WWW: 2Q Another Milestone to $100

Takeaway: 2Q spot-on with our call that this is a $100 stock over 2-yrs. But we need some serious context around some overblown near-term factors.

WWW's 2Q print was spot-on with what we needed to see to remain confident in our call that this is a $100 stock over 2-years.  We think that the revenue hammer is cocked to add $1bn in sales over three years. This is accentuated by the margin story that reared its head meaningfully in 2Q and will get return on capital moving in the right direction after a 2-year decline.


One thing that became abundantly clear to us in listening to the conference call is how bifurcated the perception is on this name. We all know that Wall Street is naturally short-sighted, but easily 80% of the time on this marathon 80-minute call was allocated to near-term puts and takes that have no real bearing on what we think is relevant to the appropriate money-making thesis.


There were two factors in particular that were a big focus (and shouldn’t be). 1) The lack of guidance, and 2) Commentary around accretion of the PLG brands.

    1. WWW bowed out of the quarterly earnings game, and simply reaffirmed an annual revenue range while upping annual EPS guidance by a dime after a $0.13 EPS beat Q2. Combined with unidentified/unauditable expenses that were supposedly pushed out, and unquantified revenue that was pulled forward, WWW succeeded in spooking the Street into keeping back half estimates low.  We're at $2.86 vs. a consensus range for the year between $2.60-$2.75.
    2. PLG Accretion. Here's one where we've got to call a spade a spade. Either the company's forecast accuracy as it relates to acquisition accretion is simply horrendous, or they've artfully sandbagged the Street's expectations on a consistent basis. Consider the progression of expected accretion/dilution vs. actual results. Going into the year, WWW guided to Modest Accretion in 1Q, Slight Dilution in 2Q, and $0.35-$0.50 per share in accretion for the year. It ended up earning $0.34ps and $0.24ps in 1Q and 2Q, respectively, from PLG, or $0.58 combined. Now, even though at the beginning of the year it called for accretion in both 3Q and 4Q, it is taking down expectations for zero back half accretion.  Perhaps we'll fall victim to thinking there's a sandbag when one does not exist, but given the momentum of Sperry and Keds, we find it very difficult to get to a loss in 2H.


The near-term factor that mattered most, in our opinion, was the fact that the Performance division went from +8% in 1Q to -4.8% in 2Q. Simply put, Merrell, WWW's largest division, tanked.  We can talk all day about how a product like M-Connect is up double digits, but the reality is that Merrell has a huge division called Outdoor Lifestyle that sells the non-performance product in the portfolio.  We think that it was ignored immediately following the PLG acquisition, which is less than optimal given that it accounts for about 40% of the Merrell portfolio.  The good news is that the company made organizational changes over the past 3-6 months, and the order backlog for the brand in aggregate turned up to the point where management noted that it can grow low single digits for the year. We have no reason to believe that they're lying about order levels, and the channel is lean enough that we don't forsee outsized cancellation levels. In other words, we're going to give them the benefit of the doubt on this one.


Even better is that the full benefit of the Merrell reorganization will be seen at the beginning of 2014, which is also when we start to see a greater impact from the company scaling Sperry and Keds over the existing International infrastructure.  From a timing perspective, this is when we think people will really start to realize that WWW is much growthier than they otherwise think.





The Street is grossly underestimating the revenue growth opportunity as the legacy WWW scales its recently acquired brands over its global infrastructure.  We think WWW can and will add $1bn in sales to its $2.7bn base over 3-years. Under its former owner, Sperry, Keds, Saucony and Stride-Rite only generated 5% of its sales outside of the US, and most of that was in Mexico and Canada. Legacy WWW, on the other hand, is the most global footwear company in the world (yes, even more so than NKE and AdiBok), with 65% of units sold outside the US through an elaborate network of seamlessly-integrated third-party distributors. Given that the infrastructure is already in place, the incremental sales should be brought on close to a 20% incremental margin, versus 8% margin today. Similarly, minimal capital is needed on the balance sheet to grow these brands, making the growth trajectory over the next 3-5 years very ROIC accretive. The stock might look expensive at 20x earnings and 12x cash flow, but the street’s numbers are low by an incremental 10% per year. We're at $5.75 to the Street's $4.25 three years out.  We’d buy aggressively on a pullback, but are not so sure that will happen. We think WWW is a double over 2-3 years.



