Wolverine World Wide Inc. on Tuesday closed on its acquisition of Collective Brands Inc.’s Performance And Lifestyle Group (PLG) business, and indicated the deal is already starting to pay off.
For the current year, officials said they expect the deal to result in per-share earnings dilution of 25 cents to 30 cents through year's end due primarily to the later-than-anticipated transaction closing date and the seasonality of the PLG business. However, the company raised expectations for additions to per-share earnings in 2013 and 2014 by a dime and now sees accretion of 35 cents to 50 cents for next year and 60 cents to 80 cents for 2014.
In May, Wolverine and a pair of private-equity firms agreed to jointly acquire Collective Brands in a $1.32 billion deal that split portions of the Collective Brand’s business. Blum Capital and Golden Gate Capital were to jointly pick up the operations of Payless ShoeSource and Collective's International, its licensing arm.
Under the deal, Wolverine paid $1.24 billion for Collective Brands' Sperry Top-Sider, Saucony, Stride Rite and Keds brands. Led by Gregg Ribatt, the PLG business had more than $1 billion in revenue in the fiscal year ended Jan. 31 from almost 40 million pairs. It includes more than 3,800 employees.
Wolverine said its 16-brand portfolio will become its largest operating group. Blake Krueger, Wolverine Worldwide’s chairman and CEO, said that the PSS business is on track to deliver “excellent double-digit revenue growth and even stronger double-digit growth in operating income this full fiscal year,” lead by Sperry and a resurgence at Stride Rite Children's Group. PLG will remain headquartered in Lexington, MA.
“Today marks a transformational event for our company,” said Krueger. “We couldn't be more excited about the tremendous growth potential that these four well-established and iconic brands bring to our proven global platform. Our new 16-brand portfolio well-diversified across product categories and consumer segments contains some of the worlds best-loved and most highly recognized brands, all of which are strongly positioned for domestic and international growth.”
On a conference call with analysts, Don Grimes, Wolverine SVP and CFO, noted that outside of the pure athletic players, Wolverine Worldwide is now the largest footwear company in the world in terms of pairs. Its existing portfolio is led by Merrill, Hush Puppies, Wolverine, Sebago and Caterpillar.
“Our portfolio now covers all age groups and is nicely balanced across men's, women's and children's,” said Grimes. “We market around 100 million units of footwear and apparel in more than 200 countries and territories around the world, and our brands cover almost all categories — casual, outdoor, work, dress, children's and athletic, to name just a few.”
Grimes said the outlook for greater accretion partly reflects the fact that PLG brands have “continued to perform quite well” this year despite the economic challenges.
PLG’s performance is being driven by Sperry, which is up 20 percent on a year-to-date basis; and Stride Rite Children's Group, which has delivered “three great quarters in a row.” Regarding Saucony, Grimes said the running brand’s year-to-date performance in the U.S. “has not been strong, but it's really has been by the brand's choice, as they chose to not anniversary two fairly significant programs with more mass retailers in the first half of this year. So Saucony is poised to have a very, very strong second half of the year.”
But the accretion lift was also due to better prospects for international growth as management mapped out a market-by-market strategy across brands.
“We are probably more bullish today than we were on May 1 regarding the international opportunity for all four brands in the portfolio, but the Sperry and Keds and Saucony, in particular,” Grimes said. He noted that less than 10 percent of PLG sales are outside of North America.
While Europe is an obvious first opportunity given Wolverine’s strong infrastructure there, growth will also come from the Asia Pacific and Latin America regions, where fully one third of Wolverine’s 52 million pairs were sold last year. He added the “incremental lift” from leveraging Wolverine's existing infrastructure internationally will likely start being noticeable in 2014 and beyond.
Beyond international expansion, Wolverine plans to drive PLG’s growth by increasing the pace of its Sperry Top-Sider concept store openings, growing from 18 concept stores today to approximately 100 within the next five years.
Grimes said the stores are enjoying “very strong positive comp” sales, along with “very strong four-wall profit margins, which is really encouraging to us, because that is one area with Wolverine we know we have room for improvement in terms of improving our four-wall profit margin in our 100 retail store fleet.”
Wolverine will also “take the necessary steps to restore PLG's gross margin to levels of the very recent past, and we will support the development of the Sperry brand into a complete lifestyle brand, capitalizing on the recent expansion of the brand into adjacent categories such as apparel, bags, eyewear and watches.”
Grimes noted the PLG’s costs had “got out of hand last year” due to strong Sperry demand that also forced them to use factories in China they hadn’t used before.
Among its other brands, Wolverine will “leverage Saucony's strong position in the minimalist footwear category, particularly in the specialty running channel, to drive improved top- and bottom-line performance.”
Keds’ growth is expected to be helped by “a more focused strategy that is currently being implemented by a new brand leadership team,” as well as aggressive growth outside the U.S. Plans call for building on the recent resurgence of the Stride Rite Children's group and leveraging its retail footprint and expertise in children's footwear for the benefit of other brands in Wolverine’s portfolio.
To finance the acquisition, Grimes noted that on August 1, it announced the execution of a senior secured credit agreement that provides $1.1 billion of the financing “at very attractive rates” consisting of a $550 million Term Loan A, a $350 million Term Loan B and an undrawn $200 million revolving credit facility. Since that time, advantage market conditions have enabled Wolverine to reprice the Term Loan B, reducing the interest rate by 75 basis points and the annual interest expense by $2.6 million. Additionally, Wolverine on Sept. 27 successfully marketed the offering of $375 million of our 6.12 percent eight-year notes. Taken as a whole, its financing package, before the impact of interest rate swaps, has a weighted average cost of approximately 4.0 percent per year.
Grimes said management would provide revised guidance on Wolverine when Q3 results are announced next week.
