It's Better to Stay Away From Wolverine Right Now

Here are a few reasons why investing in Wolverine now might be dangerous.

Mar 17, 2014 at 3:33PM

U.S. consumers increased their spending during the holiday season. However, this increase in spending did not occur in accordance with what retailers had expected. For instance, because of colder weather people bought less casual footwear and more winter-wear items, such as boots. Nonetheless, some footwear retailers came prepared to face the situation and they registered strong performances. Wolverine World Wide (NYSE:WWW), one of the leading lifestyle shoe companies, posted fourth-quarter and fiscal-2013 numbers that came in ahead of the Street's expectations.

Into the numbers
Driven by the benefits of the acquisition of the performance and lifestyle unit from Collective Brands, Wolverine's revenue surged 13.6% to $741 million. However, if we exclude the effect of the acquisition, the company's revenue increased by only 0.6%. This mainly occurred because of factors such as lower footfall at the malls as the harsh winter convinced shoppers to stay home. For fiscal-year 2013, Wolverine's revenue increased by a whopping 64% to $2.67 billion.

Also, adjusted earnings grew to $1.43 per share for an increase of 25.4% over last year as the company managed its costs well. The company also increased its selling prices and expanded its consumer-direct channels, which helped expand its gross margin. The gross margin for the year stood at 39.8%, an improvement of 120 basis points.

Competitive landscape
Peer Crocs (NASDAQ:CROX) also suffered from the problem of low demand. Its colorful and stylish footwear did not resonate with customers as it once did, which resulted in a 1.6% increase in revenue in its fourth quarter. Growth in Internet sales, which increased by 10 %, provided the main driver for this increase. Comparable-store sales, on the other hand, decreased 4%. Moreover, Crocs registered a loss of $0.20 per share for the quarter. The company declared that it will focus on increasing its profits by controlling its costs. Also, Crocs' gross margin shrank by 180 basis points as the company was unable to pass on the increase in product costs to its customers.

However, not every player has found it difficult to stir demand. Skechers USA (NYSE:SKX) posted quarterly numbers recently which beat analysts' expectations. Its revenue surged 14% to $450.7 million as a colder winter led to higher demand for products such as boots. Moreover, its diversified product portfolio, which includes both casual and sports footwear, led to higher sales.

Additionally, Skechers' efficient cost-management techniques enabled its earnings to grow from $0.08 per share to $0.28 per share. Hence, the retailer plans to expand its footprint by opening 60 to 70 new stores during the year. This company might prove to be tough competition for Wolverine.

Points to be considered
Wolverine World Wide made some significant efforts that investors should consider. For instance, it has been continuously trying to innovate and bring in new products for its customers. In fact, it plans to launch a new Sperry apparel collection this year, which should give customers more reason to enter its stores.

The footwear retailer has also partnered with various celebrities in order to attract customers. It collaborated with Taylor Swift, Kate Spade, and Hollister (of Abercrombie & Fitch) to drive the sales of its Keds category. In fact, the company has also eyed an expansion for Keds into the Latin America and Asia-Pacific regions.

Additionally, Wolverine has taken the initiative to expand its consumer-direct segment, which has higher margins. Hence, Wolverine enhanced its overall store layout to improve the customer experience. The company also made efforts to improve its online operations.

The company remains optimistic about its future prospects as its bright outlook shows. The footwear company expects revenue in the range of $2.78 billion-$2.85 billion for an increase of 3%-6%. It expects earnings to increase by 10%-14% in a range of between $1.57-$1.63 per share.

My take
Looking at Wolverine's strategic moves and its decent outlook, the company seems interesting. However, relying on Wolverine's performance appears difficult since the sales from its Heritage brands have not been very impressive. The sales growth for the company mostly occurred as a result of its recent acquisition. However, the company's recent initiatives might prove fruitful. Hence, investors would be prudent to stay on the sidelines and wait for the right time to get into the company.

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Pratik Thacker has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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