Uggs still selling comfortably
The cozy boots are a boon for parent company Decker, but is a hot fad enough to hold up the stock?
NEW YORK (Fortune) -- For those who thought the Ugg craze was just a fad, think again. It looks like we're stuck with those fury, sheepskin boots, like it or not.
In a holiday season that has lacked the sizzle of must-have fashion, Ugg boots continue to be a runaway success.
"There doesn't seem to be a fashion element that is working this year," said Jennifer Black, a retail analyst, who regularly scours shopping malls for trends. "The one exception is Uggs."
Billed as a quickie fashion fix courtesy of the California surf culture, Uggs continue to defy the skeptics. Sales are expected to top $300 million this year, up from $37 million in 2003. Despite a slew of knock-offs, which tend to cheapen a brand's image, Ugg boots remain a status symbol. Oprah Winfrey once again named Uggs as one of the best holiday gifts this year.
"Ugg boots and slippers are this season's must-have items, according to every retailer and wholesaler we met with at [the New York Shoe Show]," wrote analyst Sam Poser of Sterne Agee in a recent research note.
That's good news for shareholders of Deckers Outdoor Corp. (DECK), the parent of Ugg Australia, Teva athletic sandals and the Simple shoe brand. Deckers shares are up more than two-fold in the past 12 months, despite a broader slump in shoe stocks, which have suffered from a lack of fresh fashion.
Now, analysts are predicting even more upside for Deckers' stock. The reason? While other brands have been heavily discounted this holiday season, Ugg boots, which can cost upward of $200 a pair, are selling at full-price in most major department and specialty stores. More full-price sales mean fatter profits for the all-important fourth quarter.
In addition, early signs indicate that the first quarter of 2008 is getting off to a strong start. "Retailers are aggressively planning the Ugg business for spring," Poser wrote in his note.
As if that weren't enough reason to be a Deckers fan, here's one more: The company has more than $3 a share in cash, money that it could use for acquisitions.
Deckers bought Ugg Australia in 1995, when the boots were still largely worn by surfers, who traded in their flip-flops in the cold weather for the comfy shoes. Uggs took off a few years ago, when starlets and socialites such as Pamela Anderson and Paris Hilton started wearing the boots, often and inexplicably paired with miniskirts, a trend that is best forgotten.
Many observers predicted the Uggs craze would die along with that fashion fad, but the brand survived and branched into new categories, including sandals, espadrilles and clogs for the warm weather. This winter saw a slew of new styles, including lace ups and crochet boots.
For the moment, Uggs appear to be in tune with the cultural zeitgeist. Maybe it's the uncertain economic environment, or the mortgage crisis or the perception that times are going to get tougher, but "right now consumers are seeking out comfort," said Marshal Cohen, chief industry analyst with the NPD Group, a market research firm. Anyone who has ever slipped a foot inside a warm, cozy Ugg boot cannot dispute the comfort factor.
As with any hot stock, it can turn cold in an instant. That was the case with Crocs (CROX), a maker of rubberized clogs that are also known for their comfort. The company's stock dropped 36 percent in a single day last month when an earnings report revealed bloated inventory and slowing growth.
Deckers, for all its potential upside, is not without its challenges. The company has so far failed to repeat the success of Uggs with its other brands, the Teva athletic sandals and the Simple line of shoes, which bill themselves as echo-friendly. But the Ugg brand still accounts for 88 percent of Deckers revenue, which totaled $304 million last year.
But Deckers can't rely on Uggs to produce outsized sales gains forever. In fact, the pace of growth is expected to slow next year to 22 percent, down from nearly 60 percent in 2007, according to Jeff Mintz an analyst with Wedbush Morgan Securities.
One kicker for investors is the potential for future deals. Deckers is said to be actively seeking acquisitions, but there appear to be few candidates that fit its criteria, which include the ability to grow a niche label into a lifestyle brand. It would seem that Deckers is on the hunt for the next Ugg - and those are some big shoes to fill. 
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