers are operating from the position of not getting stuck with inventory at the end of the year, so they are bringing in 30% to 40% of 4Q orders in October & November, leaving a big nut for December. At the same time, we understand that DECK modestly increased the UGG Classic allocations and many retailers wrote orders for the larger allocations but with lower sales plans, leaving a large risk of order cancellations. DECK said on the 2Q call that they expect 4Q EPS/sales growth of 22%/19% and inventory to be up 30% at year’s end which will be on top of a 102% increase at the end of 4Q11. Based on our estimates, such an inventory position at EOY12 would equal over 30 forward WOS based on our estimates. We continue to believe that there are material risks to both guidance and the overall health of the UGG brand. If prices on Classics break down, we believe that the future of the UGG brand may be at risk. Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section. 800 Shades Creek ParkwaySuite 700Birmingham, AL 35209205-949-3500 Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC September 17, 2012 APPENDIX SECTION Company Description: Deckers Outdoor Corporation is a designer, producer, and brand manager of footwear for outdoor activities and casual lifestyles. It sells its products directly to consumers through retailers in the United States, and through distributors in a number of international countries. It markets its products under the brand names Teva, UGG, Simple, Ahnu and TSUBO. IMPORTANT DISCLOSURES: Regulation Analyst Certification: I, Sam Poser and Ben Shamsian, hereby certify the views expressed in this research report accurately reflect my personal views about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this report. Research Disclosures: Sterne, Agee & Leach, Inc. makes a market in the following subject company Deckers Outdoor Corp.. Sterne, Agee & Leach, Inc.'s research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach, Inc.'s total revenues, a portion of which is generated by investment banking activities. Sterne Agee & Leach, Inc. expects to receive or intends to seek compensation for investment banking services from the subject company and/or companies in the next three months. Price Target Risks & Related Risk Factors: Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities Exchange Commission. Company Specific Risks: Upward idiosyncratic risks include: a significant alteration in current weather patterns stimulating demand, accelerating international business compensating for domestic weakness, significant pricing offsetting unit weakness in ’12, or another highly accretive acquisition. Valuation Methodology: Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors. Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc. Company Specific Valuation: Our $38 price target implies the shares trade at 9.6X our FY12 GAAP EPS estimates. Our PT also implies that shares trade at 8.7X our FY13 GAAP EPS estimates. Definition of Investment Ratings: BUY: We expect this stock to outperform the industry over the next 12 months. NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months. UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months. RESTRICTED: Restricted list requirements preclude comment. Ratings Distribution: IB Serv./ Past 12Mos. Rating Category Count Percent Count Percent Appendix Section, Page I September 17, 2012 Buy 229 49.04% 16 6.99% Neutral 214 45.82% 9 4.21% Underperform 24 5.14% 0 0.00% ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731. Other Disclosures: Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein and may act as principal or agent to buy or sell such securities. Copyright © 2012 Sterne, Agee & Leach, Inc. All Rights Reserved. To receive price charts or other disclosures on the companies mentioned in this report, please visit our website at https:// sterneagee.bluematrix.com/sellside/Disclosures.action or contact Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or (205) 949-3689. Appendix Section, Page II
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