We have WWW on our Best Ideas list as a Long, and yesterday’s print played into our view. The company beat our estimate by $0.03, which was already 20% ahead of consensus. All that said, let’s not gloss over the fact that the growth algorithm (sales +2.7%, EBIT -6.7%, EPS -14.2%) was closer to ‘awful’ than ‘decent’. Not what we expect from this company longer-term. But that rate of change is why we think it's an interesting idea. As EPS growth goes from negative to 20%+, we think we'll be looking at 20x next year's $2.00, or $40 in 9-12 months (40% upside in a year) -- and then $48 a year later.
The good news is that we’re seeing everything we need to support our thesis that EPS growth will accelerate meaningfully – effective immediately. This is in large part driven by better top line performance. One of the drivers is Merrell, which accounts for about 20% of the company, and only comped flat then up low single digits over the past two quarters. WWW changed up what had (unbeknownst to us) been toxic leadership inside the company. The fix should become apparent in numbers within two-quarters.
The International Story is On Track
But the bigger thing we like is the trajectory of the international agreements signed by WWW to sell PLG brands overseas, keeping in mind that only 5% of PLG sold overseas before the acquisition. People don’t give the company credit for this given that they don’t see the impact all at once. But the reality is that these agreements are cumulative in nature. Once a deal is signed, it takes a quarter or two to get set up with systems. Then the distributor markets product, which takes 1-2 quarters to build a book. Then the product needs to be manufactured, shipped, and received. That’s a 6-9 month process. Then, and only then, does WWW start to see revenue.
The point is that it could take upwards of 1.5-2 years from the time a deal is signed to actually show up as revenue. The company started to sign these in earnest around 1Q13. That means that the first of the deals – nevermind the subsequent 79 – just hit the top line in a meaningful way earlier this year. We don’t think this is appropriately baked into guidance.
Aside from top-line, the area where we’re different from consensus is likely on the interest expense line. Given the cash flow characteristics, we have interest expense going to zero in four years – that’s about $0.30 per share off a $1.65 base this year. Pretty meaningful from where we sit.
One caveat is that WWW is highly likely to do another deal, and lever back up again while it scales the new brand over its infrastructure. We ordinarily don’t like deals. But the fact of the matter is that WWW is good at them, and has added meaningful value and steered shareholder capital in the right direction with almost every deal its ever done. To be clear, we don’t need a deal to make this stock work. In all likelihood it works with or without a transaction.