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Keds, Saucony Maker Wolverine Steps Up Revenue Despite Debt

In the coming years however, with the absence of acquisition related costs, Wolverine's net income could significantly increase.

Moreover, Wolverine has also improved its profitability. Its margins are now back at 2011 levels after showing a decline in 2012. In 2013, Wolverine's gross margins climbed to 39.6% from 38.2% in 2012 and are slightly better than the 39.5% gross margins in 2011.

The improvement in profitability has come due to a favorable mix of higher margin products, an increase in prices and efficiency gains in manufacturing operations.

Wolverine, however, is not nearly as profitable as some of its other rivals. According to data provided by Thomson Reuters, over the last five years, Wolverine has operated at an average gross margin of 39%, while Nike (NKE) and Deckers Outdoor (DECK) have averaged over 44% in the same period

As motioned earlier, Wolverine's growth has come along with a ton of debt. Its long term debt climbed from zero in December 2011 to more than $1.2 billion a year later. That is huge for a company whose market cap is less than $3 billion.

Wolverine is, however, moving in the right direction and has significantly reduced its debt. In 2013, the company's net debt -- debt excluding the cash reserves -- dropped to $935.8 million from more than $1 billion in 2012.

The company still has a long way to go. Its total debt-to-equity ratio is 137, which is a far cry from the debt-to-equity ratio of 1.10 of its slightly smaller rival Deckers. Moreover, Wolverine's ratio is nearly 10 times as large as the industry's average of 14, as per Thomson Reuters.

Despite debt and ongoing deleveraging efforts, Wolverine has also approved a new $200 million buyback program. This shows the management's confidence in their ability to generate cash.

The company's cash reserves rose to $214.2 million by the end of 2013, from $171.4 million in 2012.

For the current year, Wolverine is expecting solid growth in earnings. Investors could reap the rewards of the acquisition in the form of double-digit EPS growth. The adjusted earnings for 2014 are forecast to grow between 10% and 14% from revenue growth of between 3% and 6%.

The company is increasing its investments in some of its leading footwear brands and is eying growth in its e-commerce operations, including dozens of websites. Its growth in Latin America and Asia/Pacific is expected to continue throughout 2014. Moreover, after witnessing stability in its European operations in 2013, the company is expecting growth in the entire Europe, Middle East and Africa region. All of these factors will drive its earnings and revenue growth in 2014.

In short, Wolverine's earnings growth could outpace its revenues growth in 2014. This would mark a big turnaround for a company whose revenues have been growing faster than its earnings for the last two years.

Although the company's outlook for the full year is positive, its shares could come under pressure in the short term. The company is expecting a decline in earnings for the current quarter. For the first quarter, Wolverine has forecast adjusted earnings of between 28 cents and 30 cents per share, which will be a significant reduction from adjusted earnings of 81 cents per share in the first quarter of 2013.

The decline is due to the sluggishness in the retail environment and higher brand investments. Moreover, Easter will also fall three weeks later this year as compared to last year. As a result, the impact of Easter sales, which was included in the first quarter of 2013, will be pushed to the second quarter of 2014.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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