One of Valuentum’s best ideas, Collective Brands (PSS) reported quarterly results on Monday after the close. Results, as has been the case for the last several quarters, were mixed. Payless domestic continued to shut down less profitable stores, which helped contribute to the segment’s 5% sales skid. Same store sales also fell 4.5% domestically, reflecting the slow economic recovery and Payless’ ties to low-end consumers.
Internationally sales weren’t very good either. Sales only increased by 1.1%, and same stores sales actually fell in
PLG Wholesale Blowing Away Expectations
While the Payless business remains challenged, or frankly, bad, wholesale continues to post exceptional results. Sales were up 27.3%, thanks to Sperry Topsider and Saucony posting double digit gains. The maturation of the Sperry Topsider brand is evident in several of our favorite retailers, including Nordstrom (JWN) and Macy’s (M). What used to be comprised primarily of men’s shoes now offers the full range of boots and other casual shoes, and does around 50% of its sales to women. The increased assortment and popularity should allow Collective to push price increases on to retailers.
Saucony continues to ride the wave of popularity in lightweight running, which has been reiterated by Dick’s (DKS) and Footlocker (FL) on their respective conference calls. We think they’re ongoing product assortment, combined with the stickiness of running brands, bodes well for the brand’s future.
Unfortunately, Stride Rite continued to struggle. Without the benefit of new Sperry stores, sales would have fallen in the quarter for the PLG retail segment. However, management continues to close unprofitable stores and has retained its leadership position in children’s footwear. We think that much like the Payless business, sales will tick-up with the rest of the economy. Additionally, consolidating stores will increase store productivity and provide them with operating leverage going forward.
A Few Concerns Going Forward
Without a doubt, the number one concern we see with Collective Brands is the cash burn. While the company has paid off nearly $54 million in debt this year, it’s spending a lot of money to close down stores, and hasn’t generated a lot of operating cash flow. The current cash balance sits at just over $200 million, down significantly from a year ago, but still providing the firm with ample liquidity.
We’re also discouraged to see inventories coming in so high, up 13% (though only 1% by volume for Payless). We would like to see this costly inventory moved quickly, since future inventory should be at a lower raw cost and more profitable.
Operationally, Payless domestic continues to do poorly. Management sounded encouraged about results in September and October, but we hope to see even better execution in the fourth quarter.
Ultimately, we still think Collective Brands is a great opportunity, on both a discounted-cash flow and a sum of the parts valuation. Our fair value remains at $24. We caution investors that it could take some time for the situation to play-out. Everyone would love for management to announce the findings of their “strategic review” for unlocking shareholder value and expedite the process. However, without any M&A, a spin-off, or going private, Collective is a growth company (PLG Wholesale) with an enormous turnaround in progress (Payless). We think patient investors will be handsomely rewarded…eventually.