TBL: It Doesn’t Smell That Bad

Smartwool continues to prove itself as Timberland’s diamond in the rough. While only about 6% of sales at $80-90mm, it is closer to 10% of cash flow. This is a solid brand all around, and I dare you to find a retailer that will tell you otherwise. At the time of the Smartwool deal, it seemed like a ridiculously expensive acquisition at around 13x EBITDA, but interestingly enough it has turned out to be TBL’s most accretive. Based on realized numbers, TBL is looking at a ‘hindsight valuation’ of 5-6x EBITDA.

Well…the company is extending the brand into a new category – slippers. That might not seem like a big deal, but this is a natural extension for Smartwool. Can it add $20mm in slipper sales? Yes. They will have men’s and women’s styles featuring double-merino wool uppers that are naturally antimicrobial and odor-resistant. (Author’s note: I will deny having tried this, but if you wear one pair of Smartwool socks over the course of a 5-day business trip, they still won’t smell – so I’m told). The brand’s positioning on this is “The shoes are great after skiing or snowboarding. You can slip them on and drive home.” The collection, which will retail from $70 to $125, includes three women’s and two men’s styles.

My concern with TBL near-term is still that numbers look too high for ’09. Though we can’t ignore that there’s $2.50 in cash on the balance sheet, and I can get to a value for Smartwool between $1-$1.50 per share based on range of multiple assumptions. That suggests that the base business is selling for $680mm at its current $11.75. Admittedly, this would have been a heck of a lot more attractive when the stock bottomed at $8.50. But if it trades off on a miss, or a market retracement, keep this one on your screen.
I'm not saying it's pretty...but the comfort supposedly rivals UGGs.

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