Wolverine World Wide Inc /De/ Q3 FY2023 Earnings Call

Greetings, and welcome to the Wolverine World Wide Third Quarter 2023 Earnings Call. 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.

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 of 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.

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 two, 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 and international partners, supply chain partners, investors, and more, and by digging deep into our enterprise-wide operations and observing how our brands and our competitors compare 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 five observations and the actions we're taking. First and critically, we've historically underinvested in our brands, product innovation, and demand creation. I believe our top-line challenges today are 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 in protecting these brand-building investments in the future. Second, we've relied on a push model, and we've focused too much on sell-in and not enough on sell-through. We need to create a full model for our brands, driven by amazing products and outstanding storytelling. Next, we must become better brand managers, effectively manage supply and demand, and persistently protect our brands in the marketplace. We're considering sustainable growth in a new way and investing in our 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. 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 to take advantage of technology, better integrate our planning processes, and ensure better efficiency in our operations. New tools are already online and more will be piloted by year-end. All of these challenges are solvable. 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, and more resilient brands to weather the inevitable storms. Moving to our turnaround efforts to position Wolverine for the future. We've been focused on two critical efforts over the past three 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, redesigning the company. By strengthening the key strategic capabilities and talents needed to become great consumer-obsessed brand builders, focused squarely on consistently delivering amazing products and telling compelling stories, we will ultimately reinvigorate our brand's growth trajectories. As it relates to stabilizing the company, let me cover three 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 earlier this year. These transactions have further focused our portfolio and generated $155 million in proceeds to strengthen the balance sheet. Other 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% year-over-year. 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 efforts have provided visibility to approximately $215 million of annualized savings from 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 capabilities behind the key brand building areas 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 the creation of the Collective, a new strategic center of excellence 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 will work together. The Collective is intended to support and enable our brand's 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 to unlock our brand's full commercial opportunity around the world, which we believe could be very meaningful through clearer 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?

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 from the 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 by leveraging updated planning processes, new weekly read and react sessions with each business unit, and a normalized supply chain environment to make better decisions contributing 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 non-core assets that will accelerate debt pay down. During the third quarter, we generated nearly $55 million 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 non-core 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; and 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 are 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 adjusts for the licensing transition for Hush Puppies for the second half of the year. 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 in the upcoming holiday season have resulted in retailers 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 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 hiking category; 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 the 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 the 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 DTC 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 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.

Thanks, Mike. I'm going to finish this call where I started my very first call as CEO, sharing 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 development to optimization and marketing effectiveness. Equipped with these new insights, our brand teams can more successfully execute the three priorities outlined in our brand-building model: building standout products, telling amazing stories, and driving the business. Wolverine World Wide has a great history of building exceptional 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 women's products. Trend, design, and color represent significant opportunities for our brands in the future. We're enabling our brands to take advantage of these opportunities with resources like the Collective and implementing measures within the brand's processes to drive improvement. Our brands also need to excite consumers with more compelling brand and product storytelling. We believe our investment in consumer insights, along with in-house creative capabilities, will help our brand teams elevate our marketing concepts and the creative expression to our consumers significantly. Guided by in-depth external benchmarking analysis, we plan to strategically increase brand marketing investments and 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 the 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 drive the business more effectively, starting 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 a distinction in the marketplace, wherever consumers want to shop. This includes our direct-to-consumer business, and we plan to upgrade our 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, including bolstered tracking and invested capabilities to combat gray market sellers. Our turnaround 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 and 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 margins in the future. Over the past 91 days, we've actioned aggressive initiatives across many fronts, undertaking parallel efforts to both stabilize the company and redesign Wolverine World Wide for the future. There is significant work still to be done, but our team is talented, experienced, and motivated. More 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, teams, and 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 the early stages 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.

Our first question is from Jim Duffy with Stifel.

It seems you are making good progress. I'm curious if you could share your thoughts on the path to stabilization in the U.S. wholesale channel, which has been a challenge not only for Wolverine but for others in the industry. Are you seeing signs that channel partners are moving towards a more normalized inventory position? I joined the call a bit late and missed any comments about your spring orders. What is a reasonable expectation for the investment community regarding that channel reaching stabilization?

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 three important time horizons. There's the stabilization work that we've really leaned heavily into for the last 91 days because we needed to. And I'm tremendously encouraged by the progress we've made in a very short period of time for that. A lot of the work we've done was detailed in our release this morning, along with the other release we issued. Then there's the transformation of the organization as we work to pivot from who we were to who we aspire to be and invest in those necessary talents, capabilities, and tools to allow us to be great brand builders. Finally, there's the inflection point where we would pivot to growth. Obviously, the U.S. wholesale channel is critically important to us as an organization, and I think our challenges are well noted. There are reports about the U.S. wholesale channel being one of the most challenging 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, understanding where things are, where our brands fit in those channels, how inventory looks, and how the various pieces are performing. The U.S. wholesale channel is a critical part of our business, and I assure you that we are leaning into that channel to improve the performance of our brands.

