WWW – We Really Like This Stock

Takeaway: The short takeaway here is that Hedgeye Retail sector head Brian McGough really likes Wolverine World Wide (WWW). A lot.

Hedgeye Retail sector head Brian McGough presents his Best Idea, footwear maker Wolverine World Wide (WWW).  The short takeaway is that Brian really likes this stock.  He likes it for short-term traders.  He likes it for long-term investors.  He likes it for cautious buyers waiting for the right entry time.  He flat-out likes it.

Over the next 2-3 years, Brian looks for this stock to be at least a double.  Unless, of course, lots of things go right, in which case WWW, which currently trades in the low $50s, could soar well above the $100 mark.


Here’s the breakdown.


A Look Under the Hood at WWW:

WWW has complex set of footwear brands, including lots of household names like Stride Rite, Hush Puppies, Merrell and Patagonia.  But if you remember the famous “80/20 Rule,” it will not surprise you to learn that, out of about 15 brands, the top seven brands account for over 80% of WWW’s revenues – the top three brands make up half the company’s sales.  (OK, we recognize it’s not exactly 80/20, but the concept is solid.  Would you rather we called it “a log-normal distribution”?)


This well-managed company offers products under three headings: Heritage (with such brands as Wolverine and Harley Davidson), Lifestyle (Sperry, Keds, Stride Rite), and Performance (Saucony and Merrell).  In clear distinction to another well-known retailer, Payless – from which WWW acquired both the Sperry and Keds brands – WWW’s sales network operates on a uniform platform globally, providing maximum efficiency in all markets.


Modeling Assumptions:


Brian’s projections for WWW’s earnings are meaningfully above the consensus.  So much so, says McGough, that he believes the stock could be accorded a higher multiple today.  McGough estimates 2013 EPS at $2.73, versus Street consensus of $2.63.  By 2016, McGough is modeling $5.64, well above the consensus of $4.24.


WWW is a top-line story.  So much of the cost of their business is built into their efficient distribution network that nearly all of every incremental dollar of sales revenues turns into earnings.  (We told you it’s a well-run company!)


The big story here, says McGough, is a convergence of a trend in improving operating margins, together with an improvement in operating asset turns.  Calling this “a rare, rare instance where both are improving together,” McGough sees a further catalyst in the general trend as peak revenues start to roll over and fade in the retail group as a whole.  Thus, WWW stands out both on a comparative and on an absolute basis.


Where We Are Different


McGough says WWW is the most global footwear company of all.  Fully 65% of its unit sales are outside the US, far above such visible global brands as Nike and Adidas.  So it may seem counterintuitive that they recently purchased two of the least global names: Keds and Sperry.  Sperry are the folks who make Topsiders.  Right, the boat shoes.  But wait, there’s more…


In contrast to WWW’s global reach, Sperry sells 95% of its products in the US.  McGough says this is a well managed brand with a talented management team, but without the capital or the network from expansion.  McGough expects WWW’s global platform to quickly add Sperry sales overseas, with a boost to the top line. 


Together, “without making heroic assumptions,” McGough expects the Keds / Sperry combo to easily add 4%-5% top line growth.  McGough points out that WWW has done this before.  They took the Cushe brand from $10 million in revenues in 20 countries when WWW acquired them in 2009, to $50 million in 100 countries today.


In 1997 WWW bought Merrell, a brand doing $27 million in sales.  After the acquisition Merrell grew between 20%-25% annually for 15 years and is closing in on $600 million in sales today.  Now that’s management!


Pushback Points:


OK, so why isn’t WWW already at over $100?


For one thing, people think it’s pricey.  “It’s expensive, and I missed it already” we hear.


McGough agrees.  WWW is expensive.  It’s built to be expensive, and McGough thinks it will only get more expensive.


Some folks criticize the Keds acquisition as being way too costly.  McGough recalls the same criticism when Nike bought Converse.  “It was expensive and everybody thought it was stupid.”  Oh, and it turned out to be Nike’s best deal, more than ten times over the profitability of anything else they acquired.


