Gerard Klauer Mattison report on WWW:
Wolverine Wide Web/WWW BUY THOMAS A. FILANDRO
(212) 885-4003
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Price 52-Week Earnings Per Share P/E Ratio 12-Month
02/10/98 Range 01/97 01/98E 01/99E 01/98E 01/99E Target
28.69 31.13-19.44 1.01 1.18 1.42 24.3x 20.2x 35
Prior: 0.99
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WWW*-- Strong FY97 Broad-Based Global Sales & Profits --BUY
o 4Q97 EPS of $0.49 versus $0.38 were $0.02 ahead of our First Call-high
estimate. Sales for the 13-week period ending January 3, 1998 rose 16% to
$246 million, as all divisions registered solid results. Operating profits
during the quarter jumped 27%, bolstered by better-than-expected gross margin
trends, coupled with the broad-based sales strength. For the year EPS
(excluding a non-recurring restructuring charge of ($0.05) per share)
improved 33% to $1.01 versus $0.76. We maintain our view that WWW global
brands possess true staying power and reiterate our BUY rating and our 12-
month price objective of $35.
o FY98 off to a strong start, as global footwear orders are trending well
ahead of last year. WWW entered FY98 with strong indicated sales trends, as
backlogs are up 20%, and footwear orders for the first four weeks of the new
year are running 28% above the prior year. The backlog and order trends
suggest that there is no slowdown in demand for the company's various brands.
o We maintain our FY98 and FY99 EPS projections of $1.18 and $1.42,
respectively. Despite above-plan fourth-quarter and FY97 results and our
assumption of slightly higher sales and margins trends over the next two
years, we are maintaining our current EPS estimates, reflecting an
anticipated hike in the corporate tax-rate to 34% from 32%.
o Higher IMU's bolster 4Q97 gross margins and afford further gains in
FY98. 4Q97 reported gross margins rose 160 basis points to 31.3% and reflect
management's efforts to restructure its manufacturing base to operate more
efficiently, while driving product costs lower. The efficiencies in sourcing
and manufacturing provide a springboard for improved gross margin trends over
the next several years.
o Hush Puppies (HP) positioned to post significant sales and profit
improvements over the near and longer term. HP domestic wholesale business
rose 15% in FY97 and, in our view, has just hit the tip of the iceberg of the
potential market share gains over the next several years. Despite the strong
FY97 sales and improved profitability, the HP business was under-served and
has not reached its full sales potential. As a result, the division possess
significant operating margin opportunity of nearly 400 basis points over the
next several years.
INVESTMENT CONCLUSION: We reiterate our BUY rating on WWW and maintain our 12-
month price target of $35 as we believe the company's broad-based sales
strength will continue. We also believe the recent acquisition of Merrell
and the 5-year license agreement to manufacture Harley Davidson (HDI-$26
15/16) footwear affords WWW incremental sales and profit opportunities beyond
our current forecast. WWW shares are currently trading at P/E multiples of
24.3 times and 20.2 times our FY98 and FY99 EPS estimates, respectively.
Although the current P/E multiples appear high, we believe WWW brands and
strategies suggest substantial growth potential which has not been fully
appreciated by investors. As such, we continue to view WWW shares as
attractive and believe the shares should continue to trade at a premium P/E
multiple to the company's estimated secular growth rate of 20%, or 29 times
our FY98 EPS forecast of $1.18. |
