Many Americans in recent decades have made the leap to wear Ugg boots at some point in their lives, often at the point of criticism or ridicule. Originally a sheepskin boot founded in Australia, it historically has global appeal for both fashion and practicality. Outside Australia and New Zealand, UGG is a brand manufactured by Deckers Outdoor Corp. (DECK, Financial) with registered trademarks in over 130 countries worldwide.
The company is a global leader in designing, marketing and distributing footwear and apparel for both everyday use and high-performance activities. Its primary brands include UGG, HOKA, Teva, Sanuk and Koolaburra. The company’s products compete across the fashion and casual lifestyle, performance, running and outdoor markets.
Founded in 1973, the company currently has a market capitalization of $9.8 billion.
UGG shoes
The UGG brand is one of the most iconic and recognized brands in the footwear industry. The product has diversified from its sheepskin boots history and now includes spring and summer footwear as well as apparel, accessories and home goods like blankets. For the core UGG product, the company uses a proprietary raw material, UGGpure, which is almost entirely repurposed wool woven into a durable backing, as well as UGGplush, which is repurposed wool and lyocell woven into a durable backing. As part of an ongoing effort to eliminate waste in its corporate sustainability efforts, all of the wool in UGGpure and UGGplush is sheared from the sheepskin being used in other products.
HOKA brand
One of the key growth catalysts for the company has been the HOKA lineup of performance shoes and apparel. This brand is a premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. These shoes were originally designed for ultra-runners, but now appeal to everyday athletes and other consumers. High levels of marketing have driven strong revenue growth, which is expected to be over $350 million this year. For the first quarter, which ended in June, HOKA sales increased 55%. The company is expected to open its first permanent HOKA retail location during the spring of 2023.
Financial review
In July, Deckers reported its first-quarter 2023 earnings. For the period ending June 2022, net sales increased 23.5% (constant currency) to $614.5 million with domestic sales growing 14.4% and international sales rising 36.4%. In terms of brand sales, HOKA increased 54.9%, UGG decreased 2.4%, Teva increased 2.0%, Sanuk decreased 5.9% and other brands (primarily Koolaburra) decreased 45.3%.
The gross margin decreased to 48% from 51.6% in the prior-year period due to higher transportation costs and other inflationary pressures. Operating income decreased to $56.3 million from $61.8 million and diluted earnings per share of $1.66 were below the $1.71 reported last year.
Cash and cash equivalents stood at $695.2 million, while the company has no outstanding debt at this time. Inventories ballooned to $839 million from $506 million on March 31 and from $458 million a year ago.
Valuation
The company has given forward-looking guidance for the fiscal year ending March 2023, which calls for sales in the range of $3.45 billion to $3.50 billion and a gross margin of 51.5%. Earnings per share are expected to be in the range of $17.50 to $18.35. Consensus analyst earnings per share estimates are in the high end of that range at approximately $18.11. Due to ongoing growth in the HOKA brand and alleviation of inflationary pressures, estimates for the fiscal year ending March 2024 are $21.40. That puts the stock trading at almost 20 times earnings. The estimated enterprise value/Ebitda ratio is approximately 14 times using expected Ebitda of $680 million.
The GuruFocus discounted cash flow calculator creates a value of approximately $280, which is roughly 27% below the current stock price. Inputs used were starting earnings of $18.11 per share and an 8% long-term growth rate. The company does not pay a dividend at this time, but does actively repurchase shares. Repurchases in the first quarter totaled $100 million.
Guru trades
Accoriding to GuruFocus, gurus who have purchased Deckers stock recently include Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates. Investors who have reduced our sold out of the stock include Jim Simons (Trades, Portfolio)' Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
Conclusion
Deckers Outdoors is considered a quality, well managed company with plenty of growth opportunities ahead of it. However, it is not immune to the labor shortages, supply chain and inflationary issues that are affecting most of the corporate world. Gross margins declined in the last quarter, reflcting these issues.
The HOKA brand is poised for rapid growth over the near to mid term, but long-term viability may not be relied upon due to the changing popularity of top shoe brands over time. The stock appears to be fairly valued at this time and a lower entry point may be warranted for investors.
