While analysts have been generally more optimistic on Deckers Brands following a Q4 topline beat, share price and sentiments on the brand have bounced back and forth since the company reported its results last week.
So what’s causing the mixed opinions and confusion about Ugg and Teva’s parent company? FN breaks down the industry chatter.
The 2016 Guidance and Backlog
Sterne Agee CRT analyst Sam Poser summarized his take on the issue in a simple phrase: “Just because management understands what they mean, does not mean others do.”
Following the firm’s Q4 conference call, market watchers had trouble “reconciling the flat to down slightly reported backlog as of March 31, 2015 and the company’s guidance for a planned 8 percent revenue increase,” explained Poser in a note on June 1.
“In order to reconcile the flat backlog to the plan for 8 percent reported revenue growth, there are three important nuances,” Poser wrote on May 28. “Ugg Classic sales are flat despite the 20 percent decrease in their backlog—at-once orders should easily make up the deficiency in the backlog due to the extremely easy comparisons; the backlog only reflects orders through December and does not include 4Q16; and backlog does not include [direct-to-consumer] sales, which are expected to be up 6 percent-8 percent in total…”
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In his June 1 note, Poser said he had a follow-up conversation with Deckers’ President Dave Powers and CFO Tom George and as a result, he is more confident that the “conservative” guidance can be achieved.
Among the reasons for his renewed confidence, Poser said pre-booked orders placed since March 31, 2015 for fall of this year have accelerated and are up over the orders placed during the same period last year; management’s projections for increases in the Teva (9 percent) and Sanuk (11 percent) business is likely because current trends are healthy; additional websites and stores will aid direct-to-consumer expectations; and there will be some benefit from the recent Koolaburra acquisition.
Similarly, Susquehanna Financial Group LLLP analyst Christopher Svezia said that while he was disappointed by a flat overall backlog, he views U.S. growth as “solid and likely more stable versus last year.”
The Koolaburra Acquisition
In Q4, management announced the acquisition of Koolaburra brand—a sheepskin and wool-based footwear brand “with current product silhouettes that mimic the Ugg classic and certain derivatives,” as Powers described it.
Powers, during the Q4 call, said management plans to quickly reposition Koolaburra over the next 12 months to enter the mid-tier market.
“This is a highly strategic acquisition for us that will allow us to compete in this market, while maintaining the premium positioning of our Ugg brand,” Powers said. “We plan to leverage our design and development expertise as well as our key account relationships to bring Koolaburra to market.”
So far, analysts seem positive about potential benefits on the acquisition.
“This could be a meaningful growth driver for the company as we believe the value channel would likely desire Ugg designed and sourced product versus those brands that currently sell in the channel,” wrote Svezia.
“The global sheepskin-related business has revenue of $5 billion [of] which Ugg has 33 percent share—a great deal of that business is done under $100, where Ugg has no share,” wrote Poser. “ … We believe Deckers will be able to leverage their brand portfolio to gain shelf space in retailers such as Famous Footwear, Shoe Carnival, Rack Room, Shoe Show, and other moderate retailers.”
Both Svezia and Poser mention the Bearpaw brand as the major competitor for Koolaburra’s offerings, with Svezia more bullish on the latter’s ability to dominate.
Perhaps the biggest question is whether the revenue and EPS beat signal a full-fledged comeback for Deckers. Judging by the positive ratings by a decent number of market watchers, it seems that expectations are up for the quarter and year ahead.
“Although FX is expected to remain a significant headwind throughout FY16, we believe the strategic shift in fall/winter bookings is a testament to the confidence in the fashion-oriented Ugg product…” wrote Wunderlich Securities Inc. analyst Danielle McCoy of her “buy” rated stock. “In addition, we believe reducing dependence on the Ugg brand remains a key focus and we applaud the work that has been done in further developing the company’s other branded product lines and expanding distribution.”
Both Poser and Svezia also rate Deckers favorably, with Poser giving a “buy” rating and Svezia a “positive” rating.
“Deckers’s brands are showing strength and diversity across the board,” wrote Poser. “Ugg’s strength is well beyond Classics; Teva, Sanuk, Hoka, and Ahnu are all gaining traction.”