UBS Group AG: Deckers Outdoor (DECK.US) is significantly undervalued with 53% upside potential in its stock price.

UBS Group AG analyst Jay Sole stated in a recent report that Deckers Outdoor (DECK.US) is "significantly undervalued" and its stock price is expected to rise by about 53%. UBS Group AG reaffirmed its "buy" rating for the stock and noted that the strong performance of the Hoka and UGG brands in the next 12 months is expected to make investors realize the high single to low double-digit compound annual growth rate (CAGR) in sales and earnings per share (EPS) potential of Deckers Outdoor. Deckers Outdoor is known for its popular brands such as HOKA ONE ONE and UGG, with HOKA's rapid growth in recent years garnering attention. Data shows that in the 2025 fiscal year, UGG and HOKA accounted for 51% and 45% of total sales, respectively. Why does UBS Group AG believe market expectations are too low The market believes that Deckers Outdoor's performance update for the second quarter of the 2026 fiscal year is somewhat conservative - with HOKA sales growing by 11% (about 200 basis points lower than market expectations), and full-year sales growth described as low double digits for HOKA and low to mid single digits for UGG. UBS Group AG pointed out that the company's earlier higher description of brand growth was a forecast "excluding the impact of tariffs", and not an official guidance. When calculated on a comparable basis, UBS Group AG believes that the company has actually raised its growth expectations after subtracting tariffs. Over the past four years, Deckers Outdoor's final full-year EPS has averaged about 17% higher than the midpoint of its second-quarter guidance. UBS Group AG believes that the company's sales and gross margin guidance for the 2026 fiscal year is "particularly easy to exceed", pointing out that its second-quarter gross margin has already exceeded the upper limit of the guidance by 220 basis points. UBS Group AG is paying attention to the implied assumptions in the company's guidance for the third quarter, such as a year-on-year decrease in gross margin of about 300 basis points. Given the mid-single-digit percentage growth in sales, a 7% increase in second-quarter inventory, and the company's recent strong execution, UBS Group AG believes this expectation is somewhat conservative. Short-term outlook Financial reports show that in the second quarter of the 2026 fiscal year, Deckers Outdoor's revenue increased by 9.1% year-on-year to $1.4931 billion, EPS was $1.82 (higher than market expectations by $0.21), the gross margin was 56.2% (about 200 basis points higher than market expectations), and the operating profit margin was 22.8%. Sales of the HOKA brand increased by 11.1% year-on-year, and UGG brand sales increased by 10.1%. UBS Group AG pointed out that although its model does not assume aggressive share buybacks, the company's share repurchases in the second quarter accelerated to $282 million (compared to $183 million in the first quarter, and an average of $124 million per quarter in the 2024-2025 fiscal year), which could bring potential upside to EPS if continued. UBS Group AG maintains its forecast for Deckers Outdoor's 2026 fiscal year EPS at $6.60 (considering weather and macroeconomic softness in the early third quarter for UGG), expected to be $7.85 for the 2027 fiscal year, and $8.80 for the 2028 fiscal year. UBS Group AG pointed out that the industry environment remains constructive. The compound annual growth rate of the footwear industry in the next five years is about 3%-4%, with athletic footwear growing by about 8%, and the ongoing trend of athleisure is expected to continue to benefit the HOKA and UGG brands. Mid-term growth drivers UBS Group AG expects direct-to-consumer (DTC) sales for HOKA to recover to low double-digit growth in the 2027 fiscal year, benefiting from expansion into training shoes, lifestyle and apparel categories, and accelerated growth in international markets (especially in the Asia-Pacific region). With the increasing proportion of high-margin direct-to-consumer operations, the strengthening scale effect of HOKA, and leverage in selling, general, and administrative expenses, UBS Group AG expects the pre-tax profit margin to approach 23% by the 2030 fiscal year, partially offset by tariff pressures. Discounted cash flow (DCF) models show that the current market implies a future five-year EPS compound annual growth rate in the mid-single digits, while UBS Group AG estimates it to be around 9%, indicating potential upside in valuation, with a price-to-earnings ratio expected to rise to around 20 times in line with peers. UBS Group AG states that the price-to-sales ratio, free cash flow yield, and DCF results all support this valuation. Various scenarios and target prices Base case: Target price of $157 - Five-year EPS compound growth rate of about 9%; HOKA's US DTC and lifestyle business recovery; UGG's composite growth rate of about 6%; gradual decline in tariffs; P/E ratio of about 20 times for the 2028 fiscal year. Optimistic scenario: Target price of $239 - Faster expansion of HOKA's direct operations; UGG evolving into a four-season brand platform; operating profit margin of about 25.5% by the 2030 fiscal year; P/E ratio of about 24 times. Pessimistic scenario: Target price of $48 - Weak consumer spending in the US; slowing growth in HOKA market share; increased promotional activities; shrinking operating profit margin; P/E ratio of about 9 times.