by Joseph Hargett | February 28, 2013 8:27 am
Designer footwear manufacturer Deckers Outdoor (NASDAQ:DECK) is headed toward a rather important fourth-quarter earnings report after the close this afternoon. The company’s flagship product line, UGG boots, seasonally sell best in winter months, meaning investors will be paying particularly close attention to tonight’s report for any signs of weakness.
With the exception of the Northeast, most of the U.S. experienced an unseasonably warm winter — a fact that could potentially impact UGG sales. However, even the brokerage community is split on the potential impact of weather on prior quarter sales.
For instance, Wedbush recently downgraded DECK to “neutral” from “outperform,” citing valuation and guidance concerns, while Jefferies raised its price target to $60 from $50 on the belief that the UGG brand is still a “winter staple.”
If you thought you would find some clarity in Deckers’ consensus earnings outlook, think again. Currently, Wall Street is expecting a profit of $2.61, versus Deckers’ guidance of $2.73 per share offered during the company’s third-quarter earnings report. Muddying the waters further, EarningsWhisper.com reports that Deckers’ Q4 whisper number rests at $2.82 per share.
Looking at revenue expectations, analysts are anticipating sales of $623.02 million, compared to Deckers’ guidance of $640.08 million.
Even the brokerage community’s ratings offer up a mixed outlook on DECK. Specifically, data from Thomson/First Call reveal eight “buy” ratings compared to eight “holds” and one “sell” rating. Meanwhile, the 12-month consensus price target for DECK rests at $43.87, a mere 8% premium to yesterday’s close.
Short sellers, on the other hand, have been pretty blatant in expressing their opinion on DECK shares. Despite an 8% decline in short interest, a whopping 43% of DECK’s float (or shares available for public trading) remains sold short. If the company were to post strong earnings and reassure investors with solid guidance, it could create a significant short-squeeze situation.
However, options activity hints that either short sellers are buying calls to hedge against a post-earnings rally, or that options traders are considerably bullish on DECK in their own right. Specifically, the March/April put/call open interest ratio currently rests at 0.53, with call open interest nearly doubling put open interest in the front two months of options.
Taking a closer look at March options reveals that implieds have priced in a post earnings move in excess of 17% for DECK. With the stock currently pinned between its 50-day and 200-day moving averages, it’s almost temping to sell option premium ahead of tonight’s quarterly report. But only “almost.” DECK has a history of sizable post earnings moves … and unless you position your trade correctly, a premium selling strategy on DECK could lead to sizable losses.
Instead, traders looking to position themselves ahead of DECK’s quarterly report will be better off picking indirectly and utilizing a spread strategy to lower their risk on the trade. With indications that UGG sales might have been a bit weaker last quarter due to warmer weather, and with guidance up in the air for many retailers, I’m leaning toward an April 35/40 bear put spread.
Skittish investors might want to wait until after the report to enter a position, but if you can handle the risk, the April 35/40 put spread was offered at $2.35, or $235 per pair of contracts, at the close of trading Wednesday. Breakeven lies at $37.65, while a maximum profit of $2.65, or $265 per pair of contracts, can be had if DECK closes at or below $35 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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