UGGs in Play With Deckers Seen Luring Buyers: Real M&A

UGGs in Play With Deckers Valuation Seen Luring Buyers
Holiday shoppers line up at an Ugg store on Fifth avenue in midtown Manhattan, New York, U.S. Photographer: Victor Blue/Bloomberg

For shoppers seeking a U.S. footwear deal, there’s no better bargain than UGG boots.

While warmer weather and higher sheepskin costs crimped profits at Deckers Outdoor Corp. this year, Jefferies Group Inc. says that’s also made the seller of UGG brand sheepskin boots and Teva sandals less expensive for acquirers with the stock down 56 percent. The Goleta, California-based company fell last month to its lowest level relative to earnings since 2009 before ending last week at 8.2 times profit. That’s still the cheapest valuation of any U.S. footwear and accessories maker larger than $1 billion, according to data compiled by Bloomberg.

As the leader in luxury winter accessories with the opportunity to expand in handbags and men’s footwear, Deckers would be attractive for private-equity firms and rivals such as VF Corp., owner of the North Face and Timberland brands, according to Wedbush Inc. Alternative Investment Management & Research SA said the $1.17 billion company could fetch at least $50 a share, a 51 percent premium to last week’s closing price.

“The UGG brand is an attractive brand, and the company is undervalued relative to the strength of that brand,” Mitch Kummetz, a Denver-based analyst at Robert W. Baird & Co., said in a telephone interview. “It could make sense for someone to come in and make an offer. I could see a strategic buyer being interested and I could see a financial buyer stepping up here as well.”

Thomas George, chief financial officer at Deckers, and Brendon Frey, a company spokesman, didn’t return phone or e-mail messages seeking comment.

Sandal Roots

Deckers, which owns footwear brands from UGG Australia and Teva to Sanuk and Tsubo, was started in 1973 by a university student who made sandals and sold them at craft fairs. More than 87 percent of the company’s $1.38 billion in revenue last year came from the UGG line, which Deckers bought in 1995.

While the stock peaked at $117.66 in October 2011, investors have since lost 72 percent amid Deckers’s slowing sales growth. Chief Executive Officer Angel Martinez said a warmer winter curtailed boot purchases in the first quarter and steeper prices, needed to offset higher raw-material costs, deterred shoppers in the third quarter.

Deckers’s price-earnings ratio dropped on Oct. 31 to 7.1, the lowest since May 2009, according to data compiled by Bloomberg. At 8.2 times earnings last week, it was still the cheapest stock in the U.S. apparel, footwear and accessories design industry with a market capitalization larger than $1 billion, the data show.

‘Distressed Multiples’

While analysts project Deckers’s revenue growth will slow to 3.8 percent this year after a 38 percent jump in 2011, it’s still trading at the industry’s second-biggest discount to estimated revenue, data compiled by Bloomberg show. Deckers’s price-sales ratio of 0.8 compares with the median of 1.3 for the 21 companies in the industry group, based on projected revenue for the current fiscal year, the data show.

“It’s trading at distressed multiples,” Corinna Freedman, a New York-based analyst for Wedbush, said in a phone interview. “We feel like this is the bottom in the stock. We don’t think that sentiment can get much worse.”

Jefferies analyst Randal Konik said the low valuation has created an opportunity for private-equity firms as well as buyers from within the industry. After consumer deals were struck earlier this year, including Apax Partners’s agreement to buy Cole Haan from Nike Inc. and Starbucks Corp.’s bid for Teavana Holdings Inc., Deckers may be next, he said.

“We see significant upside in coming quarters due to improving performance of the UGG brand, which we think is far from dead,” the New York-based analyst wrote in a note to clients Nov. 16. He has a share-price estimate of $50 for Deckers, which ended last week at $33.08.

Today, Deckers shares gained 6.6 percent to $35.25, the biggest advance in the Standard & Poor’s 400 MidCap Index.

Growth Potential

Deckers offers suitors the chance to snap up name-brand footwear that still has significant growth potential, despite recent challenges, according to Baird’s Kummetz.

