Collective Brands Hits a Grand Slam

May.26.11 | About: Collective Brands, (PSS)

Wednesday, Collective Brands (NYSE:PSS) hit a grand slam. All four operating divisions delivered materially lower levels of profitability in Q1 2011 versus LY. Certainly, not the type of grand slam that investors in the company wanted to see.

An objective analysis of the numbers would suggest that PSS’s CEO has delivered nothing since his arrival in FY 2005. But, he spends much of the conference call attempting to describe the relatively immaterial ‘wins’ that he has been responsible for.

We get it. Most management teams attempt to spin information as positively as they can to mask the deficiencies in their performance. But, Mr. Rubel of PSS takes it to a new level. He’s known to spend extraordinary amounts of time in his conference calls discussing the success he’s having with a variety of immaterial aspects of the business (e.g. how material is the success of the Latin American business or the Sperry retail store roll-out?).

But, here’s our favorite quote attributed to Mr. Rubel during this week’s conference call::

So the core premise of the operating model remains the same. If we can remain flat to up slightly, flattish in Payless Domestic, the operating model works because everything else is working. Everything is working as planned.

In our view, that’s the interesting part. Mr. Rubel appears to be so delusional that he believes “everything else” is working.

So, let’s ignore abysmal results at Payless Domestic for a moment. Payless Canada is not working. Despite strong sales growth, PLG Wholesale EBIT margins are in decline (Q4 2010/Q1 2011). Stride Rite retail continues to report comp store sales declines.

Inventory growth has exceeded sales growth 4 straight quarters, yet investors are supposed to believe that aged inventory is not a concern. PSS management provided the standard excuses that are designed to allay any fears that inventory levels are bloated.

Yep, everything else is working.

Finally, the elephant in the room is Wal-Mart (NYSE:WMT), Kohl's (NYSE:KSS), Forever 21, Ross Stores (NASDAQ:ROST), and TJX (NYSE:TJX). Collectively, they’re KILLING Payless Domestic. We’re surprised that no one asked Mr. Ruble about the impact that WMT is having on PSS as they add-back to their shoe assortment (see WMT’s Q4 2010 conference call).

Here’s how we think that this plays out. PSS faces materially easier 2-year comp sales and profitability run rates in Q2 2011 versus Q1 2011. Therefore, Q2 2011 profitability performance will sequentially improve versus Q1 2011 (i.e. less year-over-year EBIT margin degradation). But, the dramatically tougher profitability comparisons that the company faces in Q3/Q4 2011 will be difficult to anniversary.

There may be additional “grand slams” in PSS’s future beginning in 2H 2011.

Disclosure: No positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.