We expected the company to smoke numbers, EPS came in at 15.11 vs the Street 11.48 and revenues were up 16% vs the street estimate of +8%. DECK smoking numbers was the worst kept secret on the Street. But we've got to point out that total revenues did see a deceleration from the prior quarter +25%. This quarter the slowdown came from both HOKA and UGG. HOKA was +22% from +27% last Q and UGG was +15% from +28% last Q. HOKA DTC saw a decel to +38% from +46%, wholesale only saw a sequential decel of about 5% points. While gross margins came in way ahead at 58.7% the company had UGG price increases, low UGG and HOKA promos, freight tailwinds and FX benefits in the quarter that it will not be able to maintain going forward. The company is operating at peak margins right now, and will give back some of those gains to get to a more sustainable level around 55% GM and mid-teens operating margin. The company has been increasing innovation and seeing success with new UGG product lines, but it will face very difficult comps in the upcoming year. The company is guiding UGG to +LDD and HOKA +25% for the year, which is growth we can get behind given we’re already 1/3 of the way through Q4, but ultimately we think UGG will grow MSD to HSD in the upcoming year with a LSD to MSD run rate. In the upcoming year we have HOKA growth decelerating to HSD with a MSD to HSD run rate over time. The other brands constantly vary and are not nearly as important to the story as UGG and HOKA. We expect competition in the running space to continue to heat up and with Nike coming in swinging in the Spring with a new platform, and virtually every brand – including Asics, Adidas, Saucony and Brooks all going after HOKA's jugular. Increased competition along with outsized growth over the last few years makes for a tough setup for HOKA.
To be clear, we are big fans of DECK management – something we rarely say about any management team. But are puzzled as to why a 58-year old CEO is stepping down this year. 'Spending more time family' seems to us like its really 'getting out while everything is going perfectly and competitive pressures are going to change dramatically'. We think he's smart to exit now.
Valuation is irrelevant while the P&L is accelerating, but we think 2024 will mark a notable deceleration in sales and margin degradation for DECK. That's when a 21x EBITDA multiple and eye-popping 4.6x EV/Sales number needs to be flagged. HOKA is probably carrying about a 25x EBITDA multiple now, with Ugg closer to 10x. We think as the competitive environment in running materially intensifies, ONON blows up (a valuation proxy for HOKA), and Ugg faces an impossible year to comp against next year – with just as great a chance it puts up a -5% top line as +5% – this name gets materially re-rated lower. If our numbers are right in our Elevator Pitch below, out-year EPS expectations are likely 30% too high. This CEO is no dummy. He's leaving his successor in a precarious position with a tough P&L trajectory to manage.
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