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Collective Brands: Strong Buy

HAIN GPI

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Rising earnings estimates on the back of strong second-quarter results that included a 41.7% earnings surprise, helped Collective Brands achieve a Zacks #1 Rank (Strong Buy) on September 11, 2012. Moreover, this leading lifestyle footwear and accessories brand company has delivered positive earnings surprises over the last four quarters with an average beat of 33.5%.  

With a solid year-to-date return of 47.8% and a history of exceeding the quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second-quarter earnings, sales increase in almost all divisions except Payless Domestic, strong comps growth year to date and improved margins are the primary rank drivers for this stock.

On August 31, Collective Brands reported fiscal second quarter (ended July, 28 2012) adjusted earnings of 34 cents per share, which easily surpassed the Zacks Consensus Estimate of 24 cents. Moreover, earnings surged 112.5% from last year’s 16 cents a share driven by comps growth.

Total net sales during the quarter grew 0.4% year over year to $886.0 million from $882.4 million in the comparable prior-year period. Collective Brands’ consolidated same-store sales increased 2.9% in the quarter and experienced a revenue growth of 6.1% in PLG Wholesale segment.

The top line was aided by overall growth at PLG, both retail and wholesale and strong same store sales at Payless International. The PLG Retail segment did well due to strong comparable store sales growth and contribution from the new Sperry stores. Latin America is one of the fastest growing retail markets and the company banked a comps growth of 11% in that region, driven by strong strategies and better inventory levels.

Gross profit in dollar terms increased 8.6% to $295.4 million from $272.1 million in the year-ago quarter. Moreover, gross margin expanded 250 basis points to 30.8%, reflecting robust comps in the retail segments, lesser markdowns and decreased lower occupancy costs as a percentage of revenue mainly due to shutting down of the non-performing and non-strategic stores compared with the last year.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 9.3% to $1.53 per share based on 2 out of 3 upward estimate revisions over the last 30 days, whereas, for 2013, 2 out of 3 estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 6.0% to $1.77 per share.

Valuation

Collective Brands currently trades at a forward P/E of 14.21x, a 2.5% discount to the peer group average of 14.57x. Also, on a price-to-book basis, the shares are trading at 1.82x, a 24.5% discount to the peer group average of 2.41x based on the company’s fundamentals, we expect the company’s discount to narrow in the coming quarters.

About the Company

Based in Topeka, Kansas, Collective Brands markets a portfolio of footwear and related accessories brands through its three strategic units – Payless ShoeSource, Collective Brands Performance + Lifestyle Group (PLG) and Collective Licensing International. The company reports its business in four segments – Payless Domestic, Payless International, PLG Wholesale and PLG Retail. The market cap of the company is $1.33 billion.

Other Zacks #1 Rank retail stocks include Group 1 Automotive Inc. (GPI - Snapshot Report) and Hain Celestial Group Inc. (HAIN - Analyst Report).

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