Shares of the renowned shoe company Deckers Outdoor (DECK -1.91%) experienced a significant decline of 21.4% during February, as highlighted by S&P Global Market Intelligence data. This downward trend commenced following the company’s financial report released at the end of January, prompting investors and analysts alike to reassess their outlook on the stock. The ongoing reaction to the financial results has perpetuated this downward momentum into the new month, raising concerns among shareholders about the company’s future performance.
On January 30, Deckers announced its financial results for the fiscal third quarter of 2025, exceeding expectations and even raising its guidance for future performance. Interestingly, despite this positive news, the stock still faced a substantial drop and has continued to decline since. This unexpected reaction has left some investors scratching their heads, questioning the market’s interpretation of the company’s overall health and prospects.
The core issue lies in the implications of Deckers’ guidance for the upcoming fiscal fourth quarter. With the numbers already reported for the first three quarters of the fiscal year, management anticipates generating Q4 net sales of approximately $936 million. To provide context, this figure represents a slight decrease compared to the $960 million in net sales recorded in the fourth quarter of fiscal 2024. Investors are understandably concerned about this anticipated drop in sales.
Moreover, Deckers’ guidance suggests a Q4 gross margin of around 52%, which is noticeably lower than the gross margin of over 56% reported during the same period last year. This sudden slowdown in both growth and margins has understandably caused alarm among investors, who are now closely monitoring the situation to gauge the company’s ability to rebound and maintain profitability.
Understanding Deckers’ Strategic Shift Amidst Record Financials
To provide further context, Deckers has been a publicly traded entity for three decades, and it is now forecasting a record-high gross margin of 57% for fiscal 2025. While management deserves recognition for this achievement, it is crucial to note that certain factors beyond their control have contributed to this success, including elevated average selling prices and reduced sales through wholesale channels. Such dynamics have played a significant role in shaping the company’s financial landscape.
During the conference call addressing Q3 results, Deckers’ CFO, Steve Fasching, remarked, “While we are proud to deliver this record gross margin, I would caution that the extremely high levels of full-price selling and very low levels of wholesale closeouts are abnormal, and not something we would normally expect to repeat going forward.” This statement underscores the potential volatility in Deckers’ financial performance, as these conditions may not be sustainable in the long term.
It’s important to highlight that Deckers’ stock was trading at an all-time high price-to-sales (P/S) ratio of 7, which is considered elevated for a shoe company. Over the past three years, the stock surged approximately 200%, buoyed by impressive growth and enhanced margins. However, with both growth and margins now experiencing a cooling phase, it was expected for Deckers’ stock to continue sliding throughout February as the market readjusts its valuation of the company.
DECK PS Ratio data by YCharts
Future Prospects and Growth Potential for Deckers Shareholders
Industry peers, such as Foot Locker, have reported that consumers are actively seeking discounted footwear at present, presenting a challenge for the entire retail sector, including Deckers. Nevertheless, it’s essential to maintain a broader perspective. Ultimately, the company remains optimistic about achieving a 15% growth in net sales for fiscal 2025, along with a record gross margin exceeding 57%. This reflects a robust underlying business despite the current headwinds.
The pivotal question now is how much Deckers can sustain its growth trajectory into fiscal 2026 and beyond. Even moderate growth could lead to favorable stock performance, particularly given the company’s strong financial position and the current lower valuation. Investors will be keenly watching how the company navigates these challenges and capitalizes on potential opportunities for recovery.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deckers Outdoor. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.