A lot of investors focus their attention on large- and mega-cap stocks like Amazon and Netflix. However, some of the best future opportunities can be found in smaller companies with market caps under $25 billion, and sometimes much smaller. One under-the-radar footwear company with a strong track record is Deckers Outdoor (DECK 2.25%), owner of the Ugg and Hoka One One brands.
Does this mid-cap stock with a market cap of $10.7 billion belong in your portfolio?
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What is Deckers Outdoor?
Deckers Outdoor IPO'ed in 1993 and has traded publicly ever since. It started with a focus on sandals, signing a contract to distribute Teva Sandals (one of its five core brands today) in 1985. In 1995, Deckers acquired Ugg Holdings. Ugg is currently Deckers' number one segment by revenue, driving the majority of its historical growth. The brand brought in $1.7 billion in revenue in its latest fiscal year, making up around 68% of the company's consolidated sales.
Rounding out Deckers' portfolio are Hoka One One endurance and running shoes, Sanuk (another sandal and surfer brand), and Koolaburra (a spin-off brand from Ugg). In its latest fiscal year, which ended this March, Deckers Outdoor brought in $2.55 billion in revenue, $504 million in operating income, and had earnings per share of $13.47. Recently, Deckers has made a big push to sell through its direct-to-consumer (DTC) channels, which include e-commerce sites and the 140 global retail stores it owns. In the last fiscal year, DTC sales grew 44.8% year over year to over $1 billion. DTC sales have higher gross margins than wholesale, which is why Deckers is focused on transitioning its customers to these channels over time.
HOKA ONE ONE is growing rapidly
Next fiscal year, Deckers is guiding at the high end of its guidance for $3 billion in sales and $540 million in operating income. A lot of this growth is expected to come from Hoka One One. The running and hiking footwear line grew sales 62% last year to $571 million, greatly outpacing Deckers' overall sales growth of 19%.
On the latest conference call, management reiterated that it expects Hoka One One to continue growing at a rapid pace and hit $1 billion in annual sales in the near future. With the sneaker market projected to hit $100 billion just in the U.S. by 2025, Deckers has tons of room to grow if it can keep convincing endurance athletes to buy Hoka One One shoes.
Valuation is sensible
Deckers Outdoor currently has a market cap of $10.7 billion. If it can hit the high end of its guidance, the stock will trade at a forward price-to-operating-income (P/OI) of 19.8. Deckers has seen a strong inflection in free cash flow over the last few years, generating $564 million over the last 12 months.
Management also has a strong track record of returning cash to shareholders through share repurchases. Over the past decade-plus, Deckers' share count has fallen from just under 40 million to 27.8 million, where it sits today. Last quarter, Deckers announced a new $750 million repurchase authorization, which should further reduce share count over the next few years, thereby increasing the earnings power of each share held by investors. With $1 billion in cash on its balance sheet, no debt, and a growing portfolio of footwear brands, Deckers can comfortably repurchase a lot more of its stock going forward.
Does it belong in your portfolio?
With the stock trading at a reasonable valuation, if you believe in the growth and durability of Deckers' core brands (Ugg, Hoka One One, Sanuk, Teva, and Koolaburra) and that management will continue buying back stock, Deckers looks like a buy at these prices. Of course, there are risks that Ugg could fall out of favor, or that Hoka One One might not have staying power in the endurance and fitness community, but with a forward operating income ratio below 20, this stock looks like it could be a great long-term holding.
