TBL Timberland Co. (The)

Deckers Outdoor Corporation (DECK) recently announced that it has entered into asset purchase conformity to acquire the Sanuk brand with an initial payment of $120 million in cash. Sanuk is known for its exclusive sandals and shoes and notable marketing.

The agreement includes added participation payments based on the performance of the brand in the coming five years and contains certain assets and liabilities of the brand.

Deckers stated that the acquisition will be completed by the beginning of the third quarter of 2011 and will be funded by the company’s cash reserves. As per the agreement, 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 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.

Deckers top line has increased at a CAGR of 35% in the last five years. The company’s sustained focus on new product introductions and geographic expansion has helped to achieve robust growth.

With the expiration of the existing distribution agreements, Deckers is 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. This will help to capture incremental sales and margins by selling directly to wholesale customers.

The international markets provide a significant growth opportunity, and we remain optimistic about the company’s incremental sales and earnings potential. Deckers international sales soared 45.8% in first-quarter 2011. Internationally, 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.

Deckers faces intense competition in the footwear industry from other big players on several attributes such as style, price, quality, comfort and brand name. The competitors have significant financial, technological, engineering, manufacturing, marketing, and distribution advantages that may dent the company’s sales and margins.

Currently, we have a long-term Neutral rating on the stock. Moreover, Deckers, which competes with Nike Inc. (NKE) and Timberland Co. (TBL), holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
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