INDUSTRY NOTE
Target | Estimate Change
USA | Consumer | Apparel, Footwear & Textiles January 17, 2012
EQUITY RESEARCH AMERICAS
Apparel, Footwear & Textiles
ICR Takeaways
Key Takeaway
We are recalibrating thoughts and expectations following the ICR conference
last week. Judging by the reaction to various pre-announcements and
presentations last week, we think this is a group that investors want to own. As
such, we see upward multiple bias as the market becomes more risk-tolerant.
Top takeaways below. See more specific detail on pages 2 and 3.
DECK (Buy, $125 PT). We think management did a good job of alleviating investor
anxiety. However, judging by the stock's underperformance following WWW's lower 4Q
outlook (on Thursday), there still appears to be a degree of skepticism in the stock. We do
not see WWW's relatively soft 4Q as a read to DECK for 2 reasons: 1) WWW's weakness was
in at-once orders, which account for 50% of 4Q sales (vs. DECK where at-once is <10% of 4Q
wholesale) and 2) WWW's business is much more cold weather sensitive than UGG, which
is more of a comfort/lifestyle brand. Finally - note the company's 2015 sales outlook, which
was raised from $2 billion to $2.4 billion. The new store target of 200 (up from 150) is the
most noteworthy nugget given the potent contribution of that channel. At 25% of sales, the
implied 2015 retail productivity assumption calls for $3m sales/store vs. the $6m sales/store
UGG is doing today. We see significant upside to DECK's conservative retail assumptions.
LULU (Hold, $65 PT). Tweaking up EPS and PT on pre-announcement last week. An
upward sales trajectory is clearly underway given better inventory position and easier
compares in 2012. That said, we'd wait for 1) a better entry point and/or 2) visibility into
2012 margins (in light of a 25% long-term operating margin target) before chasing. We see
a floor in the low-$50's as investors are apt to buy this structurally robust story on dips at
this point.
Finish Line (Buy, $25 PT). Stock continues to be weak despite management's positive
tone at the dinner we hosted and presentation/break-outs. Athletic cycle momentum
remains quite strong with no resistance to higher prices to date. See higher ASP's as a catalyst
to sales in 2012. At FINL, we also see a rapidly growing e-commerce channel providing 3%+
points to comp along with better conversion/average transaction trends (as the sales-force
is now commission based). Despite our positive fundamental view, we agree that the stock
needs a positive margin catalyst. We think that comes in March when 4Q11 is reported with
an extra-week, which could drive better than expected leverage (against a bar which was
reset lower with 3Q's GM% miss). See $19 as a near-term valuation floor.
Taposh Bari, CFA, CPA *
Equity Analyst
(212) 708-2712 TBari@jefferies.com
* Jefferies & Company, Inc.
Current Previous Current Previous Current Previous
Ticker Price Rating Rating Target Target Est. 2010 2011 2012 2010 2011 2012
DECK** $84.50 BUY BUY $125.00 $125.00 EPS $4.04 $5.16 $6.10 $4.04 $5.16 $6.10
FINL $19.05 BUY BUY $25.00 $25.00 EPS $0.86 $1.30 $1.61 $0.86 $1.30 $1.61
LULU $61.96 HOLD HOLD $65.00 $54.00 EPS $0.79 $1.26 $1.63 $0.79 $1.18 $1.54
WWW $35.83 HOLD HOLD $37.00 $40.00 EPS $2.17 $2.48 $2.63 $2.17 $2.54 $2.80
ZQK $4.26 BUY BUY $5.00 $4.20 EPS $0.32 $0.17 $0.24 $0.32 $0.17 $0.24
** Conviction List
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 12 to 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Updated Thoughts Following ICR
We are recalibrating thoughts and expectations following the ICR conference last week.
Judging by the reaction to various pre-announcements and presentations last week, we
think this is a group that investors want to own. As such, we see upward multiple bias as
the market becomes more risk-tolerant (from a very risk-averse position).
Another observation is that companies with weather exposure are, for the most part,
getting a free pass as most pre-announced results are not as bad as feared.
Next catalyst is earnings where companies will provide 2012 outlooks. Expect
conservatism following a tough (weather inhibited) 4Q11, higher pension expense into
2012, and FX headwinds. We think the market looks through these (somewhat transient)
issues and focuses on underlying organic trends, which for the most part are still strong.
Deckers Outdoor (DECK, $125 PT)
We believe management did a good job of relieving investor anxiety last week (between
the dinner we hosted, CEO presentation and breakouts). After a relief rally on Wednesday,
the stock again traded off Thursday following WWW comments that 4Q sales were hurt
by weather. WWW was down 5%+ on the news but rallied (to end the day up) whereas
DECK was down and has underperformed since. An important fact that’s being missed, in
our view, is that WWW’s 4Q is 50% at-once/reorder whereas DECK’s is <10%. DECK is
also, in our opinion, less weather sensitive than WWW.
