Wolverine Lowers 2014 Guidance Despite Above-Plan Q2

Wolverine Worldwide (WWW) reported second-quarter earnings declined on a modest revenue gain but results exceeded internal forecasts, helped by double-digit growth for Keds, Chaco, Saucony Cat and the flagship Wolverine Brand.

However, the company still slightly lowered its EPS guidance on a currency-neutral basis due largely to a challenging retail climate in many regions.

“We expect some revenue pressure for the back half of the year, including challenges in some third-party markets, a tougher retail and overall trading environment in Latin America, continued soft retail traffic trends in the U.S. and continuing uncertainty related to foreign currency,” said Mike Stornant, Wolverine SVP, CFO and treasurer, on a conference call with analysts.

Blake Krueger, chairman, CEO and president, pointed to the “significant progress” WWW had made in its key initiatives announced over the last year to accelerate growth and improve profitability. Management also revealed it will further accelerate those efforts, resulting in the discontinuance of its smallest brand, Cushe. But Krueger spent much of the time on the call highlighting the improving momentum seen in the quarter by many of its brands, including an uptick at Merrell.

“Our Q2 performance is reflective of our balanced business model, as we are not dependent on one or two brands or geographies to deliver great results,” said Krueger.

In the quarter ended June 20, revenues rose 2.7 percent to $630.1 million and gained 4.9 percent on a currency-neutral basis. On a currency-neutral basis, mid-single digit revenue growth was seen in its U.S. wholesale business, double-digit growth in EMEA and growth exceeding 50 percent in the Asia Pacific region. Revenue for the quarter also benefited from higher than anticipated international shipments that were initially expected to deliver in Q315. Planned retail store closures and termination of the Patagonia license agreement reduced revenue by $11.6 million versus the prior year.

Gross margin declined 100 basis points to 39.1 percent, in line with company expectations. Selling price increases were offset by a lower mix of higher margin store revenue due to closures, a higher mix of lower margin top-line revenue for certain third-party distributors, product cost increases and foreign-exchange losses. Operating margins were still better than its internal projections due to cost disciplines.

Adjusted diluted EPS was 27 cents, down 12.9 percent from an adjusted 31 cents per share in the prior year but “well ahead” of company expectations. Wall Street's consensus estimate had been 20 cents. Reported diluted EPS was 24 cents, compared to 27 cents in the prior year.

KEDS BRIGHT SPOT FOR LIFESTYLE GROUP

Among its operating segments, Lifestyle Group’s revenues were down 3.1 percent on a currency-neutral basis. Reported revenues were down 4.1 percent to $253.4 million. On a currency-neutral basis, low teens revenue growth from Keds was offset by a decline of less than 1 percent for Sperry, a high-single-digit decline in Stride Rite and a low-teens decline for Hush Puppies

Keds’ growth in the low-teens came up top of an increase of more than 30 percent last year. Internationally, Keds grew over 100 percent in Latin America and more than 200 percent in Asia-Pacific, with international now accounting for 20 percent of the brand’s mix. Said Krueger, “The brand's product and marketing stories continue to resonate with young women in the U.S. and at an even faster pace around the world.”

Sperry, as expected, was essentially flat to last year on a currency-neutral basis, following two consecutive quarters of strong growth. In mid-July, the brand launched its Odysseys Await fall campaign and Krueger said the Sperry business is already “more robust than only a year ago.” Particularly encouraging is that gross margins expanded 300 basis points in the first half due to efforts to be less promotional.

“The steps we've taken over the last year, coupled with new brand investments, are taking hold and I am pleased with Sperry's progress,” said Krueger. Sperry is expected to continue to deliver high-single-digit revenue growth for the year.

Stride Rite’s decline was primarily due to a store closure program, while the drop at Hush Puppies primarily reflected a realignment of its domestic distribution strategy.

SAUCONY AND CHACO LIFT PERFORMANCE GROUP

At the Performance Group, sales grew 9.4 percent in the quarter on a currency-neutral basis. Sales rose 5.7 percent to $223.3 million. The gains were driven by strong double-digit growth from Chaco, low-teens growth from Saucony and low-single-digit growth from Merrell.

Chaco’s revenues soared more than 60 percent, driven by “excellent growth in all channels and virtually all accounts” for its Classic Z sandals. The OutCross Evo, its closed toe program, launched successfully and is helping expand Chaco into a four-season brand. Chacos.com grew over 85 percent, driven by the custom-made My Chacos program. “Chacos.com also features exciting new product exclusives such as the limited edition Grateful Dead collection, which sold out in less than an hour– something that surprised even me,” said Krueger.
 
At Saucony, Wolverine’s third-largest brand by revenue, the low-teen gain reflected a strong response to new technologies, such as ISOFIT, within its performance models and continued growth in its Originals heritage collection. International revenues for Saucony were ahead over 40 percent in the quarter with strong momentum across EMEA, Asia-Pacific and Latin America.

Merrell’s growth accelerated to a low-single-digit gain after seeing flat sales in the first quarter. In the Performance Outdoor category, a strong response to Capra, Merrell’s pinnacle outdoor hiking collection, “helped solidify the brand's market-leading position in the category,” Krueger said. Performance sandals, hiking, light hiking and multisport products “continue to sell through very well globally.”

