By Thomas J. Ryan

While profitability is on the uptrend, Wolverine World Wide’s (NYSE:WWW) struggles to jumpstart top-line growth showed little signs of abating in the third quarter.

Revenues in the quarter ended September 10, 2016 were down 11.1 percent to $603.7 million and were down a softer-than-expected 8.6 percent on an underlying basis, which reflects updated impacts of currency and store closures. Latin America saw underlying growth in the mid-teens, but those gains were offset by declines in the larger U.S. and EMEA markets.

Citing the “tepid” overall retail climate as well as challenges at its Merrell brand, company officials slightly reduced their sales outlook for the full year and hinted at possible divestitures of under-performing brands.

Merrell was particularly disappointing in the quarter, and Wolverine officials revealed it’s taking several more steps to revive growth at its largest brand. Sperry showed incremental improvement over the second quarter with the help of a strong response to expanded boot offerings, but was still down. Saucony took a steep decline, due largely to bankruptcies in the sporting goods channel and some overall weakness in run specialty.

Overall, however, Wolverine officials indicated the company’s top line is being impacted largely across most brands by continuing weakness at traditional retail, which they expect to continue.

“We’ve been operating with the mindset that what we’re experiencing today is, frankly, the new normal,” said Blake Krueger, chairman, CEO and president, on a conference call with analysts.

He cited a variety of factors impacting retail, including a “big shift” to mobile, heightened promotional activity partly reflecting some still elevated inventories across retail and the spate of retail bankruptcies. Footwear trends have also generally been “lackluster” with the “possible exception of athletic and athleisure.” He also noted that weather, with temperatures reaching 80 in his home state of Michigan on October 18, was also having an impact in the near-term.

Looking further ahead, Krueger expects to see more consolidations in the “grossly over-stored” U.S. marketplace. However, the CEO said the consumer “is still responding to fresh, new, innovative product,” with Merrell, Sperry and Saucony having a number of promising upcoming launches planned for 2017. He also expects Wolverine will ultimately benefit from its efforts to protect the integrity of its brands in the ongoing promotional climate.

“Changes in technology just over the last several years have made this a necessity as far as being an appropriate brand steward,” Krueger said. “So this is something we’ve been focused on. We know it’s hurt our top line, and we know it’s led to a few difficult conversations with some of our retail customers. But in our opinion anyway, this is something we don’t have a choice of. This is something that must be done, especially as we look forward in this wholesale environment.”

More encouragingly, Wolverine World Wide’s earnings per share (EPS) in the quarter grew 6 percent on a currency-neutral basis, to 51 cents a share, at the high end of the company’s expectations and a penny above Wall Street’s consensus estimate.

On a reported basis, earnings increased 5.2 percent to $48.2 million, or 49 cents a share, and expanded 11 percent on an EPS basis due to fewer shares outstanding.

Chaco Up, Merrell Down
By segment, underlying revenue in the Wolverine Outdoor & Lifestyle Group slumped 10.4 percent. Chaco saw strong double-digit growth while Hush Puppies was down mid single digits, Cat was off high single digits and Merrell dropped in the mid teens.

Krueger remarked that Chaco “continued its torrid growth pace,” with overall revenue up more than 30 percent and online sales rising more than 45 percent. Said Krueger, “Chaco’s product and marketing initiatives continue to resonate with consumers, and the brand is poised to be the next $100 million brand in our portfolio.” Wolverine acquired Chaco in 2009.

Merrell’s decline reflected “ongoing challenges at retail,” including several retail bankruptcies as well as ongoing softness in the women’s active lifestyle category. A decision to exit wholesale distribution for Merrell’s apparel and accessories to focus on direct-to-consumer channels also impacted sales. With nearly 50 percent of Merrell’s revenue coming from outside the U.S., the stronger dollar continued to impact international results.

Merrell has seen some success with new product introductions, and the Moab and Capra were each up more than 30 percent in the quarter. Added Krueger, “Arctic Grip will also be a winner this fall, and our consumer activation is in full swing.”

Another bright spot was merrell.com, which was up “well over 30 percent” compared to last year. On the marketing front, Merrell’s sponsorship of Tough Mudder is exceeding expectations in its goal of reaching new and younger consumers. Research is showing that the events are contributing to the significant increases in digital and social presence for the brand.

Merrell’s Rebound Plan
Despite some bright spots, Krueger admitted that Merrell has “underachieved its potential the last few seasons, and we’ve taken actions to re-energize the product pipeline and return the brand growth.”

Krueger said part of the problem was that newer product introductions this year missed expectations but the brand also “didn’t put enough emphasis on freshening some of our legacy product and our legacy collections.”

A particular focus is being placed on speed-to-market. Merrell’s product development cycle has been overhauled, reducing concept to market time by nearly a third, with the ability to bring some new products to market in as short a time period as 75 days.

