Thursday, March 13, 2014

Keds, Saucony Maker Wolverine Steps Up Revenue Despite Debt

This article was originally published by TheStreet
By Sarfaraz A. Khan, Research Assistant: Gohar Yousuf
March 13, 2014
NEW YORK (TheStreet) -- Footwear company Wolverine World Wide (WWW_) has recently released its annual results: it managed to grow its top and bottom line, despite a challenging business environment and serious debt.
The company has made significant reductions in its debt levels, although it still has a long way to go. Compared to 2010, Wolverine has reported triple-digit growth in revenue and gross profits after the massive $1.25 billion acquisition of Collective Brands' Performance and Lifestyle group in 2012. Profitability has also improved. Moreover, for the current year, Wolverine has forecast double-digit earnings growth.
With a new buyback program and the expected growth in earnings, Wolverine's shareholders could finally start seeing the benefits of the acquisition, which included the Sperry Top-Sider, Saucony, Stride Rite and Keds brands.

Wolverine's shares have risen 22% in the last 12 months and were at $26.78 today at 11 a.m.
After the buyout of several of Collective Brands' labels, Wolverine has reported significant growth in revenues and income. However, Wolverine also reports its results on pro-forma basis under the assumption that the company had acquired PLG in January 2012, although the deal was finalized in October of that year. That way, the company eliminates the unusual impact on growth from the acquisition.
In the fourth quarter of 2013, Wolverine's revenues rose 13.6% from a year ago to $740.8 million. On a pro-forma basis, the revenues were up 0.6%, and missed analysts' estimates by $3.1 million. The company's losses shrank to $1.7 million from $3.7 million in the prior year. Adjusted earnings came in at 22 cents per share, better than market's expectations of 20 cents per share.
For the full year, Wolverine's revenues climbed 64% from the previous year to $2.69 billion; on a pro-forma basis, the revenues were up 5.6%. Annual income rose 24.4% to $100.4 million.
The difference between the company's reported and pro-forma revenues clearly shows that a significant portion of its growth has come due to the PLG acquisition.
The company witnessed strong growth in Latin America throughout 2013. Asia/Pacific picked up the momentum in the second half of the fiscal year and witnessed double digit growth in the fourth quarter.
A long-term analysis shows that the company has consistently grown its revenue and gross profits over the last several years. Since 2010, the company's revenue and gross profits have more than doubled. Net income, however, has suffered. But that was largely due to the costs associated with the debt-funded acquisition.
For instance, in 2013, the company's net interest expense climbed to $52 million from just $1 million in 2011. This was due to higher levels of debt. The acquisition also gave rise to transaction and integration costs which had an adverse impact on the company's net earnings growth in 2012 and 2013.
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In the coming years however, with the absence of acquisition related costs, Wolverine's net income could significantly increase.
Moreover, Wolverine has also improved its profitability. Its margins are now back at 2011 levels after showing a decline in 2012. In 2013, Wolverine's gross margins climbed to 39.6% from 38.2% in 2012 and are slightly better than the 39.5% gross margins in 2011.
The improvement in profitability has come due to a favorable mix of higher margin products, an increase in prices and efficiency gains in manufacturing operations.
Wolverine, however, is not nearly as profitable as some of its other rivals. According to data provided by Thomson Reuters, over the last five years, Wolverine has operated at an average gross margin of 39%, while Nike (NKE_) and Deckers Outdoor (DECK_) have averaged over 44% in the same period
As motioned earlier, Wolverine's growth has come along with a ton of debt. Its long term debt climbed from zero in December 2011 to more than $1.2 billion a year later. That is huge for a company whose market cap is less than $3 billion.
Wolverine is, however, moving in the right direction and has significantly reduced its debt. In 2013, the company's net debt -- debt excluding the cash reserves -- dropped to $935.8 million from more than $1 billion in 2012.
The company still has a long way to go. Its total debt-to-equity ratio is 137, which is a far cry from the debt-to-equity ratio of 1.10 of its slightly smaller rival Deckers. Moreover, Wolverine's ratio is nearly 10 times as large as the industry's average of 14, as per Thomson Reuters.
Despite debt and ongoing deleveraging efforts, Wolverine has also approved a new $200 million buyback program. This shows the management's confidence in their ability to generate cash.
The company's cash reserves rose to $214.2 million by the end of 2013, from $171.4 million in 2012.
For the current year, Wolverine is expecting solid growth in earnings. Investors could reap the rewards of the acquisition in the form of double-digit EPS growth. The adjusted earnings for 2014 are forecast to grow between 10% and 14% from revenue growth of between 3% and 6%.
The company is increasing its investments in some of its leading footwear brands and is eying growth in its e-commerce operations, including dozens of websites. Its growth in Latin America and Asia/Pacific is expected to continue throughout 2014. Moreover, after witnessing stability in its European operations in 2013, the company is expecting growth in the entire Europe, Middle East and Africa region. All of these factors will drive its earnings and revenue growth in 2014.
In short, Wolverine's earnings growth could outpace its revenues growth in 2014. This would mark a big turnaround for a company whose revenues have been growing faster than its earnings for the last two years.
Although the company's outlook for the full year is positive, its shares could come under pressure in the short term. The company is expecting a decline in earnings for the current quarter. For the first quarter, Wolverine has forecast adjusted earnings of between 28 cents and 30 cents per share, which will be a significant reduction from adjusted earnings of 81 cents per share in thefirst quarter of 2013.
The decline is due to the sluggishness in the retail environment and higher brand investments. Moreover, Easter will also fall three weeks later this year as compared to last year. As a result, the impact of Easter sales, which was included in the first quarter of 2013, will be pushed to the second quarter of 2014.