Credit Suisse Warns: Deckers Outdoor 'Still Struggling To Deliver Earnings Momentum'

Credit Suisse is skeptical on Deckers Outdoor Corp DECK, saying the company's sales and earnings momentum are not sustainable.

The apparel and footwear retailer's fourth-quarter earnings and sales of $0.11 and $378.6 million topped the Street view of $0.06 and $362 million, respectively.

A Closer Look: Quarterly Results

"Deckers continues to struggle with underlying demand, as 4Q16 top-line strength came on the heels of elevated promotional activity and a pull-forward of 1Q shipment, and does not look set to continue into FY17," analyst Christian Buss wrote in a note.

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Total sales were up 11.2 percent from last year. Excluding the pulled forward shipments, the growth was at 8 percent.

"Some of this looks intentional as the company exits 200 non-core wholesale accounts and closes 21 retail doors (with three closed in FY16.) With a high fixed expense base and sales down, the company looks set to see another year of declining earnings," the analyst noted.

The continued sales weakness means "underlying operating margin is likely to remain at depressed levels despite gross margin tailwinds, leaving earnings power for FY17 underwhelming."

"We struggle to see how this changes absent a significant change in distribution (entry into family footwear and Macy's to us does not seem to be the right approach) or SG&A intensity (guidance implies 200bp of SG&A deleverage.)," Buss said.

Headwinds

Gross margins declined in Q4 on high retail inventories and the transition to a new UGG classic product due out Fall 2016.

Another concern is high levels of inventories. Total inventories grew 25.5 percent to $299.9 million and well ahead of guidance for 20–25 percent sales declines in Q1.

Deckers also announced the expected retirement of CEO Angel Martinez on May 31, 2016. Martinez will be replaced by Dave Powers, who has been with the team for just shy of four years as president of direct-to-consumer and then as president last March.

Expectations

"Deckers expects 1Q17 to be down 20–25 percent year-over-year with 5 percent of the decline due to a pull-forward of shipments into F4Q16," Buss. Given a high fixed cost base, the company expects a loss of $2.10 to $2.20 in the first quarter.

Deckers sees FY 2017 EPS $4.05–$4.40 and sales down 3 percent to flat. Buss cut his FY17 revenue and EPS estimates to $1.826 billion and $4.19 from $1.924 billion and $4.77.

The analyst, who has a Neutral rating on the stock, also slashed his price target to $53 from $57.

Shares of Deckers closed Thursday's regular trading session at $49.25 and were trading down 2.54 percent in Friday's pre-market session.