WWW’s strategy with Keds includes a fashion deal with Kate Spade and a tie-in with Taylor Swift, moves that have already boosted Keds’ revenues by around $25 million.


And Sperry?


Let’s just say these aren’t your grandfather’s boat shoes.  The category known as “boat shoes” has undergone not just a transformation, but a radicalization.  McGough disagrees with those who think this “boat shoe cycle” will blow over.  He says the category has been permanently redefined, with broad new fashion offerings that speak to a wide range of ages and lifestyles. 





So, what if we’re wrong?  McGough says if the Sperry brand fizzles, it’s less than a 2% hit to revenues, providing a good risk / reward scenario.


Stock Strategy


McGough says the technical picture for the stock is “extremely bullish.”


The stock is in an odd position.  Everyone says “it’s too expensive and I already missed it.”  And no one seems to like it, which means there aren’t too many folks waiting to sell their positions – they don’t own it.  (McGough notes that WWW has historically performed well regardless of sentiment, so maybe it’s a sort of Ultimate Contrarian play.)




McGough likes this “expensive” stock right here, right now.  His model indicates WWW could produce 25% EPS growth over the coming 3 years, while at the same time taking down debt levels, a combination that he believes should have the stock trading at more than a double over the next 2-3 years.


The risks are the stock’s already high price and implied P/E of over 30.  But McGough thinks for the downside to be realized, WWW needs to suffer a combination of bad European sales, a horribly bad winter both here and overseas, and a complete failure of the “new boat shoes” model.


It isn’t often that an analyst likes a stock for short-term Traders and for long-term Investors.  McGough likes WWW for both – and even for intermediate-term Undecideds.  Expensive today.  Lots more expensive over the next couple of years.




Moshe Silver, Managing Director

Copyright © 2013 by Hedgeye Risk Management LLC


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PG – Don’t Get Fooled Again

“Meet the new boss, same as the old boss.” – The Who

Last night, Procter & Gamble CEO Bob McDonald announced his “retirement” and former Chairman and CEO AG Lafley was named as President and CEO.  McDonald was facing a fair bit of external and internal criticism, and his retirement shouldn’t come as a complete surprise to the market.  We have a couple of thoughts on the situation.

  • We think Lafley is a clear improvement over McDonald, but we aren’t entirely convinced that Lafley is all that good – for example, the Gillette acquisition took place on his watch and we think it’s a horse race between PG/Gillette and GIS/Pillsbury for worst staples acquisition of the last 20 years
  • This doesn’t strike us as a permanent solution – AG Lafley is 65 and note that any likely successor to Lafley almost certainly lives and works in Cincinnati as I type this, so don’t expect a sea change in terms of philosophy or style going forward (this is part of the reason we questioned Pershing Square’s thesis on the name).
  • While PG stock was a strong performer during Lafley’s tenure, he had several notable tailwinds, including a period of strong global growth and a company in Unilever that was a fairly consistent share donor (the current Unilever is much, much more capable global competitor) – this goes back to our prior thought that while Lafley is better, better doesn’t necessarily equal good
  • It’s unclear to us what Lafley’s strategy will be, but there are only so many levers to pull – advertise, innovate and invest in price – none of those seem to be all that positive for the broader HPC space and likely not positive for PG’s earnings base.  2014 as a reset/investment year is a real possibility
  • At $82, PG is a do nothing for us and represents more than a little bit of the triumph of hope over experience, which we see as particularly fitting given that this is Lafley’s second “marriage” to PG (Samuel Johnson - “A second marriage is the triumph of hope over experience”)
  • We are happy to sit on the sidelines until we hear a clearly defined strategy and then perhaps wait a bit more until we see some positive impact from the implementation of that strategy – PG is a big ship to get moving
  • PG’s upgrade this morning by a large sell side firm strikes us as a “true-up” after being on the wrong side of the name for a good bit of time


Call with questions,





Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


McDonald’s is unique in that it has the highest exposure to Europe of any of the major Quick Service players. Besides issues in the United States, which we and others have highlighted, Europe continues to be a major headwind for the company’s earnings growth.



