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Posted: Tue Nov 10, 2015 12:51 am
High Accruals Flash Warning Signal
Deckers Outdoor (NYSE:DECK) will be reporting Q4 2010 earnings on February 23. Based on our Merriam Report on dual cash and accrual analysis for the seven quarters through September 30, 2010, shares of DECK look to be extremely overvalued at current levels. The stock is also an interesting short candidate in our opinion.
The retail apparel space has been "crowded" the past several months and DECK shares over the past year have outperformed both Nike (NYSE:NKE) and the broader S 500 by almost triple digit percentages respectively. Not too shabby for the maker of popular UGG, Teva and Simple branded foot ware and apparel products.
But, with consumer sentiment seemingly optimistic and resilient in the face of still staggering unemployment, the contrarian in us can't help but envision clouds forming high above in the words caveat emptor.
Accruals: The catalyst in our overvalued and short sell thesis lies primarily in the accruals. We've seen lots of aggressive accounting by apparel makers over the years, but the +16.9 accrual ratio posted in Q3 is glaringly bearish. It also continues a rising accrual trend which emerged in Q4 2009 (ending December 30, 2009). Based on the accruals alone, we would be concerned if long the stock going into the upcoming earnings report.
In our experience with apparel and consumer company cash flow statements, shifting of current assets, accelerating depreciation or temporary securitization of accounts receivable are not uncommon techniques to boost cash flow. In this case, the accruals are in large part due to adjustments in accounts receivable and inventories.
Note: the company will be converting from a distributor model to ugg classic short sparkles read boots a wholesale model for the UGG, Teva and Simple brands in the UK and UGG and Simple brands in the Benelux region.
DECK accrual anomaly appears to be validated somewhat by a decline in capital productivity resulting from the build up in both inventory and receivables during the latest period. It bloomed from an average $1.05 (per dollar of sales) to $1.22 for the qtr. ending Sept.
Despite the nick to returns on assets, the company did show modest improvements in cost of sales and SGA expenses.
There are some positives: No debt, over $6 a share in cash and okay enterprise value (based on traditional valuations). It's ugg earmuffs navy for sale also worth noting the company's low ugg men's classic short 5800 black boots PEG ratio of 0.8. If DECK reports a 25% growth rate for 2010 and tells the Street they UGG Boots Outlet Store expect growth of 13% 15% in 2011, then one could argue the shares are currently discounted.
Keep in mind that analysts typically don revise estimates until the punch bowl runs low. Further, we will go out on a (hopefully sturdy) limb and declare that current consensus numbers may be a bit too rosy. Management did indicate in the Q3 report that the opening of additional retail stores (primarily UGG brand) would have less proportional impact on its growth rate.
Cash flow: Our dual cash flow indicators are displaying a recent bearish trend emerging, but the overall confirmed trend remains slightly bullish. As a percentage of sales, operating cash flow declined almost 50% in the latest quarter with a comparable decline in balance sheet cash flow for the same period.
Other caveats: On January 20, 2010, a Swedish shoe maker filed a trademark infringement suit against DECK for the term "Ugg", used in the brand name of DECK's wildly popular sheepskin boots. The complaint alleges that DECK aggressively litigated to convert a term into a US trademark.
Current intangibles: Net of goodwill look to be about 24% of total non current assets. It's difficult to place a precise value assigned to the Ugg trademark, but an adverse decision could negatively impact equity in the form of impairment, write downs or other charges going forward.
Ugg boots are wildly popular in the Southern California area and especially near the beach communities. On an anecdotal side note, we see them worn frequently in summer. They must ugg classic short sparkles read boots be comfortable.
Just keep in mind that DECK is a high beta momentum stock. If you're up significantly, don't be ashamed to take some profits off the table. In the event that our analysis proves to be accurate, investors will have an opportunity to buy the shares again at a lower price.
And, given this whacky market, it wouldn't be a surprise to see DECK return to the previous mid $80 highs. However, investors should keep a close eye on the stock between now and the Q4 earnings release.
Option activity: Judging by the premiums we seeing in various February 2011 calls, investors are expecting an upside surprise. Yet, February puts suggest that investors are buying insurance in case they're wrong.
Short interest: It is likely that any further upside in DECK shares (between now and the earnings report) will be, to some extent, the result of short covering. Short interest (as of December 31) is about 13% of float. Nike (NKE), on the other hand, has only 1.7% of its float held short. Not exactly a vote of confidence to the entire sector, but it does reveal a division of investor sentiment between names in the group.
Risks: DECK shares are currently trading at $75, almost 50% above our estimated fair value of $50. In order for this stock to stay aloft, Q4 earnings will have to be very good.
The greater risk in our view is the potential for further declines to returns on income producing assets and possible margin compression. If DECK misses consensus estimates (even slightly), or offers soft 2011 guidance, investors will be running for the exits.
