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WWW: Core Mid-Cap Long

Takeaway: We think that there’s a lot more than meets the eye at WWW. Despite the solid 1Q print, there’s plenty of runway to go.

Conclusion: Despite its outperformance year-to-date, we think that WWW has all of the tools to keep grinding higher. We're looking at $700mm+ added revenue over 3-years at a 20%+ incremental margin with disproportionately little capital  needed to accomplish its goals.  Ultimately, we think that WWW has 3 to 1 upside/downside over the next 12/18 months. 



The bear case on WWW is simple. The company started to see a slowdown in its core footwear business, so it went ahead and did a transformational acquisition by paying a steep price for Collective Brands’ PLG division potentially near the peak of the cycle for its largest and most defendable brand – Sperry. Other brands like Saucony and Keds have upside, but are not in the 'great' category like Sperry arguably is. On top of that, the stock is trading at a high teens multiple on the company’s guidance. There are two realities associated with this bear case. 1) Most of it is correct.  And 2) all of it is irrelevant.


First off, let’s look at the sentiment on WWW and all agree that people are more bearish on the name than we’ve even seen in the modern history of the company (ie even in the years not displayed by this chart). We’re likely seeing some covering on today’s print, but it still leaves the name in record bearish territory according to our sentiment monitor.               


WWW: Core Mid-Cap Long - wwwsi


Secondly, we think that this bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and RNOA. Specifically, our math suggests that in the three years following the initial acquisition year (where there will be outsized accretion) we should see the following…

a)      The addition of over $700mm in revenue – split fairly evenly between the Performance and Lifestyle groups.


b)      $150mm in incremental EBIT (20% incremental margin on top of the 8.4% reported last year).


c)       The asset base should remain relatively flat over that time period at about $3bn. The cash cycle can, and should, come down 20-30% from 2012 levels.  There’s no reason why this business should have 115 days inventory and DSOs of over 60.


d)      Over that same time period, interest expense should come down by 40% as WWW uses free cash to repay debt. As a result we should see shareholder’s equity double from $644mm ($13 per share) in 2012 to $1.3bn ($27 per share) in 2016.


e)      Importantly, RNOA should climb from 10% up to 16%, with steady improvements each year.  Admittedly, the one catch is that this is a company that once had returns of 30%. The PLG deal changed that – likely permanently (or at least for a very long time). Nonetheless, returns have bottomed and are headed up systematically. It's very important to note that it's near impossible to find an example where a company's RNOA roadmap went up (margins improving) and to the right (turns improving) simultaneously without the stock meaningfully outperforming peers.


WWW: Core Mid-Cap Long - wwwrnoa


In the end, we’re modeling 30%+ growth in earnings over each of the next two years, and 20%+ at a sustainable rate for at least the next three years. Our estimates are only 5% ahead of consensus this year, but by the end of our modeling time horizon (2016) we’re 25% ahead of the Street.


WWW: Core Mid-Cap Long - wwwestimates



In the end, this is probably one of the best managed and most consistent companies in retail. Accretion is ahead of plan, inventories are in very good shape, and though there is admittedly a permanent impediment to achieving asset turn levels WWW saw prior to the deal (acquiring as opposed to growing organically), WWW has a multi-year platform from which to grow. Add on accelerated cash flow generation and subsequent debt paydown, and we think that this story has legs (look at HBI over the past year – it’s the mother of deleraging stories. We’d put FNP in a deleregaing bucket as well – at least as it relates to expectations for proceeds from its asset sales.)  


The stock is hardly washed out – we get that. But the reality is that this for a high quality globally diversified portfolio that has consistent 20-30% EPS growth and improving returns we don’t think that arguing a high teens multiple is a stretch. 18x our 2014 estimate of $3.55 gets us to a $64 stock, or 36% above current levels. Take that out to 2015 and 2016 and we’re looking at $75 and $95, respectively. When we juxtapose that alongside 15x ehat we think is a worst case $2.50 in EPS power, we’re looking 3 to 1 upside/downside over the course of a 12-18 months.



WWW SIGMA: Inventories are extremely clean, which has continued bullish implications for gross margins.

