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Deckers learns to not take Uggs for granted

Deckers shares fell 17 percent in early trading on Friday, a day after the company missed both earnings and sales expectations for the third quarter and lowered its full-year forecast.

Still, analysts remained bullish on the company's long-term prospects, saying much of its woes came from the marquee Ugg brand not having enough fashion or foul-weather boots in stock to meet demand.

A selection of UGG Australia boots at Mercedes-Benz Fashion Week Spring 2015 Collections at Lincoln Center on September 5, 2014.
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A selection of UGG Australia boots at Mercedes-Benz Fashion Week Spring 2015 Collections at Lincoln Center on September 5, 2014.

While these execution errors put a dent in the firm's revenue—management estimated about $9 million to $12 million was left on the table as a result—they're a sign that customers are willing to shell out cash on more than the classic boot that made Ugg a household name.

"Though Ugg sales came in below expectations, we are encouraged by strong full-price selling of casual, weather and specialty boots," Jefferies analyst Randal Konik wrote in a note to investors.

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Ugg sales account for about 93 percent of Deckers' revenue.

In addition to inventory problems, Sterne Agee analyst Sam Poser said that currency pressures dented Deckers' earnings by roughly 14 cents a share, as traffic was down "significantly more" at its tourist-friendly shops, such as in Las Vegas.

"The strong dollar caused currency translation pressure, and hurt store traffic in markets to which foreign tourists flock," Poser said. "Management did a poor job clearly delineating the FX impact to earnings in the quarter."

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Both analysts have a "buy" rating on Deckers; Konik has a price target of $110 on the stock, which was trading near $68 Friday. Poser has a price target of $90.

Although Poser sounded confident that Ugg would correct its inventory issues next fall, analysts were still disappointed in the performance of Ugg's classic boot styles, known for their suede exterior and sheepskin interior. These styles account for about 30 percent of the brand's total sales.

CEO Angel Martinez attributed part of the miss to the fact that consumers typically replace these boots every two years or so, but some purchases likely shifted earlier because of last year's polar vortex. Martinez also told investors that the company did not allocate enough of its marketing dollars to its core business.

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"We now realize that we have not been placing enough emphasis on our classic line in our marketing creative, almost taking our largest business for granted," he said on the company's earnings call.

Despite these hiccups, analysts indicated they were pleased with the label's evolution into a lifestyle brand. It's attempting to make this transition by adding loungewear, outerwear, and home goods such as rugs and blankets, to its product mix.

"Longer-term, we still think the Ugg brand could be uniquely poised to make the difficult-but-rewarding leap from shearling boot company to lifestyle brand," Evercore ISI analyst Omar Saad said.