WWW: Adding to Best Ideas. 2-yr Double.

Takeaway: We're adding WWW to our Best Ideas. Accelerating grth + improving mgns + de-levering = 2-3 yr double. One of the few improving RNOA stories.

Conclusion: We're adding WWW to our Best Ideas list and think it's a 2-year double. We think that the prevailing bear case is weak and backward-looking, and that WWW has a little bit of everything that's needed for a long to attract new money and grind higher over a multi-year time period. Aside from having a high quality management team and a very consistent long-term track record, we think that new market share opportunity on a consolidated cost structure and asset base will accelerate organic growth, while taking incremental margins and returns higher. The ensuing cash flow will be used to de-lever, which provides a powerful kicker to propel earnings growth into the 20-30% range. Ultimately, we think that WWW has 3 to 1 upside/downside over the next 12/18 months. 


The outline below is a summary of our investment case. We plan to release a Black Book with a deep-dive analysis over the next two weeks.



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: Adding to Best Ideas. 2-yr Double. - wwwsentiment


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: Adding to Best Ideas. 2-yr Double. - 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: Adding to Best Ideas. 2-yr Double. - wwwestimates



At the end of the day, 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: Adding to Best Ideas. 2-yr Double. - wwwsigma     




Copper: Crash Mode

While gold is attempting to recover from its double digit percentage point crash on Monday, copper is having an even more difficult time as traders continue to sell the metal. The price of copper fell -1.1% this morning to $3.08/lb and is heading lower. Prices on the London Metals Exchange (LME) have fallen considerably since January as outlined in the chart below. With copper hitting a new six month low, we have no problem shorting stocks that have large exposure to the metal like Freeport-McMoRan Copper & Gold (FCX).


Copper: Crash Mode - LMECopper


Our Financial sector head, Josh Steiner, highlighted today some interesting comments from the American Express conference call that could negatively impact the outlook for some of the high-end restaurant companies that rely on corporate T&E for a significant part of their business.


Lower corporate spending and travel is a net negative for casual dining in general, but some of the specific companies that are levered to corporate T&E are: DFRG, RUTH and the Capital Grill which is owned by DRI.


Excerpts from the transcript:


Dan Henry, CFO: Each of the business segments is consistent with the fourth quarter of 2012, except for GCS, which is Global Corporate Services, that's the green line, and you can see here that the growth rate for that segment has moved down slightly, as T&E spending grew at a slower rate than total billings growth rate in the quarter.


Question: And finally as a follow up, can you give a little bit more color on what drove some of the weakness in GCS billed business?


Answer (CFO): So let me talk to GCS, so Corporate Services. So really across the board, we've seen lower spending in T&E categories.  And we're seeing better strength outside of the T&E categories. Corporate Services is primarily T&E type of spending, and so that's where you seeing it come down. And it's relatively broad geographically, so I think it's just lower T&E type of spending is what's causing them to be lower, and that actually ties into travel commissions and fees. So if T&E spending is lower, then that line is going to be impacted. Worldwide sales were down 3%; that's the main driver. Now travel – business travel, was down 4%, consumer was actually up 2%, but business travel is much larger than consumer travel, and so that's what's yielding the lower sales. So it's the activity in this particular category. 



Howard Penney

Managing Director


Rory Green

Senior Analyst


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Korea's KOSPI Index Moves Lower

Korea's KOSPI Index has taken a beating over the last month, falling from a notch above 2000 in late March to 1900 this morning with a -1.2% move overnight. The index is down -5.0% year-to-date as plenty of external factors weigh on the index. Japan's monetary policy that has devalued the Yen considerably has played a significant role as well as the breakdown of US tech companies/stocks with Apple (AAPL) falling below $400 a share yesterday. All these interconnected factors will continue to weigh on the Korean index in addition to the war cries of North Korea.


Korea's KOSPI Index Moves Lower - KOSPIindex

SAB Miller – TAP Implications from Trading Update

SABMiller provided an update on its full-year trading for the 12 months ending March 31st this morning.  We won’t focus on the broader results, but wanted to highlight the company’s commentary with respect to the MillerCoors JV.


 Shipments to retailers declined 3.3% in the quarter to March (TAP’s first quarter) with shipments to wholesalers declining 2.5%.  The company commented on “weaker industry performance” which is wholly consistent with our view on a weaker February and March, with weather being a contributing factor.  However, recall that our view is that the U.S. domestic industry will likely see down volume in the 2-3% range in 2013 as we lap a relatively strong 2012 and the economy remains broadly lackluster.


The weakness was across segments, with the following commentary:


“Premium light STRs were down mid single digits in the quarter, with a low single digit decline in Coors Light and a high single digit decline in Miller Lite. The premium regular and economy segments both declined by mid single digits. The Tenth and Blake division saw high single digit growth, driven by Blue Moon and supported by the national expansion of Batch 19. The above premium segment saw double digit growth following the national launch of Redd’s Apple Ale and Third Shift Amber Lager”


We remain below consensus for Q1 on TAP, as well as the full-year and it remains one of least preferred names in consumer staples.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

PM: Battling The Dollar

Philip Morris International (PM) reported weak first quarter earnings for 2013. One of the major headwinds the company is up against is a stronger US dollar. In the chart below, we've highlighted periods of dollar strength and weakness and how it is inversely correlated with strength and weakness in the share price of PM. When the dollar is weak, PM's share price tends to rise and vice versa. The outlook for Philip Morris is not a positive one on our end and we believe the company will have a rough time meeting earnings per share (EPS) estimates going forward.


PM: Battling The Dollar - PM dollar

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