This leads us to believe that there is still an elevated degree of investor skepticism in
DECK, even after management’s encouraging tone last week. We would buy the stock
here and ahead of 4Q11 earnings (late February) for the following reasons:
1) we believe 4Q11 EPS has an upward bias (mostly pre-booked and guided
conservatively)
2) management tone was very encouraging regarding sell-through,
3) risks to 2012 EPS outlook from conservative margins appear to be reflected in
the stock and
4) management’s upward adjustment to 2015 outlook reinforces LT confidence in
the brand; more importantly, the company raised retail store count from 150 to
200 by 2015; implied assumption calls for $3m sales/store (up from 2.6m in
prior outlook); this compares to $6m/store LTM.
Lululemon (Hold, $65 PT)
We are raising our EPS and PT following the company’s pre-announcement last week. The
company’s more aggressive inventory position is driving accelerating sales momentum
with 4Q11 sales set to be well ahead of initial expectations. This suggests a continued
upward bias to sales over the next 12 months as the company anniversaries easier
comparisons (2011 was a year where sales were ‘light’ as the company constantly chased
goods).
With shares up $15 / 33% in the past four weeks, we would rather wait for a better entry
point. We are also curious to see how management guides 2012 margins in light of a
seemingly better sales trajectory but against a ‘25% LT margin target’ that we heard
repeatedly in 2011. Bottom line here is the fundamental momentum is clearly to the
upside with a virtual floor in the low-$50’s as we expect investors to buy on dips (barring
a structural dislocation in the story).
page 2 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Quiksilver (Buy, $5 PT)
We are tweaking up our PT on higher multiple assumptions. The stock’s appreciation last
week following management’s presentation at ICR reinforces our view that Quiksilver
remains a misunderstood story by many.
With a stock price under $5, levered balance sheet, and elevated European mix, ZQK
screens poorly on paper. Fundamentally however - as we have said all along - the
company has a world class portfolio of brands, is very liquid (HSD% FCF yield, no debt
maturities until 2015) and is performing well in Europe despite macro headwinds.
We came to appreciate that the company’s 2015 plan is conservative with upside to both
sales and margins. For example, retail margins, which improved markedly over the past
year, are currently at break-even but still well below where they were in the mid-2000’s at
their peak. The opportunity for recovery there is still very meaningful. If the company
performed to its current plan (~8% rev CAGR, 200 bps margin expansion), it would ~80c
of EPS. An implied 15x P/E would yield a $12 stock three years from now.
Wolverine World Wide (Hold, $37 PT)
We are tweaking our EPS and PT down following the company’s comments at ICR. Two
new developments:
4Q sales will be softer (yet still within original guidance range) due to at-once
business (which represents 50% of 4Q volumes) being down YoY and
pension expense will increase $10 million in 2012, a 65 bps hit to margins
Fundamental boot trend appears in-tact but sales growth will be slower in 2012 vs. 2011
as the company anniversaries the initial Merrell barefoot sell-in cycle. We continue to see
meaningful long-term value in this company as growth areas like apparel, DTC and
international are scaled and gain appreciation by the market. We see the stock range-
bound in the mid-to-high $30’s until sales and/or margins inflect to the upside. Two
potential catalysts include 1) an acquisition, which we think could occur within the next
12 months and 2) net retail growth by mid-2012 once store closures wind down
Finish Line (Buy, $25 PT)
Management tone was positive at the dinner we hosted along with the presentation and
break-outs. The athletic cycle momentum appears well in tact with strong contribution
from brands like Nike, Adidas and Reebok.
That said, the stock continues to underperform on what is perceived as a disappointing
margin story. While we are comfortable with the lack of near-term margin upside bias, we
do agree that the stock needs a positive margin catalyst to regain near-term momentum.
We think that catalyst comes in March when the company reports 4Q11 earnings. This
quarter will have an extra (high volume) week which could yield better than expected
leverage. Once 4Q passes, some of the near-term GM% headwinds (private label
liquidation, fleece pricing) will have passed paving the way for better margin
performance).
