Wolverine's Short Term Fogs Long-Term Potential

The market is unimpressed with Wolverine Worldwide's strong end to 2013 because it wants more in the current year. Regardless, the company's strong brand portfolio bodes well for sustained growth in years ahead.

Feb 19, 2014 at 3:32PM

Brand-name-shoe purveyor Wolverine Worldwide (NYSE:WWW) is struggling to live up to its just-ended year. The company had a banner 2013 with major acquisitions and tremendous sales figures. So far this year, though, the stock has sold off much of its gain. For one thing, the company reported earnings this week that, while above expectations, guided for weaker times ahead. Much of this is due to the macroeconomic climate, but it has investors and analysts worried that the hype surrounding last year's performance and milestones may not be realized going forward. Is this a legitimate concern, or is the market punishing Wolverine Worldwide for its own myopia?

What's so bad?
Wolverine finished out a strong year in 2013. The year's results showed continued strength in its recent acquired brands -- including Sperry -- and saw the bottom line grow more than 25% to $1.43 per share. Top-line sales grew a massive 64%, though if you take out the fresh acquisitions, the pro forma revenue gain was 5.6%.

Sperry is a shining star in the company's growing portfolio, posting quarter after quarter and year after year of sales growth despite a difficult market.

The Lifestyle segment, which includes Sperry, was the leader for the fiscal fourth quarter, growing 25.9% to $265.3 million. Performance brands (Merrell, Saucony, etc.) grew in the double digits as well, while the company's Heritage lines (Caterpillar, Wolverine, and Harley Davidson boots, among others) grew just 4%.

The market eventually soured on the report, as forward adjusted earnings are projected to grow 10% to 14% in the current year.

Important going forward
Investors shouldn't dwell on the short-term guidance too much, as Wolverine has made impressive strides in building a long-term winning portfolio of brands. From the aforementioned Sperry to Keds and Hush Puppies, Wolverine's lines are perennially relevant and don't chase fads (read: Crocs).

The biggest concern last year, which remains this year, is the company's sizable debt load as a result of its expensive M&A activity in late 2012. Management has been steadfast in its dedication to bringing down debt levels, though it still holds nearly $1 billion in long-term debt on the balance sheet. The company paid down more than $100 million throughout 2013, but Wolverine cannot expand its brand portfolio meaningfully without taking the debt levels down further. Otherwise, the leverage situation could get dicey. The good thing is, the company's existing brands lend themselves well to new product introduction and innovation. In management's recent comments, CEO Blake Krueger sounded most encouraged about Wolverine's focus on bringing new products to market under existing brand names.

At just over 13 times earnings, the market gives Wolverine some appreciation for its growth prospects but seems to recognize the downside risk, which is prevalent. Still, with an EV/EBITDA of roughly eight times and strong prospects for global growth (brands are gaining impressive traction in Asia and Latin America), Wolverine is relatively compelling. Its biggest competitor, Deckers Outdoor, trades at a much richer 19 times earnings and has an EV/EBITDA of roughly 16 times. With a debt load under $250 million, it's a cleaner-looking business with similar growth prospects, but Wolverine's valuation remains more appealing. Investors who believe in the growth story and understand Wolverine management's capital allocation strategy should take a closer look.

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