The thing I'd add to that, Jim, is that as it relates to the order book, which I mentioned in my comments, retailers are buying 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. So, the order trends aren't necessarily changing much. What I would say is last year, we sold 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 high 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, I am hopeful that this will start to accelerate in the first part of the year. As we plan the business 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. I 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, as we mentioned at length in the prepared remarks, 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. The wholesale opportunity in the U.S. and Europe is an absolute focus for the teams. I hope we’ll have more to talk about as we make more progress as we lean into 2024.

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?

Yes, it's a great question, Jim. I sort of point you back towards the initial observations that I've made since assuming the share. I think we ultimately have to become better brand managers and build resilient, coveted brands that create a pull model rather than just pushing it more focused on sell-through and not just on sell-in. That's new muscle for us as an organization, but it's critical for us. We have to become better brand managers and do a better job managing supply and demand, which will be a critical evaluation from whom we distribute to and certainly how we protect our brands in the marketplace. You know us well. Hopefully, you can appreciate the transformation we're trying to do here in a tough environment. We're taking this moment where business is challenged to step back and ask how we want to run our brands and grow and protect our brands in the future. All of these decisions are on the table, and I appreciate you picking up on that.

Our next question is from Laurent Vasilescu with BNP Paribas.

I wanted to follow up on the press release. In the press release, it says that you're looking to sell Sperry at some point. But it also says that you're looking at other non-core assets. Could you unpack that a little bit? Is that regarding brands? Or are there any buildings that you're looking to sell? Any color on that regard would be very helpful.

Sure, I'll open that up, and I'll let Mike give some more specifics. But I think certainly, as this period of transformation plays out, where we see ourselves, and the company we want to become, I'd say we're looking at everything. We're looking at all options. We've previously announced the plan to seek alternatives for Sperry, and that work is well underway. We've sold some intellectual property, and we're evaluating all those things. We also previously announced the office closure and consolidation of offices. Across the enterprise and our global footprint, we're considering how to do things differently both in the effort to stabilize the company and importantly for the future of Wolverine World Wide. How do we run a less complicated business and a more efficient business focused on our biggest brands with the biggest opportunities. This cost-saving effort is really aimed at pushing more back towards our brands, product innovation, and modern demand creation.

A little more specifically, Laurent, we announced earlier that we were still working through the non-North American portion of our leathers business, that's still in play, and we're hoping to move that forward in the fourth quarter. We have some real property, some real estate that we're also looking to sell and monetize. We have some smaller opportunities in different markets around the world. We did an important transaction with one of our sub-distributors in China for the Hush Puppies brand, and we're exploring some similar opportunities that are not quite as meaningful. But as Chris said, everything is on the table. I think we're taking a prudent approach to the way we're monetizing these non-core assets.

Super helpful. As a second question, regarding the $215 million annualized cost savings program, can you unpack that across cost of goods sold versus SG&A for 2024? When does that materialize? Do you expect meaningful cost savings in the first half of the year, or is it more in the second half? Lastly, how much cash charges or non-cash charges do you expect on this $215 million?

A large portion of the $215 million, $75 million of it is recognized this year. The incremental benefit in '24 is going to be about $140 million. We announced earlier today a significant organizational redesign and restructuring of the workforce that will have a meaningful impact on 2024's cost structure. That's about $50 million of benefit and part of the $140 million we talked about. There's another $20 million or so of SG&A expense benefits that will incrementally be recognized in 2024, from things like co-locating our teams, reducing our footprint in North America and Europe, and some other synergies and benefits from the work that's been underway in the profit improvement office. Additionally, $70 million of savings will come from supply chain and product cost-related negotiations and work that have been ongoing for some time. But that number continues to be our primary focus as we try to drive our gross margin and create more capacity to invest in our brands as Chris mentioned. The breakdown is also kind of summarized in our IR deck if you'd like to see more details. But those are the highlights. I also mentioned that we have about $60 million of transitory costs this year from extraordinary expenses incurred related to the supply chain in late '22 and early '23. Those will not reoccur next year. To answer your question about phasing and timing of this, about $50 million of profit improvement from the initiatives we talked about and the transitory costs will be in the first quarter and a similar number in Q2. We're expecting strong improvements and benefits early in the year from the work we've laid out.

Our next question is from Mitch Kummetz with Seaport Global Securities.

I guess my first one is somewhat housekeeping in nature. You guys had previously given sales guidance by your five key brands. I was hoping you could update that either for the full year or give it to us for the fourth quarter. How are you thinking about that?

Mitch, this is Alex. We have outlined that in our IR deck on Page 5 of that deck.

