Thanks to efforts to reduce operating expenses, which declined by 40 percent year-on-year, Wolverine Worldwide's margins improved before exceptional items and profits soared in the fourth quarter ended on Dec. 29. The quarterly net income reached $39.3 million, compared with a loss of $60.3 million for the fourth quarter of 2017, which had been largely due to impairment and restructuring charges.
Reported revenues increased by 0.2 percent to $579.6 million, while underlying revenues went up by 3.8 percent, or by 4.6 percent in constant currencies. It was the highest quarterly revenue growth of the year, and it was driven by a double-digit increase for Merrell and a high single-digit increase for Sperry. Revenues from outside the U.S. grew by 5 percent.
The figures given by Wolverine for underlying sales and adjusted profits exclude extraordinary factors such as store closures, the sale of Sebago, the conversion of Stride Rite to a licensing model and the disposal of the military business.
The management said it is reaping benefits from the detection of consumer insights, faster product development cycles, the development of omni-channel capabilities and other initiatives to improve margins related to its transformation plan, which it calls its Global Growth Agenda.
As part of the reorganization, Wolverine has implemented a more effective digital engagement to boost the growth of its e-commerce, with less promotional activity, while aiding the development of the online businesses of its retail customers and enhancing the positioning of its brands in the digital marketplace. During the quarter, Wolverine completed its transition to a new West Coast distribution center to further support online sales in the U.S.
The group is also focusing on international expansion, with greater investment in regional resources and systems to accelerate the group's growth outside the U.S., with a specific focus on China and the balance of the Asia-Pacific region. International operation absorbed around 20 percent of the investment spend during 2018.
Overall, investments related to Wolverine's Global Growth Agenda totaled about $11 million in the quarter, bringing the full-year total to around $41 million. About 45 percent of the budget was allocated to the optimization of product development. A share of 35 percent was used for the digitalization of the group and its brands, including the development of new content and better social prospecting activities.
The group's biggest brand, Merrell, continued its recovery. It posted a double-digit sales increase excluding exceptional items for the quarter, with growth in all the segments and geographies and fueled by robust e-commerce growth of over 55 percent. Hiking shoes were the most popular items in the latest quarter, led by the Thermo, Moab and Chameleon collections. The Outdoor Lifestyle and Nature's Gym ranges also performed well.
For the current financial year, the management is projecting a high single-digit increase for Merrell, with greater strength in the second half than the first half.
Wolverine's other brand of outdoor footwear, Chaco, expanded revenues at a strong pace in the high teens during the last quarter. Overall, underlying revenues rose by 8.4 percent in the group's Outdoor & Lifestyle division, and by 10 percent in constant currencies. CAT Footwear was up by a mid-single-digit rate, but Hush Puppies remained “flattish.”
Wolverine's so-called Boston Group saw underlying revenues advance by 2.4 percent, or by 2.8 percent in constant dollars. Sperry delivered high single-digit growth, while Keds rose at a low single-digit rate. Sperry's growth in the quarter was its highest rate for the year, and it was driven by strength in the U.S. wholesale business. The boot category grew at a strong rate and retail sell-through was robust, with particular strength in the Saltwater, Siren and Striper II boot collections.
Saucony declined at a mid-single-digit rate, which still represented an improvement over the previous two quarters. The brand continued to experience growth in the Europe, the Middle East and Africa (EMEA) region. Its e-commerce business grew by over 50 percent in the quarter.
In the Heritage group, underlying revenues increased by 7.9 percent, or by 8 percent in constant currencies. The Wolverine and Bates brands were both up by mid-single digits, Hytest grew in the mid-teens and Harley-Davidson rose at a “very strong” double-digit pace. The Wolverine brand saw continued success from new styles and key product collections including the I-90, Floorhand and apparel offerings, again led by an increase of nearly 50 percent in online sales.
In reported terms, Wolverine's total revenues inched up by 0.2 percent to €579.6 million in the fourth quarter. At 39.2 percent of sales, the gross margin was 0.8 percentage points higher than in the year-ago period, thanks to the realignment of the brand portfolio, the progress of e-commerce and a significant reduction of €80 million in closeout sales as compared with the same period of 2017.
However, the incremental investments made as part of the group's growth agenda led to a decrease of 0.3 percentage points in the adjusted operating margin, down to 10.7 percent for the quarter.
Better margins than expected were obtained for the full financial year, with the adjusted operating margin rising by 0.8 percentage points to 12.0 percent. The gross margin jumped by 2.2 percentage points to 41.1 percent, which was a record for the company. Net income reached $200.3 million, compared with a loss of $700,000 for the prior year.
Annual revenues decreased by 4.7 percent to $2,239.2 million, but they were up on an underlying basis by 2.5 percent, with a 2.3 percent increase in constant currencies. The group recorded solid underlying revenue growth across its portfolio.
Looking at the present financial year, Wolverine sees sales growing by around 3 percent to something like $2.28 billion to $2.33 billion. The gross margin should improve by around 0.5 percentage points to between 41.3 and 41.8 percent.
Building on its transformation efforts, the management said it is moving to a more “disruptive” growth phase for the company, involving a heightened level of urgency. It pointed out that its more efficient operating model and improved profitability provides greater flexibility to invest in growth going forward. To that end, it expects to invest nearly $70 million in growth initiatives this year, including another $40 million on the Global Growth Agenda and $30 million to accelerate growth in global markets.
The management said it has about $1.5 billion of “dry power” available for acquisitions. It will be looking around this year for strategic additions to its portfolio.