“The market right now underappreciates the UGG brand,” Kummetz said. A buyer could “take advantage of that disconnect.”

With less than a third of Deckers’s sales coming from outside the U.S., an industry buyer that already has global distribution platforms could broaden Deckers’s reach, he said.

There are further expansion opportunities in men’s shoes, handbags and lower-priced lines, which could help offset weakness in traditional boot sales, said Wedbush’s Freedman. Deckers also plans to add an additional 30 locations in 2013, George, the company’s CFO, said on its earnings call Oct. 25.

“They’re increasing their store base and they’re expanding into a few new categories,” Freedman said. “That could increase their volumes.”

Overlooked Brands

The growth prospects of Deckers’s other brands, including Teva sport sandals, are often overlooked, according to Elizabeth Jones, a Shawnee Mission, Kansas-based analyst at Kornitzer Capital Management Inc., which oversees $6.5 billion and owns Deckers shares.

“There’s definitely value there in the Teva brand that I don’t think has been realized to its full potential at this point,” Jones said in a phone interview. “It’s well-positioned as there’s a trend in this country for people to be more active and healthy.”

Deckers may appeal to other owners of apparel and footwear lines such as Greensboro, North Carolina-based VF, or private-equity firms, said Jones and Wedbush’s Freedman. The company’s cash balance adds to the appeal, said Freedman, who projects Deckers will end the year with $5 a share in cash.

VF owns everything from the surf-inspired Reef brand to North Face winter gear. Last year it paid about $2 billion to acquire Timberland, the maker of hiking boots and outdoor clothing.

Building Value

Cindy Knoebel, a spokeswoman for VF, said the company’s policy is to not comment on acquisition speculation or targets, when asked whether it’s interested in buying Deckers.

“We have said publicly that we are interested in continuing to make acquisitions to build value for our shareholders, and that our interest lies primarily in the outdoor and action sports categories,” Knoebel said last week in an e-mailed statement.

Other bidders for Deckers may include sneaker-maker Skechers U.S.A. Inc. and PPR SA, according to Albert Saporta, managing director at Alternative Investment Management in Geneva. PPR acquired Volcom Inc. in 2011 and a controlling stake in Puma SE in 2007 to add to a luxury-goods lineup that includes the Gucci and Bottega Veneta brands.

Jennifer Clay, a spokeswoman for Manhattan Beach, California-based Skechers, didn’t respond to phone or e-mail messages seeking comment. Helene Saint-Raymond, a spokeswoman for Paris-based PPR, declined to comment on whether the company would be interested in buying Deckers.

Holiday Sales

Potential acquirers may hold off on bidding for Deckers until there’s more proof of the UGG brand’s sustainability, according to Sam Poser, a New York-based analyst at Sterne Agee & Leach Inc. UGG sales in the weeks spanning Black Friday --the day after the U.S. Thanksgiving holiday and the unofficial start to the holiday shopping season -- through the end of the year should provide “better visibility” on inventory levels and earnings power, he said.

“If it’s going to happen, it’s not going to happen until people know exactly how healthy the brand is,” Poser said in a phone interview. Until “we see the whole thing play out this holiday season, I don’t think anybody’s crystal ball is that good.”

Opportune Time

Still, analysts on average estimate the stock will climb 23 percent to $40.80 in the next 12 months, data compiled by Bloomberg show. Wedbush’s Freedman said a buyer would probably have to bid more than her $38 share-price estimate, while Alternative Investment Management’s Saporta said Deckers may fetch $50 to $55 a share in a takeover.

Given Deckers’s growth prospects, and with it trading at such a low valuation, this could be the ideal time for buyers to step in with an offer, said Kornitzer’s Jones.

“As long-term investors, we’re willing to ride through these tough periods and buy companies at attractive valuations and then when these issues resolve, obviously we should get a decent return,” she said. “And because we think there’s opportunity for a good return, we would think others might think that as well.”

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