Is UGG's really that uggly???

Is Ugg losing some of its brand cachet?

Discounts on flash-sale site sparks concerns for parent Deckers

By Andria Cheng, MarketWatch

NEW YORK (MarketWatch) — Deckers Outdoor Corp., known best for selling sheepskin boots, has seen its shares lose more than three-fifths of their value since reaching an all-time high of $118 last October, and the stock slumped another 8.7% Tuesday.

At issue are growing concerns about the company’s flagship Ugg brand losing its appeal while grappling with increased sheepskin and labor costs. The brand is crucial for Deckers because it alone generated $1.2 billion of sales, or 87% of Deckers’ total revenue last year.

Ugg classic boots

Goleta, Calif.-based Deckers DECK -8.38%  also has other brands, including Teva and Sanuk sandals.

Yet the red flag over Ugg boots was raised again on Tuesday, after Sterne Agee analyst Sam Poser reported receiving an email alerting him to limited-time sales of in-season, classic Ugg styles in basic neutral colors from flash-sale site BeyondtheRack.com. The analyst added that was the first time he’s seen the boots on sale at such a discount site, and that he called Beyond the Rack to verify the authenticity of the shoes and learned the stock didn’t come from Deckers itself.

“It means some retailers have excess inventory,” Poser said in an interview, noting there were discounts of 15% to 50% off regular prices — including one discounted to $179 from $210. Those shoes are the “stuff people think of when they think of Ugg. This is the first sign of the prices starting to break. It means demand has gone down. Early reads on Ugg sales are not promising [and] bodes poorly for fall sales.”

Deckers didn’t immediately respond to a request seeking comment. The stock was last at $43.82, down 41% so far this year.

Poser already cut his rating on Deckers stock in July to underperform from neutral, citing concerns that the shoe company’s Asian and European sales won’t improve this year and that sales will likely be hurt by higher prices and little innovation in its Ugg Classic category. He said then that he expected inventory to far outpace demand, leading to discounts. Poser also cautioned Deckers could lose its fashion customers to brands such as Michael Kors Holdings Ltd. KORS -2.50%  

“It’s clear to us that the Ugg ‘fashion trend’ has faded,” Poser wrote in a note Tuesday about the brand, which has been worn by celebrities such as Sarah Jessica Parker. “The question remains as to how much of the Ugg business is weather-related and how much is fashion-related.”

“We continue to believe that there are material risks to both guidance and the overall health of the Ugg brand,” he added. “If prices on Classics break down, we believe that the future of the Ugg brand may be at risk.”

Deckers has said the bulk of Ugg business is done in the third and fourth quarters, and that weather has had a greater impact on its business in the past two years.

Retailers’ concerns about demand for Uggs and not being stuck with excess inventory has led to a change in wholesale orders for Ugg, Poser said. Whereas in the past retailers would buy about 70% of their fourth-quarter orders in October and November, because they didn’t want to be short of Uggs to meet demand, this year retailers are only buying 30% to 40% of their orders during the same period, according to the analyst.

Uggs are sold at chains including Nordstrom Inc. JWN -1.97%  and Saks Inc. SKS -1.68%  Wholesale sales have surged to $915.2 million last year from $291.9 million in 2007, the company said in a regulatory filing.

DECK 43.95, -4.02, -8.38%

At a Goldman Sachs presentation earlier this month, Deckers Chief Operating Officer Zohar Ziv said the company is dealing with what he described as a “perfect storm,” where sheepskin prices the past two years rose about 80%, hurting this year’s profit by about $1.40 a share; and by a European downturn that’s hurt retailers across the board. He also cited weather as a concern.

Ziv pointed out that Deckers is broadening its product assortment and decreasing classic styles as a percentage of its total, and that he expects sheepskin prices to come down. Other brands such as Teva and Sanuk are trending well, according to the executive.

Deckers also is still cautious about not overdistributing the brand, he said, and consumer surveys show there’s continued demand for Uggs. “We still think there are significant growth opportunities both domestically and clearly many more internationally,” Ziv commented.

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Comment:

Interesting how the analyst from Stern Agee is critical about Deckers being sold at Beyondtherack.com but then praises Michael Kors.  Look below, Michael Kors watches being sold at Beyondtherack.com on 09/18/2012.   Since I do have an account with beyondtherack.com and I have seen plenty of Michael Kors products offered in the past besides watches, I'll post future Kors sales as they come up in Beyondtherack.com.

Michael Kors