Deckers Outdoor Corporation (NYSE: DECK)
Deckers Outdoor Corporation (Deckers), NYSE: DECK, is a high return on capital business that, per its Fiscal Year (FY) 2022 10-K, is “… a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. Our brands compete across the fashion and casual lifestyle, performance, running, and outdoor markets.” Per the same Annual Report, Deckers generated $3.1 billion in revenue and $452 million in net income which were year-over-year increases of 23.8% and 13.4%. The business is headquartered in the mean streets of Goleta, California.
Deckers was founded in 1973 by Doug Otto and Karl Lopker. Its first products were sandals that were handmade by Mr. Lopker himself. Per Wikipedia, the name of the business came about while Mr. Otto was on a business trip in Hawaii. He found that locals referred to his sandals as "deckas", a slang word based on their striped layered construction that resembled a "deck" of stacked wood.
Mr. Lopker sold his share to Mr. Otto in the early 1980s because he wanted to go into the software business with his girlfriend. QAD Inc was the name of said business and it ended up being quite successful. Although Mr. Lopker passed away in 2018, Thoma Bravo purchased QAD Inc in 2021 for ~$2 billion.
Mr. Otto kept chugging along with Deckers and entered into a licensing agreement with Teva in 1985. The business went public in 1993 and acquired UGG in 1995. Teva was acquired in 2002 along with Sanuk in 2011, Hoka in 2012 and Koolaburra in 2015. There were other acquisitions along the way, but they will be detailed later in the Risks section of this writeup.
Dave Powers is the CEO of Deckers Outdoor Corporation and has served in this role since 2016. Per the Investor Relations website, he started his professional career with 10 years of experience at Gap and then moved on to the Timberland Company where he held several executive level positions. After his stint at Timberland, he joined Converse as Vice President of its Direct-to-Consumer (DTC) business. Mr. Powers made the jump to Deckers in 2012 where he led its DTC and Omni-Channel lines of business from 2012 – 2016. Mr. Powers graduated with a degree in Marketing from Northeastern University.
Mr. Powers’ compensation is made up of five parts: base salary, annual cash incentive, long-term incentives, employee benefits and severance/change of control payments. I will only discuss the first three as they are material and make up almost all his compensation.
Pretty self-explanatory. Mr. Powers’ base salary for FY 2022 was a cool $1.1 million.
Annual Cash Incentive
Per the FY 2022 Proxy Statement, his Annual Cash Incentive was based on two factors: consolidated operating income and consolidated revenue with the former having a weighting of 70% and the latter with a weighting of 30% with minimum, target, and maximum thresholds for each. The operating income and revenue components are determined by the Compensation Committee and no further information was provided as to how or why they set the thresholds.
The two screencaps below show each component of his 2022 Annual Cash Incentive and how his performance measured up against each threshold. The screencaps were taken from pp. 53 – 54 of the FY 2022 Proxy Statement.
Long Term Awards
Mr. Powers is eligible to receive two types of long-term awards: time-based RSUs (restricted stock units) and LTIP PSUs (long-term incentive plan performance share units). The RSUs make up 40% of his total long-term awards and equity compensation with the LTIP PSUs making up the remaining 60%.
I was a bit surprised to find out that the RSUs were not awarded based on financial performance. Instead, they are awarded based on continued employment with the business and their value is subject to fluctuation based on Deckers stock price. Per p. 55 the Proxy Statement, RSUs are used primarily for the retention of executives. Per the same page, the awards vest equally in installments over a three-year period commencing August 15, 2022.
The LTIP PSUs were granted based on financial performance composed of pre-tax income and consolidated revenue targets between FY 2022 – FY 2024. Each component of the LTIP PSUs receives a 50% weighting towards the overall award.
Per p. 56 of the FY 2022 Proxy Statement, “No vesting of any portion of the award will occur if the Company fails to achieve the preestablished minimum revenue and pre-tax income thresholds. To the extent Company financial performance is achieved above the threshold amounts, the number of PSUs that will vest from the threshold to the target, and then from the target to the maximum, will increase as determined by linear interpolation, provided that the maximum number of PSUs that may vest with respect to a particular award will not exceed 200% of the targeted amount for that award regardless of the level of Company performance.” Additionally, the executive must still be employed by Deckers through March 21, 2024 to receive the awards.
