Wolverine World Wide, Inc. (NYSE:WWW) Q3 2023 Earnings Call Transcript

Wolverine World Wide, Inc. (NYSE:WWW) Q3 2023 Earnings Call Transcript November 9, 2023

Wolverine World Wide, Inc. reports earnings inline with expectations. Reported EPS is $0.07 EPS, expectations were $0.07.

Operator: Greetings, and welcome to the Wolverine World Wide Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Wiseman, Vice President of Finance. Thank you, Alex. You may begin.

Alex Wiseman: Good morning, and welcome to our third quarter 2023 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer; and Mike Stornant, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the third 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 financial measures. These non-GAAP financial measures were reconciled to the most comparable GAAP financial measures and 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 Chris Hufnagel.

Chris Hufnagel: Thanks, Alex. Good morning, everyone, and thank you for joining us on today’s call. For the third quarter, we delivered revenue and earnings in line with our expectations and inventory notably better than our target. Importantly, we achieved several significant milestones in the turnaround of the company. We’re executing more boldly and at a greater pace to stabilize and transform the business. While there is still much work to be done, I’m proud and encouraged by the progress we’ve made in a very short period of time. Mike Stornant will provide details shortly on the performance in the last quarter, followed by an update to our guidance for the balance of 2023. Given the headwinds we see on the immediate horizon, our results in the final quarter of the year will be less than we previously expected and certainly less than the company’s full potential.

And while our turnaround and ultimately, the transformation of Wolverine World Wide won’t be completed in a quarter or 2, especially given the challenging environment we find ourselves in today, we expect to continue to make meaningful progress towards our transformation goals, goals which we’ll be sharing with you along the way. Overall, I remain confident in our family of authentic brands, our global platforms and most importantly, our team. I’d like to start this morning’s call with my initial observations, along with an update on our recent progress in stabilizing the company and ultimately transforming us into great brand builders, delivering long-term, sustainable, profitable growth for our shareholders. Today marks 91 days since I first spoke to you on August 10, my first day as CEO.

Over those 91 days, I’ve had the opportunity to assess the company’s current state by engaging a broad spectrum of stakeholders, our team members, our board, key domestic international partners, supply chain partners, investors and more and by digging deep into our enterprise-wide operations and scouring the market to observe how our brands and our competitors — consumers each day. It’s become clear to me we can drive meaningful improvement across our global business through better alignment, focus and investments. Specifically, here are 5 observations and the actions we’re taking. First and critically, we’ve historically underinvested in our brands, product innovation and demand creation. And I believe our top line challenges today are in part a consequence of this fact.

We intend to and already have begun to strategically invest more in our biggest growth opportunities, and we must be better protecting these brand-building investments in the future. Second, we’ve relied on a push model, and we focus too much on sell-in and not enough on sell-through. We need to create a full model for our brands, driven by awesome products and amazing storytelling. Next, we must become better brand managers, how we distribute, manage supply and demand and how we relentlessly protect our brands in the marketplace. We’re thinking about sustainable growth in a new way and investing in the brand protection team to help manage and monitor the marketplace. Fourth, we haven’t prioritized relationships with our key partners, both here in the U.S. and around the world.

We must be more strategic and less transactional in the future. We’re reengaging with them at all levels of the organization to effectively collaborate on shared growth plans. And finally, we have regularly updated many of the tools to help us compete and win in today’s rapidly evolving marketplace, whether it be planning, product management and creation or direct-to-consumer platforms. We’re implementing a variety of solutions here to take advantage of technology, better integrate our planning processes and ensure better efficiency in our operations. New tools are already online and more we piloted by year-end. All of these challenges are solvable. And while the macro market conditions are certainly difficult today, we’re choosing to focus on what we can control.

In any environment, there are always winners and I believe the actions above will help us build better, stronger, more resilient brands to weather the inevitable storms. Moving to our turnaround efforts to position Wolverine for the future. We’ve been focused on 2 critical efforts over the past 3 months. First, stabilizing the company by deleveraging the balance sheet, reducing our inventory, and restructuring the organization to reduce the cost structure and improve the margin profile. This work will enable us to invest more in our brands and platforms to drive growth. Second, redesign the company. By strengthening the key strategic capabilities and talents needed to become great consumer-obsessed brand builders, focused squarely on consistently delivering awesome products and telling amazing stories and ultimately reinvigorating our brand’s growth trajectories.

