Initiating Coverage on Deckers (DECK US: Model Unavailable)

Date of Initiation: 3/27/2025

Current Price: $116.95

Price Target: $162.7

Conviction: 7/10

Holding Period: 3 Year Hold

Model was built using IP from Grandeur Peak, unable to share.

Deckers is a US-based parent company for multiple footwear brands, most notably UGG and HOKA. UGG and HOKA will collectively make up 95.6% of FY2025 revenue and are the two brands that investors truly care about. Deckers has some of the greatest returns on capital and margin profile of any US Consumer company I have come across and the balance sheet is incredibly clean. The management team has done a good job with revitalizing UGG and growing HOKA into a serious competitor in the running shoe space. Prior to the 3Q25 earnings, investors were rewarding Deckers with a 36x p/e multiple for many of the reasons outlined above. However, after this earnings release the company's multiple has been slashed to around 20x.

I became interested in Deckers after I saw the sharp sell-off beginning in late January. My gut reaction was that this sell-off is an overreaction, and it could be a good time to buy an incredible group of consumer brands at a discount. The reason for the pessimism is the implied topline guidance for HOKA in 4Q25. This guidance suggests that HOKA will only grow 11.2% y/y in the fourth quarter. The implied 11.2% y/y growth would be the lowest growth for HOKA y/y since they started breaking it out as a segment. The lowest y/y growth prior to this 4Q is 21.9%, so the fall to 11.2% is cause for concern.

While management claims this growth is simply a function of them selling out of product in Q3, the market has taken it as a signal that HOKA may be maturing and delivering lower overall growth rates. Thus, the critical question becomes "What is HOKA growth going to look like moving forward and what growth do we need at 20x to make this investable?"

After a great deal of modeling, research, and thought, I am of the opinion that Deckers represents an attractive asymmetric bet at it's current pricing. I have taken a 3% weight in the portfolio and will add in the event of a negative Q4.

Thesis 1: HOKA still has Headroom

The major concern in the 4Q guidance for HOKA is that they have begun to reach a stage of maturation and can no longer support sustained 20% growth. I believe this to be true. I did some market sizing exercises which estimated that HOKA currently has about 12.4% of the US running shoe market. See the following:

The model on the left is assumptions that I came up with. I feel that my assumptions are definitely conservative, as I discounted the amount of active runners in the US and also the amount of shoe replacements each runner gets in a single year. This is likely counteracted by the ChatGPT market sizing which makes the assumption that runners replace their shoes 3.4 times a year, which feels aggressive.

The main takeaway that I have from this exercise is that HOKA has achieved meaningful penetration into the domestic running shoe market, but still has a great deal of headroom remaining. I think it's not unreasonable to say that HOKA can reach 20% of the running shoe market, players like Brooks have clipped this figure before. Furthermore, I don't think it's realistic to assume that all of HOKA's remaining growth will be from US runners. The international customer base is meaningful and there are HOKA customers that buy the shoes for walking/comfort and not for running.

In the operating model, I project HOKA will grow revenue in the mid-teens over the course of the holding period. This is certainly below what it has been doing and is below the 18% expected by consensus. The beautiful part about this ~15% revenue growth from HOKA is that an attractive return is still very likely. I model 3 points of EBIT margin contraction based on management's rhetoric surrounding stellar execution and lack of promotion needed to move product. I model the multiple expanding to around 23x from 20x as certainty is attained and growth is above the 11.2% that will be achieved in Q4. Under these assumptions, you get a TSR of 37.8% and 11.3% annualized.

Thesis 2: Attractive Asymmetric Bet

While 11.3% annualized may not sound ridiculously attractive, I feel it's the relative lack of downside from this position that makes the Deckers bet attractive. In my downside case I model 11.2% topline growth being the new normal with growth trailing down to 10% by the end of the holding period. I have margins contracting 4 points and the multiple falling to 16x p/e, which is what the stock traded for before HOKA was a meaningful portion of revenue. This is very punitive, as Deckers is undoubtedly deserving of a higher multiple now than it was before HOKA and the margin mix-shift brought about by HOKA. Regardless, you would get a -14.3% return across the holding period. Almost all of this negative return is modeled to occur at the next earnings as the multiple falls. If you were to buy at this new lower multiple, you would get a 5.6% annualized return before anymore multiple expansion. The following shows how I have quantified the asymmetry of both the next quarter and the entire holding period.

On the left in bold is the weighted return across the entire holding period and on the right in bold is the weighted return for just this next quarter.

Conclusion/Where I may be Wrong

To conclude, Deckers is attractive right now at $116.95 and I have added it at a 3% weight in the portfolio. I believe the likelihood that HOKA sustains levels of growth that allow for a return are relatively high. I also believe that at the current multiple, Deckers represents both a short and long-term asymmetric bet.

Where I will be wrong is in my assumption that the lowest the multiple can get is 16x and that HOKA still has headroom to penetrate. I believe the first to be much more likely. If Denny's has taught me anything, it's that things can always get worse than you previously thought. I think the odds that HOKA has truly tapped both domestic and international markets to a level that limits growth to industry levels is low.