Wolverine World Wide Inc /De/ Q3 FY2024 Earnings Call

Good day, everyone, and welcome to today's Wolverine Worldwide Third Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note that this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Alex Wiseman, Senior Vice President of Finance.

Good morning and welcome to our third quarter fiscal 2024 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer; and Taryn Miller, Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the third quarter of 2024. 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 in attached tables within the body of the release or on our Investor Relations page on our website. References made regarding financial results and outlook for 2024 and comparable results from 2023 in each case for our ongoing business exclude the impact of Keds, Wolverine Leathers, and Sperry. 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 2024, 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, I'll now turn the call over to Chris Hufnagel.

Thanks, Alex. Good morning, and thanks to everyone for joining us on this morning's call. Starting with the headlines. In the third quarter, we delivered better-than-expected revenue and earnings. Notably, Merrell returned to growth and Saucony and Sweaty Betty were approximately flat when adjusted for business model changes and currency fluctuation, respectively. We drove record gross margin for the third quarter, the second quarterly record we've set this year. Finally, at the bottom-line, we more than doubled our earnings from a year ago. It was a good quarter for the company, further confirming our strategic direction and the great work our teams are doing. Based on these results and our outlook for the fourth quarter, we're raising both our top and bottom line guidance for the year. A year ago, we outlined an ambitious plan to turn around Wolverine World Wide and in the process, build a new company for the future. We started by taking fast and bold actions to stabilize the company and strengthen the balance sheet by significantly paying down our debt and reducing inventory, both of which are now well under half of where they stood 24 months ago. At the same time, we moved quickly to transform Wolverine World Wide for the future by rationalizing our brand portfolio, restructuring the global organization and working to improve our profitability. Today, we continue to execute with great pace against this agenda, focusing squarely on delivering the progress needed quarter after quarter to build a better business and ultimately deliver better returns for our shareholders. While we have more work to do to fully realize the potential I believe our company, brands and teams possess, we're getting better in building new muscle each and every day. Replacing our consumers and brands at the center of our approach and developing the talent, tools, capabilities, and processes needed to execute our enterprise and brand strategies with distinction moving forward. As we secure the turnaround and advance the transformation of our organization, we're thoughtfully navigating the reinvigoration of our brands and our inflection to growth as a company. We've worked hard to establish a healthier foundation for growth, cleaning up the marketplace, expanding margins, and working to better position and manage our brands at wholesale and in our own channels of distribution. As we guided at the start of the year, we've now driven sequential improvement in top line revenue for the past two quarters. We have a plan to inflect the growth as the company in the final quarter of the year and more importantly, carry this momentum into 2025. While the macro environment remains choppy and the consumer outlook is still a bit murky, our teams continue to manage the variables they can control. Focusing on our global brand building model and prioritizing designing awesome products that are innovative, trend-right, place strike and price strike, telling amazing stories that not only convey the functional benefits of our brand's products, but also resonate with consumers on an emotional level and driving the business each and every day. The third quarter was another positive chapter in our turnaround and transformation story... Before handing over to Taryn to detail our financial results in the quarter and updated outlook for the remainder of the year, I'd like to provide some additional insight on our brand's performance, starting with Merrell. As a leader in the hike footwear category, the brand remains intently focused on modernizing the trail through faster, lighter and more versatile product. Over the course of this year, the Moab Speed 2 has meaningfully advanced this effort and established itself as an important franchise for the brand. It continues to sell through well at key outdoor accounts and encouragingly, is also performing well at certain lifestyle retailers... Next week, the brand anticipates launching its second collaboration with Jeep, this iteration on the Moab Speed 2 platform an opportunity to increase the brand's awareness and continuing to build on the product franchises' success. Merrell's premier Trail Runner, the Agility Peak 5, is also selling through well in both performance and lifestyle channels. Moving on to Saucony. As the original running brand, Saucony has been an innovator in the category for decades, earning the trust of serious runners around the world with lead products like the award-winning endorphin collection. A little over a year ago, we overhauled the brand strategy to sharpen its focus on everyday runners and the broader run life opportunity by bringing better innovation into its core four franchises, the Ride, Guide, Triumph and Hurricane and by enhancing its design to provide more versatile, wearable styling... Saucony has made this important pivot while simultaneously advancing innovation in its most elite offerings. And the consumer is responding positively to the brand's evolution. Saucony has partnered closely this year with a host of key accounts to prove the power of the brand and its key product franchises and has delivered strong results in several distribution channels, including run specialty sporting goods, outdoor specialty, and beyond.

