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    The Call @ Hedgeye Plus

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I was never a massive fan of the DECK story, but it’s rare that I see any brand have this kind of momentum and get so beat up by the market. DECK printed a solid quarter, but inventories were up and sales guidance was light for 2009. That’s all this market needs to punish a stock that was already getting painted with the CROX brush – the ‘ol ‘earnings are not real because the fashion trend will not sustain itself’ call. While you call your 18-year old daughter/niece/neighbor/wife (hopefully not 18) to gauge the sustainability of the Ugg brand, consider this…
1. Let’s believe company guidance for a minute…
a. We’re looking at about $7 per share in earnings, but this includes $10.5mm in stock comp expense and $10mm of added marketing expenses for its Simple and TSUBO brands. We can’t ignore these P&L events, but they each account for $0.50 in EPS that management could have averted if it so chose. In my mind, $8 in EPS is closer to the core earnings number here.

b. The market cap is down to $620mm, but DECK has an astonishing $175mm in cash ($15/shr). Yes, $175mm in cash and $175mm in EBIT next year if you believe mgmt can actually forecast its business and hold core EBIT flat. Net it all out and this thing is at 2.5x EBIT. If you trust this management team, you can’t ignore this name here. I don’t think that management is anything to write home about in the grand scheme of retail, but I’d go as far as to say that it is a better team than a company the size of DECK probably deserves…

2. Let’s say that the US business rolls over, proves to have already hit its point of saturation, but remains a well-run, tightly distributed relevant brand in key consumer segments (a realistic bear case, I think). Then we’re likely looking at earnings closer to $6. No – not the direction of revisions I want to see. But that suggests that this name is trading at 8x earnings today.

I know you can’t make valuation calls in this market, but once real capitalists creep back onto the scene some of these small – but relevant – brands will be plucked away.