Wolverine World Wide, Inc. (NYSE:WWW) has progressed on the company's plans for an operative turnaround. The company divested the Sperry brand in January and more recently signed a new licensing partnership. Also, the previously communicated cost control has now been increasingly implemented cutting costs. Still, investors need to be cautious around the turnaround's success as Wolverine's brands still show incredibly weak sales in Q1.
In my previous article, titled "Wolverine World Wide: Critical Improvements Highlighted In ICR Conference", I went over the company's strategic plans highlighted in the ICR conference for an operational turnaround; the company's deteriorating earnings and high debt had caused Wolverine's massive issues. The article was published on the 9th of January in 2024, and since, the stock has had a total return of 58% compared to an S&P 500 return of 15% in the same period as Wolverine's cost control has been great and as the divesture of Sperry was successful. I rated Wolverine World Wide at Hold in my previous article due to the fair-seeming valuation at the time.
Brand Portfolio Optimization Has Likely Concluded
Wolverine's planned brand portfolio optimization has progressed in recent months. At the time of my previous article, Wolverine had sold its intellectual property rights in China for Hush Puppies, had sold the Keds brand, divested the U.S. Wolverine Leathers business, and had plans to find alternative solutions for the Sperry brand.
Two days after my previous article was published, the sale of Sperry was announced on the 11th of January for total cash proceeds of $130 million, as the brand was sold to Authentic Brands Group and ALDO Group. The transaction had closed prior to the announcement, and the proceeds were used to pay off Wolverine's excessive debt.
The Sperry sale concluded Wolverine's announced plans of portfolio optimization - the company is now focusing on clearly improving the remaining brand portfolio's offering and marketing, as well as cost structure, to turn the organic operations into healthier earnings and growth.
A licensing partnership with Vida Shoes International was later published in May giving the company the rights for the Merrell and Saucony brands for kids' footwear and global rights for the brands' accessories and apparel, progressing the strategy of realizing value from Wolverine's brand portfolio. I believe that licensing partnerships should be great for Wolverine, as such partnerships give a low-risk and incredibly capital-light avenue for additional earnings.
The Sales Performance Has Still Been Terrible
Wolverine has reported the company's Q4 and Q1 financials after my previous article. In the Q4 report, Wolverine showed weakness across the board with a total -18.4% revenue decline from ongoing operations on a constant currency basis, with Sweaty Betty having the best performance at -11.8% in constant currencies compared to Wolverine's worst performance of -27.9%.
Yet, the gross margin was leveraged by 2.7 percentage points despite remaining high-cost inventories and lower sales. The adjusted EPS came in at -$0.30 in Q4, aided by profitability initiatives but still below the -$0.13 in the previous Q4 due to dramatically lower total sales.
The first quarter of 2024 followed with constant currency sales from ongoing operations falling by -25.1% to $390.8 million, showing an even poorer performance in Wolverine's current brands. The adjusted EPS came in at $0.05, lower than the $0.11 in the prior year but not as wide of a decline as in Q4 as Wolverine's cost control started to show even better signs - the adjusted gross margin was leveraged by 5.4 percentage points into 46.5%, and adjusted SG&A was cut by $18.6 million from the prior Q1.
After Q1, Wolverine expects revenues from ongoing operations of $1.68-1.73 billion in 2024, down -15.7% to -13.2% from 2023 as the figure excludes the recent divestitures. The estimate suggests continued weakness in 2024, but gradual improvements compared to the incredibly weak Q1 sales. The adjusted EPS is expected at $0.65-0.85, up from just $0.05 in 2023.
While the cost savings potentially adding up to a total of $215 million on a run-rate basis as told in the January ICR presentation are great to drive short-term earnings gains in 2023, 2024, and likely in 2025, the falling sales have only made earnings worse for Wolverine. The cost cuts are only a temporary measure to keep up with falling sales. The brands continue showing an incredibly weak performance across the board, and an eventual recovery in demand is necessary for the company to sustainably generate healthy earnings, especially considering the remaining debt. The outlook expects gradual improvements in sales, and investors should keep an incredibly close eye on upcoming quarters - the sales performance currently plays a key role in the investment as a whole.