There is a TSR (total shareholder return) modifier adjustment for the LTIP PSUs. Per pp. 56 – 57 of the FY 2022 Proxy Statement, “The 2022 LTIP PSU awards earned are subject to adjustment based on a TSR modifier. The amount of the adjustment will be determined based upon a comparison of Company TSR relative to the TSR of a pre-determined set of peer group companies, or TSR Peer Group, for the 36-month performance period commencing on April 1, 2021 and ending on March 31, 2024. For purposes of the 2022 LTIP PSUs, the TSR Peer Group used is the same as the Peer Group, but also includes three additional competitive companies in similar industries. Depending on Company TSR relative to the TSR of the TSR Peer Group, the number of RSUs that will be subject to vesting pursuant to each 2022 LTIP PSU will be modified as follows with linear interpolation between the percentiles:
Notwithstanding the foregoing, in the event that Company TSR is greater than or equal to the 55th percentile relative to the TSR of the TSR Peer Group, but Company TSR is a negative amount, the TSR modifier will not be applied (the number of RSUs to be vested will not be increased as a result of the TSR multiplier), which further aligns the interests of our executives with those of our stockholders. In addition, regardless of Company TSR relative to the TSR of the TSR Peer Group, the maximum number of RSUs that may vest pursuant to a particular 2022 LTIP PSU will not exceed 200% of the targeted amount, thereby mitigating compensation-related risk.”
One thing I’d like to note is that the Compensation Committee used to grant Annual PSUs several years back when Mr. Powers first became CEO. The performance metric for the Annual PSUs was diluted earnings per share which would be an ideal benchmark for any kind of equity award. Part of me wishes that the Compensation Committee would grant LTIP PSUs going forward based on that metric, but I’m not counting on it.
Overall, I think the CEO’s incentives are good, but could be a bit better. To the Compensation Committee’s credit, total stock-based compensation has never been >1% of revenues.
The screencap below shows the Summary Compensation Table from p. 63 of the FY 2022 Proxy Statement.
I found one red flag 🚩 in the Proxy Statements and it was due to the lack of stock ownership by management and directors of the business. This group has owned <2% of the business every year since Mr. Powers became CEO in 2016. As of the FY 2022 Proxy Statement, they owned 0.8% of the business. Anyone interested in Deckers would like to see a higher percentage of insider ownership.
The Security Ownership of Certain Beneficial Owners and Management table is shown below and was taken from p. 76 of the FY 2022 Proxy Statement.
What Does Deckers Outdoor Corporation Do?
To borrow from the introductory paragraph, Deckers designs, markets and distributes its footwear and apparel brands to casual and high-performance users. Its brands are UGG, HOKA, Teva, Sanuk, and Koolaburra. The following subsections describe each brand in further detail.
Per the FY 2022 10-K, “The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic. We intend to continue diversifying the UGG brand to drive year-round product sales, including through expansion of Women’s spring and summer footwear, Men’s products, and apparel, accessories, and home goods. The UGG brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America.”
Ah, yes. UGG. I hated them as a kid. I didn’t understand their appeal. I thought they were dumb, yet almost every girl I knew in grade/high school had a pair.
Deckers is right in calling UGG an iconic brand. Even those of us who are obsessed with investing and don’t get out much know about UGG because several of our female relatives, friends, coworkers, etc. have a pair of them. I could say the word “UGG” and you would immediately have an image of its boots in your head. The brand is that powerful.
Three interesting facts about the brand after reading Deckers’ 10-Ks from the mid-90s:
UGGs used to be advertised primarily on the Rush Limbaugh Show.
UGGs used to be sold primarily in California through the early 2000s.
The brand’s popularity exploded after being featured on “Oprah’s Favorite Things” list in 2003.