Dark Ages in Europe


Despite equity markets in Europe reacting to the recent rate cuts, the underlying employment trends are not positive for McDonald’s business. The European division accounts for almost 40% of the company’s operating income. The bull case for MCD this year rests firmly on the shoulders of the U.S. business, which is struggling under structural issues and increasing competition. Listening to the MCD AGM yesterday, there was no evidence of any change in strategy to address current challenges.


We remain negative on MCD.



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MCD EURO PROBLEM - mcd operating income


Howard Penney

Managing Director


Rory Green

Senior Analyst

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Ralph Lauren: Risk Exists

Takeaway: Stocks don't go up when sales slow, costs increase, capex goes up materially and the stock is at 20x EPS. A textbook 'investing year.'

This note was originally published May 23, 2013 at 22:51 in Retail

Conclusion: We like what RL is doing, but the near-term financial implications will not be pretty and EBIT growth trajectory and RNOA will suffer. Even though this impact will likely be temporary, investors will need to wait until near the end of this calendar year until the risk profile improves. Until then, valuation matters.



We're surprised that RL was not down more on its 4Q print. Yes, the company overdelivered -- in typical RL fashion.  But there are enough factors that are changing negatively on the margin that we think will make  RL a good candidate for multiple compression in the sloppy quarters that lie ahead in the upcoming fiscal year.


We like this company as much as we ever have. It continually reinvests in its intellectual property to elevate the retail experience and gain share -- something that has worked for RL without fail.

Case in point…we kept a little scorecard of all the times that retailers and brands mentioned the words 'omni-channel' in press releases and earnings calls this earnings season. We stopped count at 100, and no, it did not take us long to get there. This has officially become the biggest cliché buzzword since 'supply chain' made it on to the scene 15 years ago. We swear that half of the execs talking about omni-channel don't even know what it means (if there even is a universally-understood definition). They're just following the cool kids.


Ralph is one of the cool kids.  It did not discuss 'omni-channel' once on its call or press release. Why? The reality is that it has been implementing a true omni-channel strategy for much of the past five-years…at a time when no one knew what it even was. Now RL is implementing retail and e-commerce models that others will be trying to implement in another five years. Simply put, we think that RL will continue to be a winner.  


But this is one of those years where the negatives to the story are likely to outweigh the positives. Specifically…

  1. FX will be a meaningful headwind in FY14 -- especially given RL's significant exposure to Japan.  Check out the Yen's move over the past six weeks. Not good.  FX is a $75mm hit to EBIT for the year.
  2. RL's Global SAP implementation, Korean e-commerce rollout, acceleration of retail rollout -- including NY flagship. There's another $75mm hit to EBIT this year.
  3. Capex is going from $276mm last year to up to $450mm in FY14 -- that's one of the biggest capex increases we're seeing out of anyone in retail.


In fairness to RL, it has proven to be an exceptional steward of capital in the past, and we have no reason to think that will change this year.  But the reality is that the $150mm in extra costs puts RL in a hole for 13% EBIT growth. This would be ok if we could justify solid double-digit top line growth as an offset -- but the reality is that we cannot (even if partially due to FX). So we've got slowing sales, eroding margins, and a step-up in capex. Any way we cut it, we can't justify the combination of these factors leading to any form of multiple expansion.  

Passing the Torch

“To you from failing hands we throw the torch.  Be yours to hold it high.”

-Lieutenant-Colonel  John McCrae


Most of you probably haven’t played for the Montreal Canadiens, but if you had, you would know that the quote above is painted on the wall in the Canadiens locker room.  The idea is that current players are expected to live up to traditions of the past.  The line itself is taken from a poem called, “In Flanders Fields”, which was written by Dr. John McCrae in World War I.


McCrae enrolled at the age of 41 with Canadian Expeditionary Force following the outbreak of World War I.  Instead of joining the medical corps, which he had the option to do based on age and training, he instead volunteered to join a fighting unit as a gunner and medical officer and was immediately sent to the German front in Belgium.


