Hedgeye Retail sector head Brian McGough presents his Best Idea, footwear maker Wolverine World Wide (WWW). The short takeaway is that Brian really likes this stock. He likes it for short-term traders. He likes it for long-term investors. He likes it for cautious buyers waiting for the right entry time. He flat-out likes it.
Over the next 2-3 years, Brian looks for this stock to be at least a double. Unless, of course, lots of things go right, in which case WWW, which currently trades in the low $50s, could soar well above the $100 mark.
Here’s the breakdown.
A Look Under the Hood at WWW:
WWW has complex set of footwear brands, including lots of household names like Stride Rite, Hush Puppies, Merrell and Patagonia. But if you remember the famous “80/20 Rule,” it will not surprise you to learn that, out of about 15 brands, the top seven brands account for over 80% of WWW’s revenues – the top three brands make up half the company’s sales. (OK, we recognize it’s not exactly 80/20, but the concept is solid. Would you rather we called it “a log-normal distribution”?)
This well-managed company offers products under three headings: Heritage (with such brands as Wolverine and Harley Davidson), Lifestyle (Sperry, Keds, Stride Rite), and Performance (Saucony and Merrell). In clear distinction to another well-known retailer, Payless – from which WWW acquired both the Sperry and Keds brands – WWW’s sales network operates on a uniform platform globally, providing maximum efficiency in all markets.
Brian’s projections for WWW’s earnings are meaningfully above the consensus. So much so, says McGough, that he believes the stock could be accorded a higher multiple today. McGough estimates 2013 EPS at $2.73, versus Street consensus of $2.63. By 2016, McGough is modeling $5.64, well above the consensus of $4.24.
WWW is a top-line story. So much of the cost of their business is built into their efficient distribution network that nearly all of every incremental dollar of sales revenues turns into earnings. (We told you it’s a well-run company!)
The big story here, says McGough, is a convergence of a trend in improving operating margins, together with an improvement in operating asset turns. Calling this “a rare, rare instance where both are improving together,” McGough sees a further catalyst in the general trend as peak revenues start to roll over and fade in the retail group as a whole. Thus, WWW stands out both on a comparative and on an absolute basis.
Where We Are Different
McGough says WWW is the most global footwear company of all. Fully 65% of its unit sales are outside the US, far above such visible global brands as Nike and Adidas. So it may seem counterintuitive that they recently purchased two of the least global names: Keds and Sperry. Sperry are the folks who make Topsiders. Right, the boat shoes. But wait, there’s more…
In contrast to WWW’s global reach, Sperry sells 95% of its products in the US. McGough says this is a well managed brand with a talented management team, but without the capital or the network from expansion. McGough expects WWW’s global platform to quickly add Sperry sales overseas, with a boost to the top line.
Together, “without making heroic assumptions,” McGough expects the Keds / Sperry combo to easily add 4%-5% top line growth. McGough points out that WWW has done this before. They took the Cushe brand from $10 million in revenues in 20 countries when WWW acquired them in 2009, to $50 million in 100 countries today.
In 1997 WWW bought Merrell, a brand doing $27 million in sales. After the acquisition Merrell grew between 20%-25% annually for 15 years and is closing in on $600 million in sales today. Now that’s management!
OK, so why isn’t WWW already at over $100?
For one thing, people think it’s pricey. “It’s expensive, and I missed it already” we hear.
McGough agrees. WWW is expensive. It’s built to be expensive, and McGough thinks it will only get more expensive.
Some folks criticize the Keds acquisition as being way too costly. McGough recalls the same criticism when Nike bought Converse. “It was expensive and everybody thought it was stupid.” Oh, and it turned out to be Nike’s best deal, more than ten times over the profitability of anything else they acquired.
WWW’s strategy with Keds includes a fashion deal with Kate Spade and a tie-in with Taylor Swift, moves that have already boosted Keds’ revenues by around $25 million.
Let’s just say these aren’t your grandfather’s boat shoes. The category known as “boat shoes” has undergone not just a transformation, but a radicalization. McGough disagrees with those who think this “boat shoe cycle” will blow over. He says the category has been permanently redefined, with broad new fashion offerings that speak to a wide range of ages and lifestyles.
[PUT IN HERE SLIDE 25, OR MAYBE 27, TO SHOW WHAT NEW “BOAT SHOES” LOOK LIKE]
So, what if we’re wrong? McGough says if the Sperry brand fizzles, it’s less than a 2% hit to revenues, providing a good risk / reward scenario.
McGough says the technical picture for the stock is “extremely bullish.”
The stock is in an odd position. Everyone says “it’s too expensive and I already missed it.” And no one seems to like it, which means there aren’t too many folks waiting to sell their positions – they don’t own it. (McGough notes that WWW has historically performed well regardless of sentiment, so maybe it’s a sort of Ultimate Contrarian play.)
McGough likes this “expensive” stock right here, right now. His model indicates WWW could produce 25% EPS growth over the coming 3 years, while at the same time taking down debt levels, a combination that he believes should have the stock trading at more than a double over the next 2-3 years.
The risks are the stock’s already high price and implied P/E of over 30. But McGough thinks for the downside to be realized, WWW needs to suffer a combination of bad European sales, a horribly bad winter both here and overseas, and a complete failure of the “new boat shoes” model.
It isn’t often that an analyst likes a stock for short-term Traders and for long-term Investors. McGough likes WWW for both – and even for intermediate-term Undecideds. Expensive today. Lots more expensive over the next couple of years.
Moshe Silver, Managing Director
Copyright © 2013 by Hedgeye Risk Management LLC
Read the Hedgeye e-book Fixing A Broken Wall Street at http://tinyurl.com/cqgter9