When an investor looks to put money into a certain sector, they often try to figure out which company may be the best. When it comes to the footwear space, one of the names that continues to impress me the most is Deckers Outdoor (NYSE:DECK). Most known for its UGG, Teva, and HOKA ONE brands, this is a stock that investors should definitely keep an eye on.
I used to cover this stock many years ago, when the business was a lot smaller and was heavily reliant on cold winters to drive sales of its flagship UGG brand. If the US had a seasonally warm pattern, or if sheepskin prices that were a big UGG component were inflated, results were significantly impacted. These days, the company is more diversified, doing well over $2 billion a year in annual revenues (company fiscal year ends March 31st).
A couple of weeks ago, the company reported its fiscal second quarter results. Despite this pandemic environment, total revenues were up 15% over the prior year period, mainly due to 83% growth in the HOKA ONE brand. Gross margins of 51.2% beat estimates by nearly a full percentage point, and operating margin improved to 20.6% of sales from 16.8% a year ago.
On the bottom line, earnings per share of $3.58 smashed estimates by nearly a dollar. Deckers has beaten estimates on the top and bottom lines every quarter since the March 2017 one, and has only had one EPS miss since late 2015. The graphic below shows the last two years of results, and you will notice that every single one of these beats isn't exactly small, even in quarters where revenues are only a few hundred million.
(Source: Seeking Alpha quarterly earnings page, seen here)
The company's solid margins have led to impressive profitability, which has come in just under $1 billion in total for the past three fiscal years. In the first half of the current fiscal year, net income of just over $100 million has nearly doubled the prior year amount. However, this business is very seasonal, so I prefer to look at the full year numbers when all is said and done.
That solid profitability has also resulted in strong free cash flow. Over the past three fiscal years, which ended in March 31st of this year, average annual free cash flow has been more than $292 million. Like the net income picture, this fiscal year has trended a lot better than its prior year counterpart, but with seasonality and the pandemic we'll see how the full year numbers play out.
At the end of its September 2020 period, the company had over $626 million in cash on the balance sheet with almost no debt. Deckers has decided to return a sizable portion of its free cash flow to investors through a share repurchase program, over $500 million in the past three years alone. No shares have been bought back so far this fiscal year, but that's reasonable given the pandemic. Take a look at the impressive share count reduction in the chart below, nearly 20% in six years.
(Source: Quarterly and annual filings, seen here)
Primarily thanks to the strength of the HOKA ONE brand, overall revenue growth is forecast to continue for a number of years. The street currently expects high single digit or low double digit revenue growth through at least the March 2024 fiscal year. Partially thanks to the buyback, earnings per share growth is expected to be even better, estimated to rise in the mid to high teens or low 20 percent range.
When you look at valuation, the average street price target is $304, which would be low double digit upside from current levels. Deckers shares go for a little more than 21 times their expected March 2022 projected earnings per share. That's only about a half point or so above the average valuation for Nike (NKE), Skechers (SKX), and Wolverine World Wide (WWW) for the same rough time period, given all these names have different fiscal years.
However, Deckers has remained resilient through the pandemic, still showing solid top line growth, while the two smaller names mentioned above are expected to show large revenue declines this year. Nike is showing low double digit revenue growth as well, but it goes for over 35 times its May 2022 fiscal year expected earnings, so if you use that number you could definitely make the case that Deckers is significantly undervalued.
In the end, Deckers Outdoor remains the best in breed name for the footwear space. Its strong revenue growth and solid profitability has led to impressive cash flow over the years. As a result, investors have been treated to a very nice share repurchase program, which has taken out more than 6.6 million shares in just six years. With a strong balance sheet and a reasonable valuation, this name looks ready to set new all-time highs in the future.