Wall Street had its best week of 2024, recovering from a rout earlier this month. For the week, $S&P 500(.SPX)$ surged nearly 3.9%, bringing it within striking distance of its July record high. The tech-heavy $NASDAQ(.IXIC)$ saw an even more impressive 5.2% gain, while the $DJIA(.DJI)$ advanced a solid 2.9%. Meanwhile, the yield on the 10-year Treasury fell as data eased concerns of an imminent recession. The best-performing concepts is Footwear.
Considering the different perceptions of the stock, this time TigerPicks chose $Deckers Outdoor(DECK)$ to have a fundamental highlight to help users understand it better.
$Deckers Outdoor(DECK)$
Deckers Outdoor Corporation, together with its subsidiaries, designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high-performance activities in the United States and internationally.
Since 2024, DECK has lost more than 13% of its market value, underperforming the broader market.
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The aim of my is to revisit DECK and answer the question: in light of the latest earnings results and the recent price decline, is it worth buying DECK now or not?
Impressive Earnings
In the most recent quarter, DECK has beaten analyst estimates, both top- and bottom line. Revenue came in at $825 million, or $18.8 million above the expectations, while GAAP EPS was $4.52 or $1.01 above initial estimates. Not only did they exceeded forecasts, but they have also revised their guidance upwards.
We believe these results are very impressive, especially considering the challenging macroeconomic backdrop - including poor consumer sentiment -, and the fierce competition in the space, which has caused many large brands to struggle in the recent past, including $Nike(NKE)$ .
It is important however to understand what factors are driving this extraordinary growth story in DECK's case. So let us jump right in.
As mentioned before, revenue has reached $825 million in the previous quarter, which represents a 22% increase compared to the same period in the prior year.
If we break down this increase by channel, we can see that both wholesale and direct-to-consumer have contributed strongly. By geography, we can see that growth has been strong both in the United States and internationally. I
On top of these breakdowns, it is even more important to see, which brands have been driving the demand for DECK's products. As discussed in our previous article, UGG and HOKA remain the driving forces.
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Income statement
With regards to sales, there are two other items that we normally like to check. One of them is inventory and the other is accounts receivable.
1. Increasing sales normally warrant increasing inventory so that the firm can meet the demand. However, excessive inventory build up is also not optimal as it can negatively impact the efficiency of the company - e.g. the inventory turnover. It can also lead to obsolete inventory and the need to discounting in extreme cases.
2. Accounts receivable can indicate if the firm is pulling demand forward from the future or not. If accounts receivable grow at a faster pace than sales, it can mean that the firm may try to inflate revenue by potentially recognizing revenue earlier or selling more on credit.
Based on the most recent balance sheet, these are not concerns for DECK.
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Future outlook
The firm has also managed to translate its sales growth into earnings growth. The gross margin has expanded from 51.3% to 56.9%, the operating income has grown from $70.7 million to $132.8 million YoY. And EPS has come in $4.52 in contrast to $2.41 last year.
Looking forward the firm expects the growth to continue both top- and bottomline. Demand is expected to remain strong and sales growth is now expected to be around 10%. The gross margin is expected to somewhat shrink and come in around 54% for the full year. Diluted earnings per share for the total year is anticipated to be in the range of $29.75 to $30.65.
In our view, these expectations are reasonable and achievable.
Valuation and conclusions
we have previous highlighted that DECK's shares have been selling at a significant premium compared to the consumer discretionary sector median and also compared to the firm's own historic valuation. Let us look at the same set of traditional price multiples to assess, whether this is still the case or not.
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While the multiples have shrunk as a result of the share price decline, the firm still appears to be trading at a premium. The question is, is it justified now?
And our answer is still no. Let us expand on this a bit:
On one hand, we believe that the growth is impressive and could justify the current valuation, especially if we take into account the positive impacts of the share repurchases, which the firm seems committed to, and the upcoming stock split, which could also make DECK's stock more accessible for many investors.
On the other hand, we believe that competition will intensify. While Nike has been struggling lately, they have huge amounts of cash on hand, which could potentially be used to boost their R&D spending to innovate and launch new, more appealing products. This could create more competition, especially for HOKA. Eventually, growth may slow, and the multiples will likely contract.
For these reasons, we maintain our "Hold" rating, as we would like to see the stock price come down even further, at least to its historic valuation level, before we could upgrade to a more bullish rating.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 16 Wall Street analysts offering 12 month price targets for Deckers Outdoor in the last 3 months. The average price target is $1,081.57 with a high forecast of $1,350.00 and a low forecast of $887.00. The average price target represents a 13.79% change from the last price of $950.53.
Resource:
https://seekingalpha.com/article/4707852-deckers-outdoor-despite-impressive-growth-it-is-still-too-expensive
What are your thoughts on $Deckers Outdoor(DECK)$ ?
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