Deckers Brands Analysis

Overall, Deckers Brands appears to offer sufficient investment value, given its potential for continued growth and stability. The main brand, UGG, reliably generates revenue every fall/winter quarter, which means that even if the performance of other brands is weak in the first half, investors can still expect a certain level of results in the second half. In addition, the global running shoe brand HOKA, which is growing rapidly, is expanding at more than six times the market CAGR, and in a world where running is becoming part of everyday life, HOKA’s running shoes are receiving very strong reviews from runners. Furthermore, the company has been consistently buying back its own shares since last year, and considering that about $1.1 billion of the buyback authorization remains, this is a shareholder-friendly move. Lastly, compared with other large competitors such as Nike, Lululemon, and Adidas, the company trades at a relatively low P/E of 25.6.

There do not appear to be any major company-specific risks, but it is important to recognize the constant risks stemming from shifts in consumer preferences and the broader macroeconomic environment. Unlike the large global players mentioned above, Deckers trades at a higher P/E than smaller and mid-sized peers such as Crocs and Skechers. However, this gap can be attributed to differences in brand equity and management capability.

Deckers Brands is a footwear company co-founded in 1953 by Doug Otto and Karl F. Lopker. It currently has a market capitalization of roughly $15.6 billion and owns well-known footwear brands such as UGG, Hoka, and Teva. The company initially focused on expanding its business in the U.S. market, but after going public in 1993 and acquiring the fast-rising UGG brand in 1995, it grew into a global company. Today, it owns more than five brand names, and its core business appears to be centered around expanding UGG as its main brand.

In addition, UGG is Deckers Brands’ main fashion/luxury brand and the primary revenue driver, accounting for more than 50% of total sales in fiscal 2023. Hoka, the second-largest brand, is a performance athletic footwear brand that has been growing since the mid-2010s and generated about 40% of 2023 revenue.

Beyond these, Deckers Brands laid the foundation for its growth in the 2000s by acquiring multiple footwear brands. However, after acquiring Koolaburra in 2015 and positioning it as a sub-brand under UGG, the company appears to have stopped pursuing further brand acquisitions and instead is prioritizing the growth of its existing brands and its evolution into a global company.

Since its founding and up through the early 2010s, Deckers Brands’ main business was wholesale distribution. Starting in the mid-2010s, however, the company began expanding its direct-to-consumer (DTC) strategy, under which it sells directly to consumers, and has positioned DTC as a core business strategy alongside wholesale. As of 2023, the company generated about $3.1 billion in revenue, and in addition to its wholesale business, the DTC sales channel that has been expanding since the 2010s now accounts for a significant portion of total revenue.

Given that in 2020 the split between wholesale and DTC was 65% and 35%, respectively, this shift suggests that the company’s more direct marketing and sales strategy continues to prove effective.

According to the company’s 2014 investor presentation, Deckers set out a plan to expand its DTC business by leveraging the global trend and rising popularity of its core UGG brand, and to use this to grow the value of its other brands. In the 2023 investor presentation, UGG had become a global fashion brand generating $1.9 billion in revenue, while Deckers Brands’ Hoka brand had grown into a global sports apparel brand with about $1.4 billion in revenue. This indicates that the strategy has been at least partially successful.

The company is also performing well outside its home market. As of 2023, 68% of Deckers Brands’ total revenue comes from the domestic market and 32% from overseas markets. A review of its international market share shows that in the $350 billion global footwear market, UGG held a 1% share of total footwear brands in 2022. Considering that Nike, the market leader, has a 7% share and Adidas 3%, this places UGG within the global top 10.

Given that UGG is the core brand of Deckers Brands, it is notable that the company managed to offset the decline in popularity of shearling boots that began in the early 2010s by expanding beyond footwear into items such as sportswear, thereby maintaining its appeal and turning its signature shearling-boot look into an iconic UGG design. By expanding its DTC business, the company shifted away from relying solely on wholesale distribution and instead grew its brand equity and popularity by opening directly operated retail stores across the country and in luxury malls around the world.

