Is the Ugh Off of Uggs? One Former Bear Now Likes Decker Stock

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UGG boots may be one of the longest-lasting women’s fashion trends since the corset, outlasting even the pashmina (that 1990s darling) as a must-own clothing item. But in the last year or so, Decker Outdoor Corp.’s (DECK), manufacturers of these iconic clunky sheepskin boots, has seen its share price fall from grace, as seen in a stock chart, as everything from a warm winter to higher costs have eaten into its revenues and profits.

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DECK Chart

While the share price has recovered some ground in recent months, it is becoming clear that UGG boots don’t offer quite the same cachet to their wearers that they once did. It isn’t just because last winter was warm or that shoppers figured that they wouldn’t need a new pair of Uggs this winter, either, that sales of the boots tumbled 12% in the most recent quarter. Justin Bieber publicly confessed his affection for Uggs by posting a picture of himself wearing the brand’s slippers, and made Uggs one of the most searched-for consumer items of the Thanksgiving weekend, ranking alongside the Kindle Fire and the iPad. Still, an attempt by the company to raise prices to offset a jump in the cost of sheepskin didn’t work.

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DECK Gross Profit Margin Quarterly Chart

Still, the company’s harshest critics on Wall Street, the analysts at Sterne Agee, who as recently as last September trimmed their stock price target for the company based on what they calculated was a 30% decline in Ugg sales during July and August, have turned more bullish of late. In early December, the Sterne Agee analysts cut their estimate for earnings for the 2012 fiscal year, but boosted their outlook for the 2013 fiscal year’s earnings to $3.78 a share from $3.31 previously, suggesting that a $65 price target is appropriate. “Even if fourth-quarter UGG revenues are down 20%,” they wrote, “those sales would exceed any other brand's fourth-quarter sales at the vast majority of retailers that carry the UGG brand.”

Not everyone shares that optimism. Pointing to what they believe are lackluster holiday sales, Canaccord Genuity analysts argue that “the post-Christmas cold snap was too little too late to spur a rebound in sales. And as YCharts' Amy Merrick noted on December 20, Decker needs a second act as college students seem to have moved on from Uggs. Bears have a very different price target on the stock: only $35 a share.

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It may not be time to write off the company or the Ugg brand just yet, however, unless you happen to take such a bearish view of the valuation gap that has opened up between Decker and the S&P 500 that you believe it will never again narrow.

There is one wild card in play here. Deckers plans to more than double the number of its own retail stores, as part of a plan to make the company less reliant on providing goods wholesale to retailers who may be unwilling to stock untested or unproven new models or ranges. Deckers is more than just Ugg sheepskin boots; the company sells other Ugg products, including sandals and sneakers, and other brands. If the company can pull this off, there is a chance that other of its products will bask in the glow of the kind of love that has been showered on the Ugg boots over the years. True, the expansion plan will require capital, a successful marketing strategy and a reasonable amount of luck, but this may be the single biggest reason to snap up Deckers shares at their current bargain prices.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.


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