As it relates to stabilizing the company, let me cover 3 important topics. We continue to actively rationalize our portfolio by selling certain Hush Puppies IP in Greater China as well as our North American leathers business this quarter. This follows the divestiture of the Cat’s brand and the licensing of our Hush Puppies brand puffing brand in North America earlier this year. These transactions have further focused our portfolio and generated $155 million in proceeds to strengthen the balance sheet. Other current important work is currently in flight, and we expect additional deleverage in the coming months. This work includes seeking strategic alternatives for the Sperry brand, which is well underway. We’re committed to aggressively paying down debt while reshaping our portfolio to become a more focused business.

Next, we made solid progress on the inventory front. Inventories for the ongoing business at the end of the quarter were down 13% compared to the prior quarter and down 33% on a year-over-year basis. We now expect to end the year with total inventory of approximately $419 million, a reduction of 34% compared to year-end 2022 and nearly $30 million better than what we guided last quarter. Finally, we made significant progress on our cost structure, including the redesign of our global operating model announced this morning. Our fast and bold profit improvement work has provided a line of sight to approximately $215 million of annualized savings with initiatives spanning organizational design, supply chain, global infrastructure and more. We’re quickly becoming a more focused, agile and efficient company with enhanced capacity to invest in our biggest growth opportunities.

As you think about the new Wolverine World Wide, let me highlight a few key actions we’ve already taken to redesign the company for the future. We’re building new muscle behind the key brand building capabilities that we believe will generate the biggest returns in today’s marketplace, including consumer insights, product design and innovation and modern demand creation. This morning, we announced an important component of our redesign initiative, the creation of the Collective, a new strategic center of excellence is focused squarely on the consumer, where teams dedicated to consumer insights, market intelligence, innovation, trends, marketing, public relations and in-house creative agency design studio. The Collective is intended to support and enable our brands product innovation design as well as creative storytelling to drive brand demand and heat in the marketplace.

I’m excited about this new team and what they can do for our family of brands today and into the future. In addition to creating the Collective, we’ve consolidated our global licensing efforts and created a new global licensing team, tap to unlocking our brand’s full commercial opportunity around the world, which we believe could be very meaningful through clear responsibilities, greater focus and improved coordination with our global partners. We’ve appointed strong and experienced leaders to oversee the Collective and our new global licensing team. I’m excited for them to get into new assignments and help drive the company forward. Now I’m going to turn the call over to Mike to share more detail on our third quarter results and updated guidance before returning to provide some closing comments on the future of our company.

Mike?

Michael Stornant: Thanks, Chris, and thank you all for joining the call. For this morning’s call, I will start with a review of third quarter results, followed by an update on our transformation work and then guidance. Third quarter revenue for our ongoing business of $519.5 million was in line with our outlook and down 20% from last year. Adjusted gross margin of 41.2% was below our expectations. We accelerated the liquidation of end-of-life inventory, which negatively impacted gross margin but helped to drive inventory levels down by $66 million more than planned. Sales to third-party distributors, which carry a lower gross margin were a bigger part of our sales mix in Q3 and also contributed to the lower gross margin. Adjusted operating margin was 4.3%, with discretionary cost management offsetting the shortfall in gross profit.

Reported operating margin was 5.2%. Adjusted diluted earnings per share for the quarter were $0.07 in line with our guidance, and it includes a $0.03 unplanned negative variance from FX changes in the quarter. Reported diluted earnings per share were $0.11 and included a gain on the sale of Hush Puppies IP in China, Hong Kong and Macau, and a gain on sale of the North American leathers business. This was offset by an impairment charge for Sperry’s intangible assets. Shifting to the balance sheet. We made meaningful progress to further improve inventory, net debt and liquidity during the third quarter. Inventory for the ongoing business was $564 million, down 33% compared to last year and over 10% better than expected. We delivered this improvement, leveraging updated planning processes, new weekly read and react sessions with each business unit and a normalized supply chain environment to make better decisions that contributed to the Q3 inventory improvement.

