PSS Collective Brands, Inc.

Wolverine World Wide Inc. (WWW), one of the leading designers, manufacturers and marketers of branded footwear and apparel, recently posted lower-than-expected second-quarter 2012 results.

Unhurried sales and decline in profitability took a toll on the company’s earnings as Wolverine reported adjusted quarterly earnings of 41 cents a share, down 14.6% from the prior-year quarters’ earnings of 48 cents and missed the Zacks Consensus Estimate of 44 cents.

Including one-time items, earnings came in at 42 cents a share, down 12.5% from the year-ago quarter.

Wolverine, the seller of products under Harley-Davidson Footwear, Hush Puppies, Merrell and other brands, marked an increase of 0.8% in its top line to $312.7 million. However, the reported revenue came below the Zacks Consensus Estimate of $314 million.

Secular headwinds and lingering concerns over the European market spoiled sales during the quarter. Further, foreign exchange added fuel to the fire by negatively impacting revenue.  

Coming to the operating groups, revenues increased 2.7% year over year to $130.7 million for Outdoor, while it decreased 3.4% to $99.4 million for Heritage and 0.5% to $41.3 million for Lifestyle.  Other business units, comprising Wolverine retail and leathers, posted a revenue growth of 8.5% to reach $37.8 million.

Gross profit decreased 3.4% year over year to $118.1 million during the quarter, whereas gross margin contracted 160 basis points to 37.8%. Management stated that increased input costs and unfavorable sales mix shift pulled down gross margins.  

Adjusted operating profit plunged 16.7% to $27.8 million in the quarter, while adjusted operating margin shrinked 190 basis points to 8.9%. However, including one-time items, operating profit decreased 31.5% to $22.8 million, whereas operating profit margin decreased 350 basis points.

In a separate development, Wolverine announced the acquisition of Collective Brands’ (PSS) Performance + Lifestyle Group (PLG) unit. The PLG unit sells footwear and related products, both wholesale and retail, for children and adults under popular brands including Stride Rite, Sperry Top-Sider, Saucony, and Keds. 

The deal is expected to provide ample opportunities to Wolverine to boost its growth prospects while facilitating the company to enhance its portfolio of brands. The company expects to close the deal during third quarter or early in fourth quarter.

Other Financial Aspects

Wolverine ended second-quarter 2012 with cash and cash equivalents of $156.6 million with no long-term debt and shareholders’ equity of $627.6 million.

Management Backs Guidance

Despite soft results, management remains optimistic for the coming quarters and maintained its earnings guidance for the current fiscal. Wolverine expects fiscal 2012 earnings between $2.70 and $2.80 a share, representing a growth of 8.9% to 12.9% from the prior year.

Moreover, Wolverine expects total revenue in the range of $1.46 billion to $1.50 billion for fiscal 2012, reflecting a year-over-year growth of 3.6% to 6.4%.

For the third quarter of 2012, the company expects revenues to be in the low-to-mid-single-digit range, while earnings are expected to remain flat year over year.  

Rockford, Michigan-based Wolverine enjoyed increased momentum in fiscal 2011, which we expect to continue into fiscal 2012. Moreover, we believe that the company remains well positioned to increase its market share on the strength of its brand portfolio. The Merrell brand has been the key growth driver in the past decade, and we expect it to catalyze future growth.

Currently, we are maintaining a long-term ‘Neutral’ rating on the stock. Moreover, Wolverine, which competes with Timberland Co. (TBL), Deckers Outdoor Corporation (DECK) and Skechers USA Inc. (SKX), has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.

 
DECKERS OUTDOOR (DECK): Free Stock Analysis Report
 
COLLECTIVE BRND (PSS): Free Stock Analysis Report
 
SKECHERS USA-A (SKX): Free Stock Analysis Report
 
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WOLVERINE WORLD (WWW): Free Stock Analysis Report
 
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