Deckers Outdoor: A compelling growth story, but shares could fall further (DECK) | Private Equity Weekly

Introduction and investment papers

Dex Outdoor (New York Stock Exchange: Deck) is a casual lifestyle and performance-oriented footwear, apparel and accessories company that has outperformed the S&P 500 and Nasdaq 100 year-to-date.The company reported that Earnings for the third quarter of fiscal 2024 exist In February, revenue and profit increased by 16% and 44% respectively compared with the same period last year, exceeding expectations. For FY24, the company expects revenue to increase 14.3% year over year to $4.15B, while operating margin will improve 200 basis points to 20%.

I’ve been impressed with Deckers Outdoor’s execution to date, as its UGG and HOKA brands have delivered strong growth, accounting for 96.2% of total revenue, driven by strong consumer demand, leading to more High average selling prices (ASP) and strong operating margins. The company continues to drive strong product innovation and sees significant momentum in its direct-to-consumer (DTC) pipeline as it expands its footprint in the U.S. and Europe. Go international while engaging in noteworthy marketing collaborations to increase visibility and increase conversion rates.

While the company may face some short-term challenges as CEO David Powers retires and Stefano Caroti takes over amid heightened macroeconomic and geopolitical uncertainty, I believe Deckers Outdoor has a long-term growth story given its culture . Unfortunately, in terms of the share price, I think the upside is limited given its current valuation. Therefore, I will continue to wait and see for a better entry point to drive meaningful upside, and currently rate the stock a “Hold.”

About Dex Outdoor

Deckers Outdoor designs, markets and distributes footwear, apparel and accessories designed for casual lifestyles and performance activities under its five proprietary brands including UGG, HOKA, Teva, Sanuk and Koolaburra. The company sells its products in the United States and internationally through wholesale and DTC channels. It has six operating divisions, including five strategic business units, responsible for the global operations of its brand wholesale division and its DTC channel. As of the nine months of fiscal 2023, 56.7% of the company’s revenue came from the wholesale pipeline, with UGG and HOKA wholesale revenue accounting for 93% of the overall wholesale revenue. The remaining 43.3% of revenue comes from its DTC segment, which also has the highest operating margin.

Benefits: Strong U.S. and global revenue growth for UGG and HOKA; excellent alignment between product innovation and marketing; strong profits

The company announced its third-quarter fiscal 2024 results in February, with revenue growing 16% to $1.56B, exceeding expectations by 7.2%. Of the revenue of $1.56B, its UGG and HOKA brands together contributed 96.2% of total revenue, growing 15.2% and 21.9% respectively.

DTC channels played an important role in driving UGG brand revenue growth, accounting for 62% of the brand’s total revenue, compared with 60% in the previous year, driven by strong customer acquisition and retention in the United States and internationally. I believe Decker Outdoor’s success in driving the growth of its UGG brand through the DTC channel has allowed the company to gain an advantage through its pricing power, resulting in higher average selling prices and higher gross margins.period Earnings Conference CallDavid Powers also highlighted that its UGG brand benefits from a strong alignment between product creation, noteworthy marketing and effective consumer positioning, resulting in reduced SKU numbers as the company drives key marketing partnerships and top-of-funnel activity to attract Engaging the community and converting them into buyers of key franchise products including the Tasman, Ultra Mini and Classic Mini, as well as launching the Weather Hybrid Collection, Goldenstar Clog and Lowmel Sneaker.

At the same time, the company is also expanding its UGG brand footprint internationally, opening stores in key markets such as Shanghai and Munich, both of which are performing well with higher conversion rates and average transaction value (ATV) per customer. . Going forward, I believe the company will continue to focus on international growth in key markets as its international revenue as a percentage of total revenue will continue to grow to 32.8% thanks to successful product innovation, localized marketing content and branding – Strengthening Distribution Partner.

Meanwhile, the HOKA brand, the second largest revenue contributor, also benefited from DTC, accounting for 40% of total brand revenue and growing 5% year-on-year, with UGG brand due to strong customer acquisition and retention in the United States and internationally. The company continues to open retail stores in China and Europe to capture full-price sales while developing new Cielo X1 products, which are positioned as “the ultimate game day shoe for the most discerning athletes.” At the same time, the company continues to promote moments that resonate with consumers through its marketing efforts. In the third quarter, HOKA teamed up with SATISFY Running to create a community experience that blended skateboarding, trail running, and sprinting on San Francisco’s steep hills, and the HOKA Clifton LS shoe sold out immediately. I believe the company can continue to see impressive growth for its HOKA brand as it positions itself in the road running space through innovative product innovation and meaningful customer moments that enhance consumption in the U.S. and internationally. User experience and performance, resulting in higher conversion rates and ASP over time.

