Deckers Outdoor Corporation’s (DECK - Analyst Report) disappointing first-quarter 2012 results and dismal fiscal 2012 outlook compelled us to take a bearish stance on the stock. Consequently, we downgraded our recommendation to Underperform with a target price of $44.00. Earlier, we had a Neutral view on the stock.
Deckers posted lower-than-expected first quarter results as unfavorable weather conditions adversely impacted the sales of UGG boots. The rise in sheepskin prices (up 40% from the 2011 level) and increased operating expenses also hurt the bottom line. As a result, management lowered its fiscal 2012 outlook.
The first quarter earnings of 20 cents a share missed the Zacks Consensus Estimate of 25 cents, and dropped more than 50% from 49 cents earned in the prior-year quarter.
Management now anticipates fiscal 2012 earnings to decline between 9% and 10%. Earlier, the company had projected earnings to remain flat with the prior year. For the second quarter, Deckers predicts loss per share of 60 cents.
Total revenue is now expected to increase 14% during 2012, one percentage point lower than what was forecast earlier. Deckers now anticipates its UGG brand sales to rise approximately 10% and Teva brand sales to increase in the low-to-mid single-digit range, whereas other brand sales are expected to decline by approximately 15%.
Previously, the company had estimated 11% growth in the UGG brand and 10% increase in Teva brand sales. Management had predicted sales to remain flat for the other brand.
Deckers also forecast a gross profit margin contraction of 250 basis points during fiscal 2012 due to increases in costs of goods sold and closeout sales level, partly offset by a calculative price rise, and higher contribution from retail sales and the Sanuk brand.
We believe that the company’s over-reliance on the UGG brand is a matter of concern. In the event of stagnation or decline of UGG sales growth, Deckers’ overall results will be affected adversely. This is because the percentage of contribution from the company’s other brands are too small to offset any slowdown in UGG sales.
Further, due to high exposure to international markets, Deckers remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. An increase in price may have an adverse impact on the demand for the products.
Moreover, Deckers faces intense competition in the footwear industry from other big shots such as Nike Inc. (NKE - Analyst Report), on several attributes such as style, price, quality, comfort and brand strength. This may dent the company’s sales and margins.
The above analysis supports our unbiased view, and advocates our bearish opinion on the stock, which is well defined through our Zacks #4 Rank that translates into a short-term “Sell” rating.