Beat the Market With Buybacks!

El Toro, a Spanish term meaning The Bull, is a wooden roller coaster at Six Flags Great Adventure in Jackson, New Jersey. The ride is wild, and not appropriate for those with a heart condition. The same applied to the shares of Deckers Outdoor Corp (NASDAQ: DECK) during 2012, where, a very good example of the effects of “Over Promising and Under Delivering” was in full display.

Starting on Jan 3, 2012 when the shares were trading at $76.42 and soon after, on Feb 23, 2012 they had gone up to $90.21 rewarding investors with a nice return of 18% in less than two months’ time, it was at this point when management came out and gave full fiscal year and 1Q12 guidance. The full year guidance was in line with analysts’ estimates as reported by Reuters but the guidance given for 1Q12 was below estimates, giving the shares its first punch of the year and sending them lower.

The down trend continued pretty much all year, with every quarter management coming out and lowering guidance even more. It was no surprise that given these facts shares tumbled down to its lowest point for 2012 of $28.63 on Oct 31, 2012. Losing over 68% from its highs it’s what I call a “steep drop” just like in El Toro with the steepest drop (76 degrees) of any wooden roller coaster in the world until 2008 (record broken by one degree by T Express).

Shares have recovered since then, closing on 2012 at $40.27 per share. But, is the recovery well sustained or should we use it to run from it?

Angel Martinez, President, Chief Executive Officer and Chair of the Board of Directors stated during the Third Quarter 2012 Earnings Release; “Over the past two years, we have raised prices…” he also said; “We believe that these selective price increases, particularly during a period of one of the warmest years on record…” Here, we can see that prices have been increasing to help mitigate the raising costs of sheepskin (principal raw material of the UGG boots), and we can also realize that missing estimates during 2012 can be attributable to a warmer year (remember the UGG boots which are the main source of revenue for Deckers are a winter product).

Now, there are two factors playing in favor of Deckers for this 2013; Sheepskin costs are expected to fall giving better margins to the company. Also, during the latest conference call on October 25, 2012 Angel Martinez said that sales were picking up over the last few weeks but more time was needed in order to assess if it was a trend or just a temporary lift. Since then, 10 weeks have passed and weather has been colder, therefore, in my opinion, sales must have increased during that period of time.

On top of that, there are other events that are of great importance and worth mentioning. For example; the company has repurchased about 185 million worth of its own shares over the past year as stated by Deckers CEO during the latest conference call. That is the equivalent of 70% of the cash available at the end of 2011. Carol Loomis (2012), in her book Tap Dancing to Work, cites Warren E. Buffett “The only reason for a company to repurchase its stock is because it is selling for less than it’s worth” (p. 47). I believe that investing 70%+ of your available cash qualifies as one of the finest examples of repurchasing its own stock.

But, how about valuation of the company?

In order to do that, we need to look around for the competition and see how its peers are doing on this side. Taking a look at the consumer goods industry and more specifically at the textile, apparel footwear and accessories sector I found the following companies competing directly in some way with Deckers:

• Nike (NYSE: NKE)
• Coach (NYSE: COH)
• Wolverine World Wide (NYSE: WWW)
• Crocs (NASDAQ: CROX)
• Skechers USA (NYSE: SKX)

Let’s compare their balance sheet for a better understanding.

Balance Sheet Comparison (mrq.)
Ticker	Book Value	Cash x share	Debt/Cash	Debt/Equity
DECK	$19.34	$1.75	9.32	0.84
NKE	$11.16	$3.93	2.34	0.50
COH	$7.03	$2.68	1.52	0.58
WWW	$13.61	$2.95	1.95	0.42
CROX	$7.09	$3.46	0.80	0.39
SKX	$17.63	$6.10	1.44	0.51

Even though, Deckers holds the highest book value per share among these competitors, and that may seem as a good thing, we must keep a close eye on the debt-to-equity ratio since it also holds the highest of them all. Having almost as much debt as equity is not a good sign under any circumstance.

When it comes to the cash-per-share metric, Deckers is the weakest of the group. With only $1.75 per share we can see the effect of investing heavily on stock repurchase. Management is really betting big on a stock recovery, otherwise they wouldn’t be putting themselves in this situation.

Valuation Comparison (as of Jan 4, 2013 close)
Ticker	Market Cap	P/E	P/S	P/B
DECK	1.40B	9.79	0.99	2.03
NKE	47.43B	23.81	1.87	4.69
COH	15.75B	15.54	3.20	7.82
WWW	2.00B	18.73	1.44	3.01
CROX	1.40B	9.95	1.24	2.13
SKX	0.95B	N/A	0.65	1.07

After reviewing the above table and comparing Deckers to Skechers for example, it may seem well valued. Nevertheless, Skechers is not reporting net profits. On the other hand, Nike has a much higher market capitalization and not only that, they also have a wide range of products and comparing them directly with Deckers wouldn’t be appropriate. So, to get a better picture I will use averages from all of the 6 companies in the table and use it as a benchmark to measure DECK’s potential.

Averages
	P/E	P/S	P/B
Benchmark	15.56	1.57	3.46

Given the above averages, Deckers Outdoor Corp. seems undervalued and an upside (if metrics do improve) on the stock price is eminent. I would definitely give this company a spot in my 2013 portfolio.

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