The Active Lifestyle category, representing about a third of Merrell’s business and recently struggling, “improved materially in the quarter as retailers and consumers responded positively to new sandal and footwear offerings.”

For the full year, Merrell remains on track to deliver mid-single-digit growth on a currency-neutral basis.

“For 2016, Merrell plans to debut a new integrated brand platform and we've already begun to socialize the new Merrell with our key partners both here in the U.S. and around the world,” said Krueger. “Merrell remains one of the most loved brands in the industry and the global leader in the outdoor footwear space.”

The top performing segment was Heritage Group, which grew 12.2 percent on a currency-neutral basis. Sales increased 14.6 percent to $127.4 million. The gains were led by strong double-digit growth from Bates, high-teens growth from Cat Footwear, low-teens growth from Wolverine, Sebago and HyTest, with high-single-digit growth from Harley-Davidson.”

Cat saw “excellent revenue gains in North America and Asia-Pacific” with domestic business, supported by its core work offerings and lifestyle offerings which boosted international growth. The Wolverine Brand bounced back following some product delays in Q1, related to the West Coast port slowdown. Wolverine Brand’s work offerings were supported by innovations such as EPX and Carbon Max, along with continued growth from core collections such as Contour Welt. Its Heritage Collection featuring the U.S.-made Thousand Mile line expanded at a mid-teens pace.

Regarding progress on its key strategic initiatives, WWW in July 2014 announced plans to close approximately 140 stores, primarily within the Stride Rite fleet, over 18 months. Krueger said WWW now expects to close a total of 120 doors though the end of 2015 with an additional 55 expected over the next five years at their natural lease expiration.

As part of efforts to streamline operations, Canadian offices and infrastructure are being consolidated with the transition expected to be completed by mid 2016.

The decision to wind down Cushe, which had revenues of approximately $17.5 million in 2014, “allows us to redeploy time, talent and resources to other high-value opportunities within the portfolio,” said Krueger. The company expects to incur $3.5 million of restructuring and impairment costs in fiscal 2015, of which $2.9 million was recorded in Q2.

Finally, WWW recently amended and extended its senior secured credit facilities, increasing borrowing capacity, extending maturity date, lowering debt cost and increasing flexibility around stock repurchases and other uses of cash.

ACCELERATING MARKETING INVESTMENTS TO SUPPORT GROWTH

Krueger also noted that the company is accelerating marketing investments to jumpstart growth across brands.

Sperry will receive the majority of its 2015 spend to support its new global brand platform, Odysseys Await. Merrell already saw increased investment with Capra’s global launch but key personal have also been added to Merrell’s product, marketing and field tech rep teams.

Sperry, Saucony and Keds are also receiving enhanced investments around international growth. On a year-over-year basis, the Boston, MA-based brands grew their international business by over 40 percent in the quarter and have added 400 new dedicated points of global distribution since being acquired in 2012.

Wolverine now expects to incur total pre-tax charges of approximately $48 million to $51 million related to the previously announced Strategic Realignment Plan. Of this amount, $26 million was recorded last year, $23 million are expected to be incurred this year, with the balance recorded next year. When reporting first-quarter results, the company had expected to incur total pretax charges of approximately $44 million to $48 million. The difference reflects the exit of Cushe and debt extinguishment costs from the debt refinancing,

As a result, reported diluted EPS in fiscal 2015 is expected in the range of $1.39 to $1.46. Previously, it had expected EPS in the range of $1.42 to $1.49.

Consolidated reported revenue is now expected between $2.82 billion to $2.85 billion, representing growth in the range of approximately 2 percent to 3 percent versus the prior year. Constant currency revenue growth is expected in the range of approximately 5 percent to 6 percent. In reporting first-quarter results, WWW expected sales between $2.82 billion to $2.87 billion, and growth on a currency-neutral basis in the range of approximately 5 percent to 7 percent.

Adjusted EPS share is expected in the range of $1.53 to $1.60. On a currency-neutral basis, EPS is expected in the range of $1.68 to $1.75, down from $1.71 to $1.78 previously.

Regarding its third quarter ended September 12, Wolverine now expects adjusted earnings in the range of 47 to 49 cents per share, which is down from Wall Street’s average estimate of 62 cents a share and compares with 63 cents a year ago.

Partly due to a slight shift in wholesale demand from the third quarter into the fourth, growth on a currency-neutral basis is expected in the mid-single digits in the quarter, with reported growth in the low single digits. Foreign currency is expected to have a nearly 350 basis points negative impact on revenue growth in Q3, the largest impact of any quarter in the year.

Earnings will be impacted by early third-party shipments that fell into the second quarter and preferred timing of discretionary operating expenses from Q2 into Q3. This includes a projected 40 percent increase in marketing and advertising spend in the third quarter, driven mostly by planned incremental investments, higher non-cash pension expense and a slightly higher tax rate than last year.

Stornant said the updated guidance “clearly implies a very strong revenue and earnings performance for Q4 as Merrell and Sperry accelerate growth and our other wholesale businesses continue their momentum into the back half of the year.”