Thank you, Chris and welcome everyone. We are pleased to report that our results for the third quarter exceeded expectations across key financial metrics. The sequential improvement in both top and bottom-line performance demonstrates the success of our strategic initiatives and the dedicated execution by our team in driving the turnaround. Third quarter revenue for our ongoing business of $440 million was $20 million above our outlook of approximately $420 million. Approximately half of the over-delivery was primarily driven by increased demand in the active group with favorable foreign currency also contributing. The remaining amount resulted from a net timing shift between the third and fourth quarters as certain wholesale orders shipped earlier than originally expected. Revenue for our ongoing business declined 7% versus the prior year compared to a decline of 24.5% in the first quarter, a decline of 18.4% in the second quarter. The third quarter of 2023 included approximately $30 million of revenue that did not repeat in the third quarter of this year, including revenue from excess end-of-life inventory liquidation and business model changes. Excluding these discrete items, third quarter revenue this year was approximately flat to 2023. Merrell revenue grew 1.4% in the quarter, with growth in both DTC and wholesale. Saucony declined 10% in the quarter, a meaningfully lower rate of decline than expected due to continued demand momentum, particularly in e-commerce and U.S. wholesale. Sweaty Betty grew 3% in the quarter, in line with expectations. The work group declined 11% in the quarter, which fell short of our original expectations of a high single-digit decline. Compounding supply chain disruptions that started with the challenges in Bangladesh had a bigger impact on the work group than originally estimated. Shipping delays limited our ability to meet the full demand for work boots in the quarter. We expect to recover most of the shortfall in the fourth quarter. Turning to profitability. We are encouraged by the growth achieved this quarter, which underscores our effective cost management and improved operational efficiency. We are seeing the rewards of our efforts over the past year to restructure the company and reduce costs, including both cost of goods sold and selling, general and administrative expenses. Adjusted gross margin of 45.3% increased 380 basis points versus last year and represents record gross margin for the quarter. Adjusted operating margin of 7.7% exceeded our outlook for the quarter driven by operating cost leverage on the stronger revenue performance. As a result of the improvement in revenue and operating margin, adjusted diluted earnings per share improved from $0.20 in the first half of 2024 to $0.29 in the third quarter. When we laid out our turnaround plan, we said profit margin expansion would lead revenue growth. With the third quarter results, year-to-date adjusted earnings per share performance is up by nearly 20% versus the prior year. We also continue to make solid progress on strengthening the balance sheet. Inventory at quarter end was $286 million, down approximately 40% from last year for the ongoing business as we further optimize inventory levels and reap the benefits of improved planning and execution. During the August earnings call, I mentioned that while we were chasing demand and had lower inventories in Saucony, we still had work to do in Merrell and the work group. We plan to address specific areas of excess inventory, mainly through our DTC channel. Although there is still work to be done to fully optimize inventory, current levels are nearing our target ensuring we have adequate coverage for the business' future needs. Net debt was $563 million, down approximately $100 million versus the second quarter and down $370 million versus last year. Now, turning to our updated outlook for 2024. We are raising our revenue and earnings guidance for the full year. Solid year-to-date results, combined with the development of our order book for our global wholesale business have strengthened our confidence in our outlook. Fiscal 2024 revenue from our ongoing business is now expected to be in the range of $1.73 billion to $1.745 billion, an increase of $18 million at the midpoint versus our August outlook. Increase in the active group demand drives $11 million of the raise and favorable foreign currency drives the remaining increase. This compares to 2023 revenue from our ongoing business of $1.99 billion and represents a decline of 12.8% at the midpoint of the range. As we shared in previous calls, there were discrete items in 2023 that are not recurring in 2024 related to end-of-life inventory liquidation, business model changes and a timing shift of international distributor shipments... Total revenue generated by these items was $185 million, with 90% occurring in the first three quarters of the year. Excluding the discrete items, full year 2024 revenue at the midpoint is expected to decline approximately 3.8%. We continue to expect full year 2024 active group revenue to decline by mid-teens percentage year-over-year and work group revenue to decline by a percentage in the high single-digits year-over-year. Brand performance expectations can be found in our investor presentation on our website. Turning to gross margin. As a result of the actions we've taken over the last year, we continue to expect strong margin expansion compared to 2023. These actions include supply chain and product cost savings, the benefit of healthier inventory level, better mix of full-price sales, and brand protection actions. Adjusted gross margin is expected to be approximately 44.5% at the midpoint of the outlook range, a record for Wolverine Worldwide and up approximately 460 basis points compared to 2023. Adjusted selling, general, and administrative expenses are expected to be approximately $650 million at the midpoint of the outlook range compared to $716 million in 2023. The lower operating cost structure includes restructuring savings partially offset by incremental investments in our business, normalized incentive compensation, and inflation. We're investing in our brand-building model to drive sustainable growth building awesome products, telling amazing stories and driving the business. Key initiatives include modernizing product line management tools to drive innovation sponsoring the Saucony London 10-K to elevate brand awareness, establishing our first innovation hub in Boston and building talent and capabilities. Adjusted operating margin is expected to be approximately 7.2% at the midpoint of the outlook range compared to 3.9% in 2023. Net interest and other expenses are projected to be approximately $36 million, down from $63 million in 2023, which reflects the benefit from the significant debt reduction over the last year. The effective tax rate is projected to be approximately 16.5%. Adjusted diluted earnings per share is now expected to be in the range of $0.80 to $0.90, an increase of $0.05 at the midpoint versus our August outlook. This compares to adjusted diluted earnings per share of $0.15 in 2023. Working capital and cash flow optimization continues to be a priority in 2024. We expect inventory to decline by approximately $85 million by year-end compared to the prior year-end as we continue to work through specific areas of excess inventory. Operating free cash flow is expected to be in the range of $120 million to $130 million with approximately $30 million of capital expenditures. We expect net debt to be $545 million at year-end, an improvement of nearly $195 million versus year-end 2023. Given this outlook for the full year, we expect the fourth quarter revenue to be in the range of $475 million to $490 million. This reflects continued improvement in revenue performance and at the midpoint, an inflection to growth. We are executing our plan and seeing momentum in our brands from increased new product introductions improvements in product design and cleaner and lower inventory levels at retail. This momentum is showing up in our wholesale and international distributor order books as expected, and e-commerce initiatives are in place for the holiday season. Fourth quarter gross margin is expected to be approximately 44%, an increase of 700 basis points from 2023. Last year's fourth quarter gross margin was adversely affected by a decline in full-price business, resulting from excess inventory in the wholesale channel. This issue has significantly improved over the course of 2024. We expect improvements in operating margin and earnings with fourth quarter adjusted operating margins of approximately 9% and adjusted diluted earnings per share in the range of $0.31 to $0.41. While it's too early to discuss the 2025 outlook in detail, there are a few key points I'd like to highlight. We anticipate cleaner year-over-year comparisons in 2025 as the discrete headwinds we faced this year will be largely behind us. While we recognize there is more work to be done, we feel good about the momentum of the business. In this dynamic operating environment, we remain focused on what we can control, investing in our brands, our team, and the technology to build new capabilities, drive growth, and deliver value to our shareholders.

