Sometimes investors need to face the truth, even if the truth is downright ugly.
This was the case Friday following Deckers Outdoor's (Nasdaq: DECK ) fourth-quarter results and fiscal 2012 forecast, which can be described only as UGG-ly!
The maker of the popular UGG boots posted a 40% rise in both sales and profits. Its dominant UGG brand grew sales by 38%, while its Teva brand saw sales rise by 46%. International sales provided the biggest boost, rising by 82%. These results actually squeaked by Wall Street's expectations. It was the company's 2012 guidance that ripped the soles right out from investors' feet.
In the upcoming year, Deckers anticipates that a combination of rising sheepskin prices and higher costs associated with opening new stores will affect its bottom line. In the first quarter, Deckers anticipates EPS of $0.25 and full-year EPS of $5.07. Both fall well short of the $0.63 and $5.82, respectively, that analysts had expected.
Despite the 13% haircut last week, there are still three visible reasons I see to avoid the stock.
1. Brand liability
This is an argument you'll see me make a lot, but Deckers is far too reliant on its UGG brand to drive growth. Based on its fourth-quarter results, UGG accounted for 87% of all revenue. Relying on one product to drive growth is great when that product is performing well, but a lack of diversity can also cripple the company when the tide changes.
I made a similar argument with regards to Zynga (Nasdaq: ZNGA ) recently. I understand Deckers and Zynga are about as apples-and-oranges as you can get, but with Zynga relying on Facebook for about 90% of its revenue, it wouldn't take much -- perhaps a readjusting of its contract or a change in consumer gaming habits -- to put a serious monkey wrench in its revenue stream.
2. Uncontrollable costs
This isn't Deckers' first rodeo when it comes to higher costs cutting into its bottom line. For the last couple of years the high cost of expanding into Europe has occasionally sunk its forward guidance. Another aspect of Deckers' business is that many of its input costs, like sheepskin, are completely out of its control.
Similarly, Crocs (Nasdaq: CROX ) also fell victim to weak first-quarter guidance on the same day as Deckers Outdoor predominantly because of its aggressive overseas expansion, but also because of rising expenses. Even though Crocs says it has more than 300 products, its products remain very centralized around the design that made Crocs popular in the first place.
Not surprisingly, Nike (NYSE: NKE ) has also had to deal with rising input costs. But because of a wide variety of products and a loyal customer base, it has had no trouble in passing along price increases to consumers.
3. Fickle consumer trends
No one likes this argument, but I'm going to put it out there again, nonetheless -- UGG boots are at risk of becoming a fad. Consumer trends are incredibly difficult to predict. Styles change with the season, and the willingness of consumers to spend their money can practically change overnight.
Gap (NYSE: GPS ) has been trying to predict what its customers want for the greater part of a decade without much success, so I have to wonder how much longer a company like Deckers can continue to ride its UGG boot to success.
The popularity of the UGG brand continues to surprise even me. I do, however, feel that Deckers' overreliance on the brand coupled with its aggressive expansion could yield a few more subpar quarters to come. Since making a CAPScall of underperform on Deckers, I am up 42%, and I don't see any reason why this call won't continue to move in that direction.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. Shoe shopping is his ultimate kryptonite. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Gap. Motley Fool newsletter services have recommended buying shares of Deckers Outdoor and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that always fits just right.