Citi's Pair Trade In Footwear: Favors Deckers Over Wolverine World Wide, Skechers Remains Top Rated

Citi expects Deckers Outdoor Corp DECK to outperform Wolverine World Wide, Inc. WWW over the next 12-months, as it sees greater relative upside opportunity from Deckers' UGG product transition, improved segmentation and cost-cutting initiatives.

"While WWW's FY16 outlook is likely conservative, it was the weakest guide of the group, and we see further risk to executing newer product initiatives in 2016," analyst Corinna Van der Ghinst wrote in a note to clients.

"In February, WWW guided a top-line decline of 4–8 percent y/y (or 0.5–4.3 percent decline excluding forex, Cushe, and store closures) and 3–10 percent EPS decline for FY16."

The analyst noted, "DECK and WWW are small/mid-cap footwear makers with a portfolio focused on outdoor and lifestyle-oriented brands. Both companies have faced investor pushback regarding the long-term growth opportunities of key brands (DECK's UGG vs. WWW's Merrell and Sperry), including their ability to expand outside of their core markets/demographics, and are trading at a discounted valuation to the rest of their peer group."

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However, Citi rates Deckers at Buy, while Wolverine World Wide is rated Neutral, as the latter still "needs to continue working down its inventory overhang through 1H." The analyst expects stronger top-line growth, operating margin expansion and EPS growth for Deckers versus Wolverine World Wide for 2016.

Meanwhile, Skechers USA Inc SKX remains Citi's top-rated footwear stock. Citi said with a growing global presence in athleisure, Skechers has the highest upside to its $44 target price and potential for multiple expansion over the next year.

"Our recent meetings with management, industry experts, and retailer read-throughs indicate continued momentum in athleisure in 2016, bolstered by major athletic brands' marketing/launches around the Olympics, while incremental distribution and share gain opportunities could drive upside to SKX's US and international revenue growth in the near-term," Ghinst said.

Citi currently has a target price of $44 on Skechers.

At time of writing, Skechers was down 0.68 percent on the day at $30.58, Deckers was up 1.86 percent at $57.99 and Wolverine World Wide was up 0.67 percent at $18.11.