Footwear Maker Could Be on the Verge of a Double-Digit Breakout
StreetAuthority Network
If you live any place in the U.S. east of the Dakotas and north of Atlanta, you were a victim of this past week's 'polar vortex.' I don't need to tell you, you needed your warmest winter gear.
As a Canadian, the deep chill of winter is something I've grown used to. In the process, I've learned the value of rugged winter boots.
My favorite boot brand is Merrell. They're comfortable, durable, fashionable, and most importantly, keep me warm on brutally cold Canadian winter days.
Merrell is one of 15 brands owned by Wolverine World Wide (WWW). This company designs, manufactures and markets a variety of footwear, apparel and accessories. Among their better-known brands are Hush Puppies, Saucony and Keds, several of which were recently added to their portfolio through a 2012 acquisition. The company also owns distribution rights under the Cat, Harley-Davidson (HOG) and Patagonia trademarks.
Founded in Rockford, Mich., in 1883, Wolverine's products can now be found in over 200 countries worldwide. The company runs nearly 450 brick-and-mortar stores in North America and the UK. It also operates over 60 consumer-direct websites. In 2012, Wolverine's annual revenue was $1.64 billion, up 16% from $1.41 billion the year before.
This number should continue to rise as the global footwear industry grows. With consumers drawn to exercise shoes, the worldwide footwear market is expected to increase at a 2% compound annual growth rate between 2011 and 2018. By 2018, global footwear sales are expected to be more than $381 billion.
Wolverine -- whose Saucony brand competes against Nike (NKE) -- will likely snag a share of these expanding revenues.
Saucony is one of the recent additions to Wolverine's arsenal. It was acquired in 2012 when the company purchased Collective Brands' Performance + Lifestyle Group, or PLG, for $1.3 billion.
In addition to Saucony, Wolverine also added Sperry Top-Sider, Stride Rite and Keds brands to its portfolio. As a result of the acquisition, Wolverine's third-quarter 2013 revenue surged 103% from the year-earlier period to a record $716.7 million. Earnings jumped 64% from the year-ago quarter to $1.08 per share.
Management recently increased its earning guidance for the 2013 full year. And over the next five years, Wolverine's earnings are expected to increase at a compound annual growth rate of over 20%.
The technical picture is bullish.
WWW Stock Chart
The stock hit a low below $20 (split adjusted) last winter. Since then, shares have surged more than 70%, forming a major uptrend.
The advance from January was pretty much continuous until early July, when WWW met round number resistance at $30. For the next five months, shares consolidated in a rectangle pattern, trading in a narrow range between support near $27 and resistance at roughly $30.
In mid-November, the stock broke out and moved above $33, where it once again encountered selling pressure. On the last day of December, the stock made a new high of $34.10. Shares are currently trading slightly below this high, but are holding just above $33.50 support.
As long as the major uptrend line, which currently intersects the chart just below $32, is sustained, WWW should continue to move higher.
According to the measuring principle for a rectangle, calculated by adding the height of the pattern to the breakout level, shares should reach a new high of $36.91 ($33.50-$30.09 = $3.41; $3.41+$33.50 = $36.91).
At current levels, this target presents traders with around 10% potential returns. However, with no nearby resistance in sight, they could move even higher.
This strong technical outlook is backed by bullish fundamentals.
Buoyed by stronger-than-anticipated third-quarter results, management raised full year revenue and earnings guidance. The company now expects full-year 2013 revenue to be around $2.7 billion, about a 6% increase from the previous year's "pro forma" revenue.
For the first quarter of 2014, analysts expect strong global demand will cause revenue to increase at least 6.7% to $689 million compared with $646 million in the year-earlier quarter.
The earnings outlook is also positive. Management projects 2013 earnings will be in the range of $2.73 to $2.83 per share, representing around 20% growth compared with earnings of $2.29 per share in the prior year.
With the recent acquisition expected to drive growth, analysts estimate first-quarter 2014 earnings will rise almost 15% to $0.47 per share from $0.41 in the year-ago period.
Given the company's strong growth outlook, supported by a bullish chart, I plan to go long on the growing footwear and apparel company.
Risks to consider: The acquisition of PLG created a somewhat high long-term debt-to-equity ratio of 1.8:1 at the end of 2012 (1:1 is considered conservative). However, by the end of the third quarter of 2013, this same ratio had been reduced to 1:42:1. As Don Grimes, the company's chief financial officer, noted in the third-quarter press release, Wolverine is diligently focused on paying down its debt. As long as the company continues to generate sales growth, this debt should be manageable.
Recommended Trade Setup:
-- Buy WWW at the market price -- Set stop-loss at $31.68, just below support marked by the intersection of the major uptrend line -- Set initial price target at $36.91 for a potential 10% gain by mid-2014
