Wolverine Worldwide Inc. lowered its guidance for the full year partly due to challenges stemming from the strengthening U.S. dollar but also due to a soft selling environment in the U.S. Management indicated it is seeing tighter open-to-buys heading into the holiday season.
The company updated its guidance while reporting second-quarter earnings declined on weak sales, although it was in line with the company’s former guidance. Among its largest brands, Merrell saw a modest gain and Sperry a slight decline. Stride Rite and Hush Puppies absorbed steep declines. Saucony and Chaco stood out with healthy gains.
On a conference call with analysts, Blake Krueger, chairman, CEO and president, said many of the macroeconomic challenges anticipated in the first half of the year have persisted and some have worsened versus prior expectations.
In the U.S., while the economy “has remained on relatively stable footing through the first half of the year, traffic trends at retail have remained soft, consumer sentiment has eroded somewhat in recent months, and unseasonably warm weather appears to have stunted early fall shopping,” Krueger said. “We believe that inventories at retail have been building through the year resulting in tight open-to-buys and a more cautious stance by retailers ahead of the critical holiday shopping season.”
Earlier this year, Wolverine increased prices internationally “for the long-term health of our brands and business,” while realizing it would impact sales in the short-term. Krueger pointed to how softer global demand across many industries, including consumer soft goods, has developed over the last several months, marked by the manufacturing slowdown in China.
“For our business, a couple of examples of countries impacted by declining commodity prices are Russia and Canada, both of which have seen declining GDP this year,” said Krueger. “Although not commodity dependent and faring better, Europe has not been immune to the economic and consumer uncertainty and is still struggling to deliver economic growth above 2 percent.”
Krueger said the combination of these factors across numerous markets has resulted in a “tougher demand environment, especially late in the third quarter, and we believe that it's prudent to expect many of these factors to persist into the fourth quarter and the first half of 2016. This has caused us, along with others in and outside of our industry, to temper the near-term outlook.”
On an adjusted basis, EPS for the year is now expected to be in the range of $1.44 to $1.47, which compares to previous guidance calling for earnings in the range of $1.57 to $1.60.
In the third quarter ended September 12, earnings on an adjusted basis – excluding restructuring and impairment and acquisition-related integration costs – reached 48 cents a share, down 23.8 percent from 63 cents a year ago. Reported earnings declined 20.6 percent to $46 million, or 44 cents, a year ago.
Adjusted revenue grew 0.7 percent while reported sales slid 4.5 percent to $678.9 million. Adjusted sales reflect the impact from planned retail store closures associated with its Strategic Realignment Plan, largely the Stride Rite chain, and the termination of the Patagonia license agreement.
Sales missed plan due to weakness in North America. Direct-to-consumer, predominantly Stride Rite store performance, contributed roughly one-third of the shortfall due to soft footwear retail traffic and efforts to improve the chain’s comp performance coming in below expectations. Efforts to be less promotional also impacted top-line growth.
Wholesale revenue, excluding DTC channels for Sperry and Merrell, contributed roughly one-third of the net shortfall, focused mainly in the North American market. The remaining softness was experienced in its North American wholesale business across several brands.
“During the quarter, retailers became more cautious as the U.S. retail landscape remained promotional and inventory levels continued to increase across channels,” said Mike Stornant, SVP and CFO, on the call. “We believe these factors impacted demand for many of our brands.”
Chaco, Saucony And CAT See Healthy Q3 Growth
In the Performance Group segment (Merrell, Saucony, Chaco and Cushe), sales inched up 1.4 percent in the quarter to $249.1 million on a currency-neutral basis and were down 3.1 percent on a reported basis. On an adjusted basis, sales rose 3.8 percent.
Krueger said the period was marked by Chaco posting “exceptionally strong double-digit growth, Merrell generating low single-digit growth, and Saucony contributing mid single-digit growth.”
The Lifestyle Group (Hush Puppies, Keds, Sperry Top-Sider, Stride Rite) saw revenues decline 8.5 percent on a currency-neutral basis to $250.6 million, and was down 9.8 percent on a reported basis. Adjusted revenue for the Lifestyle Group was down 5.1 percent. Sperry was down less than 1 percent, Keds declined in the low-single digits, and Stride Rite fell high-single digits. Hush Puppies saw low-teen declines on a currency-neutral basis due primarily to a decision to realign its domestic distribution strategy. Hush Puppies’ international licensee business remained strong with revenue up double digits.
In the Heritage Group segment (Wolverine, Cat, Bates, Sebago, Harley Davidson and Hytest), sales increased 2.4 percent on a currency-neutral basis to $150.2 million and were off 0.7 percent on a reported basis. Adjusted revenue grew 2.9 percent with Cat delivering mid-single-digit growth, the Wolverine brand producing low-single-digit growth, Hytest growing at a double-digit pace, Bates down less than 1 percent, and Harley-Davidson down high-single digits.
Merrell Sees Modest Q3 Gains, Sperry Flat
Commenting on the performance of some of the larger brands, Krueger said Merrell’s revenues inched ahead 1 percent on a currency-neutral basis.
“Its new performance collections, Capra and All Out, continue to win at retail during the third quarter,” said Krueger. “The smaller active lifestyle category followed a stronger Q2 with a softer Q3, but the new men's Telluride and women's Ashland collections successfully launched late in the quarter and are performing well this quarter.”