We now project year-end inventory of approximately $490 million, $30 million lower than our outlook in August. As it relates to net debt and liquidity, we have moved quickly to sell additional noncore assets that will accelerate debt pay down. During the third quarter, we generated nearly $55 million of cash proceeds from asset sales. As a result, we ended the quarter with net debt of $930 million, liquidity of $400 million and a bank-defined leverage ratio of 3.4x, down slightly from Q2. Efforts to monetize noncore assets continue. And we now expect an additional $65 million in proceeds from transactions that will close later this year. Including these asset sales, we expect year-end net debt of approximately $850 million and bank defined leverage of approximately 3x.

Before we cover the outlook for the rest of 2023, let me provide an update on the impact from the transformation work that Chris covered earlier in his comments. In August, we expanded a comprehensive set of operational and cost savings initiatives to accelerate the stabilization of the company. This work is being led by internal teams, including the profit improvement office with help from outside experts. In addition to the initiatives that were launched a year ago, this new work now includes a deep assessment of the company’s organizational design, global cost structure and future operating model. This work is ongoing, but has already resulted in greater expected profit improvements for the business. As Chris mentioned, we now expect an estimated $215 million of annual savings from these initiatives, including $75 million to be recognized this year and an incremental $140 million expected in 2024.

A summary of these incremental benefits are listed below. Supply chain cost improvements of $70 million, including lower product, freight and logistics costs, lower organizational costs of $50 million related to the design changes announced earlier today. Further SG&A cost savings of $20 million, including benefits from consolidating our footprint in the U.S. and Europe, synergies from further integrating the Sweaty Betty operation and other indirect savings from the global redesign of the company. In addition to these incremental profit improvements, we also expect 2024 results will reflect a $60 million benefit from 2023 transitory supply chain costs that are not anticipated to reoccur. The cost savings and operational efficiencies generated from this work will fuel future investments in new talent, demand creation, innovation and technology platforms needed to stabilize the business and then accelerate the growth trajectory of our brands.

All areas that directly address the core business challenges Chris summarized earlier. The level and timing of reinvestment needed in these areas to quickly improve brand performance is being carefully considered as part of our 2024 planning process. While we remain committed to an operating margin target of 12% in the near term, we now expect it may take longer to achieve this run rate given the current lower cost structure to drive meaningful operating margin expansion and improved cash flow in 2024. Now let me transition to the 2023 outlook for the ongoing business in the fourth quarter. Our guidance reflects the expected performance of our ongoing business which continues to exclude all results during the year for Cat’s and Wolverine leathers and adjust for the licensing transition for Hush Puppies for the second half of the year.

We continue to evaluate strategic alternatives for Sperry, and those results are included in our outlook for 2023. Like many other companies in our industry, we continue to experience low demand in our U.S. and European wholesale businesses, which represent approximately 50% of the company’s global revenue. Over recent months, our brands have seen a slight improvement in channel inventory and sell-through performance, but lower future order demand and more volatility — the upcoming holiday season and they are placing orders much closer to need. In August, our outlook contemplated second half global wholesale performance to be down mid-teens. We experienced a decline of 14% in Q3, but we now project a decline of approximately 35% in the fourth quarter.

In addition to a soft macro environment, our brands have also been negatively impacted by these important factors: heavy sell-in of end-of-life product earlier in the year which has created higher promotional pressure in the U.S. market; an ongoing decline in the hike category and excessive gray market selling for Merrell; vacating an entry price point segment and related distribution for Saucony; increased price point pressure from private label brands in the work category; temporary lack of product newness; and certain color and trend missteps across the portfolio. Outside of our global wholesale business, we expect our DTC channels to be down mid-teens in Q4, just slightly lower than Q3. We now expect mid-single-digit growth for our third-party international business in Q4.

