Event: DECK report their Q4 earnings tonight after the close. The options market is implying about a 15%* move vs the 4 qtr average of ~15.5% and the 8 qtr avg of ~11.5%. (*with the stock around $40 the March 8th weekly 40 straddle is offered at about $6.00, if you bought that you would need a $6.20 move either way to make money.)
Sentiment: Considering that the short interest in DECK is 41% of the float (more than double last year’s level, when the stock was trading around $80), and that the stock has fallen from a high of $118.90 in Nov 2011 to around $40 today, Wall Street analysts are actually relatively positive on the stock with 8 buys, 9 holds, and only 1 sell.
Option Volume / Open Interest: Over the last 20 days, options volume has been skewed towards calls with the avg volume of ~6k calls vs 3k puts a day, and total open interest is skewed heavily in favor of calls, about 1.8 to 1.
The largest lines for open interest are the Mar15th expiry 40 calls with 29,500, and the Mar15th expiry 45 calls with 12,500.
Vol Snapshot: 30 day implied vol (in red below) is near 2 year highs, even with relatively low realized recently, but that makes sense given how pivotal this earnings report will be since it’s the holiday season. Also, the implied vol is in line with where it was prior to the last 2 reports, so not out of the ordinary.[caption id="attachment_23140" align="alignnone" width="651"] 30 day IV vs RV, 2 year chart, Courtesy of LiveVolPro[/caption]
Price Action / Technicals: The 5 year weekly chart shows a stock that finally arrested its steep 1 year downtrend near the end of 2012:[caption id="attachment_23135" align="alignnone" width="629"] DECK 5 year weekly chart, Courtesy of Bloomberg[/caption]
Since then, the stock has been in a relatively neutral position, trading between 34 and 45 in that period. With the stock at 40, it’s in the middle of that recent range, with short-term support at 34 and resistance at 45.
On a longer-term basis, the stock trades in the same place it did in the middle of 2008, a year in which it earned $2.42 in EPS (vs. the 3.30 estimate for 2012, depending on the Q4 result), though earnings were on a much different growth trajectory back then, growing almost 50% per year in 2007 and 2008.
Valuation / Fundamentals: DECK has the look and feel of a classic fad stock (in DECK’s case, the UGGs brand) thrown by the wayside as the fad fades (CROX and Nintendo, due to the Wii, had similarly strong runs and falls in 2007-2008 as their fads took hold, then faded).
The valuation on a P/E basis of course looks quite cheap now vs. DECK’s history:[caption id="attachment_23136" align="alignnone" width="506"] DECK 5 year Trailing P/E, Courtesy of Bloomberg[/caption]
However, DECK is now a turnaround story rather than a growth story, and this quarter’s report is especially pivotal given that it’s the holiday season.
We’ve included the Briefing.com “Primary Points of Interest” for this quarter at the end of the note.
My View: DECK is now a cheap stock struggling to stabilize its business. If it can show signs of stabilization in its Q4 results, and provide decent guidance for 2013, then the stock has plenty of upside from current levels, particularly given the 41% short interest in the name. But this is one of those broken stories that can keep getting cheaper if the story stays broken. No strong directional view, so unlikely to get involved here.
Primary Areas of Interest:
- Guidance is given in the press release as % y/y growth. Co also provides guidance assumptions—for profit gross margin and SG&A as percentage of sales—in the earnings press release. Prior FY12 guidance included: EPS of -33% (down from 9-10% decline prior guidance), revs +5% (down from +14% guidance), gross margin decline of 430 bps to 45% (prior assumption was 250 bps decline from FY11 49.3%), SG&A as percentage of sales of 32% ( FY12 prior assumption ~30%). Prior Q4 guidance included: EPS -14% (consensus -18%), revs +6% (consensus +3).
- Gross Margin (will report Q4 explicitly and update gross profit margin assumptions in the press release): DECK reported Q3 gross margin decline of 670 bps y/y to 42.3% (slightly below estimates of ~42.6%). Co has not issued quarterly margin assumptions for past few quarters but updated FY12 assumptions (see above). The anticipated FY12 margin decline is due primarily to increase in cost of goods sold (sheepskin) and lower European margins, partially offset by increased contribution from retail sales and Sanuk brand. The co will discuss FY13 gross profit margin assumptions in the press release—these margin expectations could be huge driver this qtr when the co provides update on its new pricing and and inventory impacts.
- Pricing and Product costs: The price increases associated with DECK primary raw material—sheepskin—along with other material costs has spurred the re-evaluation of its product mix and sourcing. Co has been trying to mitigate these rising costs by raising prices in selected items. Based on sell-through patterns at retail stores and from wholesale accounts, the co was seeing pushback from customers (compounded by warmer than usual weather). Co finalized negotiations with key suppliers last Sept and adjusted prices on select classic styles retroactive to all orders shipped since July 1 (the adjustment impact was reflected in the Q4 guidance given last qtr). The co reiterated on its call that this price adjustment was not ‘discounting’.DECK update on its new pricing and inventory impacts will be huge volatility catalyst.
- Pre-booked and order commentary: This metric is key driver behind guidance and may provide more insight on trends. At September 30, 2012, in-line and carryover products represented ~94% of total UGG brand inventory (had customer orders accounting for ~72%). The products not designated for orders were primarily for direct-to-consumer business (remainder for at-once orders). Co said last qtr that the late onset of cooler weather had resulted in only small cancellation of orders and migration of some Q3 deliveries into Q4.
- Inventory (breaks out Ugg in press release; majority of the UGG brand is pre-booked–see above): Orders and inventory DECK said last quarter that it was too early to provide specific FY13 inventory guidance. Co did discuss some of the contributing factors for upcoming year including: 9 more stores at the start of this year with plans to open 30 more in 2013 and increased inventory based on strong Sanuk sales projections for 1H… Co has been adjusting receipt date of inventory to better reflect current sales trends (impact was included in the Q4 guidance). About half of projected increase in Q4 inventory is attributed to higher costs and the other half due to carryover products and increases in UGG brand spring inventory.
- Recent M&A speculation: With the stock down huge over the past year, DECK has become the target of takeover speculation. Back in January, Cramer pumped the name as VFC target (see Jan 3) but VFC confirmed on Jan 14 proposal to buy Billabong. LBO chatter also circulated the following week on Jan 9 and 10. Doubt this topic will even arise during the conference call.