Deckers Outdoor Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 5/5

Deckers Outdoor Corporation is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories for both everyday casual lifestyle use and high-performance activities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Deckers’ portfolio is anchored by brands UGG, HOKA, Teva, and Sanuk, each serving a unique consumer segment. UGG, their largest brand, commands an aura of style, comfort and quality, selling everything from boots to slippers. HOKA is focused on high-performance athletic footwear, with its running shoes capturing many markets. Teva sells outdoor and adventure footwear. And Sanuk makes casual footwear.

Business Overview

Deckers operates primarily through two segments: Wholesale and Direct-to-Consumer (DTC).

  • Wholesale: This channel involves selling products through various retailers, including department stores, sporting goods stores, and specialty footwear retailers.
  • DTC: Deckers sells directly to consumers through its own e-commerce websites and retail stores.
    • Direct-to-Consumer business is further divided into retail stores and e-commerce channels, where the company controls the inventory and has full control over merchandising.

While Decker operates 207 retail locations, their online business represents the biggest share of overall net sales.

Industry Trends & Competitive Landscape

The footwear and apparel industry is highly competitive, characterized by rapidly changing consumer preferences and intense pressure on prices. Key trends include:

  • Increased demand for comfort and performance-oriented footwear, benefiting brands like HOKA.
  • Growing sustainability and ethical considerations, impacting the supply chain and raw material sourcing.
  • The increasing significance of e-commerce and digital marketing.
  • High competition from both established and new entrants.

Decker competes with brands that create premium products like NIKE or Adidas or with specialty brands like Birkenstock.

What Makes Deckers Different?

Several factors set Deckers apart:

  • Strong brand portfolio: UGG’s established brand presence and the rapid growth of HOKA offer a combination of established luxury and high growth.
  • Innovative products: HOKA is considered a frontrunner in technical innovation, with a focus on performance running shoes and growing popularity.
  • Global reach: Deckers has a well-diversified presence in various regions, enabling growth across different markets.
  • Effective DTC strategy: Their growing DTC segment allows them to reach customers directly and capture greater margins.

Financial Analysis

Revenues and Margins

  • Sales Growth: DECK has delivered consistent revenue growth over the last few years. Growth is mostly driven by DTC, but also by expansion to new markets.
  • In fiscal year 2023 net sales increased 16.0%. DTC sales increased 17.6%, and Wholesale sales increased 15.1%. * In the latest earnings call management has reiterated that growth will primarily come from DTC.
  • Gross Profit: Gross profit has also improved consistently YoY, with a gross profit margin of 52.6% in fiscal year 2023, up from 51.5% the year before, and for the first 3 quarters of fiscal year 2024 the gross margin is around 55%.
  • Operating Income: Improved from 16.6% of revenues in 2022 to 19.5% of revenues in 2023. HOKA drove a lot of operating profit growth.
    • For the first three quarters of 2024 the operating margin is around 21%.

Cash Flow & Balance Sheet Strength

Deckers maintains a very healthy balance sheet with high cash reserves and low debt. This gives it lots of flexibility in the face of changing macroeconomic environment or even an acquisition.

  • Strong Cash Position: The company has substantial cash and short term investments.
    • As of September 30, 2024, they have cash and cash equivalents of $1,228.6 million which means they’re very liquid.
  • Low Debt: Debt is a small fraction of assets. This creates flexibility in funding operations and acquisitions.
  • Positive Operating Cash Flows: The company generates consistently positive cash flows from its core operations.

Other Aspects to Consider

Decker’s guidance for full year fiscal 2024 is revenue growth between 10-11% and EPS between $29.50 and $30.00, and has been raising their outlook and projections for 2024 throughout 2023 and early 2024.

  • Valuation: Has a Price-to-Earnings ratio around 24 and an EV-to-EBITDA of around 14. These multiples are at fairly high levels, though not outlandish. They are reflective of the company’s recent growth and brand strength. It must be noted though, that the market is clearly pricing them as a growth stock.
    • To have a meaningful discussion of valuation, you must build a detailed Discounted Cash Flow model.
  • Recent Management Changes: Dave Powers transitioned from the role of President and CEO to Executive Chairman effective Aug 1, 2024. Stefano Caroti assumed the role of President and CEO, effective the same date.

Moat Assessment

While Decker has many interesting aspects going for them, the moat is not that wide.

Moat Rating: 3 / 5

Deckers has some economic moats, but not all are sustainable or wide.

  • Brand recognition: UGG is a well-established brand with significant pricing power in the casual wear segment.
  • Innovation and Design: HOKA’s unique designs and focus on performance give them an edge in the athletic footwear market.
  • Customer Loyalty: Teva has a strong following with outdoor enthusiasts and Sanuk attracts a more niche segment of customers.
  • Distribution Network: Large wholesale and D2C presence.

However, these moats may be eroded because:

  • The competitive landscape is always changing, and trends might go out of fashion quickly, even high-end brands like UGG. * The athleisure market could cool down.

  • It’s fairly easy for a new company to try to compete with similar products, though it is difficult to replicate their brand.

Risks to the Moat and Business Resilience

Here are the risks that could impact Deckers:

  • Changing Consumer Preferences: As a fashion-focused company, shifts in style trends could cause a decline in UGG or other brand sales. This happened to brands like Crocs and others before.

  • Rising competition: Competition in both footwear and apparel intensifies constantly. New competitors and lower-cost options could diminish the company’s market share and/or make them lower prices.
  • Supply Chain Vulnerabilities: A significant part of the manufacturing happens in Asia. Supply chain issues could impact production and margins.

  • Economic Downturn: A global economic downturn could decrease discretionary spending, affecting demand for Deckers’ products.

  • Concentrated Sales: Deckers relies heavily on few key brands and regions. Any issues in those products or in the regions could have disproportionate impact on the business.

Despite these risks, Deckers has shown a good ability to adapt to changing market conditions and seems like a resilient company. They have a very strong balance sheet and cash flow generation.

Understandability Rating

Understandability: 2 / 5

Deckers is a relatively easy business to understand, but there are still some moving parts that increase the complexity:

  • Fairly straightforward business model: Designs, sells, and ships footwear products through various channels.
  • Multiple Brands with Different Segments: Understanding each brands specific target customer and potential is important to properly analyze the company as a whole.
  • Global Operations: Deckers operates in many regions with varying cultural preferences, so that makes it a bit more difficult to analyze.

Balance Sheet Health Rating

Balance Sheet Health: 5 / 5 Deckers has an extremely strong and healthy balance sheet.

  • High Liquidity: Very high cash and cash equivalents.
  • Low Leverage: Very little debt. They could easily take on significant amounts of debt for acquisitions, or for other initiatives.
  • Strong Free Cash Flows: Good cash flow generation from operations.

Recent Concerns / Controversies

Recently, on earnings call, management talked about some “product issues” related to some of their products and have said that will affect their overall gross margins for 2024. However, they still guide that the full year gross margins will remain at 52%.

  • There have been mentions of supply chain issues on the earnings calls, which have been somewhat mitigated. But it does look like increased freight costs are affecting their bottom line.

  • The company has been taking pricing actions to somewhat offset rising supply chain issues, but have been cautious on this front.

Despite these near-term issues, management is very optimistic about long-term performance.