HOKA, UGG & the Inevitable Hangover

Feb 28, 2025 7 min read

Florian

“The most important financial metric is return on invested capital”

– Warren Buffett in his 1979 annual letter

arvy’s teaser: From underdog to market disruptor, Deckers built a billion-dollar empire on UGG and HOKA. But after a decade-long party, is a hangover inevitable?

Shoe wear.

It is a competitive market.

And yet every now and then a new player emerges. Or a once popular but forgotten brand rises like a phoenix from the ashes. They either have a groundbreaking, innovative breakthrough, a new product line or an ambassador who can ignite that little fire. When they reach a tipping point, they usually grow strongly because consumers are willing to try something new or take part in the hype. As a Swiss, On Shoes quickly comes to mind here. Three crazy Swiss guys with a revolutionary idea. But there’s another one. It’s the owner of UGG and the lesser-known brand in Switzerland, HOKA (chart 1).

The first brand has risen from the ashes like a phoenix.

The second one is now enjoying great hype.

The company behind it?

Deckers Outdoor.

Chart 1: Deckers Outdoor Brands and Sales of the Respective Label

Source: arvy, as per 2024

Taking on the Top Dog

Deckers was known for UGG for a long time. I can still remember all my 16-year-old female friends wearing them as soon as the temperatures dropped, and winter was coming.

The brand’s popularity rose dramatically in the early 2000s when their signature sheepskin boots for women became popular with celebrities and others. After a few lean years, the brand experienced a resurgence following a restructuring. Today, the brand is particularly popular in Asia.

As of 2024, UGG accounts for 52% of sales. Just over a decade ago, in 2012, it still accounted for 80% of Deckers’ total revenue.

That was the year HOKA was added to Deckers’ brand portfolio. And in case you’re wondering, the other smaller brands at Deckers are Koolaburra by UGG, Teva and Ahnu. And yes, me too, I’ve never heard of them.

While UGG is a lifestyle brand, HOKA is aimed at the sportswear market.

Especially for running.

Compared to On Shoes, which is known for its distinctive CloudTec soles, HOKA is known for its signature maximalist cushioning soles and colorful designs (chart 2). Nevertheless, both have gained a strong following among both professional athletes and weekend warriors in recent years.

Much to the frustration of Nike (again chart 2). The top dog in the industry.

While the market leader has struggled with growth rates and reputational issues (see arvy’s Weekly linked above), both HOKA and On have grown into stratospheric ranges since Covid in 2020.

This has been the result of the most important thing when it comes to investing.

Capital allocation.

Chart 2: Nike, Deckers and On Holding AG footwear sales growth

Source: Finchat, shoes added by arvy

Most important task of the CEO

Investing is about capital allocation and the resulting outcome, i.e. how the CEO and management decide to invest the available capital and what the return on this investment will be.

Investors like us at arvy look for what Warren Buffet referred to in his 1979 annual report as the most important financial metric and the most important task of the CEO: Return on invested capital.

What does it look like in Deckers’ case?

A return of 8,495 times.

Excuse me, what?

Yes, Deckers’ management has made one of the best investments in history. Deckers bought HOKA in 2012 for $1.1 million. The brand had sales of just $3 million at the time. The company therefore only paid 0.367 times its revenue. A bargain!

And today?

HOKA generates annual sales of $2.2 billion (chart 3). That is an increase of 733 times.

Let’s calculate what’s behind this amazing return. Today, Deckers stock is trading at 4 to 4.5 times sales. And HOKA accounts for 42% of turnover. Deckers’ market capitalization is $22.25 billion. The two possible formulas:

Market Cap (22.25bn) x % of revenue (42%) = $9.35 billion
$2.2bn HOKA sales x 4 to 4.5 sales = $8.8 to $9.9 billion, midpoint $9.35 billion

This is of course a simplification, but it is sufficient to get an overview of the value of the brand. By the way, On is valued at $16 billion and has annual sales of $2.5 billion.

To conclude our little excursion into valuation methodology on Friday morning: $9.35 billion divided by the original investment of $1.1 million = a return of 8,495 on the original investment. Not so bad in 13 years? But as we say in the financial world…

Past performance is no guarantee of future performance.

Chart 3: The growth engine in Deckers Brands’ shoe empire

Source: Quartr

Hangover Follows the Party

To give you a number for what Warren Buffet considers the most important metric, Deckers’ return on invested capital has averaged an astounding 50% over the last five years.

This compares to 8% for the average S&P 500 company.

That’s insane!

Now comes the risk, especially in the fast-moving and cyclical fashion industry.

As I mentioned at the beginning, brands in these industries often experience either a moment where they rise like a phoenix from the ashes, like UGG, or a new innovative brand that is the hype of the day, like HOKA.

Deckers benefited from both at once, fueling a decade-long party on the equity market, with their stock gaining an average of 28% per year.

A $1,000 investment grew to over $12,000.

But with the party lasting this long in a cyclical industry, the hangover seems inevitable. HOKA and UGG, while popular, face competition and potential fading consumer interest. Deckers’ smaller brands could also become distractions. That is why the company’s disappointing results led to a 34% drop in its stock – losing a third of its value from a single weak quarter.

Time for a hangover cure in the form of stock price consolidation.

Deckers must have had a drink or two too many.

Chart 4: Deckers Outdoor over the last ten years