Deckers Outdoor (NYSE:DECK) will be reporting Q4 2010 earnings on February 23. Based on our Merriam Report on dual cash and accrual analysis for the seven quarters through September 30, 2010, shares of DECK look to be extremely overvalued at current levels. The stock is also an interesting short candidate in our opinion.
The retail apparel space has been "crowded" the past several months and DECK shares over the past year have outperformed both Nike (NYSE:NKE) and the broader S 500 by almost triple digit percentages respectively. Not too shabby for the maker of popular UGG, Teva and Simple branded foot ware and apparel products.
But, with consumer sentiment seemingly optimistic and resilient in the face of still staggering unemployment, the contrarian in us can't help but envision clouds forming high above in the words caveat emptor.
Accruals: The catalyst in our overvalued and short sell thesis lies primarily in the accruals. We've seen lots of aggressive accounting by apparel makers over the years, but the +16.9 accrual ratio posted in Q3 is glaringly bearish. It also continues a rising accrual trend which emerged in Q4 2009 (ending December 30, 2009). Based on the accruals alone, we would be concerned if long the stock going into the upcoming earnings report.
In our experience with apparel and consumer company cash flow statements, shifting of current assets, accelerating depreciation or temporary securitization of accounts receivable are not uncommon techniques to boost cash flow. In this case, the accruals are in large part due to adjustments in accounts receivable and inventories.
Note: the company will be converting from a distributor model to ugg classic short sparkles read boots a wholesale model for the UGG, Teva and Simple brands in the UK and UGG and Simple brands in the Benelux region.
DECK accrual anomaly appears to be validated somewhat by a decline in capital productivity resulting from the build up in both inventory and receivables during the latest period. It bloomed from an average $1.05 (per dollar of sales) to $1.22 for the qtr. ending Sept.
Despite the nick to returns on assets, the company did show modest improvements in cost of sales and SGA expenses.
There are some positives: No debt, over $6 a share in cash and okay enterprise value (based on traditional valuations). It's ugg earmuffs navy for sale also worth noting the company's low ugg men's classic short 5800 black boots PEG ratio of 0.8. If DECK reports a 25% growth rate for 2010 and tells the Street they UGG Boots Outlet Store expect growth of 13% 15% in 2011, then one could argue the shares are currently discounted.
Keep in mind that analysts typically don revise estimates until the punch bowl runs low. Further, we will go out on a (hopefully sturdy) limb and declare that current consensus numbers may be a bit too rosy. Management did indicate in the Q3 report that the opening of additional retail stores (primarily UGG brand) would have less proportional impact on its growth rate.
Cash flow: Our dual cash flow indicators are displaying a recent bearish trend emerging, but the overall confirmed trend remains slightly bullish. As a percentage of sales, operating cash flow declined almost 50% in the latest quarter with a comparable decline in balance sheet cash flow for the same period.
Other caveats: On January 20, 2010, a Swedish shoe maker filed a trademark infringement suit against DECK for the term "Ugg", used in the brand name of DECK's wildly popular sheepskin boots. The complaint alleges that DECK aggressively litigated to convert a term into a US trademark.
Current intangibles: Net of goodwill look to be about 24% of total non current assets. It's difficult to place a precise value assigned to the Ugg trademark, but an adverse decision could negatively impact equity in the form of impairment, write downs or other charges going forward.
Ugg boots are wildly popular in the Southern California area and especially near the beach communities. On an anecdotal side note, we see them worn frequently in summer. They must ugg classic short sparkles read boots be comfortable.
Just keep in mind that DECK is a high beta momentum stock. If you're up significantly, don't be ashamed to take some profits off the table. In the event that our analysis proves to be accurate, investors will have an opportunity to buy the shares again at a lower price.
And, given this whacky market, it wouldn't be a surprise to see DECK return to the previous mid $80 highs. However, investors should keep a close eye on the stock between now and the Q4 earnings release.
Option activity: Judging by the premiums we seeing in various February 2011 calls, investors are expecting an upside surprise. Yet, February puts suggest that investors are buying insurance in case they're wrong.
Short interest: It is likely that any further upside in DECK shares (between now and the earnings report) will be, to some extent, the result of short covering. Short interest (as of December 31) is about 13% of float. Nike (NKE), on the other hand, has only 1.7% of its float held short. Not exactly a vote of confidence to the entire sector, but it does reveal a division of investor sentiment between names in the group.
Risks: DECK shares are currently trading at $75, almost 50% above our estimated fair value of $50. In order for this stock to stay aloft, Q4 earnings will have to be very good.
The greater risk in our view is the potential for further declines to returns on income producing assets and possible margin compression. If DECK misses consensus estimates (even slightly), or offers soft 2011 guidance, investors will be running for the exits.