PSS: Starting Over

I still like this name a lot. As I sit here prepping for next week’s analyst meeting, I’m staring at our sales/inventory/margin chart. It is absolutely classic retail 101. Notice the following path…

1) Business was solid in ’06 into 1Q07. Sales up, inventories down, and margins positive (and stock at $40).

2) Inventories begin to build relative to sales in 2Q and 3Q07 – both standalone PSS and resulting from Stride Rite acquisition. Margins stay positive, but hang on by a thread as inventory builds.

3) PSS can’t hold the line with margin, and by 4Q07 falls into a negative margin position – along with high inventories and low sales. Stock tests single digits.

4) 1Q08: Margins still down, but inventories clean up. Stock finds bottom.

5) 2Q08: Sales/inventory spread in perfect balance, and margins come back to year ago levels. Stock sees high teens.

6) Next stop… Sales/inventory spread goes higher, and margins trend up. As it relates to timing, we’ve got one more quarter of tough margin compares, but 3Q and 4Q are flat-out easy. Importantly, I think we’ll see top line accelerate at the same time as we start to see PSS leverage Saucony, Sperry and Keds. We’ll hear about that on Monday.

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