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Wolverine’s Air Freight Costs Balloon to $11M in Q2

Wolverine Worldwide is raising its full-year expectations after a record-setting quarter even as it faces the same supply-chain headwinds buffeting many within the industry,

The Michigan-based company saw revenue soar 81 percent compared to last year as its two star brands, Merrell and Saucony, grew their combined revenue by more than 40 percent compared to 2019. Other success stories from the quarter included Wolverine’s performance categories—hiking, run and work, in particular—and Sperry’s boat shoe business.

“While consumer lifestyle changes related to the Covid pandemic have significantly bolstered demand for the performance product category, the underlying trends are long-term in nature, existing prior to the impact of the pandemic and are expected by industry and consumer trend experts to persist,” chairman and CEO Blake Krueger told investors Thursday.

In a Nutshell: Given Wolverine’s strong performance in the quarter, the company upgraded its full-year revenue forecast to between $2.34 billion to $2.4 billion, a $150 million increase from the outlook it offered in February. The high end of this forecast would represent a 5.6 percent increase from 2019. The company also now anticipates diluted earnings per share to be in the range of $1.85 to $1.95 and adjusted diluted earnings per share to land between $2.20 and $2.30. This outlook, Wolverine noted, assumes no “meaningful” deterioration in current market conditions due to the pandemic, but does account for current headwinds, such as the ongoing coronavirus outbreak in Vietnam.

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Like Nike and other footwear brands, Wolverine has seen its factories in the Southeast Asian country temporarily close amid government restrictions related to the recent surge in Covid-19 cases and deaths. At the moment, Krueger said, “less than half” of the company’s factories in the country are currently shuttered, with some starting to reopen as the government’s two-week mandates expire. Whether all these restrictions will truly expire soon is unclear as the government has already shown a willingness to extend and strengthen these lockdowns.

“We don’t know exactly what the future will hold, but we’ve factored all the current facts into our guidance for the rest of the year,” he added.

According to Krueger, roughly 40 percent of Wolverine’s product comes out of Vietnam. The CEO said the company’s current sourcing breakdown offers “a nice diversification” that should help mitigate any challenges related to Vietnam.

Still, given the uncertainty in the supply chain, Krueger said Wolverine is taking “a much stronger position” on inventory so as to better position it for next spring and fall. “Supply chain teams are getting well ahead of that,” he added.

Inventory at the end of the quarter was down 14.2 percent versus the prior year. This compared to a 20.8 percent-lower year-over-year inventory position three months earlier. By the end of the third quarter, the company is anticipating inventory levels will be up year-over-year. By the end of the fourth quarter, it is looking to be up in the “strong” double digits.

This improved inventory position, Krueger said, will help with a growing financial pressure point: air freight costs. Air cargo demand has soared this year as companies look to skirt clogged ports and rising container rates, including in June when it rose 9.9 percent compared to pre-Covid June 2019, according to the International Air Transport Association.

“We’ve seen pretty tremendous increases in freight rates, both inbound and outbound,” Mike Stornant, senior vice president and chief financial officer said. “I think that’s a cost pressure that we’ve factored in as we start to plan our spring business and think about 2022.”

Given the heightened cost of air freight, Wolverine has decided to remove the excess costs from its adjusted results. In the first quarter, these adjustments reflected $4 million in air freight charges “related to production and shipping delays caused by the Covid-19 pandemic.” This past quarter, that figure rose to $11 million.

Cash flow from operating activities in the quarter was $25.4 million, compared to $115.6 million in the prior year, when Wolverine was maximizing cash at the onset of the pandemic. Debt at the end of the quarter totaled $718.4 million, or $306 million less than in the prior year, and total liquidity was $1.1 billion.

Net Sales: Wolverine recorded $632 million in revenue during the second quarter, an 81 percent increase—77.7 percent in constant currency—over the prior year.

Total direct-to-consumer revenue climbed 17.5 percent versus last year and 68.8 percent against 2019. Owned e-commerce slipped 2.7 percent year-over-year, but rose 90.7 percent compared to 2019. Owned stores saw sales soar 380.5 percent against last year and 19.2 percent over 2019.

At Merrell, revenue grew 88 percent year-over-year and nearly 30 percent versus 2019. The brand’s e-commerce business expanded in the mid-single digits on top of last year’s more than doubling, while its brick-and-mortar stores saw improvement in the high teens.

Krueger attributed the brand’s strong performance footwear sales—the category more than doubled compared to last year—“in large part” to its new Moab Speed hiker and Moab Flight trail runner. Both collections, he said, exceeded sell-through expectations, sold out on Merrell’s website and became top sellers for the brand during the quarter.

Saucony, meanwhile, grew revenue 129 percent over last year and 65 percent against 2019. The brand’s e-commerce business continued to strengthen, growing more than 20 percent on top of last year’s tripling of the channel. Its road and trail running styles both saw substantial gains, with the former more than doubling year-over-year and the latter more than tripling.

The company’s work business—nearly 20 percent of its total revenue—continued to deliver strong growth, Krueger said. Its work boot brand Wolverine, for example, saw sales rise more than 70 percent, while Cat Footwear climbed nearly 50 percent.

Sperry’s boat shoe sales marked another quarterly highlight. According to Krueger, the category—led by the brand’s new Float collection—saw positive growth, particularly in men’s.

“The U.S. has always had a boat shoe category resurgence from time to time,” Krueger said. “We’re probably in the very early innings of that right now. Historically, that’s lasted for several years, when it starts. So, we’re trying to be there in the market with fresh boat shoe product like the Float.”

Wolverine reported a gross margin of 42.8 percent, an improvement of last year’s 42.2 percent. Adjusted gross margin was 44.5 percent, up over last year’s 42.2 percent. Its reported operating margin came in at 10.1 percent, well above last year’s 2.1 percent. Adjusted operating margin was 12.6 percent, compared to 5.1 percent in the prior year.

Net Earnings: Net earnings in the quarter totaled $44.7 million, or 53 cents per diluted share, an increase from last year’s net loss of $1.6 million, or 2 cents per share.

Adjusted diluted earnings per share were 67 cents—65 cents on a constant currency basis—well above last year’s 8 cents.

CEO’s Take: “Our accelerated growth and strong financial performance in Q2 are a testament to the company’s strategic focus and increasing brand investment,” Krueger said. “Over the last four years, we’ve invested behind digital marketing, technology, talent and e-commerce, as well as product innovation and design. These investments are paying off. Our brands have numerous growth opportunities in front of them, the company’s balance sheet is strong and we are confident as we plan for double-digit growth in 2022.”