Based on these trends and factors, we now expect fourth quarter revenue of $515 million to $525 million, down approximately 18% compared to last year at the midpoint and comparable to 20% decline in Q3. Adjusted gross margin for Q4 is now expected to be approximately 36%, impacted by $13 million of transitory supply chain costs that won’t reoccur next year. The significant drop in wholesale revenue, a higher mix of sales to international distributors, a higher promotional environment around holiday and further efforts to liquidate inventory to achieve our lower year-end targets. Adjusted selling, general and administrative expenses for Q4 are now expected to be approximately 38% of sales. The rate is up slightly from Q3 due partially to a much higher mix of D2C revenue expected in Q4.

In addition, we’ve made some Q4 investments that we feel will benefit future results, including higher performance marketing spend for our e-commerce sites to optimize new consumer acquisition and meaningful co-op support for key partners to drive faster sell-through at retail in Q4. Fourth quarter adjusted diluted earnings per share are now expected to be a loss of approximately $0.30 to $0.25. For the full year, revenue is now expected to be $2.19 billion to $2.20 billion. Adjusted gross margin for the full year is now expected to be approximately 39% and adjusted selling and general and administrative expenses for the full year are expected to be approximately 36% of revenue. Full year adjusted diluted earnings per share are now expected to be in the range of $0.05 to $0.10.

In conclusion, we continue to navigate a tough environment and make fundamental improvements to the business along the way. The more challenging outlook has accelerated our work to improve the financial strength of the company and has further clarified our priorities and opportunities. Profit improvement and inventory initiatives are accelerating, 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. Now I’ll turn the call back to Chris.

Chris Hufnagel: Thanks, Mike. I’m going to finish this call where I start my very first call as CEO, where we’re going in the vision for the new Wolverine Worldwide. Our vision is to become great global brand builders. To do this, we must be closer to our best leaders to head up our key brands over the past year and are investing in increased consumer research, innovation and trend support to inspire and guide our brand teams. We’re planning to bolster the development of products and marketing by fully integrating insights into our consumers throughout the go-to-market process across the entire enterprise from ideation to concept and product testing to create development and optimization and marketing effectiveness. Equipped with these new insights, our brand teams can more successfully execute the 3 priorities outlined in our brand-building model: building often products, telling amazing stories and driving the business.

Wolverine World Wide has a great history of building awesome products, and I’m eager to see our brands push that innovation even further, empowered by greater consumer insights and the investments we’re making in advanced digital product development and management tools, which Merrell is piloting now for eventual deployment to the rest of the organization. One area in which I think we have an opportunity to improve is style and trend, especially for her. Trend, design and color represent significant opportunities for our brands in the future and we’re both enabling our brands to take advantage of these opportunities with resources like the Collective and also implementing measures within the brand’s processes to drive improvement. Our brands also need to excite consumers with more compelling brand and product storytelling as well.

We believe our investment in consumer insights, along with in-house creative capabilities will help our brand teams meaningfully elevate our marketing concepts and the creative expression of them to our consumers. Guided by in-depth external benchmarking analysis, we plan to strategically increase brand marketing investments as well as engage more consumers with our messaging, both in our own channels and wherever our brands are sold. I’m especially excited to announce today that we’ve concluded through recruiting processes and have hired new Chief Marketing Officers for Merrell, Saucony and Sweaty Betty. Each of whom are starting in the next few weeks. These new talents and skill sets for modern demand creation will be critical to our future success.

We must also drive the business more effectively. This starts at a foundational level. We must get better at planning our business, and we’re implementing an improved planning process for integrated demand, inventory and supply chain management. We’re also implementing stronger SKU management and product segmentation within the brand’s go to market processes and piloting a new digital PLM system to better enable strategic management of our product lines. We expect these initiatives to further enhance the company’s effectiveness and operational efficiency. As modern brand builders, our brands need to present with a distinction in the marketplace, wherever consumers want to shop. This includes our own direct-to-consumer business, and we plan to upgrade our own digital platforms.

