Brean Cuts Target On Deckers From $70 To $63 Amid 'Caution'

• Deckers Outdoor Corp DECK shares are down 46 percent year-to-date, having declined steadily through the year.
• Brean Capital’s Eric Tracy maintained a Buy rating on the company, while reducing the price target from $70 to $63.
• Unseasonably warm weather could continue into 4Q and the guidance for the quarter appears aggressive, Tracy said.

Analyst Eric Tracy said that the Ugg Fall 2016 product review reflected some positives for the long term. These include:

1. Brand equity being intact
2. Line extensions, product/distribution segmentation helping boost US wholesale
3. DTC and International mix shifts being accretive
4. Attractive balance sheet and FCF
5. Valuation already reflecting many of the risks

Tracy added, however, that the market would focus on the near-term, during which the company faces seasonal challenges, and catalysts are lacking in the absence of weather helping the Holiday season.

The analyst mentioned that the Fall ’16 featured “a number of the product line extensions we continue to believe will be important in diversifying/sustaining of domestic wholesale market.”

He added, however, that Deckers’ strategy of segmenting product and tiered distribution can result in consumers finding “too many similar Ugg styles in disparate channels of distribution,” leading to cannibalization of business.

Checks indicated mixed results from Ugg brand for Thanksgiving and Black Friday. Tracy believes that weather would need to improve into Holiday for the company to deliver on 3Q. Moreover, unseasonably warm weather could continue past 3Q, and the 4Q guidance appears aggressive, projecting 18 percent revenue growth, EPS of $0.57 versus $0.04 last year.

The EPS estimates for FY16 and FY17 have been reduced from $5.13 to $5.01 and from $5.68 to $5.46, respectively.