Deckers owns and operates a portfolio of footwear brands including UGG, HOKA, Teva, Sanuk, and Koolaburra.

UGG Brand: ~$2bn LTM sales (Jun’22) with a 55/45 split between wholesale/DTC.

HOKA Brand: ~$1bn LTM sales with 70/30 split between wholesale/DTC.

Hoka and Ugg together represent ~92% of DECK revenues.

Hoka launched ~7 years ago and is known for its authentic, highly cushioned/high-performance running shoes. Revenue grew at a ~59% CAGR from Fiscal’19 to Fiscal’22 (Mar’22 year-end) underscoring the significant growth in brand heat over the past few years. While growth will decelerate over the next 3 years off a higher base I estimate the brand can still grow at a healthy 35% CAGR through Fiscal’25 with DTC growth outpacing wholesale growth which is gross margin accretive. The brand remains underpenetrated both in terms of total TAM potential within just the running shoes market and underpenetrated from a wholesale distribution perspective as well. Running shoes is ~$11bn market of which HOKA sales represent ~9% share. Other athletic footwear (cross-training/gym/fashion) is an additional ~$10bn market that the brand can penetrate over time. The majority of growth over the past 2 years came from market share expansion within existing specialty/outdoor retailers (increased order book, new product launches) versus opening new points of distribution. As of 1Q’23 Hoka was still in less than 20% of DKS stores with FL distribution just launching. In addition to expanding toward non-running specialty wholesale, international and DTC brick & mortar stores present growth avenues as well.

UGG growth stagnated for a few years around Fiscal’16/’17 and the company subsequently implemented a segmentation and allocation strategy in 2H’18 wherein it rationalized distribution (exited 400 doors in the US while adding select premium partners) and began diversifying its product lines. The company undertook a similar restructuring in Europe which was largely completed by end of calendar 2021. As part of the process UGG exited ~20% of wholesale accounts, localized marketing, and reduced the brand’s sales reliance on core classics in the region.

UGG wholesale operating margins (pre unallocated corporate) improved to 34% in Fiscal’19 versus 27% in Fiscal’16 (off of a similar revenue base). The brand also materially diversified its product line away from the core classic boot both within women’s footwear and via launching men’s, kids, and apparel lines. Brand revenues grew at a ~9% CAGR from Fiscal’19 to ’22 with 13% and 15% growth the past 2 years as the brand was a beneficiary to some extent from the pandemic trend toward casualization. I model sales roughly flat through Fiscal’25 (1.3% CAGR) though I think there is upside potential to this estimate as L-MSD is possible as some percent of customers acquired over the past few years stay with the brand. That said, I believe UGG stabilization, not outsized growth, is all that is needed for the stock to work if HOKA can continue to grow/execute.

While 1Q’23 inventory levels increased substantially y/y it’s worth noting that last year’s inventory was below normal operating level given significant supply chain issues (factory shutdowns in Asia, port congestion, logistics issues). Additionally, given longer lead times earlier in the year (which have started to normalize as of late) the company ordered fall/winter product earlier in order to ensure it would be able to meet demand.

The company is guiding for Hoka revenues to grow in the ~40% range for F’23 and I expect actual results to come in above that for the full year as demand remains strong. I expect F’23 EPS to be in the $19.50 to $20 range versus guidance for $17.50 to $18.35. I think F’24/25 Street revenue / EPS estimates are too low. I think the company can do $23.50 EPS in F’24 and close to $27 in F’25 (52.2% GM% by F'25 which represents modest expansion from baseline as DTC penetration increases and air freight costs reverse + SG&A margin flat at 33%, dollar growth in line w/revenue growth, as the company continues to invest in marketing to grow the HOKA brand). This includes the impact of ~10% share count reduction as the business generates substantial FCF that can be used toward share repurchase ($1.55bn repurchase authorization as of 1Q’23). $27 EPS at 20x PE (18% EPS CAGR from F’22 to F’25) equates to a 2-yr price target of $540 or ~50% upside from current levels.