Analysts Still See Silver Lining After Deckers’ Tough Q3

Ugg Swarovski Boots Challenge
Ugg x Swarovski Classic Tall boots.
Courtesy of brand.

Despite an after-market stock sell-off following its third-quarter earnings announcement Thursday, analysts say key initiatives keep them optimistic on Deckers Brands as they eye future opportunities.

Susquehanna Financial Group LLLP analyst Christopher Svezia made a case for maintaining a positive rating on the company’s stock despite a mixed Q3 where revenue and profit edged up slightly but sales missed forecasts.

Ugg continues diversifying — with core classics only 25 percent of brand sales — and strong consumer acceptance of new products; newly announced initiatives should bring $25 million in SG&A savings; and despite 26 percent [inventory] growth, a good case was made for normalized inventory by 2Q17,” Svezia wrote. “With the holiday quarter out of the way, focus turns to FY17…”

Deckers CEO Angel Martinez announced a series of plans aimed at cutting costs Thursday, including potentially shuttering 20 stores; closing both the Sanuk office in Irvine, Calif. and the Ahnu office outside San Francisco; and realigning its brand management. The Sanuk office is moving to the firm’s Goleta, Calif. headquarters while plans for the Ahnu office have not been disclosed — but Martinez said the firm is seeking “strategic alternatives for Ahnu.”

Once the changes associated with the brand realignment, office consolidations, and the closure of retail stores are fully implemented, we expect to achieve an annualized SG&A run rate savings of $35 million, of which we plan to reinvest approximately $10 million in the business,” Martinez said during Deckers’ conference call.

Canaccord Genuity Inc. analyst Camilo Lyon was bullish on Martinez’s plans to reinvigorate the company and attributed lesser-than-expected revenue growth in the quarter to warmer weather impacting demand for Ugg product and leading to elevated inventory.

“While elements of the quarter did not meet our expectations (i.e. weaker sales/gross margin), we believe the company is positioning itself for a structural rebound as it accelerates cost-saving initiatives while also diversifying its product assortment,” Lyon said, maintaining a buy rating on the stock. “As such, we believe this quarter marks the bottom in fundamentals (and likely the stock) as the company takes necessary and aggressive steps to improve its cost structure, brand positioning, and overall profitability. Deckers is a second half story (consistent with our recovery thesis) and the transition it intends to undergo in F2017 is necessary to evolve the brand.”

In Q3, Ugg sales advanced 1 percent, or 3.3 percent on a currency-neutral basis, to $743.2 million. Teva sales increased 3.2 percent, or 4.1 percent on a currency-neutral basis, to $14.1 million; Sanuk sales decreased 17 percent to $17 million; and the combined net sales of the company’s other brands increased 48.4 percent to $21.6 million, an increase primarily attributable to a $6.7 million rise in net sales for the Hoka One One.

Citi Research analyst Corinna Van der Ghinst was also optimistic on Deckers, reiterating a buy rating on the stock, citing “Deckers’ focus on creating a more sustainable business” by “rationalizing the brand portfolio and store base; transitioning Ugg out of stale old classics into high growth, non-core product; and better segments across channels and price points.”

In December, Deckers announced that Ugg would remove all remaining Classic Ugg boots from U.S. wholesale following the winter season and replace them with a revamped Classics II collection featuring upgraded features — at likely higher price points — for fall.

For his part, Sterne Agee CRT analyst Sam Poser was down on Deckers following the earnings release, downgrading the shares to underperform and warning investors “do not own this stock.”