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.
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.