Retail footwear specialist Deckers Outdoor (DECK) saw EPS of 3 cents in the first quarter of 2013, far above analysts expectations of a loss and the company’s own guidance of -12 cents EPS for the quarter.
Just reading that headline, you would expect the stock to be bullish, but in fact the equity fell over 9% on the news and closed the day down a little over 8.5%. This was in part as a result of poor traction for the company’s new Sanuk brand of shoes and sandals, down 4.4% to $30.9 million gross for the quarter, and modest growth in UGG and Teva brands, which saw 7.9% and 3.6% growth respectively.
Besides Sanuk, which is worth a small percentage of the company’s top line, DECK saw gains across the board, so why the crash?
Partly, this is due to flat revenue expectations in the second quarter and failure of the company to show a dramatic emergence in consumer traction with its biggest brands. Here is where expectations dictate performance more than actual sales: the market clearly wanted to see evidence that fashion was favoring the company’s product lines, and instead saw largely secular growth that probably has more to do with higher consumer spending on low-cost goods than on an actual resurgence of the company itself.
Betting on DECK before the earnings call was largely a bet on brand value: the hope was that Deckers had value in its UGG, Teva, and Sanuk brands that would ensure growth in the long term. In reality, we saw marginal growth in sales more to do with a better U.S. economy than with the company’s value itself. Or, even more worrying, a slide in the company’s brand value from premium to commoditized product, which is making it more attractive to a more pragmatic and brand-apathetic shopper.
Cyclical Investment
The better-than-expectations report and sharp drop in stock price demonstrates an aspect of investing that even professionals have difficulties managing: stocks go up and down based not only on past performance, but also on the perceived likelihood of future growth. That perception involves many things, including last quarter’s sales but also psychological momentum and market change.
Retail stocks rise and fall with consumer behavior, so when people are shopping more, retail companies go up. But retail stocks are also dependent on trends and fashion, which is where competition between in-vertical competitors like Under Armour (UA) and Nike (NKE) can cause stock volatility and great profit potential for people who understand the changing fashions.
The difficulty is knowing how those fashions are changing. As the case of Deckers shows, a change in consumer behavior can cause a disappointment that markets will punish companies for relatively quickly. For DECK to recover, it will need a secret weapon to make its products trendy again. For investors, they need to decide whether DECK is up to the task and buy, or sell, accordingly.