The dynamics of retail apparel industry are very inviting for analysts and investors as some of the very decent buying opportunities become overshadowed by huge brand names like Nike (NKE) and Adidas (ADDDF.PK). In this analysis, I intend to compare R.G. Barry Corp. (DFZ) and Wolverine Worldwide (WWW), two competing small players of the apparel industry.
A major proportion of R.G. Barry's business operations is based on footwear products. The company also operates in other accessories such as cushioned insoles and handbags etc. The company claims to have contributed towards 30% of the total North American slippers market in FY12. Over the years, the company has shown a resilient performance in terms of earnings growth and profit margins.
Wolverine, on the other hand, has a relatively larger set up with a product range which also includes industrial work shoes and uniform shoes. The company's exposure also extends a little further into Canada and some parts of Europe. Wolverine's stock has shown a substantial upward trend over the recent years which shows investors' confidence in the company's future prospects.
The stock prices of these two companies have soared in recent periods due to strong support from economic conditions. The consumer spending trends are improving and confidence levels are at new highs. The increase in disposable income and the improvement in future outlook have lent massive support to the apparel industry, which is clearly evident in the stock price trends of these companies.
The above chart shows the stock prices of the two companies since the beginning of FY08. The chart shows that over this period, Wolverine has outperformed R.G. Barry by demonstrating a price appreciation of 121.5%. Despite this apparent outperformance of the stock, it is essential for us to see if this surge in prices is supported by the performance of the company.
Comparison of Performance Indicators
In order to conduct this comparison, basic performance and stability indicators have been considered which will eventually project a marked difference between the two companies.
The above chart shows the net income growth of the companies since the beginning of FY10. The chart provides some very interesting insights about the two companies. Firstly, the relatively diverse business structure of Wolverine makes it less susceptible to cyclical volatility. On the other hand, R.G. Barry has a smaller and less diversified setup which allows for a higher degree of volatility in the company's earnings performance. Secondly, the earnings growth suggests that R.G. Barry has substantially outperformed Wolverine by growing its earnings by 185.9% over this period as compared to Wolverine's 8.53% corresponding growth.
The above chart shows the growth in free cash flows of the companies since FY09. The chart shows that over the reference period, the free cash flows of Wolverine have in fact declined by 55.84% whereas R.G. Barry has managed to improve its free cash flows by 96.84%.
Data Source: Morningstar
The above table shows the relative size of the two companies and their profit margins as compared to the overall industry. The table indicates that R.G. Barry is much smaller, but the performance indicators are suggesting strong growth prospects for the company. In the last fiscal year, the company conducted two acquisitions in order to enter into cushioned insoles and accessories businesses. This approach towards expanding businesses is a key growth driver which will provide remarkable upside potential to the company. At the same time, the company is operating at an operating margin of 14.3% and a net margin of 9.2% which is substantially above the industry average. On the other hand, Wolverine's margins are well below the industry averages. This limits the company's capacity for profitable growth over the coming years.
The comparative valuation is aimed towards determining the potential of companies in a going forward prospect. In this situation, I will use key valuation metrics to conduct this valuation analysis.
Data Source: YCharts
The above table uses four price multiples to evaluate the two stocks against industry averages. The table also shows their respective dividend yields. The valuation indicators suggest that R.G. Barry, despite its impressive financial performance, is undervalued across all price valuations against the industry. On the other hand, the weak performance of Wolverine has not been reflected in its stock price as the company remains overvalued against the industry averages. This provides substantial upside potential to R.G. Barry in the coming periods.
The two companies in consideration are showing varying trends in terms of stock price and financial performance. R.G. Barry is operating at stronger margins, showing higher growth and is underpriced at the same time. The market has not priced the growth capacity of R.G. Barry and at the same time, Wolverine remains highly overvalued. This provides a substantially profitable investment opportunity. Keeping these factors in view, I recommend a buy position for R.G. Barry and a sell position for Wolverine.