Shares of Deckers Outdoor Corp. climbed Thursday after an analyst raised his price target on the company's stock, saying he expects its costs for the sheepskin used in Ugg boots is coming down.
THE SPARK: Jefferies analyst Randal Konik on Thursday raised his price target on the company's stock to $100 from $65 on the belief that its sheepskin costs — a key raw material for Deckers — may moderating, due to lower market prices and changes to the design of some of its Ugg boots.
THE BIG PICTURE: Deckers has been struggling for some time with its Ugg boot brand. In addition to concerns that consumer appetite for the once ubiquitous boot is fading, the company has also faced soaring costs to make the boot over the past few years.
Deckers recently raised the price of Ugg boots to offset big increases in the price of sheepskin and other raw materials. The company said those price increases hurt its sales, and in late October it said it had decided to lower the prices on some classic Ugg styles.
According to analysts, the company is also considering a new "Ugg Pure" concept that could cut its costs. Pure is a wool pile process that replicates the feel of the fur part of its boots and would be used primarily in sock liners and foot beds.
Sheepskin is the most important raw material for company as the bulk of its revenue comes from the Ugg brand.
THE ANALYSIS: The cost of sheepskin soared over the past two years, up about 80 percent by Konik's measure. He said a larger sheep herd and stabilized wool prices are sending market prices back down. In turn, the company was able to lock in its contracts for 2013, which should bring its sheepskin costs should be down 11 percent for the year.
He also said that the new Ugg Pure material, which is 100 percent wool but does not have the sheepskin still attached to it, should make the company less dependent on sheepskin. UGG Pure has an improved feel and consistency than the lower grade sheepskin it will be replacing in UGG products.
In addition, the analyst said he believes the brand is far from dead and is the leader in comfort winter boots.
THE SHARES: Shares jumped $3.69, or 7 percent, to $56.27 in afternoon trading Thursday. Over the past 52 weeks, the company's shares have traded between $28.53 and $69.80.