2023-10-10 00:50:08 ET
Summary
- Deckers Outdoor's FQ1 was solely powered by HOKA, as it was its only brand to see an increase in sales.
- Gross margins have been strong, as the company has seen a shift in sales more towards its DTC channel.
- DECK's valuation is higher compared to peers, leading to a "Hold" rating.
In mid-July , I wrote that while HOKA had become a growth engine for Deckers Outdoor ( DECK ), that the stock looked overvalued compared to peers. The stock is down over -8% since then, trailing the -5.5% return by the S&P 500.
Company Profile
As a reminder, DECK owns several footwear brands, including UGG, HOKA, Teva, Sanuk, and Koolaburra. It sells its footwear both through the direct to consumer channel via its own e-commerce sites and stores, as well as in the wholesale channel.
UGG remains DECK's largest brand, accounting for over half its sales last fiscal year. UGG is best known for its comfortable sheepskin boots in both classic and other styles. HOKA, which is known for its running shoes, meanwhile, is its fastest-growing and second-largest brand. It accounted for nearly 40% of its fiscal year 2023 sales.
Fiscal Q1 Results and Upcoming UGG Season
As the air starts to chill and leaves turn colors in some parts of the country, pumpkin spice lattes and UGGs come to the forefront. However, before UGG season starts, DECK is powered by its HOKA brand.
For fiscal Q1, DECK saw its sales climb 10%, or 11.1% on a constant currency basis, to $675.8 million. That beat analyst estimates for revenue of $666.9 million.
Adjusted EPS, meanwhile, rose 45% to $2.41, topping the consensus by 20 cents.
The results were all powered by HOKA, which was the only brand that saw an increase in sales for the quarter. HOKA sales jumped 27.4% to $420.5 million, while UGG sales dropped -6.0% to $195.5 million. Teva sales plunged -18.8% to $48.4 million, while Sanuk sales sank -32.3% to $9.6 million. Other sales, mostly Kookaburra, fell -33.9% to $1.8 million.
Domestic sale rose 9.1% to $419.5 million, while international sales climbed 11.4% to $256.3 million.
DTC sales soared 35.3% in the quarter to $250.4 million and represented 37% of revenue. HOKA DTC sales soared 62.7% to $159.8 million, with each region seeing 50% growth in HOKA sales.
Wholesale sales fell -0.9%, with UGG wholesale revenue down -11.8% to $121.5 million. The company noted that there was a change in UGG wholesale ordering patterns compared to the past few years. While the wholesale numbers may seem disappointing, it's not uncommon for there to be timing shifts, and many retailers have seen over-ordering in various products after earlier supply chain constraints, so it's not a surprise that many would be looking to order later than usual.
Gross margin improved by 330 basis points in the quarter to 51.3%. The company credited beneficial brand and channel mix dynamics for the improvement. The increase in DTC sales, which have higher margins, certainly helped in this regard and this continued shift is an overall good sign for the company.
DECK's balance sheet remained in pristine share, with $1.05 billion in cash and equivalents, and no debt. Inventories, meanwhile, were $740.6 million versus $839.5 million a year ago. The company bought back $25.5 million shares in the quarter as well. Given its cash position, it wouldn't be surprising if DECK is on the hunt to acquire another shoe brand, something it has done in the past, including with HOKA.
Looking ahead, DECK projected full-year sales to be about $3.98 billion, up slightly from prior guidance calling for revenue of $3.95 billion. It expects gross margins to be 52% and an 18% operating margin, in line with its prior forecast.
The company expects full-year HOKA sales to increase by over 20%, and for UGG revenue to rise in the low single digits driven by international expansion.
The company guided for adjusted EPS to be between $21.75-22.25. That's up from a prior outlook for adjusted EPS of between $21.10-21.60. The EPS guidance excluded the impact of any share buybacks.
Discussing the momentum of the HOKA brand on its FQ1 call , CEO David Powers said:
Yes, obviously, we are super excited about the continued momentum of HOKA. Broad-based, it's just continuing to beat or exceed expectations for us, and we're really optimistic about the rest of the year. DTC growth, as you saw for both brands was exceptional. Wholesale for HOKA is about where we expected it to be for this quarter, a couple of puts and takes here and there by channel and region. But generally speaking, right in line with our marketplace management expectations. We love how this flywheel is working for us. We're creating awareness out in the marketplace at a top level of the funnel. The awareness is increasing dramatically for the brand, up 20% over last year and that's driving all channels, but particularly as designed into DTC. So there's some noise out in the wholesale channel with markdowns and promotions from other brands, a lot of inventory in the channel. So we're managing that tightly by purpose. But again, as I say, raising awareness at a high level and seeing the brand interest coming directly to our DTC business is super exciting for us. Obviously, it's our most profitable sale."
On the UGG front, the company noted that it has reduced its SKU count from about 600 items last fall to around 400 for this autumn. It has increased inventory in key styles and focuses on its best sellers.
DECK posted a solid quarter that was all about continued momentum at HOKA. Fiscal Q1 is a seasonally light quarter for UGG, but sales will begin to pick up in the current quarter, with deliveries to wholesale, and then fiscal Q3 tends to company's big UGG sales quarter. The brand remains popular, although has matured, with international becoming a more important growth driver for the brand. China's reopening should help on this front.
Right now, nothing appears to be stopping the momentum in HOKA, even as other brands become more promotional. However, HOKA has a pretty ardent following among runners and continues to draw in new users.
Valuation
DECK trades around 16x the FY24 (ending March) consensus adjusted EBITDA of $785.7 million and 14x the FY25 consensus of $902.6 million.
From an EV/EBITDAR perspective, it trades at around 14.5x FY24 estimates.
It trades at a forward PE of 22x the FY22 consensus of $22.62. Based on FY25 analyst estimates of $26.00, it trades at 19x.
DECK is projected to grow its revenue nearly 10% in FY24 and about 11% in FY25.
Comparatively, fellow popular footwear brands Crocs ( CROX ) and Skechers ( SKX ) trade at much lower multiples despite similar projected growth. The gap appears too wide in my view.
DECK Valuation Vs Peers (FinBox)
Conclusion
HOKA continues to be a growth driver for DECK, while UGG remains a solid, core brand that continues to have international expansion opportunities. Meanwhile, the company has been seeing a nice boost to gross margins as more of its sales have been shifting to its DTC channel. It's also benefited from freight costs coming down.
While DECK has been a great job, the stock trades at a much higher valuation compared to peers CROX and SKX, which have similar overall growth profiles. Given the valuation difference, I continue to rate DECK a "Hold." I upgraded the cheaper CROX to "Strong Buy" last month .
The biggest risk to DECK to the downside would a weakening consumer that causes the growth of HOKA and UGG to slow down. The jobs market remains strong, but the Fed continues to be focused on keeping rates high trying to cool inflation, which could lead to an economic slowdown. Meanwhile, the return of student debt payments could eat into the buying power of millennials and GenZ, two core UGG and HOKA demographics.
Its biggest upside potential is if HOKA's expanded offerings beyond running shoes take off and it gets even more shelf space in the wholesale channel, spurring even faster growth.
For further details see:
Deckers Outdoor: HOKA Momentum Continues, But Pricey Vs. Peers