Short Revisit: Deckers Brands
In Q3, HOKA’s sales increased by 91%, driven by triple-digit growth in its DTC segment. HOKA’s global marketing campaigns continue to succeed and spread brand awareness in international markets. On the other hand, UGG’s Q3 sales declined by 1.6%, primarily due to FX headwinds (LSD on a constant currency basis). Overall, DECK total company Q3 revenue increased 13.3% YoY. Exceptionally strong sales resulted in a 9% EPS surprise ($10.48 vs. $9.61).
Despite HOKA’s larger base, growth rates have held up, demonstrating momentum across the product line and significantly increased wholesale through market share gains and select new strategic access points. Moreover, CEO David Powers continues with positive remarks regarding HOKA on the Q3FY call:
“According to aggregated US run specialty store data, during December, HOKA increased market share by 5 percentage points versus last year, delivered the highest average product turns, and maintain a gross margin well above the channel average.”
Additionally, management raised the FY23 sales guide +11-12% y/y and now expects EPS of $18.00-18.50 while maintaining gross margins, SG&A, and operating margins.
Inventories
My initial analysis pointed out the heightened inventory levels for DECK. While DECK doesn’t provide brand inventory levels, it discloses wholesale assets for each brand. At least this can be a helpful proxy for inventory levels. Management noted that UGG’s overall inventory declined YoY on the Q3 earnings call. I note that in Q3, UGG wholesale assets declined 22% on a YoY basis. Moreover, on the HOKA side, wholesale assets increased 116% YoY in Q3. It should be noted that wholesale revenue also increased 83% YoY, so growth in assets/inventory is not as outsized as it seems.
Q4 Preview
With data and several analyst reports reaffirming continued momentum, I expect another solid quarter with a 4Q23 EPS beat. Despite fears of macro slowdown, DECK has the potential to continue to grow in FY24.
According to FactSet consensus, DECK is expected to grow by 13.3% Y/Y (12% organically) to $3,569M for the full year, with a 17.8% EBIT margin. From a segment perspective, FactSet consensus expects UGG’s FY23 sales to decline 4.4% to $1,895M, while HOKA is expected to expand 56.8% to $1,398M.
Conclusion
At ~20x FY24 EPS, the valuation is still compelling, given the momentum of HOKA. The main catalyst for higher estimate revisions and multiple expansion will be led by continued growth at HOKA. Additional drivers would be margin expansion from HOKA growth, improved DTC mix, and lower freight costs (a topic I touched on in my initial analysis). I still assume LSD growth for UGG in the future. In summary, the stock can garner a higher multiple as HOKA continues to become a more significant percentage of the business, and the market sees evidence that growth remains intact.
Deckers Brands continues to be one of the most exciting apparel and footwear companies.