When a company forecasts lower sales or profits, its stock usually takes a hit. It's not always easy to tell whether your company is having a fire sale or burning down. Maybe it is time to get out -- or maybe it's time to buy more!
To help tell the difference, we pair up the dour guidance news with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think the companies still have the power to turn lemons into lemonade, maybe investors should take notice.
Here are two stocks that have recently announced reduced guidance.
CAPS Rating(out of 5)
Previous or Consensus Estimate
Deckers Outdoor (NAS: DECK)
Q2 2012 EPS
E-Commerce China Dangdang (NAS: DANG)
Q2 2012 Revenue
Don't blindly sell into their bearish outlook -- you still need to do some research. Use the announcement as a jumping-off point for additional research.
Walk this way
The fad is finally coming to an end, as we all knew it would. Sheepskin-boot maker Deckers Outdoor said that sales of its iconic Uggs footwear would rise only 10% this year, falling off the cliff from its previous estimate of... 11%. Hmm. Maybe there's still some tread left on this shoe after all.
While Crocs (NAS: CROX) and more recently Skechers (NYS: SKX) were nearly killed off by knockoffs of their unique footwear -- a rubber shoe for the former, a toning shoe for the latter -- Deckers was able to blithely ignore the cheap imitations that flooded the market in the aftermath of its Uggs hitting the pop culture scene. They remained a comfortable, fashionable product that maintained its cachet long after even I thought it was doomed to the bargain bin where all fads go to die (it remains my single worst CAPScall).
The risk with Deckers, though, has always been its reliance upon the Ugg brand for growth. While its Teva brand soldiered on, it was never enough of a standout to carry the company like Ugg did. And when we had an unseasonably warm winter like this past one, it affected sales of the company's boots, though other styles remained strong. Yet it was only the acquisition of the Sanuk brand last year that allowed Deckers to report higher sales this quarter.
Also pinching profits were rising commodities costs, particularly that of sheepskin, which is already 40% higher than it was at this point last year. It's those higher costs that led Deckers to report lower-than-expected profits in the first quarter and for it to reduce guidance for the second quarter and the rest of the year.
Shares of the footwear specialist have been cut in half from the highs they hit late in 2011, although it trades at just 10 times earnings estimates and when factoring in its growth prospects it does appear cheap. While Deckers could go on to benefit from falling sheepskin prices later on, as CAPS member Mliaom suggests -- which are now down 66% or more in Australia (footwear, and Ugg in particular, drives the market) -- I'm not ready to wade back into the company yet if only because of its continued reliance upon the iconic brand. Companies that live by a single product, customer, or supplier will die by it too when conditions change for the worse.
Tell me in the comments section below or on the Deckers Outdoors CAPS page whether you think it can walk away from the big hit its stock has taken.
A rough patch
And speaking of bad calls, my timing on rating E-Commerce China Dangdang to outperform the market could hardly have been any worse. A few days after my CAPSCall, the company's CFO announced his resignation, which spooked the market and sent its stock reeling. Considering he's sticking around for three months until a successor is found, this doesn't seem like the typical concerning event when the top finance guy bolts for the door.
But there were larger issues as well facing the Chinese e-commerce leader, including a slowing economy that may impact sales going forward. Baidu.com (NAS: BIDU) , which is trying to break into the e-commerce channel, has had several false starts and its latest is rumored to be floundering as well. And with guidance calling for sales to grow "only" 50%, the market was disappointed because Wall Street had even higher expectations.
With All-Star CAPS members rating Dangdang evenly split on its prospects, it might be advisable to add the e-commerce platform to the Fool's free portfolio tracker to see if it can recover, then let us know on the E-Commerce China Dangdang CAPS page what you think its prospects are.
Looking under rocks
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At the time thisarticle was published Fool contributorRich Dupreyowns shares of Skechers USA, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Baidu.Motley Fool newsletter serviceshave recommended buying shares of Skechers USA and Baidu. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.