We think $19 is a floor for FINL based on current valuation well below FL. In fact, we
recommend FINL over FL for its 1) lack of European/FX exposure, 2) faster growing e-
commerce channel and 3) conversion catalyst (sales force now commission based).
page 3 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 1: DECK Income Statement
($ Millions, except per share amounts) 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales $813 $1,001 $1,343 $1,681 $156 $137 $278 $430 $205 $154 $414 $569
Cost of Goods Sold 442 499 662 872 78 76 148 197 102 88 212 260
Gross Profit 371 502 680 809 78 61 130 233 102 66 203 309
SG&A 189 254 388 469 49 48 65 93 74 77 112 125
Operating Income 182 248 293 341 29 13 65 141 28 (11) 91 184
Other (income) expense, net (2.0) (1.0) (0.2) (0.8) (0.1) (0.5) (0.2) (0.2) (0.1) (0.0) 0.1 (0.1)
Pretax Income 184 249 293 341 29 14 66 141 28 (11) 91 185
Income Taxes 67 90 91 102 11 5 25 50 9 (3) 28 57
Net Income 118 159 202 239 18 9 41 91 20 (7) 62 127
minority interest (0) (2) (0) 0 (0) 0 0 (2) (1) 0 0 0
Fully Diluted EPS $2.98 $4.01 $5.16 $6.10 $0.46 $0.23 $1.05 $2.27 $0.49 ($0.19) $1.59 $3.25
Fully Diluted Shares Outstanding 39.4 39.2 39.1 39.2 39.1 39.1 39.2 39.3 39.4 38.7 39.2 39.2
% of Sales 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit 45.6% 50.1% 50.7% 48.1% 50.0% 44.3% 46.8% 54.2% 50.0% 42.8% 49.0% 54.3%
SG&A 23.2% 25.4% 28.9% 27.9% 31.5% 34.7% 23.3% 21.5% 36.3% 49.7% 27.1% 21.9%
Operating Income 22.4% 24.8% 21.8% 20.3% 18.5% 9.6% 23.5% 32.7% 13.7% -6.9% 21.9% 32.4%
Tax Rate (% of Pretax) 36.2% 36.0% 31.0% 30.0% 37.2% 35.0% 37.5% 35.2% 30.1% 30.2% 31.2% 31.0%
% Growth, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Sales 17.9% 23.1% 34.1% 25.2% 16.2% 33.7% 21.7% 23.6% 31.3% 12.6% 49.1% 32.3%
Gross Profit 21.5% 35.3% 35.5% 19.0% 32% 49% 33% 35% 31% 9% 56% 32%
SG&A 23.8% 34.4% 52.7% 20.9% 24% 30% 44% 37% 51% 61% 74% 34%
Operating Income 19.3% 36.1% 17.9% 16.4% 49% 213% 23% 33% -2% -181% 39% 31%
Net Income 22.6% 35.6% 26.8% 18.3% 47% 163% 21% 34% 9% -184% 52% 39%
Diluted EPS 23.0% 34.5% 28.5% 18.2% 47% 160% 22% 31% 6% -182% 52% 43%
BPs Change, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit 135 451 53 (253) 607 455 388 440 5 (155) 219 5
SG&A 109 214 352 (100) 199 (98) 362 204 479 1,504 381 35
Operating Income 26 237 (299) (153) 409 552 27 237 (474) (1,659) (162) (30)
Marketing expense 2009 2010 2011E 2012E
Marketing expense 29 33 45 56
% of revenues 3.5% 3.3% 3.3% 3.3%
% growth 15.5% 15.2% 34.7% 25%
% of SG&A 15.2% 13.0% 11.5% 11.9%
Source: Jefferies estimates, company data
page 4 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 2: DECK Segment Details
Sales by Category 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 813 1,049 1,343 1,681 156 137 278 430 205 154 414 569
Ugg 712 873 1,170 1,430 104 100 256 413 148 108 377 537
Teva 78 101 122 140 43 31 14 13 50 40 15 17
Sanuk -- 48 27 87 -- -- -- -- -- -- 16 11
Other 24 26 24 24 8 6 8 4 6 6 7 5
Sales Growth, % 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 18% 29% 28% 25% 16% 34% 22% 24% 31% 13% 49% 32%
Ugg 22% 23% 34% 22% 14% 35% 20% 24% 42% 8% 47% 30%
Teva -10% 31% 20% 15% 21% 38% 52% 26% 17% 29% 7% 25%
Sanuk -- -- 20% 15% -- -- -- -- -- -- -- --
Other 13% 12% -10% 0% 15% 1% 26% -4% -28% 1% -12% 20%
other metrics 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Same-store sales, % 27.6% 16.6% 28.2% 19.2% 17.9% 11.6% 2.6% 23.6% 15.4%
Retail: Sales per average store 5.3 5.6
weighted avg selling price / pair, $ 45.80 47.71 30.71 35.41 58.61 34.24 38.28
change, % 8% 4% 7.0% 1.8% 0.1% #DIV/0! 11.5% 8.1% -100.0% #DIV/0!
