Starting around September of this year, the next couple of years at Wolverine (NYSE:WWW) could be very interesting. The billion dollar-plus acquisition of Collective Brands' (NYSE:PSS) Performance and Lifestyle Group holds the promise of transforming the company from a high-return/low-growth cash-farmer into a company that produces both robust returns and solid growth. Against that backdrop, a two-cent miss in quarterly earnings just doesn't seem like a big deal and this looks like a stock that could still be an attractive buy today.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Second Quarter Results Frame the Need for the PLG Deal
Wolverine's fiscal second quarter results weren't poor, but they do highlight some of the challenges that may have inspired the aggressive acquisition move.

Revenue rose less than 1% this quarter, with the large Outdoor Group seeing nearly 3% growth, while Heritage dropped more than 3% and Lifestyle fell about half a point.

While the company had a slight miss on revenue, it had a more substantial miss on gross margin. Due in part to closeouts, gross margin fell 160 basis points. While Wolverine management didn't do anything unexpected on the SG&A line, the slightly higher spending here, coupled with the lower gross margin, drove a 17% drop in operating income and that two-cent miss in EPS.

SEE: The Most Important Metrics For Earnings Season

PLG Is an Opportunity to Change
There's nothing wrong with the business Wolverine already has; the company produces good returns on capital and solid free cash flow, while also boasting a very solid international business. That said, there's also nothing wrong with injecting some growth into the model.

The PLG deal is going to give Wolverine multiple opportunities to drive improved performance. The star brand of the deal, Sperry, is quite strong and could be an even bigger threat to the likes of Nike's (NYSE:NKE) Converse with Wolverine's better international distribution. Likewise, Saucony's presence in athletic and specialty stores brings new sales channels to Wolverine, and PLG's much greater exposure to department stores like Kohl's (NYSE:KSS) could also open this channel wider for Wolverine's other brands.

SEE: Free Cash Flow Yield: The Best Fundamental Indicator

It's probably not fair to compare this deal to VF's (NYSE:VFC) acquisition of Timberland, but I do believe it could do a lot of good for Wolverine. At the same time, the large amount of debt that Wolverine is taking on makes good execution critical. Clearly not all acquisitions go as planned (as companies like Brown Shoe (NYSE:BWS) have learned), and any missteps or disappointments in terms of synergies are going to result in swift punishment from the market.

The Bottom Line
Given the reputation and last performance of Wolverine's management, I'm surprised that these shares trade where they do - I would have thought that the market would have already dialed in a lot of incremental value for the PLG deal. Then again, some of this could be due to the weak conditions in the European market (a major market for Wolverine) and the risk of further cost inflation in China.

SEE: 5 Other Countries Affected By A Troubled Europe

All in all, I like the PLG deal and I'm not really bothered by this quarterly miss. There's some risk that management is maintaining expectations that are too high for the rest of the year, and investors should be a little careful about building a full position ahead of the next earnings report. That said, when considering the long-term potential of the soon-to-be larger Wolverine, it's hard not to like these shares today.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  9. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center