Let's just mention the fourth quarter stats there.

Yes. For fourth quarter for Merrell, I'm looking at a high teens decline; Saucony, mid-teens decline; Sweaty Betty, high single-digit decline; and Wolverine, high 20s decline.

Okay. That's helpful. And then, Chris, you mentioned the importance of sell-through versus sell-in. Both are obviously important, but can you talk about what you're seeing right now in terms of sell-through on your Fall '23 product line? Because it sounds like some of the revised guidance, a lot of that is the macro, but it sounds like some of it is a bit self-inflicted as well. So I was hoping you could address that.

Yes. For sure. I mean, I will address that. I think we're sitting here today. There are a lot of things we could be reacting to in the news. We could be talking about weather or student loan repayments or a lot of things in the channel. What we're choosing to do is really focus on the things that we can do better. Once we get things in order, then you'll probably hear us talk about some of those macro factors. But certainly, it's a challenged marketplace, and we're focusing on what we can do better. From a product standpoint, we haven't had our strongest introduction this year across much of the portfolio. For us, it begins with product. We ultimately have to deliver innovative, trend-right, and well-priced products to the marketplace. I would say we're not firing on all cylinders as an organization, which is why one of the things we announced today was the establishment of a new center of excellence to help our brands build amazing products. I think it's going to benefit us tremendously as we get closer to the consumer and the marketplace. Certainly, for our brands, it’s all a little bit different. We certainly are seeing some green shoots out there. Some recent introductions by Saucony have checked, and we're encouraged by that. The Moab 3 for Merrell, which is the #1 hiking boot in the world, is experiencing good sell-through at our key partners. Overall, I would say we are underperforming, and as we work to stabilize the organization, we have to focus on driving and improving our product pipeline and then ultimately driving brand heat in the marketplace. Those are the things we are focused on. What we’re seeing in the marketplace is reflected in our guidance. But as we consider 2024, there are improvements expected in product pipeline and our investment in that demand creation engine for those brands.

And I guess maybe just a quick follow-up on that because you’ve identified a lot of significant cost savings opportunities, but you just mentioned the need to reinvest. How should we think about redeploying some of those savings into more investment in the business and the brands?

As we talk about cost savings and the improvements we’re going to see, as we undertook the redesign work over the past few weeks, we were focused on protecting our big brands and growth engines. As we build our 2024 plans, we are setting aside marketing dollars that we need to reinvest. As we think about investments this quarter, we’re making incremental investments this year to get our brands moving again. We're considering how we’re spending on our own direct-to-consumer channels and performance marketing to have a better holiday, cultivating new buyers that will help us in 2024. We’re working across the U.S. wholesale channel as we liquidate and move inventory faster while engaging with key wholesale partners to get our brands performing better in those markets. A key takeaway from this call is that our restructuring effort was critical and likely overdue; however, it’s essential that cost-saving efforts do not just go to the bottom line. We must invest back in our brands, amazing products, and incredible stories, and I know we are capable of driving the business.

Our next question is from Abbie Zvejnieks with Piper Sandler.

I'm looking at Slide 9 of the Investor deck quickly about some of the aspirational growth targets. So I guess, for the active group, this lays out 7% to 10% revenue growth, which is like a long-term financial aspiration. What gives you confidence in what you're seeing today within the health of the brand that you can get back to that point? I understand making a lot of investments in brand building and products, but just anything that you’re seeing today that gives you confidence there?

Yes. I'll start, and I'll talk about the active group. We'll start with Merrell, the company's biggest brand, coming off the best year in the brand's history in 2022. 2023 is a challenging year for sure. I believe some of the challenges for Merrell are self-inflicted. We did not manage the Moab 2 to Moab 3 transition well coming out of the supply chain crisis, really putting that brand under pressure, pressure we’re working through. Encouragingly, though, the Moab 3 continues to perform. As for market share, apart from the last quarter, we've had a year's worth of market share gains. Merrell's biggest category, which is outdoor, is under pressure. In fact, it's the worst-performing category tracked by NPD. There are certainly headwinds for Merrell. At the same time, from a brand standpoint, I think the brand is healthy. We have a great team in place, as well as a new CMO joining the company. I feel good about the product pipeline as we enter next year. We're seeing some green shoots in trail running, which is critical. However, we have to be less dependent on that core hike category and expand. Regarding Saucony, that category is very competitive. Saucony arguably competes in the most competitive market among our brands. Their success revolves around phenomenal product pipelines and how we drive demand. I'm encouraged by the 2024 product pipeline coming, including new introductions like Ride, Guide 17, Triumph 22, and Hurricane 24. Our investments will focus on these core programs for next year. Overall, I believe there are plenty of reasons to be optimistic as we think about 2024.

