Deckers Outdoor Corporation (DECK), the manufacturer of sheepskin boots and slippers, recently announced that it has completed the buyout of the Sanuk brand on July 1, 2011.
In an earlier release, Deckers stated that it has entered into asset purchase conformity to acquire the Sanuk brand with an initial payment of $120 million in cash. The latter is known for its exclusive sandals and shoes and notable marketing.
The contract includes further participation payments based on the performance of the brand in the coming five years and contains certain assets and liabilities of the brand. The buyout will help Deckers in gaining Sanuk’s customer base in the action sports footwear segment and will be modestly accretive to the earnings of fiscal 2011.
Sanuk will continue to operate from Orange County, California, its present headquarter. The brand generated more than $43 million of net sales in 2010. The acquisition will be funded by the company’s cash reserves.
Deckers’ sustained focus on product innovation and terrain expansion facilitated the company to achieve robust growth. Further, Deckers is now directly managing the distribution of UGG, Teva and Simple brands in the U.K.and the UGG and Simple brands in the Benelux region and France, resulting in incremental sales and margins by selling directly to wholesale customers.
Moreover, global markets provide a significant growth opportunity to the company. We are optimistic about the company’s incremental sales and earnings potential. Globally, Deckers distributes its products throughout Europe, Asia Pacific, Canada, and Latin America.
However, the company’s over-reliance on the UGG brand is a matter of concern. In the event of stagnation or decline of UGG sales growth, Deckers’ overall results will be affected adversely. This is due to the percentage of contribution from the company’s other brands, which are too small to offset any slowdown in UGG sales.
Further, Deckers faces stiff competition in the footwear industry from Nike Inc. (NKE) and Timberland Czo. (TBL), on several attributes such as style, price, quality, comfort and brand name, which might adversely affect the company’s sales and margins.
Currently, we have a long-term Neutral rating on the stock. Moreover, Deckers holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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