After the closing bell last Thursday, Deckers Outdoor (NASDAQ:DECK) announced a licensing agreement with privately held Fownes Brothers. Under the terms of the agreement, Fownes will design, manufacture, and market Ugg-brand, cold-weather accessories such as gloves, hats, and scarves. The two will get cozy through January 2008, with an option for three more years if there is a hand-in-glove fit.
I can't help but feel partially responsible for this. You see, I put all of my prognostication skills together when I said, "I see gloves and hats in the future," in September's Hidden Gems. Clearly, my instincts are finely honed. (Yeah, I missed the scarves.)
Product extensions, when done correctly, are a great value-building strategy. They lengthen the period of high growth, which is method three of the four basic ways to increase value. I believe Ugg gloves, hats, and scarves accompany the boots and handbags very nicely. Think about it. As long as the colors are complementary, I could see ladies buying multiple pairs of gloves, hats, and scarves to mix and match with their boots and handbags.
I think this deal is likely to strengthen the brand. Brands are defined by the experiences they create. I can imagine a woman walking down Fifth Avenue in New York on a wintry afternoon. The wind is blowing cold from the north, but her feet, hands, and head are cradled in warmth against her Ugg apparel. You don't think Nike (NYSE:NKE) wants you to feel like a champion every time you step up to compete? You don't think Coke (NYSE:KO) wants you to be refreshed no matter what season or what time of day you knock one back? Ugg wants women to feel the difference sheepskin products make, and gloves, hats, and scarves are more ways to do it.
Product licensing also fits with Deckers' style. Deckers outsources manufacturing, so it has experience managing vendor quality. It has also outsourced design jobs, but to my knowledge, it has not outsourced marketing. Gloves, hats, and scarves are Fownes' specialty. So Deckers utilizes the expertise of Fownes and collects royalty payments. Sounds like a page out of the Cherokee Group (NASDAQ:CHKE) playbook.
One thing makes me wonder, though. The analyst at RBC Capital Markets recently downgraded the stock, noting supply-chain constraints with dyeing the sheepskin. If that process is causing 60-day delays for boots and handbags, how long will the delays be for higher volumes of products like gloves, hats, and scarves? Hopefully, someone has considered that.
So what's the right price to buy? Shoot, I don't know what the "right" price to buy is. I have a recommendation, but you'll have to try Hidden Gems for 30 days to find out what I think it is. Don't worry, the trial is free. And I bet you'll be so impressed, you'll want to sign up to see what other superior investment ideas Tom Gardner recommends.
Fool contributor David Meier owns shares of Nike and will enjoy a Diet Coke tomorrow afternoon with lunch. He does not own shares in any other company mentioned.
