Reducing China Sourcing And Upgrading Saucony Will Shape Bright Future

Key Takeaways

• Wolverine's strategic sourcing shift away from China aims to enhance cost structures and improve gross margins and net earnings.
  
• Investment in brand growth and marketing for brands like Saucony and Merrell could boost revenue through increased market share and consumer engagement.
  
• Uncertainty in trade policies and evolving conditions may impact Wolverine World Wide's revenue, margins, and growth, especially for the Wolverine and Sweaty Betty brands.

Catalysts

Designs, manufactures, sources, markets, licenses, and distributes footwear, apparel, and accessories in the United States, Europe, the Middle East, Africa, the Asia Pacific, Canada and Latin America.

• Wolverine World Wide has been diversifying its sourcing away from China, with plans to reduce China-based sourcing to near zero by 2026. This strategic move aims to mitigate tariff impacts and could improve future cost structures, positively impacting gross margins and net earnings.
  
• The Saucony and Merrell brands showed robust revenue growth in Q1, driven by product innovation, brand expansion, and market share gains in key categories like running and hiking. This momentum in their largest brands could lead to sustained revenue growth and better margins through higher full-price sales.
  
• Sweaty Betty has shifted focus to improving profitability by reducing promotional activity and increasing full-price sales, which has already resulted in a 1,000 basis point gross margin improvement. This strategic shift may lead to healthier long-term net margins.
  
• By employing strategic price increases and leveraging dual sourcing capabilities, Wolverine is mitigating tariff impacts. These actions are expected to protect profitability amidst fluctuating trade conditions, suggesting potential future earnings stabilization or growth.
  
• Wolverine World Wide is making significant investments in brand growth and marketing, particularly for Saucony, which plans to expand its retail footprint and increase brand awareness. This could drive top-line revenue growth through enhanced consumer reach and engagement.

Wolverine World Wide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wolverine World Wide's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $130.5 million (and earnings per share of $1.54) by about May 2028, up from $71.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, down from 18.8x today. This future PE is lower than the current PE for the US Luxury industry at 18.2x.
• Analysts expect the number of shares outstanding to grow by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.49%, as per the Simply Wall St company report.

Wolverine World Wide Future Earnings Per Share Growth

Risks

• The uncertainty in the marketplace related to initial tariff proclamations and potential trade policy changes creates risks for Wolverine World Wide, possibly affecting their future revenues and profit margins.
  
• Wolverine World Wide withdrew their full-year guidance for 2025 due to the dynamic nature of operating conditions, particularly the evolving tariff situation, which could impact consumer sentiment and spending, ultimately affecting earnings.
  
• While Saucony and Merrell are showing growth, the inconsistency and choppiness in trends for their Wolverine brand and Sweaty Betty could pose risks for sustaining momentum and achieving revenue targets in the long term.
  
• The strategic initiative for improving the profitability and premium positioning of brands like Sweaty Betty comes at the expense of top-line growth, suggesting there is a trade-off which could lead to lower short-term revenue until the strategy comes to fruition.
  
• Wolverine World Wide's complex supply chain and focus on diversifying away from China could result in operational challenges and increased costs, which may impact net margins and earnings if not effectively managed.

Valuation

• The analysts have a consensus price target of $20.333 for Wolverine World Wide based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $130.5 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $16.67, the analyst price target of $20.33 is 18.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.