The brand has successfully managed to expand away from its original boot line to the degree that you’d be hard pressed to go to most parts of the United States during the fall, winter or spring and not see a lot of girls wearing some kind of UGG product. Remember this because there will be more on its brand evolution in the next section of this writeup.
Per the FY 2022 10-K, you can find UGG products at “… Urban Outfitters and ASOS, domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, streetwear and sports style partners such as Footlocker and Journey’s, as well as online retailers such as Amazon.com, Zappos.com, and Zalando.com.”
A link to its website featuring its full product lineup can be found here:
Per the FY 2022 10-K, “The HOKA brand is an authentic, premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth for the HOKA brand, which has quickly become a leading brand within our run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. The HOKA brand’s product line includes running, trail, hiking, fitness, and lifestyle. The HOKA brand is sold globally, including in the US, Canada, Europe, Asia- Pacific, and Latin America.”
Formerly called Hoka One One, this brand’s popularity shot up during COVID. I can’t recall anyone I know or seeing anyone on the street wearing HOKAs five years ago. Today, they’re almost commonplace in certain parts of New York City.
HOKA is known for its “maximalist” shoe design. They were originally created for marathon and ultramarathon runners who responded well to the extra cushioning. HOKA quickly developed a following in the running community and was acquired by Deckers in 2013. The brand has grown like a weed ever since. More on HOKA and what I learned about it will be detailed in the next section.
Per the FY 2022 10-K, you can find HOKA products at “… full-service domestic specialty retailers such as Fleet Feet, JackRabbit, Road Runner Sports, REI, select online retailers such as Zappos.com, and other strategic partners, such as DICK’s Sporting Goods, Running Warehouse, and Nordstrom. We continue to expand our HOKA brand wholesale distribution in international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group and Himaraya in Japan.”
A link to its website featuring its full product lineup can be found here: https://www.hoka.com/en/us/
Per the FY 2022 10-K, “The Teva brand was born in the Grand Canyon and for decades has served as a trusted companion for outdoor adventure seekers around the world. Today, Teva builds upon sport sandal leadership, authentic outdoor heritage, and a commitment to sustainability to drive growth through category expansion and a young, diverse, and adventurous consumer. The Teva brand’s product line includes sandals, shoes, and boots. The Teva brand is sold globally, including in the US, Canada, Europe, Asia-Pacific, and Latin America.”
Teva was the flagship brand for Deckers until UGG took over in the mid-2000s. It’s known for being one of the first “sport sandals” on the market and its rugged design. A “sports sandal” is a sandal that has a strap around the ankle and toes to reinforce the foot to stop it from sliding. Teva appeals to outdoorsy types and isn’t as cool or trendy as UGG or HOKA.
Per the FY 2022 10-K, you can find Teva products at “… specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, United Arrows, ABC Mart, Aeon Sports, Urban Outfitters, DICK’s Sporting Goods, DSW, and Nordstrom, and online retailers such as Amazon.com and Zappos.com.”
A link to its website featuring its full product lineup can be found here:
Per the FY 2022 10-K, “The Sanuk brand originated in Southern California surf culture and has manifested into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories, focusing on innovations in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity. The Sanuk brand is primarily sold in the US.”
I don’t think many of you know about Sanuk. To be honest, I didn’t either until I saw a picture of them. I remembered people wearing them in Florida. They’re usually found in coastal communities especially down south and out west. They’re funky and look like a shoe that beach goers or surfers would wear for chilling out. Sanuk has collaborated with the Grateful Dead for a line of products in case you need further information on who it appeals to. It was and continues to be a very niche brand that isn’t growing. You’ll see why in the Valuation section of this writeup.
The image below is of the Chiba, its most well-known product, to give you a sense of what its baseline model looks like.
Per the FY 2022 10-K, you can find Sanuk products “… primarily through domestic independent action sports and outdoor specialty footwear retailers, as well as larger national retail chains, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com.”
