Why Deckers Outdoor Stock Dropped 7% Today

All of a sudden, investors are wondering whether a shoe stock should really cost nearly $1,000.

Shares of Deckers Outdoor (DECK -6.65%) slid 7.3% through 2:50 p.m. ET Wednesday after Truist Securities analyst Joseph Civello downgraded the shoemaker from buy to hold, and cut his price target by 12% to $864 a share.

Deckers is probably best known for selling the Ugg and Teva brands, but it was actually the fast-growing Hoka sportswear brand that earned the analyst’s ire, on worries it might grow only 25% this year.

Wait. “Only” 25?

I know, right? For any other footwear brand, 25% growth would be pretty impressive. For that matter, even at Deckers, Teva sales grew only 15% year over year in 2023, and Ugg sales were down 8%. The thing is, Civello had been modeling 40% year-over-year growth for Hoka this year, but according to StreetInsider.com, the analyst now thinks that — based on February and March sales trends — Hoka sales will only grow 25% this year.

Hence the downgrade.

Is Deckers stock a buy?

Now, the good news is that Truist data is showing “very strong” sales for Ugg, which is apparently reviving already despite the warm weather. And Civello believes Hoka still has good long-term potential.

The other bad news, though, is that Deckers stock at 31 times earnings looks vulnerable if the short-term growth slowdown in Hoka sales turns out to be as severe as Cavillo predicts. Hoka or no Hoka, most analysts see Deckers earnings growing only about 19% annually over the next five years, which — while objectively a great growth rate — may not be great enough to justify a 31 P/E ratio on the stock.

Throw in a bit of investor nervousness about faster inflation, and the potential for the Federal Reserve to postpone or cancel planned interest rate cuts (which investors had been counting on to boost stock market returns), and the market was primed to overreact to Truist’s downgrade today. Given the high price of Deckers stock, and the fact that it’s up 89% over the past year already, I can’t really blame investors for selling and taking some profit today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Truist Financial. The Motley Fool has a disclosure policy.

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