WWW: Thoughts Into the Print

Takeaway: The Q looks fine. But we’re looking for one thing only. No, not Sperry, but the number and productivity of Int’l dist deals signed.

This WWW quarter to be reported tomorrow is an important event for our confidence in our Long thesis.  To be clear, we’re not too worried about the EPS number. We think that looks fine. We’re at $0.28, about a penny above the Street, which would represent a 22% growth rate in EPS compared to a 6% decline in 1Q.  The consensus view is that the revenue is weak, and that the company will make up for it with lower pension expense. That’s mostly correct, but well-telegraphed. We shouldn’t see any downward revision to guidance for the year. If anything we think WWW will beat and keep FY guidance steady, implying that 2H will be lower (that’s what it always does). Keep in mind that the company was at the FFANNY trade show in early June where it held 1-on-1s, and then presented at a broker’s Consumer Conference. Both of those happened just 1-2 weeks before the quarter closed June 14th. In other words, WWW knew its numbers, and likely would have preannounced at that time if it thought the quarter or year was at risk.   

The key thing we’re looking for, however, is a) the number of international distribution arrangements signed for Sperry, Keds, Saucony and Stride Rite, and b) the revenue generated by the deals that have already been signed. Why is this so important? The crux of the investment opportunity here is WWW scaling up the International distribution for the four PLG brands. It already has the most efficient international distribution network of any footwear company in the world, with better than 60% of its shoes sold outside the US across a network of 210 distributors over 11,000 points of distribution. All of them are on SAP, and all are exclusive to WWW. Conversely, the PLG brands generated only 5% of its sales outside of the US due to the inefficiencies of being under the umbrella of its former owner, Collective Brands (Payless). When we look at the timeline associated with this deal, organic international growth should be ramping up right now. Here’s the timeline…

PLG Acquisition Timeline

  • 2012 was the year of the PLG deal (4Q12). It was big, and painful initially – no EBIT, just interest from $1.2bn in debt.
  • 2013 was the year of integration. In 1H people moved around, brands were repositioned, and management realigned. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
  • Then comes 2014 – which should be all about revenue growth. The global salesforce, which is the most efficient footwear distribution operation on the planet, has four new major tools (brands) in its toolbox. WWW has been lining up international distribution arrangements over the past 18 months and is now sitting on about 55. Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.

Here’s what the company has said in its last seven public appearances about its cadence in signing new deals.

  • Q2'13 CC (Jul ‘13):  almost 20 distribution agreements in key growth markets and anticipate another 15 to 20 programs will come online in the back half of 2013
  • Q3'13  CC (Oct ‘13):  We continued to make progress on this front during the quarter by signing and executing distribution agreements covering 14 key growth markets, bringing the total number of new agreements since closing to nearly 35 covering 67 countries.
  • Investor Day (Oct '13) : Since acquisition, we've signed 35 new agreements covering 67 countries, and we're very excited about certainly the most recently inked agreements with the Elan Corporation for the Sperry Top-Sider and Keds brand for the China market.
  • ICR (Jan '14):

 WWW: Thoughts Into the Print - WWW Chart1

  • Q4 '13 CC (Feb '14) : significant investments to build out the full Sperry Top-Sider lifestyle assortment. We have seven license agreements in place today for everything from swimsuits to sun glasses and our most exciting initiative, the introduction of a full range of Sperry apparel via license agreement with Li & Fung is scheduled to launch this coming fall... We've signed 15 to 20 new contracts for Sperry. We still only have Sperry in about 67 countries around the world, for example.
  • Q1'14 CC (Apr '14): During the quarter, we signed agreements covering over 25 key growth markets, bringing the total number of new agreements since closing to nearly 55, covering nearly 85 countries.
  • Baird Conference (May '12): And as we noted in our earnings call last week, since the acquisition closed, we've signed 55 new distribution agreements for the newly acquired brands covering 85 markets. And so those distribution agreements are in place.

So there are 55 agreements in place as of May, and probably close to 70 today. We’re ahead of the consensus this quarter due to revenue growth associated with these arrangements.  If we’re wrong, then we’ve got to step back and question our logic, math and thesis. But based on what we know today, we’re comfortable owning this one.