The UGG-ly Truth About This Earnings Report

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One of the biggest fears of any retailer is having its product wind up as a fad. Heelys (NAS: HLYS) , with its wheeled sneakers, and now Crocs (NAS: CROX) , with its iconic rubber shoes, have fallen and had difficulty getting back up. Deckers Outdoor (NAS: DECK) and the company's well-known UGG brand have thus far avoided the "fad" stigma, but I'd hardly call it a safe bet to succeed.

Shareholders, on the other hand, will probably disagree with me, especially after Deckers' phenomenal earnings report last night. Despite being a pessimist, I have to give credit where credit is due, and Deckers does deserve credit for increasing UGG sales by 47%, international sales by 114%, and net income by 49%. Deckers struggled under the added costs of expanding into Europe and opening its own stand-alone locations, but after two years the fruits of its labor are finally being realized.

"So what isn't to like?" you may be asking. I'd point to the company's overreliance on the UGG brand as both its selling point and its crutch. UGG sales accounted for $376.7 million, or 91% of all sales during the third quarter. With its Teva, Sanuk, and Simple brands only accounting for 9% of total remaining sales, there is a ton of implicit risk built into the stock if consumers grow weary of the UGG brand. A myriad of factors including high unemployment levels, sinking consumer confidence, and even changing fashion trends could very easily disrupt the UGG's dominance.

Plenty of wholesalers have made the transition to brick-and-mortar retailers, including one of my favorite examples, True Religion Apparel (NAS: TRLG) . But unlike True Religion, which has a diverse product line, Deckers will need to be reliant on acquisitions to grow its brand portfolio. Spending heavily on acquisitions to diversify its revenue stream, all while material costs rise, could also hamper the company's profit potential.

Lastly we have Deckers valuation relative to its peers:

Company

Price/Book

Forward P/E

Price/Cash Flow

Deckers Outdoor

6.8

19.5

79.1

Nike (NYS: NKE)

4.5

16.7

27.5

Steven Madden (NAS: SHOO)

3.8

14.

18.0

Fossil (NAS: FOSL)

6.7

20.0

32.8

Source: Morningstar.

Deckers' growth rate clearly keeps it in contention with many of its larger and smaller rivals, but almost 80 times cash flow is a tough pill to swallow regardless of the company's history of growth.

Deckers will need to be careful not to expand too quickly while also focusing on diversifying its brand portfolio if it hopes to keep its stock price anywhere near where it's at now. With so little diversification in its portfolio and a long history of fickle consumer spending habits, I'd personally avoid this stock like the plague.

What's your take on Deckers Outdoor? Do you see a beautiful bargain or an UGG-ly disaster just waiting to happen? Share your thoughts in the comments section below and consider adding Deckers Outdoor to your free and personalized watchlist to keep up on the latest news with the company.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has no sense of fashion but knows a scary stock when he sees one. You can follow him on CAPS under the screen name TMFUltraLong and on Twitter where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Nike and Fossil, creating a diagonal call position in Nike, and, in a separate newsletter, shorting shares of Fossil. Try any of our Foolish newsletter services free for 30 days. 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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