Deckers Outdoor Stock Still Attractive At $258?

DECK: Deckers Outdoor logo
DECK
Deckers Outdoor

After almost a 54% increase in Deckers Outdoor Corp’s stock (NYSE: DECK) since the beginning of this year, at the current price of around $258 per share, we believe the footwear designer and distributor could still have a modest upside. Though an economic downturn has squeezed demand for lifestyle brands, Deckers Outdoor’s affordable products along with a liquidity position of approximately $1.1 billion (including $626.4 million in cash and equivalents, plus $462.6 million available under its existing revolving credit facilities) should help the company weather the Covid storm. Deckers’ running shoe brand Hoka delivered a strong 83% surge in revenues in Q2, after being the only brand in the company to record a boost in sales in Q1 as well. People have increasingly turned to the outdoors to stay active amid coronavirus-related restrictions and safety measures, benefiting the company’s sales. With the success of the Hoka brand and strong e-commerce sales, the company looks poised to see higher stock growth in the coming quarters. The company owns a portfolio of leading fashion lifestyle (Ugg, Koolaburra) and performance lifestyle brands (Hoka, Teva, and Sanuk). 

Deckers’ stock has largely outperformed the broader markets between fiscal 2018 ( year ended March 2018) and now. The retailer’s stock is around 187% higher than it was at the end of fiscal 2018, compared to 38% growth in the S&P. Our dashboard, What Factors Drove 187% Change In Deckers Outdoor Stock Between Fiscal 2018 And Now?, provides the key numbers behind our thinking, and we explain more below.

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DECK’s stock grew a solid 49% from around $90 in fiscal 2018 to $134 in fiscal 2020 – justified by the roughly 12% increase in the company’s revenues from $1.9 billion in FY 2018 to $2.1 billion in FY 2020. In addition, earnings growth, on a per-share basis, was higher by a large  170%. This was driven by a 690 bps net margins expansion from 6.0% to 12.9% and around 11% decline in shares outstanding during this period. It should be noted that Deckers underwent a restructuring back in February 2016 to improve gross margins, reduce the company’s overall cost structure, and to eliminate underperforming brands. These writedowns and impairments took a short-term toll on the company’s financials (dragging down the net income figure to only $5.7 million in FY 2017 from $122 million in FY 2016) but helped to streamline operations for future growth. Consequently, the net income margin improved from 0.3% in FY 2017 to 6.0% in FY 2018.

Finally, Deckers’ P/E ratio declined from about 25x at the end of FY 2018 to 14x at the end of FY 2020. While the company’s P/E is now around 26x, it could expand modestly going forward on the basis of its casual and active offerings.

How Is Coronavirus Impacting Deckers’ Stock?

After posting weak Q1 sales due to store closures, Deckers Outdoor reported strong Q2 results (quarter ended Sept 2020) as it seemed to gain from a recovery in apparel sales, digital growth, as well as a sector-wide trend toward comfort and athletic wear (which comprises most of what the company sells). In the fiscal first half of 2021, the company’s revenues grew by 11% year-over-year. In addition, Deckers’ gross margin rate improved 170 bps from 49.2% of sales during the same period last year to 50.9% this year. Operating income also improved by 84% year-over-year to $121 million in the fiscal first half. The company also saw a 74% spike in direct-to-consumer revenues to $171.9 million in Q2.

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