Bad News For Deckers Lululemon Athletica inc

That the sound of Deckers (DECK) investors checking their account balance today The stock is down 8% in early morning trading after a downgrade by Sterne Agee. The boutique research firm noted that its channel checks indicate a weak environment for Deckers Outdoor UGG boots.

According to the report, individual retailers are seeing less demand for the with the fur which is especially bad news during the holiday retail blitz. As with most specialty retailers, the fourth quarter represents the most important season for earnings so if the assessment from Sterne Agee is accurate, DECK could turn out to be a major disappointment for investors.

Using the current price (accounting for this morning gap lower), DECK is trading for less than 15 X 2012 earnings expectations of $5.95 per share. Analysts are assuming 18% earnings growth from 2011 to 2012 so the multiple of 15 is inline with the growth expectations.

But considering the fickle nature of highend apparel shoppers UGG Bailey Button along with a challenging economic environment it easy to see how analyst estimates could turn out to be drastically overstated. If the UGG brand is truly becoming (borrowing the term from the downgrade report), Deckers could be presented with the choice of killing margins to move product or watching their primary revenue stream evaporate.

This standard pricing decision is difficult for typical retailers who face a traditional supply / demand curve featured in most economic textbooks. But in the world of fashion and apparel, there is an additional level of complexity.

Luxury or premium buyers actually prefer to pay a higher price for specialty retail items. Whether it is because of the perceived value associated with a higher price, or because wearing a premium brand cements their affluent image, the traditional supply / demand curve can be inverted as higher prices drive more demand from highend consumers.

But if Deckers UGG boots lose their luster with affluent customers, lowering the price won be very helpful in generating more revenue. Across the globe, the middle class has been shrinking. Even a discounted pair of UGG boots will still be more expensive than lowend apparel offerings so it unclear exactly who Deckers would be targeting if it lowered prices to increase demand.

Ironically, the same paradox can be true about the stock. Since DECK has been a momentum stock for so long, a major break in the stock price could send its shareholder base running for the hills. Momentum traders no longer want anything to do with the stock, and DECK is still too expensive (and uncertain) to capture a value investor attention.