With Quiver Quantitative’s recent institutional holdings data, we can see that several hedge funds and asset managers have been increasing their holdings in Deckers Outdoor Corporation (NYSE: DECK). Firms such as Blackrock, Wellington Management, and Citadel have all added to their DECK positions recently. Most notably, Blackrock increased shares held by 20.9% (as filed on 6/30), bringing their total DECK holdings to 2,951,309 shares worth around $1.65 billion dollars at current market prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Deckers Outdoor Corporation.
In July, Deckers Outdoor Corporation (NYSE: DECK) posted strong first quarter earnings results for fiscal year 2024. First quarter revenue for fiscal year 2024 increased 10% to $676 million dollars, with diluted EPS increasing 45% to $2.41 per share, leading management to raise guidance for diluted EPS for fiscal year 2024 in the range of $21.75 - $22.25 dollars per share. This diluted EPS guidance for FY24 implies a 12.3% to 14.9% YoY increase in diluted EPS from FY23, reflecting the strength of the business’ HOKA shoe brand. Breaking down the business’ brands, we can see that HOKA brand net sales increased 27.4% YoY to $420.5 million dollars, further showcasing the strength of the HOKA brand, the highest performing brand within Deckers Outdoors Corporation’s brand mix. In addition to HOKA, UGG brand net sales decreased 6% YoY to $195.5 million dollars, Teva brand net sales decreased 18.8% YoY to $48.4 million dollars, Sanuk brand net sales decreased 32.3% YoY to $9.6 million dollars, and other brands (mainly made up of the Koolaburra brand) net sales decreased 33.9% to $1.8 million dollars. Additionally, the business also announced that they had repurchased 52,000 shares of the business’ common stock for $25.5 million dollars at a weighted average price per share of $485.95, showcasing the business’ sound capital allocation priorities that do a good job of aligning management and shareholder interests. As of June 30th, there was still $1.33 billion dollars remaining for share repurchases under the business’ current share repurchase program.
Additionally, outside of these relatively strong earnings results, management also released a full FY24 guidance outlook for the business. Management is guiding net sales to be approximately $3.980 billion dollars for fiscal year 2024, with gross margins expected to still be around 52% and SG&A expenses as a percentage of sales to be approximately 34%.
Deckers Outdoor Corporation is a global leader in designing, marketing, and distributing innovative apparel, footwear, and accessories for both high-performance activities and everyday casual lifestyle activities. Deckers Outdoor Corporation markets their products under five brands, namely UGG, HOKA, Sanuk, Teva, and Koolaburra. These products and brands are sold through international distributors, quality international and domestic retailers, and directly to consumers’ through Deckers Outdoor Corporation’s DTC business, which includes the business’ e-commerce websites and retail stores. These brands and products compete across the fashion and casual lifestyle, running, performance, and outdoor markets, with management believing that the business’ products are distinctive and appeal to a large demographic. Additionally, all of the business’ products are manufactured by independent manufacturers, with most of these manufacturers being based in Asia. Deckers Outdoor Corporation generally purchases products from manufacturers on the basis of short-term purchase agreements or individual purchase orders, in contrast to long-term purchase agreements. This gives the business greater flexibility in terms of manufacturing, as they are much more agile and able to respond to changes in international trade relations, changing consumer preferences, and evolving inventory management requirements.
Deckers Outdoor Corporation operates in an industry that is highly competitive, competing with athletic and footwear companies, branded apparel companies, and retailers with their own private labels. While management does acknowledge the fact that the industry is fragmented, they also acknowledge the fact that some of the competitors are larger and have substantially larger resources, some of which directly compete with the business’ product and brand lines. Additionally, with the rise of offshore manufacturing and e-commerce, it has become increasingly easier for new companies to enter the markets that Deckers Outdoor Corporation operates in, increasing competition. In such a highly competitive landscape, it is important to understand the competitive factors that are important to succeed. Management acknowledges that the competitive factors important to the markets and industry they operate in include responding quickly to changes in consumer preferences, producing appealing products, maintaining and enhancing brand strength, pricing products competitively, and weathering the impacts of supply chain disruptions. Additionally, the business’ key customers also face competition from sporting goods stores, department stores, online retailers, and retail specialty stores, which can affect their financial position and ability to do business with Deckers. While this tough competition may be a red flag for investors, we believe that Deckers Outdoor Corporation’s brand offerings are solid and have strong brand name recognition, evidenced by the business’ high return on capital metrics.
Management is solid and their capital allocation priorities do a good job of aligning shareholder and management interests. Despite Deckers Outdoor Corporation’s low float (around 25.77 million shares outstanding), management has still been aggressively buying back shares over the past few years. In 2021, management repurchased 307,080 shares at a weighted average cost of $322.87 dollars per share. Additionally, management repurchased 1,043,554 and 928,262 shares in 2022 and 2023, respectively, with a weighted average cost of $341.77 in 2022 and $320.35 in 2023. As we can see, management has been aggressively buying back the business’ common stock in recent years, despite the low float of the business, creating excess shareholder value and rewarding shareholders handsomely. While management likes to repurchase shares, they have not offered a cash dividend on their common stock since inception.
In terms of management incentives, management is incentivized well, with incentives that do a good job of aligning shareholder and management interests while also retaining executive talent over the long-term. The 2023 executive compensation plan includes a base salary, an annual cash incentive reward, time-based RSUs, and long-term incentive plan performance-based stock units. In FY23, CEO Dave Powers had 89% of his total compensation at risk, with 89% of his total compensation coming from cash and equity incentive plan bonuses based on a number of objective goals. With a majority of bonuses being paid out in the form of equity (>70%), management and shareholder interests are well aligned, as management has ownership in the business and the performance of the business’ shares correlates to their total compensation. Additionally, it also does a good job of retaining executive talent in the long-term. With management building up equity in the business that is vested over a multi-year time horizon, executive leaders are incentivized to stay with the business.
