Wolverine World Wide, Inc. (NYSE:WWW) Q1 2023 Earnings Call Transcript May 10, 2023

Wolverine World Wide, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.03.

Operator: Greetings, and welcome to the Wolverine Worldwide Inc. First Quarter 2023 Earnings Call. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Alex Wiseman, Vice President of Finance. Thank you. Please go ahead, sir.

Alex Wiseman: Good morning, and welcome to our first quarter 2023 conference call. On the call today are Brendan Hoffman, our President and Chief Executive Officer; and Mike Stornant, our Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the first quarter 2023. The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. This morning’s earnings press release and comments made during today’s earnings call include non-GAAP disclosures, which adjust for certain items such as environmental and other related costs, net of cost recoveries, reorganization costs, foreign exchange rate changes and a gain on the divestiture of the Keds [ph] business.

Financial results and guidance for 2023 and comparable results for 2022 where our ongoing business exclude the impact of CDs, which was sold in February 2023, and Wolverine Leathers which is subject of a sale process and reflect an adjustment for the transition of our Hushpuppy North America business to a licensing model in the second half of 2023. These disclosures were reconciled in attached tables within the body of the release. I’d also like to remind you that statements describing the company’s expectations, plans, predictions and projections such as those regarding the company’s outlook for fiscal year 2023, growth opportunities and trends expected to affect the company’s future performance made during today’s conference call are forward-looking statements under U.S. securities laws.

As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company’s SEC filings and in our press releases. With that being said, I’d now like to turn the call over to Brendan Hofton.

Brendan Hoffman: Thank you, Alex. Good morning, everyone, and thank you for joining today’s call. We delivered first quarter results in line with our guidance and despite industry headwinds, we are reaffirming our full year guidance. Our active group delivered 12% revenue growth on a reported basis and 15% revenue growth in constant currency, led by Merrell and Saucony [ph] with the strongest revenue increases coming from our international markets. As expected, our actions to expedite the sale of end-of-life inventory pressured gross margin that have left us better positioned for future performance. We are encouraged by the progress we have made to execute on our strategy for long-term revenue growth and profitability increases.

As laid out in prior calls, the strategy includes building stronger brands that resonate more powerfully with our consumers, distorting investment to our growth brands and extending our brands from their core businesses into large, fast-growing adjacent markets and categories. Additionally, we have continued to make progress against our operational goals to remove cost and complexity while we increase our speed, efficiency and agility. First quarter financial highlights include: reported revenue from the ongoing business, in line with our expectations of $580 million, up 1% on a reported basis and increasing 3% in constant currency from the first quarter of 2022. Adjusted diluted earnings per share of $0.09 above our expectations for adjusted diluted EPS of $0.05.

Net inventory for our ongoing business declined nearly $20 million sequentially from fourth quarter of 2022 and is on track to end 2023 down approximately $225 million versus the prior year. During the quarter, we further improved our operational capabilities and our ability to execute against our financial and strategic goals. The highlights include: the refinement of our operating structure, specifically the new brand group structure now enables our teams to more easily collaborate and share best practices across common categories and markets. We are also making great strides to modernize our supply chain and operations planning processes, including the investment in a new product life cycle management tool set that will be operational later this year.

In March, we integrated Sweaty Betty into our London-based international team to align them more closely with the company’s global centers of excellence. We expect this change will allow us to better leverage the company’s logistics, technology and operational expertise to harvest savings that can be reinvested in growth opportunities for sweaty Betty. The profit improvement office remains on track to deliver $65 million of cost savings in 2023. I’m especially pleased to see the collaboration across all areas of the business to secure these benefits and make them sustainable going forward. We have begun to see earlier-than-expected flow-through of some of the supply chain savings. We continue to expect $150 million of annual savings from the profit improvement office in 2024.

The optimization of our portfolio continues, allowing us to focus resources on the businesses and brands that we believe will drive the highest return for our shareholders. The recent sale of Keds and pending licensing of Hush Puppies will enable this focus and these transitions are well underway. We also continue to work towards an exit for the Wolverine leather business. As we evaluate opportunities ahead for the company, we need to focus our future efforts and investments on our growth brands, Merrell, Saucony and SwittiBetty. Therefore, we have decided to explore strategic alternatives for Sperry over the coming months while we continue the foundational work needed to position the brand for long-term success. Berry is a special brand with unique authenticity and heritage.

