Footwear maker Wolverine World Wide detailed its progress in moving away from Chinese production as coronavirus panic grips global markets.
In a Nutshell: Now that the epidemic of coronavirus (officially known as COVID-19) has become a major concern for China and for the global economy, the company behind Merrell, Saucony and Sperry said it is “fortunate” this process was already underway before the outbreak.
“Our first priority is the safety and well-being of our employees and partners in China, and we are making every effort to support them,” Wolverine World Wide chairman, CEO and president Blake Kreuger said in the company’s quarterly conference call on Tuesday. “From a business standpoint, we separate the emerging impacts of the coronavirus into two buckets: revenue and supply chain.”
Wolverine expects just 2 percent of its total 2020 revenue will come from China, and the entire Asia-Pacific region amounts to roughly 10 percent of its global revenue, according to Kreuger. China will still be a focus for the company’s future growth but Wolverine’s current revenue exposure is “relatively insignificant.”
On the supply side, Wolverine still sources about 20 percent of its products directly from the region, though that number is down from 40 percent just a year ago when the group pivoted away from China in the face of increasing tariffs.
Kreuger still expects some production delays from China factories along with a possible pinch in the supply of raw materials shipped from Chinese vendors.
“This is being closely monitored, but will be difficult to quantify until our factory partners have more clarity on the return of workers from Chinese New Year,” Kreuger said. “So far, the return rate of workers to factories has been better than expected and is not expected to have a material impact on production in Q1.
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“None of our factories are in the Wuhan region,” he added, referencing the city where the outbreak originated.
At this early stage, Wolverine expects an impact of approximately $30 million in the first half of 2020.
Sales: Wolverine reported revenue of $607.4 million in the fourth quarter of FY19, an increase of 4.8 percent over the comparable period last year but below the $614.08 million expected by Wall Street.
For the full year, the brand group turned in revenue of $2.27 billion, up 1.5 percent over FY19 but still slightly below Wall Street expectations of $2.28 billion. Wolverine’s top three brands, Merrell, Sperry and Saucony combined for 10 percent constant currency growth, Kreuger said.
The company’s reported gross margin fell by 50 basis points in FY19 to 40.6 percent.
Wolverine’s outlook for FY20 places annual earnings in the range of $2.29 billion to $2.34 billion, growing 3 percent at the high end of the range.
Earnings: Adjusted diluted earnings per share increased by 13.5 percent in the fourth quarter to 59 cents, just above the 58 cents expected by analysts.
Wolverine’s reported EPS reflected a loss of one cent due to the resolution of two “meaningful litigation matters” regarding groundwater pollution at the location of a former tannery in the U.S. Expenses for the litigation amounted to $58 million, recorded in the fourth quarter after settling with the state of Michigan, 3M and two townships in the area.
For the full year, Wolverine reported adjusted diluted EPS of $2.25, an increase of 3.7 percent. The average Wall Street expectations was $2.26.
Wolverine estimates EPS in the range of $2.05 and $2.20 in FY20, acknowledging a 10-cent impact related to coronavirus supply chain disruption.
CEOs Take: In a period of macroeconomic changes, Kreuger noted Wolverine’s work improving e-commerce and inventory management.
“In the fourth quarter, our e-commerce and international channels exceeded expectations and were major contributors to our overall performance,” Kreuger said. “Our efficient business model and strong deployment of capital throughout 2019 allowed us to deliver excellent earnings leverage, resulting in record adjusted earnings per share for both the fourth quarter and full-year.
“We are also pleased with our strong cash generation for the quarter and full-year, partially aided by excellent inventory management in the fourth quarter,” he added.