Wolverine World Wide, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A global designer, marketer and licensor of a wide range of quality footwear, apparel and accessories, with a portfolio of owned and licensed brands, operating through retail and e-commerce channels, wholesale and licensing divisions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Wolverine World Wide (WWW) operates a diversified portfolio of well-known footwear brands like Merrell, Saucony, Sperry, and Wolverine, along with licensed brands such as Cat and Hush Puppies. The company generates revenue through a variety of channels: wholesale, direct-to-consumer, and licensing.

Business Overview

Wolverine World Wide (WWW) is a global footwear and apparel company. Here’s a breakdown:

  • Brands: A mix of owned (Merrell, Saucony, Sperry, Wolverine, Keds, Stride Rite) and licensed (Cat, Hush Puppies, Harley-Davidson) brands catering to various consumer preferences.
  • Channels:
    • Wholesale: The company sells products to department stores, sporting goods chains, independent retailers and distributors globally.
    • Direct-to-Consumer (DTC): They operate their own retail stores and e-commerce platforms, allowing for direct sales to consumers and better control over brand experience.
    • Licensing: Licensing their brands to third parties, which allows for expanded distribution and revenue generation.
  • Geographic Presence: WWW has a global presence with significant sales in North America, EMEA (Europe, the Middle East and Africa), and Asia Pacific.
  • Global Footwear Market: The global footwear market is large and competitive, encompassing a wide range of brands and price points.
  • Shifting Consumer Preferences: There’s a notable trend toward athleisure footwear, a combination of athletic and casual styles which has driven recent growth for athletic brands. Consumers are also increasingly seeking comfort, sustainability, and versatility in footwear.
  • E-commerce Growth: The rise of online shopping has been a significant driver of growth in the footwear market. Consumers are looking for a seamless experience in both digital and physical channels.
  • Sustainability Concerns: Environmental concerns have been leading to a greater emphasis on ethical and sustainable sourcing of raw materials as well as production processes.
  • Increased competition : Competition from athletic, fashion, and outdoor brands that continually reinvent themselves, requires constant investments and innovations in the products and brand building efforts.

Competitive Landscape

  • Highly Competitive: The footwear market is intensely competitive, with numerous global and regional players, from large corporations to smaller, niche brands.
  • Key Competitors: Competitors of WWW include behemoths like Nike, Adidas, Deckers and also many smaller players.
  • Pricing power: Pricing power varies depending on the brands and categories. Some brands have better ability to charge premium prices based on brand strength or differentiated products.

What Makes Wolverine Different?

Wolverine World Wide’s key differentiator is the combination of a diverse portfolio of heritage brands across multiple categories, and its ability to innovate and meet consumer needs through product design and technology.

  • Diverse portfolio: The portfolio provides a level of diversification across different consumer tastes and price points.
  • Brand heritage: Some of their brands have a rich history and strong brand equity in particular categories.
  • Innovation and quality: They are focusing on new material sourcing, processes, and product design to increase quality and reduce costs.

Moat Analysis: 2 / 5

Wolverine World Wide has a very weak moat, at this current moment. Here’s why:

  • Brand Strength : While they do own several strong brands with a rich history, brands like Merrell, Saucony, and Sperry are constantly challenged by competitors with innovative and highly sought after products. The company has a broad portfolio with high and low-profile brands, rather than having only great ones. This mix makes its brand power only moderately strong compared to other players.
  • Scale and Distribution : Wolverine does not show any substantial distribution or scale advantage over its competitors. Its reach is mostly regional, and a large part of its revenues are still dependent on wholesales.
  • Switching Costs & Network Effects : The company’s offerings don’t benefit from network effects or high switching costs, a factor that can lead to greater consumer loyalty and recurring revenues. The cost of switching shoe brands is negligible, and customers do not benefit from using one particular shoe brand, over another.
  • Proprietary Technology/Patents: The company does not have a strong record of patents or proprietary technologies. It focuses on innovative materials and manufacturing processes, but other companies can access similar materials and processes, making it hard to defend its innovation efforts.
  • Intangible Assets: There are no valuable licenses that the company has. Their brand recognition is the primary asset they own, but competitors also own highly sought after brands that compete with them directly.

Based on the above, it can be inferred that Wolverine World Wide doesn’t have a strong moat due to the lack of a unique and sustainable advantage. The company earns a low rating because it lacks significant barriers to entry and struggles to develop long lasting differentiation. Competition is too high, and any perceived differentiation from the company is quickly neutralized by other competitors. While brands offer some differentiation, the competition is fierce, and the brands are easy to substitute.

Risks to the Moat

  • Competition: Intense competition from major athletic brands, new fashion players, and fast-growing DTC brands threatens Wolverine’s market share and profitability.
  • Changing consumer preferences: Shifting fashion trends and consumer preferences can quickly make some of Wolverine’s products less desirable. Failing to adapt to trends can destroy existing and well-established brands as seen with other shoe brands in the past (Crocs and Uggs).
  • Pricing Pressure: High competition and commoditization of some footwear categories put pressure on margins. If the company can’t have sustainable prices and lower costs, it would destroy any advantage they might have.
  • Supply chain issues: Global supply chain disruptions, particularly in sourcing raw materials, manufacturing, and shipping, can cause inventory issues, high costs, and affect profitability.
  • Economic downturn: A global economic slowdown may lower discretionary spending on non-essential items like footwear, thus significantly impacting their revenues.

