The divestiture of Sebago and the military business caused a 3.9 percent decline in sales at Wolverine Worldwide, down to $558.6 million, in its third quarter ended Sept. 29. On a comparable basis, sales inched up by 0.5 percent, but they were up by 1.5 percent excluding the leather business and by 1.1 percent in constant currencies.
The company's net income more than doubled to $58.8 million, reaching a record level in terms of earnings per share after two years of transformation. The gross margin improved by 0.7 percentage points to 41.6, with a rise of 1.7 percentage points on an adjusted basis, thanks in part to lower closeouts and lower markdowns.
The operating margin nearly doubled to 12.2 percent as compared to 6.4 percent in the year-ago period, and it grew by 0.8 percentage points to 12.6 percent excluding the operations that have been divested.
The group's biggest brand, Merrell, continued its recovery. It posted a low single-digit increase for the period, driven by its hiking products and by continued strength in its Nature's Gym collection, but it could have done better.
Merrell's sales were limited by lean inventories after the 19 percent jump it had enjoyed in the second quarter, but re-orders were up in the high teens. The brand's quarterly revenues were also affected by late incoming shipments, lower closeout sales and sluggish markets in Latin America and elsewhere.
The management sees Merrell delivering growth in the low teens in the fourth quarter, boosted by new products and higher marketing expenditures. Wolverine's other brand of outdoor shoes, Chaco, suffered a low single-digit sales decline, due to softness in its line of Z sandals, but its online sales surged by 35 percent, and the brand should return to growth in the current quarter.
Overall, sales declined by 0.7 percent to $243.6 million in Wolverine's Outdoor & Lifestyle division. On an underlying basis, they grew by 2.9 percent, with growth of 3.9 percent in constant currencies and with CAT footwear rising at a mid-teen rate and Hush Puppies falling at a double-digit rate.
Wolverine's so-called Boston Group endured a 4.0 percent sales decline to $214.6 million, although the drop was limited to 0.5 percent on an adjusted basis and 0.1 percent in constant dollars. Sperry had flat sales, but Saucony went down at a high single-digit rate, in spite of ongoing growth Europe, the Middle East and Africa (EMEA). Keds grew at a mid-teen rate.
Sperry's sales of boat shoes continued to decline. The brand's sales were also impacted by late deliveries, but its vulcanized shoes performed well. U.S. sales were good in the wholesale and online channels. The management is confident that a good momentum in boots will lead Sperry to book a high single-digit gain in the fourth quarter and an overall sales increase of more than 3 percent for the full financial year. Even better sales results are expected for 2019.
In the Heritage group, sales declined by 5.7 percent to $84.1 million, but underlying sales were up by 2.7 percent, with a growth of 2.8 percent in constant currencies. The Wolverine brand performed well, growing at a double-digit rate, driven by an increase of nearly 50 percent in online sales and the introduction of new products.
Geographically, the U.S. performed best, growing at a mid-single-digit rate. Overall revenues rose at a low single-digit rate in EMEA, but they declined in Canada and Latin America. Merrell and Keds were impacted the most in Latin America from high inflation and political and economic issues.
Across the group, e-commerce grew by over 33 percent in the third quarter. Such sales have gone up by 27 percent so far this year, thanks to investments of $15 million in the segment, and the growth rate could accelerate to more than 35 percent in the fourth quarter.
Organically, the group's sales went up by 2.1 percent in the first nine months of this year, and they were 2.5 percent higher excluding its own leather segment, which is being affected by volatile pricing. Merrell alone grew by 7 percent.
For the full financial year, Wolverine sees sales growing by between 3 and 5 percent, reaching a level of around $2.24 billion, at the lower end of a previously forecasted range. The gross margin should improve by 1.5 percentage points, leading to operating margins of 11.7 percent on a reported basis and 12.1 percent on an adjusted basis, and to an indicated net income of around $200 million. The operating margin already improved by 1.2 percentage points in the first nine months of the year.
This will be after incremental investments of $45 million related to the group's transformation program. Next year, they will be about half as high, helping to improve the bottom line along with a projected single-digit increase of more in total revenues.
Merrell and Sperry have benefited the most so far from the implementation of a new business model, which also calls for more action in international markets. It is being gradually applied to the group's other smaller brands, using less sophisticated processes.
While noting that footwear products already have some of the highest import duties in the U.S., Blake Krueger, chairman, chief executive and president of the group, told investors that Wolverine is not too concerned about the current trade war with China as it now represents only around 15 percent of its total production.