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Deckers Outdoor: Expanding Profitability, Strong Wall Street Support
Stock Analysis & Ideas

Deckers Outdoor: Expanding Profitability, Strong Wall Street Support

Deckers Outdoor (DECK) designs and distributes footwear, apparel, and accessories.

It is the parent company of UGG and other brands such as Teva and Sanuk. We are neutral on the stock.

Measuring Efficiency

Deckers Outdoor needs to hold onto a lot of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting its success.

To measure its efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

Deckers Outdoor’s cash conversion cycle is 88 days, meaning it takes the company 88 days for it to convert its inventory into cash. This compares unfavorably to the consumer discretionary sector average of 42 days.

In addition to the cash conversion cycle, let’s take a look at Deckers Outdoor’s gross margin trends. Ideally, we would like to see a company’s margins expand each year. We also accept flat gross margin trends if a company already has very high margins.

In Deckers Outdoor’s case, we can see that gross margins have expanded in the past several years. This is what we like to see because it gives the company the opportunity to increase free cash flow or reinvest a larger percentage of revenue into growth initiatives.

Image created by the author

Risks

To measure Deckers Outdoor’s risk, we will first check to see if financial leverage is an issue. We do this by comparing its total debt-to-free cash flow. Currently, this number stands at 0.6. It’s important to note that all of the debt is comprised of lease liabilities instead of borrowed money.

Overall, debt is currently not a material risk for the company because its interest coverage ratio is 72.4 (calculated as free cash flow divided by interest expenses).

In addition, the stock is currently in a downtrend. Although this is not a fundamental risk, it may not be ideal at the moment for investors who don’t like volatility.

However, there are other risks associated with Deckers Outdoor. According to Tipranks’ Risk Analysis, the company disclosed 28 risks in its most recent earnings report. The highest amount of risk came from the Finance & Corporate category.

The total number of risks has decreased over time, as shown in the picture above.

Wall Street’s Take

Turning to Wall Street, Deckers Outdoor has a Strong Buy consensus rating based on five Buys and one Hold rating assigned in the past three months. The average Deckers Outdoor price target of $475.33 implies 39.1% upside potential.

Analyst price targets range from a low of $400 per share to a high of $525 per share.

Final Thoughts

Deckers is a good company with increasing gross margins. In addition, it has strong support from Wall Street. However, we remain neutral because the stock is currently in a downtrend and prefer to see a clear trend reversal.

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