footwear volume (million pairs) 15.7 18.0 4.0 3.6 4.5 5.9 4.7 3.6
change, % 6.8% 14.6% 5.3% 28.6% 18.4% 7.3% 17.5% 0.0% -100.0% -100.0%
Stores 18 27 44 69 18 19 24 27 27 30 37 44
UGG retail (U.S.) 6 10
Outlet (U.S.) 7 9
UGG (International) 5 8
new stores (YoY) 6 9 17 25 1 1 5 3 0 3 7 7
sales / average store 1.3 0.5 0.9 2.8 1.3 0.7 1.0 2.8
Sales by Region 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 813 1,001 156 137 278 430 206 154 414 569
U.S. 646 764 117 65 205 377 149 83 258 471
International 167 237 39 72 73 53 57 72 156 98
Sales Mix, % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
U.S. 79% 76% 75% 48% 74% 88% 72% 54% 62% 83%
International 21% 24% 25% 52% 26% 12% 28% 46% 38% 17%
Sales Growth, % 18% 23% 16% 34% 22% 24% 32% 13% 49% 32%
U.S. 11% 18% 15% 16% 14% 22% 27% 27% 26% 25%
International 55% 42% 21% 55% 48% 35% 46% 0% 114% 85%
Source: Jefferies estimates, company data
page 5 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 3: LULU Income Statement
($ Millions, except per share amounts) 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales $453 $712 $992 $1,335 $138 $152 $176 $245 $187 $212 $230 $363
retail sales 393 591 829 894 116 129 143 203 157 178 190 304
direct-to-consumer sales 18 57 99 108 9 10 14 25 14 19 24 43
other sales 41 63 64 61 14 13 19 18 16 16 16 15
Cost of Sales 230 316 424 585 64 72 79 101 77 90 102 155
Gross Profit 223 395 568 750 74 80 97 144 110 122 128 207
SG&A 136 215 285 377 42 46 54 72 58 63 69 96
Operating Income 87 181 283 372 32 34 42 72 52 59 60 112
Net Income 58 114 183 238 20 22 26 46 34 39 39 71
Minority Interest 0 0 0 0 0 (0) 0 (0) 0 0 0
Fully Diluted EPS $0.41 $0.79 $1.26 $1.63 $0.14 $0.15 $0.18 $0.32 $0.23 $0.26 $0.27 $0.49
Fully Diluted Shares Outstanding 141.6 143.7 145.2 145.9 143.2 143.5 143.7 144.4 144.9 145.2 145.3 145.4
% of Sales 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit 49.2% 55.6% 57.2% 56.2% 53.8% 52.8% 55.1% 58.7% 58.7% 57.5% 55.8% 57.2%
SG&A 30.1% 30.1% 28.7% 28.3% 30.3% 30.3% 31.0% 29.4% 31.0% 29.5% 29.9% 26.4%
Operating Income 19.2% 25.4% 28.5% 27.9% 23.5% 22.5% 24.1% 29.3% 27.7% 28.0% 25.9% 30.8%
Interest Income (expense) 0.0% 0.4% 0.2% 0.0% 0.1% 1.4% 0.1% 0.2% 0.5% 0.3% 0.3% 0.0%
Pretax Income 19.2% 25.8% 28.7% 27.9% 23.6% 23.9% 24.2% 29.5% 28.2% 28.3% 26.2% 30.8%
Tax Rate (% of Pretax) 32.7% 38.2% 35.9% 36.0% 40.0% 40.3% 38.9% 35.9% 36.3% 35.7% 35.5% 36.0%
Net Income 12.9% 16.0% 18.4% 17.9% 14.2% 14.3% 14.8% 18.9% 18.0% 18.2% 16.9% 19.7%
% Growth, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Sales 28.1% 57.1% 39.4% 34.6% 69.3% 55.8% 55.7% 52.8% 35.1% 39.5% 31.0% 47.8%
Gross Profit 24.6% 77.3% 43.5% 32.1% 113% 78% 72% 66% 48% 52% 33% 44%
SG&A 17.3% 57.5% 32.9% 32.4% 67% 49% 54% 61% 38% 36% 26% 33%
Operating Income 37.9% 108.6% 56.2% 31.8% 230% 139% 103% 73% 59% 74% 41% 55%
Pretax Income 36.4% 111.5% 54.9% 30.8% 229% 153% 103% 74% 61% 65% 42% 54%
Net Income 30.5% 94.3% 60.6% 30.6% 201% 135% 84% 62% 71% 78% 50% 54%
Diluted EPS 29.6% 91.2% 58.9% 30.1% 195% 131% 81% 60% 70% 74% 49% 53%
BPs Change, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross Profit (141) 633 165 (105) 1,098 654 518 479 496 474 73 (150)
SG&A (277) 6 (141) (46) (44) (129) (39) 143 76 (78) (110) (300)
Operating Income 136 627 306 (58) 1,142 783 557 336 420 552 184 150
Pretax Income 116 664 (19) (21) 1,144 918 562 353 457 442 205 128
Net Income 23 306 287 (80) 618 480 229 108 379 393 216 78
Same Store Sales 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
SSS 12% 37% 22% 15% 51% 38% 32% 32% 19% 25% 18% 25%
SSS (constant currency) 9% 30% 20% 15% 35% 31% 29% 28% 16% 20% 16% 25%
