At the end of last summer, I concluded that Wolverine Worldwide (NYSE: WWW) intensified as equities recovered to pre-pandemic levels, and not just equities but operating performance as well. With the company that moves For a major direct-to-consumer and e-commerce player, amid reasonable valuations, the setup looked pretty good, but sadly, the title has fallen on hard times since then.
Fast travel down memory lane
Wolverine owns many (shoe) brands such as Merrell, CAT, his eponymous brand, Chaco, Puppies, Harley-Davidson, Spery and many more. Applications include work, hiking, boating, winter boots, military and sandals, as the company generated $2.3 billion in sales in 2019, before the pandemic. Operating margins were posted at 11% as the resulting earnings power of $2.25 per share led to undemanding valuations, with shares trading at $34 pre-pandemic, a multiple of 15 times, net debt of $600 million having been reduced to a leveraged ratio of 2 times.
Shares fell to a low of around $15 amid the outbreak of the pandemic, but recovered quickly as the company managed to limit cash burn, or at least losses, during the toughest times of the pandemic. the pandemic. 2020 sales fell 21% to $1.79 billion as adjusted operating margins of 7.5% were still quite respectable. The company forecast 2021 sales to recover to $2.2 billion, with adjusted earnings estimated at $2 a share as shares rallied to $32 in August, partly because net debt fell. just $350 million. The company further raised its full-year guidance to $2.4 billion in sales and adjusted earnings of $2.25 per share.
With the company backing a business valuation of $3 billion at the time, Wolverine announced a substantial deal with the purchase of Sweaty Betty for $410 million, acquiring a global fitness and lifestyle brand. which focuses on women. With $250 million in sales, the deal was valued at 1.6x sales, a modest premium to Wolverine’s valuation. This seems reasonable as the acquired businesses have huge online and direct-to-consumer channels, even if a multiple of 16x EBITDA was a bit higher.
With sales estimated at around $2.5 billion and earnings estimated at $2.30 per share, excluding the impact of the deal, the outlook looked pretty good, with shares trading in the middle of the thirties.
Amid all of this, I found the valuation not too demanding, but the company still faced great secular challenges as the company still had work to do to complete the transformation. I concluded that stocks looked relatively cheap, but needed more conversion and execution to create a sustainable business and therefore real appeal.
Since my take in August, the shares have lost some value, having retreated to the $30 mark at the end of the year, the shares have now fallen to just $23 per share. This disappointing share price action is the result of weaker operating performance. Along with the release of third quarter results, the company cut its 2021 guidance to $2.4 billion in sales and adjusted earnings from $2.05 to $2.10 per share, amid inflationary pressures and plant breakdowns in Vietnam, among others.
In February, the company released its 2021 results. Sales for the full year were $2.41 billion, adjusted earnings per share were $2.09 per share, with margins of operations adjusted to 10.6% of sales. GAAP earnings were just $0.81 per share, with the adjustments between the two metrics quite aggressive as the company made adjustments for the Sweaty Betty deal, but other things are a bit more questionable. : including higher air freight costs, shipping delays and other pandemic related items. tendencies.
For 2022, the company reported sales at just over $2.8 billion, suggesting a roughly $400 million increase in sales, mostly the result of the Sweaty Betty purchase. Despite inflationary pressures, the company sees adjusted operating margins around 11% with adjusted earnings between $2.30 and $2.45 per share.
Net debt was $806 million at the end of the year, with adjusted EBITDA around $290 million, making this leverage a bit higher, equal to 2.8 times the EBITDA here.
Although the leverage is a bit higher after the last deal, this is partly the result of some short-term cash flow conversion. Therefore, Wolverine’s pullback does not come alone, as investors fear a combination of inflation, slowing demand in Europe and deteriorating purchasing power seen by consumers around the world.
Considering all of this, the leverage is a bit higher than expected and the forecast for 2022 certainly carries some risk. On the other hand, stocks are trading at just 10 times adjusted earnings, as the adjustments are quite aggressive by any means, but the risks seem manageable. But increasing leverage in this heightened period of uncertainty is sadly ill-timed.
Weighing it all up, I still think the appeal has increased on a net basis and, while there are few imminent drivers, the valuations here look compelling enough to gain some exposure alongside other players in the sector. also.