We must also intensify the prioritization of our key domestic and retail partners, partnering with them to more closely drive growth together. We’ve initiated a series of top stop meetings to engage with them and rejuvenate our strategic partnerships both here in the U.S. and around the world. Finally, to be great brand builders, it’s incumbent on us to become better brand managers. This includes how we distribute, how we manage supply and demand and importantly, how we protect our brands in the marketplace, included bolstered tracking and invested capabilities to combat gray market sellers. Finally, our turnout efforts will take time and I expect the brand headwinds we’re experiencing now to persist into the new year. At the same time, the efforts noted above will require incremental investment, the full extent of which is still being assessed.

We’re fortunate to have identified and secured significant profit improvements so quickly. These savings will help fund the needed investments while also driving meaningful operating margin expansion in 2024. We will strive to find a responsible balance between delivering improved bottom line results while ensuring we’re investing appropriately to help realize the full potential of our portfolio in the long term. I want to confirm that we remain committed to delivering mid-teens operating margin in the future. Over the past 91 days, we’ve actioned aggressive initiatives across many fronts, parallel efforts to both stabilize the company and redesign Wolverine World Wide for the future. There is significant work to still be done, but our team is talented, experienced and motivated.

And importantly, we’re moving at a new pace. We have a shared vision to become consumer-obsessed brand builders, and we have an extraordinary portfolio of authentic industry-leading brands positioned in the right categories, supported by a strong global distribution network and powerful enabling platforms. I’m incredibly encouraged by what the team has accomplished in a few short weeks and what I believe we can do together as one Wolverine in the future. Despite the near-term challenges, I’m optimistic about our future and have deep conviction to make our vision a reality for our brands, our teams and our shareholders. In closing, I want to express my gratitude to every member of our global team. The work you’ve done and continue to do each day is sincerely appreciated.

We’ve made tremendous progress to stabilize Wolverine World Wide and we’re in early days of transforming our 140-year-old company. I firmly believe our very best days are ahead, but the only way is through. Let’s go.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Jim Duffy with Stifel.

Jim Duffy: So on the plus side, it seems like you’re making some good progress. I guess I’m curious if you could just share some thoughts on kind of the glide path to stabilization in this U.S. wholesale channel, which has been such a challenge not just for Wolverine but for others across the category. Are you seeing glimpses that channel partners are getting into a more normalized inventory position. I don’t — I jumped on the call a little bit late. I don’t know if you made any comments about your spring orders. What’s a kind of reasonable expectation for the investment community for that channel getting to a point of stabilization?

Chris Hufnagel: Sure. Well, thanks, Jim. I appreciate the question. I’ll hit it first, and then Mike can add on. Certainly, as we think about the turnaround of the company, and I think about it across 3 important time horizons. There’s a stabilization work that we’ve really, for the last 91 days have leaned heavy into because we needed to. And I’m tremendously encouraged by the progress we’ve made in a very short period of time for that. And I think a lot of the work we’ve done was detailed in our release this morning, along with the other release we issued. That certainly is the transformation of the organization as we work to sort of pivot from who we were to who we aspire to be and investing in those needed talents and capabilities and tools to allow us to go be great, great brand builders.

And then there’s the inflection point where we would pivot to growth. Obviously, the U.S. wholesale channel, it’s critically important on us as an organization. And I think our challenge is there are certainly well noted. And I think certainly from an industry standpoint, and there’s lots of reports about the U.S. wholesale channel is 1 of the most sort of fraught right now from an industry standpoint. So we’re working to get much closer to our partners. Hopefully, that came through in the prepared remarks, I’m sort of understanding where things are, where our brands fit in those channels, how inventory looks in those channels and then how the various pieces are actually performing. So U.S. wholesale is a critical piece of our business. And I think that is 1 of the places that we’ve spent a lot of time in the first 91 days, both sort of assessing that channel, addressing some of the issues, rekindling important relationships with key partners.

Talking about working our own inventory through from a liquidation standpoint and then importantly, investing in that channel to help sort of stabilize and inflect the growth. So I think you hit on a key point, Jim. It’s a critical channel for us, and I will assure you that we are leaning into that channel to improve the performance of our brands.

