Barchart.com data from Wednesday trading shows that 43 stocks hit 52-week highs on the day. One was Deckers Outdoor (DECK), the maker of Ugg boots and Hoka sneakers.
DECK has hit a 52-week high on 57 occasions over the past 52 weeks, the highest number of any U.S.-listed stock. As a result, its shares are up 63% over the last 12 months and 350% over the past 60 months.
It can’t go any higher. Can it? It can. Here’s why I feel this way.
The Gift That Keeps on Giving
In June 2022, I wrote an article for Barchart that discussed the obscenely cheap acquisition by Deckers of the Hoka brand in 2012. It was so cheap it’s tough to nail down the price paid for the brand.
In my article from a year ago, I said that it had acquired Hoka One One (pronounced o-nay, o-nay) in September 2012 for $1.1 million, or about 0.4x sales. The CEO at the time of the acquisition, Jim Van Dine, projected Hoka would have $100 million in annual sales at some point in the future.
It’s certainly exceeded that number. In its most recent quarter (Q2 2024), Hoka’s sales were $424.0 million, 27.3% higher than a year earlier. They accounted for nearly 40% of its sales.
“The strength of demand for our HOKA and UGG brands continued to drive exceptional performance, producing record revenue and earnings for Deckers in both the second quarter and first half of fiscal year 2024,” said Dave Powers, President and Chief Executive Officer.
Before I get into the main argument against buying its stock at these elevated levels, let’s return to the purchase price.
I’ve had a chance to look at the financial statements more closely from 2013 and 2012.
On May 21, 2012, it paid $2.0 million for a non-controlling investment in Hoka. In September 2012, it acquired the remainder of the equity for $8.3 million. That brings the purchase price to $10.3 million.
“In September 2012, the Company acquired Hoka, and the total purchase price included contingent consideration payments with a maximum of $2,000,” Deckers states on pg. F-25 of its 2013 10-K.
“Based on current projections as of December 31, 2013, contingent consideration for the acquisition of the Hoka brand of approximately $1,800 is included within other accrued expenses and long-term liabilities in the consolidated balance sheets.”
The $1.8 million in contingent consideration raises the purchase price, as best as I can tell, to $12.1 million.
Assuming that’s in the ballpark, it paid about 4x sales, which isn’t cheap by any means -- VF (VFC) paid 1.6x sales for Timberland in 2011. Still, when that translates into more than $1 billion in annual revenue within a decade, I doubt too many long-time Deckers shareholders want an inquest.
Hoka, quite simply, keeps giving to shareholders.
The Argument Against Buying
The biggest argument one can make against buying DECK stock is that Hoka’s sales are decelerating. In Q2 2024, as I said earlier, Hoka sales increased by 27.3% year-over-year. In Q3 2023, they jumped 58.3% YOY, more than double. In Q2 2022, they were up 47.0% YOY.
So, comparing Hoka’s second-quarter sales from the past three years confirms the deceleration in its growth rate. However, that's natural with high-growth brands. After all, 40% growth from $100 million is $40 million by dollar value, whereas 10% growth from a $400 million base is the same $40 million.
Further, looking at Q1 2024’s 10-Q, Hoka’s wholesale revenue was $260.8 million, with an operating margin of 33.2%. The Ugg wholesale operating margin was 13.9%, less than half.
So, which would you rather have? 27% YOY growth from Hoka or Ugg? You don’t have to answer. It’s self-evident.
Here’s another thing.
Deckers paid more than $125 million for its Sanuk brand. Its total sales in Q1 2024 were less than $10 million. It will certainly not be the company’s third billion-dollar brand.
The way I see it, Deckers has two legs of a three-legged business model. All Hoka has to do is continue growing its sales each quarter. It doesn’t have to be spectacular growth to deliver outsized profits.
In the meantime, Ugg needs to generate higher margins, but fortunately, it has Hoka to give management the time necessary to complete the task.
Is DECK stock expensive? At 4.0x sales, absolutely. Its P/S multiple has never been this high. However, that hasn’t dissuaded analysts. Of the 18 that cover it, 14 rate it Overweight or an outright Buy, with a $625 target price, about 5% higher than its current share price.
It’s fair to say that analysts are being cautious about the company’s target price given how far it’s run in the past year, combined with the fact the markets have lost ground for three consecutive months. They’re waiting for the other shoe to drop.
Looking 233 days out, I like the June 21/2024 $660 put. Sell one or more of these, and your premium is $88.50 with an annualized yield of 23.3%. The net price paid should the shares be put to you is $571.50.
Should the shares stay about where they are ($594) or rise slightly, you’re getting a good deal on the entry price. If they go up by 20%, you get to keep $8,850.
Of course, I would be irresponsible not to mention that if its shares go down 20% by June 2024, you’ll be sitting on a paper loss of $9,600.
Buyer beware.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
