Why Ugg’s Slipping Revenues Could Be the Biggest Hurdle to a Deckers Sale

Although Deckers Brands confirmed this week that a possible sale is at least one of the options that the company is currently mulling, several market watchers are doubtful that the firm’s once “it brand” has what it takes to lure a viable strategic buyer.

We don’t believe a strategic buyer would be interested in Deckers given the state of the Ugg brand, which is far less healthy now as compared to 2010,” wrote Susquehanna Financial Group LLLP analyst Sam Poser on Wednesday.

Ugg makes up about 80 percent of Deckers annual revenue, Poser noted, adding that a financial buyer may be interested in the company — which also owns Teva, Sanuk and Hoka One One — but that that avenue could also be problematic.

A financial buyer is likely valuing Deckers with the unrealistic premise that profitability can be restored to 2011 levels,” Poser wrote. “In our view, it would be very difficult to restore such profitability. The Ugg brand is now overdistributed, and innovation has been lacking. … A major overhaul by an exceptionally talented management team is needed, [and] private equity’s track record in managing retail businesses has been poor.”

Citi Research analyst Corinna Van der Ghinst wrote in a memo late Tuesday that although it “could be difficult to get a larger strategic deal done in the current U.S. retail environment,” she sees several positive factors to a Deckers buyout.

Deckers has an interesting brand portfolio, in our view, consisting of authentic brands with higher-end distribution,” Van der Ghinst wrote. “Despite challenges in recent years, management has generally maintained tight distribution for Ugg, which continues to have high brand awareness.”

She added that Deckers also has “an attractive balance sheet,” but noted that its anchor brand “continues to face significant underlying challenges,” including an estimated 50 percent exposure to the department store sector, which has been under immense pressure in recent months.

Other Ugg-related issues, according to Van der Ghinst, include “heavily second-half-weighted seasonality of [the brand], recent retraction of Ugg’s global [direct-to-consumer] growth strategy, and limited opportunities to leverage Ugg sourcing across other apparel/footwear platforms.

Deckers issued a statement on Tuesday saying that its board of directors had initiated a process that includes an exploration of strategic alternatives to enhance stockholder value. According to the statement, this may include a sale or other transaction; however, such a transaction is not a fait accompli. There is also no timetable for the completion of the review process.

In February, just days after Deckers’ stock took a tumble on a significant third-quarter earnings miss, activist hedge fund Marcato Capital Management purchased a 6 percent stake in the firm. The move was widely considered the first big sign, following months of speculation, that a Deckers Brands buyout might materialize.

(Marcato disclosed in a filing with the U.S. Securities and Exchange Commission in February that it had snapped up 1.9 million shares in Deckers Brands and that it planned to have discussions with the firm’s management, board and other shareholders around enhancing shareholder value.)

As of 11:15 a.m., analysts seemed to cheer the news of a possible Deckers Brands sale, sending the firm’s shares climbing nearly 5 percent, to $61.51.

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