LaylaBird
LaylaBird
Shares of Wolverine World Wide, Inc. (NYSE:WWW) have seen very tough times as of late, with shares down three quarters from a 2021 high, now back to levels last seen in the 2000s.
Known from its namesake Wolverine Boots, Hush Puppies and Merrell, the shoemaker has been hit hard by a range of developments, mostly relating to being overextended in terms of debt, number of brands, inventory while secular headwinds.
In an effort to grow by shrinking the business, I am not convinced about the strategy, making me very cautious to get involved as management does not have credibility on its side.
Founded in 1883, Wolverine has a long and rich history and became a publicly listed company in 1965. What followed were numerous acquisitions and partnerships, but a decisive action was the 2012 purchase of the Performance Lifestyle Group of Collective Brands.
As of now, Wolverine focuses on consumer-obsessed, authentic and innovative brands, focusing on helping consumers live healthier and productive lives. Three quarters of the business is made out of the wholesale channel, complemented by a direct-to-consumer model in which the e-commerce sales outweigh the sales though own stores. About half of sales are generated in the U.S., about a quarter in Europe and the Middle-East, complemented by activities in the wider Asia-Pacific region, Latin America and Canada.
Brands carried by the business include Merrell, Saucony, Sweaty Betty, Wolverine, Hush Puppies, Harley-Davidson, Cat and Chaco, among others. The first brands mostly include the so-called active group, responsible for about three quarters of sales, complemented by the work group, responsible for the remainder.
There are some real problems, however, as this was a $2.7 billion business in 2015, at the time posting decent operating margins around 10% of sales. Through 2022, sales were dead flat, with operating margins cut in half as the company has been in restructuring mode ever since.
This resulted in some brands and business lines being sold, inventory being cut, debt being reduced, in order to address margins, positioning and the financial footing of the business.
In February, Wolverine World Wide announced its 2023 results, with full year sales down nearly 17% to $2.24 billion, driven by divestments. This includes the February 2023 sale of Keds, the sale of US Wolverine Leather in August 2023, and the non-U.S. Wolverine Leather business being divested in December 2023.
Amidst many moving targets, the company posted a GAAP operating loss of $68 million, but results were aided by $90 million gain on asset sales, offset by $185 million in impairment charges. Adjusted for many items, the company squeezed out a tiny profit of $0.15 per share (comparing to a $1.37 per share number in 2022).
Despite all these efforts, in terms of divestments, net debt came in at $740 million by year-end, for a 2.9 times leverage ratio. With 80 million shares trading around the $10 mark, the market value of the firm approximates the net debt load.
For 2024, the company sees sales between $1.70 and $1.75 billion, down between 12 and 15% on a comparable basis, but down more on a reported basis due to divestments. Operating margins are seen around 5% and change, suggesting that operating earnings might come in close to $100 million. Adjusted earnings are seen around $0.75 per share, with net debt seen down to $575 million, driven by a combination of divestments, retained earnings and further inventory reductions.
Despite the somewhat challenging outlook and poor performance, the company continues to pay out quarterly dividends of $0.10 per share, for a yield of roughly 4% here.
Early in 2024, Wolverine announced that it has sold its Sperry brand to Authentic Brands Group in a $130 million deal, going a long way in reducing net debt in 2024. This is a substantial deal, as Sperry generated $207 million in sales in 2023, suggesting that a near 0.7 times sales multiple has been fetched.
The company posted minimal operating losses and minimal adjusted operating profits, more or less in line with Wolverine at large. In comparison, all of Wolverine is now valued at an enterprise value of about $1.4 billion on a pro forma basis at $10 per share, suggesting that the business trades at around 0.8 times sales seen this year and that the price fetched for Sperry looks in line, but certainly is not spectacular.
The latest deal makes that Wolverine has seen its sales come down by around a billion since its peak, as such declines painful as we recognize that peak sales were achieved already a decade ago, certainly if one accounts for inflation seen in the meantime.
This is very painful for investors as the company still carries some debt, and despite divestments of some lower performing assets, the pro forma earnings power is still not convincing as Wolverine simply does not have credibility on its side here.
Let's, for a second, assume that over time the company can return to post operating margins of 10% on a $1.75 billion revenue base, resulting in EBIT of $175 million. In such a case the company carries along about $600 million in net debt, which could cost about $30 million in interest, as statutory tax rates around 25% could yield net earnings of $109 million, resulting in earnings power of $1.35 per share.
Given that many peers trade at teens or mid-teens earnings multiple, Wolverine World Wide, Inc. stock upside seems limited to $20 per share, but requires some heavy work. Given all this, the potential is not enticing enough given risks to the execution and long term lackluster performance, making me very cautious here, as I have no reason to get involved.