UGG And HOKA Will Expand International Direct Channels

Key Takeaways

• Deckers' growth is driven by international market expansion and direct-to-consumer success, boosting revenue and enhancing customer engagement and retention.
  
• Strategic product focus on UGG and HOKA, combined with high-margin sales and collaborations, ensures strong net margins and future market share growth.
  
• Potential phase-out of Koolaburra and increasing freight costs may reduce profit margins, while global expansion risks could hinder international revenue growth for Deckers.

Catalysts

Designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high-performance activities in the United States and internationally.

• Deckers Outdoor is expecting significant revenue growth driven by the strong demand for its UGG and HOKA brands, with a 15% increase projected for fiscal 2025, which would mark the fifth consecutive year of mid-teens or higher growth. This growth outlook reflects the company's successful expansion into international markets and direct-to-consumer channels, boosting overall revenue.
  
• The company is maintaining high gross margins, recently achieving 60.3% in the largest and most profitable quarter in its history. This is attributed to a high degree of full-price selling, favorable product mix, and reduced markdowns, which are expected to continue supporting strong net margins.
  
• Deckers' strategic focus on building a robust direct-to-consumer business is seeing balanced revenue growth across both DTC and wholesale channels. This approach is enhancing customer retention and acquisition, providing a sustainable path to improved earnings by leveraging higher-margin direct sales.
  
• New product launches and collaborations, like HOKA's Bondi 9 and UGG's fashion collaborations, are expected to cement brand loyalty and expand market share, particularly in premium segments. These initiatives target increased consumer engagement and are anticipated to contribute significantly to future revenue growth.
  
• The phase-out of the lower-margin Koolaburra brand is part of Deckers' strategy to focus on more profitable growth opportunities with core brands like UGG and HOKA, which is expected to streamline operations and improve overall net margins and earnings.

Deckers Outdoor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Deckers Outdoor compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Deckers Outdoor's revenue will grow by 11.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 19.1% today to 16.3% in 3 years time.
• The bullish analysts expect earnings to reach $1.1 billion (and earnings per share of $8.18) by about April 2028, up from $942.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 40.1x on those 2028 earnings, up from 16.8x today. This future PE is greater than the current PE for the US Luxury industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Deckers Outdoor Future Earnings Per Share Growth

Risks

• The potential phase-out of the Koolaburra brand and the associated sunset of koolaburra.com could lead to a reduction in revenue and impact net margins as the company redirects efforts and resources away from this product line.
  
• Management's caution regarding foreign exchange rate fluctuations presents a risk, as adverse movements could negatively affect revenue and profit margins, especially given Deckers' international operations.
  
• The anticipation of more normalized promotional and closeout environments in the coming quarters could lead to decreased gross margins and lower net earnings as discounting becomes more prevalent.
  
• The expected increase in freight costs is a headwind that can reduce gross margins and earnings, impacting overall profitability compared to past quarters with lower freight rates.
  
• Any execution missteps in the planned global expansion and growth strategies for brands like HOKA could fail to meet expected international revenue targets, potentially impacting overall earnings.

Valuation

• The assumed bullish price target for Deckers Outdoor is $238.94, which represents one standard deviation above the consensus price target of $189.99. This valuation is based on what can be assumed as the expectations of Deckers Outdoor's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $260.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 40.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of $104.18, the bullish analyst price target of $238.94 is 56.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.