- Short case no longer valid, investors may want to go long.
- New buyback provides business confidence.
- Valuation much more appealing despite reduced estimates.
- Guidance disappointment may provide buying opportunity.
A couple of months ago, I wrote an article available to Seeking Alpha Pro subscribers that detailed why a short position was advised for Wolverine World Wide (WWW). I recommended a short position in the low $60s, and that was before the 2 for 1 stock split. Now, that recommendation would have been the low $30s, and shares are down since then. At that time, I was not a fan of the valuation in comparison to other names in the space. Also, I was worried that a poor balance sheet would hurt the company's financial flexibility going forward. In the past couple of weeks, some news items from the company have changed my opinion a bit. Today, I'll detail why a short position is no longer warranted, and why investors might want to actually go long this name.
New buyback program:
One of the reasons I didn't like the name back in October was a balance sheet that was weak on paper. In late 2012, the company made a tremendous acquisition (the "PLG acquisition") that brought them the Sperry Top-Sider, Saucony, Stride Rite, and Keds brands. That acquisition brought a ton of debt, and as you can see from the table below, really impacted the balance sheet. You can view the Q3 2013 balance sheet in the latest 10-Q filing.
*Liabilities to assets ratio.
I did give the company credit for getting the net debt number under $1 billion in Q3 for the first time post-acquisition, and a recent move to save some interest expenses down the road. But with a nearly $1 billion net debt position, I figured the company would be basically using its cash flow to pay back debt for quite a while. In the following table, I've shown the quarterly version of the above table end Q3 2012 to end Q3 2013.
The balance sheet had gotten better since the completion of the acquisition, but I wasn't a total believer in late 2013. However, the company recently announced a new $200 million buyback program, expected to be executed over four years. My short thesis was partially based on the company's inability to buy back stock, but since it will be able to, I have to change my tune a little. The company expects to announce results on Feb. 18, so we'll get the Q4 balance sheet then. I expect further deleveraging as time goes on, but not as quickly as I expected. As much as I thought paying back debt was a priority, the company feels comfortable buying back stock while paying back debt. That's a positive development in my opinion, and should benefit shareholders going forward.
A more appealing valuation:
In my previous article, I included the following table, showing Wolverine against Deckers Outdoor (DECK), Crocs (CROX), Steven Madden (SHOO), and Skechers (SKX). The table showed (at that time) expected revenue and earnings growth for 2014, as well as the P/E and P/S values at that time. These numbers are based on analyst estimates from Yahoo! Finance, for example, this page for Wolverine. Some of these names use adjusted (or non-GAAP) earnings per share values, so for a complete apples to apples comparison, some adjustments may be needed. For now, I'm using the numbers as they appear on Yahoo! to eliminate one-time items.
In October, Wolverine's growth profile was not great compared to the others. That wasn't my main issue, however. The stock traded at a 20% premium on price to earnings and a nearly 13% discount on price to sales. Since all of these names are profitable, I was more concerned with the huge premium on price to earnings.
However, that premium has since evaporated, and many of these names have seen their growth expectations come down a bit. That's probably not too shocking, given the tough holiday environment for retail and now terrible weather in Q1. Here's how the above table looks as of Friday.
Deckers is the only name that has seen its estimates rise since my last article. However, Deckers has also seen a tremendous jump in its stock. Compared to the average, Wolverine now trades at just a 1% premium on P/E, much more reasonable than the 20% premium back in October. Additionally, the discount on P/S has expanded from almost 13% to almost 25%. A much more reasonable valuation makes this name no longer a short candidate, and potentially a name investors may want to go long.
Preliminary 2013 results and 2014 guidance:
About a month ago, Wolverine World Wide announced preliminary results for 2013. The company expected $2.69 billion in revenues and the high end of its $1.37 to $1.42 adjusted earnings guidance range for EPS. Reported earnings were expected to be $0.85 to $0.90, and the company expected inventories to be materially lower than the end of 2012. Especially in a tough retail environment, lower inventories are a much more welcome sign, as it will lead to less discounting in the future.
Wolverine CEO Blake Krueger provided the following quotes in the above linked press release:
"Fiscal 2013 included several noteworthy accomplishments of which we are exceptionally proud."
"Our revenue and earnings are expected to reach record levels, we successfully integrated and grew our newly acquired brands, and the performance of Merrell, our largest brand, strengthened as the year progressed."
"In the quarter, excellent double-digit revenue growth from Hush Puppies, CAT Footwear, and Keds and solid mid-single digit revenue growth from Merrell and Saucony were partially offset by softness from Sperry Top-Sider and Stride Rite."
"We are pleased that our multi-brand, multi-geography business model was able to deliver record full-year earnings at the high end of our previous guidance."
Even in a tough retail environment, the company did fairly well in Q4. I don't think there will be any Q4 surprises at earnings next week. The big item to watch will be guidance. Along with the preliminary 2013 results in January, the company also provided the following guidance for 2014:
Don Grimes, the Company's Senior Vice President and Chief Financial Officer, stated "We are pleased with the momentum of our business as we move into 2014. In light of the current tepid environment for consumer soft goods in the U.S., our preliminary outlook for fiscal 2014 is for full-year revenue growth in the mid-single digit range, with year-over-year revenue growth accelerating over the course of the year. Consistent with the Company's long track record of delivering earnings growth in excess of revenue growth, we expect full-year diluted earnings per share to grow at a solid double-digit rate."
Current analyst estimates, which I linked to above, call for 5.3% revenue growth in 2014. I think that is a fair estimate at this time. The company guided to mid-single digit growth, which in my view, is 3% to 7%. I'll be interested to see next week what the company gives for guidance, especially given all of the bad weather in the US recently. I do think there is the potential for guidance to be a little light, maybe 3% to 5% overall. Analysts are looking for $1.67 in EPS during 2014, as opposed to the $1.42 adjusted figure for 2013 that analysts expect. If poor guidance does ended up hurting the stock, I think it would be the opportunity for investors to pick up shares. The company, like many others, stated that revenue growth should accelerate as the year continues.
Wolverine World Wide is no longer the short candidate it used to be. Shares are about $6 off the 52-week high, despite a recent rally. The company recently announced a large buyback program, which I was not expecting. This gives me confidence that the company will deleverage the balance sheet and buy back stock at the same time. Also, while estimates have come down, so have the estimates of many retail peers. The valuation for the name is much more reasonable. This now looks like a name investors might want to check out. Investors might want to wait to enter until after next week's earnings, just in case guidance is light due to bad US weather so far in Q1. Wolverine World Wide was a decent short pick in late 2013, but some recent developments have me changing my opinion.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.