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. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  2. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  3. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  4. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  5. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  10. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
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