By Marlize van Romburgh Friday, May 27th, 2011

The Goleta-based footwear firm said May 19 that it will pay $120 million in cash for Sanuk, a young, Irvine-based surf sandal company that one analyst says has the potential to be a $100 million brand within three years.

Deckers has taken shoe startups and turned them into multimillion-dollar fashion icons before. Take Ugg Australia: When Deckers bought the sheepskin boot brand from Australian surfer Brian Smith in 1995, sales were at $17 million. Last year, Deckers pulled in more than $1 billion in total sales — $873 million of that from Ugg.

In recent years, Deckers has been scouting for another young company to take under its wing.

“We wanted a profitable company with a great management team and a product lineup to complement ours,” Deckers CEO Angel Martinez told the Business Times.
Sanuk has tremendous growth potential, he said. “It’s really just getting started.”

Sterns Agee analyst Sam Poser told the Business Times that Deckers and Sanuk make “a good match,” especially because there isn’t much overlap between their product lines.

The sandal company could be a $100   million brand within three years, he said. Poser reaffirmed his “buy” rating and a $120 price target on Deckers’ stock in a note to clients on May 24, prompting shares to climb 1.6 percent to $88.82.

Sanuk, founded in 1997 by Southern California native Jeff Kelley, makes flip-flops and slip-on sneakers for the surf-culture crowd. It will remain headquartered in Orange County, Martinez said. “We think that’s a cultural home for them.”

Sanuk’s senior management will continue to manage the brand, with Deckers stepping in with money and the ability to distribute to a larger market worldwide, Martinez said.

Sanuk has fewer than 50 employees, and although it pulled in $43 million in sales last year, just $7 million of that was overseas, where Deckers has been making a big push.

Poser, the analyst, said Sanuk is a well-run company that has needed a leg up from a larger firm. “They have a very good management team,” he said. “They just didn’t have the liquidity to grow the business to the next level.That’s where Deckers comes in.”

In addition to the up-front cash, Deckers will make bonus payments based on performance to Sanuk over the next five years.

Poser said the Sanuk deal might also couple well with the marketing of Simple, a smaller Deckers brand that has struggled to gain traction. “The Simple brand has been slow and can grow on this,” Poser said. “They’ll be able to open up the distribution of Simple.”

Deckers’ share price had been steadily climbing until late April, when the company said it will likely experience a second-quarter loss as a new wholesale model shifts sales from one quarter to the next.

Although the Ugg parent turned a $19.2 million first-quarter profit, up 7 percent over the same quarter last year, investors balked at the predicted loss. Shares dropped 8 percent in after-hours trading immediately after the earnings report but recovered back to the $90 range over a few days.

Martinez said shareholders overreacted to what’s essentially an accounting change. “I don’t know why it caught investors off guard,” he said. “We’ve been talking about this for more than year.”
With a conversion to a wholesale model for some Deckers brands, including Ugg, in the U.K. and Western Europe, about $50 million worth of product that would have shipped during the second quarter will now ship during the third quarter.

That, combined with higher overhead costs in what is traditionally Deckers’ lowest-sales quarter, triggered the projected 25-cent per share loss.
Pose said Deckers tends to issue guidance conservatively and that he expects strong growth from the company in coming years.

“There’s so much newness with the Ugg brand for both men and women,” he said, noting that the brand has expanded well beyond its signature sheepskin boot.

Deckers expects 2011 revenue to increase about 21 percent over last year, pegging projected full-year sales at about $1.2 billion. The Sanuk acquisition, expected to be finalized in the third quarter, will add a small boost to profits, it said.

• Contact Marlize van Romburgh at [email protected].