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A Potential Triple Digit Gain For Just $165 In Risk

A Potential Triple Digit Gain For Just $165 In Risk

Deckers Brands (NYSE: DECK), a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories, [recently] announced financial results for the third fiscal quarter ended December 31, 2019.

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  • The stock was up on the news.

    DECK daily chart

    “Our third quarter results were driven by three of our brands experiencing record levels of quarterly revenue, resulting in an updated outlook that reflects another year of strong top-line growth and earnings expansion,” said Dave Powers, President and Chief Executive Officer.

    “Heading into the fourth quarter, our brands are intent on maintaining the momentum seen throughout this fiscal year as we are planning continued investment in consumer engagement opportunities and compelling product introductions.”

    Throughout this release, references to Non-GAAP financial measures exclude the impact of certain charges relating to retail store closures, tax reform, organizational changes and other one-time or non-recurring amounts.

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  • For the third quarter, net sales increased 7.4% to $938.7 million compared to $873.8 million for the same period last year. On a constant currency basis, net sales increased 8.4%.

    Gross margin was 54.1% compared to 53.8% for the same period last year.

    SG&A expenses were $251.9 million compared to GAAP SG&A expenses last year of $225.4 million and Non-GAAP SG&A expenses last year of $227.8 million.

    Operating income was $255.8 million compared to GAAP operating income of $244.7 million for the same period last year and Non-GAAP operating income of $242.3 million for the same period last year.

    Income tax expense was $55.0 million compared to GAAP income tax expense of $48.3 million for the same period last year and Non-GAAP income tax expense of $48.4 million for the same period last year.

    Diluted earnings per share was $7.14 compared to the GAAP diluted earnings per share of $6.68 for the same period last year and the Non-GAAP diluted earnings per share of $6.59 for the same period last year.

    UGG® brand net sales for the third quarter increased 2.6% to $781.1 million compared to $761.0 million for the same period last year.

    HOKA ONE ONE® brand net sales for the third quarter increased 63.6% to $93.1 million compared to $56.9 million for the same period last year.

    Teva® brand net sales for the third quarter decreased 25.1% to $17.2 million compared to $22.9 million for the same period last year.

    Sanuk® brand net sales for the third quarter decreased 34.5% to $8.5 million compared to $12.9 million for the same period last year.

    Wholesale net sales for the third quarter increased 8.9% to $525.1 million compared to $482.2 million for the same period last year.

    Direct to consumer net sales for the third quarter increased 5.6% to $413.7 million compared to $391.6 million for the same period last year. DTC comparable sales for the third quarter increased 4.7% over the same period last year.

    Domestic net sales for the third quarter increased 12.7% to $645.7 million compared to $573.0 million for the same period last year.

    International net sales for the third quarter decreased 2.6% to $293.1 million compared to $300.8 million for the same period last year.

    The news pushed the stock above resistance as the chart using weekly data shows.

    DECK weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying DECK could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

    A Specific Trade for DECK

    Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For DECK, the February 21 options allow a trader to gain exposure to the stock.

    A February 21 $195 call option can be bought for about $4.10 and the February 21 $200 call could be sold for about $2.45. This trade would cost $1.65 to open, or $165 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $165.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in DECK the maximum gain is $3.35 ($200 – $195= 5; $5 – $1.65 = $3.35). This represents $335 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $165 to open this trade.

    That is a potential gain of about 103% in DECK, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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