Bearish Stance on Deckers

Deckers Outdoor Corporation (DECK - Analyst Report) seems to be in an unfavorable position as the soft economic environment continues to take its toll on the performance of this designer, producer, and brand manager of innovative, niche footwear and accessories, as evident from its second-quarter 2012 bottom line results.

The company’s dismal performance compelled us to take a bearish stance on the stock, and therefore we went on to downgrade our recommendation to “Underperform” with a price target of $33.00. Earlier, we had a “Neutral” view on the stock.

Second Quarter Loss Widened

Deckers second-quarter 2012 loss of 53 cents a share fared better than the Zacks Consensus Estimate of loss of 59 cents but widened from a loss of 19 cents delivered in the year-ago quarter due to sluggishness in the European market on account of the ongoing economic crisis. International sales during the quarter dropped 14.7% to $61 million. UGG brand net sales fell marginally by 0.3%, whereas Teva brand net sales tumbled 15.4%.

Despite a 14% expected growth in the top line, management projects fiscal 2012 earnings to decline between 9% and 10%, and anticipates 1% growth in total revenue and a 31% decline in earnings per share for the third quarter.

Deckers, which competes with Wolverine World Wide Inc. (WWW - Snapshot Report) and Nike Inc. (NKE - Analyst Report), also forecasts a gross profit margin contraction of 250 basis points due to increase in costs of goods sold and higher closeout sales level for fiscal 2012.

Downhill Estimate Revision

Following Deckers’ second quarter results, the Zacks Consensus Estimates have been portraying a downward trend.

The Zacks Consensus Estimate for the third quarter of 2012 dropped by 5 cents to $1.07 per share in the last 60 days. For the fourth quarter, the Estimate fell 16 cents to $3.59. For fiscal 2012 and 2013, the Zacks Consensus Estimates slid 24 cents and 30 cents to $4.24 and $4.96, respectively, in the last 60 days.

Other Weaknesses

Deckers’ over-reliance on the UGG brand is a matter of concern. In the event of stagnation or decline of UGG sales growth, the company’s 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.

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 the U.S. An increase in price may have an adverse impact on the demand for the products.

Closing Comment

An erratic consumer behavior and a sluggish economic recovery still remain matters of concern. The above analysis supports our unbiased view, and advocates our bearish stand on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term “Strong Sell” rating.