Flanders is a region in Belgium where Germany launched the first chemical attack in the war during the second battle of Ypres.    At the conclusion of the battle, McCrae was inspired to write the poem after seeing the poppies grow on the graves of the dead at Ypres, thus the opening line of the poem, “In Flanders fields the poppies blow.” To this day, Canadians wear poppies on Remembrance Day in memory of those who died while serving in the Canadian military.


Back to the global macro grind . . .


This idea of transition from past to present is one we discussed in great detail on an expert call yesterday with Jim Rickards, the author of “Currency Wars: The Making of the Next Global Crisis”.  The focus of our discussion of transition related to the Federal Reserve. Specifically, what will happen as Chairman Bernanke’s term ends in January 2014?


On a basic level, if Bernanke moves on, whoever comes in to lead the Fed will be burdened with unwinding the most dovish monetary policy in the history of central banking, including the longest run of zero interest rate policy and a quantitative easing  program that is without parallel. Ultimately, the Fed will have to unwind the $3.4 trillion in securities on its balance sheet.  That torch is passed to you Mr. or Mrs. Next Fed Head!


One area in which we would hope to see an improvement from the next Chairman of the Federal Reserve is in economic projections.  In the Chart of the Day, we look at the U.S. GDP growth projections supplied by the Fed going back to the 2010.  Here is the skinny:

  • In 2010, the Fed’s peak GDP growth projection was 3.5%, which missed the actual number by 32%;
  • In 2011, the Fed’s peak GDP growth projection was 3.7%, which missed the actual number by 51%; and
  • In 2012, the Fed’s peak GDP growth projection was 2.7%, which missed the actual number by 19%.

If you didn’t know that economics isn’t a science, well, now you know. 


In terms of improving their internal models, we may just send the new Chairman of the Federal Reserve a Hedgeye dart board and some darts.  On a serious note, the fundamental problem with such shoddy projections is that the Federal Reserve is actually setting monetary policy based on these numbers, which currently involves purchasing $85 billion in securities monthly.  It should be no surprise then that we have market volatility.  


Speaking of central banking induced volatility, the Nikkei had a 7% intraday swing yesterday.  What was the catalyst you ask?  The Bank of Japan’s Kuroda came out midday and said that the “BOJ has announced sufficient monetary easing.”  Obviously, the markets don’t believe him.  Neither do we and therefore we are keeping our short Japanese Yen recommendation in our Best Ideas product.  We are also negative on JGBs on the recent break out above 1% on the 10-year.


No surprise, the Keynesian economic standard bearer Paul Krugman is taking the other side of our research this morning in an op-ed in the New York Times and calling, “Japan the Model”.  Like a fledgling hedge fund analyst that has to defend his position to the seasoned portfolio manager, Krugman finds the facts that best support his case.  We behavioral economists call this framing.


Interestingly, on one hand Krugman is heralding the success of Japanese monetary policy because “Japanese stocks have soared”.  Conversely though, he tells us not to worry about the recent sharp sell-off in Japanese equities when he writes:


“I’m old enough to remember Black Monday in 1987, when U.S. stocks suddenly fell more than 20 percent for no obvious reason, and the ongoing economic recovery suffered not at all.”


You can’t have your cake and eat it too Dr. Krugman!


Our ever savvy Healthcare sector head Tom Tobin offers an alternative thesis to the long decline of Japan’s economy, which is simply that over the last 50 years the population growth rate has been in steady decline.  Not surprisingly, this decline in population growth has correlated very closely with GDP growth.  That’s not our prognostication on the holy pages of the New York Times, but rather the simple math.


The fundamental problem that Keynesian economists who advocate printing to infinity and beyond have is that they can’t explain how printing leads to more jobs and higher employment.  Simply put, that is because debasing a currency doesn’t incentivize companies to invest and hire.  In fact, it does the opposite.


We are happy to continue to trade the market volatility induced by Keynesian economics, but at some point we do hope that the torch is passed on from these charlatans.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Weimar Nikkei, and the SP500 are now $1, $101.61-103.92, $83.24-84.29, 101.42-103.69, 1.95-2.05%, 13.11-15.73, 14,271-15,097, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


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