Business Resilience

Wolverine World Wide has some resilience in the face of challenges:

  • Brand Portfolio: A diverse brand portfolio can reduce the impact from shifts in consumer preferences for one particular brand or category. But it will not offer full protection from market headwinds.
  • Distribution Channels: The company’s diversified distribution model limits its exposure to changes in a single channel, and gives flexibility in case of disruptions to certain channels.
  • Efforts for cost-cutting and efficiency measures: The company is continuously looking to make production and distribution processes more efficient, cutting costs, and increasing profit margins.

However, because they do not possess strong moats, the company is prone to being negatively impacted by any adverse market conditions, and it will not fully retain profits it gains from new opportunities or trends.

Financials In-Depth

The most important takeaways are all based on the latest documents. Here is what they show:

  • Revenues and Gross Margin:
    • Q1 2023 revenues are 542.5 Million USD.
    • Gross margin is 44.6 percent for the reported quarter.
    • The main revenue drivers for WWW are the performance of wholesale and direct-to-consumer channels. The Active and Work segment are still the leading segments of the company in terms of revenue. The company is facing declines in revenues from its Lifestyle segment.
    • Recent declines in DTC sales are worrying, and the company needs to re-focus on improving this segment to create new value and revenues.
  • Operating Expenses:
    • Reported S&A Expenses increased to 266 million dollars in the quarter.
    • Increase in operating expenses was mainly driven by higher marketing and promotional expenses.
  • Profitability:
    • Operating profit was 15.3 million, with the operating margin of 2.8%. This implies that the company is struggling to keep costs in check.
    • There has been high volatility in their margins due to many external factors as seen from previous reports and earning calls. The new report, however, shows a slight uptick in their profitability, mainly due to improvements in operational efficiencies and cost management.
  • The company reported an increase in the net loss of 314 million dollars due to noncash impairment charges. This shows that there may have been previous overvalued intangible assets that the company is now having to adjust. These charges do not impact cash flows but definitely impact overall valuation.

  • Net earnings are $-0.84 in Q1 2023. This net loss highlights the fact that the company is struggling in the current macro environment with its operations and business. The company has to implement several strategic decisions to bring its net profits back to positive territories.

  • Liquidity and Capital Resources:
    • Cash and cash equivalents were 266.6 million.
    • The company reported that at the end of Q1 2023 they had nearly 550 million dollars of borrowings under their credit facilities. This highlights the fact that the company has taken on high leverage, which can be dangerous for its long-term sustainability.
    • Free cash flow is -$117.9 million. This also gives concern about the company’s profitability since their core business is burning cash.
  • Guidance:
    • The company has lowered its full-year revenue guidance to between 2.55 billion and 2.60 billion, along with diluted earnings per share in the range of 0.58 to 0.68. This shows that the company is being challenged in the current environment.

Financial Health: 3 / 5

Wolverine World Wide has a slightly weak balance sheet. The company has low cash, high levels of debt, and low cash flow. Some points:

  • Debt: They have high amounts of long term debt which means it may struggle to repay it in the future, especially if profitability and cash flow do not improve significantly in the future.
  • Liquidity Low cash balances mean that the company has less liquidity to make quick moves or counter downturns.
  • Free cash flow: Negative cash flow indicates a potential problem in the company’s ability to generate sufficient cash from its operations, which raises concerns about the long-term sustainability of the business.
  • Goodwill Impairments: The high goodwill writedown has materially decreased their equity and overall asset values. Also the goodwill impairment is a sign of past overpayments and a reduction in the profitability of past deals.

The combined debt and liquidity issues give a rating of 3/5. The company needs to improve its balance sheet by lowering debt, increasing free cash flow, and stabilizing revenues and margins.

Understandability: 3 / 5

The business model of Wolverine World Wide is moderately complex. The brand and operating segments give an added layer of complexity.

  • Diverse Portfolio: The large brand portfolio with wide array of different products across a wide array of different channels may be hard to understand for investors.
  • Global Operations: Operating across several geographies and distribution channels increases the operational complexity.
  • Licensing Arrangements: Licensing arrangements add another level of complexity and require greater due diligence to understand its implications on the business performance.
  • Financial Complexity: While their revenues are easy to track, understanding how they create value from operating leases, and how they account for intangible assets, pensions, and other adjustments, requires some added reading and diligence.

Given these points, and the fact that the company has been struggling to maintain a steady business in recent times, the understandability of the business is rated as a 3/5.

Recent Concerns and Management’s Take

Wolverine World Wide is going through a period of transformation, focusing on cost efficiencies, product innovations, and brand building. The company faces significant competition in its segments, and it recognizes the need to adapt to evolving market dynamics and consumer preferences. Management has highlighted on several earnings calls the need to enhance their digital business, develop more innovative products, and continue to manage the cost side of the business.

  • Poor performance: The company has seen a drastic reduction in sales and earnings in recent reports and forecasts. Management has acknowledged the current issues, citing inventory correction, inflationary environment, and slow consumer demand.

Management said that these issues are temporary and will be resolved over time and are unrelated to long term prospects of the company.

  • Focus on Brands: Management is focusing on developing existing brands and innovating in different categories.
  • Leverage Management: The company is taking on debt to refinance and pay off previous loans as well as increase share buybacks. They have expressed confidence in that leverage and are comfortable with these amounts.
  • Cost-cutting initiatives : Management has highlighted cost management as a critical factor in recent earnings calls, focusing on reducing inventory and operational expenses to bring profitability back to its former glory. The company is cutting back on marketing and advertising expenses and focusing on its higher-margin product line.
  • Supply Chain: They are also focusing on getting supply chain and inventory under control.

Management is confident that they can right the ship in the coming quarters, but there are many challenges ahead for the company, and it remains to be seen whether their efforts will pan out or not.