Wolverine Worldwide's Above-Average Growth

By Ryan C. Fuhrmann | October 13, 2010 AAA

Last week, footwear brand firm Wolverine Worldwide (NYSE:WWW) reported third-quarter earnings that were better than analysts had forecast. Management also upped its full-year sales and profit expectations, all of which sent the stock towards its highs for the year. At current stock levels, the valuation may have gotten ahead of sustainable operating fundamentals.
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Third-Quarter Sales Review
Sales increased 11.7% to $320.4 million on double-digit growth in the footwear and heritage brand operating segments. Segments are divided by brand and footwear function. The footwear unit sells company namesake as well as Bates and HyTest brand footwear. Heritage licenses Cat footwear from Caterpillar (NYSE:CAT) and the Harley-Davidson (NYSE:HOG) brand that is sold through Harley dealerships and other retailers. The outdoor group segment sells hiking and related outdoor footwear under the Merrell, Patagonia and Chaco brands. It reported more modest top-line growth of 5.6%. Rounding out the major segments, Hush Puppies eked out 0.4% growth.

Management detailed that its strong performance was "broad-based" across all branded product categories and that benefited from restructuring maneuvers during the economic downturn that are now paying off in terms of sales and profit growth.

Quarterly Profit Recap
Gross margins fell slightly to 40.1% of sales as price increases and other volume benefits were offset by higher freight and other product costs. However, operating expenses grew only 9% to $80.7 million and allowed the company to leverage sales growth to a 32.5% boost in operating profit to $47.9 million, or 15% of sales. Interest expense and lower other income tempered the net income increase to 31.8%. Earnings reached $48.1 million, or 70 cents per diluted share, which beat analyst expectations. (For related reading, take a look at Analyst Forecast Spell Disaster For Some Stocks.)

Strong year-to-date results allowed Wolverine to up its full-year sales guidance to a pretty tight range of $1.2 billion and $1.22 billion, or year-over-year growth of 9% to 10.8%. The company expects to report about $2 in diluted earnings per share. This represents significant growth over the $1.24 per diluted share reported last year, which contained nearly $30 million in one-time charges.

Bottom Line
Wolverine has a track record of leveraging average 5.2% annual sales growth to 9.1% earnings growth over the past decade. At a forward P/E ratio of 15.2, the valuation is slightly ahead of where the fundamentals currently lie. Rivals such as Deckers Outdoor (Nasdaq:DECK) and Skechers USA (NYSE:SKX) trade at lower forward multiples and offer similar growth profiles going forward. Overall, Wolverine has proven itself a consistent performer, has officially made it through the credit crisis largely unscathed and is currently posting growth statistics ahead of historical trends. A share price below $30 would represent a much more compelling entry point to ensure that the current outperformance isn't just a flash in the pan.

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