At the risk of stating the obvious, generating sales in a company is a lot easier than generating profits on those sales.
Yet investors often become captivated by revenue growth while paying less attention to the profits that ultimately accrue to shareholders. A company can generate billions of dollars in annual sales and still struggle to produce meaningful earnings.
In a letter to investors in April, billionaire hedge fund manager David Einhorn wrote the following on Crocs:
CROX is a global footwear company best known for its iconic clogs. It is a well-run business with industry-leading margins and a 10-year annualized organic sales growth rate of 12%. Last year, a decline in U.S. sales raised existential concerns about the core brand, which we believe were overblown. While consumer preferences have shifted in the U.S., over half of core Crocs brand sales now come from international markets, which continue to grow at a strong pace. We also expect U.S. declines to moderate as comparisons normalize following last year’s inventory clean-up actions. We established our position at an average price of $83.49 per share, or about 6x our 2026 EPS estimate. The company has directed most of its free cash flow to buybacks, and we expect annual repurchases of over 10% of the outstanding shares going forward. CROX ended the quarter at $83.02.
What a difference a few months can make. This past week, we exited our remaining CROX shares at $128+ per share, representing a 50% year-to-date gain.
With the benefit of 20/20 hindsight, Crocs paid way too much for their HeyDude acquisition and it left them with a hefty amount of debt. This and the uncertainties mentioned by Einhorn led to an unwarranted level of pessimism and a correspondingly cheap stock price. Simple business, temporary concerns, and a compelling valuation are a great combination. It was during this time that we built our Crocs holding for clients.
Today, other investors and analysts have come around to the Crocs story. Pessimism and skepticism have turned to optimism. And the gain in the shares doesn’t offer the same margin for error.
While we still like the company and its long-term prospects, the near-term optimism and rising stock price encouraged us to take gains and move on. For our sake, we hope Crocs will step in another mud puddle so we get an opportunity to own it again.
Several times in the past few months, we were able to buy as many shares as we wanted between $75 and $85 a share. When Crocs flirts with $130 a share weeks later, we start questioning that risk/reward equation.
Fear not… Ugly shoes seem to be a staple in the Devotion portfolio. Like the shoes or not, the numbers are quite attractive.
Deckers Outdoor Corp (ticker: DECK) has resided in the portfolio for a couple of months. The company’s brands include: Ugg, Hoka, and Teva – styles whose beauty is in the eye of the beholder. But nobody comes to us for fashion advice.
Likewise, the Deckers Outdoor stock chart isn’t pretty either. Unlike CROX shares, DECK shares have barely moved. The share price seems to bounce from $95 to $115 a share with regularity. At today’s closing price, DECK shares are up 1.9% compared to the price on January 1st.
Nonetheless, one need only take a look at the underlying business and Decker’s appeal becomes apparent. The company has nearly $2 billion in the bank and ZERO debt—a net cash position. In fiscal 2025, Deckers had net income greater than $1 billion. And what are we paying for a pretty balance sheet and hefty earnings?
Deckers Outdoor has approximately 141 million total shares. The price per share is ~$105 each. That puts the market value of Deckers at $14.8 billion. At this price, we think DECK is compelling. The company expects 2026 earnings to be higher. All of its brands are expected to see volume growth. And the vast amount of cash generated will likely be used to repurchase DECK shares.
In 2025, Deckers Outdoor repurchased 6.5% of all their outstanding shares in the marketplace. Why do it? There are several reasons, but the one that applies to Deckers is this: companies with excess cash and a belief that their shares are undervalued, will repurchase shares and boost shareholder wealth by doing so. At the start of 2025, DECK had 150.2 million shares outstanding. That number of shares fell below 140 million by year-end. This is powerful stuff. If you owned shares in DECK last year and didn’t sell them, your stake in the company increased by 7% even if you didn’t buy 1 additional share. Deckers shrunk the pie by buying out some of its shareholders. In a way, we are all better off with Deckers shares staying cheap so that the company can buy as many shares for as little as possible.
If the share price stays where it is, it is conceivable that the company can repurchase 8-10% of all of its outstanding shares in calendar year 2026. Wow!
While the financial press and frenzied investors obsess over AI and semiconductors, driving those valuations to dangerous levels, some of the market’s most rewarding investments are more likely to come from far less glamorous businesses.
Crocs and Deckers won’t be mistaken for artificial intelligence leaders or space exploration pioneers. They simply sell shoes – ugly ones at that. But both companies have generated substantial profits, and abundant free cash flow. Investors have warmed to Crocs. It has a history of greater volatility and we have taken our gains for now and benefitted handsomely. A 50% move in a few months tends to do create undue optimism: it compresses the margin for error as consensus starts to assume stability.
We think Deckers is the better investment at the current price. Let’s see how it performs. The price may not reflect a fire sale, but it doesn’t reflect incredible optimism either. Deckers experienced “peak euphoria” in late 2024/early 2025. In January 2025, less than 17 months ago, Deckers shares peaked at $224 a share! With 150 million shares outstanding, that put the value of the company at $33.6 billion.
Compare that to today…
At today’s stock price of $109, Deckers Outdoor valuation has fallen over 50%. With less than 140 million shares outstanding now and a vastly lower stock price, investors are assigning a value to the whole company of just over $15 billion.
Devotion was not interested in Deckers at a $224 price tag, but at the current price it appears to be a bargain.
We frequently get asked why we are buying more of a stock in decline. And this is precisely why these articles are critical. We need understanding. We are buying businesses. So long as our investment thesis is intact, a lower price is a GOOD
thing.
We live in a world where people become MORE interested in something after its price doubles and less interested after a price is cut in half. We didn’t like the price-to-value equation of Deckers at $33 billion, but we really like it at $15 billion. When a quality home, vehicle, clothing item goes on sale for 50% OFF, buyers line up. Yet in the stock market, many investors run the other direction. We view DECK’s decline as a reason to consider it, not a reason to run
In fact, we believe Deckers is a stronger business today. It combines a fortress balance sheet, exceptional cash generation, growing brands, and aggressive share repurchases—all while trading at a valuation that strikes us as reasonable rather than euphoric. Furthermore, management is allocated investor cash intelligently. This all should lead to a high return on our capital.
If the price falls further, Devotion will likely be an eager buyer.
In the beautiful world of ugly shoes, we are stepping into DECK and out of CROX.
Disclosure: The author owns shares in Deckers and Devotion Capital has purchased DECK shares for clients. The author and Devotion clients do not own CROX shares.