Source: Jefferies estimates, company data
page 6 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 4: ZQK Income Statement
($ Millions, except per share amounts) 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Total sales $1,838 $1,953 $2,052 $2,143 $426 $478 $503 $545 $434 $489 $540 $589
Cost of goods sold 870 929 991 1,025 203 216 248 262 217 233 264 277
Gross profit 967 1,024 1,061 1,118 223 262 255 283 216 256 277 312
SG&A 817 890 910 940 213 217 221 240 213 218 232 247
Operating income 150 134 151 178 11 45 34 44 4 38 45 65
Interest expense 79.7 58.5 62.0 58.0 13.7 15.1 15.7 14.1 15.5 15.5 15.5 15.5
minority int and other 3.4 2.8 2.8 2.8 1.2 1.7 (0.3) 0.2 0.5 1.0 0.3 1.0
FX loss (gain) (5.9) (0.1) 0.0 0.0 (2.1) (2.3) (1.5) 5.8 0.0 0.0 0.0 0.0
Pretax income 73 73 86 118 (2) 31 20 23 (12) 21 29 48
Income taxes 26 42 44 37 6 15 9 12 10 10 12 12
Net income 48 31 42 81 (8) 16 11 11 (22) 11 17 36
Fully diluted EPS $0.32 $0.17 $0.24 $0.45 ($0.05) $0.09 $0.06 $0.06 ($0.14) $0.06 $0.09 $0.20
Fully diluted shares outstanding 150.1 176.7 176.0 179.7 161.6 182.0 183.5 179.7 164.7 179.7 179.7 179.7
% of Sales 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Gross profit 52.6% 52.4% 51.7% 52.2% 52.4% 54.8% 50.7% 51.9% 49.9% 52.3% 51.2% 52.9%
SG&A 44.5% 45.6% 44.3% 43.9% 49.8% 45.3% 43.9% 43.9% 49.1% 44.6% 42.9% 41.9%
Operating income 8.2% 6.9% 7.3% 8.3% 2.6% 9.5% 6.7% 8.0% 0.8% 7.8% 8.2% 11.0%
Tax rate (% of pretax) 34.9% 57.6% 51.2% 31.5% -321.4% 47.5% 44.9% 52.5% -80.1% 46.7% 41.7% 24.9%
% Growth, YoY 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Sales -7.1% 6.3% 5.1% 4.4% -1.5% 2.1% 14.0% 10.1% 1.7% 2.3% 7.3% 8.1%
Gross profit 3.9% 5.9% 3.6% 5.4% 1% 5% 11% 7% -3% -2% 8% 10%
SG&A -0.9% 8.9% 2.3% 3.3% 6% 5% 16% 9% 0% 1% 5% 3%
Operating income 41.1% -11.0% 12.6% 18.4% -51% 6% -14% -5% -68% -17% 31% 49%
Net income 1030.2% -35.4% 36.2% 92.4% 214% 4% -12% -49% 192% -30% 52% 225%
Diluted EPS 876.7% -45.1% 36.8% 88.4% 148% -17% -28% -50% 187% -29% 55% 225%
BPs Change, YoY 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Gross profit 556 (21) (73) 50 107 160 (158) (162) (250) (250) 50 100
SG&A 276 112 (123) (49) 360 123 63 (31) (75) (75) (100) (200)
Operating income 279 (133) 49 98 (254) 37 (220) (131) (175) (175) 150 300
Pro Forma Adjusted EBITDA 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Adjusted Operating Income 150.3 133.8 150.7 178.4 10.9 45.4 33.9 43.5 3.5 37.9 44.5 64.7
D&A 53.9 55.3 54.0 53.8 14.0 13.5 12.7 15.1 13.5 13.5 13.5 13.5
non cash stock based comp 12.8 14.4 8.0 11.3 2.4 2.6 4.9 4.5 2.0 2.0 2.0 2.0
Adjusted EBITDA (calculated) 217.0 203.5 212.7 243.5 27.3 61.5 51.6 63.1 19.0 53.4 60.0 80.2
Adjusted EBITDA (reported) 214.3 200.2 0.0 202.6 28.2 62.1 52.7 57.1
EBITDA Growth, %
calculated 27.7% -6.2% 4.5% 14.5% -27% 0% -1% -4%
Source: Jefferies estimates, company data
page 7 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 5: ZQK Segment Details
Sales by Segment 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Total Sales 1,838 1,953 2,052 2,143 426 478 503 545 434 489 540 589
Americas 843 914 1,022 1,093 194 211 260 250 203 232 299 287
Europe 729 761 752 764 165 207 176 213 165 198 174 215
Asia Pacific 261 272 274 281 67 58 65 82 65 57 66 86
Corporate Operations 5 5 5 5 0 2 1 1 0 2 1 1
-5% -5% 3% 2% -1% 5% 7%
Sales Growth (constant currency), % 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Total Sales -9% 3% 8% 6% 1% -1% 6% 7% 3% 6% 11% 11%
Americas -9% 8% 12% 7% 4% 5% 11% 13% 5% 10% 15% 15%
Europe -7% 1% 6% 5% 1% -4% 2% 6% 3% 3% 8% 8%
Asia Pacific -14% -7% 2% 3% -8% -12% -3% -7% -5% 0% 6% 7%
Corporate Operations 39% 1% 0% 3% -46% 95% 84% -54% 0% 0% 0% 0%