A link to its website featuring its full product lineup can be found here: https://www.sanuk.com/on/demandware.store/Sites-SANUK-US-Site/default/Home-Show
For you Dead Heads out there, a link to its Grateful Dead collaboration can be found here: https://www.sanuk.com/sanuk-x-grateful-dead-collaboration/
Per the FY 2022 10-K, “The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer to complement the UGG brand offering.”
Think of this brand as UGG lite. It’s for people who can’t afford or don’t want to pay the premium price point for the UGG label. It has essentially been folded into the UGG brand. Its logo even says “Koolaburra by UGG”. Its products look like UGG, but a trained eye can tell the difference. It shoots for the same aesthetic though.
Per the FY 2022 10-K, you can find Koolaburra products “… primarily through department stores and online retailers. Key accounts of the Koolaburra brand include larger national retail chains, including Kohl’s, DSW, Macy’s, QVC, Shoe Carnival, and Famous Footwear, as well as online retailers such as Amazon.com and Zappos.com.”
A link to its website featuring its full product lineup can be found here:
What’s Unique About Deckers Outdoor Corporation
There were three parts of the business that stood out after I finished my reading and research. The first two parts were UGG and HOKA. The third was its DTC (Direct-To-Consumer) business, but I will discuss it later in the Valuation section of this writeup.
As mentioned above, UGG caught lightning in a bottle after the almighty Oprah recommended its boots on her “Favorite Things” list back in 2003. The brand blew up afterwards and has continued that momentum for 20 years. There were two aspects of the brand that I noticed during my research that have helped it stick around for so long.
The first was that UGG has been and continues to be a premium/luxury brand. I would tell you to look at where UGGs are sold, but they can be found at a lot of stores these days. Everywhere from Foot Locker to ASOS to Nordstrom sells UGGs. Admittedly, this wasn’t an encouraging sign.
Then I looked at prices on UGG’s website and found luxury in the form of its pricing. The women’s UGG classic boot will run you $170. Every woman’s boot I found for <$100 on its website was on sale. I’m not sure if this was due to the business offloading inventory or simply a post-holiday sale, but the normal retail prices for each of them was well in excess of $100. UGG even sells boot covers, but they’ll cost you $50.
Don’t think that Deckers is going to cut you deals on any of UGG’s other lines of business. The best-selling slippers, the Tasman, costs $110. Fleece lined socks are on sale for $20 a pop. They’re usually $40. The UGG men’s Chelsea boot is $190. A men’s robe is $148. The Janey II men’s bag which is a clear plastic bag lined with faux fur and a huge UGG labeled strap costs $125. The kid’s classic UGG boot is $130. Its version of a baby blanket is $68. I hope you’re getting the picture here.
The second aspect I noticed about UGG was its evolution as a brand. I noticed this by looking at a couple of different data points. The first was its advertising and marketing and the other was its product development.
I would like to do an in-depth analysis on UGG’s advertising and marketing, but I think a lot of the heavy lifting can be done by going to its YouTube channel and Campaigns page on its main website.
A link to the UGG YouTube channel can be found here: https://www.youtube.com/@ugg/featured
A link to the UGG Campaigns page can be found here: https://www.ugg.com/blog?category=campaigns
What you’ll notice about its marketing is who it features and what is missing from most of the advertisements. If you go back to its advertising campaigns from earlier in the 2010s and before, UGG was marketed primarily towards a whiter audience. That’s the plain and simple truth. Some of you reading this might not want to hear it, but I don’t know what to tell you. Over the last several years, the brand has pivoted more towards people of color, LGBTQs, artists and creatives.
What’s missing from its marketing and advertising? UGG products and that’s by design. They’ll be there from time to time, but they aren’t the focus of the advertisement. What UGG is promoting are the people and lifestyles shown in its campaigns and videos. This strategy reminded me a lot of YETI.
