Should You Buy Wolverine World Wide on the Pullback?

Shares of Wolverine World Wide (NYSE: WWW  )  have been under tremendous pressure this year. The footwear maker is down 23% as its sales have struggled in recent quarters on the back of weak retail traffic. Additionally, other factors such as harsh winter weather and the restructuring of one of its brands have also weighed on Wolverine's business. Moreover, competition in the footwear industry is intensifying as the likes of Skechers USA (NYSE: SKX  ) and Brown Shoe (NYSE: BWS  ) are investing aggressively to attract more customers.

What gives?
A closer look at Wolverine's performance in the first quarter reveals that the company suffered from a confluence of one-time events. Although Wolverine managed to meet bottom-line expectations in the first quarter, the weakness in the U.S. footwear industry affected it.

Last year, the U.S. retail market reached its lowest level since 2008, and the weakness continued in the first quarter of fiscal 2014. In addition, severe cold weather conditions significantly set back Wolverine as shoppers remained indoors and stores had fewer retailing days. In fact, Wolverine lost 600 retail business days due to weather-related closures. This is more than 10 times the number of closures in a normal year.

However, Wolverine might improve going forward as the weather improves. As the spring season arrived, the company's business got better. Moreover, its new spring and summer products received a positive response.

Focus on brands and expansion
Wolverine's five subsidiaries -- Merrell, Saucony, Chaco, Cushe, and Patagonia -- reported solid mid single-digit revenue growth in the quarter. The company had made some tactical changes in Merrell last year to boost the brand. It had appointed a new brand president for Merrell, along with a new creative director. According to management, these changes have paid off and should result in strong growth momentum for the Merrell brand in this fiscal year. 

However, Wolverine's Sperry Top-Sider, Hush Puppies, and Stride Rite brands did not perform up to the mark. The bad weather affected Sperry's sales, which led the company to exit some distribution channels in the U.S. This caused around half of its first-quarter revenue decline. However, as these distribution channels were not consistent with Wolverine's growth strategies, the company seems to have made a smart move.

Also, it made some significant changes in the management of Sperry that might lead to a turnaround. Wolverine has made several key leadership changes in the Sperry brand, such as recruiting senior talent to head the marketing and sales teams. Moreover, according to market data, Sperry has maintained its No. 1 position in the competitive casual footwear market. Wolverine aims to make Sperry its first billion-dollar brand going forward, so it is making moves consistent with this objective to improve its performance. 

Moving on, Wolverine has a strong distribution network with around 11,500 distribution centers. Its brands are available in many of the world's best malls and high streets, according to management. In the previous quarter, it opened around 150 new model-branded stores or shop-in-shops around the world. Wolverine cites growth in China and Latin America as its key growth drivers. As a result, it expects to open another 800 stores and shop-in-shops by the end of the year to capture more of the market. 

Skechers and Brown look set to improve
It is essential for Wolverine to continue expanding its business and strengthening its brands in the face of competition from Skechers and Brown Shoe. Skechers is seeing double-digit growth in almost every area where it distributes its products directly. Skechers is also upgrading its distribution center in Europe to improve its capability and efficiency in the continent. The company is also witnessing rapid growth in China, a market that Wolverine is targeting. 

In fact, during the first quarter of 2014, Skechers saw a jump of 50% in its Chinese business. In addition, Skechers is growing rapidly in several emerging markets such as South Korea, the UAE, Indonesia, Turkey, and Taiwan. 

Brown Shoe, on the other hand, is investing aggressively in its Sam Edelman brand. Brown Shoe is focusing on bringing in more talent and bolstering its marketing, e-commerce, and branded retail stores. In addition, Brown Shoe seems to have left the effects of a harsh winter season behind as its first-quarter results exceeded expectations. Normal weather conditions in the last two weeks of April led to strong sales for its contemporary fashion platform, which enabled Brown Shoe to raise its annual earnings guidance. 

The bottom line
Wolverine has been a disappointment so far this year, and its recent results were not exciting either. However, the company was a victim of severe weather conditions and its business started to improve as the weather returned to normal. In addition, since Wolverine is undertaking improvement strategies and has a strong presence across several markets, it might be a smart idea to buy the stock on the pullback.

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