Deckers Outdoor: Ascent to the Olympus of the Shoe Industry, but to be Enjoyed with Caution

The name Deckers Outdoor is currently on everyone's lips, not least due to the stock's inclusion in the S&P 500 Index in March and a remarkable 6-to-1 stock split. The California-based company, renowned for esteemed footwear brands like Hoka, seems to be a favorite among investors at present. However, the true appeal of this stock may indeed lie in its simplicity—a quality that even investment guru Warren Buffett would consider. Deckers owns several prominent footwear brands like Ugg, Hoka, Teva, and Sanuk, catering to various target groups from runners to sandal enthusiasts. This diversification provides Deckers with broad market reach, offsetting the risks of a company specializing in a single category. Sales rely on direct distribution through fewer than 200 worldwide locations and e-commerce, as well as wholesale, with the latter contributing 57% of sales in the past fiscal year. This dual strategy has proven advantageous, especially as competitors like Nike, due to a strong focus on online sales, have lost market share, which Deckers has cleverly captured. Recently, Deckers has benefited from a revenue increase, propelling profit margins to record levels. Yet, the question arises whether these profits are sustainable or merely due to a temporary demand surplus in a cyclical industry. Management already anticipates a slight decrease in gross margin from 56% to 54% this year, highlighting the risks of such a high valuation level, currently about 31 times earnings. The footwear business is generally considered recession-proof, as shoes need to be regularly replaced. As long as Deckers remains in consumers' consciousness and continues to gain market share, revenues could indeed be higher in five years. However, profits could come under pressure if margins shrink. In an ideal Buffett world, the investment would be more profitable at a lower valuation. Yet currently, there remains some uncertainty about whether Deckers’ earnings growth will continue in the long term. For investors who missed out on entering the most successful stocks, now might be an opportune moment. Experts are currently recommending 'Double Down' on three outstanding companies—Deckers could be an interesting choice despite the high valuation, but caution is advised.