Turning to profitability, the company’s gross margin improved 580 basis points year-over-year to 58.7% as strong consumer demand and DTC-driven strong growth in UGG and HOKA brands led to higher average selling prices, allowing the company to gain economies of scale. At the same time, other factors such as freight savings, selected pricing actions and product mix optimization also help improve gross margins. Meanwhile, the company’s operating income was $487.9 million, up 34.5% year over year, with a profit margin of 31%, as it increased SG&A expenses by 23% year over year to invest in talent and drive marketing efforts. I firmly believe that its DTC channel should continue to grow, both in the U.S. and internationally, given the company’s focus on driving robust product innovation, consumer positioning, and coordination between marketing efforts to increase awareness and drive conversions, allowing it to Maintain its pricing power and profit margins.

The Bad: Growing global macroeconomic and geopolitical uncertainty, leadership changes

Deckers Outdoor has achieved outstanding performance under the leadership of David Powers, with its stock returning more than 400% over the past five years and outperforming the index by more than 4 times. With David Powers announcing his retirement, Stefano Caroti will become the next President and CEO. Stefano Caroyi has served as chief commercial officer to this day, and while he has successfully led the company’s omnichannel strategy and HOKA brand operations, leadership changes often bring a series of uncertainties, especially given the company’s strong performance to date.

I also believe that the leadership change comes at a time of heightened macroeconomic uncertainty and geopolitical tensions. As inflation continues to exceed the Federal Reserve’s 2.2% target rate, Interest rate cut was pushed further. That means financial conditions will remain tight for longer, which often means an economic slowdown ahead as companies start laying off workers to protect profits. At the same time, the tightening monetary policy of the United States often leads to a tightening of the international monetary environment, and central banks of various countries need to monitor the trend of their own currencies. Therefore, I believe a prolonged slowdown in global macroeconomics will lead to slower consumer spending, which will hurt Deckers Outdoor’s top and bottom lines as they may need to implement deep discounts to manage inventory, resulting in lower ASPs, lower returns on marketing spend Rates and profit margins declined.

I would also like to point out that Deckers Outdoor outsources the production of its products to independent manufacturers primarily in Asia, with a purchasing office in Hong Kong and on-site supervision offices in China and Vietnam. While this gives them an advantage in maintaining an asset-light business, we shouldn’t overlook the potential supply chain risks that could impact Decker Outdoors if geopolitical tensions escalate and international trade relations sour.

Combined: Deckers Outdoor is a “Hold”.

Looking forward, Deckers Outdoor expects fiscal 2024 revenue to increase 14.3% annually to $4.15B, while gross margin and operating margin are expected to increase by at least 450 basis points and 200 basis points year-over-year to 54.5% and 20% to 54.5%, respectively. Yes, the company continues to drive customer acquisition and retention in the U.S. and internationally, led by its strong product innovation and noteworthy marketing engine, allowing it to maintain its pricing power and unlock operating leverage.

Assuming the company continues to grow in the low single digits over the next 3 years until FY2026 and then slows down in the high single digits until FY2028, it should be able to generate $5.8B in revenue. In the interim, as the company continues to optimize its product mix and leverage its pricing power, its operating margins should gradually improve to at least 22% by FY28, which will result in $1.28B in operating income, equivalent to a 10% discount The present value is US$880 million.

take S&P 500 Index as proxy, with the company’s earnings growing at an average of 8% over 10 years and a P/E ratio of 15-18, I think Deckers Outdoor should be trading at least 1.25 times the S&P 500 based on its earnings growth rate over that period. That implies a price target of $749, a downside of about 8%. I don’t think this is sufficient to build a long-term position, especially given that the S&P 500’s P/E ratio is high relative to its 5-year and 10-year averages, thereby increasing the U.S. 10-year price as inflation remains above the Fed’s target Treasury bond interest rates will rise to 4.5%, a sharp retracement of at least 10%. Therefore, I will remain on the sidelines for now, waiting for a better entry point to secure a significant move higher, and rate the stock a “Hold” for now.

in conclusion

There’s no denying that Deckers Outdoor’s UGG and HOKA brands are seeing strong growth as strong consumer demand for its product franchises and the success of its DTC pipeline in the U.S. and internationally are able to drive higher average selling prices, thereby enabling The company was able to maintain strong operating margins. Despite the uncertainty surrounding a leadership change amid increasing macroeconomic and geopolitical uncertainty, I believe Deckers Outdoor can continue to drive growth given its culture of innovation and creating moments that resonate with consumers. However, in my opinion, the stock is currently priced perfectly with limited upside, so I will stay on the sidelines for now and rate the stock a Hold.