You're totally right about brand recognition and Chris Hufnagel mentioned it. He effectively said there was no strategy or direction (the word he used to describe WWW's business was "transactional) and instead of creating something with the brands, they just went on a buying spree making poor, value destructive acquisitions. Similar to VFC, another company I'm watching.
I imagine that inventory problem will sort itself out with time. Ex-management blamed supply chains. But if they can get rid of inventory quickly (even at discounts), cash flows will pick up. Is that something management are eyeing to alleviate some pressure? In the early 2000s such a strategy worked. Has the market gotten smarter in 20 years?
I think the competition element is harder to figure out, especially as we move forward. WWW will never be in the playing field of NKE (for example). They're niche and even with a solid consumer base, they're still a cyclical.
I'm investing in the sheer "cheapness" of the combined operations. They recently sold a Kentucky distribution centre for $23m, are looking to sell Sperry, and have sold/licensed the worst performing segments of their business (Leathers, Keds etc). Hufnagel is taking an aggressive approach to taking out the trash.
Annual revenues (normalised) in the future may even dip below $2b after these divestitures but if profits and cash flows improve, I don't really care. On $2b peak revenues, peak profits may be at a 7% net margin or $140m. And the last time they made a margin around that mark, they traded 15x earnings. A valuation of $2.1b. This is lazy, back-of-the-envelope analysis that isn't totally perfect, but it demonstrates the point I think - current market cap is a little over $700m.
If you want to do the same thing with FCF, WWW's best year (not inc. 2020) was $285m (10% margin) and they traded 10x FCF. On $2b, that's exactly $2b. Either way, it's much higher than today's valuation.
I don't know if growth is accessible. I'm assuming it's not. Historical management have tried and failed to make acquisitions - is that because the brands they're working with have already "maxed out"?
I'm just buying a cyclical somewhere near its trough - it may fall more, I don't know. If there is some accessible growth that Hufnagel can extract from the brands (which he has implied), it's a bonus. |