Thanks, Taryn. Looking ahead, I believe we possess tremendous competitive advantages. We have a portfolio of authentic global brands positioned in attractive categories that are focused on making people's lives better, healthier, happier, and more productive. Our brands are considered leaders in their categories and are long respected for making great innovative products. In addition, we've developed an extensive global distribution network over decades with best-in-class partners to reach our consumers in every corner of the world. While these are certainly invaluable advantages, as we've said before, brands have to do more to win in today's dynamic and competitive marketplace. To enable our brands to compete and win, we've been hard at work strengthening key capabilities for the new Wolverine Worldwide. Beginning with the consumer, we created a collective last fall to better identify consumer trends and innovation insights to guide product innovation, design, and storytelling. As a part of this initiative, we also established The Den, an in-house creative studio designed to equip our brands with the tools they need to quickly and efficiently develop creative assets to tell amazing stories in today's always-on digital world. We've tested a key city strategy through focused initiatives in Tokyo and London with our biggest brands, Merrell and Saucony, and we're encouraged by the early results. To help us run about our business, we're enhancing our integrated business planning approach by redesigning related processes, bolstering our tool set and adding new talent. We anticipate this new competency will be fully online early next year. On the product front, just three weeks ago today, we cut the ribbon to open our first-ever innovation hub located in the heart of the West End of Boston to tap into the region's deep product talent and augment the teams here in Michigan. Finally, we've hired new critical product and marketing talent for our brands over the past year. And just last week, we announced the appointment of Susie Kuhn as our President of the Active Group. An industry veteran, she's a tremendous addition to the team, and I look forward to partnering with her and her leadership of our company's biggest brands. We've been busy, but we're unequivocally not slowing down. All of the work we've done to this point in our turnaround we believe has prepared the organization to better compete and win, the opportunity to drive for better and the privilege to write the next chapter in our company's 141-year story. Before concluding our prepared remarks, I'd like to thank our teams for being all in and dedicating themselves to the work we've done together over the last 455 days. You've been simply great and I'm incredibly grateful for and motivated by your work, passion, grit and drive. And while we've written a good story together to date, the most important chapter is the next one. With that, thank you to all of you on the call this morning for taking the time to be with us, and we're happy to answer your questions.