The second part of UGG’s brand development has been its product evolution. Going back to the 1996 10-K, UGG had a lineup of 26 models of footwear. It’s website currently boasts several dozen models of women’s shoes alone. The business deserves credit for realizing that it had to evolve and couldn’t keep slinging classic UGG boots forever. A lot of the credit for its evolution was directed towards Andrea O’Donnell, the former President of Fashion Lifestyle at Deckers Brands. This article by Women’s Wear Daily does a great job of explaining her impact on the UGG brand. She is credited with transforming the brand to what it is now. I don’t want to go in to the too much detail as this writeup is pushing 3800 words already, but she was behind UGGs brand collaborations with the likes of Jeremy Scott, Y Project and Feng Chen Wang. She’s also credited with the popular Fluff Yeah sandal and the push to be more inclusive. Do yourself a favor and read the article! Let’s move on to HOKA.
What makes HOKA unique is its shoe design, specifically the use of foam cushioning. This is called a “maximalist” outsole. It has been a feature of its shoe designs since the brand’s inception back in the late 2000s. I didn’t know why this was a big deal, so I asked a friend who ran cross country in college to fill me in on the appeal of HOKAs.
The TL; DR is that back in the mid-2000s, there was a push towards “minimalist” running shoe designs. These kinds of shoes sought to mimic running barefoot as much as possible. HOKA went against the grain big time and added a ton of foam cushioning to the outsole. It basically went right when all the other major running brands were going left.
This initial feedback was good, but I wanted more data points, so I decided to do the same thing I did with Focusrite. I went to some stores around town and looked at reviews on the internet.
The notes below detail the feedback I received from several running stores in Manhattan and Brooklyn.
Hoka has a lot of cushioning.
It’s firmer than the foam from competitors like Adidas, Saucony, On Cloud, etc.
Hoka’s are also good for wide feet. They give feet a wider platform to expand on.
I asked the employee if all of the shoes are good and she said yes. The differentiation besides what she said boils down to brand.
Fleet Feet on 14th Street
Hoka’s have a lot of cushioning.
They’re great for people with plantar fasciitis. They help with lower foot pain.
They have a slight drop in the shoe of a few millimeters instead of a more noticeable one with other brands. He said Altras are usually flat with no drop.
The store associate specifically said that they’re taking share from Nike and Adidas.
Confirmed that their models are more focused on training versus a lifestyle shoe or shoe for people who are on their feet a lot at work after I asked about it.
People like the design and color patterns of the shoes too which I thought was an interesting side note.
Fleet Feet 7th Ave in Brooklyn
Hoka’s have a firmer foam that is better for heel strikers which most runners are.
A lot of people like them. Doesn’t seem like a fad.
Better for wide feet.
Pricing is similar to competing brands.
Brooklyn Running Company
People like Hoka because they’re following a trend.
The trend being the large amount of foam.
Other brands have added foam to their shoes in response to Hoka.
Your feet rest flatter in Hoka’s compared to other brands. He said other brands have higher lift.
Comfortable everyday lifestyle shoe. Good if you’re spending a lot of time on your feet.
Super Runners Shop - Court St.
Hokas have a lot of cushioning.
Lower offset than other brands.
Foam is firmer and better for rocking while you walk/run.
Blew up during the pandemic. Its marketing prowess was good.
Employee I talked to said the brand seems like a fad, at least for now.
Now we arrive the internet reviews. They’re solid across the board except for Trust Pilot where HOKA scores a lowly 2.8/5 stars.
Every other site I went to had positive ratings of HOKA products. Here is a list of links that will take you to reviews for HOKA products: Zappos, Amazon, REI, Nordstrom, Running Wearhouse, Dick’s Sporting Goods, Fleet Feet. I didn’t provide links from Runner’s World because it engages in affiliate marketing, which is fine, but I wanted to keep the reviews as unbiased as I could. I won’t go into further detail about the reviews on these sites because it’s obvious that HOKA scores well after taking a few minutes to look through them.
I judged HOKA the same way I did Focusrite too. I asked myself what the chances were that my friend, the employees of the stores I went to and all the online reviews from users of its products were lying. It’s low and pretty close to zero. I’m confident that HOKA has something exceptional going with its products and its overall brand.
