How Low Can Deckers Outdoor Go?

Shares of Deckers Outdoor (NAS: DECK) hit a 52-week low today. Let's look at how it got here and whether a cloudy forecast is still in the cards.

How it got here
Deckers has fallen victim to the law of big numbers: It simply can't grow at a torrid pace forever. In the fourth quarter, Deckers shareholders were shocked out of their shoes when the maker of the popular UGG brand warned that rising expenses related to sheepskin costs and European expansion plans were going to cause it to earn less than Wall Street had predicted. This latest setback wasn't the first time Deckers has blamed the added costs of opening new stores in Europe for a forthcoming earnings shortfall.

What's more disheartening is that shoe sector giant Nike (NYS: NKE) has faced many of the similar issues that Deckers has dealt with but has had no problem passing along price increases to its consumers to counteract rising costs.

How it stacks up
Let's take a look at how Deckers Outdoor stacks up next to its peers.

DECK Chart

DECK data by YCharts

This chart puts into perspective that despite hitting a 52-week low today, Deckers is still outperforming its peers over the past five years.



Price/Cash Flow

Forward P/E

5-Year CAGR

Deckers Outdoor2.980.410.135.3%
Crocs (NAS: CROX) 3.712.912.223%
Wolverine World Wide (NYS: WWW) 3.12312.64.3%

Source: Morningstar; author's calculations. CAGR = compound annual growth rate.

As you can see from the above metrics, these companies tend to trade similarly to one another. What is worth noting is that Crocs' revenue growth would have dropped to just 4.3% if we looked at just the past four years instead of five. It too cautioned in its latest quarter that rising costs would take a bite out of its bottom line. Wolverine World Wide has also had a rough go of it. When reporting its results in late January, its fiscal 2012 EPS forecast fell just below Wall Street's expectations. Perhaps the bright red truck out of all these figures is Deckers, trading at a staggering 80 times cash flow.

What's next
Now for the real question: What's next for Deckers Outdoor? That question is really going to depend on whether or not Deckers Outdoor can control its costs and avoid becoming the next fad.

Our very own CAPS community gives the company a three-star rating (out of five), with 85% of members giving it an outperform rating. Personally, I don't see much light at the end of Deckers' tunnel, and I shared my opinion on the company just over a month ago. As I see it, Deckers' inability to control costs and reliance on the UGG brand for 87% of its sales represent potentially crippling flaws in its business model. My current CAPScall of underperform on Deckers is up 58 points, and I'm not planning to end that call anytime soon. The best value in this sector, in my opinion, remains Nike.

Craving more input on Deckers Outdoor? Start by adding it to your free and personalized watchlist. It's a free service offered by The Motley Fool to keep you up to date on the stocks you care about most.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Deckers Outdoor and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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