This article is about Deckers Outdoor (DECK). Fashion and retailing has long been one of the toughest areas of business in which to make money. The successful retailing business requires a product that is perceived as “fashionable” by the desired customer, and must also be priced at a level that it is attractive to buy.
In addition, it must not be able to be copied easily. For example a plain white t-shirt is considered a wardrobe staple for the summer months, and can probably be found in almost every closet in theUnited States. However, these simple garments can be made for less than a dollar in cheap manufacturing hubs like Vietnam or Bangladesh. More importantly, there is nothing that distinguishes a white t-shirt made by a global multi billion dollar brand from one sold at Wal-Mart, meaning that there is no incentive for customers to pay more.
The truly successful clothing and apparel companies (i.e Deckers Outdoor) have been able to craft a global brand around their unique product. Converse has the iconic Chuck Taylor All Stars, Nike and Adidas compete fiercely for the market in hi-top sneakers and companies like the North Face andColombia attempt to dominate the winter wear market.
Deckers Outdoor (DECK) is taking a slightly different approach to building a highly successful retail model. This approach has seen their share price fluctuate over a wide range this year, with lows below $75 as recently as March before strong rebounds that led to recent closes above $95.
So can Deckers Outdoor hold on to these gains through the crucial holiday period?
Understanding the Business
The business model of Deckers Outdoor isn’t of a pure play retailer. For example, some brands like Louis Vuitton or Nike, research, design, produce and market their own branded products exclusively. You would never find anything produced by Adidas, Reebok or Everlast in a Nike store.
However, other retailers operate what is known as a “holding company” model. This means that they bring together a range of brands under one company banner. The reason for this is to eliminate duplication and inefficiencies in administration and distribution, and to focus instead on marketing and sales.
It is also often a way for smaller brands to benefit from the experience and contacts of a large distribution company, and reach a far wider audience than they would be able to reach if they attempted to do it on their own. The economics of the model make sense, with global brands spending literally billions of dollars every year on marketing and branding initiatives in the retail sector, through sponsorships of elite athletes and events, which are far too expensive to be available to smaller operators.
The business model of Deckers Outdoor is to be a holding company that identifies small niche brands that might appeal to a much wider audience. They take a stake in the brand and then use their resources to grow the addressable market. In this way they aim to take niche brands “mainstream” and therefore increase their revenue and profits rapidly.
The notable brands in their stable include Ugg, Tsubo, Mozo and Hoka One One. Each of these brands is marketed to speciality higher margin retailers throughout the world, with Deckers Outdoor also having 117 company owned stores that showcase their brands. It also has a growing direct to consumer offering through a network of websites.
Metrics and Measures
The most recent sales figures pointed to the success of these strategies. The headline sales figure of net sales was an impressive $480.3 million, which was a stellar 24.2% increase on the previous year.
Even better for Deckers Outdoor (DECK) was the fact that margins expanded from their previous levels to a healthy 46.6%. This points to a strong ability for the company to charge a premium for the products and minimal discounting, both huge advantages in the tough retail industry.
The big earnings driver was the Ugg brand, which drew in sales of $417 million compared to $337 million for the same period last year. The other brands made up the balance, with none exceeding $25 million in sales.
The majority of the sales were achieved in the domestic North American market, with $289 million and e-commerce sales were another highlight, quickly growing by 45% to $21.6 million. These results show that the targeted initiatives to grow lucrative markets were beginning to gain traction.
The Investment Case
The investment case for Deckers Outdoor (DECK) is based on several factors. The first is the continued ability of management and staff to identify niche brands that are capable of growing and being attractive to a wide audience.
Retail brands go out of fashion over time, meaning that they must be replaced or reinvented for the company to continue to grow profits. That means the Deckers Outdoor needs to have a strong team of buyers and talent scouts, in much the same way as professional football teams need strong recruiting departments to find good prospects.
The other major factor affecting an investment in Deckers Outdoor is the reliance of the company on one brand, Ugg, to drive its revenue. If customers avoid that brand it will have a disproportionate level of impact on the company as a whole and will blow a hole in profit growth. Finding another large contributor to company profits would be desirable as it would diversify the company away from single brand risk.
Deckers Outdoor (Deck) is a profitable company operating in the tough retail sector. Going into the crucial Christmas trading period (this article was written in mid-December 2014), it is well placed to grow its profits through distributing popular brands. However, the company is reliant on a single brand for the vast majority of its profits, so identifying another contributor that could take some of the load off that single brand would be an advantage for Deckers Outdoor.