In releasing third-quarter results, Wolverine Worldwide Inc.'s management were dying to show off its new acquisition – Collective Brand’s Performance & Lifestyle Group (PLG) that includes the Sperry Top-Sider, Saucony, Stride Rite and Keds brands. Unfortunately, Europe got in the way.

With earnings falling for the fourth straight quarter in the period, Wolverine again cut its EPS and sales guidance for the year.

While still expecting a stronger at-once order environment in its fourth fiscal quarter, the company expects continued European macroeconomic turmoil to present challenges over the balance of the fiscal year. The company's revised full-year revenue guidance is in the range of $1.425 billion to $1.435 billion, an increase of 1.1 percent to 1.8 percent over the prior year's record revenue. Excluding the impact of the PLG acquisition, the company now expects fully diluted earnings in the range of $2.26 to $2.31 per share.
In July, it predicted $2.70 to $2.80 a share in adjusted earnings and $1.46 billion to $1.5 billion in revenue.

Including the contribution from PLG from the date of closing on Oct. 9 forward, full-year revenue is expected to be in the range of $1.645 billion to $1.655 billion.  

As disclosed last week, the company expects the contribution to earnings from the PLG acquisition in the 2012 stub period to be dilutive in the range of 25 to 30 cents per share, due primarily to the later-than-anticipated transaction closing date and the seasonality of the PLG business. Also disclosed last week, expectations for additions to per-share earnings in 2013 and 2014 were lifted by a dime and Wolverine now sees accretion of 35 cents to 50 cents for next year and 60 cents to 80 cents for 2014.

In the third quarter, Wolverine earnings slid 19.1 percent to $32.7 million, or 66 cents a share, down from $40.4 million, or 82 cents, a year earlier. Excluding acquisition-related expenses, earnings in the latest period were 72 cents a share. Revenue fell 2.4 percent to $353.1 million. The quarter faced tough comparisons against an approximately 13 percent revenue jump in the year-ago quarter. Foreign exchange negatively impacted reported revenue by $5.4 million.

Revenue and adjusted earnings per share were in line with the company's expectations communicated on Sept. 6 and reflected difficult macroeconomic and retail conditions in Europe, mitigated by strength in the US Analysts surveyed by Thomson Reuters were looking for 73 cents a share on $362 million in revenue.

“While these results represent a solid performance for the company, given the double-dip recession and economic headwinds in Europe, we have not fully realized the potential of our brands in that region, and still have plenty of growth opportunities in other geographic regions around the world,” said Blake Krueger, Wolverine’s chairman, CEO and president, on a conference call with analysts. “There are always opportunities for growth, regardless of the macroeconomic environment, and this continues to be our focus going forward.”

With the exception of Europe, Wolverine’s performance so far this year was described by Krueger as “solid” in all major regions. Said Krueger, “Our combined US wholesale business continues to generate good growth, delivering a mid-single-digit revenue increase during the last quarter, with gains generated across our brand portfolio. Our international license and distributor business was also a bright spot, delivering solid year-over-year revenue gains.”

On the call, Don Grimes, SVP and CFO, said the US growth was boosted by single-digit growth from its two largest US brands, Merrell and Wolverine, accompanied by double-digit increases from Hush Puppies, Sebago, Cat Footwear, Bates and HyTest. Its international distributor businesses for Wolverine, Sebago, Cat Footwear and Harley-Davidson in markets outside of the EMEA region each delivered double-digit increases during the quarter, helping drive single-digit growth in Latin America, and double-digit growth in the larger Asia Pacific region.

In the EMEA region, where Wolverine generates about 20 percent of its reported revenue, unit volume down in the high teens and revenue down over 20 percent due to difficult macroeconomic conditions. Said Grimes, “The tough economic environment in the EU is driving consumers to trade down when they are making buying decisions, not only for footwear, but also for many other consumer product categories.”

The outdoor channel in Europe was also impacted by a cold and wet spring and summer. The UK faced a particularly promotional period following the Olympics. Grimes said Wolverine is “not expecting a meaningful improvement in European fundamentals in the near term,” but still expects “continued solid to excellent performance” in other regions to help offset Europe’s weakness.

