Jefferies Remains Confident on Deckers Outdook (DECK), Answers 10 Top Investor Questions

April 3, 2013 8:43 AM EDT Send to a Friend
Get Alerts DECK Hot Sheet
Price: $79.80 --0%

Rating Summary:
    17 Buy, 13 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 27 | Down: 26 | New: 17
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In a follow-up to a 3/28 report, Jefferies reiterated their Buy rating and $100 price target on Deckers Outdoor (NASDAQ: DECK) Wednesday saying the stock remains their #1 pick. The firm answered the top 10 items of feedback from investors.

1) What gives us confidence that sheepskin prices will decline beyond 2013? Based on our discussions with the USDA, herd sizes are beginning to build once again. Coupled with a more normal breeding-to-slaughter cycle, prices should remain on the
decline past 2012.

2) How much of a benefit do you see from lower sheepskin prices? We believe the company may get back more than a $1.00 of lost EPS over the next 2 years as sheepskin prices decline and the company starts to use alternative raw material sources (e.g. UGG Pure).

3) What are our thoughts on UGG Pure and can it be a meaningful margin
driver?
We think it will be a modest margin driver near-term as the company will only use the product for minor parts of their products (e.g., footbeds).

4) Where can operating margins go long-term? DECK operating margins peaked in the >25% and troughed at ~13%. Given a tremendous amount of margin compression was driven by cost headwinds (e.g., sheepskin) and fixed cost deleverage, we think a lot of the lost margin can be recovered. We believe a high teens or near 20% operating margin can be attained in the medium term for DECK.

5) Why are your estimates so far above consensus? We believe sales will recover quicker than the Street expects as a replacement cycle starts, prospects for colder winter in 2013 improves and reorder trends get better as wholesale channel inventories are worked down.

6) Are your estimates aggressive? We don’t think so as our sales assumptions are low DD% growth in 2013 and 2014 and we only project modest margin expansion and modest share buybacks in our estimates.

7) What are inventories like in the channel? We think they are pretty lean as department stores clearly ordered lean going into winter 2012 and the weather thus far in spring 2013 has remained frosty.

8) Do you think DECK will need to lower prices again? No. We believe the initial price cut was enough and clearly the brand had solid demand during 4Q with comps much better sequentially than 3Q.

9) How are customers thinking about UGG brand right now? We believe the brand remains very popular as facebook likes continue to rise (>2M) and internet traffic patterns remain positive.

10) What's the next catalyst for the stock? We think 1Q results will beat against a very low bar and will show sequential improvement in comps, inventory control and margins

For an analyst ratings summary and ratings history on Deckers Outdoor click here. For more ratings news on Deckers Outdoor click here.

Shares of Deckers Outdoor closed at $55.33 yesterday.


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