481482

Deckers (NYSE:DECK) Beats Expectations in Strong Q1


Full Report / May 23, 2024

Footwear and apparel conglomerate Deckers (NYSE:DECK) reported Q1 CY2024 results topping analysts' expectations, with revenue up 21.2% year on year to $959.8 million. The company expects the full year's revenue to be around $4.7 billion, in line with analysts' estimates. It made a GAAP profit of $4.95 per share, improving from its profit of $3.46 per share in the same quarter last year.

Deckers (DECK) Q1 CY2024 Highlights:

  • Revenue: $959.8 million vs analyst estimates of $888.8 million (8% beat)
  • EPS: $4.95 vs analyst estimates of $3.00 (65% beat)
  • Management's revenue guidance for the upcoming financial year 2025 is $4.7 billion at the midpoint, in line with analyst expectations and implying 9.6% growth (vs 18% in FY2024)
  • Gross Margin (GAAP): 56.2%, up from 50% in the same quarter last year
  • Market Capitalization: $22.92 billion

Established in 1973, Deckers (NYSE:DECK) is a footwear and apparel conglomerate with a portfolio of lifestyle and performance brands.

The company's most famous brand, UGG, is a household name known for its sheepskin boots that blend luxury and comfort. These boots have amassed international recognition and are synonymous with a casual, relaxed style.

Deckers also owns Hoka, a brand that has gained popularity in the running community for its innovative approach. Hoka’s running shoes emphasize enhanced cushioning and a unique sole design that provides a distinctive running experience. This brand has captured a customer base beyond the running niche, appealing to people seeking comfortable, performance-oriented footwear.

In the outdoor footwear market, Teva offers a variety of sandals and shoes that combine durability, functionality, and environmental consciousness. The brand appeals to outdoor enthusiasts who value adventure and an active lifestyle, aligning with a growing trend towards outdoor recreation and eco-friendly products.

In addition to these flagship brands, Deckers operates other smaller lines that contribute to its diversified brand portfolio including Sanuk and Koolaburra.

Deckers' success is rooted in its commitment to quality, innovation, and understanding of consumer preferences. The company invests heavily in research and development, ensuring that its products exceed customer expectations in terms of comfort, durability, and style.

Footwear

Before the advent of the internet, styles changed, but consumers mainly bought shoes by visiting local brick-and-mortar shoe, department, and specialty stores. Today, not only do styles change more frequently as fads travel through social media and the internet but consumers are also shifting the way they buy their goods, favoring omnichannel and e-commerce experiences. Some footwear companies have made concerted efforts to adapt while those who are slower to move may fall behind.

Deckers primary competitors include Nike (NYSE:NKE), Vans and Timberland (owned by VF Corporation NYSE:VFC), Columbia Sportswear Company (NASDAQ:COLM), Merrell (owned by Wolverine World WideNYSE:WWW), and Skechers (NYSE:SKX).

Sales Growth

A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Deckers's annualized revenue growth rate of 16.2% over the last five years was decent for a consumer discretionary business.

Deckers Total Revenue

Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Deckers's annualized revenue growth of 16.7% over the last two years aligns with its five-year revenue growth, suggesting the company's demand has been stable. 

Deckers also reports sales performance excluding currency movements, which are outside the company’s control and not indicative of demand. Over the last two years, its constant currency sales averaged 18.4% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can see that foreign exchange rates have been a headwind for Deckers.

Deckers Year-On-Year Constant Currency Revenue Growth

This quarter, Deckers reported remarkable year-on-year revenue growth of 21.2%, and its $959.8 million of revenue topped Wall Street estimates by 8%. Looking ahead, Wall Street expects sales to grow 9.7% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Deckers has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer discretionary sector, boasting an average operating margin of 19.9%. Deckers Operating Margin (GAAP)

In Q1, Deckers generated an operating profit margin of 15%, up 1.9 percentage points year on year.

Over the next 12 months, Wall Street expects Deckers to become less profitable. Analysts are expecting the company’s LTM operating margin of 21.6% to decline to 20.4%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Deckers EPS (GAAP)

Over the last five years, Deckers's EPS grew 226%, translating into an astounding 26.7% compounded annual growth rate. This performance is materially higher than its 16.2% annualized revenue growth over the same period. Let's dig into why.

Deckers's operating margin has expanded 6.9 percentage points over the last five years while its share count has shrunk 12.3%. Improving profitability and share buybacks are positive signs as they juice EPS growth relative to revenue growth.

In Q1, Deckers reported EPS at $4.95, up from $3.46 in the same quarter last year. This print beat analysts' estimates by 65%. Over the next 12 months, Wall Street expects Deckers to grow its earnings. Analysts are projecting its LTM EPS of $29.29 to climb by 3.6% to $30.34.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Deckers's five-year average ROIC was 55.7%, placing it among the best consumer discretionary companies. Just as you’d like your investment dollars to generate returns, Deckers's invested capital has produced excellent profits.

Deckers Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Deckers's ROIC has significantly increased. The company has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.

Key Takeaways from Deckers's Q1 Results

We were impressed by how significantly Deckers blew past analysts' constant currency revenue and EPS expectations this quarter, driven by huge outperformance at its Hoka ($533 million of revenue vs estimates of $496 million) and UGG ($361 million of revenue vs estimates of $318 million) brands. On the other hand, its full-year EPS forecast was underwhelming. Still, this quarter's print was strong enough to mask the slightly weaker earnings outlook (especially considering its full-year revenue guidance was in line). Overall, we think this was a really good quarter that should please shareholders. The stock is up 2.5% after reporting and currently trades at $927.2 per share.

Is Now The Time?

Deckers may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Deckers is a good business. First off, its revenue growth has been decent over the last five years. And while its projected EPS for the next year is lacking, its stellar ROIC suggests it has been a well-run company historically. On top of that, its EPS growth over the last five years has been fantastic.

Deckers's price-to-earnings ratio based on the next 12 months is 29.9x. There are definitely things to like about Deckers and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the consumer discretionary landscape, it seems there's a lot of optimism already priced in. We wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $944.34 per share right before these results (compared to the current share price of $927.20).

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.