Boosted by fatter gross margins and a strong pick-up in sales at Merrell,  Wolverine Worldwide reported adjusted earnings per share in the fourth quarter of 41 cents per share, a 20 percent increase over the last year. Fourth quarter revenue reached nearly $580 million, representing underlying growth of 1.7 percent.

“We’re obviously pleased with these results as the momentum in the business continued into Q4,” said CEO Blake Krueger on a conference call with analysts.

He said that during the quarter, the company “made excellent progress” with its Wolverine Way Forward transformation program and that particularly helped the company achieve its 12 percent operating margin target well-ahead of the original schedule while also providing investment capacity to fuel its growth initiatives.

“We are pleased to say that the heavy lifting is behind us with the store closures, portfolio changes and organizational restructuring now complete,” said Krueger. “The company’s pace of execution over the last two years has been incredible. The foundation is now set for a new and more profitable operating model that is focused on speed, innovation and growth, something we’re calling our Global Growth Agenda.”

In the Wolverine Outdoor & Lifestyle Group, underlying revenue in the quarter grew 14.4 percent compared to the prior year with Merrell growing in 18 percent, Cat up in the mid-teens, Chaco posting nearly 30 percent growth and Hush Puppies down mid-single digits

“The Merrell business continued to accelerate in Q4, benefiting from the successful launch of the Chameleon 7 and the excellent performance from the expanded Arctic Grip offering, which grew over 50 percent,” said Krueger. The brand’s new Nature’s Gym collection continued to perform well and the Merrell Work and Tactical program also supported growth in the quarter.

Krueger said Merrell is now focused on five distinct consumer territories, and each of these territories grew in Q4. Said Krueger, “This model for growth is focused on the consumer with an emphasis on greater speed and a continuous flow of new and innovative product. We are obviously pleased with the continued momentum in the Merrell business.”

Merrell is expected to see flattish sales for the first quarter but show high single digit growth for the year.

Chaco again delivered strong growth in the quarter as its e-commerce business grew nearly 40 percent. This performance was driven by Chaco’s expanded women’s product offerings along with continued robust growth from the Z Sandal franchise. Said Krueger, “The U.S. market remains a growth opportunity for the brand as Chaco continues to expand its domestic footprint with national retailers and new independent accounts.”

At the Wolverine Boston Group, underlying revenue declined 6.5 percent versus the prior year, with Sperry, as expected, down high single digits, Saucony down mid-single digits and Keds down low single digits.

The Sperry women’s boot category exceeded expectations for the quarter with “e-commerce performance up over 30 percent and strong retail sell-through. Based on the continued success of the category, Sperry boots are already receiving “strong fall 2018 commitments” from retailers. New sneaker collections also performed well for Sperry in the quarter, although the gains were not sufficient to offset continued softness in the boat shoe category and lower closeout sales in the quarter. Said Krueger, “We expect a better first half for Sperry and a return to growth in the second half of the year.”

Regarding Saucony, Krueger said what while Originals continues to see growth, the performance side was impacted by “a tougher quarter in Q4 than some prior quarters” in the overall specialty channel. The brand also was impacted by “some late product deliveries and a couple of quality issues that were frankly not anticipated and a bit unusual, given the factories that we do business with.”

He noted that Originals continue to see strong growth, particularly in some key international markets, and Saucony will be launching “a pretty unique premium approach” to its Life On The Run athleisure collection this year. The brand is also expected to continue to benefit from the overall trend supporting athletic, running silhouettes.

Saucony is expected to show mid-single digit growth for 2018, with a stronger pace of growth expected in the back half of the year.

In the Wolverine Heritage Group, underlying revenue for the group was down approximately 10 percent excluding the Bates Department of Defense contract business, which was sold in Q4. The Wolverine brand was down low double digits and the Bates civilian, HYTEST and Harley-Davidson businesses collectively fell mid-single digits.

“During Q4, we experienced some weakness in at-once orders in the work category as retailers consciously managed the inventory down and also shifted to a more need-now-buy-now order calendar,” said Krueger. Last year, this trend occurred across a number of consumer soft goods categories. Nevertheless, the Wolverine brand gained market share in the U.S. work boot category in Q4 and the brand’s e-commerce business grew nearly 45 percent. We expect Wolverine to return to growth in Q1 of 2018.”

Reported results reflect a fiscal year calendar change. Prior to fiscal 2017, Wolverine reported its quarterly results of operations on the basis of 12-week periods for each of the first three fiscal quarters and a 16 or 17-week period for the fiscal fourth quarter. Beginning in fiscal 2017, the company’s fiscal year is comprised of 13-week quarters for each of the first three fiscal quarters and a 13 or 14-week period for the fiscal fourth quarter.

As a result, reported revenue of $578.6 million decreased 20.7 percent during the fourth quarter, or decreased 7.1 percent after taking into effect the quarterly calendar change.

Reported gross margin was 38.4 percent, compared to 36.6 percent in the prior year. Adjusted gross margin on a constant currency basis was 38.5 percent, compared to 37.1 percent in the prior year, reflecting an improvement of 140 basis points despite a 50 basis point negative mix impact from store closures.

Reported operating margin was -12.7 percent, compared to 2.1 percent in the prior year. Adjusted operating margin on a constant currency basis was 10.7 percent compared to 8.1 percent in the prior year.

