Citi Downgrades Deckers Outdoor, But Believes Downside Risks Are Already Priced In

Deckers Outdoor Corp DECK reported robust 4Q results, although the FY17 guidance was below expectations.

Citi’s Corinna Van der Ghinst downgraded the rating on the company from Buy to Neutral, while lowering the price target from $69 to $53.

Reasons For The Downgrade

Although Deckers Outdoor has made robust progress on the transition of UGG into a “more sustainable lifestyle business,” Van der Ghinst downgraded the rating due to the FY17 guidance indicating further wholesale declines, along with a more challenging wholesale environment in the U.S.

“We believe this is a disproportionately higher risk for DECK vs. peers since 100 percent of DECK’s profits are generated in the back half of its FY,” Van der Ghinst stated.

In addition, the company continues to have high exposure to departmental stores, which the analyst believes are “secularly challenges.”

Deckers Outdoor’s SG&A leverage plans have also been adversely impacted due to the weaker FY17 sales.

However, with the stock having declined 19 percent since March, Van der Ghinst believes that the downside risks are already priced in and that Deckers Outdoor is fairly valued at present.

4Q Beat & Guidance

The company reported its 4Q16 EPS ahead of the estimate and the consensus, driven by the colder January weather, closeouts and sales being pulled forward from 1Q17.

However, the EPS guidance for FY17 of $4.05-$4.40, on flat to down 3 percent revenue, came in below the consensus, driven by weaker sales and margins.

The FY17 EPS estimate has been lowered from $4.90 to $4.50.