Analysts: Challenges Ahead for Wolverine

NEW YORK — Cost cutting and expense management led to a better-than-expected first quarter for Wolverine World Wide Inc., but analysts cautioned that the company may be pressured as it moves into the second half of the year.

“They put up a very good quarter, and they basically did it by controlling expenses,” said Jeff Mintz, an analyst at Wedbush Morgan Securities. “But with revenues down by 11 percent, they’re obviously still suffering from an economic slowdown.”

Inventory was up 16 percent for the quarter, to $218 million, which the firm attributed to one-time events, including its recent Chaco acquisition. The company’s backlog, meanwhile, was down by double digits, indicating weak preorders for the third quarter.

Blake, the company’s CEO and chairman, pointed to at-once buying as the impetus. “Order flow has been tougher for everybody to predict almost going back a year,” he said during a conference call last week. Krueger expected the third quarter to be better, but added that retailers are being “judicious on how they’re placing orders, and they’re watching their own inventories very, very closely.”

The Rockford, Mich.-based company reported a net income of $10.5 million, or 21 cents a diluted share, versus last year’s first-quarter profit of $23.7 million, or 46 cents a diluted share.

Adjusted for restructuring costs, Wolverine reported earnings of 41 cents a share, beating analyst estimates on Yahoo Finance of 31 cents. Impairment charges related to the firm’s restructuring totaled $14.5 million, which contributed to Wolverine’s 56 percent profit decline.

Revenues for the first quarter were $255.3 million, down 11 percent from $288.3 million during the same period in 2008.

The Wolverine and Patagonia footwear brands saw earnings increase, while the Hush Puppies Group, parent of Wolverine’s which includes Merrell, posted declines.

Chris Svezia, an analyst at Susquehanna Financial Group, believes that most of Wolverine’s challenges are “a reflection of what’s going on in the global landscape,” not a failing of the company’s business. However, he cautioned, many of the benefits Wolverine experienced in the first quarter, including a positive impact of foreign exchange and high margins on its at-once business, could reverse in coming quarters.

“We’re going to see steeper declines in revenues in the second quarter, and visibility into the third quarter is still tough,” Svezia said. “It will be difficult to see significant gains unless we get an overall improvement at retail. But this is not a broken brand, it’s just suffering at the same rate as most global brown shoe companies. By the fourth quarter, [Wolverine] could be an interesting story.”

For the first quarter, Wolverine saved about $1.2 million through its restructuring plan, which was put into place in January. That plan included the elimination of 10 percent of its workforce, or 450 jobs, as well as the merging of distribution operations and the closure of a tannery in its hometown of Rockford. It should save the company $17 million to $19 million annually, at a cost of $31 million to $36 million (before taxes) recorded throughout 2009.

The company last week reaffirmed its guidance for the year. Wolverine expects earnings of $1.74 to $1.97 a share, adjusted 12 to 15 cents for foreign exchange and 12 cents for increased pension expenses. Wolverine also reaffirmed that its revenues for 2009 would be between $1.07 billion to $1.15 billion.

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