Wolverine Worldwide, Inc Is A Buy On Post-Earnings Weakness

Wolverine Worldwide, Inc Forecasts Strong Rebound 

Wolverine Worldwide, Inc (NYSE: WWW) and the shoe industry at large didn’t have a fantastic 2020. Like other retailers of apparel, there was little impetus for demand due to social distancing and work-from-home trends. At least in the beginning. Now, more than a year into the crisis, not only is the shoe industry at large posting a nice little rebound but the trends are accelerating. Assuming the reopening continues unabated we expect to see Wolverine World Wide outpace even its own updated and very positive guidance. 

“We believe 2021 will be a breakthrough year for the Company, and our first-quarter performance was an excellent start,” said Blake W. Krueger, Wolverine Worldwide’s Chairman and Chief Executive Officer “ ... Our brands are well-positioned in trending, performance-oriented product categories like running, hiking, and work; and their momentum remains strong. We anticipate growth to continue to accelerate moving forward.”

Wolverine World Wide Falls On Market-Beating Results 

Wolverine World Wide had a great quarter and one in which sequential growth continued for the 4th quarter. The $510.7 million in net revenue is up 16.3% from last year and beat the consensus if only by a slim 25 basis point margin. Gains were driven by strength in the company’s two top brands as well as eCommerce. The Merrel brand saw its sales surge 25% while Saucony sales jumped 55% and eCommerce 84%. 

The revenue gains were translated into higher margins as well and despite the impact of upward price pressures. The gross margin widened by 210 basis points GAAP and 290 basis points adjusted to hit 4.3% and drive operating gains of larger proportion. The operating margins widened by 760 bps GAAP and 320 bps adjusted to drive significant improvement in earnings. At the GAAP level, the $0.45 in EPS is up 200% from last year and beat the consensus by 1000 basis points. At the adjusted level the $0.40 in reported earnings is up 55% but missed consensus by a penny, that’s the only bad news we could find. 

Guidance for the remainder of the year is equally positive if a little light in regards to earnings. The company upped its target for revenue to $2.24 to $2.3 billion versus the $2.23 consensus which is estimating 25% to 28% YOY growth. The adjusted EPS target was also increased but to a range that brackets the consensus with the consensus above the mid-point of the range. In our view, the guidance but possibly cautious in light of our expectation for the economic rebound. The Fed’s GDPNow tool is tracking Q2 GDP in the double-digit range and we think GDP could accelerate from there before it cools off. 

Wolverine Worldwide Could Increase Its Dividend 

Wolverine Worldwide is not a well-recognized dividend-grower but it does have a history of increases. Based on the Q1 results, the outlook, and the balance sheet we think the company could not only sustain its current payment but increase it as well. Not only is the payout ratio very low but free cash flow is good and on the rise too. The company paid down a substantial amount of debt over the past year that has improved liquidity, leverage, coverage, and FCF. If these trends continue the next dividend increase could be substantial as well. 

The Technical Outlook: Wolverine Worldwide Enters Correction

Shares of Wolverine Worldwide shed more than 8% and are on the verge of a deeper correction because of the Q1 earnings. The earnings weren’t bad, nor was the outlook, but what they were was not enough to spark buying in the face of a broader market sell-off. What this means is share prices for this stock are going to continue falling until finding a firmer level of support that can sustain price action until market conditions improve. In our view, this stock could fall another 10% to 12% before hitting major support but, if it does, we’d be buyers. At that price point, near $34 to $36, the stock would be trading about 17.5X to 18.5X its earnings at the low end of the range and present a much better value-to-yield.