2023-09-01 09:56:01 ET
Summary
- Deckers Outdoor Corporation is a global leader in innovative footwear, apparel, and accessories, with brands like UGG and HOKA dominating sales.
- The company's operating margin has been declining, indicating struggles in managing costs effectively.
- Based on a DCF valuation, I estimate Deckers' fair value at $516 per share, which represents a 7% downside to current market price. I rate DECK stock a Hold.
Deckers Outdoor Corporation (DECK), is the global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. Deckers market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and other brands. Deckers is facing headwinds that are currently affecting the company and its profitability. Let me dive into the details and explain why I give Deckers a Hold rating.
Company Overview
Wholesale and Direct-To-Consumer % of total revenue (Created and calculated by the author based on Deck financial reports and the author's projections)
Deckers Outdoor is a global footwear company with a wide range of products. As of March 31, 2023, the company operated 164 retail stores, 52 of which were located in the United States and 112 of which were located worldwide. Deckers' sales are split between two sectors: wholesale 56.7% and direct-to-consumer ((DTC)) 43.3%.
Deck's net sales (Created and calculated by the author based on Deck financial reports and the author's projections)
Deckers Outdoor's brand sales distribution is dominated by UGG and HOKA, which account for over 90% of the company's total sales. UGG is the leading brand, accounting for 53% of sales, followed by HOKA at 39%. Teva is the third-largest brand, accounting for 5% of sales, and the remaining 2% of sales come from the company's other brands. Deckers Outdoor is well-positioned for future growth, as its leading brands continue to be popular with consumers.
Deck's Net sales and Segment Margin (Created and calculated by the author based on Deck financial reports and the author's projections)
While it is informative to know which products or services contribute the most to revenue, it is ultimately more important to identify the biggest contributors to operating profit. This is because operating profit is a measure of a company's profitability after taking into account all of its costs, including both variable and fixed costs. Therefore, the product or service that contributes the most to operating profit is the one that is likely to be the most sustainable source of profit for the company in the long term.
Deck segment growth (Created and calculated by the author based on Deck financial reports and the author's projections)
Deckers' flagship brand, UGG, saw a slight decline in sales in FY2023. This may be due to consumers being more selective about their purchases in the current inflationary environment. However, the company's newer brand, HOKA, had a strong performance, offsetting some of the decline in UGG sales. HOKA is a leading brand in the performance footwear market, and its focus on comfort and performance has been well-received by consumers.
The Teva brand also performed well in FY2023, contributing to Deckers's overall revenue growth. However, the Sanduk brand saw significant declines in sales. This may be due to the brand's focus on casual footwear, which has become less popular in recent years. Sanduk may need to reposition itself as a more performance-oriented brand in order to compete with other brands.
Overall, the performance of Deckers's brands was mixed in FY2023. However, the strong performance of HOKA and Teva offset the decline in UGG sales. I agree with your assumption that we might see a decline in the next quarters, but in the long run, I think Deckers will get over it, and we will see a rise in the UGG brand and the small brands.
Q1 2024 Overview
Deckers beat consensus revenue by 1.33% and EPS by a staggering 8.22%, so why did the stock drop?
In 2023, we saw a decrease in business activity. We attributed this to inflation, which is still around. People are less inclined to buy shoes and products when they don't have to, and costs have increased. This led to a very strong decrease in operating profit. Let's dive deeper into the numbers.
We saw a YoY raise of 10.10% in the top line plus an Operating Profit increase of 1.38% YoY, but the bad news is in Operating Margin by segment.
Deck operating margin segment (Created and calculated by the author based on Deck financial reports and the author's projections)
As we can see above, the operating margin is declining for all brands besides HOKA. We see a decline in demand and rising costs that are not helping the situation. In the future, I want to see Deckers' management recover this segment and manage this situation much better than they do today.
Deck Operating Profit (Qualtrim)
I am always on the lookout for companies with a track record of increasing operating margins. This is a strong indicator of management strength, product strength, and crisis management ability. Unfortunately, this is not the case for Deckers. The company's operating margin has been declining in recent years. This is a red flag for me, as it suggests that it may be struggling to manage costs effectively.
Valuation
Deck's Estimates Revenue (Created and calculated by the author based on Deck financial reports and the author's projections)
I used a discounted cash flow ((DCF)) methodology to assess Deck's fair value. I assumed that the company's revenue would grow at a compound annual growth rate ((CAGR)) of 8.6% between 2024 and 2029, based on the strong demand for HOKA and the strong Teva brand. The revenue growth rate that I assumed between 2024 and 2029 is 8.3%, which is in line with the consensus assumption. This is lower than the company's historical growth rate ((CAGR)) of 9.9% between 2016 and 2023.
I also assumed a weighted average cost of capital ((WACC)) of 8%. Based on these assumptions, I estimate DECK's fair value at $513 per share, which represents a 3.2% downside compared to the market price at the time of writing. The valuation reflects a 2025 P/E of 16.97, based on my EPS projection for 2025. This is in line with the consensus.
Author's assumption (Created and calculated by the author)
Based on DECK's Q1 2024 results , I project that the company will generate revenue of $1,098 million in Q2 2024, which is higher than the consensus of $950 million. I also project that DECK will achieve an operating profit margin of 15.5% in Q2 2024. After adjusting my model to reflect DECK's Q1 2024 results, I now project that the company will generate full-year revenue of $4,010 million in 2024. This represents a growth of 10.6% from 2023.
Risks & Challenges
Competition: There are several other decentralized exchange platforms in development, and one of these may become more popular than DECK.
Regulatory uncertainty: The regulatory landscape for decentralized exchanges is still evolving, and it is possible that new regulations could make it more difficult for DECK to operate.
Technical challenges: DECK is a complex platform, and there is a risk that technical problems could prevent it from functioning properly.
Security risks: Decentralized exchanges are vulnerable to security attacks, and it is possible that DECK could be hacked.
Low liquidity: DECK is a new platform, and it is possible that it will not have enough liquidity to attract users.
Conclusion
Deckers Outdoor is a well-established company with a strong track record of growth. However, the company is facing some challenges, including rising costs and declining operating margins. These challenges could weigh on the company's profitability in the near term. Having said that, I believe Deckers has the potential to overcome these challenges and continue to grow in the long term. I would recommend a Hold rating for Deckers Outdoor until its operating margin challenges are resolved.
For further details see:
Deckers Outdoor: Hold Until Operating Margin Challenges Are Resolved