What The DECK Happened? Deckers Outdoor Announces Ugly Guidance
Despite a strong fourth quarter report released on Thursday, shares of Deckers Outdoor (NASDAQ: DECK) tumbled lower as investors clearly signaled the company's guidance for 2014 was unacceptable.
Deckers easily beat its fourth quarter consensus estimate of $3.80 by $0.24. Revenue of $736 million beat the consensus estimate by $24.53 million.
With so much expectation on the line for the company to see robust demand for its UGG's boots due to extreme cold temperatures, management painted a picture that many investors perceived to be just as cold as the weather.
For the first quarter 2014, management expects to lose $0.16 a share, well below the consensus estimate for a profit of $0.10. Revenue is expected to rise only six percent in the quarter, half of the 12 percent analysts predicted. Additionally, the company added that its profit would decline in the first half of 2014 due to rising costs related to 28 new store openings in the second half of 2013.
Shares of Deckers initially fell more than 18 percent following the poor guidance. Analysts were mixed if investors should give the company “the boot” or if shares are “on sale” and represent an attractive entry point.
ISI: Disappointing earnings an entry point
Omar Saad, analyst at ISI Group, believes that the company still has an attractive bullish thesis for the long term, despite a short-term hiccup.
In a note to clients, Saad argued that Deckers maintains a healthy sales trend with an improving gross margin. Additionally, Deckers is at a stage where it is now investing in its brand, as opposed to traditionally under-investing in the business.
Deckers opened 40 stores in 2013 and intends to open an additional 25 in 2014.
Saad understands that investors are taking issue with the company's spend to build out its retail stores, but investors should consider that the company is still in its infancy stages with only 110 small stores globally. These stores are “critical to elevating the brand” beyond its historical 'mom-and-pop' distribution.
Shares are Buy rated with a $80 price target.
Jefferies: Change of mind
Randal Konik, equity associate at Jefferies, believes that an upside case can no longer be made following Decker's poor guidance. Konik, a former “strong supporter” of Deckers, argued the case in a note to clients that risks now outweigh the rewards.
Konik's bullish case was based on the likelihood of upside to earnings due to higher gross margins and expense leverage on strong sales. Given the company's aggressive spending schedule for 2014 and a softer than expected revenue outlook, the upside case is no longer valid as the company is “digesting the costs associated with its torrid pace of store growth.”
While ISI Group's Saad believes in Decker's investment plans, Konik believes that doing so is not prudent for the stock and doing so is “taking the wind out of the sails,” following a very strong 2013.
Konik believes that Decker's long-term strategy could be more plausible in 2015 as investments scale, but the analyst is “less assured” and it is prudent to wait until the investment cycle stabilizes to get comfortable with the earnings trajectory.
Shares are downgraded to Hold from Buy with a price target lowered to $75 from a previous $100.
Piper: Nothing changes
Erinn Murphy, senior research analyst at Piper Jaffray, believes that while guidance management offered is below expectation, there is a “high level of conservationism” within the guidance and nothing has fundamentally changed in the company's longer-term thesis.
Deckers remains a global growth story with strong margin expansion opportunities, according to Murphy. She also believes that management's fiscal 2014 guidance of 10 percent growth is highly conservative. “We believe potential upside in fiscal 2014 could stem from revenue and gross margin beats,” the analyst wrote in a note to clients.
Murphy argued that “beat & raise” guidance that the company established in 2013 can continue into 2014. As such, the analyst sees no reason to make any rating or price target changes.
Shares are Overweight rated with a $96 price target.
Susquehanna: Expectations reset towards positive
Christopher Svezia, senior analyst at Susquehanna, believes that despite a disappointing outlook, any pullback should be viewed as an entry point. Additionally, as “product remains king” and the company is better today than it was two years ago, expectations need to be reset.
Svezia points out the company's product assortment and backlog, which improved by 24 percent, a clean inventory at wholesale and DTC (direct to consumer), favorable retail margin comparisons, conservative guidance and potential fiscal 2015 leverage as reasons to be positive. “We believe now is a prudent time to establish or add to positions,” Svezia argued in a note to clients.
Shares are upgraded to Positive from Neutral with a price target raised to $87 from a previous $78.
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