Shares of Wolverine Worldwide rose $1.66, or 6.8 percent, to $26.04 Wednesday after the company reported first-quarter earnings that easily topped Wall Street’s estimates.
On a conference call with analysts, Blake Krueger, CEO, described the results as a “very good performance given the continued tepid consumer environment and challenging conditions at retail.”
He also said the company has made “excellent progress” in its Wolverine Way Forward initiative and remains on track to meet the program’s target of attaining 12 percent adjusted operating margin by the end of 2018.
“Our team’s hard work over the past year is already yielding meaningful results,” said Krueger. “We’ve accelerated our efforts to leverage deep consumer insights to amplify our product innovation and compelling storytelling, both critical drivers of sustained growth. Future growth will require agility and deep consumer connections in the face of what we are calling the new normal, a global slow to no-growth environment, challenging retail marketplace, and shifting consumer expectations. Despite these continuing realities, our go-forward strategy is already yielding positive financial results.”
Net earnings in the quarter slid 4.0 percent to $16.7 million, or 17 cents a share. On an adjusted basis, EPS rose 19.4 percent to 37 cents a share, exceeding Wall Street’s consensus estimate of 31 cents.
Adjustments exclude the impact of restructuring and impairment costs, store inventory markdowns related to retail stores closings in both periods as well as the impact of an additional week of operations in the latest quarter. Adjusted earnings on a currency-neutral basis were 41 cents a share, a gain of 32.2 percent.
Net revenue of $591.3 million decreased 4.8 percent after taking into consideration the impact of the additional week. Underlying revenue declined 2.0 percent. Wall Street was expecting $556.6 million on average.
Among its operating segments, underlying revenue for the Wolverine Outdoor & Lifestyle Group was up 0.1 percent with Merrell growing low single-digits, Chaco posting “very high” single digit growth, Cat up mid-single digits, and Hush Puppies down mid-teens.
Merrell saw broad-based growth in the quarter, growing in the U.S., Canada, Latin America and Asia Pacific. Stores and e-commerce also contributed to a solid quarter for Merrell, with e-commerce up over 20 percent, which helped to offset some headwinds associated with bankruptcies and store closures in the domestic marketplace.
“The new Moab 2 and the Nature’s Gym collection both drove growth in the performance outdoor category,” said Krueger. “And the launch of the new Merrell Work program was very well received at retail. We expect these product initiatives to gain additional traction and placement in the coming months.”
He added that the launch of the Chameleon 7 collection, one of the brand’s largest franchises; and the new MQM (07:14) collection, featuring Pinnacle innovation to enable agile movement in rugged terrain, is expected to contribute to the continued momentum in the performance outdoor category in the back half of the year.
The active lifestyle category continued to be challenging in the quarter, although the rate of decline was “significantly” lower than the last couple of quarters. Said Krueger, “This category remains an important opportunity and focus for the team going forward. The brand’s product innovation pipeline is the strongest I’ve ever seen it, and I’m encouraged by Merrell’s start to 2017.”
In the Wolverine Boston Group, underlying revenue dropped 9 percent although it was better than expected. Sperry was down low-double digits and Saucony down mid-single digits. Keds was off mid-teens as that brand continued to implement its new distribution strategy by selectively reducing points-of-sale and exiting certain distribution in the U.S. marketplace.
Sperry performed better than anticipated, with strong growth in own DTC operations, especially e-commerce, which grew over 20 percent. Although Sperry took market share in boat, that category remains pressured in the current fashion cycle. Efforts continue to be made to make Sperry less reliant on the boat shoe category.
Sperry boots performed well in Q1 despite market challenges for the boot category overall in the quarter. A strong performance of more-athletic styles like the Crest and the Seaside also contributed to the better-than-expected Q1 revenue results for Sperry. Overall, Sperry continues to diversify its product category assortment with more athletic designs, vulcanized styles, and new collections like 7 SEAS, which sold “very well” in the quarter.
