Wolverine World Wide, Inc. saw strong double-digit gains at Merrell in the third quarter but overall sales and profitability came in below plan due to supply chain and promotional pressures. The company reduced its guidance for the year.

“While we were pleased to deliver third quarter revenue growth of 9 percent and 12 percent on a constant currency basis, both revenue and profit came in below our expectations reflecting ongoing supply chain disruption, heightened promotional activity at retail, and deteriorating macro conditions. We are facing congestion in our own US distribution centers and inland transportation networks and many wholesale customers are currently dealing with heavier inventories and warehouse constraints. These headwinds have resulted in certain shipping delays that impacted most of our brands. Sperry’s performance was further impacted by softer-than-expected trends in the boat category and a sluggish start to boot sales due to unusually warm weather.” said Brendan Hoffman, Wolverine Worldwide’s President and Chief Executive Officer. “Despite these external headwinds, we saw notable strength in our international business, and within our portfolio Merrell continued its strong momentum delivering 39 percent constant currency growth.”

“We are excited to share our new brand group structure and related reportable segments. This important change will allow us to better unlock the capabilities and synergies of our strong portfolio of brands. The new structure was recently approved by our Board of Directors and took effect in the fourth quarter. The financial highlights below provide information under the existing and new reportable segments.”

Sales of $691 million were below Wall Street’s consensus estimate of $710.2 million. EPS of 48 cents on an adjusted basis fell short of Wall Street’s consensus estimate of 55 cents.

Revenue of $691.4 million represents growth of 8.6 percent versus the prior year and growth of 12.2 percent on a constant currency basis. Our international business was especially strong, up 33 percent to $303 million. Direct-to-Consumer revenue was up 4.5 percent to $160 million.

By segment, sales at Michigan Group (Merrell, Cat, Wolverine, Chaco, Hush Puppies, Bates, Harley-Davidson, and Hytest) grew 20.1 percent to $390.2 million. Sales at Boston Group (Sperry, Saucony, Keds and Stride Rite) were down 4.3 percent to $247.7 million. Other revenue (including Sweaty Betty) reached $53.5 million against $53.1 million a year ago.

Broken down by activity, Active sales increased 13 percent to $398.2 million, Work sales grew 11.2 percent to $157.8 million, Lifestyle sales were down 6.9 percent to $117.7 million, and Other sales advanced 11.3 percent to $17.7 million.

By key brands, Merrell’s sales jumped 33.6 percent to $198.6 million. Saucony’s sales eased 0.6 percent to $129.7 million. Sperry sales were down 12.4 percent to $70.0 million. Wolverine Brand sales slipped 1.2 percent to $59.1 million. Sweaty Betty’s sales declined 3.3 percent to $37.8 million.

Gross margin of 40.2 percent versus 43.2 percent in the prior year and reflects a higher mix of international distributor sales that carry relatively lower gross margin but operating margins on par with overall business.

Selling, general & administrative expenses were $219.0 million. Adjusted SG&A expenses of $216.4 million or 31.3 percent of revenue, was 130 basis points lower than the prior year.

On a reported basis, EPS was 48 cents against break-even results a year ago. On an adjusted basis, EPS was 48 cents against 56 cents a year ago, a decline of 14.3 percent. On a constant currency basis, adjusted EPS would have been even at 56 cents against 56 cents.

On a reported basis, operating margin improved 180 basis points to 8.5 percent from 6.7 percent a year ago. Adjusted operating margin was down 190 basis points to 9.0 percent from 10.9 percent a year ago.

Inventory at the end of the quarter was $880.9 million, up 113.8 percent compared to unusually low levels last year and represents our peak position for 2022. Higher freight, handling and other inventory costs, represent approximately 15 percent of the increase. In-transit inventory of $281 million was up from $57 million last year. This heavy in-transit position was caused by inland logistics congestion and limited capacity in our distribution centers.

Net debt at the end of the quarter was $1.35 billion and liquidity was $400 million. Our bank-defined leverage ratio was 3.4x. This leverage position is a peak for this fiscal year and relates mostly to the increase in inventory in the quarter. In the first month of the fourth quarter, net debt and liquidity have improved by approximately $100 million. Wolverine said it expects to generate $250 million to $300 million of operating free cash flow in the fourth quarter, bringing our bank-defined leverage ratio down closer to 3x.

Outlook

“We expect revenue growth of 2 percent to 6 percent in the fourth quarter which includes a 4 percent negative impact from foreign exchange rate fluctuations. We are anticipating a heavily promotional environment, especially in our North American wholesale and global DTC channels.” said Mike Stornant, Executive Vice President and Chief Financial Officer. “These market conditions will put downward pressure on gross margin for the quarter. We are prioritizing the liquidation of non-core inventory over the coming months to improve our working capital position in 2023. We expect the new brand structure and the establishment of the new Profit Improvement Office to create great value through meaningful operational efficiency and cost reductions to be recognized in 2023.”

Fourth Quarter 2022 Outlook

  • Revenue is expected to be in the range of $650 million to $675 million, representing growth of approximately 2.3 percent to 6.2 percent. Foreign currency exchange rate fluctuations are expected to have approximately $28 million (or 4.4 percent) negative impact on fourth quarter reported growth.
  • Adjusted Gross margin is expected to be approximately 38.0 percent compared to 42.4 percent in the prior year. This decrease reflects the Company’s efforts to reduce seasonal inventory and includes an expectation that the fourth quarter holiday period will be highly promotional, as well as an expectation for increased logistics and handling costs and unfavorable foreign exchange rates.
  • Diluted earnings per share are expected to be between ($0.19) to ($0.09) and adjusted diluted earnings per share are expected to be between ($0.15) to ($0.05). Foreign currency exchange rate fluctuations are expected to have a $0.03 negative impact on fourth quarter EPS.
  • The Company expects its aggressive inventory actions to position it to reduce inventory at year end versus the third quarter of 2022 and improve distribution efficiencies allowing it to more timely receive and ship products at the start of fiscal 2023.

Full-Year 2022 Outlook

  • Revenue is expected to be in the range of $2.670 billion to $2.695 billion, representing growth of approximately 10.6 percent to 11.6 percent. Foreign currency exchange rate fluctuations are expected to have approximately $76 million (or 3.1 percent) negative impact on full-year reported growth.
  • Gross margin is expected to be approximately 41.0 percent, assuming an increased promotional and markdown cadence and a higher mix of lower-margin international third-party sales in the back half of the year.
  • Operating margin is expected to be approximately 9 percent and adjusted operating margin is expected to be approximately 7 percent, reflecting increased promotional costs and higher inventory handling costs.
  • The effective tax rate is expected to be approximately 21 percent.
  • Diluted earnings per share are expected to be between $1.90 to $2.00 and adjusted diluted earnings per share are expected to be between $1.41 to $1.51, representing a decline of (24.1 percent) to (18.7 percent). Foreign currency exchange rate fluctuations are expected to have a $0.13 negative impact on full-year EPS.
  • Diluted weighted average shares are expected to be approximately 79.9 million.

Under its prior outlook, sales growth was expected in the range of 14.0 percent to 16.0 percent. Diluted EPS was expected to be between $2.62 to $2.72 and adjusted EPS between $2.10 to $2.20, Gross margin was expected to be 42.5 percent. Operating margin was expected to be approximately 11.5 percent and adjusted operating margin was expected to be approximately 9.5 percent.