Q2 results are indeed messy, but considerably better than we expected. We thought EPS would be secondary to one of two things that had to happen, either a) the company said nothing about its strategy, or b) the board stood up like a big boy and showed the investment community that it's taking the bull by the horns and actually does have a plan. We clearly got the later.
There will be plenty more to chew on after the call, but with over 25% of the shares short this one will be up sharply.
Here are a few takeaways from the results:
- Top-line came in up +4.9%, the most robust growth the company reported since the acquisition of Stride Rite in 2007. It looks like this was largely driven by aggressive pricing in an effort to clear inventories.
- Comps came in slightly better than expected down -0.7% (vs. our -2%E) with International up +3% and Domestic down -2% reflecting sequential improvement both on a 1yr and 2yr basis.
- PLG came in strong up +25% and the company is guiding to 20% growth again in Q3.
- Gross margins (adjusted) down -360bps were worse than expected, but makes sense given that the company got even more aggressive on pricing during the quarter to reduce inventories.
- SG&A (adjusted) was down -2% excluding severance though it's not entirely clear what's in that number.
- Inventories were up +16% on 5% sales growth. While at face value this appears horrible, it's a sequential improvement from 1Q and again reflects a more aggressive posture towards clearing the balance sheet. While there is more work to be done here, the sales/inventory spread at -11% was the best it’s been in the last four quarters and significantly better than -24% posted in Q1.