The UGG-ly Truth About This Earnings Report

One of the biggest fears of any retailer is having its product wind up as a fad. Heelys (Nasdaq: HLYS  ) , with its wheeled sneakers, and now Crocs (Nasdaq: CROX  ) , with its iconic rubber shoes, have fallen and had difficulty getting back up. Deckers Outdoor (Nasdaq: DECK  ) and the company's well-known UGG brand have thus far avoided the "fad" stigma, but I'd hardly call it a safe bet to succeed.

Shareholders, on the other hand, will probably disagree with me, especially after Deckers' phenomenal earnings report last night. Despite being a pessimist, I have to give credit where credit is due, and Deckers does deserve credit for increasing UGG sales by 47%, international sales by 114%, and net income by 49%. Deckers struggled under the added costs of expanding into Europe and opening its own stand-alone locations, but after two years the fruits of its labor are finally being realized.

"So what isn't to like?" you may be asking. I'd point to the company's overreliance on the UGG brand as both its selling point and its crutch. UGG sales accounted for $376.7 million, or 91% of all sales during the third quarter. With its Teva, Sanuk, and Simple brands only accounting for 9% of total remaining sales, there is a ton of implicit risk built into the stock if consumers grow weary of the UGG brand. A myriad of factors including high unemployment levels, sinking consumer confidence, and even changing fashion trends could very easily disrupt the UGG's dominance.

Plenty of wholesalers have made the transition to brick-and-mortar retailers, including one of my favorite examples, True Religion Apparel (Nasdaq: TRLG  ) . But unlike True Religion, which has a diverse product line, Deckers will need to be reliant on acquisitions to grow its brand portfolio. Spending heavily on acquisitions to diversify its revenue stream, all while material costs rise, could also hamper the company's profit potential.

Lastly we have Deckers valuation relative to its peers:

Company

Price/Book

Forward P/E

Price/Cash Flow

Deckers Outdoor

6.8

19.5

79.1

Nike (NYSE: NKE  )

4.5

16.7

27.5

Steven Madden (Nasdaq: SHOO  )

3.8

14.

18.0

Fossil (Nasdaq: FOSL  )

6.7

20.0

32.8

Source: Morningstar.

Deckers' growth rate clearly keeps it in contention with many of its larger and smaller rivals, but almost 80 times cash flow is a tough pill to swallow regardless of the company's history of growth.

Deckers will need to be careful not to expand too quickly while also focusing on diversifying its brand portfolio if it hopes to keep its stock price anywhere near where it's at now. With so little diversification in its portfolio and a long history of fickle consumer spending habits, I'd personally avoid this stock like the plague.

What's your take on Deckers Outdoor? Do you see a beautiful bargain or an UGG-ly disaster just waiting to happen? Share your thoughts in the comments section below and consider adding Deckers Outdoor to your free and personalized watchlist to keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has no sense of fashion but knows a scary stock when he sees one. You can follow him on CAPS under the screen name TMFUltraLong and on Twitter where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Nike and Fossil, creating a diagonal call position in Nike, and, in a separate newsletter, shorting shares of Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2011, at 11:53 PM, blackhawk2011 wrote:

    Very insightful article. I am also bothered by the

    huge increase in inventory of 80%. The company seemed to say that the increase was in part due to future expected orders from Europe, but then stated that Europe was still subject to uncertainty. Also, the increase in intangible assets by $187 million raises a question. They said it was primarily related to the Sanuk acquisition, but the payment there was only about $125 million.If so, what is the other $62 million attributable to. Finally, your point on cash flow is excellent--if they're selling so much, why did short term borrowings go from zero to $45 million. Their cash seems to be going back into inventory and intangibles at a significant rate.

  • Report this Comment On October 29, 2011, at 8:46 AM, prginww wrote:

    Deckers & UGG'S are here to stay.Here in Florida the stores don't have inventory on hand.When people sell this stock i will by more.DancingRJD

  • Report this Comment On October 31, 2011, at 11:14 PM, LVS666 wrote:

    How do you still have a job after writing this article? I hope you put your life saving into a short position on $DECK. I suspect that I will soon see you matching with the Occupy Sesame Street crowd. You will be grouch, the poorest, smelliest MF on Sesame Street.

    Love,

    LVS-666

  • Report this Comment On October 31, 2011, at 11:23 PM, LVS666 wrote:

    Deckers put my kids through college. The last time I listened to a writer at the Motley Fool I lost half my net worth on Sears calls.

  • Report this Comment On September 11, 2012, at 4:35 PM, FundamentalsMan wrote:

    I currently like this company but it looks like this was a timely article. I suspect those who commented thus far wish they could take them back.

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