Wolverine World Wide (NYSE:WWW) won't receive flashy headlines for quadruple-digit growth -- and that's a good thing. As is, its respectable top-line performance will keep it under the radar of many media outlets, quietly rewarding those that matter most: its shareholders.
Fool contributor Stephen Simpson recently offered a snapshot look at the footwear manufacturer's second-quarter results, in which the company increased its top and bottom lines by 10.5% and 13.6%, respectively. He, too, concluded that the latest figures were "solid, but not spectacular."
That doesn't mean there is little to be excited about with Wolverine. As Stephen highlighted, there is a "buzz" about the company's upcoming ventures to offer Merrell apparel and Patagonia footwear. The latter development was the subject of much discussion in its latest quarterly earnings conference call. Bodhi Zappa and Hank Schofield will join me in an investigation of the latest call to get a clearer picture of the potential and problems this brand could bring to Wolverine.
Not your grampy's outdoor footwear
Jeremy: In recent years, premium outdoor labels have driven growth for many apparel and footwear manufacturers. These high-end labels -- whether it's VF's (NYSE:VFC) The North Face, K2's (NYSE:KTO) Marmot, or Columbia Sportswear's (NASDAQ:COLM) Mountain Hardware and Montrail -- are fueling top-line sales and bottom-line profits. Bodhi, should Wolverine World Wide expect the same out of Patagonia?
Bodhi: As California surfers pay their respects to the church of the open sky, so, too, Wolverine World Wide will ride the wave of outdoor euphoria.
Hank: Thank you for that, most holy beach bum.
Bodhi: Bro, how can you not be excited about the Patagonia introduction when the outdoor business is the company's "most significant growth opportunity," according to CEO Tim O'Donovan? This category led the way in the quarter, with revenues rising 15.3% compared with the same period a year ago. This was achieved almost entirely by Merrell's performance. And beyond sales, O'Donovan added that the brand continues to be its "largest profit contributor." Now, Merrell is a fine name, but in the world of outdoor enthusiasts, it is no Patagonia. I can only imagine the possibilities this premium line will open for the company.
Jeremy: We will find out soon enough; the company plans to launch 32 styles of Patagonia footwear beginning as early as the fourth quarter, with the bulk of the shipment arriving in the spring of 2007.
Shark feed?
Hank: Look, I am sure there is a "buzz" with this product -- even O'Donovan was encouraged by the "level of interest from a variety of top-tier retailers globally." Later in the call, he added that the level of interest has surpassed what was originally thought possible when initiating the project. But that doesn't mean the concept is risk-free.
The outdoor biz has been going gangbusters for years, and you have to wonder if Patagonia is showing up at the tail end of the party. I mean, the competition in this industry is brutally fierce, with oversaturation a real concern. And this is a risk that Wolverine can ill afford to be wrong on, considering that expenses related to the investment in the Patagonia project are being characterized as "fairly significant." This project is a major reason why costs as a percentage of revenues will rise 70 to 90 basis points this year.
Jeremy: A legitimate concern, and one that an analyst in the call alluded to when asking management to comment on the competitive pressures facing Merrell. Management's response is encouraging for the Patagonia launch, however. On outdoor categories like trail-running, O'Donovan commented, "We can anticipate strong competition, but we're more than holding our own and continuing a very strong double-digit pace of growth for the Merrell business globally."
Merrell: competitor or complimentor?
Hank: Beyond outside competition, what about cannibalization and the potential of Patagonia sales eating away at Merrell's business, given the similar customer base? O'Donovan even indicated that just in terms of the Patagonia apparel dealer network, "About 25% of them were also Merrell customers." This highlights the reality of overlap.
Bodhi: But he also said that "75% of them weren't" Merrell customers. This highlights opportunity.
Also remember that Wolverine has extensive experience in bringing licensed footwear to the market. The company also has the rights for both Harley-Davidson (NYSE:HDI) and Caterpillar (NYSE:CAT) -- currently its "two largest licensed footwear businesses." Both of which, I might add, were strong contributors to the most recent quarter. This suggests to me that this initiative is not being handled with a shoot-from-the-hip mentality. The product will be intentional, and it's customer targeted, and I fully expect Patagonia will be a nice boost to Wolverine.
Let the footrace begin
Jeremy: Thank you, Bodhi and Hank, for your helpful perspectives. Looking at it from numerous angles provides a multifaceted view of the situation -- one that enables us to obtain a better read on Patagonia's potential for Wolverine and its shareholders.
While we should not overlook the rising level of competition in this industry, the opportunity here for Wolverine looks substantial. Investors will get an early gauge of the possibilities when the first Patagonia shoes hit store floors in the fourth quarter. With the bulk of the initial shipment to arrive in the first quarter of fiscal 2007, there is little doubt in this Fool's mind that Wolverine World Wide will continue its track record of record revenue.
VF is a Motley Fool Income Investor pick, and Columbia Sportswear is a Motley Fool Hidden Gems selection.
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
