This Fashion Retailer's Time is Up

If you're like the typical American, you've probably got a closet full of stuff you simply don't wear anymore. And if you're female, statistics show you may have a few more "unwearables" than men. According to ClosetMaid, the average woman has more than 100 items in her closet, yet finds 21% of those items unwearable.

That means clothing and footwear designers have to work extra hard at keeping our attention, especially if their lines cater to women, as today's target does. If you're a company that produces "unwearables," chances are your customers aren't coming back to add more.

But before we go pointing fingers at either sex or even at the fast-changing, mega-consumer society we live in, let's remember one key element that's always influenced our lives and the clothes we wear: style.

From the flapper dresses of the early 20th century to the bell-bottoms of the '70s, clothing styles can change dramatically from year to year. And some, (thankfully) never come back.

Clothing styles can shift dramatically from year to year, and these shifts can bankrupt a clothing company. Changes in style helped steal the mojo from hip companies like Urban Outfitters (NASDAQ: URBN) and Abercrombie (NYSE: ANF) in just a couple of years.

And just as I foretold their coming demise, there's one previously popular shoe brand that's stock is overpriced and dated, just like its boots. 

With increased competition and consumers' lack of attention span adding to retailer's struggles, it's hard for brands to keep earnings momentum going, especially when they lack product diversity.

And that's exactly what's been going on with Deckers Outdoor (NYSE: DECK) for years. Sales have been on the decline, and analysts are abandoning the stock.

But there's been a recent surge in the stock price as some investors are hopeful for an acquisition.

This rumor been passed around before, when DECK's chances of selling looked brighter.

Now, with fading revenues and declining brand strength, the company's still lofty valuations certainly don't justify a buyout. The situation actually feels a bit like Hain Celestial (NASDAQ: HAIN) did back in September 2015. Back then, buyout rumors helped bring HAIN above $65, but the deal never came to fruition, and shares continued to tumble. Once sales stabilized and shares dropped to current levels around $35, a buyout seemed bit more realistic.

Like HAIN back in late 2015, DECK's sales would need to drastically improve or shares would need to come down for a likely acquisition to take place, but since the smart money doesn't see sales improving much, DECK is in perfect position for a put play.

Analysts have already begun to lower their price targets on the stock to a consensus average of $53.50 -- below current prices above $54. This is especially bearish considering the fact that analysts are "long biased" and typically project a future value that's higher than current value.

And in an American market that's currently full of optimism, the bearish action we are seeing from top analysts is not a good sign for Deckers Outdoor, whose biggest brand sums up how I feel about shares... UGG!

A Real One-Trick Pony 

From an investor's perspective, Deckers Outdoor is essentially a holding company (one company with different brands and different strategies for each).

But DECK vehemently denies this fact and markets itself as a focused footwear, clothing and gear company. It presents itself as cool, independent and full of the same people who wear its products, not a bunch of Wall Street types who are just interested in profits.

Right...

DECK's brands include Teva, Sanuk, Koolaburra and Hoka One One, names many of you have likely never heard of. Its more recognizable flagship brand, UGG (mostly boots), accounted for more than 81% of the company's annual revenues.

The peculiar-looking sheepskin boots once led the company's stock to great heights. Back in 2007, UGGs (like the plastic Crocs shoes) were all the rage. But just as other clothing brands like Structure, Wet Seal, Limited Brands and others have faltered, DECK is losing ground.

UGG's popularity, along with DECK's earnings peaked in 2011, but both have been trailing off ever since.

And unless there's a complete revival of the niche brand, it seems those weakening trends will continue. Because the unique brand was purposely marketed with a particular style, it's unlikely to morph into a multi-styled and timeless brand like Nike (NYSE: NIKE) or Levi's, both of which have been able to stay relevant despite immense competition.

No Upside Catalyst 

UGG boots are distinctive fashion items that are highly susceptible to changes in consumer tastes. Even the most risk-hungry analysts don't see a compelling argument for the stock, even with the potential for a buyout.

In spite of slowing sales across the company, Deckers has been expanding its brick-and-mortar footprint at a time when most retailers are realizing the power and lower cost of online sales. These new stores cost lots of money to maintain and eat up a fair amount of corporate cash.

The company could turn around and shut them down, but it would likely lose consumer confidence in a brand that's already fading.

DECK's earnings miss sent shares as low at $44 a share just a month ago. Shares had traded all the way down to $41 in January 2016, when the company was making $4.66 a share annualized, compared to just $3.50 now.

So maybe investors are a little Trump Drunk and excited, but by my estimates, the stock should be trading closer to its five-year forward P/E average of 13.7 as opposed to the 15.5 it is now.

Assuming a best-case scenario, the stock is supposed to earn $3.78 in 2018. At 13.7 times earnings, that's a value of $51.79... and even that seems generous.

How to Bet Against DECK 

Add it all up, and it seems that shares of DECK are poised for a decline. But rather than simply short shares of the stock, my Profit Amplifier readers and I recently placed a simple option trade that will allow us to risk less capital upfront -- while potentially magnifying our profits if our thesis on DECK holds true.

I can't get into the exact details of the trade today, but suffice it to say that we believe this is the best way for investors to make money on overvalued companies in a late-stage bull market like the one we're in now. If you're new to options, I urge you, don't let your preconceptions fool you -- our method is one of the safest, most reliable ways of profiting with options. If you're interested in learning more, simply check out this page

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