It is the brand I was most familiar with when I joined the company. I’m convinced that with the right focus and investment, this brand has a very bright future. This decision will allow us to put more resources behind banding Merrell’s lifestyle business, extending Saucony’s reach beyond the core everyday active and lifestyle consumers, global expansion of Saucony’s original business, which remains robust in Europe and has great potential elsewhere in the world, particularly in the U.S. Stabilizing Sweaty Betty’s home market in the U.K. and Ireland, while looking for opportunities globally, including the U.S. and China, investing in technology, specifically around our e-commerce platform and user experience. Moving on to brand results, starting with the active group consisting of Merrill Saucony SwediBetty and Chaco.

We are pleased with the group’s performance in the first quarter, including 12% growth on a reported basis and 15% in constant currency. However, some of this was due to timing given last year’s recovery from the Vietnam shutdown that changed the order flow throughout the first half of the year. As expected, this benefited Q1 and will pressure Q2 Merrell’s revenue increased 18% on a reported basis and 20% in constant currency to $180 million in the first quarter. This performance was in line with our expectations for high teens growth in the quarter. Notably, Merrill gain market share based on NPD data due to strength in core products and extensions and new franchises. Most notably, the strength of our core Moab franchise, which we refreshed with the launch of the Moab I reinforced our product leadership while demonstrating our ability to drive relevance and consumer love through technological innovation.

As a result, Merrell showed the biggest share gains of all brands in the high category for the quarter. In trail running, Merrill return to share gains in the first quarter. We are excited about Merrell’s expansion of its lifestyle product line and believe this is our highest growth opportunity for Merrell. Our lifestyle product line, OneTRL, continues to expand the brand’s reach with retail partners and customers. In the quarter, we opened the first on TRL store in Tokyo and plan to selectively open more OnTRL stores, which provides the brand’s most elevated expression around the world. Looking ahead, we continue to expect Merrill’s revenue to grow mid-single digits in fiscal 2023. However, we expect Q2 revenues to decline mid-teens versus 2022 caused both by the difficult macroeconomic headwinds as well as year-over-year product flow shifts that I mentioned earlier.

Revenue for the first half of 2023 is expected to be flat. Before I discuss Saucony’s results, I wanted to make you aware of a change in leadership. Anne Cavassa previously Saucony’s brand President, has left the company. We thank her for her contributions and wish her well. The process of naming a successor is well underway. In the interim, Chris Hufnagel, President of our active group, will be working more closely with our strong Softening team. We believe having Chris more involved in the day-to-day operations of Saucony will allow for greater collaboration and synergies with Merrill as we look to solidify Saucony as a preeminent leader in core running and leverage the brand’s strength in technology and innovation to build out a lifestyle offering to broaden its wear occasions and consumer reach.

In the first quarter, Solphany’s revenue grew 21% on a reported basis and 25% in constant currency to $133 million. Revenue surpassed our expectations for high single-digit growth in the quarter, driven by increases in the performance core run category and early progress on our initiative to broaden our reach to an active and lifestyle consumer, along with the change in receipt flow I mentioned earlier. In the quarter, we also launched Endorphin Elite with a very positive consumer reaction and saw a 74% sell-through on Saucony.com in the first week of the launch. Despite being new to the market of the 25,000 runners who competed at the Boston Marathon, it was in the top 10 most worn styles. Overall, Saucony [ph] was the second highest Warren shoe brand in the sub 3-hour category at the Boston Marathon.

Now touching on our Saucony Originals business, which is approaching 20% of the brand’s global revenue. In the U.S. wholesale channel, we opened new accounts, including fashion lifestyle platform, Shopbop and Evereve, leveraging on our classic franchises to expand reach to more lifestyle consumers. In Europe, we featured the Hu is Rod Dixon campaign to launch the DX N trainer, putting the style in the number one spot for multiple weeks post launch on Saccony.EU. Looking ahead, we expect Saucony revenue to decline mid-single digits in Q2, grow mid-single digits in H1 and grow high single digits in fiscal 2023. Moving on to SweatyBetty. First quarter revenue decreased 3% in constant currency and 11% on a reported basis to $47 million. These results, while disappointing, were better than our expectations for a mid-teens decline.

FettiBetty results continue to be impacted by a challenging retail environment in the U.K. The recent launch of the Zero Gravity running bra [ph] along with other product innovations, has led to improved sales trends in April, higher units per transaction and less promotional activity. We continue to stabilize Sweaty Betty in its home market in the U.K. and Ireland, while improving profitability through synergies from stronger integration within the rest of the portfolio. Looking ahead for Q2, we expect a low teens decline in SweatyBetty revenue. For fiscal 2023, we expect Sweaty Betty to decline low single digits on a reported basis and increased low single digits on a constant currency basis. Work Group revenue declined 17% on a reported and constant currency basis to $115 million.