WWW: Core Mid-Cap Long - wwwsigma     



Playing The Volatility Game

One way we trade the S&P 500 is by examining volatility. When the CBOE Volatility Index (VIX) is at extremely low levels, usually around or below 13, and the S&P 500 is overbought and above our immediate-term TRADE line of resistance, we look for an opportunity to sell the index and vice versa. Yesterday's spike in volatility and downturn in the S&P 500 was brought on by exacerbated selling in gold, commodities and yesterday's tragedy in Boston. When this sort of anomaly happens and happens quickly, we sit back and wait. No need to rush into a market that doesn't work with your trading method.


Playing The Volatility Game - VIXSPX

PODCAST: Talking About Gold


Today’s Question & Answer portion of our Morning Investment Call held for Hedgeye subscribers focused on the topic du jour: gold. CEO Keith McCullough talks about where gold will trade next as fund managers and institutional investors rush to sell their positions in the precious metal.


No matter which way you put it; gold is crashing. What should surprise investors is how some people stay bullish on gold until it gets to a price like this morning’s. The reality is that a strong US dollar has popped the commodity bubble brought on by Federal Reserve Chairman Ben Bernanke and it’s looking very ugly this morning. You can listen to the full Q&A session with Keith in the audio posted above.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

KO and the Start of Earnings

Every earnings season has its own “feel” and the early read on the consumer staples Q1 EPS reports is that so long as the report isn’t a complete disaster, the momentum behind the stock (and the sector) is likely to continue as money flows into consumer staples persist for a variety of reasons (low volatility, yield, etc).

KO is an interesting test case – the stock was down hard with the market yesterday, but simplistically held the $40 level (old resistance, now support) and is up over 5% today on a print where the positives outweighed the negatives, but we wouldn’t characterize as outrageously bullish.


The company posted 4% global volume growth (versus consensus closer to +3% and against a +3% comp) –reported revenue declined 0.9% against a +5.9% comp while constant currency revenue grew 1.1% (+6.9% in the comparable quarter).  One change in this quarter when compared with recent history was the degree of operating leverage - +1.1% constant currency top line translated into +5.1% growth in operating income (currency neutral).


What we liked:

  • Solid global volume growth number
  • Degree of operating leverage
  • Superb volume performance in Eurasia (+15.0%) which drove much of the upside versus consensus
  • +$0.01 versus consensus on EPS (not a lot, but better than the alternative)
  • Beginning stage of bottler transformation in the U.S. (long-term positive) – expanding, swapping and consolidating territories with the ultimate goal of improving both efficiency of distribution and efficacy of delivering product to consumers

What we didn’t like:

  • We probably won’t see any material change to 2013 consensus (for our part, estimates remain unchanged following this quarter’s results)
  • Cash from operations declined 3.7%, as accounts receivable increased 4.0% and inventories increased 4.8% (Q1 is not a significant cash flow quarter for the company, however)
  • Price/mix was flat in the quarter (against a +3.0% comp)

Like many of the names in consumer staples, we don’t see a compelling need to run out and chase KO (particularly +5.0% today).  Difficult comparisons persist though the balance of 2013, but the quarter just reported displayed the company’s ability to effectively manage through multiple headwinds.  Looking at the sector more broadly, we are happy to take a beer frame (watch and learn) on the short side as it is clear that the demand for low volatility, relatively high-yielding assets persists.


Call with questions,



Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Gold: Don't Catch A Falling Knife

With the panic selling that took place in gold yesterday, many investors have wondered if it's worth buying at $1300/oz or at current levels. We stick by the old adage of "don't catch a falling knife." We're of the impression that gold will continue to head lower now that the commodity bubble brought on by Federal Reserve Chairman Ben Bernanke has popped. The US dollar will appreciate and drive down commodity prices further which will increase consumption and growth, a net positive for the economy. And when the economy is doing well, people don't flock to gold out of fear. Any bounces in gold remain an opportunity to short the commodity and today's no exception.


Gold: Don't Catch A Falling Knife - SPOTGOLD


This note was originally published April 15, 2013 at 18:25 in Gaming

  • WYNN leads the pack with an amazing 71% ROI (based on 2012 EBITDA) on Wynn Macau and Encore
  • LVS’s $4 billion and climbing investment in Sands Cotai Central has depressed its ROI
  • Peninsula investments earned much higher ROIs but Cotai still looks like a great investment



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.