WWW: Opportunity Knocking


We've been working more and more on WWW since the PSS acquisition, and while today's pre announcement by no means is positive, it does not change the underlying reason why we've been warming up to it. It draws attention to risks in Europe, which we probably under appreciated. But we're seeing downward revisions in next year's EPS below a level we think the company will earn.

 

Consider the following:

  • WWW’s European business has been a drag on performance for several quarters now and continues to be. Underestimating this headwind has been a big miss by management and has lead to earnings disappointments in each of the last two quarters for the first time in over 4-years. WWW is not alone as the rest of retail has suffered a similar plight. While this underperformance is not new news, continued weakness is coming in below expectations and that’s not good for near-term results – we get that.
  • It’s worth noting, however, that EMEA was already running down double-digit in Q2 so it’s not clear yet if there’s incremental weakness, or simply a delay in sales reaccelerating. We expect the company to elaborate on this later today.
  • EMEA accounts for ~25% of revenues and a similar if not slightly greater portion of WWW’s earnings. Relative to our expectation for Q3 EMEA sales to reflect improvement coming in down –HSD, this update impacts revenues by an incremental $6-$10mm in the quarter and $0.15 in EPS for the year. At historical multiples (~14x EPS), we’d expect this to impact the value of the stock by ~$2/share near-term.
  • Furthermore, once the PLG deal closes (early Oct), EMEA will account for closer to 15% of revenues. With less than 10% of the PLG business coming out of Europe, we expect distribution expansion alone to reaccelerate sales in Europe.  
  • Outside of Europe, the base business is positive and improving with U.S. wholesale and retail both posting positive quarter-to-date performance. In addition, revenue compares getting increasingly more favorable over the next three quarters as the company laps slower European demand and the timing of military orders in 1H.
  • The margin setup also gets more favorable ahead. WWW took it’s medicine last quarter clearing excess fall/winter product. While this accounted for a -200bps gross margin hit, it also resulted in WWW’s sales/inventory
    spread turning positive for the first time in 10 quarters – very positive for gross margins headed into 2H.

Continued weakness overseas begs the question regarding the timing of the PLG deal to be completed in early October. While it will likely tarnish the timing suggesting an offset to what might be an eroding base business, we expect WWW’s base business to stabilize near-term and continue to post top and bottom-line growth in the single-digits and double-digits respectively.


More importantly, the positive impact of the PLG acquisition on NewCo is still largely underappreciated and outweighs this latest delta. While the company continues to guide to $0.25-$0.40 and $0.50-$0.70 in EPS accretion, we expect closer to $0.50 and $1.00 in F13 and F14.


To be clear, this incremental weakness out of Europe is unfavorable on the margin, but is not material enough for us to alter the positive outlook we have on the intermediate-to-longer term upside in earnings. We’re shaking out at $3.45 and $4.30 in EPS for FY13 and FY14 well above consensus, which still does not fully reflect the pending acquisition. All things considered, we’d be buyers on weakness this morning.

 

 

 WWW: Opportunity Knocking - WWW S

 

 


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more