Deckers Outdoor Braces for Big Losses

Image source: Deckers Outdoor.

The retail industry is heavily seasonal, with the holiday shopping period driving results for most retailers. Footwear company Deckers Outdoor (DECK -0.22%) has that impact magnified because of the success of its cold-weather Ugg brand of sheepskin fleece boots, and the hot months of the year present huge challenges for Deckers as it resigns itself to losses and takes great pains to minimize them. Despite its best efforts, Deckers investors come into July 28's fiscal first-quarter financial report expecting even more red ink than it suffered last year, and a big drop in sales could also weigh on the company. Let's take an early look at Deckers Outdoor to see whether things will be as bad as many fear.

Stats on Deckers Outdoor

Data source: Yahoo! Finance. * Represents percentage increase in expected net losses.

How bad will Deckers Outdoor earnings look?

In recent months, investors have gotten a lot more concerned in their views on Deckers earnings. They now expect losses for the second quarter that are almost half again as large as they previously thought, and they've cut their full-year projections for this year and next by 5% to 7%. The stock has still managed to make some headway, rising 7% since mid-April.

Deckers Outdoor's fiscal fourth-quarter results were stronger than many had expected but left investors prepared for tougher times ahead. Sales jumped 11%, setting a new record, and Deckers managed to post a small profit on an adjusted basis. Currency impacts lessened, and the company's Ugg, Teva, and Hoka One One lines performed especially well during the quarter. The fact that Deckers overcame warm weather throughout much of last year was a mark of success for the retailer, but the guidance that it gave for the fiscal first quarter was far worse than they had expected.

How Deckers is looking for growth

Even with troubling views about its near-term future, Deckers Outdoor hasn't given up on finding ways to bolster its business. In June, the company announced that it had entered into a partnership with Grammy Award-nominated artist Jhene Aiko to create a personalized collection of Teva shoes. With three new styles tailored for hiking and exploration in a fashion-conscious way, Deckers hopes that the more summer-oriented Teva line can grow and help diversify the retailer's season exposure to some extent.

Nevertheless, Uggs are Deckers' bread and butter, and a new refresh of the concept hopes to capture more business. In mid-July, Deckers released its new Classic II line of Ugg boots, which it sees as an opportunity not just to update the iconic product but also to build momentum toward a whole new line of products related to the Ugg brand. Already, Deckers has turned the shoe into a full collection of accessory and lifestyle products, and refreshing the fashion concept could open the door to a whole new round of innovations that could draw customers to make purchases.

Yet one challenge Deckers consistently faces is the threat of counterfeit products. The company scored a big victory in late June, working with local and federal law enforcement agencies to identify an estimated 3,660 pairs of fake Ugg products worth more than $700,000. The seizure is just a small part of the counterfeit business, but every little bit helps Deckers protect the integrity of its brand.

In the Deckers Outdoor earnings report, investors should focus on whether the retailer's efforts to expand its product lines result in better sales. It's too much to expect Deckers to put too much of a dent in the losses that investors are prepared to see, but even incremental progress would be a favorable sign that the strategic vision that the Ugg maker has put in place has the potential to produce long-run success given enough time.