Deckers Outdoor Corporation is a very efficient business. The business operates at a LTM ROIC of 32.4% and a LTM ROE of 32.7%. With a WACC of 10%, Deckers Outdoor Corporation operates at a ROIC to WACC ratio of around 3.25x, showcasing the business’ ability to generate returns on cash reinvested back into the business at rates of return far higher than their cost of capital. With the ability to reinvest cash back into the business at high rates of return, Deckers Outdoor Corporation is able to rapidly compound its intrinsic value over the long-term, handsomely rewarding shareholders in the process. Looking further at efficiency metrics, we can see that ROIC has expanded over the last few years, signifying that Deckers Outdoor Corporation may hold a strong moat in the footwear and apparel industry. In 2014, Deckers Outdoor Corporation operated at a ROIC of 23%, compared to today where the business operates at a LTM ROIC of 32.4%, one of the highest return on capital figures amongst competitors.
Analyzing Deckers Outdoor Corporation’s income statement, we see stellar sustained growth in revenue, gross profit, and earnings within the last decade. Since 2014, Deckers Outdoor Corporation has grown revenue at a CAGR of 28.75%, with gross profit growing at a CAGR of 29.25% in that same time period. While these growth rates are stellar, it must be noted that these growth rates factor in fiscal 2015, where Deckers Outdoor Corporation increased revenue and gross profit by a whopping 516.5% and 508.7% YoY, respectively. Taking this massive growth spike out of the equation, Deckers Outdoor Corporation has increased revenue and gross profit at CAGRs of 8.2% and 8.8%, respectively, further showcasing the business’ stellar growth in revenue and gross profit within the last decade. In terms of earnings, Deckers Outdoor Corporation has grown EBITDA at a CAGR of 51.6% since 2014, with EPS growing at a CAGR of around 17.7% since 2015 (In 2014, Deckers operated at an EPS of $-0.08). However, it must be noted that these figures are slightly misleading, as Deckers’ massively increased revenue and gross profit in 2014. Leaving out 2014 in the EBITDA CAGR calculation, we still get an EBITDA CAGR of 11.7%, further showcasing the business’ earnings growth within the last decade. Additionally, the EPS CAGR is a little misleading as well, as Deckers Outdoor Corporation operated at a negative EPS in 2014 and their EPS slided from 2015-2017. A more accurate way to look at EPS growth is to look at it from 2018 to today, which brings us to a CAGR of 33.4% from 2018 to today, a stellar growth rate that further symbolizes the business’ earnings growth over the last few years. This growth in EPS can largely be attributed to share repurchases. Deckers Outdoor Corporation is a cannibal, decreasing shares outstanding by 21.5% since 2015.
The business currently holds around $1 billion dollars of cash and equivalents on their balance sheet, with no long-term debt or short term borrowings. With net debt of $-786 million dollars (a negative net debt signifies that the business holds more cash than debt on their balance sheet), we can see that Deckers Outdoor Corporation has plenty of runway to operate comfortably for the foreseeable future, with a clean balance sheet and plenty of cash on hand to pay down any future debt they may incur.
Looking at Deckers Outdoor Corporation’s cash flow statement, we can see stellar sustained growth in net income and free cash flow, showcasing the business’ operational efficiency. Since 2015 (Deckers operated with negative net income in 2014), Deckers Outdoor Corporation has grown net income at a CAGR of 14.2%, with free cash flow growing at a CAGR of 39.1% since 2014. While Deckers Outdoor Corporation does show some cyclicality in free cash flow generation, they have been able to expand free cash flow margins over the last decade, acting as a catalyst for the business’ explosive growth in free cash flow. In 2014, the business operated at a free cash flow margin of 10.3% of revenue, whereas today the business operates at a LTM free cash flow margin of 16.3% of revenue, showcasing the business’ efficiency at generating cash from its revenue. As the business’ free cash flow margin expands, they can generate more cash from revenue, which the business can then use to repurchase shares, offer / increase a dividend, or reinvest the cash back into the business at high rates of return relative to their weighted average cost of capital.
After conducting a reverse discounted cash flow analysis, we can see that Deckers Outdoor Corporation is trading at prices that imply a 11.34% growth rate in free cash flow over the next ten years, using a perpetuity growth rate of 3% (largely in line with US GDP growth) and a discount rate of 10%. While this may seem like a high growth rate to enter a position at, we think it is fair. While Deckers Outdoor Corporation has shown some cyclicality in the past in regards to free cash flow generation (the largest decrease occurring during the Covid-19 pandemic), they have expanded their free cash flow margin over the last decade and have shown explosive free cash flow growth within the last decade. While past results do not indicate future performance, we believe that expanding free cash flow margins will act as a catalyst in the long-term for Deckers Outdoor Corporation’s free cash flow generation. If the business is able to incrementally expand free cash flow margins over the next few years, it is very possible that this growth rate in free cash flow implied by current share prices is attainable. Additionally, another catalyst for future free cash flow generation is increased consumer spending on footwear and apparel. In a post-Covid inflationary economic environment, consumer spending has fallen, especially from its 2021 high. As the economy and macroeconomic conditions improve, further increases in revenue from heightened consumer spending will act as another catalyst for free cash flow generation.
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