Shares of Deckers Outdoor (NASDAQ:DECK) continue their upward trajectory, thanks to the popularity of UGG sheepskin footwear. UGG has proven extremely popular for a few years now, but I can't help wonder if investors are playing a game of musical chairs by investing in the name.
Looks like others have already come to a similar conclusion. After accruing some "stupendous gains" in the stock, advisors Tom Gardner and Bill Mann removed the name from their Hidden Gems recommendation list late last year. Their concern wasn't based on the current valuation, as it is very reasonable right now, but on fears that if the UGG music suddenly stops, earnings could plummet, meaning the company was being valued off its peak earnings potential.
Their concern also centered on Deckers' other brands. Its Teva sandals are still struggling and saw a 6% decrease in sales for 2006, and Simple Brand sales, though doing well, only accounted for about 4% of last year's total sales. They may have been more inclined to hold on to Deckers had it possessed other brands to fall back on should UGG's trends turn south, but as it stands currently, luxury sheepskin accounts for close to 70% of total sales.
As I recently highlighted, dependency on only one key brand can turn out badly for investors. Shoe rival K-Swiss (NASDAQ:KSWS) is hurting as sales of its Classic sneaker, which account for nearly 70% of its sales, are falling in its primary domestic market. Investors who bought in at the highs are almost 30% poorer, with another difficult year on the way.
In contrast, more diversified footwear providers such as Skechers (NYSE:SKX) and Steve Madden (NASDAQ:SHOO) are benefiting from a number of popular brands sold to women and men alike. There's also Nike (NYSE:NKE), which has the most product and geographical breadth of any shoe firm out there, not to mention the scale to lean on suppliers and offset the faddish fluctuations that come with operating in a fashion-based industry.
The fact that Deckers hasn't been able to turn around Teva may indicate that UGGs' popularity is due as much to luck as to management's ability to scientifically develop a successful brand. That doesn't mean UGGs won't continue to be a hit, or that Deckers' shares won't continue to run, but eventually I suspect the music will change. Whether it stops is anyone's guess, but at some point it will at least become harder to hear, and that won't be good for investors trying to find a chair.
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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
