Why Has Deckers Outdoor Stock Gained 35% In 2020?

Deckers Outdoor stock (NYSE: DECK) faces near term pressure. The stock is up 35% YTD while the S&P is flat. YTD Revenues are flat and the company’s valuation looks high with limited growth prospects. Revenues are expected to be down for the rest of the year, despite a strong performance of the HOKA brand. However, the performance of other brands has been below par which will negatively impact its revenue growth rate-pressuring its stock price.

Following a large 105% rise since the March 23 lows of this year, at the current price of $235 per share, we believe Deckers Outdoor stock, a footwear designer and distributor company, has reached its near term potential. Deckers’ stock has rallied from $113 to $235 off the recent bottom compared to the S&P which moved 48% over the same time period, despite its YTD revenues growing by a mere 2%. Gradual store openings, as well as Deckers Outdoor’s strong direct to consumer reach, has helped the stock in beating overall markets. Moreover, the stock is up 193% from levels seen in early 2018, over two years ago. Deckers stock has fully recovered and is almost 20% above the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Notably, the stock is up 37% from the beginning of the year while the broader market is almost flat. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Why Deckers Outdoor Stock moved 193%? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise of the last 2 years is justified by the roughly 12% growth seen in Deckers’ revenues from $1.9 billion in FY’2018 to $2.1 billion in FY”2020 (ending March). This combined with a 2.2x jump in net income margin from 6% in 2018 to 12.9% in 2020 and a 10.6% reduction in share count due to stock repurchases worth $500 million, helped earnings per share basis swell 170%. Notably, Deckers’ margin expanded as a result of robust revenue growth coupled with lower product costs, a favorable mix of higher-margin products, lower markdowns, and a lower effective tax rate.

However, a sizable drop in Deckers’ P/E multiple partially mitigated gains to its stock from an upbeat earnings trend. Deckers’ P/E ratio fell from about 22x at the end of 2017 (P/E was unusually high to due lower EPS resulting from changes in the tax rate) to 17x at the end of 2019. While the company’s P/E has now increased to 24x, it seems to be overvalued when the current P/E is compared to levels seen in the past years – P/E of 17x at the end of 2019 and 14x as recently as late 2018. We believe there is a possible downside for Deckers’ multiple when compared to levels seen over the recent years, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. 

How Is Coronavirus Impacting Deckers Outdoor’s Stock?

The Coronavirus crisis has hit the apparel industry hard, and Deckers is no exception. Fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. Despite the pandemic, Deckers Outdoor delivered a steady performance in its first-quarter results (ending June), with the company’s revenues improving by 2.3% to $283 million. Moreover, the management stated it is witnessing a strong e-commerce growth, driven by full-price selling at both UGG and HOKA brands, helping to offset some of the volume loss from the retail business. Further, the company’s digital presence has increased, with HOKA search interest growth being second-highest among peer brands while the UGG brand’s search interest grew more than 73% in FY’20. However, despite its digital growth, we expect the overall demand to be lower in FY’2021 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently overvalued.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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