Credit Suisse Concerned With Deckers Outdoor's Elevated SKU Counts

Credit Suisse is “increasingly cautious” on Deckers Outdoor Corp DECK ahead of its second-quarter earnings on October 27 as it believes higher SKUs could pressure markdowns and hit gross margins in the second half.

“We are increasingly cautious on DECK shares as the brown shoe category remains out of favor with consumers and the UGG brand enters more mass and family footwear distribution channels,” analyst Christian Buss wrote in a note.

Credit Suisse’s analysis indicates SKUs counts are up significantly (on average, up 70 percent year-over-year per week this quarter) despite out-the-door pricing remains flat year-over-year.

On the SKU front, the analyst said the company could face excess inventory overhang from the first quarter and the addition of new SKUs under the "UGG Classics II" product line.

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“With the addition of the new Classics II product line this fall, retailing at a 10–20 percent premium to legacy product still in the market, we will be looking to see if Deckers can maintain its historical pricing discipline,” Buss continued.

Meanwhile, Buss projects second-quarter revenue to drop 0.8 percent from last year on choppy sales momentum through the first half of the year.

In addition, the analyst would focus on the sales of new products — The Classic UGG II and the sub-$100 Sheepskin Boot sub-brand “Koolaburra by UGG.

“We are cautious on the introduction of this new sub-brand as there is potential for some brand dilution for UGGs from brand overlap as the sub-brand enters family-value channels like Kohl's Corporation KSS and Shoe Carnival, Inc. SCVL,” Buss noted.

The analyst maintains his Neutral rating on shares with $56 target price.

At time of writing, shares of Deckers Outdoor were down 2.43 percent at $56.10.

Full ratings data available on Benzinga Pro.