Can Deckers Outdoor Start 2016 on the Right Foot?

Image: Deckers Outdoor.

Footwear and apparel specialist Deckers Outdoor (DECK -1.59%) finds itself in a tough market environment right now. The rise of athletic apparel for all-purpose use has put companies like Under Armour (UAA 1.81%) in position to take maximum advantage of current fashions, and that has left the maker of the Ugg brand in a position in which it has to work to sustain its past popularity. With the company set to report its fiscal third-quarter financial results on Thursday, Deckers investors want to see the company show signs of regaining some of its lost momentum. Let's take a closer look at what's been happening with Deckers Outdoor lately and what investors should expect in the future.

Stats on Deckers Outdoor

Source: Yahoo! Finance.

Can Deckers Outdoor earnings climb higher?
In recent months, investors have worried a lot more about Deckers Outdoor's earnings prospects. Projections for the fiscal third quarter have fallen by more than $0.20 per share, and that has pulled down expectations both for the current fiscal year and fiscal 2017 by 5% to 10%. The stock has struggled as well, falling another 3% since late October.

Deckers Outdoor's fiscal third-quarter results in October actually defied the pessimism that many investors had about the footwear specialist. Deckers posted revenue growth of more than 5%, and although net income fell slightly, the company topped the earnings expectations that investors had set. Ugg sales rose, although Deckers' Teva brand suffered double-digit percentage declines. Comparable sales in its direct-to-consumer channel fell more than 5%, showing the dependence that Deckers still has on wholesale and distributor sales for its success.

Yet concerns about the particularly warm weather this winter threw cold water on the optimism following Deckers Outdoor's financial report. Ugg sheepskin boots seem tailor-made for cold weather, but the overall lack of snow in the eastern part of the U.S. throughout December made some investors nervous about the need for retailers to discount Uggs. In addition, sentiment among retailers generally suffered during the holiday season, and that could have spelled even more trouble for Deckers in trying to cater to fashion-conscious shoppers.

However, Deckers is answering the call to innovation. Just as Under Armour has made a smart move into footwear to capitalize on the popularity of its apparel offerings, Deckers chose to offer a new line of Uggs that have a slimmer fit. Opportunistically refreshing a proven brand name is a business model that many successful companies have used to keep generating profits with new product ideas, and in particular, the new Uggs could offer a look that the somewhat clunky older boots lack.

In the Deckers Outdoor earnings report, investors should look closely at the inventory numbers that the company posts. In past challenging years, Deckers has sometimes made the mistake of trying to protect profit margins at the expense of not getting products out the door, and that has led to an overhang of extra inventory that prevented the company from moving forward. Now, if Deckers wants to keep innovating, the best move is for it to accept discounted prices and the margin reduction that they'll bring to make room for new, more stylist products. If it can prepare itself for a brighter future, then Deckers should be able to emerge from the holiday season stronger than ever.