UGG has established itself as a stable brand that delivers steady sales every fall and winter, thanks to designs popular among teens and people in their 20s and the shoes’ comfortable fit. However, because of the seasonal nature of the product—shearling boots see weaker demand in spring and summer—HOKA, which focuses on athletic and performance footwear, appears to be the main driver of Deckers Brands’ revenue in the first half of the year.

As Deckers Brands continues to expand its DTC business with the goal of global growth, the company plans to keep increasing the number of directly operated stores and department-store concessions worldwide. In particular, it appears focused on further growing HOKA and other subsidiaries to offset the seasonality of UGG. By launching not only footwear but also a broader range of sportswear and casual wear, the company has ample potential to maintain its popularity and trendiness while further expanding its market share.

Looking at the most recent results, the latest fiscal Q2 earnings report showed that total revenue grew about 24.7% year over year to roughly $1.1 billion. Earnings per share (EPS) rose 79% from a year earlier to $6.81. This fell short of the consensus estimate of around $11.89. The strong contribution from UGG, whose popularity picks up again heading into the fall and winter seasons, and from HOKA, which had been delivering steady sales growth since spring, played a major role in this performance. As highlighted on the earnings call, growth in HOKA’s DTC channel was a key driver of overall revenue growth.

UGG’s sales rose 28.1% year over year to $610 million, while HOKA climbed 27.3% to $420 million. In contrast, Teva fell 28.4% to $21.5 million, and Sanuk’s revenue declined 28.5% to $5.4 million. Other brands, including Koolaburra, grew 7% in total to $30.6 million.

Management also noted that this performance is tied to a steady double-digit increase in average selling prices, but it appears that strong wholesale distribution demand ahead of the fall season overlapped with this trend, resulting in an even larger upside.

Domestic and international revenue both increased, but international growth outpaced the domestic business: domestic revenue rose 21.1% to $750 million, while international revenue jumped 33.3% to $340 million.

Both DTC and wholesale revenue posted solid gains. DTC revenue rose 38.8% to $330 million, and wholesale revenue increased 19.4% to $760 million.

Gross margin expanded by 5.2 percentage points to 53.4%, underscoring steady and robust growth.

During the quarter, Deckers Brands repurchased 347,000 shares, with the buybacks totaling $185 million in value. As a result, $1.146 billion remains under the current share repurchase authorization. Given that the company has effectively signaled its intention to exit the Sanuk brand, this is seen as a move to prepare for potential new brand acquisitions. Management also expects UGG to continue to deliver steady single-digit growth, and believes HOKA’s growth story is far from over. They anticipate that fourth-quarter results, supported by new product launches, will be stronger than the third quarter, and project that HOKA can sustain growth above 20%. For Teva, they guided to slower growth, in line with a broader trend of economic slowdown.

In addition, multiple analysts have continued to raise their target prices for Deckers Brands and are reiterating Buy ratings. This appears to reflect back-to-back weeks of double-digit share price gains and quarterly results that have consistently beaten expectations. Deckers Brands also raised its 2024 expected earnings per share (EPS) from $23.50 to $24.10, and lifted its 2024 revenue outlook to around $4 billion.

Comparing the 2023 financial statements with 2022, cash increased by about $150 million to $980 million, and in this year’s second quarter it roughly doubled year over year to $820 million. Inventory declined from $920 million last year to $720 million in value. The company again repurchased 347,000 shares this quarter, which, together with the ample cash position, can be interpreted as a move to position itself for future acquisitions.

Cash flow has improved compared with last year’s downtrend, although it still falls short of 2021 cash levels. Even so, the company appears to be sustaining very rapid growth in the post-COVID period.

The company’s current ratio stands at 3.84, indicating very strong liquidity, and its debt ratio is just 0.21, suggesting that assets are being managed comfortably relative to liabilities. The debt-to-equity ratio is 0.45, which is very favorable compared with peers, leading to the assessment that the company has an overall very strong balance sheet.

A review of Deckers Brands’ major competitors shows that they exhibit similar post-COVID trends in revenue and cash flow, so it is difficult to say these metrics are unique to Deckers alone. However, when compared with other peers such as Crocs and Skechers, Deckers’ share price and valuation appear to be set at a significantly higher level, which warrants some caution.