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This is going to be a messy quarter for PSS, which reports after the close today, but the reality is that numbers may or may not matter. It’s the company’s first since the departure of CEO Matt Rubel and you can bet that it will be sweeping everything it can under the rug this quarter. All in, we’re at ($0.03) vs the Street at $0.12.

The fundamental call is still that this is a company with two divisions with the PLG group alone worth where the stock is currently trading. That’s unlikely to change with the print. But we can’t debate the fact that this synthetic value is more elusive than ever without a real CEO. Given our below-consensus estimates, we wouldn’t buy into the print, but if it trades off meaningfully around any bloodshed, we’d definitely look to get more constructive.

The ‘dark horse’ move here for PSS (i.e. the move that the 25%+ of the float that is short does not want to see) would be to clear its balance sheet in a meaningful way – especially given that Inventories have been growing disproportionately to sales over the last four quarters. This would tag EPS this quarter, but would be a positive margin event for 2H12.

Here are our assumptions for the quarter:

Top-line

  • We expect sales up +2.7% driven by PLG and continued international expansion.
  • In looking at NPD POS footwear data, we can get a sense of what brands are doing from a directional standpoint. While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends. Since Q1, three of PLG group’s four brands have accelerated sequentially or remained flat. In addition, with Q3 backlog up +39% compared to +49% in Q1, we expect revs up +20% on the heels of +22.5% growth last quarter.
  • In the domestic business, sales in the family footwear channel have improved sequentially coming in at -1.3% for the quarter up from -2.4% in Q1. In light of a particularly abysmal Q1 and a significantly more favorable compare relative to peers, we expect a stronger sequential pickup with domestic comps still performing below the industry at -4.5% up from -8.3% last quarter.
  • On the international front where the company has been performing significantly better, we expect comps up +5% reflecting a modest sequential deceleration on a 2-year basis.
  • In aggregate, we expect the Payless comps to come in down -2% driven by an improvement in traffic from last quarter as well as mix (more toning and boots), which is likely to keep ticket up LSD.

Gross Margins:

  • We are modeling a 250bps decline in Q2.
  • Similar to Q1, higher product costs and channel mix will pressure margins in Q2. However, with product costs expected to be up LDD from +6% last quarter, we expect this headwind alone to impact margins by -250bps. Mix will likely account for another -40-50bps headwind assuming $35mm of incremental PLG sales at sub 30% margins.
  • Offsetting these headwinds to some degree will be modest tailwinds from rent/occupancy equating to +20bps and product mix with greater volume from toning and boots.

SG&A:

  • We are modeling SG&A growth of 5.5%, however this may vary considerably as the company could opt to sweep all sorts of costs under the carpet this quarter.
  • With a $10mm severance-related charge expected in the quarter (=~$0.10 in EPS) along with costs associated with building out the international business offset in part by increase PLG growth spending last year ($5mm+), we expect SG&A to be up +5.5% in the quarter.

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