The value of talk is underrated. This morning, Jefferies Group, Inc. (NYSE:JEF) reiterated its buy rating for Deckers Outdoor Corp (NASDAQ:DECK) , but it also increased its target from $50 to $60. Wow! As expected, Deckers jumped like a person wearing some other company’s shoes — who can jump in Uggs? — and this morning the stock went up 5%. The move is evidence of the kind of faith that we put in ratings, and how much those little words — buy, sell, hold, outperform, etc. — can mean to companies. It’s also evidence of how short our memories are. In January last year, Jefferies reiterated its buy rating for Deckers with a price target of $125 — hope you didn’t buy then.
The Jefferies effect
Back in early 2012, the stock was trading around $85 and Jefferies had just had a great meeting with the company’s management team. The ratings agency was excited by the huge sales growth potential that came from Deckers’ recent acquisition of the Sanuk brand. This year, Jefferies is excited that it’s been cold.
In the newest update, Jefferies analysts mentioned that the cold weather was going to help Deckers out. It also said that strong sales around Black Friday show that “the brand is still very relevant (and NOT dead).” Based on the bounce this morning, investors must take it as a strong sign that analysts have to emphasize the fact that a brand isn’t dead.
But there’s a lesson to be learned here. As much as it’s idiotic that the company would jump based on one analyst report — even when the analyst has shown itself to be bad at predicting the very company it’s talking about — it’s also idiotic to take that analysis to prove the opposite of what’s true. Deckers should be judged sensibly based on its current sales, income-generating potential, cash flow position, and brand strength. So let’s actually look at those, and see what’s really in store for Deckers.
Underlying performance
Let’s start with sales. In the company’s last reported quarter, same-store sales dropped 13%, while total sales fell 9%. That decrease has partially been offset by an increase in selling prices, which the company has had to put in place to offset rising sheepskin prices. In 2012, sheepskin rose 40% in cost on top of a 30% increase in 2011. The good news is that in 2013, prices for sheepskin are locked in, and are 11% lower than 2012’s prices. That’s going to help the company’s gross margin, which fell 7 percentage points last quarter due to those cost pressures.
The combination of sales and costs means that income has been hammered recently. In the last quarter, earnings per share fell 26% to $1.18. Oddly, the company has managed to control its finances a bit, even with the walls weakening around it. Free cash flow has increased over the last year, though it’s still running negative.
