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V.F. Corp. & Deckers: The UGG Fits

UGG maker Deckers deserves its recent Cramer shout-out

   

In a Dec. 3 edition of Mad Money, Jim Cramer highlighted the reasons why Deckers (NASDAQ:DECK) — a one-time fad turned real shoe company that’s down 46% year-to-date — could be a takeover target for V.F. Corp. (NYSE:VFC) at $50 per share.

While I don’t always agree with Jim Cramer, this time he’s on the mark. Deckers is definitely takeover material.

Here’s a few quick reasons why:

  • As Cramer commented on CNBC, the combination of last winter’s mild weather and insanely high sheepskin prices drove Deckers’ stock from a high of $115 a year ago down to around $28 in October. To put its current situation in perspective, its price-to-sales ratio at the moment is 1.1 times revenue, less than at any time since 2002. By almost every valuation metric, DECK stock is cheaper than it has been in the past five years.
  • It would take Deckers 6.4 years to recoup $1 of earnings based on today’s prices compared to 7.8 years for Steven Madden (NASDAQ:SHOO) and 8.5 for Wolverine World Wide (NYSE:WWW). Even though it’s up 35% in the past month through Dec. 4, DECK has plenty of room left to gallop. Cramer suggests holding back half your position for the inevitable pullback, but I don’t know that there’s going to be one.
  • My wife has worked in the retail industry all of her adult life. Not only is she good at the operational side of the business, but she truly is a fashion horse. She doesn’t make fashion faux pas. That’s why this holiday shopping season, when she bought a pair of lime-green sheepskin slippers for my mother-in-law, the fact that they were made by UGG was all I needed to confirm Deckers isn’t a fad.

Still, back on Oct. 26, DECK dropped 17% on its disappointing third-quarter earnings report. There’s no painting a pretty picture on this one; it happens to the best of ‘em. However, it has since gained back the $6 shellacking and then some. It’s time to learn from it, then move on.

Deckers’ weakness has always been its one-dimensional nature. However, that might be changing.

The company acquired Sanuk — a producer of sandals and shoes — for $120 million in July 2011. It does a nice job, along with Teva, of balancing UGG’s winter focus while delivering better margins. I don’t think Peter Lynch would describe its acquisition as “diworsification.”

UGG boots accounted for 88% of its overall revenue in the third quarter; that number was 92% in the same quarter two years ago. Meanwhile, in the most recent Q3, Teva’s sales increased 22.1%, while Sanuk’s grew 17.6%; both brands were virtually identical in terms of dollars.

Slowly but surely, Deckers is relying less on UGG and more on Teva and Sanuk, and investors have to keep their eye on these two secondary brands in the coming quarters. As long as they’re growing, it’s all good. Give Sanuk and Teva five more years, and I don’t see why both brands can’t be significant contributors to overall revenues. It’s not going to happen overnight, but it will at some point.

Someone like V.F. Corp. can provide the financial muscle, not to mention manpower, to make it happen sooner. VFC paid $2.3 billion a little over a year ago acquiring Timberland; Deckers, with a market cap of $1.5 billion, would fit nicely into the apparel conglomerate’s lineup.

Also, I think Deckers could teach V.F. Corp. a thing or two is in the area of online sales.

For the first nine months of 2012, Deckers generated $43 million in e-commerce revenue, or 5.4% of its overall sales. In 2011, VFC’s online sales were $178 million on $9.5 billion in revenue for a measly 2% of sales. With V.F. Corp. opening around 700 stores by the end of 2015, the implementation of a more vibrant multi-channel retail experience will produce improved results in both the stores and online. It can and will do better. The addition of Deckers would definitely speed up the process.

Bottom Line

Jim Cramer talks about a lot of stocks. Sometimes he knows them well; other times he’s grasping at straws. When it comes to VFC, he’s right on the money.

Deckers is almost as attractive an acquisition as Timberland was in 2011. The farther UGG moves along in its recovery, the more likely it becomes a nice snack. I’d be shocked if V.F. Corp. didn’t make a move on DECK by the end of 2013.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/12/v-f-corp-deckers-the-ugg-fits-vfc-deck/.

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