Two years ago, Deckers Outdoor (NYSE:DECK) was in the middle of a proxy fight with activist investor Richard McGuire, who was calling for all kinds of changes at the maker of Uggs. Typically, CEOs and boards don’t take kindly to this kind of uninvited criticism. Interestingly, the company followed many of McGuire’s suggestions sending DECK stock to $120.
Unfortunately, for McGuire, he sold his Deckers Outdoor stock in March 2018 for $95 a share, leaving $45 in gains on the table, with more potentially in the offing.
Deckers Raises Guidance
The company announced its Q3 2019 earnings Jan. 31; they were very healthy.
Revenues increased 7.7% on a constant currency basis in the quarter to $873.8 million, a company record. Regarding the bottom line, Deckers’ operating profits on a non-GAAP basis increased 19.3% to $242.3 million while non-GAAP earnings were $6.59 a share, 32.6% higher than a year earlier.
It’s these numbers that sent DECK stock more than 10% higher on the news.
The question for investors, including Mr. McGuire: Is now the time to buy?
Yes It Is Time to Buy DECK Stock
As I stated at the top, Deckers was doing poorly in 2017. If not for some of the moves it made in 2018, such as closing some of its retail stores, cutting its inventory levels, putting a lid on expenses, and recruiting some board members who knew something about retail and fashion, its stock wouldn’t be in the $140s.
Although McGuire’s activism might have pushed the company to speed up its plan to reignite company sales, it was CEO Dave Powers, a six-year veteran of the company who became Deckers CEO in June 2016, who made it happen.
According to Dave Powers, President and Chief Executive Officer:
“With third quarter results delivered and an updated outlook for the full fiscal year 2019, I am pleased to say that we are now well ahead of schedule to deliver on the long term strategic goals we laid out two years ago… Our third quarter results were propelled by the UGG brand as it successfully delivered a compelling product offering, with thoughtful and controlled distribution. In addition, we achieved impressive growth with our Hoka One One and Koolaburra brands.”
Highlights of the third quarter other than the top and bottom lines include a 12.5% increase in wholesale net sales to $482.2 million, which account for 55% of revenue.
Gross margins in the quarter improved by 160 basis points to 53.8%. Ugg sales, which account for 87% of the company’s overall revenue, increased by almost 4% in the quarter.
However, it is the company’s Hoka One One sneaker line that holds the most untapped potential — in the third quarter sales of the brand increased by 79.2% to $56.9 million or 6.5% of its overall revenue, 260 basis points from a year earlier.
If it can continue to deliver exponential growth from Hoka One One while continuing to increase Ugg’s sales by mid-single-digits each quarter, $140 is going to seem very cheap 3-5 years from now.
No, It’s Not Time to Buy
The only reason I can think of for not buying DECK stock at this point has everything to do with the fact it is trading within 5% of its all-time high of $146.90.
If you bought below $50 in early 2017, just as the Deckers turnaround plan was getting going, you’re sitting on a 200% return over 24 months. That’s a long way to come in a short period.
However, Deckers has a forward P/E of 17.2 at the moment, the same as the S&P 500, and less than its five-year historical average. So, at the very worst, you’re getting growth at a reasonable price.
The Bottom Line
Deckers has come a long way in two years. In two more years, Deckers shareholders likely will be celebrating a second time.
I hadn’t paid a lot of attention to Deckers in recent years, but the latest results suggest it’s ready to have another growth spurt. At $140, it’s a buy.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