FX (input)
Europe -3% -8% -9% -7%
Asia Pacific 2% -2% -5% -2%
FX (calc)
Europe -1% 3% -7% -3% -8% 3% 14% 5% -3% -8% -9% -7%
Asia Pacific 18% 12% -2% 0% 8% 11% 23% 9% 2% -2% -5% -2%
Average Currency Assumptions
USD / euro 1.35 1.39 1.30 1.34 1.34 1.41 1.43 1.40 1.30 1.30 1.30 1.30
USD / Australian dollar 0.91 1.03 1.01 1.02 0.99 1.03 1.07 1.03 1.01 1.01 1.01 1.01
Japanese Yen / Australian dollar 80.47 82.89 78.97 78.97 82.22 84.51 85.78 79.06 78.97 78.97 78.97 78.97
Sales Growth, % 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Total Sales -7% 6% 5% 4% -1% 2% 14% 10% 2% 2% 7% 8%
Americas -9% 8% 12% 7% 4% 5% 11% 13% 5% 10% 15% 15%
Europe -8% 4% -1% 2% -7% -1% 16% 11% 0% -5% -1% 1%
Asia Pacific 4% 5% 0% 3% 0% -1% 20% 2% -3% -2% 1% 5%
Corporate Operations 39% 1% 0% 3% -46% 95% 84% -54% 0% 0% 0% 0%
Sales Mix, % 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E
Total Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Americas 46% 47% 50% 51% 45% 44% 52% 46% 47% 47% 55% 49%
Europe 40% 39% 37% 36% 39% 43% 35% 39% 38% 40% 32% 36%
Asia Pacific 14% 14% 13% 13% 16% 12% 13% 15% 15% 12% 12% 15%
Corporate Operations 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Source: Jefferies estimates, company data
page 8 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 6: WWW Income Statement
($ Millions, except per share amounts) 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total sales $1,101 $1,249 $1,409 $1,518 $285 $258 $320 $385 $331 $310 $362 $407
Cost of goods sold 663 755 852 917 166 154 192 242 193 188 215 256
Gross profit 438 494 558 601 119 104 129 143 138 122 147 151
SG&A 314 347 387 423 79 77 81 112 88 89 90 120
Operating income 123 146 171 177 40 27 48 31 49 33 56 31
Interest expense 0.1 0.4 0.9 0.8 0.1 (0.0) 0.1 0.2 0.2 0.1 0.3 0.3
Other (income) (0.2) (1.4) 0.1 0.0 (0.2) 0.4 (0.2) (1.3) (0.6) 1.0 (0.3) 0.0
Pretax income 124 147 169 177 40 27 48 32 50 32 56 31
Income taxes 35 40 47 49 12 8 14 7 14 8 16 9
Net income 89 107 122 127 28 19 34 26 36 24 40 22
Fully diluted EPS $1.78 $2.17 $2.48 $2.63 $0.56 $0.39 $0.70 $0.52 $0.72 $0.48 $0.82 $0.45
Fully diluted shares outstanding 49.9 49.5 49.3 48.4 50.9 49.2 48.8 49.3 49.8 49.9 48.7 48.6
% of Sales 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross profit 39.7% 39.6% 39.6% 39.6% 41.6% 40.3% 40.1% 37.1% 41.6% 39.4% 40.6% 37.2%
SG&A 28.5% 27.8% 27.5% 27.9% 27.6% 29.7% 25.2% 29.0% 26.7% 28.6% 25.0% 29.5%
Operating income 11.2% 11.7% 12.1% 11.7% 14.1% 10.6% 15.0% 8.1% 14.9% 10.8% 15.6% 7.7%
Tax rate (% of pretax) 28.0% 27.1% 27.9% 28.0% 29.1% 29.0% 29.0% 20.4% 28.0% 25.7% 28.3% 29.0%
% Growth, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Sales -9.8% 13.4% 12.9% 7.7% 11.6% 4.8% 11.7% 23.2% 16.1% 20.1% 12.9% 5.6%
Gross profit -10.0% 12.9% 12.9% 7.7% 13% 12% 12% 15% 16% 17% 14% 6%
SG&A -9.0% 10.6% 11.4% 9.3% 7% 5% 9% 18% 12% 16% 12% 7%
Operating income -12.4% 18.7% 16.4% 4.0% 25% 36% 16% 4% 24% 22% 18% 0%
Net income -7.2% 20.8% 13.8% 4.0% 30% 44% 11% 12% 26% 25% 18% -14%
Diluted EPS -6.2% 21.8% 14.4% 5.9% 28% 45% 13% 15% 29% 23% 17% -13%
BPs Change, YoY 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Gross profit (8) (18) 1 (1) 39 257 (7) (262) 3 (95) 44 10
SG&A 26 (70) (36) 41 (109) 16 (63) (116) (87) (110) (22) 50
Operating income (33) 52 37 (42) 148 241 55 (146) 90 15 66 (40)
Source: Jefferies estimates, company data
page 9 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 7: WWW Sales Details
Sales by Segment 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales 1,101 1,249 1,409 1,518 285 258 320 385 331 310 362 407
Outdoor 416 468 552 599 114 98 121 135 138 127 145 142
