Shoe seller Wolverine Worldwide (WWW) posted strong third-quarter results driven largely by former Best Ideas Newsletter portfolio holding Collective Brands' PLG brands. Revenue surged 9% year-over-year on a pro forma basis and more than doubled on a year-over-year reported basis, to $717 million (modestly exceeding consensus estimates). Earnings per share were even stronger, rising 61% year-over-year to $1.16 (excluding acquisition costs) and coming in handily above consensus expectations. Year-to-date, the company has generated $96.2 million in free cash flow, equal to 5% of total revenue.
Image Source: Wolverine Worldwide
Wolverine's 'Lifestyle' and 'Performance' groups were the drivers behind revenue expansion during the quarter as the company continues to capitalize on the success of recently-acquired Sperry Top-Sider and its long-time growth brand-Merrell. By any measure, we'd say management is very happy with its acquisition of Collective's brand portfolio.
From a broader perspective, Wolverine's third quarter underscores the broader strength of the footwear market. Nike (NKE) reported outstanding results for its fiscal year 2014 first quarter, echoing the positive results we received from DSW (DSW) and Brown Shoe Co (BWS). Any fears that Wolverine acquired PLG at the top of a fashion cycle have largely been alleviated.
On the gross margin side of the profit equation, Wolverine continues to experience expansion, with gross margins up 70 basis points year-over-year to 39.9%. Year-to-date, gross margins have jumped 120 basis points to 40.5%.
However, the improved gross margin has been stifled by higher fixed/overheard costs. Excluding acquisition-related expenses, SG&A jumped 100 basis points year-over-year, to 26.3% of total revenue. Management didn't go too heavily into detail explaining the issue, but we gather the inherited direct-to-consumer businesses acquired from Collective Brands as well as higher marketing spend were to blame. Nevertheless, we believe the fixed-cost increase is not something to worry about, especially considering how transformative the PLG acquisition has been from a cash flow perspective.
Looking ahead, Wolverine raised its full-year earnings guidance to $2.73-$2.83 per share from its previous range of $2.60-$2.75. Management doesn't provide a revenue outlook, but given the increased earnings range, the firm is anticipating a strong fourth quarter.
Overall, we're encouraged to see strength persist from the firm's stable of brands. One of the risks of the PLG acquisition was that Sperry Top-Sider popularity had peaked just as Wolverine made the acquisition, but that simply isn't the case. Though we expect to tweak our fair value estimate, we remain on the sidelines with respect to Wolverine at this time; we won't be adding the stock to the portfolio of our Best Ideas Newsletter.