DECK the Halls with Uggs

Sheepskin boots for surfers in California become one of the hottest fads in 2003 when Oprah put them on her "best of" list. As she has done so many times in the past, Oprah brought national attention to the boot maker, known as Uggs. Soon to follow were the celebrity sightings and before you knew it, the 4-lettter word was a household name for teenagers, kids, mothers, and the business women that dressed trendy on the weekends.

Just as so many fads disappear after a few years, it was obvious Uggs could not withstand the test of time. Or could it?

The demand for Uggs, which is owned by Australian shoe company Deckers Outdoor (DECK), has not only kept its pace, but it has increased over the last four holiday seasons. The success of Uggs has helped DECK move from $3 in 2003 to a recent high of $160. A $10,000 investment would have netted you over a half million dollars in less than 5 years.

Every holiday season I tell myself, this is the end for Uggs. There is no way people will continue to spend $150 for sheepskin boots that were supposed to be a short-term fad. And each year I am proven wrong. If you do not believe me, look at the numbers.

In 2003, Uggs generated $37 million in sales. This year that number is expected to top $300 million and by 2012 analysts believe it could reach $750 million. The company expects a large portion of that growth to come from international sales, which currently account for a minimal amount of revenue. In November the company announced its most recent earnings report and cited an 86% increase in net income with revenue rising 57%.

Best Research Strategy

One of the most reliable research strategies can be done be every investor. In Uggs case, simply go to the malls and see if the boots are selling as well as the headlines read. If you did that as I did, you will be amazed at how quickly they are flying off the shelves. For example, Nordstrom (JWN) cannot keep them in stock; the demand is so high, the company has created an "Uggs" hotline to call and find out when the next shipment will arrive. This is the fifth Christmas season for Uggs since Oprah granted them the "best of" status and they continue to outperform.

Compared with other recent footwear fads like Crocs (CROX) and Heelys (HLYS), Deckers has been able to sustain the steady growth of the stock price without many potholes along the way. The stock is currently trading just below an all-time high and is up 160% for the year. CROX is up 88% for the year, but is nearly 50% off its October high. HLYS's run as a fad appears to have crashed and burn; the stock is down 80% this year.

Keep in mind that DECK also sells the Teva brand sandals and Simple shoes. The two combined only account for approximately 15% of sales, but some changes to the Simple strategy will help the company meet its growth numbers over the next five years. It is not often a footwear company that began as a fad becomes a long-term winner for investors, but DECK has clearly proven that theory wrong. When you see women and men wearing sheepskin boots on a hot summer day, it is apparent the company is poised for higher prices.

Disclosure: Firm owns shares of Nordstrom and Crocs

Comments

[the teller]

DECK is an American company not Australian. but the boots you talk about first appeared on the beaches of Australia, not California. You are in CROX and JWN and you can't tell a good product backed by good brand and good management from a fad? DECK's stock price growth was anything but steady. It was a freaking roller coaster. ask anyone who had the guts to hold DECK in the last 5 years.