The revenue decline in the quarter was primarily due to normalized phasing of Caterpillar International spring product flow as well as pressure from consumers trading down to lower price point products. Our brand teams have already responded with great offerings in the under $100 price category. Our highly anticipated collaborations continue to resonate well with customers, generating further brand awareness and loyalty. Following the first launch in 2022, Wolverine continued its journey in the Halo universe with the launch of our 4 Boot Limited Edition Wolverine and Halo Master Chief boot collaboration and sold out in less than one minute. Within the last week, Wolverine won collaboration of the Year from Fashion Group International for its Pappy Van Winkle boots, and they were honored as brand of the year by the accessories Council.

Finally, we are very excited about Bates test launch at Walmart in over 200 stores in the second half of the year. This expansion could be very meaningful to the brand given the runway Walmart offers. Looking ahead, we expect work group revenues roughly flat in fiscal 2023, with high single-digit declines in Q2. The Lifestyle group, which includes Sperry and Hushpuppy saw a revenue decline of 8%, both on a reported basis and constant currency. Ferry first quarter revenue declined 13% to $63 million, which was softer than our expected high single-digit decline due to lower sell-throughs of certain styles caused in part by the unfavorable weather during the spring season. We are focused on stabilizing Sperry with initiatives to introduce styles that more closely resemble the brand’s DNA.

We remain optimistic about the growing prep fashion trend that is emerging in the market. We expect Sperry [ph] revenue to decline high single digits in fiscal 2023, with a low teens decline in the second quarter. Now I will briefly touch on our international business. Revenue grew 13% on a reported basis and 18% in constant currency in the first quarter. Our brands continue to resonate well in global markets, and we see significant opportunities in both owned and JV operated markets. Merrell and Saucony across regions were the key drivers of performance with 29% and 37% growth, respectively. Saucony’s China JV once again had a very strong quarter as sales grew over 100%, exhibiting the strength of our multichannel strategy. In Q1, the brand launched the endorphine lead in China, which sold through 60% in 30 days and provided invaluable activization and media opportunities for the brand.

The growth also includes the addition of 12 new stores during the quarter, bringing our total store count to 81. We continue to expect Saucony revenue from our China JV to double in 2023. In conclusion, as we move through the year, we remain focused on driving growth across our active group, leveraging our leading position in work and addressing our underperforming brands, all while increasing the efficiency of our business model. We are excited about newness and marketing initiatives planned for the back half of the year across our brands. We are fully on track to return to the high single-digit growth in the second half of 2023 as we lap supply chain disruptions of last year. Finally, we expect to continue to reduce inventory and take costs out of the business to free up investment for 2024 and beyond.

I will now turn the call over to Mike to discuss more details about our first quarter financial results and our 2023 outlook. Mike?

Mike Stornant: Thanks, Brendan, and thank you all for joining the call. Let me briefly recap certain financial highlights primarily from our ongoing business for the first quarter, and then I will cover our outlook for the second quarter and full year. First quarter revenue for our ongoing business of $580 million was in line with our outlook and represented approximately 3% constant currency growth. Our most important brands, Merrell, Saucony, Sweaty Betty and Wolverine accounted for over 70% of our revenue during the quarter. Reported revenue was $599.4 million. Adjusted gross margin of 40% was in line with our expectations. Adjusted operating margin was 5.1% and included the impact of $25 million of incremental transitory supply chain costs.

The reported operating margin of 7.6% included the gain from the sale of CDs, partially offset by reorganization costs. Adjusted diluted earnings per share for the quarter were $0.09 and $0.12 on a constant currency basis. The reported diluted earnings per share of $0.23 reflects a gain on the sale of the Keds brand. Inventory for the ongoing business was $726 million, and improved $19 million compared to Q4 2022. The first quarter was a good start to the year, and we achieved nearly all of our short-term objectives. We fully appreciate the importance of operational discipline, cost control and cash flow in this volatile environment, and we have made important improvements in all areas. Brendan mentioned some of the benefits being driven by the profit improvement office, but I want to emphasize the great work this team is doing to accelerate and crystallize cost savings as a fundamental part of strengthening the foundation of the company.

