Nike(NYSE: NKE) has historically been the best shoe stock to own. But the last five years have been a completely different story. Shares of Nike have actually dropped about 16% during that time even though the S&P 500 is up a strong 81%.
There's another shoe stock that's crushing both Nike and the S&P 500 over the last five years: Deckers Outdoor(NYSE: DECK). It's enjoying fast-growing brand awareness for its Hoka and Ugg footwear, leading to strong revenue growth and profits. And the stock is absolutely soaring, as the chart below shows.
Nike reported results for fiscal 2024 on June 27. And with the report, management lowered its financial guidance for its fiscal 2025, saying it expects revenue to drop year over year.
For its part, Deckers' outlook is much brighter. On July 25, the company reported results for its fiscal first quarter of 2025. And unlike Nike, Deckers raised parts of its full-year guidance, sending the stock higher.
Based on these two reports and the fact that Nike's outlook is declining, whereas the outlook for Deckers is rising, the simple conclusion would seem to be that Deckers stock is the better buy today. But there's a little more to investing than this, and there's more for investors to consider before drawing conclusions.
The case for caution with Deckers stock
Deckers owns several shoe brands. As mentioned, Uggs and Hoka have been performing particularly well in recent years. In the first quarter, net sales for Hoka were up 30% year over year, and net sales for Uggs were up 14%. This is following 28% growth and 16% growth, respectively, in 2023.
Deckers has enjoyed fantastic long-term gains. The chart below shows that it's averaging about 20% growth over the last five years. But the chart also shows that its price-to-sales (P/S) valuation has roughly doubled during this time.
DECK PS ratio data by YCharts; YoY = year over year.
Here's what this means. Deckers stock is more expensive than it once was and more expensive than the average shoe stock because its growth has been impressive. But it likely needs to sustain this growth to continue warranting this high valuation. If the growth rate falls, the valuation could also come back down to more normal levels, bringing the stock price down.
I believe Deckers can sustain its profit margins, which is also important and in its favor. In recent years, higher brand awareness has led to robust direct-to-consumer sales growth, boosting margins. I think that can continue.
But it's challenging to maintain 20% annual sales growth for shoes. I would expect that to slow for Deckers, which could cause the stock to pull back from highs. For perspective, management expects 10% top-line growth this year after putting up 18% growth last year.
Can Nike turn things around?
Whereas the valuation for Deckers is elevated right now, Nike stock trades at its lowest valuation in over a decade. The chart below shows it's cheaper than normal at 2 times sales, but it's also unusually cheap at less than 20 times earnings.
NKE PS ratio data by YCharts; PE = price to earnings.
Compared to Deckers, the price is much better for starting a position in Nike. That said, Nike doesn't have as much going for it right now. It's forecasting a modest drop in sales. And profits could drop as well, as management invests in newer inventory and a fresh marketing message.
In other words, investors need to make a choice: Invest in Deckers at an unattractive valuation but with things going smoothly, or invest in Nike at a good price but with unclear plans to stimulate attractive growth.
There might not be one right answer here
Warren Buffett's first rule of investing is to not lose money. In other words, limiting downside risk is of upmost importance. For investors with this mentality, Nike stock might be the better buy today. Already trading at historically low valuations, the downside risk could be lower than with Deckers -- whose valuation is high and growth is slowing.
However, those who take a long-term view to investing and are willing to assume some downside risk might still consider Deckers over Nike today. Yes, its slowing growth could bring down the valuation and consequently the stock price with it. But the company has zero debt, and its margins are good. And that can help over longer time periods.
Over the last 10 years, Deckers reduced its share count by 25%, and its cash position is soaring.
DECK average diluted shares outstanding (quarterly); data by YCharts.
Even if growth slows further and the valuation drops, Deckers can still be a winning investment because it has financial flexibility. Just as it's done for years, it can use its profits to boost shareholder value. That might not mitigate the downside risk in the nearer term, but it does give reason to think it can have higher upside over the longer term.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