“Sperry’s boot program has been one of the bright spots in the industry over the last couple of years, and the brand will build on this success with the introduction of new men’s and women’s collection this fall,” said Krueger. ”An expanded Gold Cup Collection is also in the works.”
Saucony also performed better than expected in Q1 given the impact of bankruptcies and store closures in the broader athletic and sporting goods sector. The brand’s core technical run business was up more than 10 percent, behind the success of new introductions under the Freedom ISO and Guide franchises, both with EVERUN technology. This success was offset by softness in the Originals category as some international distributors remained focused on reducing their inventory positions in this category.
Said Krueger, “Although bankruptcies and store closures persisted in the quarter, Saucony continues to deliver groundbreaking product innovation in both the technical run and at leisure categories. Looking ahead to the remainder of the year, Saucony has a robust pipeline of new product introductions in both of these categories.”
In the Wolverine Heritage Group, underlying revenue was down 0.4 percent compared to the prior year. The Wolverine brand was up high-single-digits and helped by strong revenue growth across its key categories and channels in both footwear and apparel, with the wolverine.com business up nearly 30 percent. Bates was down double-digits due to lower demand in the quarter from the Department of Defense and delayed timing of contract awards compared to the prior year.
Companywide, reported gross margin of 39.7 percent, compared to 39.6 percent in the prior year. Adjusted gross margin on a currency-neutral basis was 41.7 percent, up 120 basis points versus the prior year.
Reported operating margin was 5.5 percent, compared to 5.9 percent in the prior year. Adjusted operating margin on a constant currency basis was 11.0 percent, up 260 basis points versus the prior year and excludes $4.4 million of incremental inventory markdowns related to the accelerated store closings.
Inventory at the end of the quarter was down 25.9 percent versus the prior year, meaningfully better than expected.
Wolverine said its previously announced Store Restructuring Plan was accelerated, with 180 stores now closed since the beginning of 2017. The company incurred approximately $9.2 million of operating losses in the latest quarter for stores within the Plan that will not reoccur next year. The losses include $4.4 million of inventory mark-downs related to accelerated store closures. The company exited 104 underperforming stores during the quarter and an additional 76 stores subsequent to quarter-end. All Stride Rite and Track-N-Trail concept stores are now closed. These store closures allowed the company to liquidate inventory totaling approximately $20 million during the quarter.
Added Mike Stornant, SVP and chief financial officer. “We made tremendous progress on our store realignment plan including the closure of all Stride Rite stores, and now have line-of-sight to our go-forward store-fleet. We managed our working capital well in the quarter, with inventory down over 25 percent and DSOs improving by 1.1 days. We believe the strength of our global brands combined with the continued discipline in the management of our business and implementation of our Wolverine Way Forward plan leaves us well placed to achieve our goals.”
Wolverine also announced that it acquired the OnlineShoes.com domain site and consumer database. Last year, OnlineShoes.com had over 35 million site visits and has a database of nearly 4 million consumers. Said Krueger, “We believe leveraging this existing traffic and consumer database will enable us to accelerate growth across our portfolio of brands. We will continue to look for new and innovative ways to drive growth, consumer connections and, ultimately, shareholder value by actively managing our portfolio.”
Looking ahead, reported revenue is expected in the range of $2.270 billion to $2.370 billion – unchanged from the company’s original outlook. This represents a decline of approximately 9.0 percent to 5.0 percent. Underlying revenue is 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 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, resulting from operational excellence initiatives focused on supply chain optimization, omnichannel transformation, and operational efficiencies. Previously, reported operating margin was projected in the range of 7.9 percent to 8.5 percent and adjusted operating margin in the range of 9.9 percent to 10.4 percent.
Reported diluted earnings per share is expected in the range of 73 to 83 cents a share compared to 89 cents in 2016. Adjusted diluted earnings per share are now expected in the range of $1.50 to $1.60 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 $1.58 to $1.68.
Previously, reported diluted earnings per share were expected in the range of $1.19 to $1.29, adjusted diluted earnings per share in the range of $1.45 to $1.55, and $1.53 to $1.63 on a currency-neutral basis.
Photo courtesy Merrell