Great. Just one more thing, that was very helpful. Given the results and stock price? I know Chris, we talked about when you joined, and the excitement in the team about the changes being made. Now that you've had a round of layoffs, can you talk about the morale of the team?

Great question. People and culture are at the very top of my list of things that I care about most. In about 15 minutes, we're doing another global town hall with all our associates around the world. I've been really clear that we are in a turnaround that has three chapters: stabilization work, transformation work, and inflection work. We've been very communicative, holding global town halls every couple of weeks alongside virtual coffee hours. We completed an internal pulse survey recently, and certainly, yesterday was hard for the team during the restructuring. Those are some of the toughest decisions we make. Yet, I believe there's energy in the company; we know what we have to accomplish and need to get after that work. I'm staying close to the team and am thankful for their response over the last three months. It has been an extraordinary time for us as we navigate this evolving environment.

Our next question is from Sam Poser with William Trading.

Chris, you discussed the need to transition from a push model to a pull model. You mentioned working with your major accounts for support. Given the current circumstances, do you think it will take through next year to shift to a pull model? Especially since you'll need to pull back to determine demand more accurately? And will that require strict product allocation, even though it might initially seem counterproductive?

Yes. It’s a good question. That's certainly not lost on us. We've talked about managing brands in Wolverine Worldwide and how we manage the marketplace. Our envisioned future regarding our goals will take time. We're not going to wake up a quarter or two from now thinking we've miraculously created a pull model. But ultimately, that's where the company needs to get to and to be effective global brand builders, those efforts must be undertaken. There are easier things we can do along the way to help us achieve that. As we discuss expectations for growth, we are cautiously approaching those milestones. That’s why we’ve worked quickly on our cost structure to improve profit contributions while also finding a balance to reinvest in our brands. Over the last 91 days, I’ve had discussions with our top strategic accounts here and talked to a lot of partners globally. They are encouraged by our direction and the commitment to building our brands strategically.

Just a quick follow-up. Doesn’t this indicate that, to restore brand strength, revenue in 2024 must decline greatly, while margins see improvement from lower revenue to enhance brand health? Also, on how you will measure demand, given that some products caused gray market concerns and how will you prevent excess goods sales?

Yes, good question. We're not providing guidance for 2024. However, as we build our plans, we view 2024 as a low growth year, both from a portfolio standpoint and based on what we see ahead. This drives the work over the last few months to best position the company for improvement. I believe we have to balance operating margin expansion and sufficient investment in our brands for long-term sustainable growth. While we could take extreme actions to achieve a higher operating margin next year, it wouldn't be the best for our brands or stakeholders. We are building plans towards meaningful operating margin expansion while ensuring we invest behind product innovation and brand creation. Regarding the gray market, those issues have persisted to some extent, worsened by our inventory challenges stemming from COVID supply chain issues. We're seeing significant feedback from wholesale partners about these challenges, and we're taking aggressive steps to better monitor and manage this, ensuring strict consequences when we identify violations.

Our last question is from Mauricio Serna with UBS.

Can you provide more details on the two largest brands? It seems that Saucony is resonating in better shape than Merrell. What are the specific dynamics affecting both brands, especially with Merrell facing headwinds from demand? Do you expect that to change in '24? As for Saucony, why is it performing better? Also, regarding Sweaty Betty, can you clarify why the Q4 guidance points to a decline despite stronger Q3 revenues?

Thanks, Mauricio. I see three questions there, and I'll address a couple of them then turn it back to Mike. Starting with operating margin, the growth expectations for 2024 will be modest. At the same time, we need to balance operating margin expansion and adequate investment in our brands for long-term growth. We could achieve higher margins next year by making harsh cuts, but it wouldn’t position the portfolio well for our brands or shareholders. We need to achieve operating margin expansion while investing in key areas such as product innovation and demand creation. Regarding Merrell and Saucony, they operate in different categories where performance has variance. Saucony competes in a strong and competitive market with lots of potential. I'm optimistic about its upcoming product pipeline, and as we drive demand, I see opportunities for growth. On the other hand, Merrell faces challenges due to a declining outdoor category, which it lacks resilience in. While some headwinds are present, our brand is still strong with a good team in place and a positive product outlook as we look to diversify beyond the core hiking category.

Mauricio, regarding Sweaty Betty, we had strong wholesale performance in Q3 versus the prior year, primarily tied to timing issues we had a year ago in transitioning that business. There's a flip between Q3 and Q4 on the wholesale side affecting growth rates in each quarter. Towards the end of the year, we’ve seen a more healthy performance with less promotional pressure, which is favorable. Overall, the dynamics might lead to a slightly lower DTC business in Q4, but we're managing excess inventory and gross margins are healthier.

There are no further questions at this time. I would like to hand the floor back over to Alex Wiseman for closing comments.

Thanks again to everyone for joining us today. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.