An avg stock portfolio prob = sub-par compensation. The same holds true for a portfolio of average brands. Welcome to the world of WWW. Adding to Short bench, pending positive 1H setup. This is a solid ‘sell strength’ name in 1H.
TAIL
In order to look forward, we have to look back. Remember when this model went through three phases of ‘transformation’?
- Year 1 (’13): WWW acquires PLG – buys 100% rev and 24% EPS growth.
- Year 2 (’14): Cost synergies. 33% EPS growth.
- Year 3+ (’15-’16): Organic growth story as WWW leverages new US brands over global infrastructure. Goal of 15%+ EPS CAGR with consensus at 20%+? Well, it only delivered 1.5% so far. 15% is probably a pipe dream.
This is such a big tell about what this story has become…and I know it’s very ‘rear view’ but I think you have to look back to look forward.
Remember when this was ‘an excellent management team’, a ‘great company’, and a portfolio of ‘very good’ brands. That was fine in a world where you can stuff a growing channel with so-so content, engineer respectable earnings, and drive one of the best 20-year stock charts in Retail. Kind of like what VFC did (it’s also in a similarly tough place now – which is probably underappreciated).
In a new world where a ‘pull-model’ is more critical, WWW simply can’t stack up anymore. When you get to a point where one of your best brands (Sperry) is opening stores and selling rain coats and faux Vineyard Vines belts in Prime (expensive) MSA real estate, it’s pretty much over. And with leverage considerations, this company can’t acquire anything with enough size to offset the marginal nature of the portfolio – and if it could, I struggle with what it should buy.
I’d actually argue that it should go the way of LIZ/FNP/KATE and divest the junk at a point when desperate and irrational buyers incrementally need content. This, I think, is the really smart move by the BoD – and one it almost certainly won’t make. AMZN/Zappos would love to own 80% of WWW’s content. It’s so-so, but AMZN needs apparel/footwear content big time.
Yes it has ‘great cash flow’, sort of. But it has debt too – not huge, but 1.7x leverage. I know avoiding debt is inefficient from a CFO perspective, but this is a cyclical fashion business = debt is bad. The 10% FCF yield looks attractive from a long perspective, but the dividend is so-so at 1.4%, and I’m not sure the cash flow is real. This is the case with VFC, KSS, TGT, FL, CRI, HBI, TJX, TIF, JCP, M, etc…
Would I bail out of this stock today? Probably not. Near term expectations are very much in check. To hit 1H numbers we only need minimal sales growth given the ‘superb’ SIGMA move (margins, sales, and inventory all in sync). So perhaps you’ve got a beat or two ahead of you. But unless this story changes up dramatically – and structurally – I’d treat any near-term strength as an opportunity to dump it.
