Black Book thesis solidly intact. No changes to our estimates on PSS or the view we articulated in our Black Book (let us know if you are interested in a copy) about how and why PSS has $2.00+ in EPS power over 2-years – about 65% ahead of the Street’s expectation.
The quarter in itself was kind of a yawn. Probably more puts than takes – which is one thing we outlined in our Black Book, but it was definitely not anywhere near as bad as it could have been given the circumstances and the sentiment. Comp was right in line (but still weak at -7.3%), GM a 100bps worse than we had in our model. SG&A in line. Tax rate helped, but will be a benefit on an ongoing basis. Working capital and cash flow was really solid – the CF trajectory was better than I modeled, and inventories are in check.
As for the outlook, the only thing that was new to me was that mgmt quantified a 20%+ decline in rent on leases being renegotiated during the course of business. This is above the mid-teens rate I had in my model (you do the math – rent is 15% of COGS, and 20% of stores up for renewal per year at 20% price cut).
Rubell probably kept earnings in check for 3Q by noting that product costs (68% of COGS by my math) will be down only low-single-digits in 3Q and then will accelerate to 10%+ in 4Q. I think the 3Q is a low-ball number. Even with better meat on the bone from PSS on financials, my sense is that numbers won’t go up anywhere near as much as they should.
As for other items that lead to my 6% margin and $2.00 in EPS power number… nothing really changed. Own out of the print, not into it. This continues to be a BIG idea.