By Eric Smith
Shares of Wolverine World Wide Inc. fell $3.28, or 9.1 percent, on Wednesday after the company reported another quarter of what CEO Blake Krueger called “choppy” revenue growth for 2018.
Reported revenue of $558.6 million decreased 3.9 percent during the third quarter—missing Wall Street targets by $23.5 million—while underlying revenue increased 0.5 percent and further adjusting for currency, increased 1.1 percent.
“Q3 revenue was impacted by several unrelated items,” Krueger said on Wednesday’s earnings conference call with analysts. “Lean inventory positions for a few of our brands, including much lower closeout inventory, some delayed product receipt … , macro headwinds and our low-margin leathers business related to historically low leather prices, and softness in Canada and some countries in Latin America.”
This continued slow growth came amid a solid profit for the company, which lifted its guidance for the third time this year after reporting earnings on an adjusted basis rose 44 percent.
Reported diluted earnings per share was 60 cents, compared to 24 cents in the prior year. Adjusted diluted earnings per share were 62, compared to 43 cents in the prior year and 6 cents better than Wall Street’s consensus estimate of 56 cents.
And the company’s Q3 operating margin of 12.6 percent was up 80 basis point over last year, which “represents the highest quarterly performance of the year,” Krueger said.
Krueger went on to discuss, among other topics, Wolverine’s “Way Forward” transformation, which SGB covered earlier this year (click here to read Wolverine’s ‘Consumer Obsession’ Kicks Into High Gear).
“The global transformation of the company over the last 24 months has greatly improved the efficiency of our business model allowing us to generate significant earnings leverage and strong cash flow,” he said. “Our improved profit delivery, strong balance sheet and healthy liquidity position that put us in a position to invest in growth initiatives and focus on revenue expansion.”
But how Wolverine achieves that revenue expansion remains a concern. Even Merrell, which sparked the company in Q2, bumped into some pressures during the most recent period, Krueger noted.
“Merrell’s growth in Q3 was impacted by sluggish retail conditions in the international market noted above as well as lean inventories resulting from very strong growth in Q2 of almost 19 percent,” he said. “Merrell is now in a much better inventory position and is poised to deliver low teens growth in Q4 with new product introductions and a significant increase in demand creation.”
Krueger said projected low teens growth for Merrell in Q4 will be driven as “new product introductions accelerate, increased marketing drives expanded consumer engagement, and our DTC business becomes a bigger component of the overall revenue met.”
The sluggish revenue was a concern according to some of the analysts who cover Wolverine, though they also said that Wolverine is likely to show a revenue growth rebound starting as early as Q4.
“Margin and earnings improvement continued in 3Q but the shortfall to revenue has shaken confidence,” according to “3Q EPS Upside but the Market Wants Topline, Case for Resurgence Remains Credible,” the note that Jim Duffy of Stifel wrote to investors. “Emerging from restructuring exiting 2018, revenue growth becomes more important to earnings progress looking forward. Despite the disappointment, we believe the case for L/MSD (low- to mid-single digit) revenue growth remains credible. Key drivers on display in 2H include growth from the two largest brands (Merrell and Sperry) and the Work category and >33% growth from owned e-commerce (~10 percent of 2018 revenue).”
And in a note titled “Tougher 3Q but Merrell and Sperry Expectations are Promising,” Michael Kawamoto of D.A. Davidson wrote, “Most of the issues have been worked through, and brand momentum at Merrell and Sperry, combined with lean inventories, give us confidence that 4Q guidance is achievable.”
As Krueger noted on the earnings call, the company isn’t wavering from its plan to invest in future growth. It plans to invest up to $45 million in “incremental investments to drive future growth as part of our Global Growth Agenda,” he said.
“We remain committed to this enhanced investment strategy for 2018 and expect to implement a number of new initiatives to drive accelerated revenue growth over the long term,” he added. “We expect the fourth quarter to benefit from these investments, resulting in underlying revenue growth of 3 percent to 5 percent compared to the prior year. We expect Merrell to deliver low-teens growth and Sperry to deliver high-single-digit growth in the quarter. Growth in our e-commerce business is also expected to remain very strong in the fourth quarter.”
The company updated its revenue and earnings projections for the full year. Revenue is now expected to be approximately $2.24 billion, representing 2.5 percent underlying growth for the full year. The updated guidance includes the fourth quarter impact from weakness in the Latin America region and the bankruptcy of a work boot customer. Previous guidance was $2.24 billion to $2.32 billion.
And reported diluted earnings per share are now expected to be between $2.09 to $2.13 and adjusted diluted earnings per share are now expected to be between $2.12 to $2.16, an increase over our previous outlook. Previous guidance was $2.08 to $2.15.
Wolverine World Wide’s portfolio of brands include Merrell, Sperry, Hush Puppies, Saucony, Wolverine, Keds, Stride Rite, Chaco, Bates, HYTEST, and Soft Style. The company also is the global footwear licensee of the popular brands Cat and Harley-Davidson.
Photo courtesy Merrell