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WIKI ANALYSIS
Deckers Outdoor Corporation (DECK) makes niche footwear, such as sport sandals and luxury sheepskins. Like most clothing manufacturers, Decker's is subject to both the fickle fashion tastes of its consumers and general economic conditions. These vulnerabilities take on new dimensions for Deckers, however, due to the unique nature of its business. The company's main product is its UGG boot, a trendy sheepskin boot that accounted for 77% of its sales in 2007. In recent years (2005-2007) appearances on the Oprah Winfrey show as well as the adoption of the boot by other celebrities have boosted the company's sales. In 2007, Oprah named the boot as one best holiday gifts of 2007, contributing to a 64% spike in sales over the previous year. The company's reliance on a single product, however, means that any shift consumer fashion preferences away from sheepskin boots will have a dramatic impact on its business. Moreover, a large part of the company's customer base consists of young middle income women, and this increases the company's sensitivity to economic conditions. [1][2] The UGG boot can cost up to $200 and as such is considered a luxury by the company's customers. As a result, during downturns, UGG will be the first thing to get the boot.
Business Financials
The company seeks to offer footwear that is distinctive and appeals broadly to men, women and children. Its products are sold through domestic retailers, international distributors, and directly to end-user consumers through its websites and catalogs. The company's products are sold under Teva, Simple, and UGG brand names. Teva is primarily an outdoor sandal, Simple is primarily casual footwear (clogs, sneakers, and sandals) and UGG is the trendy sheepskin boot.
The graph below shows net sales vs. operating income for Deckers Outdoor since 2004:
In 2007 revenue increased 48% to $449 million. This includes domestic sales growth of 45.3% to $386.6 million and international sales growth of 62.6% to $62.3 million in 2007.[4] This is due primarily to: (1) an increase in the weighted-average wholesale selling price per pair, which increased 14.1% from $30.29 in 2006 to $34.55 in 2007, an increase in sales of UGG brand products, which carry higher average selling prices and had its tenth year of double-digit growth with sales increasing 64% to a record $348 million (2) a 26.9% overall increase in the volume of footwear sold from 9.3 million pairs in 2006 to 11.8 million pairs in 2007, and (3) the continued expansion of their eCommerce business and retail store business. [5] The increase in operating income was primarily due to higher sales and gross profit compared to 2006.
Business for Deckers Outdoor is seasonal, with the highest percentage of Teva brand net sales occurring in the first and second quarters of each year and the highest percentage of UGG brand net sales occurring in the third and fourth quarters. To date, the Simple brand has not had a seasonal impact on the Company. [6] With the dramatic growth in the UGG brand in 2006 and 2007, combined with the introduction of a Fall Teva product line, net sales in the last half of the year have exceeded that for the first half of the year. Below is a graph of net sales vs. operating income divided into quarters for 2007:
_for_2007.bmp)
Below is a graph of net sales vs. operating income divided between Deckers' primary products for 2007:
_for_2007.bmp)
Below is a graph of Deckers' revenue by geography for 2007:
Key Trends and Forces
Consumer preferences for sheepskin determine DECK's success
The retail business depends on a company's ability to react to the rapidly changing fashion tastes of consumers and to provide appealing merchandise in a timely and cost effective manner. Specifically for Deckers Outdoor, the continued strength of Teva, UGG and Simple brands is paramount. As of 2008, the success of Deckers depends on UGG boots remaining fashionable. If UGG boots were ever to go out of style, as is often the case with fashion trends, Deckers could potentially lose up to 80% of its revenue. However, some features of the UGG boot that have allowed it to persist longer than most fashion trends of this kind, is that it comfortable, and, due to the sheepskin, allows a "breathability" that keeps the foot warm in cold temperatures and cool in the summer.
DECK has greater exposure to U.S. economic cycles than other retailers
A depressed economy hurts businesses that appeal to niche markets and rely on a consumer’s disposable income. Deckers is a niche market because their UGG boots, their primary source of revenue, at upwards of $200 are a luxury brand of shoe. Consumers can find cheaper shoes, even cheaper UGGs (albeit it knock-offs) if need be. Furthermore, because a significant portion of Deckers' consumers are in the middle class, Deckers will face a difficult 2008 if the economy goes through a recession as predicted.
Limited resources for supply of sheepskin
Sheepskin, which is in high demand and limited supply, is the principal raw material for most of Deckers' UGG brand products. These skins are available only during the Spring lambing season. Several problems that sheep tend to suffer from are having about a 10% natural fatality rate and many births which are still born. In 2007, two suppliers provided all of the sheepskin purchased by Deckers' independent manufacturers.[10] Furthermore, sheep are susceptible to hoof and mouth disease, which can result in the extermination of an infected herd. Additionally, the supply of sheepskin can be adversely impacted by weather conditions and harvesting decisions. In 2007, the UGG boot represented 77% of Deckers' net sales.
DECK is almost completely reliant the UGG boot
The success of Deckers Outdoor is linked with the success of the UGG boot, which represents 77% of their net sales. In 1998 the UGG boot began to be marketed as a high fashion luxury item with price tags of up to several hundred dollars. The success of UGGs took off as more celebrities bought into the comfortable lifestyle and were pictured in more and more magazines. In 2005 Oprah featured them in her show “Oprah's Favourite Things”. [11]In 2007, sales of the UGG brand increased 64%, though Deckers does not believe this to be sustainable. However, aside from being a trendy boot, the UGG is generally recognized as comfortable and, as a result of 100% sheepskin, breathable. Deckers believes that the luxury and comfort features of UGG brand products will continue to drive long-term consumer demand, however, as a result of the significant fashion element to UGG brand they seek to prolong its longevity by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. As part of this strategy, They have increased their product offering to approximately 150 styles for men, women and children for the Fall 2008 season.[12]
Competition
A number of Deckers' competitors have significantly greater financial resources, as well as greater brand awareness in the footwear market. Competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Two of note are Nike and Timberland.
| Deckers Outdoor and Competitors | Revenue in 2007 ($US) | Net Income in 2007 ($US) |
|---|---|---|
| Deckers Outdoor | 448.93M | 66.44M |
| Nike | 17.92B | 1.83B |
| Timberland Company | 1.44B | 40.00M |
References
- ↑ CNNMoney.com
- ↑ oprah.com
- ↑ DECK 2007 10k - Page 34
- ↑ DECK 2007 10k - Page 41
- ↑ DECK 2007 10k - Page 41
- ↑ DECK 2007 10k - Item 1A - Page 17
- ↑ DECK 2007 10k
- ↑ DECK 2007 10k - Page 39
- ↑ DECK 2007 10k - Page 39
- ↑ DECK 2007 10k - Item 1A - Page 17
- ↑ womensfashion.com
- ↑ DECK 2007 10k - Item 1A - Page 38
- ↑ finance.yahoo.com
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