In its Outdoor Group, which includes Merrell, Chaco, and Patagonia footwear, sales were down 7.9 percent in the quarter to $134.0 million. Krueger noted that the growth came against near 20 percent growth in the year-ago period.

Krueger highlighted the accelerated gains in market share for the Merrell brand in the last four weeks, according to OIA VantagePoint. In Performance Outdoor, Krueger noted that the overall category has been under pressure as outdoor retailers struggle with the impact of last year’s unseasonally warm fall and winter as well as a shift in consumer taste to lightweight and athletic styling. But he noted that Merrell “continues to take market share with fresh new product introductions for the outdoor enthusiast.”

In Outside Athletic, Merrell has “enjoyed incredible recent success and growth,” with its entry into the category marked by the introduction last year of the Barefoot Collection, the largest introduction in the company's history. That’s being followed by an extension to address a broader range of activities with adjacent collections, such as Bare Access, Mix Master and Proterra, as part of the M-Connect series.

“Retail response has been terrific, with key retailers clamoring for the early delivery of product in Q4,” said Krueger. “However, M-Connect largely remains a Q1 2013 program. Although Outside Athletic is the smallest of these three segments for Merrell, the year-to-date shipments are up almost triple digits and orders for delivery next year are up at a strong double-digit pace.”

On the downside, Krueger said the Active Lifestyle segment, its more casual area and best known for the Jungle Moc, “has been the toughest category for Merrell over the last couple of seasons.” He said Merrell’s team “is focused on bringing innovative new products to market on an accelerated timetable as we attack this important growth area.”

Chaco and Patagonia footwear brands experienced revenue declines during quarter. Chaco's performance was mostly driven by softer retail conditions in the outdoor channel, and Patagonia footwear was driven by lower sales volume in Europe. Said Grimes, “While we remain appropriately cautious, there is good news on the horizon for Europe. Technical and specialty running is gaining momentum, which bodes well for Merrell's increased focus on outdoor athletic footwear and particularly the global launch of the M-Connect collection, which is poised to be the company's single biggest product launch in our history.”

In the Heritage Group (Wolverine, Caterpillar, Harley-Davidson, Bates, HyTest), sales increased 1.3 percent to $129.6 million as US growth overcame softness in Europe. Double-digit growth was seen in the US, driven primarily by the Wolverine, Cat and Bates brands, and in international markets. That was partially offset by softness in Europe for Cat and planned declines in the Harley-Davidson footwear business.

The top-performer in the group was the Wolverine brand, which continues to lead by a wide margin in the important US core work segment with a 22 percent market share as reported by SportScanInfo data. The brand's 1000 Mile collection of rugged casual footwear also contributed to the brand's success with a Wolverine store opened in the quarter in New York City's Nolita district exceeding expectations. Wolverine apparel also posted “very strong double-digit” growth.

In the Lifestyle Group (Hush Puppies, Sebago, Soft Style, Cushe), revenues were down 5.1 percent to $52.7 million. On the upside, strong double-digit gains were seen in the U.S. for Hush Puppies, benefiting from a turnaround strategy focused on better product and better distribution. Key revenue drivers for Hush Puppies include accelerated deliveries of women's boots to major department stores and strong retail sell-through of women's core casual programs.

Sebago saw “excellent double-digit revenue gain,” benefiting from its Triwater Collection for men in the performance category and its improved women's offering. The brand’s department store business saw a strong increase while new accounts include Bass Pro and West Marine. A Sebago collection of premium leather dockside and spinnaker styles is being launched key retailers like Saks Fifth Avenue, Bloomingdale's, Nordstrom, Harrods, Russell & Bromley and John Lewis.

Krueger also spent time heralding the potential of its newly-acquired PLG business. The four brands expand the company’s footprint in the men's and especially women's markets, strengthen it athletic and outdoor offering, and improves its reach into the children’s category with Stride Rite. With the four additions, Wolverine’s 16-brand portfolio makes the company the largest footwear company outside of the pure athletic players in the world in terms of pairs.

Said Krueger, “PLG is an excellent, well-managed business that has been growing at a solid double-digit rate for over the last several years, with fiscal 2012 revenue expected to top the $1.1 billion mark, another record for PLG.”