Michael Stornant: And the thing I’d add to that, Jim, is that as it relates to the order book, which is I mentioned in my comments, retailers are buying so much closer to need right now. So the visibility into Q1 in the first half is pretty similar to the visibility we had into Q4. And so the order trends aren’t necessarily changing much. What I would say is last year, we sold in about $20 million of end-of-life product in the first quarter. Obviously, that’s not going to repeat again, but that wasn’t really low margin. So we’re not going to anniversary that. But when we think about the health of the business and the improvements we’re seeing in terms of channel inventories and our sell-through rates and things, hopeful that, that’s going to start to accelerate in the first part of the year.

But as we plan the business, more around the stabilization that Chris was talking about, about $50 million of those profit improvements that we expect to incrementally achieve next year will be achieved in the first quarter. That’s the transitory cost going away and the profit improvement initiatives that we’ve laid out. So really feel like we’ll see sequential improvement on the P&L from a profitability standpoint. Inventories are going to be much cleaner. So things that are under our control that we mentioned at length in the prepared remarks, I think, are going to give us a nice start to the year from the standpoint of sequential improvement in profitability and balance sheet metrics and so on. So the wholesale opportunity in the U.S. and Europe is an absolute focus for the teams.

And I think hopefully, we’ll have more to talk about as we make more progress here as we lean into 2024.

Jim Duffy: Very good. And just a bigger picture and strategic question, Chris. I’m encouraged that you and the team are taking a fresh perspective on appropriate distribution. Clearly, you had elevated off-price sales this year. But as you look more broadly across your wholesale distribution, do you think it’s appropriate to abdicate any of your legacy distribution in the interest of building healthier brands going forward?

Chris Hufnagel: Yes, it’s a great question, Jim. And I sort of point you back towards the initial observations that I’ve made since assuming the share. I think we ultimately have to go better brand managers, and we have to build resilient covetable brands that create a pull model versus us just pushing it more focused on sell-through not just on sell-in. And that’s new muscle for us as an organization. But that is critical for us. And we have to become better brand managers, do a better job managing supply and demand, and that will be a critical evaluation from who we distribute to and then certainly how we protect our brands in the marketplace. So you know us well. Hopefully, you can appreciate the transformation we’re trying to do here in a tough environment.

And then honestly, exerting new muscle as an organization for how we manage and protect our brands in the marketplace. But all of those things are and we certainly are taking this moment where business is challenged to take it as a moment to step back and say, how do we want to run our brands in the future? How do we want to grow and protect our brands in the future. So all of those things are on the table and all those things we’ll be making those decisions, and I appreciate you picking up on that.

Operator: Our next question is from Laurent Vasilescu with BNP Paribas.

Laurent Vasilescu: I wanted to follow up on the press release. In the press release, it says that, obviously, you’re looking to sell Sperry at some point. But it also says that you’re looking to — at other noncore assets. Maybe can you just unpack that a little bit? Is that with regards to brands? Or are there any buildings that you’re looking to sell? Any color on that regard, that would be very helpful.

Chris Hufnagel: Sure. I’ll open that up, and I’ll let Mike give some more specifics. But I think certainly, as this period of transformation, sort of where we see ourselves, the company we want to go be and the needed work we have to do from a stabilization standpoint, I would say we’re looking at everything. We’re looking at all options. And we previously announced the plan to seek alternatives for Sperry. That work is well underway. We’ve sold some intellectual property. We’re evaluating all of those things. And we also previously announced the office closure and sort of consolidation of offices. And I think across the enterprise, across our global footprint, where can we do things differently both is in the effort to stabilize the company, but then I think more importantly, the future of Wolverine World Wide.

How do we run a less complicated business, how do we run a more efficient business, how do we focus on our biggest brands with the biggest opportunities. And then importantly, this cost-saving effort I really want to emphasize is that all of the work here is really — is underpinned with the goal towards pushing more back towards our brands, product innovation and then modern demand creation. So in total, Laurent, where we are and having been able to get sit in this chair, I would say everything is on the table right now as we consider what we want the next chapter of the company to be.