Wolverine Still A Winner

By Stephen D. Simpson, CFA | October 04, 2011 AAA

The footwear market has been mixed up for a while now and this quarter really has not been all that different. Struggling names like Brown Shoe (NYSE:BWS), Collective Brands (NYSE:PSS), and Skechers (NYSE:SKX) continue to have their issues, while companies like Nike (NYSE:NKE) and Wolverine (NYSE:WWW) continue to offer shoppers what they want even at higher price points.

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Solid Third Quarter Performance
Wolverine had a bit of a problem last quarter when its outlook disappointed investors and they sold off the stock. As has been the case more often than not in this company's history, though, that conservatism was another set-up for an "under-promise, over-deliver" quarter.

Wolverine surpassed expectations this quarter, with nearly 13% revenue growth, fueled by the outdoor category (where sales climbed almost 20%) and the lifestyle category (up more than 21%). The company's heritage category, which includes the traditional Wolverine work boot and licensed products from the likes of Caterpillar (NYSE:CAT) and Harley Davidson (NYSE:HOG), was up less than 7% and the laggard of the quarter.

Higher prices and controlled corporate spending are mitigating the damage to the bottom line from higher input costs. Gross margin improved almost half a point this quarter, and operating margin was up a bit more than that, fueling a nearly 18% rise in operating income.

Diversification Paying off
Is Wolverine struggling in its heritage category because of the employment situation? Maybe that seems like a foolish or obvious question - after all, a lot of the industries that would seem to be "work boot-type jobs," industries like construction and heavy manufacturing, have not been strong. By the same token, investors shouldn't overlook the fashion angle - there have been plenty of times over the years where people bought work boots as fashion statements.

This is worth mentioning because it highlights how well the company has done with its diversification efforts. As consumer tastes shift, Wolverine increasingly has the opportunity to keep those sales by offering customers a different style of shoe. It also happens to be a strategy that has worked for other shoe companies like Nike and Deckers (Nasdaq:DECK).

A Future with Plenty of Options
There has always been a lot of merger and acquisition activity in the footwear industry, including the relatively recent announcement that VF Corp (NYSE:VFC) will buy Timberland (NYSE:TBL). It's worth wondering, then, where Wolverine sees itself in that context. Wolverine is not an especially large company, and certainly not prohibitively so. What's more, this is a company that is trading at a reasonable price, has a good history of cash flow and returns on capital, and excellent brands. Sort of sounds like a Berkshire Hathaway (NYSE:BRK.A) type of company, doesn't it?

At the same time, companies like K-Swiss (Nasdaq:KSWS) and Brown Shoe are beaten-down enough to where they could be targets if Wolverine wanted that sort of challenge - not too likely, admittedly, but still a possibility. Likewise, there are plenty of small one- or two-note footwear companies with a good brand or two but little leverage in manufacturing and marketing, and those could be good tuck-in deals if Wolverine wants to grow that way.

The Bottom Line
With the markets down as much as they are from earlier this year, there is no particular shortage of stocks trading 30% or more below fair value. In that respect, then, Wolverine is not exactly a unique opportunity. It is a solid company with growing brands, good management and good fundamentals, so it is certainly a reasonable idea in a tough market. (For additional reading, take a look at The Ups And Downs Of Investing In Cyclical Stocks.)

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