The brand has also reorganized its product development team and appointed new category and design leads for its women’s business. Investments have been made in securing consumer insights and market research to get closer to its consumer and support innovation, while marketing spend has been refocused toward digital and social vehicles to more effectively reach the brand’s target younger consumer.

Finally, merrell.com has been redesigned to “tell richer and more robust brand stories.”

Merrell will relaunch the Moab in the first quarter and introduce a new Nature’s Gym category targeting the athletic outdoor space. In the active-lifestyle category, the 168 collection targeting the after-sport category will be expanded. New collections of casual sandals and boots for both men and women will also be introduced in the first quarter. In the back half of the year, the brand will relaunch the Chameleon, a core program within its performance outdoor category.

Merrell will also enter the tactical and work markets in the first half of 2017. Krueger noted that Merrell boots “have been a favorite of our military and special ops forces around the world for years.” Last week, Wolverine broke ground on an expansion of its Big Rapids manufacturing plant in Michigan to support the effort.

The fourth quarter for Merrell is expected to show another overall decline, with growth expected to resume in 2017.

Sperry And Saucony
In the Wolverine Boston Group segment, underlying revenue declined 8.6 percent in the third quarter versus the prior year. Sperry and Keds were down in the mid single digits and Saucony was off in the mid teens.

Sperry’s performance marked strong improvement after being down in the high teens in the second quarter. Boots, a newer category, was up more than 40 percent. Boat shoes, as expected, were down, but performed better than planned and Sperry gained market share versus competitors in the category.

Flattish revenue is expected for Sperry in the fourth quarter. For 2017, growth is expected to resume, with a number of updates and launches planned.

Like Merrell, Saucony was impacted by some retail bankruptcies but also “tougher trading conditions” in the run specialty channel. Krueger estimated that the run specialty channel accounts for a third to nearly half of Saucony’s domestic business, but is particularly important from a brand positioning standpoint in helping the brand sell into other channels, including sporting goods. EMEA, Saucony’s largest international region, was up double-digits.

Krueger was upbeat about several introductions for Saucony set for the next several quarters. “We expect Saucony’s performance to be significantly better in the fourth quarter and to return to growth in 2017,” he said.

In the Wolverine Heritage Group, underlying revenues were down 1.4 percent year over year in the quarter. Bates was up strong double digits, while Wolverine was down mid teens. The decline for its flagship Wolverine brand was due to a shift in focus to premium channels and accounts that’s already leading to improved margins.

Bottom-Line Improvements 
Companywide, adjusted gross margin in the quarter was 40 percent on a currency-neutral basis, flat to the prior year and slightly better than expected. Supply chain initiatives contributed to lower product cost in the third quarter, and the impact of currency fluctuations was less than the second quarter.

The bottom line was also helped by a reduction in total SG&A expense by $23.6 million versus last year, including benefits from store closures, lower variable costs related to the wholesale business, lower pension expense and the timing of certain marketing expenses. Efforts to reduce inventories also progressed, down 7.6 percent compared to last year.

Discussing some key overall initiatives, Krueger said the company’s international business is “holding serve in 2016” following a rocky 2015 that was impacted by currency and macro-economic challenges.

Around its channel initiatives, investments in e-commerce, which is delivering significantly higher margins than the company average, continue to pay off. Online sales companywide were up 21 percent in the quarter. Wolverine now plans to “significantly accelerate” its brick and mortar store-closing efforts following a review earlier in the summer, and has retained an external advisor to facilitate this. The company will have about 320 stores overall by the close of the year. About two-thirds of the locations are Stride Rite, with the rest primarily Sperry and Merrell full-price and outlet locations. Reflecting the ongoing efforts to close doors, Wolverine’s store revenue saw a low-teen decline in the period.

Possible Brand Divestitures
Krueger said that following a review of its brand portfolio, the company had identified several brands that were either losing money or non-core, and has hired an external partner to explore strategic alternatives, which could include a divestiture for some. He did not identify which brands were affected.

The company’s overall portfolio includes Merrell, Sperry, Hush Puppies, Saucony, Wolverine, Keds, Stride Rite, Sebago, Chaco, Bates, Hytest, Cat and Harley-Davidson.

Wolverine now expects full-year 2016 reported revenue at the lower end of its projected range, while adjusted diluted earnings per share are projected near the midpoint of its past range. The outlook calls for revenues in the range of $2.48 billion to $2.58 billion, a decline of approximately 8 percent to 4.3 percent on a reported basis. Underlying revenues are expected to slide 1.8 percent to 5.6 percent.

Reported EPS is expected in the range of $1.02 to $1.12, updated to incorporate the impact of debt extinguishment costs. On a currency-neutral adjusted basis, adjusted EPS is projected in the range of $1.48 to $1.58.

Photo courtesy Saucony/Wolverine World Wide