Nice Recovery, But I’m Still Dead

The market is spitting in the face of the bears, but they’re shitting on me. Like I said yesterday, insider information was leaked before DECK’s earnings. The only reason why I held was because of the 2 point gap down. I figured the news had leaked and the damage had been done.

Wrong.

Nothing could’ve prepared me for what looks like the RIMMification of the company.

Sam Poser from Sterne Agee is sticking to his $32 price target, but says the company is still too optimistic. Here’s a snippet of the report.

Our Call
The worst is yet to come. Despite lowered guidance, management appears far too confident that cold weather will fully ease the pain. We believe that Classic styles will perform better if weather comes, but the fashion part of that business may be lost forever. We expect that material order cancellations in 4Q12 will result in a guidance miss and severe pressure on 2013. We are waiting to speak with management prior to updating our estimates.

3Q EPS results were overstated and there are oodles of red flags: DECK reported 3Q12 EPS of $1.18 which was above guidance but was 26% below last year. However, revenue was down 9.2% versus LY and down 10% versus guidance. The EPS beat was a result of a push-out of some expenses into 4Q, and we believe, an unwillingness by management to appropriately address the excess UGG inventory resulting from the 11.9% decrease in UGG sales. Overall inventory was up 36.4% at $486.7M. The UGG inventory was up 43% at $452M. The company increased its borrowing on its credit facility from $45M LY to $275M this year, which included $85M for share repurchases, and resulted in $7.42 in net debt per share compared with $0.60 in net cash per share LY. Accounts receivable (A/R) increased to 63% of sales versus 47% which leads us to believe that management is giving better terms or is stuffing the channel. We further question the A/R increase because non-DTC sales decreased from 89.1% of total sales to 86.1% of total sales.

Will DECK weather its guidance? FY12 EPS guidance was reduced from ~$4.58 to $3.40. FY12 revenue is now expected up 5% versus prior guidance of up ~14%. UGG sales are now expected to be flat with last year compared to prior guidance of +10%. Baked into UGG guidance are an increase in 4Q sales of 6%, which includes an 11% decrease in SSS, and what we view as a modest decrease in wholesale revenue. The over/under on achieving 4Q guidance appears to solely based on weather; weather was mentioned 39 times on the 3Q12 call versus 10 times on the 3Q11 call. 4Q GM is expected to decrease by 430bps versus prior guidance of -250bps. The change in GM is a result of higher sheepskin costs and lower European margins, offset by increased retail, and Sanuk sales. Neither sales nor margins are including potential material cancellations from wholesale accounts despite the fact that orders have already been pushed out of 3Q into 4Q. Inventory levels at year end are expected to be up 20% on top of a 102% increase LY, which reflects 30 forward WOS.

2013 appears dicey: The company expects to open ~30 stores and get back 150bps in margin due to lower sheepskin prices. Higher prices caused a 500bp drag in GM in ’12. That 150 bp increase may only serve to offset other weaknesses. Management said that all expenses are in play, including store openings, if 4Q12 guidance is not achieved. We see a major risk of order cancellations in 4Q12 which will likely result in poor ’13 results, with 1Q13 being a liquidation period. We continue to believe that there is no safe inventory and that the Classic UGG styles are subject to fashion risks despite management’s weather commentary.

The market was supposed to be down 100. All things considered, today’s tape is terrific. But it’s just more of the same, isn’t it? Slow grind, churning between industries, devoid of momentum and energy.

I’m down 4% for the day, still very dead.