Footwear Stocks to Watch in Q2 Earnings: DECK, RCKY, SQBG

The second-quarter 2016 earnings season or the quarter ended Jun 30, 2016, is well underway. So far, the second-quarter earnings season has witnessed a modest improvement, in comparison to the slowdown seen in the past few quarters.

As the earnings season gets into full steam, this week is expected to be crucial as the reporting cycle picks up pace. About 1,000 stocks are expected to come up with their earnings numbers this week, comprising 189 S&P members. The reports of these companies will actually confirm the direction of where the earnings trend is headed – ‘Will it validate the encouraging start witnessed so far?’ or ‘mark the 5th consecutive decline for the S&P index?’

Looking at the second quarter as a whole, total S&P 500 earnings are expected to be down 3.4% on 0.5% lower revenues, with 9 of the 16 Zacks sectors anticipated to post an earnings decline in the quarter.

The real picture of the trend so far is visible from our latest Earnings Trends report published on Jul 22.

Among the reporting companies this week, we would track the footwear stocks which belong to the broader Consumer Discretionary sector. The sector has seen nearly 22.9% of its members report their second-quarter results, of which total earnings were up 14.4% year over year on 4.4% revenue growth.

Though this reflects a positive picture thus far, we think it is too early to determine any trend for this sector as a major chuck of earnings from this sector is still to come. The second-quarter forecasts show that earnings for the Consumer Discretionary sector are expected to drop 0.6%, whereas revenues are anticipated to increase 3.4%.

The footwear industry not only caters to the footwear needs of consumers, but also enhances their style quotient. Among the footwear stocks that have already reported earnings, we saw Skechers U.S.A. Inc. SKX miss earnings estimates while Under Armour Inc. UA reported in line results. However, both companies missed top-line estimates.

That said, we will now focus on footwear stocks that are slated to report earnings on Jul 28.

To start with Deckers Outdoor Corp. DECK, we are unsure whether this leading designer, producer and brand manager of innovative, niche footwear and accessories will be able to post a positive earnings surprise in the quarter to be reported. The company’s past performance reveals that it has outperformed the Zacks Consensus Estimate by an average of 23.5% over the trailing four quarters. The company’s Zacks Rank #4 (Sell) and Earnings ESP of -2.94% indicate that the chances of a beat are very less. A stock generally needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for a beat.

Deckers’ lackluster outlook for the first quarter and fiscal 2017 raises concerns. The company projects net sales to plunge in the 20–25% range in the first quarter, along with a loss of about $2.10–$2.20 per share. However, in an effort to bring itself back on the growth trajectory, it announced a restructuring plan that focuses on realigning its brands into two groups, along with optimization of its store fleet. The company is also concentrating on opening smaller concept omni-channel outlets and developing its eCommerce portal. (Read more: Deckers: What Will Q1 Earnings Release Unveil?)

Next, the earnings picture for Rocky Brands Inc. RCKY – an Ohio-based designer, producer and seller of footwear and apparel – looks vague. The company’s Zacks Rank #3 (Hold) when combined with an Earnings ESP of 0.00% makes surprise prediction difficult. Its Most Accurate estimate and the Zacks Consensus Estimate stand at 24 cents. Moreover, the company has a negative surprise history, wherein it has underperformed the Zacks Consensus Estimate in three of the last four quarters. The average negative surprise for the past four quarters is 52.1%.

Also in the queue is Sequential Brands Group Inc. SQBG, which owns, promotes, markets, and licenses a portfolio of consumer brands in apparel, footwear, eyewear, fashion accessories, and athletic and home goods categories worldwide. The company has outperformed the Zacks Consensus Estimate by an average of 98.8% over the past four quarters, with a beat in each quarter. Though the company carries a Zacks Rank #2 (Buy), our prediction of an earnings beat is complicated by an Earnings ESP of 0.00%. The company’s Most Accurate estimate and the Zacks Consensus Estimate stand at 6 cents.

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