We think that Best Idea Long DECK is one of the few names with realistic/beatable TREND and TAIL earnings expectations out there. This year, EPS expectations actually have a reverse hockey stick – decelerating growth, which we think is far too conservative. The company reported an EPS and revenue beat, $0.18 and 1.3%, respectively, and guided up (but still below Street estimates for the year). The company had revenues of $676mm vs the Street of $700mm. Revenues were up 10% for the quarter, accelerating from +7% last quarter. While UGG was still down YY, there was significant sequentail improvement in revenues, from down 16% last quarter to down 6% this quarter. Management said that part of the negative sales growth at UGG was due to wholesale changes in orders getting pushed out slightly, but still ultimately ending the year with revenues +LSD. We expect UGG to have HSD growth in the backhalf of the year, as wholesalers place orders and the new styles and new iterations of classics are released. The product innovation and newness at UGG is in a big upcycle, lots of new product to attract new and repeat customers. HOKA growth slowed from +40% last quarter to +27% this quarter. The guide for HOKA implies a slowdown over the remainder of the year, with full year revenues up +20%, and growth mostly driven by DTC. The company made it clear it plans to invest in marketing for HOKA to increase awareness, especially internationally, and grow DTC. The growth in both DTC in general and HOKA will help the company increase gross margins, targeted at 52% for the full year. We like to see that management is increasing the SG&A line; the company is investing in marketing and brand awareness, growth internationally, and initiatives that will help expand gross margins. Overall, the company guided to about 10% revenue growth for the year, and we’re coming in around 13% growth, with EPS closer to $24.15 vs the guide of $21.25-22.25.
Mind you, we took DECK lower on our Best Idea Long list last month for a couple of reasons. 1) The call worked…it doubled since we put it on at about $260. 2) We're mildly concerned that the consensus is doing ‘monkey math’ with valuing this company. Apply an ONON multiple to HOKA, and slap a 6x EBITDA multiple on Ugg. That was our logic when we first went long with 25% higher earnings estimates than the Street. 3) The Street’s numbers have caught up – or at a minimum closed the gap to within 10% – materially as the company has executed masterfully. 4) We’re incrementally concerned that ONON, which is not tiering and selectively distributing its product like HOKA will blow up over 12 months, which could cut its multiple in half, thereby dinging the ‘monkey math’ people are now applying to DECK. This math made sense before the stock doubled, but poses risk today.
We can still underwrite an $800 stock over a TAIL duration – using a HOKA multiple at half that of ONON (but on higher EBITDA numbers), which is why we’re definitely sticking with this name as a Best Idea Long. Is it towards the bottom of our list? Yes…as our variant view around the name has narrowed the gap with consensus. But we still you get paid owning this name by earnings growth alone, which we think is the second best managed name in footwear next to Nike.
