It’s always nice to find a solid multi-year story that actually has near-term earnings juice. PSS is one of the few.
There’s been increasing evidence to suggest that Payless’ Performance Lifestyle Group along with core retail stores are likely having a solid first quarter. In fact, our above-consensus estimate for the quarter of $0.88 vs. Street at $0.74 may be looking a bit conservative given some mid-quarter data points. Additionally, though sourcing is less of a driver that it has been, it should still fuel GM% to come in 2x expectations. The key variable is how aggressively the company reinvests in SG&A during the quarter – we’re modeling 5% growth yy. With rent and DC savings offset by growth investments in PLG there could be some variability in opex, but the bottom line here is that the two most important lines of the P&L are tracking nicely.
Here are a few facts to consider:
- First, as it pertains to Saucony. It’s no secret that performance running has been and still is one of the strongest performing sub-categories of athletic footwear. Last month we addressed the strength vis-a-vis, Brooks - a direct competitor to Saucony as well as another of the niche “running only” brands. Brooks CEO recently noted that after a mid-single digit increase last year, the company’s U.S sales are tracking up 25% through April with a double digit positive backlog through the Fall. Keep in mind this is also consistent with commentary from FL and HIBB last week, both of which highlighted performance running as a leading category.
- Secondly, the NPD monthly brand data is directionally accurate. While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends. The charts below include trends through the end of April. Despite an Easter induced spike in March, trends turned positive across all major brands on a sequential basis during the quarter (bottom chart).
- What about the backlog? Unbeknownst to most investors and analysts, PSS began reporting a backlog number for the wholesale division at the end of its fiscal year with the filing of its 10-K. Perhaps last year’s data point was lost in the shuffle during the market meltdown, which is why not many people are focusing on this year’s version. According to the filing, PSS’ Performance Lifestyle Group backlog (for orders delivered this year) was up 36%. Now keep in mind the order book does not include or account for cancelations or shipment delays, but this is impressive growth nonetheless. In taking a look at the past 2-years, approximately 88%-90% of year-end backlog has been realized in Q1 revenues. With a backlog of $222mm at year-end, if we assume only 80% is realized (which we have) that suggests 20% growth yy, or 3.5% to the top-line alone.
- Finally, the overall health of the family footwear channel suggests our 3% same store sales estimate for the core retail business may prove conservative. Recall that 4Q same store sales were light given lack of inventory support for key trends including boots as well as the post-Oprah hangover. Continued strength in mall traffic as indicated by Q1 retail sales along with a conservative forecast for a flat ticket, we further believe a 3% comp may indeed be too low. Consider the following charts as a proxy for PSS’ historical same store sales results as well as the charts illustrating relative comp trajectories including preannouncements from both DSW and SCVL.