Krueger said Merrell continues to be held back by relatively low consumer awareness, and a new leadership team has developed a new brand platform and product initiatives along with an aggressive go-to-market strategy designed to amplify Merrell in the marketplace. Retail partners have signed up to provide dedicated space to specific product franchises, like the expanded Moab collection.
Merrell’s growth is now expected to be flat on a currency-neutral basis for the year. Continued strong growth in the performance category is forecasted to be offset by softness in its active lifestyle segment along with some specific regional challenges given the brand's expansive international footprint.
Sperry was essentially flat in the quarter with adjusted revenue down less than 1 percent. The performance was softer than expected with most of the decline coming from the boat shoe category. However, the brand's product category expansion strategy “has started to produce meaningful results to offset the women's fashion trend cycling away from the boat shoe silhouette,” said Krueger.
Non-boat product categories contributed nearly half the brand's total revenue in the quarter and delivered “very strong double-digit growth, especially in vulcanized sneakers and boots.” Sperry also boosted gross margins by 380 basis points through select product price increases and benefits from the “Odysseys Await” campaign.
Krueger said the campaign, launched in spring, “is beginning to move the needle with the consumer, growing brand awareness, solidifying brand affinity and influencing purchasing decisions. We also brought the platform to life in a new store design that is currently being rolled out and is producing very strong double-digit comp revenue growth while nearly doubling the penetration of apparel and accessories.”
Krueger added, “Although Sperry is an established business of significant size today, we believe it is still in the early stages of its life cycle with incredible growth potential for the company, and we're excited by the early successes to move beyond its dominant position in the boat shoe category.”
Sperry is expected to deliver low-single-digit growth on a currency-neutral basis for the full year. While softness in the boat shoe category is expected to continue, growth is set for boots, vulcanized and active styles, along with steady growth in consumer direct and international.
Stride Rite’s retail business was impacted by sluggish macro retail traffic trends and an aggressive promotional environment across retail. While store conversion improved, traffic declines persisted.
Krueger said that under a strategic realignment plan, the focus at Stride Rite has put a greater focus on e-commerce, mobile and omnichannel initiatives.
“[This plan] has proven to be the right direction, and we have decided to reevaluate the Stride Rite brick and mortar fleet with an even more critical eye. We plan to ensure optimal rationalization of our stores and to continue our investments in digital initiatives where we are seeing strong growth and great progress. This will all better align the brand with how the modern mom is shopping,” he explained.
At the same time, Krueger said Stride Rite intends to continue with its progress in expanding wholesale distribution in conjunction with a strict product segmentation strategy to make the brand more accessible to consumers. He added, “We expect the result will be a healthier Stride Rite children's group aligned with today's consumer and poised to focus on the brand's best opportunities.”
Stride Rite now anticipates closing an additional 25 Stride Rite stores under its strategic realignment plan initiated in July 2014. It had expected to close 175 doors with approximately 120 expected to close by the end of 2015. The closures will leave Stride Rite with approximately 125 doors.
Increased Marketing Spend Impacts Bottom Line
Companywide gross margin was 40.0 percent in the third quarter, better than projected and flat with the prior year's gross margin despite challenging foreign exchange headwinds.
Adjusted operating margin of 11.9 percent was better than expected but 190 basis points lower than the prior year, due primarily to planned incremental brand investment and higher pension expense.
Marketing spend increased approximately 26 percent as the company continued its incremental demand-creation investment strategy. Reported operating margin last year was 11.2 percent.
Inventories were $495.5 million, representing a 6.3 percent increase versus the prior year.
To address the new challenges in the marketplace, Wolverine continues to focus on inventory discipline. “Specifically, our inventory is high quality and is as clean as it has been in several years,” said Krueger. “We are narrow and deep in core styles and collections, which puts us in a position to satisfy consumers and retail customers who are buying closer to need.”
Wolverine has also been making adjustments on the backfilling of inventory impacted by the stronger dollar; is readjusting its store fleet with the changes caused by digital social and mobile technologies; and improving marketing to better reach the omnichannell shopper. Investments are also supporting and aligning product to consumer preferences especially in the leisure athletic category.
“We know that growth is dependent on offering the consumer a great brand experience and something unique beyond price and believe these initiatives will drive future growth and closer connections with our consumers,” said Krueger. “We expect that our business model will continue to generate strong free cash flow and a high quality earnings stream.”
Other details of the updated guidance include:
Adjusted revenue is expected to expand 2.1 to 2.8 percent. Previously, currency-neutral growth was expected to climb in the range of 5 to 6 percent;
Reported revenue is expected in the range of $2.69 billion to $2.71 billion, representing a decline of 1.8 percent. It previously expected sales of $2.82 billion to $2.85 billion, representing growth of 2 to 3 percent;
On a currency-neutral basis (on an adjusted basis), EPS is expected in the range of $1.57 to $1.60, down from previous expectations of $1.68 to $1.75;
Total pre-tax charges are now expected to total $50 million to $54 million related to 2014’s Strategic Realignment Plan, the exit of the Cushe business, certain organizational changes across the business and debt extinguishment costs from the debt refinancing. Of this amount, $26 million was recorded in 2014, and $25 million is expected to be incurred in 2015 with the balance of the charges to be recorded in 2016. Previously, charges were expected between $48 million and $51 million with $26 million expected to be recorded in 2014, and $23 million in 2015;
Reported EPS is expected in the range between $1.28 and $1.31, down from $1.39 and $1.46.
