June 5, 2008: 6:04 AM EDT
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The shoe that won't quit

The remarkable longevity of the Ugg boot is helping Deckers maintain its rapid growth.

By Suzanne Kapner, writer

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(Fortune Magazine) -- I finally decided to take the plunge this past winter and buy a pair of Uggs. I had initially dismissed the sheepskin boots, favored by celebrities such as Britney Spears and Jessica Simpson, as a fad and expected them to go the way of prairie dresses. Instead, several years into the craze, Uggs' popularity showed no sign of ebbing. Not just for snow bunnies anymore, Uggs are becoming a shoe for all seasons (check out the new sandals for spring). And the comfort factor seemed undeniable. After years of squeezing my feet into pointy-toed stilettos, the very thought of those furry boots was seductive. But when I got around to shopping for my Uggs in late January, the style that I wanted was sold out in all the stores in my area.

The scarcity factor was not a glitch in the supply chain, but rather a carefully calibrated strategy by Ugg parent Deckers Outdoor (DECK) that is one of the big reasons behind the brand's success. Deckers tightly controls distribution to ensure that supply does not outstrip demand by operating just three freestanding Ugg stores and selling to a limited number of department and specialty chains. To understand the importance of that strategy, consider the fate of once red-hot Crocs, the maker of the colorful clogs. Crocs flooded the market, selling its shoes in its own freestanding stores and through a broad spectrum of third-party retailers. The oversupply tarnished the brand. Crocs (CROX) shares are down 85% from their recent high of $75 in late October.

While other shoe companies have stumbled through the current rough economic patch, Deckers has continued to post the kind of numbers that helped it secure spot No. 98 on our 2007 list of Fastest-Growing Companies. Earnings have exceeded analysts' estimates in each of the past 12 quarters. Ugg sales totaled $348 million in 2007, up from $37 million in 2003. And the outlook is promising, with product extensions like slippers and apparel, and a budding overseas business to boost growth. Ugg sales surged 84% in the first quarter, and anticipation of continued strength in the brand led Deckers to lift its 2008 earnings and revenue guidance in late April. The company now expects to earn roughly $6.43 a share on revenue of $588 million, compared with previous guidance of around $6.07 a share on revenue of $561 million. The stock has soared 44% since dipping below $92 in mid-March.

Tight supply strategy

But fast-moving stocks can be risky. "If Deckers ever opened up the supply of Uggs to meet demand, sales would shoot up like a rocket, but they'd come back down just as fast," says Sam Poser of research firm Sterne Agee. Any Ugg missteps would be detrimental to Deckers, given that its other businesses are either in turnaround mode or too small to pick up the slack. Teva, the company's second-largest brand by revenue, is attempting to regain a foothold with its rugged sandals, but new management and increased investment in R&D have yet to show a sizable payoff. Its other two brands, Simple, known for eco-friendly sneakers, and the newly acquired Tsubo, which marries style and comfort with a specially cushioned sole, are not expected to have a material impact on sales or earnings for at least five years, according to Wedbush Morgan Securities analyst Jeff Mintz.

With Deckers shares trading at 22 times expected 2008 earnings, compared with a footwear industry multiple of 14, there is little room for error. True, Deckers' operating margins and earnings growth are twice the industry average, and the company has no debt and more than $6 a share in cash. But at such a lofty price, all it takes is one false move to send the stock sliding on the proverbial banana peel.  To top of page