Will Demand Pick Up?
To combat the sharp, unhealthy decline in sales, Wolverine has been increasingly active in bringing out new shoe models - especially the Saucony brand has seen major product innovation and marketing efforts, outlined by the company's continuous new press releases including releases such as Guide 17, Saucony x Bodega, updated Endorphin Speed 4, and redesigned Triumph 22 all being released from February 2024 forward. Saucony's marketing has also been activated with the signing of runner Vanessa Fraser in March. The Wolverine brand has also seen a good number of updates.
Some of the new Saucony shoes have been noticed to sell well recently - it was reported on the 2nd of May that Williams has upgraded the stock's rating due to great sales prior to the Q1 report that beat revenue estimates clearly. The shoes could start to only gradually show in Saucony's total growth, though, as in Q1 Saucony's sales fell by -24.7% in constant currencies.
I believe that investors should take better growth estimates cautiously. The company has clearly activated product innovation and marketing, but any success in financials is yet to be seen. I believe that the base scenario is cautiously optimistic as especially the brand Saucony refreshment has been significant.
Updated Valuation - Balanced But Likely Turbulent
I updated my discounted cash flow [DCF] model from my previous estimates to account for the Sperry divesture and other financial performance. I now estimate the FY2024 revenue outlook mid-point, and revenue growths of 7%, 5%, and 3.5% in the following years sequentially as the improved product and branding efforts cause growth. Afterwards, I estimate stable 2% growth.
The revenue estimates differ from my previous estimates largely, estimating stronger mid-term growth as the short-term weakness has continued stronger than previously anticipated and as the product & brand turnaround has been more clearly already implemented.
As Wolverine's cost control has proven to be incredibly effective, I have raised my margin estimates from an eventual EBIT margin level of 7.0% to 8.5% despite short-term sales declines eating away short-term profitability - the cost control measures look to improve earnings in 2024 and likely beyond. I've also slightly adjusted the cash flow conversion upwards as lower sales require less working capital and Wolverine's capex has continued on a low level despite greater product innovation.
The estimates put Wolverine's fair value estimate at $12.85, 7% below the stock price at the time of writing showing a fairly balanced risk-to-reward. I believe that investors should still be cautious - the DCF model estimates quite a successful brand turnaround in the next couple of years, which could either happen stronger or weaker than the model anticipates causing wide turbulence to the fair value estimate with Wolverine's high debt. The fair value estimate is up from $9.44 previously due to the demonstrated great cost control measures raising margin estimates, as well as the cut debt.
A weighted average cost of capital of 9.32% is used in the DCF model. The used WACC is derived from a capital asset pricing model:
In Q1, Wolverine had $12 million in interest expenses, making the company's interest rate 5.60% with the current amount of interest-bearing debt. As the equity valuation has gone up and Wolverine has managed to pay down some debt, I now estimate a long-term debt-to-equity of 60% instead of the prior 80%.
To estimate the cost of equity, I use the United States' 10-year bond yield of 4.27% as the risk-free rate. The equity risk premium of 4.60% is Professor Aswath Damodaran's latest estimate for the United States, updated on the 5th of January. I have kept the beta estimate the same at 1.71. Finally, I add a liquidity premium of 0.25%, creating a cost of equity of 12.39% and a WACC of 9.32%.
Takeaway
Wolverine's strategic turnaround has progressed, as Sperry was sold in January and a new licensing partnership has been signed. Yet, investors should be extremely cautious in upcoming quarters - while Wolverine has demonstrated impressive cost control, all of the company's remaining brands have continued performing incredibly poorly in Q4 and Q1. A product innovation and branding update has recently been clearly implemented especially for the Saucony brand, and investors need to keep an eye out for improved sales that the 2024 sales outlook gradually expects during the year. The valuation seems to be fair, and I remain at a Hold rating for Wolverine World Wide despite a likely turbulent short-term outlook.