Wolverine World Wide, Inc. reported Thursday it is taking immediate actions to further its ongoing strategic transformation into a brand-led and consumer-obsessed growth company and laid out the beginnings of a strategic plan to transform the business over the next year. The third quarter was tough but it wasn’t unexpected as senior management shared, but they also had to confront the fact that the fourth quarter was setting up to be worse than expected, causing the company to pull back on guidance.
“We are moving with speed and urgency to transform the company, which will enable us to capitalize on our biggest growth opportunities,” said Chris Hufnagel, president and CEO, Wolverine World Wide, Inc. “We are taking decisive steps to stabilize the business by divesting non-core assets, paying down debt, reducing inventory, and right-sizing our cost structure. At the same time, we are redesigning the organization to become great global brand builders.”
To help stabilize the business, enhance financial performance, and provide future investment capacity for Wolverine Worldwide’s strategic growth brands, the company has accelerated and expanded its transformation effort and the work of the Profit Improvement Office. To date, the company has identified initiatives that are expected to deliver $215 million in annualized savings, including a global workforce restructuring.
“We are committed to taking the necessary actions to best position the company for future profitable growth,” continued Hufnagel. “Decisions like these that affect our team are difficult, and we are committed to supporting each team member through this transition.”
Key changes made by the company in connection with redesigning the organization include:
- “The Collective” – a new strategic center of excellence that includes a reimagined innovation, insights, and trends team; an internal creative and public relations team; and an in-house creative production studio.
- Global Licensing – a new global licensing function to unlock the portfolio’s full commercial opportunity around the world. This team will oversee and manage all the company’s licensed businesses, including Hush Puppies and Stride Rite, along with apparel and accessories programs.
- Integrated Planning – a new global planning function designed to meaningfully improve integrated demand, inventory, and supply chain management, while enhancing the company’s ability to respond to shifts in consumer and market dynamics.
- Product Lifecycle Management & Digital Product Design – a new set of advanced digital product management, design, and development tools which will further enhance the company’s product capabilities and efficiencies.
- North American Commercial Structure – a consolidated North American commercial structure, aligning the company’s Canadian operations with those in the United States to drive efficiency and alignment.
The company said these actions follow the company’s recent sale of Keds, the Hush Puppies intellectual property in China, Hong Kong, and Macau, the sale of its North American Wolverine Leathers business and the company’s announcement that it is pursuing strategic alternatives for the Sperry brand.
“The Collective is intended to support and enable our brands product innovation design as well as creative storytelling to drive brand demand and heat in the marketplace,” said Hufnagel. “I’m excited about this new team and what they can do for our family of brands today and into the future.”
He added that in addition to The Collective they have consolidated their global licensing efforts and created a new global licensing team to tap into unlocking our brand’s full commercial opportunity around the world, which they believe could be very meaningful through clear responsibilities, greater focus and improved coordination with global partners.
“We’ve appointed strong and experienced leaders to oversee the Collective and our new global licensing team. I’m excited for them to get into new assignments and help drive the company forward,” the CEO added.
The acceleration of the initiatives comes as the company reported dismal third-quarter results, that while expected, reflected an ongoing business that was down in strong double digits across most of the enterprise, with the exception of a mid-single-digit decline in the Wolverine brand business, a mid-teens decline in the Saucony business and double-digit growth in the Sweaty Betty brand.
Consolidated company revenues declined 23.7 percent to $527.7 million in the third quarter versus the corresponding quarter in 2022, and declined 24.7 percent on a constant-currency (cc) basis. Revenue from the ongoing business was $519.5 million and declined 21.1 percent on a constant-currency basis.
- Merrell sales fell 24.3 percent (-25.2 percent cc) to $157.0 million in the third quarter.
- Saucony sales declined 14.0 percent (-14.6 percent cc) to $116.4 million.
- Sperry took the biggest hit in Q3, falling 41.4 percent (-41.5 percent cc) to $46.2 million.
- Wolverine brand sales dipped 4.7 percent in both reported and constant-currency terms to $56.3 million.
- Sweaty Betty was the lone winner in the brands reported, growing 19.0 percent (+11.1 percent cc) to $45.0 million in the quarter.
The ongoing business excludes the impact of Keds, which was sold in February 2023, the U.S. Wolverine Leathers business, which was sold in August 2023, the non-U.S. Wolverine Leathers business, which is currently the subject of a sale process, and reflects an adjustment for the transition of the Hush Puppies North America business to a licensing model in the second half of 2023.
The company’s third-quarter International revenue was down 24.4 percent to $229.0 million compared to the prior-year quarter and, International revenue from the ongoing business was down 22.3 percent (-24.6 percent cc) to $221.8 million in the period. Direct-to-consumer revenue was down 14.5 percent to $136.6 million in Q3, compared to the Q3 period last year, and down 12.8 percent for the ongoing business compared to the prior-year quarter.
Gross margin was 40.8 percent of sales in Q3, compared to 40.2 percent in the prior-year period, a 60 basis point improvement that was reportedly due to “profit improvement initiatives and channel mix, partially offset by the sale of higher-cost inventory due to transitory supply chain costs from 2022 and a higher mix of closeout sales in the quarter.”
“We accelerated the liquidation of end-of-life inventory, which negatively impacted gross margin but helped to drive inventory levels down by $66 million more than planned”, said company EVP/CFO Mike Stornant. “Sales to third-party distributors, which carry a lower gross margin were a bigger part of our sales mix in Q3 and also contributed to the lower gross margin.”