I found two more interesting pieces of information about HOKA. First, it has a line of orthopedic shoes. Some of its models have a Seal of Acceptance from the American Podiatric Medical Association. Per the HOKA website, “The American Podiatric Medical Association (APMA) Seal of Acceptance recognizes products that have been found beneficial to foot health. To earn the Seal, each product is reviewed by a group of APMA podiatrists to ensure it promotes foot health. They have frequently awarded the Seal to selective styles of the innovative, cushioned footwear from HOKA.”
A link to HOKA’s orthopedic shoes can be found here: https://www.hoka.com/en/us/orthopedic-shoes/
The second interesting piece of information became apparent as soon as I went researching for HOKAs around the city. They’re expensive. They routinely retail for ~$150 or more. You’ll find a sale here or there, but don’t expect to find huge markdowns. I wouldn’t call HOKA a luxury brand like UGG, but it certainly is a premium one.
The screencap below shows Deckers’ revenue growth since 2002. The data were taken from TIKR.
Side note: I put revenue figures from 2013 – FY 2022 below the revenue figures from 2002 – 2012 because I thought they would be easier to read than one long screencap.
The business has managed to CAGR revenues by 18.88% since 2002 which is quite impressive for a two-decade period. Deckers trades at ~3.5x sales given its current market cap of ~$11 billion.
Let’s look at segmented revenue in the two screencaps below. I’m so thankful to TIKR for providing the data and making it easy to copy and paste into a spreadsheet.
It’s easy to see why I profiled UGG and HOKA in the previous section because of how dominant they are along with the DTC business versus the other three brands in the Deckers portfolio.
Earlier in the writeup, I stated that Sanuk was and continues to be a niche brand. Its revenue decline over the years proves my point. There’s a case to be made that Teva and Sanuk should be discontinued, sold, or spun off due to their lack of growth over the years.
I listed Deckers’ DTC business as the third differentiating feature of the business and you can see why from the two screencaps above. I’d like to mention that this segment is made up of both e-Commerce and Retail Store sales. DTC sales have CAGR’d at a 46% clip since its humble beginnings back in 2002, but that was an almost comically low starting figure. Over the last 15 years, DTC sales have CAGR’d at 21+%. Over the last ten years, DTC sales have CAGR’d at 27+%. It’s fair to say that this segment of the business is firing on all cylinders.
Besides its impressive financial performance, its DTC strategy has another added benefit. It protects the business from its distributor partners and doesn’t allow them to dictate terms with Deckers. This isn’t to say that Deckers doesn’t need the likes of Nordstorm, Amazon, etc., but no brand wants to be beholden to them either. It’s a complicated dance and one of the various aspects of running a business that most people wouldn’t ever think about, but Deckers has managed to stick to the beat of an ever-changing consumer landscape with its thriving DTC business.
Deckers’ geographic revenue breakdown is shown in the screencaps below. The data were taken from TIKR.
Foreign sales, which includes every market outside of the United States, have CAGR’d at 21+% since 2002 and make up about 1/3rd of sales. More on this in the Tailwinds section of this writeup.
Deckers’ balance sheet data are shown in the screencaps below. The data were taken from TIKR. I didn’t have a strategy to make them look bigger. You’re going to have to zoom in on them unfortunately. Sorry 😅.
There were two possible concerns on the asset side of the balance sheet. The first concern was the increase in inventory in the late 2000s and through 2010s. That was due to the building out of its DTC business along with growth in the overall business. Inventories also skyrocketed 🚀at the end of FY 2022 due to supply chain issues and long lead times for its production cycle. Am I thrilled with this? No. Is there anything I can do about it? No. Does management’s explanation of long lead times and supply chain issues make sense given that other footwear and apparel brands are experiencing the exact same problems? Yes. It’s just one of those things you have to deal with when analyzing a brand business.
The second concern was Goodwill. There was a huge impairment of ~$114 million during FY 2017. I go into further detail about this in the Risks section of this writeup.
The liability and equity side of the balance sheet below wasn’t too concerning given that the business had more cash and cash equivalents on hand than total liabilities. The business has rarely taken on short or long-term debt and when it has the amounts were small and repaid with haste.
