2023-06-05 15:51:12 ET
Summary
- Deckers Outdoor Corporation has upside potential due to its reasonable P/E and strong EPS growth trajectory.
- DECK's UGG and HOKA brands have consumer appeal, but downside risks include uncertainty in foreign markets and possible margin contraction.
- The growth outlook and valuation of DECK are positive, with a buy rating and a target price of $575.
- I highlight key price levels to watch on this winning retailer.
Retail stocks have taken it on the chin after printing highs back in late 2021. The SPDR S&P Retail ETF ( XRT ) was above $100 two-and-a-half years ago but then went on to endure a nearly 50% drawdown. Less discretionary spending despite a robust jobs market hurt many retail names. Then just recently, shares of Foot Locker were hit hard as lower-end consumers shy away from getting the latest kicks. Others, like Lululemon ( LULU ), appear to be doing just fine, but then we get a report like the one from Dollar General ( DG ) last week.
But I see upside potential in shares of Deckers Outdoor Corporation ( DECK ) given its reasonable P/E and stellar EPS growth trajectory.
Retail Wrecked, But Bouncing, Holding Long-Term Support
According to Bank of America Global Research, DECK designs and markets footwear and accessories for men, women, and children. Deckers sells its products including accessories such as handbags, headwear, and outerwear, through domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through websites, and retail stores under the UGG (63% of revenue), HOKA (28%), Teva (5%), Sanuk (1%), and Other (2%) brands.
The California-based $12.5 billion market cap Footwear industry company within the Consumer Discretionary sector trades at a high 24.6 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
DECK reported a solid EPS beat back on May 25. EPS verified at $3.46 (GAAP), besting analysts' estimates by $0.76. The 'kicker' was a nearly 8% top-line beat and, more importantly, an earnings guidance increase. You just don't see these sorts of numbers with growth (color on that ahead) much in retail right now.
Among the athletic footwear firm's growth outlets, it is the UGG and HOKA brands that have appeal with many consumers. But downside risks include uncertainty in foreign markets and possible margin contraction if international investments do not pan out.
On valuation , analysts at BofA see earnings nearing $20 this year, but the real bullish story is told in the out years. Per-share profits are seen climbing at a steady pace - near 20% - through 2026. The Bloomberg consensus forecast is not quite as sanguine compared to BofA, though.
No dividends are expected to be paid on this consumer growth stock, but its EV/EBITDA ratio is not that far above the market's average. Moreover, with decent free cash flow, both DECK's operating and GAAP earnings multiples are reasonable and frankly cheap should earnings growth verify, and the share price remains stable.
Deckers: Earnings, Valuation, Free Cash Flow Forecasts
With DECK's FY 2024 now underway, if we apply $23 of EPS to a 25 P/E, then the stock should be near $575. A 25x P/E is a PEG of only about 1.4. While that is at a slight premium to the sector median, robust earnings growth backs it up.
DECK: Low Valuation Grade Is Deceiving
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2024 earnings date of Thursday, August 3. The calendar is light on volatility catalysts aside from the reporting date.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, while it is still early, Seeking Alpha reports that the consensus forecast is $2.13 with a high-low range of $2.51-$1.87. That would be a strong 28% increase from $1.66 of operating EPS earned in the same period a year ago. Deckers has topped analysts' estimates in 11 of the past 12 releases, according to data compiled by Option Research & Technology Services (ORATS). While the stock traded higher post-earnings last time, the stock response history has been mixed.
This time around, options traders have priced in a 5.7% earnings-related share price swing when analyzing the at-the-money straddle expiring soonest after the August earnings date. With low implied volatility across the market today, and with a pair of soft reactions, I am inclined to sell that premium.
DECK: Overvalued Option Premium
The Technical Take
DECK faked out the bulls in late May. The stock dropped from above $500 about a month ago to a low of $424, busting below the topping pattern in 2021 that featured a range of $444 to $452. But notice in the chart below that the stock held its rising 200-day moving average. The trend is clearly higher, with both the short-term 50-day and longer-term 200-day sloping upward and with the 50 above the 200.
The stock hit overbought conditions at the $503 peak, but the upside move was confirmed by the higher high in the RSI momentum indicator at the top of the chart. Overall, long here with a stop under the May low makes sense. Back to the options angle, selling a put at the $450 strike could make sense while buying one at the $400 strike for protection could be a reasonable trade.
But long-term investors should like the technical trend on DECK and overall momentum is strong.
DECK: Shares Rally Back Above The 2021 Highs
The Bottom Line
I like the growth outlook and valuation of DECK while shares have found their footing on the chart. I have a buy rating, targeting $575.
For further details see:
Deckers Outdoor: Shares Find Their Footing, Big EPS Growth Expected