Wolverine Worldwide Inc.’s third quarter results came in better than expected as a result of a stronger-than-expected profit contribution from last year’s mega-acquisition that brought Sperry Top-Sider, Saucony, Stride Rite, and Keds. The strong performance was led by double-digit revenue increases across many of its brands, including Merrell, Sperry Top-Sider, Saucony, Keds, Chaco and Cushe. The gains came despite continued cautious buying stances by U.S. stores.
“Domestically, the market has remained tepid as conflicting messages on the economic recovery had caused retailers to be cautious with their buying in particular and consumers to be measured with their spending,” said Blake Krueger, chairman, CEO and president, on a conference call with analysts. “Outside the U.S., Europe has recently begun to show signs of stabilization, and economic forecasts are now calling for limited growth in 2014.”
Earnings jumped 65.9 percent in the quarter ended Sept. 7, to $54.4 million, or $1.08 a share. Excluding acquisition-related transaction and integration expenses in both years, fully diluted EPS in the quarter was $1.16, a 61.1 percent hike over the prior year and easily ahead of Wall Street’s consensus estimate of $1.03.
Revenue vaulted 103.0 percent to $716.7 million, reflecting the acquisition that closed in October 2012 while advancing a solid 9.0 percent on a pro forma basis.
Revenue in the U.S., its largest market, grew in the upper single digits in the quarter versus prior year on a pro forma basis. Revenue from the EMEA, Latin America and Asia Pacific regions all grew at a double-digit pace.
By segment, revenues in the Performance Group – consisting of Merrell, Saucony, Chaco, Cushe and Patagonia Footwear – jumped 67.0 percent to $254.1 million while increasing 13.4 percent on a pro-forma basis. Merrell, Saucony, Chaco and Cushe all delivered double-digit revenue growth.
Merrell's healthy results in the quarter reflected growth from each of the Performance Outdoor, Outside Athletic and Active Lifestyle categories, “with the latter being especially gratifying because we've been working very hard to regain traction with the brand's casual offerings,” said Don Grimes, CFO.
Added Krueger, “Merrell remains the category leader in outdoor footwear. We're also very excited about the addition of Gene McCarthy as President of Merrell, which we announced earlier in the quarter. Gene is a recognized leader in the footwear and apparel sectors and he has already leveraged his extensive industry and leadership experience to impact and help drive the business.”
Elaborating in the Q&A session, Krueger noted that Merrell saw a “pretty good rebound” in Europe and exceeded expectations there against easy comparisons. Latin America was also “very strong” for Merrell, benefiting from the success of concept stores. The U.S. saw growth, “which was very encouraging,” said Krueger.
Grimes added that Merrell is seeing positive backlog across all three components of the business although comparisons get tougher in the Outside Athletic category in the latter part of year against last year’s launch of M-Connect.
Saucony had “another impressive quarter,” according to Grimes, and is benefiting from strong launches, including the Omni 12, an Editor's Choice from Runners World Magazine; and Carrera, the best cross-country shoe from Running Network. Saucony also continued to gain market share in the run specialty channel, growing at more than twice the rate of the overall category, according to Grimes.
Chaco’s momentum was driven by strong at-once demand for the classic Z sandals and “a nice lift” from the MyChacos initiative, its customizable sandals program on chacos.com. Cushe benefited from continued traction in the U.S. with key retailers such as REI, Dillards and Flip Flop Shops.
Lifestyle Group sales including Sperry, Hush Puppies, Keds and the Stride Rite Children's Group – leapt 678.4 percent to $295.8 million and increased 9.6 percent on a pro-forma basis, led by Keds and Sperry.
“Sperry continued to build on its momentum from the first half of the year, posting very strong double-digit revenue growth in the quarter,” said Krueger.
Sperry has now grown at a double-digit rate for 16 consecutive quarters. Grimes said Sperry’s men's business was “very strong” across all channels, but the women's business was “cycling against exceptionally strong shipments in the prior year of sequined and vulcanized product, business that wasn't repeated this year.”
Comp store sales at Sperry grew over 20 percent on the strength of significantly higher conversion and higher average ticket. It expects to end the year with approximately 50 Sperry stores.
At Keds, the turnaround is particularly being helped by the brand’s partnership with Taylor Swift and its product collaboration with Kate Spade. A new partnership with teen chain Hollister that includes exclusive product is also helping expand the brand into key style segments to reach new consumers, especially young consumers.
“In the fourth quarter, Keds will begin to roll out kiosks in important U.S. regional malls to present a full expression of the brand and to continue to get closer to its core consumers,” added Krueger. “The strategic marketing investments we are making in this classic American brand are paying off.”
Hush Puppies saw “mixed results” as double-digit revenue growth in the U.S. and Latin America and a solid gain in Asia Pacific were more than offset by continued challenges in Europe and Canada.
The Stride Rite wholesale business delivered its “strongest revenue quarter ever,” benefiting from transformation efforts. The segment includes Stride Rite, Saucony Kids, Keds Kids and Sperry Top-Sider Kids.
Heritage Group – consisting of Wolverine, Cat Footwear, Bates, Sebago, Harley-Davidson Footwear and HyTest – saw sales inch up 0.8 percent to $144.6 million. Cat Footwear saw double-digit growth while increases for the Wolverine brand were traced to improvement in Canada and better business at EMEA. New lifestyle offerings drove growth at Harley-Davidson. Bates, HyTest and Sebago all saw declines.
Gross margins increased 70 basis points to 39.9 percent, driven primarily by favorable channel mix, partially offset by foreign exchange contract losses.
Excluding acquisition-related transaction and integration expenses, operating expenses increased to 26.8 percent of sales from 25.3 percent the prior year. The increase was due to incremental pension and incentive compensation expenses, amortization expense related to purchase price accounting, a higher mix of consumer direct activities, and investments in key brand-building initiatives.
With the above-plan quarter, Wolverine boosted its adjusted per-share earnings forecast for the year, now expecting $2.73 to $2.83, ahead of its previous range of $2.60 to $2.75 a share. It narrowed its revenue estimate to $2.71 billion to $2.73 billion, from $2.7 billion to $2.775 billion.
The top-line range represents annual growth between 6.4 percent and 7.1 percent. The bottom-line guidance represents growth in the range of 19.2 percent to 23.6 percent, compared to prior year adjusted earnings per share of $2.29, and growth of 30.0 percent to 34.8 percent after further adjusting the prior year for 19 cents per share of non-recurring tax benefit.
Wolverine also announced it had decided to no longer operate its own factories in the Dominican Republic, where it currently has two primarily supporting Sperry and Sebago products. Grimes said that decision reflects “both the benefits of sourcing from larger, more efficient producers and by our desire to focus on our core competencies of creating innovative products and building enduring global lifestyle brands.”
One factory will be closed while Wolverine is the process of evaluating strategic alternatives for a second in Santo Domingo, including a possible sale to a third party. A total charge for the exit expected to be the range of $7 million to $10.4 million will be recorded in the fourth quarter. Annualized pre-tax savings from the exit is expected to be approximately $4 million.