The most impressive line item was the increase in equity. It went up almost every year and the business deserves a ton of credit for this considering how difficult that is to achieve over a two decade period.
Free Cash Flow
The screencaps below show Deckers’ “real free cash flow” since 2002. The data were taken from TIKR.
Deckers’ free cash flow has experienced a lot of variance over the years. The inconsistency was due mainly to overall business performance, impairments, write downs and increases in inventory. I hate to be repetitive, but I’ll go in to further detail about the impairments, write downs and increases in inventory in the Risks section of this writeup.
Deckers currently trades at ~116x its most recent yearly “real free cash flow”. That’s an eyewatering multiple and should surely come down once FY 2023 results are reported, but it’s all I have to go on until then. I didn’t want to assume that FY 2021’s real free cash flow was “normal” because of the previously mentioned inconsistency.
Returns on Invested Capital (ROIC)
My calculation for Deckers’ returns on invested capital since 2002 are shown in the screencap below. The data were taken from TIKR.
*The difference in NOPAT and Net Income in FY 2017 was primarily due to the Goodwill impairment mentioned in the previous subsection about Deckers’ capital structure.
Even though its ROIC has fluctuated over the years, the business has managed to keep the figure above my 15% threshold for most of the time. Like its free cash flow, I wish it was more consistent, but I cannot control such things. On to its returns on incremental invested capital.
Returns on Incremental Invested Capital (ROIIC)
My calculations for Deckers’ returns on incremental invested capital (ROIIC) are shown in the screencap below.
By my calculations, Deckers compounded the value of its business by 15-17% between year-end 2002 and year-end fiscal 2022.
Per Yahoo Finance, its stock price closed on 12/31/2002 at $1.11/share and on 3/31/2022 at $273.77/share which was a CAGR of ~33%. Since the end of FY 2022, its stock price has run up more than 50% to ~$414/share. Per its Press Release on 2/2/23 (linked here), the first three quarters of FY 2023 saw sales increase 17.45%, operating income increase by 13.12% and net income increase by 10.94%.
Deckers is trading at a rich valuation regardless of whether you’re using a sales multiple, cash flow multiple or ROIIC. Its stock price has CAGR’d at almost double the rate that I think is appropriate. The price is simply too dear.
The biggest risk that I found with Deckers was its capital allocation. Let’s start off with the good. The acquisitions of UGG and HOKA were grand slams. Every one of its competitors would like to own both brands. Given its robust financial performance, the shift towards having a large DTC presence was the right decision too. Finally, management has been plowing money into buybacks over the last several years. With all that being said, there is more than meets the eye with each of these positive capital allocation factors.
Deckers has made several acquisitions besides UGG and HOKA that didn’t work. In fact, most of them haven’t worked out. A list of its acquisitions is shown below. I only mention the price for two of them as the rest were immaterial. All the information about brand acquisitions were taken from Deckers’ 10-Ks.
Simple, an alternative shoe brand, was purchased in 1993 and discontinued in 2011.
In 1993, the business took a 50% stake in Picante, a designer of casual apparel for men and women. Its 50% interest was sold back to original owner of Picante in 2001.
In 1995, the business took a 50% stake in Trukke, a designer and producer of winter boots. Its 50% interest was sold back to the original owner of Trukke in 1997.
In 2002, the business purchased the rights to Teva for $62 million. From 1985 – 2002, it had a licensing agreement with the original owner. If you paid attention to the segmented revenue breakdown screencap in the previous section, you would’ve seen that Teva is doing a little more than 2x the purchase price in sales every year. Deckers also took a $32 million impairment charge on Teva in 2008. It doesn’t strike me as a great acquisition.
In 2008, the business acquired TSUBO, a maker of high-end casual and dress shoes. It took a ~$3.5 million impairment charge during the same year. It took an additional $1 million charge in 2009. This brand was sold in 2016.
In 2009, the business acquired Ahnu, an outdoor lifestyle brand for men, women and children. It was discontinued in FY 2016.