The net loss in the quarter was $80.9 million, or 65 cents a share against a loss of $500,000, or 2 cents, a year ago. The reported results in the latest period include restructuring and transformation costs of 24 cents a share and other special charges recorded in the quarter for the non-cash impairment of the Sperry indefinite lived trade name of 45 cents, environmental and other related costs of 28 cents, and the impact of tax reform of 9 cents. The adjusted diluted earnings per share of 41 cents a share compared with 34 cents in the prior year, an increase of 20 percent.

Adjusted results came in line with Wall Street’s targets. On February 8, Wolverine pre-announced results, indicating that sales would land at top end of its full-year outlook entering the year and EPS would reach the high end of its previous earnings outlook.

For the full year, reported revenue of $2.35 billion decreased 5.8 percent vs. the prior year. Underlying revenue grew 0.6 percent. Reported earnings came to $700,000, or break even per share, and included full-year costs directly related to the company’s restructuring and transformation of 82 cents a share and the special charges recorded in the fourth quarter, also coming at in 82 cents a share. Adjusted EPS were $1.64, and, on a constant currency basis were $1.71 compared to $1.36 in the prior year, growth of nearly 26 percent.

With the benefits of its Way Forward transformation initiative, the company plans to invest $40 million to $45 million in its new Global Growth Agenda, which is comprised of three key elements:

  • Powerful Product Creation Engine – Relentless and frequent introduction of craveable product that resonates around the world – taking full advantage of new creative design capabilities, stronger consumer insights and a faster supply chain.
  • Digital-Direct Offense – Seamless interaction with its consumers through more effective digital engagement to drive its owned e-commerce growth beyond 20 percent, improve the on-line businesses of its retail customers and enhance its brand positioning in the digital marketplace.
  • International Expansion – Greater investment in regional resources and systems to accelerate international growth, with a specific focus on China and the Asia Pacific region.

Elaborating on the Global Growth Agenda, Krueger noted that as part of the Way Forward transformation, Wolverine’s teams have invested in new creative and design capabilities, while expanding its consumer insights and market intelligence skills to improve speed and flexibility. This includes substantially shorter concept to market lead times, as shorter 60 days, and a greater ability to quickly backfill product collections that perform well at retail.

In 2017, Merrell was its first brand to implement this new model and tool set, focusing on clear product segmentation, extensions into new consumer territories, and a faster cadence of new product introductions. The Merrell product team was reorganized around its newly defined consumer territories and now incorporates deeper consumer insight and market intelligence to influence design.

In addition, a recent supply chain restructuring allowed Merrell to bring fresh, innovative product to market in half of the normal time. As a result, Merrell brought several innovative product collections to market earlier than originally planned, including the launch of the new Merrell Work and Tactical product line in Q2 and the Chameleon 7 series in Q4. This new approach and mindset was successful as Merrell delivered high single-digit growth in 2017.

Added Krueger, “All brands in the portfolio have now adopted this model and are developing go-to-market strategies which utilize these new processes and tools. We expect to commit about 45 percent of our 2018 incremental investment to this first element with a focus to enhance design, product flow, demand planning, supply chain capabilities and distribution centers while continuing to invest behind our consumer insights and global sales force teams.”

On an enhanced Digital-Direct Offense, Krueger noted that approximately 28 percent of all footwear sales in the U.S. are made online and the trend is expected to continue.

As such, Wolverine “will continue to over-index our investments toward our Digital-Direct Offense.” E-commerce has been its fastest growing channel over the last two years with nearly 20 percent growth in 2017 and that growth is expected to accelerate in 2018. The growth will be helped by key strategic investments around 30 percent of the total incremental investment which includes greater social prospecting, new advertising up and down the consumer funnel, and the implementation of a new unified consumer database, which is designed to increase retention and enhance the lifetime value of its consumers. More exclusive product introductions, less promotional activity and increased spend on digital demand creation is also expected to drive online growth.

Said Krueger, “We have several brands in our portfolio that excel in this area and by no coincidence delivered excellent e-commerce growth for 2017 including Merrell with nearly 25 percent growth, Chaco with nearly 35 percent growth and Keds with over 32 percent growth. We are implementing the new concepts, tools and capabilities that were tested and validated in these businesses over the past year in our remaining brand.”

International in 2017 represented over 30 percent of its revenue and approximately 50 percent of its global pairs were sold outside of the U.S. To spur growth, nearly 25 percent of its incremental investment spend will be allocated to support international growth, specifically to strengthen regional teams, especially in China and the Asia-Pacific region, collaborate with new partners on new global product introductions, and improve systems to better service its global business.

He noted that Wolverine remained particularly underpenetrated in China as less than 10 percent of its global revenue was generated from the region in 2017.

“This is an incredibly exciting time for the Company after the two years of restructuring and hard work,” said Krueger. “We will transition our focus to growth. We now have the tools and capabilities to accelerate top-line performance and certainly have the financial capacity to invest for the future, drive organic growth and add new brands to the portfolio.”

For the current year, the outlook calls for:

  • Revenue in the range of $2.24 billion to $2.32 billion, a reported decline of 1.3 percent and underlying growth of nearly 6 percent at the high-end of the range.
  • Gross margin expansion in the range of 40 to 80 basis points, despite a negative mix impact of 20 basis points from 2017 store closures.
  • Reported operating margin of 11.6 percent and adjusted operating margin of 12 percent, inclusive of incremental investments in the company’s Global Growth Agenda.
  • An effective tax rate in the range of 18 percent to 21 percent, reflecting new U.S. tax laws.
  • Reported diluted earnings per share in the range of $1.87 to $1.97 and adjusted diluted earnings per share of $1.95 to $2.05, an increase of 25 percent at the high-end of the range.

Photo courtesy Merrell