Heritage Brands -- 455 501 534 94 89 120 151 111 103 128 159
Lifestyle Group -- 183 206 221 51 35 46 51 52 42 55 57
Other 12 13 16 16 3 3 3 4 3 4 4 5
Other Business Units 110 131 134 148 23 33 30 44 27 35 29 44
Sales Growth, % 2009 2010 2011E 2012E 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Total Sales -10% 13% 13% 8% 12% 5% 12% 23% 16% 20% 13% 6%
Outdoor -3% 12% 18% 9% 16% 5% 6% 22% 22% 30% 20% 5%
Heritage Brands -- -- 10% 7% -- -- -- -- 18% 15% 7% 5%
Lifestyle Group -- -- 13% 7% -- -- -- -- 1% 17% 22% 13%
Other -6% 6% 24% 5% 6% -28% 9% 43% 11% 45% 23% 20%
Other Business Units -4% 19% 3% 10% 15% 17% 27% 18% 14% 5% -5% 0%
Backlog 424
growth, % 19% 30% 38% 55% 38% 30% 13% 8%
Source: Jefferies estimates, company data
page 10 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Chart 8: FINL Income Statement
($ Millions, except per share amounts) 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E
Total sales $1,170 $1,229 $1,334 $1,388 $282 $301 $261 $385 $299 $332 $282 $421
Cost of goods sold 794 815 866 895 188 201 179 246 196 215 191 264
Gross profit 376 414 467 492 94 100 82 138 103 116 91 157
SG&A 300 301 331 347 72 73 75 81 77 83 82 90
Operating income 76 113 136 145 22 27 7 57 27 34 9 67
Interest income 0.3 0.5 0.5 0.4 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1
Pretax income 77 113 137 145 22 27 7 57 27 34 9 67
Income taxes 30 42 52 55 9 10 3 21 10 13 3 25
Net income 47 71 85 91 14 17 4 36 16 21 6 42
Fully diluted EPS $0.86 $1.32 $1.61 $1.75 $0.25 $0.31 $0.08 $0.67 $0.30 $0.39 $0.11 $0.81
Fully diluted shares outstanding 54.6 53.8 52.8 51.9 54.3 54.0 53.4 53.5 54.0 53.1 52.1 51.9
% of Sales 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E
Gross profit 32.2% 33.7% 35.0% 35.5% 33.3% 33.1% 31.4% 36.0% 34.5% 35.1% 32.3% 37.3%
SG&A 25.6% 24.5% 24.8% 25.0% 25.4% 24.2% 28.9% 21.2% 25.6% 24.9% 29.2% 21.3%
Operating income 6.5% 9.2% 10.2% 10.4% 7.9% 9.0% 2.5% 14.8% 8.9% 10.2% 3.1% 16.0%
Tax rate (% of pretax) 38.8% 37.5% 37.9% 37.5% 38.6% 38.1% 37.7% 36.7% 38.5% 38.1% 37.6% 37.5%
% Growth, YoY 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E
Sales -3.3% 5.1% 8.5% 4.1% 9.0% 0.8% 8.7% 3.4% 6.0% 10.1% 8.1% 9.4%
Gross profit 1.8% 10.0% 12.9% 5.4% 23% 5% 15% 4% 10% 17% 11% 13%
SG&A -5.7% 0.4% 9.9% 4.9% -2% -5% 6% 3% 7% 14% 9% 10%
Operating income 48.1% 47.8% 21.0% 6.4% 642% 44% 25154% 4% 20% 25% 33% 18%
Net income 49.2% 51.0% 20.1% 7.0% 677% 43% 13403% 8% 20% 24% 32% 17%
Diluted EPS 47.8% 53.4% 22.4% 8.8% 679% 45% 13789% 10% 21% 26% 35% 20%
BPs Change, YoY 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E
Gross profit 161 152 136 44 380 122 183 4 121 195 90 130
SG&A (65) (113) 31 20 (291) (148) (68) (10) 19 76 31 10
Operating income 226 265 105 23 670 270 251 14 101 118 59 120
Same store sales 2010 2011 2012E 2013E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E
SSS -0.5% 6.3% 7.7% 5.0% 10.9% 2.0% 10.1% 4.0% 6.5% 11.0% 7.7% 6.0%
Source: Jefferies estimates, company data
page 11 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Company Description
Lululemon Athletica is a yoga-inspired athletic apparel retailer. Founded in 1998, Lululemon is headquartered in Vancouver, Canada where
it originated but is an American company incorporated in Delaware. The brand''s points of differentiation include grass roots community-
based marketing, a unique culture, innovative product development and tight distribution through an interactive store fleet. With ~$500m
in sales, Lululemon is an early-cycle retailer with growth opportunities which include domestic store expansion, new product launches and
economies of scale.
