A $70 Bull Case In Deckers, A $49 Bear Case

Deckers Outdoor Corp’s DECK UGG business seems to be at an inflection point, Susquehanna’s Sam Poser said in a report. He initiated coverage of the company with a Neutral rating and a price target of $59.

The UGG business contributed 81 percent of Deckers’ revenue in FY16. This business now appears to be at an inflection point.

The Positives

The business is likely to have achieved strong sales during the 2016 Anniversary Sale hosted by Nordstrom, Inc. JWN. Poser commented, “Such strength at the Anniversary Sale often proves to be a good leading indicator for the subsequent fall selling season.”

The reinvigoration of the Classic Boot program would likely result in an improvement in overall performance. “Lastly, we expect to see ongoing improvement into calendar 2018 for the smaller Teva, Sanuk, and Hoka brands,” the analyst wrote.

The Negatives

Management's decision to open up UGG distribution to Macy's Inc M and introducing Koolaburra by UGG at Kohl's Corporation KSS and Shoe Carnival, Inc. SCVL is likely to have an adverse impact on the UGG brand’s long term health.

“Also, inventory levels at the end of 1Q17 were up 25.6% on a sales increase of -18.4% and flat to -3% revenue guidance for FY17,” Poser noted.

The bull case scenario is at $70, provided weather conditions are favorable in Fall this year and the launch of the new UGG and Koolaburra by UGG product performs well. The bear case scenario is at $49 in case weather is unfavorable and marketing decisions adversely impact the UGG brand.

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