Wall Street is becoming increasingly uncomfortable with Deckers Outdoor (DECK).
The footwear maker of the popular UGG brand disappointed analysts after booking $796 million in sales for its fiscal third quarter on Thursday, missing expectations by more than 4%. The report was accompanied by news of increased inventory levels as holiday demand for winter footwear receded, largely to warmer-than-expected weather.
"Do not own this stock," Sterne Agee analyst Sam Poser said bluntly in a Friday investment note, which included a ratings downgrade to Underperform. "DECK is changing its reporting segments from 4 to 2, and is no longer providing supplemental commentary. The aforementioned actions demonstrate an unconscionable lack of transparency."
Sterne Agee also highlighted increased inventory of its popular UGG brand by roughly 32% at the end of its last fiscal quarter, reported yesterday, and significant cuts to earnings and revenue guidance. (Total inventories increased more than 26% on the quarter.)
"Management said the majority of the excess UGG inventory is UGG foul weather boots, slippers and casual boot product that will be carried over into the fall '16 line," Poser said in the report. "We contend footwear inventory is not fine wine, and does not improve with age."
CEO Angel Martinez pointed to unseasonal weather, currency headwinds and a reduced customer base of tourists on Thursday's call with analysts.
"December temperatures in our key markets around the world were at or near record highs, leading to a decrease in demand for cold-weather product," he said. "On top of this, the retail industry experienced soft store traffic. We believe some of the decline in traffic was tourist driven, as the U.S. dollar continued to strengthen against most major currencies."
And some still hold out some hope that a strategy of closing about 20 stores to save costs will help give Deckers some room to turn things around (shares are down 35% over the past 12 months).
"Store closures will lead to substantial cost savings," Canaccord Genuity analyst Camilo Lyon said in a Friday report, which nonetheless downgraded Deckers' price target to $67 from $70. "While the timeline on these closures is unclear, the goal is to complete the closures by the end of fiscal year 2017."
Bank of America (BAC) also downgraded Deckers' outlook to Neutral from Buy, citing disappointments in the company's earnings report.
"While our expectations were already low for the fiscal third quarter/fiscal fourth quarter 2016 given the warm weather and promotional environment, we previously anticipated an earnings rebound against easy comparisons in fiscal 2017; however, we now expect earnings pressure will sustain well into fiscal 2017 and anticipate cautious forward-year guidance and negative backlogs when DECK reports fiscal fourth quarter," Bank of America analysts said.
