Wolverine Worldwide has decided to streamline its operations, terminating its footwear license with Patagonia and to close down about 140 under-performing stores in the next 18 months. About 75 percent of the stores, which have seen a slowdown in mall traffic, belong to the company's Stride Rite Children's Group, which it took over along with the rest of the so-called P+LG group, including also Sperry Top-Sider, Keds, Sebago and Saucony, in the autumn of 2012.

Wolverine World Wide Inc.

Consolidated Income Statement

(Million US$, 2nd Quarter ended June 14)

 

2014

2013

%
Change

REVENUES

613.5

587.8

4.4

Cost of Sales

367.7

346.7

6.1

Restructuring Costs

0.1

-

-

SG & A*

196.0

196.2

-0.1

Integration Costs

2.5

7.9

-68.4

Interest Expense

10.5

12.5

-16.0

Other Expense

-

0.6

-

Pre-Tax

38.5

23.9

61.1

Tax

10.9

5.8

87.9

Minority Interest

0.1

0.2

-50.0

NET INCOME

27.5

17.9

53.6

Earnings/Share (Diluted)

0.27

0.18

50.0

* Selling, General and Administrative Expenses.

The Patagonia footwear line contributed very little to the group's sales and profits. The planned store closures will take place in 2014 and 2015, and they will cost between $30 million and $37 million. The management has decided to reinvest the expected annual pre-tax savings of $11 million from this move in the development of omni-channel retailing, in line with the evolution of the consumers' shopping habits.

Retail still generates only about 15 percent of the turnover at Wolverine, but the company has already invested strongly in e-commerce, developing a common platform based on Demandware for all its brands, which it is rolling out in the U.S. first and then internationally. Mobile applications have already grown very rapidly and now represent around 25 percent of all transactions going through Wolverine's e-commerce platform.

Blake Krueger, chairman, president and chief executive of Wolverine, announced the new strategic realignment while reporting a slight rebound in the group's revenues, which grew by 4.4 percent to $613.5 million for the second quarter ended June 14, after dropping by 2.8 percent in the first quarter. Keeping the momentum in the first quarter, sales grew at a double-digit rate in Europe, the Middle East and Africa (EMEA) as well as in the Asia-Pacific region, offsetting softer increases in the U.S. and Canada.

Wolverine World Wide Inc.

Pro Forma Revenue by Operating Group

(Million US$, Second Quarter ended June 14)

 

2014

2013

%
Change

Lifestyle Group*

264.1

255.2

3.5

Performance Group**

211.2

199.7

5.8

Heritage Group***

113.5

110.6

2.6

Other

24.7

22.3

10.8

Total Revenue

613.5

587.8

4.4

* Sperry Top-Sider, Stride Rite, Hush Puppies, Keds, Soft Style

** Merrell, Chaco, Patagonia Footwear, Cushe, Saucony

*** Wolverine, Cat Footwear, Harley-Davidson Footwear, HyTest, Bates, Sebago

Krueger and Don Grimes, the group's chief financial officer, indicated that sales outside the U.S. have grown considerably as a result of the signing of 58 new foreign distribution and licensing contracts for the PL+G brands, covering 85 countries. Wolverine continues to count only the licensing fees it collects on its licensing contracts, but Krueger pointed out that the international sales of Sperry, Keds, Sebago and Saucony jumped by about 20 percent in the first half of this year on a wholesale-equivalent basis, and that they are going to grow even faster in the second half of this year and in 2015.

Since the acquisition of these brands in late 2012, sales inside the U.S. have declined from about 95 percent for Sperry to just below 90 percent, from about 90 percent for Keds to around 80 percent, and from just over 80 percent for Saucony to 66 percent.

Sperry, Keds, Stride Rite and Hush Puppies belong to Wolverine's Lifestyle Group, whose revenues increased by 3.5 percent to $264.1 million in the second quarter. Sperry was down by less than one percent against the corresponding period of a year ago, with a loss of four percentage points from its previously announced retreat from the family footwear retail channel.

Boat shoes still represent more than 50 percent of Sperry's sales, but they are being ignored by women in the U.S. The brand is adding more sandals, flats and espadrilles to its offering and will come out in the autumn with an expanded line of apparel. Sperry's sales of men's shoes are still growing.

Hush Puppies continued to perform very well internationally, but declined in the U.S. due to lower demand for its casual offerings and from the department stores. Keds enjoyed strong double-digit growth in the quarter in the U.S. and abroad, creating strong demand through its partnership with Taylor Swift, whom it accompanied during her Asian singing tour. Stride Rite, which has almost no presence outside North America, posted a mid-single-digit gain, performing better than in the first quarter.

The Heritage Group raised its revenues by 2.6 percent to $113.5 million, fueled by strong double-digit growth for CAT footwear in all the geographies, especially in the women's segment. The Harley-Davidson line grew, too, and the Wolverine brand posted a solid increase, especially in North America, but Sebago and Bates were down.

Wolverine's Performance Group, which we are analyzing more in detail in two sister publications, SGI Europe and The Outdoor Industry Compass, reported a 5.8 percent sales increase to $211.2 million, with Chaco and Saucony contributing most of the growth. Merrell's sales increased by less than 5 percent as compared to a year ago, but the brand's sales were soft in the U.S. and Canada. In the lifestyle segment, Merrell's sales were up in men's shoes and down in women's footwear.

The management is now forecasting a 3 percent increase in total revenues for the current financial year, with flat sales in the third quarter and a strong increase in the fourth one. It will probably have to review downward its sales projections through 2018, which last called for a compound average annual growth rate of 8.5 percent, but no change is expected in the outlook for the group's profitability.

In the second quarter, Wolverine's net income improved by 54 percent to $27.6 million, with a 34.8 percent increase excluding extraordinary items. While gross margins declined by 0.9 percentage point to 40.1 percent, due to higher input costs and stronger promotions in the U.S., operating expenses were reduced without compromising the marketing budget, which remained at 5.1 percent of sales. Modest expansion in gross margins and an increase of 10 to 14 percent in earnings per share are expected for the full year.