Looking ahead, he said Wolverine will be focused on accelerating PLG's growth pace with a particular focus on brand expansion into international markets.

Discussing each brand, he said Sperry’s revenue more than doubled in size every three years since 2002, benefiting from its position as the leading brand in the boat shoe category while also expanding into casual and women’s footwear categories. One half of its revenue now come from the women's offering and the business has become better balanced across seasons. In addition to accelerating international growth, growth avenues for Sperry include continuing to widen its non-boat shoe product offerings, expanding owned retail and e-commerce, and accelerating the transition “to a true lifestyle brand with a greatly expanded apparel and accessories presentation.”

Wolverine indicated the prior week that it planned to increase the pace of its Sperry Top-Sider concept store openings, growing from 18 concept stores today to approximately 100 within the next five years.

Regarding Saucony, Krueger said Wolverine plans to accelerate its market share growth in the US run specialty channel through the brand’s award-winning designs. He added, “We will focus on leveraging Saucony and Merrell's performance credentials to create a dynamic one-two punch in running, training, trail and minimalist products.”

Keds’ new management team is refocusing the brand on its primary target consumer, teenage girls and younger women. The brand continues to garner “strong awareness” among women of all ages, and last week announced a partnership with singer/songwriter Taylor Swift on a collaboration. Said Krueger, “Although only a week old, the excitement and positive response to this collaboration has been amazing.”

Stride Rite is seeing a resurgence due to a strategic turnaround plan implemented a few years ago, with comp stores across its network of 300-plus stores delivering comp store increases in the mid- teens, said Krueger.

Krueger also Wolverine sees opportunities to achieve higher profit performance from the PLG business, “as the team has a clear path forward for additional gross margin expansion and operating margin improvement. In addition, although this acquisition is not based on the realization of significant efficiencies, we now believe that we will deliver ongoing synergies above the high end of our previously disclosed range.”

Gross margin in the quarter narrowed to 39.2 percent from 40.6 percent due to slightly higher closeout sales and negative brand mix due to growth in its Bates and HyTest brands.

Adjusted SG&A, which includes $3 million of non-recurring acquisition-related expenses, totaled $89.2 million versus $90.2 million in the prior year. The $3 million of SG&A in the quarter directly related to PLG acquisition consists primarily of legal and other third-party expenses. Additionally, approximately $1.4 million of financing expenses were incurred in the quarter related to the new senior secured credit facility that was executed on July 31.

The new full-year guidance implies Q4 revenue of approximately $441 million, growth of 8.6 percent. Q4 earnings are now seen in the range of 42 cents to 47 cents per share, versus prior-year earnings of 47 cents per share.

While Europe is expected to remain challenging, Canada is also a “mixed picture” with strength in the work category being offset by retailer consolidation and consumers shifting tastes in more athletic profiles. The launch of M-Connect in Canada in 2013 is expected to boost results in that country.

Grimes said the US market has been “solid” thus far in 2012 and that trend is expected to continue over the balance of this fiscal year and into next, particularly with the contribution from the newly acquired brands, whose businesses is disproportionately skewed to the US market.

“Our business with core outdoor specialty retailers remains strong and our market share is expanding in this sizable channel, a channel that is far more material to the Merrell brand than the department store channel,” said Grimes.

He also expects the full launch of M-Connect to boost sales in the first half of the coming year. Said the CFO, “Quarter to date through this past Saturday, our at-once orders are up in the mid-single-digit range versus the prior year and we expect even better at-once order growth over the balance of the quarter, driven partially by easier comparisons.”

For 2013, the newly acquired PLG brands are expected to grow their full-year revenue at a double-digit rate in 2013 compared to full-year 2012 and deliver improved profit margins. Companywide revenues are expected to increase in the high-single-digit range. Moderate gross margin expansion in 2013 is expected to be driven by improvements in PLG's gross margin, fewer closeout sales across the portfolio, and the realization of sourcing efficiencies. Operating expense leverage off of the high-single-digit revenue growth and PLG's contribution to earnings is expected to reverse from the dilution projected for the remainder of this year.