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WWW: Deal Done, See Upside

Takeaway: Accretion projections re PLG raised - update on core biz next week. We continue to like this name.


With the PLG acquisition now complete, management is taking up accretion expectations ahead of next week’s earnings call. We’ve been writing since the announcement back in July that accretion projections look conservative – and think they still are. The question remains how WWW’s core business is faring, which we hit on in our note “WWW: Opportunity Knocking” re last month’s preannouncement (included below). We’ll get the update there Tuesday (10/16).


The bottom-line here is that we think European weakness is likely to stabilize and start reaccelerating as the company realizes incremental earnings from the PLG business over the next 2-3 quarters and investors start looking at ~$3.50 and $4.25+ in EPS in FY13 and FY14 respectively as the Street takes estimates higher (the deal is not yet in consensus numbers). WWW has a solid management team and a global platform to leverage its growing portfolio of brands. We continue to like this name. One of our concerns is the timing of the deal at what might be a peak in the boat shoe cycle. This is about the only factor keeping us from putting this name on the ‘love’ side of our ledger.


Here are a few callouts re this morning’s call:

  • Accretion projections were increased by $0.10 to  $0.35-0.50 (from 0.25-0.40) in F13 and $0.60-0.80 (from 0.50-0.70) in F14.
  • Dilution of $0.25-$0.30 during the stub period in the remainder of F12 reflects the timing of the deal closure post higher volume PLG selling periods in August and September.
  • The composition of accretion factors have shifted to reflect higher non-cash amortization and interest charges that will be more than offset by net synergy and higher revenue and profit growth expectations.
  • In a positive update on PLG, the business had very strong BTS results with full year expectations now for the portfolio to post revenue and profit growth in the double-digits after reporting +8% revenue growth through 1H.

Our comments from 9/6 note “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 exectations 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: Deal Done, See Upside - WWW S