Wolverine World Wide, Inc. saw double-digit gains at Merrell in the third quarter, but overall consolidated sales and profitability came in below plan due to supply chain and promotional pressures. Wall Street punished the company in response to its reduced guidance for the year, as WWW shares plummeted more than 34 percent for the day.

Sales of $691.4 million, up 8.6 percent versus the year-ago period, were below Wall Street’s consensus estimate of $710.2 million. Revenues were up 12.2 percent on a constant-currency basis. EPS of 48 cents on an adjusted basis fell short of Wall Street’s consensus estimate of 55 cents.
The international business was said to be “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.

Wolverine World Wide also announced a new brand reporting structure with three groups based on function—Active, Work and Lifestyle.
The Active Group will be comprised of Merrell footwear and apparel, Saucony footwear and apparel, Sweaty Betty activewear, and Chaco footwear. Chris Hufnagel, leading the Merrell brand, was appointed president of the Active Group. Saucony and Chaco now report to Hufnagel. The Sweaty Betty brand will continue reporting to Hoffman.

Active Group sales increased 13 percent to $398.2 million in the third quarter.

Merrell’s sales surged 33.6 percent to $198.6 million in the period, with strong growth across regions, channels and categories, while Saucony’s sales dipped 0.6 percent to $129.7 million. Saucony.com revenue was up 30 percent in the quarter, or 33 percent on a constant-currency basis, reflecting an increase in promotional activity and “a strong consumer response to new products showcased in the quarter.” The company expects Saucony to deliver over 20 percent growth in the fourth quarter.
Sperry sales were down 12.4 percent to $70.0 million.

Sweaty Betty sales declined 3.3 percent to $37.8 million in the period but increased 13 percent on a constant-currency basis. On a like-for-like pro forma basis, its revenue was down 28 percent, or 16 percent, on a constant-currency basis. “This performance is below our expectations due to logistic delays that negatively impacted shipments of U.S. wholesale orders; performance was primarily challenged by the tough macro environment in its home market, the U.K., where consumer sentiment continues to deteriorate significantly,” Hoffman shared.

The Work Group includes Wolverine footwear and apparel, Cat footwear, Bates uniform footwear, Harley-Davidson footwear, and HyTest safety footwear. Tom Kennedy will continue to lead the brands as president of the Work Group.

Work Group sales grew 11.2 percent to $157.8 million in the quarter. Wolverine Brand sales slipped 1.2 percent to $59.1 million in Q3.

The Lifestyle Group includes Sperry footwear, Keds footwear, and Hush Puppies footwear and apparel. Katherine Cousins, who joined the company as president of Sperry in 2021 and has overseen Keds since the beginning of 2022, was appointed president of the Lifestyle Group.

Lifestyle Group sales were down 6.9 percent to $117.7 million in the three-month period that ended September 30.

Other sales advanced 11.3 percent to $17.7 million.

The company noted that kid’s footwear results from Saucony, Sperry, Keds, Merrell, Hush Puppies, and Cat would report within each applicable brand.

WWW saw gross margin of 40.2 percent of sales in the third quarter, compared to 43.2 percent in the year-ago quarter. The result reflects “a higher mix of international distributor sales that carry relatively lower gross margin but operating margins on par with the overall business.”

SG&A expenses were $219.0 million. Adjusted SG&A expenses of $216.4 million, or 31.3 percent of revenue, were 130 basis points lower than Q3 last year.

Adjusted operating profit decreased 10 percent to $62 million in Q3 due partly to higher promotional sales in the company’s DTC channel compared to “unusually low promotions last year.”

Discounts in wholesale due to late deliveries and unfavorable foreign exchange rates also hit profits.

On a reported basis, the 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.

On a reported basis, EPS was 48 cents per share against break-even results in the year-ago period. 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 conference call with analysts, company President and CEO Brendan Hoffman provided additional context on the factors that impacted revenue in the quarter.

“First, starting with U.S. wholesale, which represents our largest channel and the largest miss versus our outlook for the quarter, as Sperry, Keds, Sweaty Betty, the Wolverine brand, and Saucony were heavily impacted by the following key factors,” Hoffman detailed.

He said logistics and warehouse congestion, which starts with the company’s owned distribution centers, are operating over capacity, making it difficult to receive new product and process outbound shipments. He said that ongoing congestion within inland transportation networks remains challenging and is its number one operational priority.

“Many wholesale customers are currently dealing with heavy inventories and warehouse constraints, Hoffman continued. “This resulted in certain shipment delays causing some elevated cancellations and additional discounting. Logistics delays and integration timing on Sweaty Betty’s U.S. wholesale business limited the brand’s ability to service its U.S. wholesale orders.”

He also said Sperry underperformed expectations as “logistics and warehouse congestion led to late deliveries and slowed the introduction of newness, which was further exacerbated by declining trends in the boat shoe categories and with the unusually warm weather, a sluggish start to the boot season, all of which led to shipping delays, discounts and order cancellations.”

Hoffman indicated that its global DTC channels, which include Sweaty Betty, leveraged to clear inventory during the quarter, which drove 4 percent revenue growth, 9 percent in constant currency, in line with expectation. “However, higher-than-expected promotions resulted in lower gross margin during the quarter,” Hoffman added. “Challenging macro conditions in the U.K., Sweaty Betty’s home market, put extra pressure on performance in the quarter.”

The CEO said it moved up deliveries, especially in the company’s core evergreen products, to ensure the company had ample supply to meet backlog, which was at a historic high. “So while we have not navigated the supply chain as seamlessly as we would have liked, we have plans in place that should allow us to improve the flow of goods, increase the rate of on-time deliveries and reduced inventory levels,” he shared. “These actions include reducing forward purchases with our suppliers, especially in core products that we have in the warehouse and forcefully moving through seasonal products.”

Inventory at the quarter’s end was $880.9 million, up 113.8 percent compared to “unusually low levels” at quarter-end last year, and represents the company’s highest level 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.

Looking ahead, WWW is forecasting that fourth-quarter revenue will 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 roughly $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 Q4 period, reflecting the company’s efforts “to reduce seasonal inventory and includes an expectation that the fourth quarter holiday period will be highly promotional.”

The diluted loss per share is expected to be between negative 19 cents and 9 cents. The adjusted diluted loss per share is expected to be between negative 15 cents and 5 cents. Foreign currency exchange rate fluctuations are expected to have a 3 cents negative impact on fourth quarter EPS.

Full-Year 2022 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 roughly $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.
Full-year diluted EPS is expected to be between $1.90 and $2.00, and adjusted diluted EPS is expected to be between $1.41 and $1.51 per share, representing a decline of 24.1 percent to 18.7 percent for the year. Foreign currency exchange rate fluctuations are expected to have a 13 cents negative impact on full-year EPS.

Photo courtesy WWW/Sweaty Betty