WRC: Getting Easy To Not Like It Again

I struggle with this one. My model has the company missing the quarter by a nickel due to weaker top line and gross margins (see below), and visibility on any stability is six months away at best. I still don't think that the margin structure is sustainable without any temporary help from the Obama administration breaking the buck. In fact, the consensus is looking for flattish EBIT margins at 10% during the upcoming year as well as in 2010. Maybe that's doable, but I can't get to upside - even with sourcing savings on the docket.


But would I be shocked to see them beat the quarter? No. WRC has posted an average 40% variance each quarter over the past 5-years. In fact, this company beat for the last 11 quarters until dropping the bomb in 4Q (just after management sold the most stock since emerging from bankruptcy). Since then the company has not given explicit guidance to the public, but set low general hurdles, and has subsequently worked the conference and 1-on1 circuit meaningfully. Would it have done so in advance of a big miss? Probably not. If another big miss happens, this name will be in 'sentiment purgatory' for a long long time.


But it's certainly not there now. 80% of sell-side ratings are 'Buy' and only 4% of the share are held short. As noted, management timed mass sales magically before the last big miss in 4Q.  But with the stock dropping to $12.60, you would think that management would have jumped back on board, huh? Not quite. Not a single purchase from $13 up to its current $28. Maybe the senior management team is as weary of the current multiple as I am.


Our Model

Our WRC model is coming out at $0.68 for the quarter, $0.05 below the Street consensus of $0.73.  The key difference in our model vs. others lies on the top-line coupled with a slightly more negative forecast on gross margins. 



Revs are decelerating as square footage growth in CK cannot fully offset declines in all other divisions, comparisons extremely tough, and unfavorable FX(-9)%.


Revenues decelerating on a 2 yr basis throughout the year and will decelerate in 1H on a 1yr basis.  Compares ease a bit in 4Q, as this was the first quarter that WRC reported a substantial slowing in sales momentum at any point over the past 9 quarters.


Square footage growth of 20% (up 25% in F08) for CKI will continue to help drive sales in the sportswear and intimate (CK retail) segments.  The most recent data point given at a March B of A conference was that comps were running 10% for retail. While still robust, this was down from a 12% run rate in 4Q.


Timing of swim shipments may have an impact on 1Q as retailers continue to shift receipts closer to need.  Also given the short selling season for swim, it is possibly that wholesale accounts remain extremely conservative on inventory commitments given the inherent margin risk associated with the category.



Decelerating along with sales after huge gains over the past 2 years.  1H especially tough with GM's up 600+ bps total over prior 2 years.


SG&A expected to be down but at a slightly lesser rate than sales. 


$70mm in cost cuts announced for 2009 and more recent headcount reductions are expected to the keep SG&A dollars down for the year by 8%.


Capex/Working Capital

CapEx should be down slightly in 09, $40mm vs. $42mm in 08.  Square footage growth down slightly to 20% from 25%.  Keep in mind that this rate of growth is in the top 5% of retailers in this climate. Why not ease back with capital commitment and hold out for better terms on properties (i.e. LULU, URBN, HIBB, COH).


Inventory position will be the first metric I check when numbers are released. WRC has done a solid job over the past three years with consistently growing inventories ahead of sales. This was when FX was a benefit, growth came disproportionately from International ops, and they sold off low-turning intimate and swim businesses. The extent to which WRC can hold this will be the key to Gross Margin volatility in 2H.



WRC: Getting Easy To Not Like It Again - 5 10 2009 8 38 34 PM


WRC: Getting Easy To Not Like It Again - 5 10 2009 8 29 43 PM

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