Thank you. And we'll take our first question from Laurent Vasilescu with BNP Paribas. Your line is open.

Good morning. Thank you very much for taking my question. And Chris and team, congrats on the continued progress here. Chris, I think in your prepared remarks, you talked about the momentum for both key brands, Merrell and Saucony heading into 2025. I would love to drill in a little bit more on that comment. I know you've recently parted with a number of key retail accounts for those two brands. Can you maybe just give us some color for the audience here on what's the reception so far with these key accounts?

Sure. Thanks Laurent. Appreciate the question. Yes, I think certainly, as we've thought about the reset at Wolverine and the work we needed to do, we took a healthy look at our biggest brands and first starting with products. And what products did we have, what was in the pipeline, what innovation did we need to bring? And where could we improve and where could we streamline and focus on doing fewer things, bigger and better and certainly pay attention to where the consumer was moving and how we could tap into that. And with Merrell and Saucony specifically, we've got new leadership in those brands. We've got new sales leadership in those brands. And we looked at the distribution and really focused on the U.S. and said, where are our brands showing up, what channels were growing, what partners would we want to be with? And then how could we go in and take advantage of that. And credit to those brands and certainly credit to the partners and thanks to the partners for opening up and being open to thinking about our brands in different ways. So, you certainly will see both Merrell and Saucony showing up in new accounts as we brought great relevant products that resonate with consumers.

Okay, wonderful. That's great to hear. And then, Taryn, I think last call, we were talking about during the Q&A about the longer-term opportunity for gross margins to go to 45% to 47%. I know you're not prepared to guide for 2025. But high level, as we think about not just the gross margin, is there an opportunity to get back to 10% operating margins? Or is there an environment that leads us to where, yes, the operating margin of 10% plus is no longer in the realm of possibilities?

Thanks. I'll take the first one on the China situation and then turn it over to Taryn to talk about gross margin, operating margin. We worked really hard over the last handful of years from a sourcing standpoint to diversify our sourcing footprint. We have a new leader in our global supply chain, who I'm really pleased with and our exposure, which in 2018, 2019 would have been north of 40% from China, and today, we're well down sort of in the mid-teens. That's a significant reduction from where we were.