In 2011, the business acquired Sanuk for $123,544,000 plus contingent consideration. Per the 2011 10-K, the contingent consideration included 51.8% of the gross profits of the Sanuk brand in 2012, 36% of the gross profit of the Sanuk brand in 2013 and 8% of the gross profit of the Sanuk brand in 2015 multiplied by 5. Weird stipulation, I know. The purchase included $113,944,000 of Goodwill which was entirely impaired in FY 2017. The total purchase price for the brand, including all contingent consideration, was in excess of $175 million.
The business started a brand called MOZO in 2011 that was marketed towards people in the restaurant industry. This brand was sold in 2015.
Koolaburra was acquired in 2015. It has since been folded into the UGG brand.
Overall, Deckers’ acquisition strategy has been a mixed bag when considering UGG and HOKA versus the other brands that didn’t work out. Weighing them against one another is tough because most of the brand acquisitions have resulted in right or left tail outcomes. They’ve either been duds or blockbusters. The only one that’s been somewhere near the middle is Teva.
The retail portion of DTC segment has had its own issues over the years too. Deckers announced a restructuring plan in February of 2016. Per the “Restructuring Plan” section of the FY 2019 10-K, the business spent $55.6 million in total on this project. A full list of expenses can be found in the screencap below which was taken from p. 32 of the FY 2019 10-K.
Included in the restructuring was the closure of 46 company owned stores which was ~30% of the total number of stores in FY 2016. The business stated that the restructuring was due to a “changing retail environment”. The explanation made sense, but it did show that it had overextended its physical retail presence. On to the buybacks.
The two screencaps below show Deckers’ history of stock buybacks since 2002. The data were taken from TIKR.
I’m pro stock buybacks, but as you can see, they’ve been inconsistent. They had been increasingly steadily from FY 2018 – FY 2020, but then COVID struck. My main concern here is that I haven’t seen enough consistency from the business regarding stock buybacks to have high confidence that it will keep increasing them in the future.
Enough about capital allocation risks. There’s a risk involving Andrea O’Donnell. If your eyes haven’t glazed over yet, you’ll remember that Andrea was created with making UGG more appealing to a more diverse customer base. She left Deckers in September of 2021 to become the CEO of Everlane. Will Deckers be able to evolve its brands, specifically UGG, without her at the helm? I think only time will tell and the year and a half since her departure isn’t a long enough period to issue a decision either way.
The final risk is the HOKA brand and one question surrounding it. Is it a fad or not? Only one of the employees at the stores I went to said it was and I didn’t come across a lot of information about it being one during my research. Its running (no pun intended) white hot though. Sales CAGR’d 46.5+% between FY 2017 and FY 2022. Per its Q3 FY 2023 Press Release (linked here), sales were up 90+% versus Q3 of FY 2022. I don’t know how they’re doing it, but this growth must slow down at some point, right? Who knows when that will happen? Maybe they’ll continue to go on a tear for the foreseeable future? The point is that I don’t know how to assess whether it’s a fad or not, so I probably just need to monitor it for a while.
For as much as I went into detail about the risks surrounding the business, Deckers has had a hell of a run. It has been a 400 bagger since the turn of the century. That was not a typo. The business has managed to roll with the punches year after year.
The business still has a long growth runway considering it does approximately 1/3rd (~$1 billion) of its sales outside of the United States. That doesn’t guarantee success by any stretch, but it does represent a sizable growth opportunity.
It has a great balance sheet and is conservatively financed. Management isn’t engaging in any kind of financial engineering or using smoke-and-mirror tactics to obfuscate revenues, earnings, cash flow, etc.
Is Deckers Outdoor Corporation a great business? I don’t know if I’d call it great, but it’s not bad either. I’d say it falls somewhere between “above average” and “pretty good”. It has two world class brands, a robust DTC strategy, great marketing, high returns on capital and decent compensation incentives. I have concerns about is capital allocation strategy, whether it can keep up its marketing prowess going forward and don’t know if HOKA is a fad or not. I also think that the stock price has gotten ahead of itself. I’m going to give it a pass for now, but keep my eye on it.
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Disclosure: I do not own shares in Deckers Outdoor Corporation.