1 Best-in-Class Growth Stock to Buy Now

If you think the competition at the Olympics is fierce, the off-field rivalry between two footwear companies may be even more fierce.

That’s due to the fact that established players, such as Nike (NKE) and Adidas (ADDYY), face challenges from a new wave of fast-growing players like On Holding (ONON) and Hoka brand parent Deckers Outdoor (DECK). On Holding is backed by tennis legend, Roger Federer.

The global sportswear market’s biggest players include not only Nike and Adidas, but also Under Armour (UAA) and VF Corporation (VFC). However, they have seen their combined market share eroded by newcomers.

This group generated 80% of the market’s revenue between 2013 and 2020, but that share fell to around 64% last year, according to RBC Capital Markets. RBC analysts expect this trend to continue, with the up-and-coming brands forecast to compound annual sales growth twice as quickly - at an 11% CAGR versus the incumbents’ 5% CAGR over the next five years.

The athletic shoe subsector is even more competitive, and it's turning into a real race between the old established firms and the new kids on the block.

Inside the Athletic Shoes Race

The athletic shoe sector is unique in that shoes are still mainly bought in physical stores, from retailers stocking a variety of brands. Nike needs to re-engage with these to boost its representation, particularly in specialty running shoes – a segment that is critical for brand authenticity.

Much of Nike’s footwear sales (about 60% of total revenues) in recent years have been retro basketball lines, such as the Air Force 1, Jordan 1 and Dunk.

However, their popularity is waning in favor of “terrace” trainers, such as the Adidas Samba and Gazelle ranges, and those offered by other brands, too. In its latest quarter, Nike experienced its slowest revenue growth in two years.

Nike has always had a reputation for creating shoes for which people were willing to pay a premium. But the company took its eye off the ball as far as innovation and design go. That has opened the door wide for competitors to steal market share.

Adidas is doing well after a couple of years where its profits were hit after its Yeezy partnership with Kanye West was unwound in October 2022, following the rapper’s anti-Semitic outbursts.

Last year, Adidas brought in a former Norwegian soccer player, Bjørn Gulden, to be CEO. Previously, he oversaw Puma’s (PUMSY) transformation back to respectability and profitability.

Gulden quickly shifted production to pump out more Sambas and Gazelles. Adidas shares responded accordingly, increasing by 21% over the past year, compared with Nike’s 32% decline.

Meet the Challenger Brands

That’s a nice turnaround story. However, I prefer the smaller, faster-growing companies.

Challengers like On Running and Hoka have gained a lot of market share in the performance running market. On Holding's Cloudflow 4 and Hoka's Clifton 9 have become particular favorites with runners and joggers, who also use them for everyday activities. These shoes are known for their extra cushion and durability.

Here’s just one example of these shoes gaining market share:

Data from May 25 showed that On's market share in the footwear category at retailer Dick’s Sporting Goods (DKS) was 12%, up from 8% in the beginning of January, while Hoka saw its market share rising to 13% from 8%. For comparison, Nike's market share at the retailer fell to 32% in May, down from 39% in January. This is according to YipitData, which measures market share using email receipt and transaction data. 

On’s sales are forecast to reach $2.6 billion this year, which would be a tenfold increase over a five-year period! Sales of the Hoka brand increased by 28% over the past year to $1.8 billion, and helped parent Deckers Outdoor boost its gross margin by 530 basis points to 55.6%.

Deckers stock is up 35% year-to-date, and 66.7% over the past year. And while On Holding stock is up less than 13% over the past year, shares have gained nearly 50% year-to-date.

Among these two challengers, let’s take a closer look at Deckers, which has a 40-year history of building niche performance and lifestyle brands into market leaders.

Deckers Outdoor Stock is a Buy

As of March 31, 2024, Deckers operated 164 global retail stores (including 83 concept stores and 81 outlet stores). It generates 67% of sales domestically and 33% internationally. Its stock has a current market capitalization of $23.4 billion.

On July 26, DECK stock jumped as much as 16% intraday as multiple brokerage firms raised their price targets after fiscal Q1 earnings. (Btw, shares of On Holding were up more than 5% in sympathy.)

The stock jump followed the company's successful bet on full-price sales of its hot-selling Hoka running shoes and UGG boots, which allowed it to raise its annual profit forecast. Deckers now expects annual profits in the range of $29.75 to $30.65, compared with its previous forecast of $29.50 to $30.

Deckers reported a nearly 30% rise in Hoka sales in its first quarter, driven by demand in wholesale channels. The iconic UGG sheepskin brand, which is taking market share in the sandals market, had a 14% jump in sales. The company has strong brands, and will continue to see incredible growth from its HOKA brand for the next five years.

Already, Deckers has experienced strong growth over the past three years due to its HOKA brand, with 27.9% growth in the 2024 fiscal year. And there are no signs of slowing. Its margins have held up better than its peers, and I expect this trend to continue.

Deckers Outdoors is a best-in-class footwear company and deserves a high multiple, thanks to its higher growth and fortress balance sheet. Deckers has no outstanding debt and boasts $1.4 billion in cash and equivalents.

Ahead of its September 6-for-1 split, DECK stock is a buy below $950.