PSS: When Boring is Exciting

 

PSS hit one right down the middle.  The annuity-like characteristics of Payless funded above average growth in the sexier part of the portfolio. This might be the quarter that people realize that PLG exists.

 

It’s been a while since we could refer to a PSS quarter as being ‘boring.’ That’s a good thing for such a high beta stock. Our thesis on this name is quite simple – use cash flow from a fully mature US store base to fuel growth in its stable of premium brands and International Payless retail business. When investors focus heavily on the prospect for a meaningfully positive US comp, we get worried. Same thing for a big negative comp. Why?  Because both are unsustainable.  

 

This quarter’s flattish comp (+0.4%) was about in-line. Importantly, it’s on an improving trend on the margin – at the same time PSS’ compares get easier in the coming two quarters. We’re still banking on marginally positive comp for the next two quarters, but we have more confidence that they’ll get there.

 

Additionally, in a move that is likely to get overlooked, management stepped up its cadence on domestic net store closures from 9 in 2010 to 40 in 2011. While this only represents 0.9% of Payless stores, we think it should help comp challenges, working capital, and profitability (and not to mention managements’ time and focus) on the margin. 

 

Looking at PLG, it was kind of a mixed bag. Top line slightly missed our estimate – but still came in at a robust 16%. While a sequential slowdown from the +20% growth rates reported in each of the prior two quarters, Q1 backlog accelerated. This was perhaps the most positive development in the quarter.

 

Most importantly, the backlog accelerated at the same time the Sales/Inventory spread improved by 500bps. Is it in an ideal position? No. But it is definitely getting better on the margin.

 

One thing we liked on the call was Matt Rubel’s realistic view on input costs relative to what we’ve heard from other CEOs over the past two months. He noted the dynamics around trying to pass through higher prices to a soccer Mom who is buying shoes that her kids will outgrow in 3 months. Will any or all of the strategies work to mitigate margin risk? Time will tell. But those who win will be those with a clear process that looks beyond taking prices up on a like for like basis.

 

In the end, we’re taking our 2012 number down slightly to $2.00 due to a slightly higher tax rate.  We’re sitting here with a $22 stock. Based on our math, Saucony and Sperry alone are worth $12-$14. That suggests that the remaining business is worth less than $10.

 

PSS: When Boring is Exciting - PSS S 3 11

 

PSS: When Boring is Exciting - PSS Comp Trends 3 11

 

 


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