What To Expect When Deckers Reports Q4

When Deckers Brands — owner of Ugg, Teva, Hoka One One and other shoe brands — last reported, results were mixed and management announced plans to consolidate offices and close select retail stores.

As the company prepares to release its fourth quarter results on Thursday, analysts are mixed in their opinions, with the more bullish market watchers pointing to long-term growth prospects for the firm.

Citi Research analyst Corinna Van der Ghinst said she remains cautious on fall ’16 as Ugg readies its transformation. She sees progress on the multi-year transition, “with management taking the pain on classics last year in order to pave the way for a more sustainable business in FY17 and longer term.”

In December, the company unveiled its plans to remove all remaining Classic Ugg boots from U.S. wholesale following the 2015 winter season and replace them with a revamped Classics II collection featuring upgraded features for fall ’16.

Deckers is sharpening the core wholesale business this year, with improved segmentation [including Koolaburra at the mid-tier], elevated brand presentation and new international wholesale doors, while rationalizing U.S. doors to focus on Ugg’s strongest partners,” Van der Ghinst wrote on Friday.

Consensus estimates predict that Deckers will post diluted earnings per share of 6 cents, two pennies above the prior year’s same quarter, and revenues of $366.6 million, a 6.5 percent year-over-year gain.

Van der Ghinst placed her EPS bet a penny above consensus, at 7 cents per share, while she expects revenue growth below consensus, at 5.7 percent.

Reiterating a buy rating on the stock, Canaccord Genuity Inc. analyst Camilo Lyon said he believes the company — which saw its share price hit its 52-week low of $40.74 back in January — is setting up for second-half recovery.

We remain positive on our second-half recovery thesis as we believe this quarter will have the last potentially negative set of data points before heading into what should be a stronger season for Ugg,” Lyon wrote on Friday. “With the heavy investment cycle behind Deckers, an evolving product assortment in Ugg that should lead to channel expansion.”

Lyon said he expects Q4 EPS to come in at 7 cents on 7 percent sales growth. The analyst also predicted that inventory will be elevated until September and backlogs will be down mid-single digits or less.

We fully expect FQ4 inventory growth to be above last quarter’s 26 percent growth due to fall ’15 carryover inventory that is flowing into the fall ’16 plan and late spring/early summer receipts,” Lyon explained. “Similarly, next quarter’s inventory should also be higher than FQ4 due to fall receipts, before coming in line with sales in FQ2 (September) as the company begins to ship fall ’16 product.”

Regarding channel inventory, Lyon said he believes most of the excess classic Ugg inventory was cleared over the past few months, making channel inventory clean.

Susquehanna Financial Group LLLP analyst Christopher Svezia was also fairly upbeat on Deckers — placing his bets in line with consensus and noting the company is a “margin story.”

We believe [Q4] comp declined due to weak traffic offset by some favorable weather,” Svezia wrote Tuesday. “As we look to FY17, Deckers is clearly a margin story (favorable fx, cost cuts, lower inputs and promotions) with sales likely flat on lower Ugg domestic orders and a smaller direct-to-consumer footprint as management continues right-sizing costs while evolving product and distribution.”

A less optimistic Sterne Agee CRT analyst Sam Poser reiterated an underperform rating on the company’s stock on May 13, noting that he expects a “tough quarter with a bleak outlook.”

Q16 is a small quarter, and we do not foresee a material guidance miss since guidance was drastically reduced when 3Q16 results were announced,” Poser wrote. “FY17 is turning into a transition year at best and possibly worse given the commentary by department stores. The order backlog is likely to be down double digits.”

Poser added, “The health of the Ugg brand appears at risk following a hasty transition from the original Classic boots to Classics 2.0. Inventory, [which was] overdone focus on direct-to-consumer, and the decision to co-brand Koolaburra and Ugg for the moderate channel all make for a weak outlook.

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