Deckers Outdoor (DECK 2.62%) shares are up 18% year to date, in line with the S&P 500 and the Consumer Discretionary sector. The footwear company recently reported fiscal second quarter revenue of $542 million, up 8% year over year, above analyst estimates of $529 million. Earnings came in at $2.71 per share, an increase of 14% and also well ahead of analyst expectations of $2.33per share.
However, DECK shares shed 3.3% the day following the report, as investors focused on the muted guidance for the important holiday quarter. Management sees revenue growing approximately 1% to 3% for the fiscal 2020 third quarter, compared to the 8% increase the company enjoyed in the same period last year.
The core UGG business continued to perform well in the U.S. with total sales up 2.2% in the quarter. The company's Fluff Yeah hybrid sandal slipper is drawing new customers to the UGG brand. And Deckers continues to succeed in its PR and digital marketing efforts -- CEO David Powers noted during the earnings call:
UGG brand interest in the U.S. was up 11% in the quarter versus last year, according to Google trends. In particular, we have seen another 20-plus percent increase in customer acquisition within the key 18 year old to 34 year old demographic. This targeted demographic increase has been driven by the powerful organic PR earned by the UGG brand, which includes several high-profile celebrities photographed wearing our product.
Some of Deckers' secondary brands delivered enviable results as well -- HOKA ONE ONE products saw a 50% sales increase during the quarter, though the smaller Sanuk brand struggled as revenue fell 22% year over year.
The reward of smaller brands
While UGG remains the cornerstone brand for the company at about 75% of the top line, secondary brands HOKA ONE ONE and Koolabura are becoming important growth drivers. Importantly, their expansion helps decrease the sales volatility that comes from weather and consumer taste patterns for the core UGG business. Global sales at HOKA and Koolaburra increased 50% and 41% in the second quarter, respectively.
The HOKA momentum shows no signs of slowing down, with Deckers executives predicting strong growth in the important upcoming holiday third quarter. HOKA's success is linked to its innovation and new products, including the Carbon X and Rincon. The latter, released in July, drew new consumers to the brand, and management noted that 50% of online consumers of Rincon products were new. HOKA's product innovation is also paying dividends as spring product launches won product awards.
Deckers stock fairly valued given current risks
Despite handily topping guidance in the second quarter, there are still a few risks for investors to consider. There has been weakness in the European market for UGG products. Deckers' management is addressing this by resetting the marketplace. During the call, management said this multiyear reset "is intended to clean up inventory in the marketplace, consolidate the account base to focus on partners who best represent the UGG brand, and provide a more differentiated consumer experience." At these early stages, management's plan has no guarantee of success.
Decreased consumer confidence and spending is another potential headwind. Customers are likely to cut back on luxury UGG fashion boots, for example, if an economic slowdown settles in, and the muted holiday expectations certainly didn't help.
Lastly, uncertainty around tariffs comes with its own problems. While management believes that they have been able to mitigate any material impact from tariffs thus far, higher costs would compress margins. That said, Deckers is in a manageable position with less than 20% of its global production in China going to the U.S. market.
Shares of Deckers are trading at 16.5 times forward earnings, roughly in line with its historical average. Given the low guidance for the holiday shopping season and risks around Europe and tariffs, investors may want to wait for a pullback to pick up shares. Supporting brands like HOKA may be delivering impressive growth, but it makes up only about 14% of the company's top line.