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Wolverine (WWW) Stock Declines 11% Despite Q4 Earnings Beat

Zacks Equity Research

Wolverine World Wide, Inc. WWW reported fourth-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues were almost in line with the same. The company’s bottom line also improved year over year buoyed by impressive gross margins, lower interest expenses and reduction in operating expenses.

However, the better-than-expected performance was not enough to placate investors who seem to be let down by management’s muted outlook for 2019 as well as revenue decline in 2018. Management envisions earnings per share of $2.20-$2.35 for 2019. The mid-point of $2.28 is below the Zacks Consensus Estimate of $2.33.

Shares of Wolverine decreased approximately 11% during the trading session on Feb 20. Also, this Rockford, MI-based company has lost 8.3% against the industry’s 0.9% growth in the past six months.

Q4 Highlights

Wolverine’s fourth-quarter adjusted earnings of 52 cents per share exceeded the Zacks Consensus Estimate of 49 cents. Notably, this marked the company’s fourth straight quarter of positive earnings surprise. The bottom line also surged 26.8% from the prior-year period number primarily due to decline in cost of goods sold, fall in interest expenses and lower environmental cost.

Revenues came in at $579.6 million almost in line with the Zacks Consensus Estimate of $580 million. While underlying revenues increased 3.8%, the metric improved 4.6% on a constant-currency basis.

Wolverine World Wide, Inc. Price, Consensus and EPS Surprise

Wolverine World Wide, Inc. Price, Consensus and EPS Surprise | Wolverine World Wide, Inc. Quote

Segmental Performance

The Outdoor & Lifestyle Group’s underlying revenues grew 8.4% (10% in constant currency) year over year owing to impressive performance by the Merrell brand that grew at a double-digit rate. This marked the eighth straight quarter of revenue growth for the brand. Further, revenues at Cat improved at a mid-single-digit rate, while it increased at a high teens pace for Chaco. At Hush Puppies the metric remained flat year over year.

At the Boston Group, underlying revenues improved 2.4% (2.8% in constant currency) compared with the previous-year figure. Sperry grew in high single-digits including low single-digit improvement from Keds and double-digit surge in kids business. However, revenues at Saucony decreased by mid-single-digits.

Underlying revenues at the Heritage Group grew 7.9% (8% in constant currency). Wolverine and Bates brands’ revenues increased in mid-single-digits each. Harley-Davidson witnessed solid double-digit revenue growth, whereas HYTEST revenues improved at a mid-teens rate in the quarter under review.

Moving on, the company’s adjusted gross profit grew 1.9% to $227.1 million, while gross margin improved 70 basis points (bps) to reach 39.2%. The gross margin expansion was driven by last year’s portfolio amendments, strong e-commerce growth and lower closeout sales.

Further, adjusted operating profit came in at $62.1 million, down from $63.4 million in the previous quarter. Meanwhile adjusted operating margin contracted 30 bps to 10.7%. Higher SG&A expenses resulted in operating margin decline.

Adjusted SG&A expenses increased by $5.7 million to $165 million due to costs associated with digital, marketing and other investments.

2018 Highlights

In 2018, Wolverine’s adjusted earnings of $2.17 per share outpaced the Zacks Consensus Estimate of $2.15. Also, the bottom line increased 32.3% year over year. Revenues totaled $2.2 billion, which matched the Zacks Consensus Estimate. However, the top line declined 4.7% on year-over-year basis.

Other Financials

This Zacks Rank #2 (Buy) company ended the quarter with cash and cash equivalents of $143.1 million, long-term debt of $438 million and stockholders' equity of $991.6 million.

In the quarter under review, the company repurchased shares worth approximately $105 million.

Other Developments

Wolverine is on track with its GLOBAL GROWTH AGENDA that encompasses three key strategies namely Powerful Product Creation Engine, Digital-Direct Offense and International Expansion. The company seeks to create a strong, innovative and fast product pipeline, and undertook roughly 45% of incremental investment in 2018.

Furthermore, Wolverine is making efforts to enhance its digital capabilities and allocated nearly 35% of its spending to this arena during 2018. The company expects to make similar investments in 2019.

2019 Guidance

Management remains focused on investing in organic growth, strategic buyouts and efficient capital allocation. To this end, Wolverine announced a new four-year share buyback plan of up to $400 million. Markedly its capital deployment strategy includes plans to hike the quarterly dividend by 25%.

For 2019, Wolverine expects revenues to be in the range of $2.28-$2.33 billion, reflecting 3% growth.

Gross margin for the year is expected to be in the 41.3-41.8% band. Wolverine anticipates adjusted operating profit of $280-$294 million. Further, it expects adjusted operating margin in the range of 12.2-12.6%. This includes a $40 million impact from ongoing investments related to the Global Growth Agenda.

Cash flow from operations is expected to be between $200 million and $220 million. Management envisions adjusted earnings in the range of $2.20-$2.35 per share for 2019.

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