The footwear company behind Keds, Merrell and Sperry, Wolverine World Wide, reported a solid third quarter for FY2018 and has raised year-end expectations after results were released on Wednesday.
In a Nutshell: Not all of the Wolverine World Wide brands succeeded in the third quarter, Boston-based sneaker brand, Saucony, was down high single digits. But, growth in digital spaces—like Keds’ nearly 40 percent growth in e-commerce—and improved operating margin, helped continue raised expectations for FY2018.
Over the last 24 months, Wolverine World Wide has enacted transformation initiatives it calls “Our Way Forward,” which leadership credits for the strong turnaround from its most crucial businesses. This included lower product costs, less discounting and a “cleaner” inventory pipeline that led to the company’s fourth consecutive quarter of underlying growth and the lowest operating margin it has seen since 2011.
In the quarterly earnings call, Mike Stornant, senior VP and CFO of Wolverine World Wide, stated operating margin for the quarter had been boosted by a “broad-based expansion of gross margin across our brands.” Additionally, operating margin nearly doubled to 12.2 percent in the quarter, compared to 6.4 percent in 2017.
Cost-saving initiatives from the new corporate program reduced overall inventory (Q3 of FY2018 saw a 4.3 percent decrease in inventory compared to the previous year) and increased focus on wholesale opportunities, as well as direct-to-consumer strategies.
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Executives praised the new initiatives and their ability to deliver operating leverage that outperformed expectations and positive underlying revenue growth. They expect revenue to “improve meaningfully” once Wolverine World Wide’s largest brands, Merrell and Sperry, implement the cost-cutting program completely.
Lower taxes of 7.8 percent, powered by a one-time tax break from a $40 million discretionary pension contribution in Q3, also helped to cut costs as Wolverine brands continue to bounce back.
Sales: Revenue for Q3 was down 3.9 percent to $558.6 million, though it marked an improvement over the 9.7 percent loss in the second quarter of 2018. Underlying revenue adjusted for currency went up 1.1 percent. Revenue continues to improve after a sustained period of losses—annual revenue decreased to $2.35 billion in FY2017, a 5.8 percent loss over FY2016, which also saw a 7.3 percent decline from the year prior.
Earnings: Net earnings reached $58.9 million for the quarter, up considerably from the $22.8 million in net earnings in the year prior period.
Wolverine World Wide’s has raised its end-of-year outlook for FY2018 every reported quarter so far, including Q3, in 2018. The outlook is based on further improvement to gross margin and a lower tax rate of 15 percent to 16 percent, compared to the expected rates of 18 percent to 20 percent predicted in Q2.
Diluted earnings per share is expected to come in around $2.09 to $2.13 for the full year 2018, up from an expected range of $1.92 to $2.02 after the first quarter.
CEO’s Take: Wolverine Word Wide’s chairman, CEO and president Blake Krueger said: “Our Way Forward transformation initiatives continue to gain traction and deliver tremendous benefits as evidenced by better than expected operating leverage in the quarter. Underlying revenue growth in the third quarter was positive, and we expect underlying revenue growth for the fourth quarter to improve meaningfully as our growth initiatives take hold especially for our two largest brands, Merrell and Sperry.”
“We remain committed to this enhanced investment strategy for 2018 and expect to implement a number of new initiatives to drive accelerated revenue growth over the long term,” Kreuger concluded. “We expect the fourth quarter to benefit from these investments, resulting in underlying revenue growth of 3 percent to 5 percent compared to the prior year. We expect Merrell to deliver low-teens growth and Sperry to deliver high-single-digit growth in the quarter. Growth in our e-commerce business is also expected to remain very strong in the fourth quarter.”