Deckers Outdoor Corp (DECK), NIKE, Inc. (NKE): 2 Numbers Suggest This Company Isn’t Facing Reality

Common Sense Says 2013 Isn’t Going To Be A Good Year
Let’s think this through, Deckers’ management is assuming a 46% gross margin for the full year. However, last year the company saw gross margin drop 5% because they had to mare down prices to move inventory.

This year, management expects just 4% sales growth at UGG, but inventories are already up 23%. In addition, looking at Deckers Outdoor Corp (NASDAQ:DECK)’s total inventory versus their annual sales, the company is already carrying too much.

In the last year, V.F. Corp. was the most efficient of the group, with annual revenues compared to current inventory at just 12.45%. In second place, NIKE, Inc. (NYSE:NKE) had a 13.88% inventory to sales percentage. Even Under Armour, which has been criticized for too much inventory in the past, came in at 17.4% inventory to sales. Deckers by comparison clocked in at 21.22% inventory to sales.

The bottom line is, Deckers is already carrying relatively more inventory than their peers. The company is likely to have to take more markdowns to get this situation resolved, which will lead to a lower gross margin. If the company would grow EPS by just 5% with a 46% margin, imagine what could happen if the margin comes in lower.

Better Options Abound
From an investment perspective, each of Deckers Outdoor Corp (NASDAQ:DECK)’s competitors seems like a better deal. V.F. Corp. pays a yield of 2.1% and NIKE, Inc. (NYSE:NKE)’s yield is 1.5%. Both companies are also expected to grow earnings faster than Deckers in the next few years. In fact, V.F. Corp. pays the highest yield, is growing faster, and yet sells for a similar P/E ratio. Investors looking for even better growth, could go with Under Armour’s expected 21% EPS growth rate.

Every quarter Deckers’ management ignores this inventory problem, making it harder to solve. It’s time for the company to face reality, clear out their excess inventory, and start fresh. Investors should probably just start fresh with a different stock.

The article 2 Numbers Suggest This Company Isn’t Facing Reality originally appeared on Fool.com and is written by Chad Henage.

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