WWW: 2Q Another Milestone to $100 - 1



WWW: 2Q Another Milestone to $100 - 2






SHORT BBEP and ROYT, Call Details

SHORT BreitBurn Energy Partners (BBEP)

SHORT Pacific Coast Oil Trust (ROYT)


CALL TODAY AT 1PM EST to discuss our theses on these two names.

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We believe the high-yield energy equity space to be rich hunting grounds for short/sell ideas. 


The performance of Master Limited Partnerships (MLP) is particularly representative of the 2009 - 1H13 yield chase.


But behind the guise of what are commonly pitched to retail investors as low risk, high yield fixed-income alternatives, we are finding many instances of aggressive and irregular accounting (in most cases, non-GAAP measures and other “management metrics”), poor corporate governance, and grossly overvalued securities.  Many of these companies trade at ~30 - 50x earnings with low organic growth prospects, have low-to-negative FCF yields, and pay dividends/distributions well in excess of earnings or free cash flow. 


Our recent work on the short sides of LINN Energy (LINE, LNCO) and EV Energy Partners (EVEP) has provided a solid base to work from - we know what to look for. 


This report focuses on two high-yield energy short ideas: BreitBurn Energy Partners (BBEP) - an upstream MLP - and Pacific Coast Oil Trust (ROYT) - a BreitBurn-affiliated trust that is trading at 2x our 3P NAV.


Kevin Kaiser

Senior Analyst

Overbought: SP500 Levels, Refreshed

Takeaway: Our immediate-term risk range says there’s a risk spread of -3.5% (1650-1592), so we’ll sell some.



Nice rally (on no volume) after A) holding TREND support (1592) and B) breaking out above our TRADE line (1621) on more US Employment #GrowthAccelerating news (both NSA rolling Jobless Claims and Monthly Payrolls) last week.


Who said #RatesRising is bad? And for who? Where to from here? Our immediate-term risk range says there’s a risk spread of -3.5% (1), so we’ll sell some (taking net exposure from 7 LONGS, 3 SHORTS Friday to 4 by 4 here).


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1650
  2. Immediate-term TRADE support = 1621
  3. Intermediate-term TREND support = 1592


In other words, this risk range is narrow and trade-able, and we’re cool with that. The SP500 is in a Bullish Formation (bullish TRADE, TREND, TAIL) and the VIX is in a Bearish Formation, so we’re trying to thread the needle here within our range – but at least we know that.




Keith R. McCullough
Chief Executive Officer


Overbought: SP500 Levels, Refreshed - SPX

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The world’s 4th largest country (by population) continues to flash bearish divergences vs something like #WeimarNikkei (which was up +2.6% overnight giving US futures a bid.) Jakarta down -0.4% all the while. It is down -15.4% since May 20.  #EmergingOutflows continues.


The FTSE is up +1% here this morning with the DAX up about the same. The FTSE is back above its TREND line of 6371, whereas the DAX is still below hers of 8262. The capital flows out of Commodities, Debt, and Emerging Markets are looking for parking spots right now. These are two to watch. #liquidity


The10-year is down 9 basis points on the week so far to 2.65%. This gives Gold a bit of a bid off the year-to-date lows. Correlation risk remains obvious from USD to rates to commodities and Emerging Markets. The 10-year risk range is 2.56-2.74%. Higher-lows and higher-highs #bearish for bonds.

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WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing 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 financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


US growth stocks continue to be where it’s at (Russell hits all-time high again yest); rest of world all over the place



The two most important days in your life are the day you are born and the day you find out why. – Mark Twain


Since Bernanke first raised the possibility of tapering in May 22, the yield on 10-year Treasury notes has risen to 2.64% on July 8 from 2.04%. Treasuries lost the most since 2009 in the first half of the year and posted their longest run of quarterly declines since 1999. (Bloomberg)

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