To answer your question, I think there was one more question regarding margins. We're pleased with the improvements we're seeing in both gross and operating margins in 2024, which align with our initial guidance. This is largely due to consistent top line progress each quarter throughout 2024, along with the momentum from our cost-saving initiatives, including supply chain enhancements and spending optimizations. We're observing positive results year-to-date, which is also reflected in our fourth quarter guidance.

Hi, good morning and congrats. Just quickly looking at the investor deck, I see work group is now guided to grow low double-digits in this all factors, the shipment delays? Or is there more impact there? Are we capturing all the demand that was missed in the third quarter? Just want to make sure I understand the dynamics there.

It's a good question, and I appreciate you bringing it up. Regarding the work group in Q4, there are three factors that support our revenue growth assumption. First, we experienced delays in Q3 due to both production and sourcing. The work group produces over 40% of its output in Bangladesh, which has recently faced several challenges, including civil unrest, floods, and logistical issues. Therefore, we anticipate recovering the missed revenue from Q3 in Q4. The work group's fourth quarter last year faced challenges, so we have an easier comparison this time. Additionally, due to demand in the marketplace, we plan to accelerate some production from the first quarter of next year to respond to consumers wanting products earlier. These three factors give us confidence in the work group's guidance for Q4.

Okay, got it. That's super helpful. And then just a bigger picture question. Saucony outperformed expectations pretty candidly. You've seen solid traction, et cetera, more newness, et cetera. I know we're currently still in a period of work through and adding on that newness aspect, but would just be curious to hear your thoughts on brand growth from here, what we should be looking for to drive and raise awareness in 2025 and just your overall thoughts as to how big Saucony could get?

Yes. Thanks for calling that out. Obviously, we're not going to guide for Saucony today. But certainly, there are a lot of things we're working in that brand's favor right now. And I take you back to sort of a reset and overhaul of the brand strategy, sort of opening up that aperture to service a broader run as one of the best performing categories in the marketplace. And I think our change in strategy pivot as we think about that consumer, both from the performance run and from the lifestyle run has helped that brand sort of resuscitate in very short order. We're seeing good growth and momentum in the performance category, the core four, The Ride, The Guide, The Triumph, The Hurricane, which we're encouraged by. At the same time, there's a lifestyle thing happening, and we're capitalizing in Saucony benefits from a very deep product archive and this retro-tech fashion thing that's happening right now, Saucony has the ability to capitalize. It's important to note, though, that we're not walking away from Elite run. And I think one of Saucony's best innovations is going to be dropped early next year with the Endorphin Elite 2 and the new foam that we're going to introduce. So, I think from a product side, that brand is firing right now on all cylinders. At the same time, we've really taken a hard approach of how we build awareness and affinity in the marketplace. I want to highlight our key strategy in London, where we are investing more by sponsoring the London 10-K. The team is actively engaging with initiatives like run clubs. We are witnessing record search interest for Saucony in the U.K., even before our full activation. Next year, we will also open our first Saucony store in London, which is promising. From a brand perspective, Saucony is gaining significant attention. Your observation about the brand's potential is something we are also deeply considering, as we believe there is great opportunity for growth with Saucony and our dedicated team across the product range. Globally, the brand has notable visibility and strong partnerships, so we are optimistic about its growth prospects.

Yes, thanks for taking my questions. Chris, just to start, how are you guys planning for potential new tariffs next year? Are you guys thinking about changing your pricing architecture at this point at all for maybe the back half of the year, fall 2025 product or anything? What can you share there?

Yes. Thanks, a very relevant topic. And I think us, along with just about everyone is sort of digesting the news and the new reality and to contemplate what's going to be on the horizon. I will tell you this, Wolverine's a 141-year-old company. We've seen 15 Republican administrations, 10 Democratic administrations. We've been through a civil war, two world wars, a cold war, and a couple of global pandemics. And I think our job really is to build a durable and resilient business model that can weather those changes. As it relates to the tariff question, I answered Laurent's question earlier, exposure to China is down dramatically from where we were just a couple of years sort of in that mid-teens range.