We remain confident in our ability to deliver $150 million in profit improvements in 2024 in support of our 12% operating margin target. Let me transition to our 2023 outlook for the full year. Our guidance reflects the expected performance of our ongoing business, which excludes the full year projections for Keds and Wolverine Leathers and adjust for the licensing transition for Hushpuse [ph] exrpected in July. Like many other companies in our industry, we have seen some deterioration in market trends since the start of the year and especially since early March. Macroeconomic concerns and a cold spring selling season have impacted consumer demand. Despite this added pressure, we believe the diversity of our portfolio and global reach will help to mitigate the risks ahead of us.

As a result, we are reaffirming our outlook for revenue, earnings and year-end inventory. Revenue from our ongoing business is expected in the range of $2.53 billion to $2.58 billion, constant currency growth of approximately 1% to 3%. Adjusted gross margin is expected to be approximately 42%. Adjusted operating margin is expected to be approximately 8.5%. Adjusted diluted earnings per share is expected in the range of $1.40 to $1.60 compared to $1.37 in 2022. Year-end inventory is expected to improve by approximately $225 million. Operating free cash flow is expected to be at least $200 million and year-end debt leverage is expected to be approximately 2 times Now let me provide our outlook for the second quarter, which reflects the performance of our ongoing business and excludes CDs and Wolverine Leathers .

For reference, the second quarter 2022 revenue for these businesses was approximately $40 million, and the EPS contribution was $0.02. We expect Q2 revenue of approximately $580 million, a decline of approximately 13.7%. This estimate reflects the challenging trading conditions that persist in the market. both at wholesale and in our D2C channels Some retailers are still working through elevated inventory levels and most are managing the flow of goods conservatively. In addition, it’s worth noting that Q2 2022 was a record revenue quarter for the company that benefited from a shift in sales out of Q1 because of significant Vietnam factory closures and delays experienced last year. We expect Q2 gross margin of approximately 41% and operating margin of approximately 6%, including $23 million of transitory inventory costs.

We expect adjusted diluted earnings per share of approximately $0.20 for the second quarter, which includes a negative $0.02 impact from foreign currency exchange rates. Briefly looking beyond the second quarter, let me share some insights related to the back half of the year. Given the revenue performance now expected for the first half of the year, revenue for the second half is estimated to approach 55% of the annual total, which is consistent with more normal pre-pandemic phasing. As we discussed in February, gross margin and operating margin improved significantly in the back half of the year as transitory inventory costs received and the benefits of our profit improvement efforts increased sequentially. We also expect our inventory levels to continue to improve each quarter in the second half.

In conclusion, we are successfully navigating a tough environment and making fundamental improvements to the business along the way. While difficult, the choices we are making to simplify and clarify our brand portfolio, including the recent Sperry announcement will allow us to lean into our brand and category strength. Ongoing changes to our supply chain processes and technology platforms are making us more nimble and accurate. Profit improvement and inventory initiatives are on track, and we are creating capacity to invest in our highest priorities in 2024. Thank you to the entire Wolverine team for their ongoing commitment to the changes we are driving at the company. I’ll now turn the call back to the operator.

Q&A Session

Operator: [Operator Instructions] The first question we have is from Abbie Zvejnieks from Piper Sandler. Please go ahead.

Operator: The next question we have is from Laurent [ph] from BNP Paribas. Please go ahead.

Operator: Next question we have is from Mitch Kummetz from Seaport Research. Please go ahead.

Operator: Thank you. The next question we have is from Dana Telsey from Telsey Group. Please go ahead.

Operator: [Operator Instructions] Next question is from Sam Poser Williams Trading.

Operator: Next question we have is from Jim Duffy from Stifel. Please go ahead

Operator: The next question we have is from auto [indiscernible] from UBS.

Q – Unidentified Analyst : I wanted to ask about the first quarter. If you could talk about the exit rate on the direct-to-consumer channel. And what do you expect, like in terms of like the guidance, the sales cadence for the year, what does that imply for growth across both channels for the second half of the year? And then on inventories, could you talk maybe a little bit more about any pockets where you believe there’s more work to be done than others in terms of bringing it to more normalized level? Should we expect 3Q inventory growth to be in line with sales growth based on the commentary you provided priorly?

Operator: There are no further questions at this time. I would now like to turn the floor back over to Brendan Hoffman for closing comments. Please go ahead.

Brendan Hoffman: Well, thank you, everyone, for joining us today. We look forward to discussing our Q2 results with you in August. Have a good day.

Operator: Thank you, sir. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.