My final thoughts on Deckers Outdoor; Why Kohl's is a clear 'value trap'

1) Today, let's come back to footwear maker Deckers Outdoor (DECK)...

As a reminder, on Friday, I shared my usual "first glance" with the company's stock chart and historical revenue and net income... and on Monday, I dug a bit deeper into the financials. I concluded that "Deckers' historical financials are among the best I've ever seen outside of the tech world – an A+."

However, I also noted:

But investors (correctly) don't value companies based on past performance – they do so on future performance.

Deckers' earnings will be down year over year in the current quarter (the fourth quarter of the company's 2025 fiscal year). Is this a one-quarter hiccup or a sign of further declines to come?

So let's take a look at the company's latest earnings, which it reported on January 30 (and the stock has been sliding ever since – hitting another 52-week low yesterday).

In the fiscal-year 2025 third quarter, sales rose 17.1%, gross margin increased from 58.7% to 60.3%, and earnings per share ("EPS") jumped 19% – all very strong.

The problem was what the full-year guidance implied for the fourth quarter...

Management expects to generate fourth-quarter net sales of about $936 million, down 2.5% from $960 million in the fourth quarter of fiscal 2024.

And profits will be down even more – from $0.82 per share to $0.59 per share, based on analysts' consensus estimates – because Deckers' guidance implies a fourth-quarter gross margin of about 52%, down from 56% year over year.

During the conference call, Chief Financial Officer Steve Fasching cautioned:

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.

In summary: Deckers had unusually strong tailwinds... it has reset expectations... and, along with concerns about tariffs and the economy, the stock has been nearly cut in half in less than six weeks.

With an expectation for Deckers to earn $6.66 per share in the coming fiscal year (starting April 1), that means the stock is trading at about 18.1 times forward earnings.

That's attractive for a high-quality company with such pristine financials.

Meanwhile, my team and I here at Stansberry Research will do some more work – in particular, focusing on whether there are any long-term concerns about Deckers' two major brands, Ugg and Hoka.

If we decide the stock is compelling enough to add to our Stansberry's Investment Advisory model portfolio, subscribers will be the first to know.

If you aren't already an Investment Advisory subscriber, you can find out how to become one – and how to gain instant access to our full portfolio of existing open recommendations – by clicking here.

2) At first glance, retailer Kohl's (KSS) has some similarities to Deckers...

Both companies are consumer facing, and their stocks are down sharply since the end of January (31% in Kohl's case) to hit 52-week lows yesterday.

But in fact, they are vastly different situations: a possible value opportunity versus a clear "value trap."

I warned my readers about Kohl's two and a half years ago in my e-mail on August 26, 2022, when the company reported disappointing earnings and the stock had fallen to $29.74 per share.

That was prompted by an e-mail I received from my friend David Berman of Durban Capital – who closely follows major U.S. retailers – in the wake of that earnings report from Kohl's. In my August 26 e-mail, I shared David's words of caution:

Kohl's took down EPS guidance from $6.45-$6.85 to $2.80-$3.20 – CRAZY!

In the last three years, sales are down 8%, yet inventories are up 10% – not good. And payables are 60 days – already stretched.

Worse yet, they announced a $500 million accelerated share repurchase program, which is ludicrous.

In the past year, net debt has nearly doubled from $4 billion to $7.4 billion thanks to massive inventory build, [capital expenditures], and recklessly buying back $1.2 billion of stock.

This is a classic example of how a weak CEO and board can possibly put a retailer into bankruptcy.

After shocking second quarter numbers, due largely to dumping excess inventory, they're making a bad situation worse, straining their already stretched balance sheet by buying back stock to try to increase EPS through accretion. How myopic.

There's a high chance that the company will become distressed, resulting in the sacking of CEO Michelle Gass.

Shareholders should be furious about the company's foolish buybacks, but they're apparently either short-term oriented or just don't get it.

Fast-forward to now...

Kohl's reported dreadful earnings yesterday: Fourth-quarter sales tumbled 9.4%, driven by comparable sales declining 6.7%. For the year, the company reported adjusted earnings per share of $1.50, which was down sharply from the previous year.

But at least Kohl's was profitable and generated $182 million of free cash flow (although it foolishly paid out $222 million in dividends – cash it will likely need)...

The guidance for 2025 was even worse: The company expects to be barely profitable, with earnings per share of only $0.10 to $0.60 (versus estimates of $1.22), with sales falling another 5% to 7% (expectations were for a gain of 0.2%).

Not surprisingly, the stock plunged 24% yesterday to close at $9.15 per share – a multidecade low, as you can see in this chart:

It's amazing how prescient David was about Kohl's: He correctly pointed out "ludicrous" share repurchases, the "sacking of CEO Michelle Gass" (which happened a few months later), and the "high chance that the company will become distressed."

Sure enough, look at the company's net debt over the past 30 years:

And look at how much cash Kohl's has spent on share repurchases and dividends since it began share buybacks in 2006:

In total, the company has paid out $13.7 billion in share repurchases and $4.0 billion in dividends – and yet only has a market cap of about $1 billion today!

This is a case study of bad capital allocation – and a classic value trap.

So don't be tempted to bottom-fish with Kohl's. David's warning that there's a "high chance that the company will become distressed" is just as true today as it was in 2022.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.