WWW - Wolverine World Wide: Shares Soar On Performance And Optimism Of A Sale

2023-05-11 13:28:21 ET

Summary

• Shares of Wolverine World Wide shot up after the company announced financial results for the first quarter of its 2023 fiscal year.
• Although sales weakened, they did come in higher than anticipated and management announced a strategic review for one of its brands.
• But given how shares are priced, upside moving forward is likely limited for now.

No matter how you stack it, May 10th was a fantastic day for shareholders of footwear and apparel company, Wolverine World Wide ( WWW ). Despite demonstrating some weakness on both its top and bottom lines for the first quarter of its 2023 fiscal year, the company exceeded expectations that analysts set for it and reaffirmed guidance for the year as a whole. On top of this, management also announced a strategic review that involves a potential sale of one of its properties. All of this, combined, sent the stock soaring higher, closing up 11.3% for the day. While this is nice to see, the company is not the greatest prospect in the space to consider. Shares are not exactly cheap and the historical financial performance achieved by management has been quite lumpy. Given these considerations, I would argue that the company is still more or less fairly valued at this time. And as such, I cannot help but to keep it rated a ‘hold’ for now.

A rough quarter that exceeded expectations

Before the market opened on May 10th, the management team at Wolverine World Wide announced financial results, covering the first quarter of the company's 2023 fiscal year. On the top line, revenue for the quarter came in at $599.4 million. Although that represented a decline of 2.5% compared to the $614.8 million generated one year earlier, the number reported by management actually exceeded analysts’ expectations by $21.9 million. Digging deeper, we find some interesting data points that are worth considering. At present, the company has three core operating segments. The largest of these, the Active Group, consists of the company’s Merrell footwear and apparel brand, as well as its Saucony, Sweaty Betty, and Chaco brands. Revenue under this segment spiked 11.5%, climbing from $346.1 million to $385.9 million. Interestingly, sales growth would have been around 15% had it not been for foreign currency fluctuations.

Outside of this, weak demand caused sales for the other segments to worsen. Of the three units, the one that suffered the most was the Lifestyle Group, with revenue dropping 21.3% year over year. When you break out the data into specific brands, you find that the Merrell and Saucony brands performed exceptionally well, with revenue climbing 17.6% and 21.2%, respectively. With so many brands under one corporate entity, some may wonder why the company isn't taking steps to perhaps divest itself of some. But that seems to be what management decided. In their earnings release, they stated that they were exploring strategic alternatives for the Sperry brand name. In the first quarter, revenue there came in at $62.9 million. That was 13% lower than the $72.3 million reported one year earlier.

On the bottom line, the picture for the company was most certainly mixed. Earnings per share came in at $0.23. That was almost double the $0.12 per share generated one year earlier. Analysts were expecting profits per share of $0.21. On an adjusted basis, the company generated profits per share of $0.09. That was $0.06 per share higher than what analysts thought they would come in at. The earnings per share generated by the company translated to net profits of $19 million. That was almost double the $9.7 million reported one year earlier. Other profitability metrics, however, we're not quite as positive. Operating cash flow went from negative $92.5 million to negative $97.8 million. Even if we adjust for changes in working capital, cash flow would have gone from $39 million to $4.8 million. And finally, EBITDA for the company dropped from $58.5 million to $32.8 million.

Given bloated inventory levels, not only with this company but across many aspects of the economy, the expectation had been that there would be considerable weakness in the results of some companies and perhaps even downward revisions for the year. However, that does not appear to be the case when it comes to Wolverine World Wide. Management still expects revenue to grow by between 0% and 2%, with constant currency revenue growth of between 1% and 3%. This should take sales up to between $2.53 billion and $2.58 billion. Earnings per share guidance remained unchanged at between $1.50 and $1.70, with the range for adjusted earnings coming in $0.10 per share lower than that. This would translate to net income, at the midpoint, of $126.9 million, with adjusted net income of $119 million. This reaffirmation is rather interesting when you consider management’s rather ambitious plans from an inventory perspective. At the end of the 2022 fiscal year, the company had $745.2 million in inventories. That number dropped to $725.9 million at the end of the most recent quarter. And by the end of this year, management is forecasting inventories of around $520 million. That would be the lowest on record since the first quarter of 2022 when inventory levels came in at $483.3 million.

As for valuing the company, we do run into some complications. We know that adjusted net profits should be around $119 million. But we don't know about the other cash flow metrics. If we annualize the results experienced so far when it comes to EBITDA and apply that not only to EBITDA but also adjusted operating cash flow, you would get EBITDA for the year of $111.4 million and adjusted operating cash flow of $53.5 million. Taking this data, I was able to create the chart above. That same chart also has trading multiples for the company using results from 2021 and 2022. As part of my analysis, I also compared the company to five similar firms. These results can be seen in the table below. It is true that, on a price to earnings basis, Wolverine World Wide happens to be the cheapest of the group. But when it comes to the price to operating cash flow approach, four of the five ended up being cheaper, while using the EV to EBITDA approach, I found out that our prospect was the most expensive of the group.

Takeaway

To tell you the truth, I am a little surprised that Wolverine World Wide performed as well as it did from a share price perspective in response to its quarterly release. I suppose that this surprise might be misplaced. After all, the company did beat analysts’ expectations on both its top and bottom lines. Management outlined a plan to further reduce inventory levels and it is exploring an asset sale of its most troubled property. All of this is great for shareholders to see. But financial results in the past have been volatile and shares in the company are quite pricey relative to similar firms. That valuation is particularly problematic. Given that valuation, combined with broader economic concerns that could hurt the company moving forward, I do believe that the ‘hold’ rating I assigned the company in February of this year is still appropriate.

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