And as a follow-up, I just want to dig in a little deeper on the Saucony distribution expansion. Are you guys still kind of cleaning up removing accounts? Can you say kind of maybe what the net account growth is for our net door growth is for spring 2025? And any more color in terms of kind of where you're seeing more door growth? Is it U.S. versus international? Is it lifestyle versus performance anymore, you parse these things out a little bit more, if possible?

Yes, I'm not going to give a net count sort of year-over-year. In the prepared remarks, we did talk about an additional 900 doors in the U.S. around supporting that lifestyle distribution. And I will tell you, it was thoughtful distribution because honestly, it probably could be more than that. We're trying to build a great brand for the long term, make sure we can capitalize on growth opportunities in front of us. At the same time, be thoughtful about where we want to sell.

Thank you. And I'll go on to the question. I'll start following on the Saucony business. Lot of noise related to wholesale adjustments creating year-to-year comparisons that are difficult to interpret. Can you maybe talk to us about Saucony's e-commerce growth in the quarter and how that splits between performance and lifestyle?

Yes, Saucony had a good third quarter, showing mid-single-digit growth. The positive aspect is that we are experiencing growth in both performance and lifestyle categories. It's not one or the other; it's both. However, Saucony's dot-com growth was somewhat limited because we couldn't restock products quickly enough. Even now, if you visit saucony.com, you'll find that in certain key styles, we unfortunately do not have complete color and size options available. I mentioned in the last call that about a year ago we decided it was better to miss some demand than to end up with significant inventory problems again. As a result, I would say Saucony's growth was somewhat limited because we simply didn't have enough products available for sale due to our tight supply. Overall, Saucony.com saw mid-single-digit growth, and we are experiencing growth in both performance and lifestyle categories. Great question. I appreciate it. Sort of acknowledging that you followed our story and appreciate sort of acknowledging the journey we've been on. And about a year ago, we talked about a turnaround in three chapters, stabilization, transformation, and then ultimately inflection to growth. And we said the margin improvement would lead revenue growth. And all of those things have played out as we had planned, and I'm thankful for that. I think the stabilization work is largely behind us. Stabilization work really was focused on attacking the debt situation, reducing and better managing inventories and then certainly adjusting our cost structure from a restructuring standpoint to have a cost structure that better matches the size and profit profile of the organization. At the same time, allowed us to invest in things that are critical capabilities going forward whether it's teams or marketing or demand creation or new tools that we need. So, I would say that the stabilization is largely behind us, and I certainly am thankful for that. As it relates to transformation, I think brands and companies easily have to be in some level of transformation. I think the world is moving extraordinarily fast.

Thank you very much I've got a follow-up on the tariffs and then another question. On the tariffs, what percent of your units are international sales? And because the tariff sounds like it's going to affect a lot more than China. So what percent of your units are international these days?

Units, international, I would say, north of 50% approaching 60% from a unit standpoint.

I am here to help accelerate growth. I think she has been there and done that for big brands. She understands both the wholesale and the retail side of the business. She really understands the go-to-market process and really a commercial driver of the business. At the same time, she has global experience. She's lived in China, she's lived in Europe, and she's worked for leading brands; Foot Locker, Nike, Converse, to name just a few. We are already better today having her walking the rooms, working with the teams being out in the marketplace.

Great. Thanks so much. Good morning and congrats on all of the results. Great to hear about momentum and innovation. Chris, at Saucony, you have driven some really great brands meet with the collabs. Anything you can share about how we should think about the pace of those next year? And do you see these collabs mostly for the lifestyle piece or performance as well?

Yes. Collaborations are a critical piece as they sort of drive brand awareness and drive brand heat and then us partnering with other like-minded brands or individuals as we think about our brands. That is a tried and true and tested playbook, and I think you've seen Saucony really accelerate that and really do some amazing collaborations this year...

Thank you. And it appears that we have no further questions at this time. That concludes today's teleconference. Thank you for your participation. You may now disconnect.