Not long ago, investors feared getting decked by Deckers (NASDAQ:DECK). On Tuesday, the company's fourth-quarter earnings apparently assuaged some of those concerns. The report was welcome news for followers of this footwear concern -- the name behind Ugg boots and Teva sandals -- but it did leave several important questions dangling.
Deckers reported a 31% fourth-quarter profit increase to $12.1 million, or $0.94 per share. Sales increased 23% to $91 million, based on strength from the Ugg line. Net sales of Uggs increased 30% in the quarter, while sales of the Teva brand drooped slightly (not too surprising, perhaps, since sandals aren't usually a hot winter item). Investors will be happy to learn that gross margin increased to 40.6% from 38.9% on a year-over-year basis, and that the company seems to have gotten its inventory issues under control. Although inventories increased only 10% year over year, Deckers was careful to point out that they decreased 50% from the September quarter, reflecting strong holiday sales.
This Motley Fool Hidden Gems selection has had an interesting year. Last spring, the stock got nailed when it released lower guidance. Even recently, things still looked pretty shaky. But Deckers' strong sales lately haven't eliminated its risk; the company's reliance on the Ugg brand to stay afloat leaves the company vulnerable to ever-changing fashion trends.
Indeed, the boost in Deckers' current quarter may stem partly from Uggs' appearance on Oprah Winfrey's "Favorite Things" episode back in late November. Most of us know that Oprah's word is enough to incite fairly rabid consumer interest, launching books as obscure as Tolstoy's Anna Karenina to the pinnacle of the best-seller lists; her endorsement of Uggs was a big help in making the boots a must-have holiday gift.
If you glance at this chart, you'll see that Deckers has had quite a roller-coaster year, vacillating between stock market trend-setter and financial fashion victim. I'm concerned about the cyclical patterns in Deckers' product lines, and what will happen when the Oprah effect wears off for Uggs. Although Deckers' shares are trading at more reasonable multiples than they have in the past, investors should remember that the company's trendy brands always face the inherent risks of fickle fashion retail. Fools should keep a careful eye on management's attempts to reposition the footwear brands for greater strength and staying power.
Deckers is a Motley Fool Hidden Gems selection. If you're interested in finding great investment ideas in small-cap companies, join Tom Gardner and his team of analysts by signing up for a 30-day free trial.
Alyce Lomax does not own shares of Deckers.
