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Wolverine Hopes Reorg Will Cure What Ailed Sluggish Q3

Shoemaker Wolverine Worldwide released its third quarter financial report on Wednesday with earnings lower than expected.

In a Nutshell: ‘Headwinds’ are the defining factor in Wolverine World Wide’s lower than expected third quarter-earnings report.

Citing factors beyond the company’s control, such as supply chain disruption, unusually warm weather discouraging boot purchases, and ‘deteriorating macro conditions’, Wolverine announced third quarter revenue growth of 9 percent and 12 percent on a constant currency basis.

The outdoor shoe brand Merrell was the only Wolverine label to outperform last year’s Q3, producing $198 million in revenue for a 33.6 percent improvement. Beyond just succeeding financially, Merrell is set to be crowned Brand of the Year by Footwear News at an event on Nov. 30.

The unusually warm weather didn’t translate to success for Wolverine’s boat brand Sperry, which was down 12.4 percent year over year, or the women’s activewear brand Sweaty Betty, acquired last year at a cost of $410 million, which earned the least at $3.3 million.

Sperry’s prospects may or may not be helped by high brand awareness, registering at 57 percent. In its earnings call with Wall Street analysts, Hoffman predicted Sperry’s margins would bounce back into the low 20 percent range, but macro forces are likely to keep Sweaty Betty in single digits.

Wolverine’s fourth-quarter fortunes could be bolstered by a reorganization of the company’s group structure, specifically segmenting between an Active Group (Merell, Saucony, Sweaty Betty and Chaco), Work Group (Cat, Bates, Harley-Davidson, et al) and Lifestyle Group (Sperry, Keds, Hush Puppies).

The hope is that the new reporting structure will allow the company to focus its employees’ energy and talent on the brands that are delivering the greatest returns and provide increased transparency to investors. The segment change was approved by the board last week.

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“I believe this new group structure will unlock our potential to not only grow faster but also become a more efficient and simplified organization that delivers industry-leading margins,” said president and CEO Brendan Hoffman, who also announced the launch of a Profit Improvement Office, the goal of which is to “identify cost savings, increase efficiencies, and enable investments that will fuel our future growth.”

Fruits of these changes likely won’t show until at least 2023, but as for Q4 2022, the Michigan-based company which turns 140 years old next year, predicts total revenue between $650-$675 million, which would bring the year-end total to $2.67-$2.695 billion, a growth of 10.6 percent to 11.6 percent.

Key to fourth-quarter success will be liquidating inventory, Hoffman says. At the end of Q3, inventory came in at $880.9 million, 113.8 percent up compared to a year ago, a spike the CEO attributes heavily to logistical problems.

Merrell will be named Brand of the Year by Footwear News at a Nov. 30, 2022 event.

“We are facing congestion in our own U.S. distribution centers and inland transportation networks and many wholesale customers are currently dealing with heavier inventories and warehouse constraints,” Hoffman said. “These headwinds have resulted in certain shipping delays that impacted most of our brands.”

Net Sales: Wolverine recorded $691 million in net sales for Q3, an 8.6 percent increase over a year ago. Adjusted for currency that number climbs to $714 million and 12.2 percent adjusted for currency.

With an eye toward the new reorganization plan, the Active products, bolstered by Merrell’s strong quarter, led the way in sales with $398 million, up 13 percent from a year ago, followed by Work at $157 million, up 11.2 percent and Lifestyle down 6.9 percent year over year with $117.7 million in sales.

Wolverine saw its home office in Michigan outperform its Boston group with $390.2 million and $247.7 million in sales, respectively, a 20.1 percent bump for Michigan year-over-year and a 4.3 percent drop for Boston.

Net Earnings: Wolverine’s gross profit margin for Q3 was 40.2 percent, down from 43.2 percent in 2021, owing largely to the difficulties with inventory, though operating margin sat at 8.5 percent, an increase of 6.7 percent in 2021, creating a $0.48 bump in diluted earnings per share after registering a zero in that line a year ago.

Operating expenses were $219 million, down better than $13 million from a year ago and consequently operating expenses as a percentage of revenue declined by nearly 5 percent.

Net earnings were up considerably with $171.7 million registered in Q3, up from $82 million a year ago, though offset by a number of related expenses, the biggest being ‘changes in operating assets and liabilities’ costing $592.3 million over $118.3 million in the same category a year ago.

Credit—as expense and revenue—also figures into year-over-year discrepancies. Wolverine reported $668 million in third-quarter ‘Borrowings under revolving credit agreements’ (up more than $300 million from 2021), and ‘Payments under revolving credit agreements’ sending out $153 million after just $40 million in Q3 a year ago.

CFO’s Take: “We expect revenue growth of 2% to 6% in the fourth quarter which includes a 4% negative impact from foreign exchange rate fluctuations. We are anticipating a heavily promotional environment, especially in our North American wholesale and global DTC channels,” said Mike Stornant, executive vice President and chief financial officer. “These market conditions will put downward pressure on gross margin for the quarter. We are prioritizing the liquidation of non-core inventory over the coming months to improve our working capital position in 2023. We expect the new brand structure and the establishment of the new Profit Improvement Office to create great value through meaningful operational efficiency and cost reductions to be recognized in 2023.”