SG&A expenses were $188.1 million, or 35.6 percent of revenue, in the quarter. Adjusted SG&A expenses of $191.7 million, or 36.9 percent of adjusted revenue, were 510 basis points higher than the prior-year quarter.
Operating profit was down 53.6 percent to $27.3 million in Q3, compared to $58.8 million in the year-ago quarter. Operating margins shrank over 300 basis points to 5.2 percent of sales in Q3, compared to 8.5 percent of sales in Q3 last year.
Net income was $9.0 million in the third quarter, compared to $38.8 million in the corresponding period last year. Diluted EPS was down 77.1 percent to 11 cents a share in Q3 from 48 cents a share in Q3 last year.
Stornant walked through the planned benefits of the transformation program and the estimated $215 million of annual savings from these initiatives, including $75 million to be recognized this year and an incremental $140 million expected in 2024.
The CFO detailed the savings further by sharing details the following:
- Supply chain cost improvements of $70 million, including lower product, freight and logistics costs, lower organizational costs of $50 million related to the design changes.
- Further SG&A cost savings of $20 million, including benefits from consolidating the company’s footprint in the U.S. and Europe, synergies from further integrating the Sweaty Betty operation and other indirect savings from the global redesign of the company.
- The company also expects 2024 results will reflect a $60 million benefit from 2023 transitory supply chain costs that are not anticipated to reoccur. The cost savings and operational efficiencies generated from this work are expected to fuel future investments in new talent, demand creation, innovation and technology platforms needed to stabilize the business and then accelerate the growth trajectory of the company’s brands.
All areas that directly address the core business challenges will get additional focus and investment. In other words, it appears the company is going to over-invest in its core portfolio and move on from the rest of the brands that are not seen as important. To the casual observer, this may sound similar to the realities currently confronting VF Corp. as well and the decisions that the Board and a new CEO are making to address their bloated portfolio and the challenges it creates.
“The level and timing of reinvestment needed in these areas to quickly improve brand performance is being carefully considered as part of our 2024 planning process,” Stornant shared while attempting to temper near-term expectations. “While we remain committed to an operating margin target of 12 percent in the near term, we now expect it may take longer to achieve this run rate given the current lower cost structure to drive meaningful operating margin expansion and improved cash flow in 2024.”
Inventory at the end of the quarter was $563.8 million, down approximately 33 percent compared to the 2022 Q3 quarter-end.
“We made solid progress on the inventory front,” Hufnagel shared. “Inventories for the ongoing business at the end of the quarter were down 13 percent compared to the prior quarter and down 33 percent on a year-over-year basis. We now expect to end the year with a total inventory of approximately $419 million, a reduction of 34 percent compared to year-end 2022 and nearly $30 million better than what we guided last quarter.”
Net Debt at the end of the quarter was $930 million, and liquidity was approximately $400 million. The company’s bank-defined leverage ratio was 3.4x.
“In the third quarter, we achieved several critical milestones as we took decisive action to stabilize and transform the company while delivering revenue and earnings in line with our expectations,” reported Hufnagel. “We continued to reshape our portfolio, reduce our inventory, and redesign the company to become consumer-obsessed brand builders – focused squarely on building compelling products and telling amazing stories.
But while he may feel they are starting to make progress, Hufnagel also knows the challenges ahead and laid out the realities of hitting the expected numbers through the end of the year.
“Given the headwinds we see on the immediate horizon, our results in the final quarter of the year will be less than we previously expected and certainly less than the company’s full potential,” Hufnagel shared with analysts. “And while our turnaround and ultimately, the transformation of Wolverine World Wide won’t be completed in a quarter or two, especially given the challenging environment we find ourselves in today, we expect to continue to make meaningful progress towards our transformation goals, goals which we’ll be sharing with you along the way.
Looking ahead, Stornant said that fourth-quarter brand performance is expected to be mixed across the portfolio.
“The Saucony and Sweaty Betty businesses have stabilized and are showing signs of improvement,” he shared. “However, Merrell continues to operate in a challenged outdoor category, and our Work Group brands continue to experience headwinds in wholesale demand. As a result, we are reducing our fourth-quarter revenue outlook to a range of $515 million to $525 million and adjusted diluted earnings per share to a range of ($0.30) to ($0.25) for our ongoing business.”
Stornant said the company is driving additional profit improvement benefits and now expects the Profit Improvement Office to deliver approximately $215 million of annualized savings in 2024.
“We are also improving our balance sheet metrics and are on track to achieve our year-end inventory target of $490 million,” he said. The strategic alternatives review for the Sperry brand is progressing, and we are pursuing the sale of other non-core assets in Q4.”
Full-year 2023 outlook is as follows:
- Revenue from the ongoing business is expected to be approximately $2.19 billion to $2.20 billion, representing a decline of approximately 13 percent versus the prior year.
- Gross margin is expected to be approximately 38.7 percent of sales, and adjusted gross margin is expected to be approximately 39.1 percent of sales.
- Operating margin is expected to be approximately 4.8 percent of sales, and adjusted operating margin is expected to be approximately 3.4 percent of sales.
- The effective tax rate is expected to be approximately 25 percent, and the adjusted tax rate is expected to be approximately 18 percent.
- Diluted earnings per share are expected to be between 35 cents and 40 cents a share and adjusted diluted earnings per share are expected to be between 5 cents and 10 cents. Stornant said these full-year EPS expectations include an approximate 18 cents negative impact from foreign currency exchange rate fluctuations.
- Diluted weighted average shares are expected to be approximately 79.4 million.
- Net Debt at year-end is expected to be approximately $850 million resulting in bank-defined leverage of approximately 3x.
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