UA: Look to History

Hey UA… Here’s a recommendation for you… if you’re gonna suggest that Footwear, your hugest future revenue growth driver, is going to be flat next year, you may actually want to add that color to the press release.  No matter. What’s my view? As noted several times, the one potential shocker to this quarter would be increased SG&A growth to build a footwear organization. The company gave us that today. Given the strength of 3Q revenue – by a long shot – it simply did not matter to 3Q, and I don’t think it will matter much to 4Q either.

The salt in the wound came when UA noted that sales associated with that investment would be flattish next year. I don’t buy it. I think its McCarthy buying time, and keeping his hurdle low. This is not just my ‘gut’ (a gut is something that’s tough to invest with for me), but rather analysis based on historical precedent. Let’s look at McCarthy at Timberland.

He joined in May 2006 and was charged with the task of heading up the flailing ‘Yellow Boot’ business. This was about a third of sales, but 2/3 of profit – and was headed nowhere but down. He halted the decline over 2 quarters. He then grew the business for a year in the mid-single digits, while the rest of TBL shrunk by close to 10%. So of course, TBL pulled him away from the newly branded ‘Authentic Youth’ business, and made him co-president of the Company, while it took resources away from his former division.

The point here is that I agree that it will take some time for McCarthy to make a mark at UA, but the clock started ticking in August. UA will be selling product made under a process that is not his through April/May, and then ‘The McCarthy Product Transition’ kicks in for fall – not 2011 as the company suggests.

The company suggests about $0.97-$1.00 in earnings next year. We’re at $1.20. Then we’re at $1.75 the year after. 40% CAGR in earnings and cash flow? That doesn’t stink.