For Deckers Outdoor Corp (DECK), it’s Ugg or Bust!

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Deckers Outdoor Corp (NASDAQ:DECK), best known for its Ugg sheepskin boots, has had a rough year. The Goleta, Calif.-based company struggled with rising commodity costs, lower margins and declining sales over the past year, and shares lost half their value as investors fretted over the questionable future popularity of its Ugg boots.

However, the stock finally caught a break after its fourth quarter earnings topped Wall Street expectations and the company projected strong top line growth next year. Is Deckers finally worth a look for bottom-fishing value investors, or is this just another soggy boot caught on the fishing rod?

Fourth Quarter and Guidance

For its fourth quarter, Deckers Outdoor Corp (NASDAQ:DECK) earned $98 million – a 22.9% decline from the prior year quarter. Diluted earnings per share came in at $2.77 per share, down from $3.18 per share a year earlier, but still topped the Thomson Reuters consensus of $2.61.

Revenue rose 2.2% to $617.3 million, missing the analyst estimate of $623.03 million.

For the full year, Deckers’ profit was down 36.1% from the prior year to $129 million. Revenue was approximately the same at $1.4 billion.

While those numbers looked mediocre, it was the company’s guidance – which forecast sales growth of 7% in 2013 – that propelled the stock to rally 15% on March 1.

Sales Growth

Deckers Outdoor Corp (NASDAQ:DECK) reported more robust sales growth abroad than back at home. Its domestic sales edged up 2.1% to $446.7 million, while international sales surged 15.6% to $170.5 million.

Retail sales rose 37% to $135.5 million, but same-store sales declined 3.4%. However, the company fared better online, with e-commerce sales rising 31% to $87.6 million.

Deckers intends to open over 100 company-owned stores globally over the next three years. This is roughly in line with its prior expansion effort in fiscal 2012, when it added 30 new stores.

Ugg or Bust!

During the fourth quarter, Decker’s Ugg sheepskin boots – its best-selling product – generated $584 million, or 96.4% of the company’s total revenue.

At this rate, Deckers should change its ticker from DECK to UGG since it has become completely dependent on a single brand. Total revenue from Ugg sales rose 2.9% from the prior year quarter, which the company attributed to a colder winter season.

A look at Deckers’ revenue quarterly growth over the past five years reveals the cyclical importance of colder seasons – making the fourth quarter the company’s most important reporting period.

DECK Revenue Quarterly data by YCharts

However, analysts have expressed concern that Ugg is losing its exclusive appeal due to its widespread availability at discount retailers such as Marshalls, and from a variety of discount e-commerce sites.

Other Brands

Decker’s other brands, though dwarfed by Ugg’s sales, showed mixed signs of growth during the fourth quarter.

Sanuk, its flip-flops and sandals brand, grew sales 39.2% to $15.3 million. Deckers expects Sanuk sales to rise 15% during the year.

But Teva, which sells sandals, hiking shoes and water shoes, posted a 29.5% sales decline to $13.7 million.

Shrinking Margins

Due to Deckers’ heavy dependence on Ugg, rising costs for sheepskin and other raw materials are a major threat to the company’s margins. Throughout the first half of the year, Deckers raised prices on its Ugg boots to offset those rising costs – resulting in a decline in sales volume.

Last fall, the company cut the cost of the boots to revive sales. As a result, gross margin dropped from 51.0% to 46.3%.

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