Quiksilver is the world's largest wholesaler of action sports inspired apparel and footwear. The company was co-founded in 1976 by Bob
McKnight (Chairman, CEO and President) and Jeff Hackman as the U.S. licensee of the Australian brand (which has since been acquired). The
company has since evolved into a diverse portfolio of leading brands, most notably Quiksilver (the namesake surf brand), Roxy (a juniors surf
brand started in 1991) and DC (a footwear/skate inspired company acquired in 2004). It operates across a diverse global distribution network
(60% of sales outside the U.S.) and sells into a wide range of retail channels ranging from core surf/skate shops to national department stores
to owned retail stores.
Deckers is a leading designer and wholesaler of footwear brands based in Goleta, California. The company's portfolio of brands includes
UGG, Teva, Simple, Tsubo and Ahnu.
Based out of Rockford, Michigan, Wolverine World Wide is a leading designer and wholesaler of casual, work and military footwear.
The company manages a portfolio of 11 brands (includes both owned and licensed brands), some which have a much larger presence
internationally than in the U.S. As a whole, the company is very well diversified across brand, distribution, geography, end use and customer
demographic. Merrell, part of the Outdoor Group, is the company's largest brand (just under 40% of sales) and most visible growth lever
over the next 3-5 year period. As an established leader in the outdoor footwear space, Merrell continues to embark on its strategy of extending
its lifestyle appeal into product adjacencies and the direct to consumer channel of distribution.
Finish Line is one of the leading retailers of athletic footwear in the U.S. with over 650 stores. The company sells to men, women and kids
across a variety of brands with Nike accounting for 61% of the product mix last year. The company also operates an e-commerce website,
finishline.com, which we estimate to represent 5-10% of sales.
Analyst Certification
I, Taposh Bari, CFA, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this research report.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives
compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst's judgement.
Jefferies & Company, Inc makes a market in the securities or ADRs of Lululemon Athletica.
Jefferies & Company, Inc makes a market in the securities or ADRs of Deckers Outdoor.
Jefferies & Company, Inc makes a market in the securities or ADRs of Finish Line.
Meanings of Jefferies Ratings
Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.
Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month
period.
The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within
a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price
consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform
rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-
month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/
or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities
regulations prohibit certain types of communications, including investment recommendations.
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Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on
the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total
return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market
risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,
P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,
and return on equity (ROE) over the next 12 months.
Conviction List Methodology
1. The aim of the conviction list is to publicise the best individual stocks ideas from the Jefferies Global Research.
2. Only stocks with a Buy rating are allowed to be included in the recommended list.
3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen
is used to ensure a well-diversified portfolio.
4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.
5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:
non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative
to the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached their
target price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.
6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during
the month.
7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.
8. The conviction list is published once a month whilst global equity markets are closed.
9. Transaction fees are not included.
10. All corporate actions are taken into account.
Risk which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based
upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of
the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
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Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
page 14 of 17 Taposh Bari, CFA, CPA, Equity Analyst, (212) 708-2712, TBari@jefferies.com
Please see important disclosure information on pages 12 - 17 of this report.
Consumer
Target | Estimate Change
January 17, 2012
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 742 52.50% 107 14.42%
HOLD 577 40.80% 61 10.57%
UNDERPERFORM 94 6.70% 2 2.13%
Other Important Disclosures
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companies:
United States: Jefferies & Company, Inc., which is an SEC registered firm and a member of FINRA.
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Please see important disclosure information on pages 12 - 17 of this report.
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Target | Estimate Change
January 17, 2012
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Consumer
Target | Estimate Change
January 17, 2012
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