Ugg, Indeed: Does the Correction in Deckers Stock Present a Buying Opportunity?
Until recently, Deckers Outdoor Corp. (DECK) was one of those golden stocks investors liked to brag about, a hip boot designer that racked up a nearly-500% share price gain in less than five years. But Deckers shares are down 45% in the past five months alone; for mundane and familiar reasons, rather than unexpected scandal. It’s a cautionary tale now, on how a solid, fast-growing mid-cap can quickly turn to bite the investors it once enriched.
On the surface, this precipitous decline in Deckers’ shares makes little sense. Deckers’ Ugg boots and Teva sandals remain popular fashion statements that sell well. Uggs are pricier than other brands, worn by celebrity, require replacing often and sold worldwide. It’s a nice mix for a retail investment in a recovering economy. The company forecasts another 15% revenue increase this year.
The trouble with Deckers really began in the middle of last year, although a lot of investors chose to ignore it. Like many fast-growing companies, Deckers’ profit gains rarely kept pace with revenue gains, but the steady growth in earnings was reassuring. Last year, however, Deckers' operating margin narrowed.
By the time Deckers announced in February that higher materials costs (mainly sheepskin) would keep 2012 profits flat, a lot of investors had already sussed out the implications. Deckers shares, which were still trading above 20 times earnings in September, were going to look awfully expensive without growing profits. So they sold.
That’s about it. No boardroom scandals, no horrible management decisions, no fading demand for a fashionable product. Just a commonplace business issue that suddenly made investors worry that their shares weren’t really worth the premium they were selling for.
There’s a great chance that Deckers shares will come back. Now that its PE ratio has dropped below 13, just about every analyst who follows the shares recommends buying them.
But these 52-week lows at Deckers are good to keep in mind when considering paying 50-to-120 PEs for companies like Amazon.com (AMZN), Under Armour (UA), Chipotle Mexican Grill (CMG) and Lululemon Athletica (LULU). High growth stocks cost more because the chances of high rewards are bigger. But so are the chances of punishment. It doesn’t take a disaster to turn a great expensive stock into a real loser.