The sneaker and shoe business is ruthlessly competitive, and Nike has dominated the industry for decades. Nike is still the world's largest sporting shoe and apparel company by a wide margin, but it may no longer be the best stock in the space.
That distinction may now belong to Deckers Outdoor (DECK -2.43%), which has risen 400% over the past five years, while the once-vaunted Nike stock has declined 32%.
Deckers hasn't risen in a straight line, though. The stock took a good tumble following its previous earnings announcement, and shareholders are cautiously awaiting the company's first-quarter results, which are due after the market close on May 22.
But don't let the recent setback throw you off its trail -- Deckers is still the ultimate growth stock to buy with $1,000 today.
Running circles around the competition
Deckers Outdoor owns several shoe and sneaker brands, including UGG, Koolaburra by UGG, HOKA, Teva, and Ahnu.
Image source: Getty Images
The company has performed well since the COVID-19 pandemic. Many consumer-facing companies, including Nike and Deckers Outdoor, enjoyed a short-lived pandemic growth spike thanks to the U.S. government's efforts to boost the economy with stimulus money.
However, inflation and depleted consumers have caused Nike's growth to fade to the point revenue is contracting. It's fair to say the economy has slowed, but such excuses only go so far. Deckers Outdoor has continued to grow, and analysts expect sales to reach $6 billion next year.
Data by YCharts.
The company's sustained success shows its brands resonate with consumers, and the growth is profitable. Deckers Outdoor generated $1 billion in free cash flow over the past 12 months, or just over 20% of sales. That's nearly twice the free-cash-flow margin of Nike, which is supposed to have the industry-leading scale and juicy margins that go with it.
Earnings loom ... can the company continue to grow?
Investors may be wary of Deckers Outdoor because the stock plunged following its previous earnings report. You wouldn't know it from the market's reaction, but the company had a great quarter, beating revenue and earnings estimates. Management also raised its full-year revenue guidance.
Confused? Don't be. It helps to remember that the market can respond to news in unexpected ways. Fortunately, being a long-term investor means the current share price volatility takes on less weight compared to the company's strong growth prospects in the years ahead.
Additionally, Deckers Outdoor has zero long-term debt, $2.2 billion in cash, and no dividend. With its solid cash flows, management has tons of flexibility to invest in the business.
What makes Deckers Outdoor a buy right now
Before the January earnings report, Deckers stock traded at a price-to-earnings (P/E) ratio of more than 36. That kind of premium tends to come with high expectations, which likely explains the market's bearish response to an otherwise strong quarter.
But Deckers Outdoor is headed into this earnings report with a P/E ratio of just 21 as of this writing. Even the S&P 500 trades at 24 times earnings! Analysts estimate Deckers Outdoor will grow earnings at an average annual rate of 15% over the next five years. Investors should feel confident buying a stock with earnings growth this strong, while it trades at a discount to the broad market.
