WWW - CFO Don Grimes Departure
Takeaway - This is the second notable change in management at Wolverine in the past month. The first being the departure of Gene McCarthy, who headed up WWW's biggest brand, Merrell, which has been struggling YTD putting up a flat Q1. Let's be clear, however, in that McCarthy leaving was not voluntary, while Grimes' is. Grimes accepted a position to be EVP, COO & CFO of Neiman -- so he's in effect trading up to a $5bn company from a $3bn.
WWW is a deep organization, so there's no doubt in our minds that the company will not miss a beat financially. But where Grimes was particularly strong was in communicating the appropriate message to the investment community. CEO Blake Kreuger is a first-rate CEO and great leader -- but he does not know how to speak to Wall Street. We don’t know the new CFO Michael Stomant -- and while we don't doubt his abilities as CFO given the massive pool of divisional CFOs WWW has to pick from, his 'Wall Street Management' skills are untested.
Nonetheless, we’re comfortable with owning this sleepy name that has several levers. We think that the PLG brands are growing outside the US to a far greater extent than is apparent in the GAAP results. Merrell with the leadership change probably has a free pass for another few quarters. Estimates look extremely achievable this year. Also the Street is not accounting for what should be 500bps in financial deleverage. If we don’t see this, it is likely bc WWW goes ahead and does another deal – and it can stomach up to a $1.3bn transaction at current leverage levels. We usually don’t like deals, but in WWW’s case they usually serve as a positive catalyst.
PVH - 1Q15 Earnings Callouts
1) Excluding translation effects, the growth algorithm in the quarter looked clean. Revenue +3%, EBIT +8%, Earnings +20% with the delta between EBIT and earnings growth driven by an $11mm reduction in interest expense. Net debt to total capital down from 44.4% to 40.9% since 1Q14. The company expects to generate $450mm in FCF this year, and use $350 million of that to pay down debt, with the remainder being used to ‘opportunistically’ fund new $500mm share repo announced today. We wouldn't rule out a deal -- it's what these guys do.
2) On the guidance front, the company took the range up to $6.85 -$6.95 after a $0.12 beat (+9%) from $6.70 - $6.90 while increasing the Fx hit from $1.20 to a $1.25. Relative to expectations, the 2Q guidance looks light (11% below current consensus numbers) as the company benefited, at least on the top line, from the shift of wholesale Heritage shipments into 1Q from 2Q and the shift of the Chinese New Year (which landed in 2Q14) into 1Q15 this year. Fx continues to be a sizable headwind, taking 17 percentage points off the earnings growth for the year. We’ve heard RL take considerable flak for the way it (mis)managed its way through the strengthening dollar, but PVH may be a close 2nd. As a percent of revenue, Int’l is a bigger chunk of PVH’s portfolio at 47% compared to RL at 33%, but 15% earnings dilution is amongst the biggest we’ve seen in this space.
3) We don't currently have a call on PVH. At 14.7x P/E and 10.4x EBITDA, valuation isn’t prohibitive here. Numbers in the near term are coming down, setting a low bar for the quarter PVH will report in 3 months. But, the company will need to continue to keep CK cranking and find a way to turn Tommy. Tommy NA just put up its first negative growth rate (-1% C$) in a quarter in over 4 years, and the first miss usually isn’t the last. Not much margin upside left to engineer, which makes this a very top line dependent story -- and we're uncomfortable making the leap in this situation.
FL - Notable Insider Sale
Takeaway: John Maurer, Treasurer/IR at FL, executed 18,000 options struck at (an average of) $20 worth $775,000. This is the individual that knows the numbers better than anybody. Management stock sales have picked up meaningfully in both size and frequency since former CEO Ken Hicks resigned back in early November. We don't think that's a coincidence.
Ashley Furniture Shopping Itself
Takeaway: We'll be watching this deal with interest. Ashley might be the biggest concept in the home furnishings space that nobody talks about. Fact is, the company is the 2nd biggest concept in the home furnishings space behind only IKEA. At 1x EV/Sales the valuation looks much more like ETH than a higher end concept like WSM or RH. Makes sense that Ashley would be shopping itself in this environment because a) growth looks more or less tapped in the US with a 25k footprint and 475 units and b) productivity is approaching pre-recession peaks up 25% since bottoming out in 2008. But let's be clear...great assets don't need to be 'shopped'.
ICSC - Chain Store Sales
Takeaway: We've seen trends improve marginally since a slow start to the first 1/4 of the year which got his by both weather and the port closure, or so the retailers say. Starting next week, comps get much tougher for the balance of the summer -- when we had a 13-week period of sales growth clocking in at 4% or better (which is VERY high for this data).
DG - 1Q15 Earnings
WMT - Walmart to raise wages for some employees starting in July, promises $10 minimum by 2016
Neiman Marcus Group Names Grimes in Top Role
GME - GameStop Corp. Announces Agreement to Acquire Geeknet, Inc.