Every Parent’s Fear: Those Pricey Uggs You Bought Your Daughter?

Deckers (DECK) is struggling to find its second act.

The maker of the once-ubiquitous Ugg boots rode the trend too long and now faces a wave of customer defections. College students, formerly a mainstay of the Ugg business, are wearing sleek riding boots to football tailgates. Even as Uggs lose cachet, knock-offs are proliferating: On Wednesday, style arbiter J.Crew was touting Minnetonka shearling baby booties for $29.95 -- 40% less than nearly identical baby Uggs. Last month the Guardian newspaper suggested using discarded Uggs for weasel beds.

Deckers startled investors in October by reporting a 9% decline in third-quarter sales and a 31% drop in net income, blaming a slowdown in Uggs, which accounted for a whopping 88% of total sales. Deckers’ share price has fallen nearly 60% over the past year, making for a very unfashionable stock chart:

DECK Chart

DECK data by YCharts

The company now admits customers balked when it raised its already-high boot prices above $200 to compensate for a surge in sheepskin costs. And warm weather for the second winter in a row has left an inventory overhang. This week Nordstrom (JWN), an important Deckers customer, marked down Uggs and other expensive boots by one-third or more to clear them out.

Another headwind for Deckers: Retail forecaster ShopperTrak says the holiday shopping season lost steam after Black Friday, the Associated Press reported. On Wednesday, ShopperTrak said it now expects holiday retail sales to increase 2.5%, well below its September prediction of a 3.3% gain.

Deckers has plenty of short-term problems, but its long-term trends are more worrisome. Brands like Ugg -- whose very name captures the so-ugly-they’re-cute vibe -- inevitably reach a tipping point where sloppy-chic becomes just plain sloppy. The same thing happened earlier this decade to plastic Crocs shoes and Juicy Couture velour tracksuits. Neither Crocs (CROX) nor Juicy owner Fifth & Pacific Companies (FNP) has been able to build on the success of the original fads:

Deckers is trying to broaden its product lines. It enlisted Patriots quarterback Tom Brady for holiday advertising and created spring and summer shoes that don’t leave feet sweltering. It’s also gone shopping for other brands.

Last year the company bought Sanuk, a niche brand of sandals and Toms-like moccasins, but it would take a lot of flip-flops to replace one lost Ugg sale. This year, Deckers purchased Hoka One One, a fledgling maker of goofy-looking running shoes that earn good reviews from ultra-runners. Hokas’ $140-to-$170 price range could help make up for slowing Ugg sales. But athletic shoes are a crowded field, with heavily-advertised competitors like Nike (NKE), New Balance and Brooks, and runners have complained about shelling out so much for a shoe they’ll replace in six months.

The brands that reinvent themselves tend to be stodgy but storied names with long histories and a reputation for quality, such as Coach (COH) and Burberry Group. And even those well-managed luxury retailers have struggled recently with slow economies worldwide:

DECK Chart

DECK data by YCharts

Some analysts have suggested jumping into Deckers because the stock is relatively cheap, trading at a roughly PE ratio of about 9, while rivals Nike and Steven Madden (SHOO) are roughly twice as costly.

DECK PE Ratio TTM Chart

DECK PE Ratio TTM data by YCharts

But Nike and Steven Madden have a broad product range, while Deckers is still a one-note business. The markdown on Deckers shares seems justified until -- or unless -- it can find a long-term solution to its sales woes.

Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at editor@ycharts.com.

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