Wolverine Worldwide raised its guidance for the year after reporting second-quarter results that topped Wall Street’s targets. Benefiting from its transformation initiatives, most brands exceeded revenue expectations for the quarter while also over-delivering on operating profit goals.
“We had a strong quarter, highlighted by second-quarter revenue and earnings that surpassed expectations and reflected progress toward our holistic, enterprise-wide strategic transformation, the Wolverine Way Forward,” said Blake W. Krueger, Wolverine Worldwide’s chairman, chief executive officer and president. “This transformation of our business is focused on elevating our most powerful brands with consumers, delivering continuous product innovation and sustained organic growth, and unlocking incremental operational efficiencies, all with an emphasis on pace and speed. We believe that the Wolverine Way Forward will put us in the best position to win in the ‘new normal’ fast-changing global consumer retail environment.”
Second Quarter 2017 Review
Reported revenue of $598.8 million increased 2.6 percent during the second quarter, but adjusted revenue decreased 3.3 percent after taking effect for a calendar change. Underlying revenue increased 1.4 percent. Wall Street’s consensus estimate for revenues had been $568.2 million.
Reported gross margin was 37.9 percent, compared to 38.8 percent in the prior year. Adjusted gross margin on a constant currency basis was 39.1 percent, up 60 basis points versus the prior year, and includes a negative 210 basis points impact of store closures.
Reported operating margin was 4.9 percent, compared to 7.2 percent in the prior year. Adjusted operating margin on a constant currency basis was 11 percent, up 380 basis points versus the prior year, and excludes $3 million of incremental inventory markdowns related to the accelerated store closings.
Reported diluted earnings per share were 21 cents, compared to earnings per share of 24 cents in the prior year. Adjusted diluted earnings per share were 43 cents, a record second-quarter performance for the company. Wall Street’s consensus estimate had been 29 cents a share. On a constant currency basis, adjusted earnings per share were 44 cents, compared to 26 cents in the prior year.
Inventory at the end of the quarter was down 24.1 percent versus the prior year.
The company generated $138.4 million of cash from operations during the second quarter.
“We are pleased to have delivered better-than-expected results for the second quarter, demonstrating the effectiveness of key initiatives focused on operational excellence, growth and speed,” stated Mike Stornant, senior vice president and chief financial officer. “Our proactive efforts, which have been gaining momentum over the last eighteen months, paid off in Q2, with most brands exceeding our revenue expectations for the quarter, while also over-delivering on our operating profit goals. We made tremendous progress on our store realignment plan, and have line-of-sight to our go-forward store-fleet. We managed our working capital well in the quarter, with inventory down over 24 percent and DSOs improving by 1.7 days. We believe the strength of our global brands combined with the continued operational discipline and implementation of the Wolverine Way Forward leaves us well positioned to achieve our near-term growth and stated operating margin goal of 12 percent by the end of 2018.”
Wolverine Way Forward Transformation Update
Under the previously announced Store Restructuring Plan, the company has closed 180 stores since the beginning of 2017 including 76 closures during the second quarter of fiscal 2017. The company expects an additional 33 store closings before the end of fiscal 2017, leaving a remaining retail store fleet of approximately 80 stores. The company incurred approximately $5.3 million of operating losses in the second quarter for stores closed, and these losses will not reoccur next year. The losses include $3 million of inventory mark-downs related to accelerated store closures. These store closures allowed the company to liquidate inventory totaling approximately $8.4 million during the quarter.
Effective July 2, 2017, subsequent to end of the quarter, the company entered into an agreement to license the Stride Rite brand to Vida Shoes International, a leader in the children’s footwear and fashion industry, currently marketing children’s shoes under Carter’s, OshKosh, Hanna Andersson and other brands.
Effective July 31, 2017, subsequent to the end of the quarter, the company entered into an agreement to sell the intellectual property and certain other assets related to the Sebago brand for $14.3 million. The agreement permits the company to sell off its remaining inventory through the end of fiscal 2017.
Fiscal 2017 Outlook
A strong second quarter, coupled with some improving trends in the business, have resulted in the following improvement to the company’s full-year 2017 outlook:
- Reported revenue in the range of $2.32 billion to $2.37 billion, which includes a $40 million reduction in revenue from the conversion of the Stride Rite business to a license model. This is a reported decline of approximately 7.0 percent to 5.0 percent, but underlying revenue is now expected to increase and be within the range of flat to growth of 2.0 percent, reflecting approximately $175 million impact from retail store closures, the Stride Rite change noted above and currency.
- Reported operating margin in the range of 5.2 percent to 5.8 percent and adjusted operating margin in the range of 10.4 percent to 10.9 percent, resulting from operational excellence initiatives focused on supply chain optimization, omnichannel transformation and operational efficiencies. Fiscal 2016 adjusted operating margin was 8.5 percent.
- Reported diluted earnings per share in the range of 82 cents to 92 cents compared to 89 cents in fiscal 2016. Adjusted diluted earnings per share are now expected in the range of $1.55 to $1.65 compared to $1.36 in fiscal 2016 adjusted on the same basis. On a constant currency basis, adjusted earnings per share in the range of $1.62 to $1.72.
When it reported first-quarter earnings on May 10, Wolverine had said it expected reported revenue in the range of $2.27 billion to $2.37 billion, representing a decline of approximately 9 percent to 5 percent. Underlying revenue was expected in the range of down 2.3 percent to growth of 1.9 percent, reflecting approximately $160 million to $180 million of impact from currency and retail store closures. Reported operating margin was seen in the range of 5.2 percent to 5.9 percent and adjusted operating margin in the range of 10.2 percent to 10.7 percent. Reported diluted earnings per share in the range of 73 to 83 cents a share compared to 89 cents a share in fiscal 2016. Adjusted diluted earnings per share were expected in the range of $1.50 to $1.60 On a constant currency basis, adjusted earnings per share in the range of $1.58 to $1.68.
Fiscal Year Calendar Change
Prior to fiscal 2017, the company reported its quarterly results of operations on the basis of 12-week periods for each of the first three fiscal quarters and a 16- or 17-week period for the fiscal fourth quarter. Beginning in fiscal 2017, the company’s fiscal year is comprised of 13-week quarters for each of the first three fiscal quarters and a 13- or 14-week period for the fiscal fourth quarter. There is no change to the company’s fiscal year-end date. References to the “quarter ended” or “second quarter” refer to the 13-week period ended July 1, 2017 or the 12-week period ended June 18, 2016.
The company’s portfolio of brands includes: Merrell, Sperry, Hush Puppies, Saucony, Wolverine, Keds, Stride Rite, Sebago, Chaco, Bates, and HYTEST. The company also is the global footwear licensee of the popular brands Cat and Harley-Davidson.
Photo courtesy Merrell