Deckers' Ugg-ly Valuation

Following on the heels of a strong fourth quarter, footwear firm Deckers Outdoor (Nasdaq: DECK) today announced record financial results for first-quarter 2004. Net sales and net earnings for the quarter increased 23% and 28%, respectively, over the previous year.

Company executives are outwardly bullish. They increased guidance for 2004 full-year sales to a range of $164 million to $174 million, which is approximately a 40% increase over 2003. This is particularly aggressive since the pace of year-over-year sales growth in this quarter (23%) actually slowed relative to the previous quarter -- fourth-quarter 2003 revenue growth versus the prior year was 39%.

The growth projections and the valuation are driven by the company's Ugg product line of sheepskin boots. Ugg sales more than tripled this quarter as the boots continue to be a hot fashion item. The key question for investors remains whether the brand is ephemeral or here to stay.

The stock is clearly priced as if the brand is not just a fad. At almost $30, it's trading at a trailing P/E of 37 and 2.3 times sales. That is significantly pricier than industry leadersNike (NYSE: NKE), Reebok (NYSE: RBK), and Timberland (NYSE: TBL), which trade at price-to-sales ratios of 1.7, 0.7, and 1.6, respectively.

Other than Ugg, the business is solid but not spectacular. Revenues are up a more modest 14% excluding Ugg's results. Teva sales continue to be strong compared to recent years, but investors must keep in mind that this is a brand that is still rebounding. Full-year sales of Teva in 2003 were $73 million, which is up from the two previous years but still down significantly from 1999 sales of $81 million. And the company's third product line, Simple, continues to struggle. Sales were down almost 40% this quarter.

Most concerning to investors is that while company executives talk up the stock, they are at the same time preparing to sell a significant number of shares. The company recently announced a secondary offering of 1.5 million shares by the company and 2 million shares by company executives, including the CEO. If insiders truly believed in the long-term prospects of their brands, they would be holding on to their shares, not selling them.

All of this only increases my concerns about the valuation of this stock. In February, I argued that the company was overvalued at a stock price of around $25. As the price now approaches $30, my belief is that based on fundamentals, the stock is even more overpriced and risky than it was a few months ago.

To long-term investors, I reiterate -- only more strongly -- the opinion I gave last quarter on this stock: Steer clear.

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Fool contributor Salim Haji lives in Denver, Colo., and does not own shares in any of the companies mentioned. He does, however, own a pair of Teva sandals.