Deckers Outdoor Corp. is launching its Ugg brand in 200 Macy’s Inc. stores, a move that Susquehanna Financial Group analysts call “dangerous.”

The promotional environment at Macy’s gives analysts cause for concern. And Susquehanna says their checks indicate that higher-end Ugg wholesale accounts are being cautious with Ugg because of wide distribution.

“History has taught us that Macy’s has and will promote heavily in order to drive sales while demanding markdown money,” the Friday note said.

Companies like Coach Inc. US:COH and Ralph Lauren Corp. RL, +0.51% have been pulling back from department stores in an effort to keep promotions at a minimum.

The initial Ugg launch began in the fall with Macy’s M, +0.23% flagship Herald Square store, according to Deckers DECK, +2.06% Chief Executive Dave Powers, and was accompanied by a 35-store test. Now the brand is heading into hundreds of new stores, an expansion that will continue into the fall.

“We want to optimize the business in those stores and make sure we have a robust presentation across all genders and all seasons,” said Powers.

Based on the company’s fourth-quarter results, Susquehanna believes “Deckers stock will have its day in Friday trading, but the risk that Deckers will miss future targets is high.”

Deckers shares closed up 18.8% on Friday.

Deckers reported a fourth-quarter loss of 49 cents per share versus a loss of 73 cents per share last year. Adjusted earnings were 11 cents per share, ahead of the FactSet consensus for a six-cent loss. Sales were $369.5 million, down from $378.6 million, but also ahead of the $358.0 million FactSet consensus. Direct-to-consumer same-store sales were flat. Ugg sales were down 1.1% to $243.0 million for the quarter.

Susquehanna also has concerns about Deckers’ guidance for sales of about $2.0 billion by 2020. Sales for full-year fiscal 2017 ending March 31 were $1.79 billion, down from $1.88 billion the prior year.

“No doubt $100 million in cost savings flowing to the earnings before interest and taxes line by fiscal year 2020 is impressive and closing 30-to-40 stores appears to be constructive,” the analyst’s note said. “However, Deckers still needs to rationalize distribution and inventory in order to restore the health of the Ugg brand.”

Susquehanna rates Deckers shares neutral with a $60 price target.

Deckers announced at the end of April that it’s exploring strategic alternatives, including the sale of the company, which Wedbush analysts say limits the visibility on the company’s full-year 2018 guidance.

Deckers forecast for sales to decline in the range of down 2% to flat and adjusted EPS in the range of $3.95 to $4.15. The full-year FactSet EPS consensus is $4.01.

Wedbush analysts say the feasibility of this outlook won’t be known until later in the year.

“[W]e caution that earnings are highly sensitive to fall/winter weather, therefore we believe visibility on guidance’s achievability is limited until we get closer to the holiday selling season,” the note said.

Wedbush rates Deckers shares neutral with a $61 price target, up from $57.

Meanwhile, Canaccord Genuity analysts are bullish about the 2020 outlook.

“Importantly, it appears that there are multiple ways for the company to achieve this earnings before interest and taxes target [of $260.0 million], so should sales fall short of the $2 billion there are backstops in the selling, general, and administrative expenses that can make up the difference,” analyst Camilo Lyon wrote in a Friday note.

Canaccord rates Deckers shares buy with a $76 price target, up from $69.

Deckers shares are up 36.5% for the past year while the S&P 500 index SPX, +0.14%is up 15.6% for the period.

November 9, 2017

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