Here Is The Next Hero!
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wolverine World Wide (NYSE: WWW), a footwear and apparel retailer, is becoming attractive recently. In my article, I talked about how this retailer is strategizing its moves which can be fruitful in the long run. Among its strategies of expanding its footprint in emerging markets and combating rising input prices, it had a particular strength to look forward to – its acquisition of Collective Brands’ (NYSE: PSS) performance and lifestyle business.
Wolverine is expecting to complete the buyout in the next quarter. Through this acquisition, Wolverine intends to expand its offerings in the women, casual, and children’s collection. The announcement of the acquisition has already delighted Collective Brands’ investors sending the stock prices north. The addition of 4 new brands in Wolverine’s kitty will play a major role to boost its lifestyle business which has already been showing growth.
But it is also important to understand how Collective Brands has been doing; this should provide a better picture of how the acquisition affects Wolverine. The target had recently posted its quarterly results that were much better than its previous quarters.
Rising input costs had been taking a toll on its earnings, pushing its earnings into red each time. But cost inflation was not alone responsible for losses made each quarter. If that was the case, then its industry peers like Foot Locker (NYSE: FL) would not have been posting great results. Collective Brands had other serious issues which were dragging its results down.
Probable Causes…
The company was unable to manage costs efficiently, and took a hit on margins in the process. Also, inventory levels were not taken care of, which led to higher costs. And most importantly, Collective Brands lacked product innovation. The retail industry requires continuous development of new product designs to keep customers hooked.
This is where other retailers such as Foot Locker and Nike (NYSE: NKE) specialize. They have been continuously launching new products and designs to meet the changing tastes and preferences of customers. Nike’s flyknit technology, among many other product launches, has been an attraction for their customers. Digital products such as Nike+ have worked well, especially with the timing of Summer Olympics and European Football Championship. Even Foot Locker’s innovation with new and different colors to its footwear attracted great customers’ attention.
On the other hand, Collective Brands had been quite inactive on this front. Additionally, subdued promotional efforts in an environment where customers need to be lured to stores affected the retailer. Hence, the footwear retailer started closing down stores which were not very profitable and unviable. The store closures again brought more costs to the company and reduced both top and bottom line numbers.
End to Miseries…
Hence, the retailer seemed to be in a bad loop where miseries were endless. However, the shoe maker did not lose hope and pulled up its socks for a turnaround. Easing of cost inflation along with proper strategic initiatives taken by Collective Brands appeared in its second quarter results this time. With strong cost cutting initiatives accompanied by proper inventory management, the retailer witnessed a 100% year over year jump in its adjusted earnings, clocking $21 million.
Even though it closed down more than 350 stores in the last year, the company managed to register a top line growth of 0.4% to $886 million which is appreciable. The major boost came from its Performance and Lifestyle segment, which grew 6% during the quarter. Moreover, its emphasis on providing value to the budget conscious consumers through its new Payless strategy helped drive revenue with same store sales growth of 2.9%.
If we look at the store mix of the retailer, it is clear that the company followed a safe strategy which made its cost structure light and reduced risk. On one hand, it closed down its wholly owned stores and on the other, it increased its franchised stores which reaped huge benefits. This way Collective Brands cut down on its costs and managed to drive revenue at the same time. Wolverine might benefit with this kind of cost structure which can help drive its bottom line further.
The Target Becomes Even More Attractive
Collective Brands has fought the battle hard but it was late enough to be implemented till it finally decided to sell itself. The strategy of closing down unprofitable stores worked well for the company, giving better results and making them more focused on the potential ones. Also, focus on everyday value products attracted customers’ attention. However, Collective Brands has given 50% returns to the investors since the start of the year which is quite remarkable. Hence, Wolverine’s decision of acquiring this potential footwear giant was well taken since these positives will help the acquirer grow into a bigger industry player.
Bottom Line
With great efforts Collective Brands made a strong comeback in the customers’ minds. Customers’ loyalty for the brands it offered is expected to continue. This can go a long way to benefit Wolverine. Wolverine will be taking up the Performance and Lifestyle Group which was the star performer this quarter. After the acquisition Wolverine will have 16 lifestyle brands to offer to its shoppers giving them a wide variety. With a year-to-date return of 32% to investors the company seems to be right on track with greater value to offer. Investors should take notice of this global player getting big.
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