Looking Beyond Wolverine’s Second Quarter Earnings

By Himanshu Poddar - July 16, 2012 | Tickers: PSS, FL, NKE, WWW | 0 Comments

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Here is another retailer which has fallen prey to the European markets' soft demand. Wolverine World Wide (NYSE: WWW) posted lackluster second quarter results that failed to meet analysts’ expectations. But a stellar guidance, boosted by the proposed acquisition of Collective Brands’ (NYSE: PSS) performance and lifestyle business, helped the company appease investors, and the stock surged. Let’s understand what the quarter has in store for us.

Analyzing the Underperformance

Hit hard by the soft retail environment in Europe, revenue for the quarter stood at $312.7 million, flat from last year. Another hiccup for the footwear retailer was higher product prices, which impacted volumes negatively. The price hike was a small measure to fight cost inflation, and it didn’t help Wolverine’s profit much. Even the previous quarter's results were adversely affected by weak European demand, which is now becoming a trend for retailers.

Increasing commodity prices are weighing heavily on retailers and consumers. Wolverine’s peers such as Nike (NYSE: NKE) and Foot Locker (NYSE: FL) have been bearing the pain of sluggish demand in Europe and increased commodity prices. This has hurt their revenue and net income, as consumers aren’t exactly welcoming the price increase.

Coming back to Wolverine, adding to the quarter’s woes were the unfavorable impact of foreign currency translation and costs related to the acquisition of Performance + Lifestyle Group from Collective Brands, a leading lifestyle footwear retailer; the acquisition is expected to be completed in the third quarter.

Some Bright Points to Note…

Though the quarter was not a terrific one, it did come with a silver lining. The footwear giant enjoyed a tax benefit of $0.07 per share, which helped it in offsetting pending acquisition costs to some extent. It also performed well in its outdoor segment, which grew 2.7% to $130.6 million. Its Merrell brand was the strongest among its 12 brands.

Compared to its competitors, Nike and Foot Locker, the Michigan-based company has been less active strategizing its moves to boost sales while its peers are planning new products. But with the close of the PLG acquisition it will add another four strong brands to its kitty. The addition of the Collective Brands unit is expected to be very beneficial for the company, adding 25 to 40 cents in earnings per share.

Moreover, to overcome its dependence on the European market, Wolverine has been expanding its international presence through joint ventures. Its expansion in Columbia and India will prove to be fruitful, since emerging markets will push up revenue for the retailer, along with bringing the benefits of diversification.

All these positive points, backed up by larger orders, have led the company to raise its guidance for the year. It expects revenue to grow 6.4%, clocking between $1.46 billion and $1.50 billion for the year in spite of a weak performance. The earnings outlook is even better, between $2.70 and $2.80 per share, which is a growth of 9% to 13% over the previous year.

My Takeaway

Wolverine World Wide has been busy making itself solid and tough so that it can combat economic headwinds. Though this quarter wasn’t a great one for the company, it has a lot of potential. Moreover, its expansion into emerging markets will probably help it to some extent in tiding over Europe’s low demand. This will diversify risk. Lastly, its move to add the lifestyle brand is being looked forward to by all investors. I think it might be the right time to give this stock a thought.

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