Investors have rekindled their love for Deckers Outdoor (NYSE:DECK), maker of the iconic UGG sheepskin boots, bidding the shares up strongly over the past twelve months. The company had a tough operating year in 2012, as top-line growth slowed sharply and profitability struggled under the weight of a 40% rise in sheepskin prices. In response, Deckers has continued to diversify its product line, a major part of which was the purchase of surfing-inspired footwear brand Sanuk in 2011. However, with over 80% of total sales tied to the UGG brand, are investors jumping the gun with this developing story?
What's the value?
Deckers popularized the sheepskin boot and it is the category's dominant brand, generating over $1 billion in sales in 2012. Deckers also has a strong position in the sport sandal segment through its ownership of the Teva and Sanuk brands. As cracks have started to appear in growth for its trademark sheepskin franchise, Deckers has been broadening its sandal product lines. This includes adding closed-toe and sports training varieties.
In fiscal year 2013, Deckers continues to search for a winning growth formula. It reported a marginal 1% increase in overall product volumes and a larger operating loss versus the prior-year period. The company's results were hurt by lower average prices in its wholesale channel. Prices were down 5.5% as consumers opted for the company's lower priced offerings. In response, Deckers has been slowly moving to increase its control over the sales process through its own store network. It plans to add up to 36 stores globally in the current fiscal year.
More timely opportunities
Given Deckers' still outsized reliance on its fashionable trademark product line, investors might want to consider a more diversified play in the sector. A good alternative would be Steven Madden (NASDAQ:SHOO), a designer of affordably priced shoes for men and women primarily under its Steve Madden, Steven, and Betsey Johnson brands. Like other lifestyle consumer product companies, Steven Madden has also successfully expanded its brand into non-core product areas, including handbags, sunglasses, and sleepwear.
In FY2013, the company has continued its growth trajectory, albeit at a slower pace. This was led by a double-digit revenue gain in its accessories segment. Like Deckers, Steven Madden has seen a leveling off of growth in its wholesale footwear segment. Steven Madden has offset this performance with solid revenue gains in its retail network, the source of roughly 16% of its overall sales. More importantly, the company's profitability continues to rise. This provides strong cash flow for further product development and retail store expansion.
Another alternative that offers even more product diversity and is well positioned for growth in the footwear business is DSW (NYSE:DSW), the national chain of shoe warehouses that offers a per-store selection of roughly 1,500 styles to its value-conscious shoppers. The company benefits from a loyal customer base, no doubt attracted to its simple pricing strategy, with the 20 million members of its loyalty program accounting for 89% of its total sales. In addition, DSW has a profitable secondary business managing in-store shoe departments for select discount retailers which was enhanced by a recent agreement with off-price retailer Loehmann's to manage departments in its 40 store network.
In FY2013, DSW has continued to ride an increase in comparable store sales to higher operating profitability after adjusting for one-time project costs. While comparable sales in the women's product category were negative during the period, the shortfall was offset by gains in the men's and athletic categories. As the current period illustrates, DSW's diversified product assortment allows it to maintain profitable and consistent growth regardless of which designer is currently at the top of the charts, and provides the cash flow for further expansion of its store base.
The bottom line
Investors have been riding Deckers' stock price to gains in 2013. However, the company remains an operational work in process as it tries to increase the breadth of its products at lower price points. Despite a toehold in the athletic footwear arena with its Teva and Sanuk sport sandals, Deckers is overly reliant on its UGG brand for overall financial success. It will also likely continue to experience rising overhead costs as it focuses on expanding its retail store network and lowering its reliance on department stores. As such, investors should take a wait-and-see approach on Deckers and focus on its more value-focused competitors that have larger retail store bases.
Robert Hanley owns shares of DSW. The Motley Fool has no position in any of the stocks mentioned. 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.