Wolverine Worldwide reported better-than-expected sales and profits for the first quarter ended April 1, due in part to an accelerated program of store closures and the liquidation of $20 million worth of related inventories. Besides 104 underperforming stores shut down during the quarter, an additional 76 stores were closed in more recent weeks, leaving the group without any of its previous Stride Rite and Track N-Trail stores in operation in the U.S.
The group's revenues were down by 4.8 percent to $591.3 million, with a drop of 2.0 percent on an underlying basis. At 41.7 percent, the gross margin was up by 1.2 percentage points from the year-ago period on an adjusted basis, thanks in part to lower product costs. Also on an adjusted basis, the operating margin improved by 2.6 percentage points to 11.0 percent, moving the company closer to the 12 percent target it has set for itself by the end of 2018. Net earnings went down by 4 percent to $16.8 million in the year-ago period, but they were up by nearly 30 percent on an adjusted basis.
Basically flat sales were recorded on an underlying basis in Wolverine's Outdoor & Lifestyle division, which is led by Merrell, with an increase of only 0.1 percent. Within this segment, Merrell posted low single-digit sales growth for the quarter, with continued momentum in technical performance partly offset by a decline in active lifestyle, albeit lower than a year ago. Within the same division, Cacho delivered very strong single-digit growth, while Hush Puppies suffered a decline in the mid-teens. Cat Footwear grew at a mid-single-digit rate.
Merrell benefited from new product launches with selected retailers in the U.S. and continued growth in the Europe, Middle East and Africa region. The management is now anticipating a mid-single-digit increase for Merrell over the full financial year. One of the drivers behind the brand's strengthening growth rate is going to be a robust product pipeline, featuring among others the new Moab shoe, the MGM collection and an expanded range of models with Vibram's Arctic Grip sole.
Led by Sperry and Saucony, Wolverine's Boston Group had to endure a 9 percent drop in revenues on an underlying basis. Saucony, whose sales went down by a mid-single digit in the quarter, experienced a sales increase of more than 10 percent for its core technical running shoes, while foreign distributors reduced their orders for the more casual Saucony Originals line. Keds fell at a mid-teen rate.
The Heritage division was down by 0.4 percent, with the Wolverine brand going up and Bates going down.
Pointing out that Saucony is expected to register a sales increase for the full year, the management said the brand suffered even more than Merrell from the disruption of the retail sector in the U.S., which doesn't seem to be over yet. It admitted, however, that U.S. retailers' inventories are much lower than a year ago, leading to improving order volumes.
Wolverine has been reacting to the situation by shutting down stores – 30-40 more due to close in the next weeks – and by investing in e-commerce. Merrell's online sales grew by about 20 percent in the first quarter, with mobile traffic up by 35 percent, and those of Sperry increased by more than 20 percent.
The company has also made a small investment in a dormant U.S. website, Onlineshoes.com, taking over its database of more than four million consumers. On the other hand, the company is likely to announce soon the disposal of one of its brands, following a strategic review of its portfolio.
The management credited its investments in e-commerce, operational efficiencies and the reorganization of its supply chain for the group's improving profitability. It predicted that its operating margin will continue to rise, reaching a level of between 10.2 percent and 10.7 percent for the full financial year on an adjusted basis, and leading to an increase of up to 60 percent in adjusted net income. The gross margin should go up by 0.5 percentage points.
In view of the continued “tepid” consumption trends in the U.S. and the strong dollar, Wolverine is expecting basically flat sales for the full year, predicting that they may go down by up to 2.3 percent or go up by up to 1.9 percent on an underlying basis, with an adverse impact of between $160 million and $180 million from currencies and store closures. While reporting strong foreign orders already booked for the fourth quarter, it continues to see plenty of opportunities for growth outside the U.S.,
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