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2 Reasons to Sell Deckers Outdoor Corp.?

By Brian Stoffel – Mar 14, 2014 at 10:31AM

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Are the days numbered for this maker of Ugg-branded boots?

It was two years ago, March 2012, when Deckers Outdoor Corp. (DECK 1.64%) and I came together. The maker of Ugg-branded boots and shoes -- as well as Teva sandals -- had fallen on tough times and the stock had fallen. I saw an opportunity.

Since then, however, Deckers has been a serial underperformer. While the broader market has returned 32% since that fateful day, Decker's has only notched a 10% gain. Some might say that's respectable enough, but I think it raises the question: Is it time to sell Deckers?

Source: Ugg. 

Every year, once a year, I review my family's stock portfolio to make sure we are comfortable with all of our holdings. I find that this once-per-year regimen is often enough to force me to stay on top of all of our investments, but not too often to cause me to worry about short-term issues and lose sight of the bigger picture.

Today, I'll be looking at two of the best reasons to consider selling Deckers shares and my take on those reasons.

This is fashion, and whims change at the drop of a hat
Sure enough, it already seems to many as if the company's Ugg products have fallen out of favor. During 2013, sales of Uggs accounted for 83% of all revenues. In other words, Uggs are the lifeline for the company. So when Deckers forecast sales growth of 6% -- versus a consensus estimate of 12% growth -- for the first quarter of 2014, many saw this as a sign that Uggs were losing popularity.

Indeed, sales of Ugg shoes through the wholesale channel have fallen 11% since peaking in 2011. And with Teva and Sanuk shoes accounting for such a small portion of Deckers' sales, this could be a seriously disturbing trend for shareholders.

This doesn't quite tell the whole story, however. After doing a little digging, I was surprised to find out the Ugg boots have been around for more than 35 years. They represent what started as a fashion trend, but have morphed into a staple product to own for those living in colder climates. And since the company has started to offer up other Ugg products, like slippers and shoes for both men and women, it is broadening its base.

In reality, the reason wholesale revenue for Uggs has fallen isn't because it's losing the fashion contest. Instead, it's because more Uggs are being sold through company-owned retail stores and the Deckers' e-commerce website. When you add all of these together, you see that Uggs have never been more popular.

Source: SEC filings, sales in millions.

While the slight dip in Ugg sales in 2012 is a little alarming, it's clear that the product has staying power. 

Looking at the company's other lines of shoes, though Teva's sales haven't grown much lately, the continued success of Sanuk shoes could provide meaningful revenue a few years down the line.

Source: SEC filings, sales in millions.

Revenue growth is slowing
Some bears have a point here. Sales of Uggs are certainly stable, but they're not growing at eye-popping rates anymore. And even though Sanuk shoes look to be doing better, they are a very small portion of the company's overall revenue pie.

Given such trends, the company's stock, which trades at 17 times earnings, looks to be priced for perfection.

While revenue might not be growing, however, earnings could be. Deckers is in the middle of a transition now. Instead of selling its shoes to retailers for a decent margin, it's selling its products directly to the customer for a great margin. That means that even if sales growth isn't explosive, earnings growth could be.

As it stands right now, Deckers has 80 Ugg concept stores and 33 Ugg outlet stores worldwide. That number will only grow moving forward. While the company will have to spend some serious cash to get there, it could very easily pay off in the long run.

With e-commerce adding another high-margin line of sales and free cash flow having grown by 78% last year alone, these two reasons aren't enough to change my mind.

I think I'm going to be just fine holding on to my shares of Deckers.

Brian Stoffel owns shares of Deckers Outdoor. The Motley Fool has no position in any of the stocks mentioned. 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.

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