Wolverine Worldwide enjoyed a 50 percent increase in sales to foreign distributors in the last two years, and the company continues to see international expansion as being critical to the future growth of its brands, now numbering 15 following the termination of its footwear licensing contract with Patagonia.
In the first quarter ended March 28, Wolverine experienced a very strong double-digit increase in Asia-Pacific. Sales grew in all other geographies, but WWW's own operations for Europe, the Middle East and Africa (EMEA) suffered a low single-digit decline in local currencies and a drop of nearly 15 percent in U.S. dollars as compared to the strong first quarter of a year ago. One of the reasons was the difficult market situation in Russia, which affected mainly the Merrell brand. Pricing was an issue there.
The company has more than 200 distributors and licensees for all its brands around the world. With much of the group's foreign expansion taking place through a distributor or licensing mode, the progress is not fully reflected in the company's revenues, which inched up by only 0.6 percent to $631.4 million in the latest quarter, up by 3.4 percent in local currencies. Adjusted further to eliminate the impact of the expired Patagonia footwear license and of 60 store closures, the currency-neutral growth would have amounted to 5.1 percent.
In any case, the reported revenues fell short of the company's guidance due to the strength of the dollar, lower sales of Wolverine and Sebago shoes, and relatively weak sales for Merrell and Saucony in terms of dollars. Merrell suffered a mid-single-digit sales decline in dollars. On a currency-neutral basis, Merrell was flat and Saucony recorded a single-digit increase.
Each of WWW's operating groups posted improved revenues in constant currencies. In contrast with previous trends, the Performance Group scored less well than the Lifestyle and Heritage Brands segments, however. Led by Merrell, the Performance Group rose by 2.1 percent in local currencies but fell by 2.2 percent in dollars, down to $243.4 million.
At Merrell, sales of performance outdoor shoes experienced a high single-digit increase, helped by the global launch of the new Capra range, and men's active gained traction. On the flip side, the softness in women's casual shoes started again, after a pause in the fourth quarter, and the outside athletic segment declined from the high level of a year ago.
Blake Krueger, chairman, president and chief executive of the group, said he was excited by many positive trends in the Merrell business such the introduction of new leather and Gore-Tex products in the Capra range for next autumn, the recent sell-through of the All Out collection, the positive performance of the women's Terran collection and the Active Lifestyle sandal category, and the continued global momentum in Merrell's Moab collection. Merrell is still expected to book a sales increase in the mid-single digits this year.
A small component of WWW's Performance Group, Chaco, continued its strong progress in the quarter. It saw sales jump by 70 percent due to its new closed-toe styles. The brand is approaching an annual sales level of $100 million, but Merrell remains the largest brand, with a turnover of about $600 million.
Sparked by the continued resurgence of its Sperry label, following significant investments that included the launch of a new brand platform, WWW's Lifestyle segment booked a sales increase of 2.1 percent to $243.0 million, with a currency-neutral rise of 3.6 percent. Stride Rite and Hush Puppies were down in dollars and local currencies, but Sperry's sales grew by around 15 percent in the quarter, with a double-digit increase in its boat-shoe business and double-digit expansion in e-commerce. Women's boat shoes returned to growth (more about these brands in Shoe Intelligence).
At the Heritage Group, revenues rose by 4.5 percent to $126.1 million, and were up by 7.0 percent on a currency-neutral basis. CAT Footwear expanded by almost 20 percent, with balanced geographic growth. The work shoe category advanced by a double digit, while men's and women's lifestyle products improved by 40 percent.
The wholesale channel still represents about 85 percent of the group's turnover, but e-commerce grew by 30 percent in the first quarter, thanks in part to the launch of Merrell's web store during the period. Customers in many European countries can order products from Merrell's website, with detailed product descriptions in many languages.
After shutting down about 60 directly operated brick-and-mortar stores - 11 of them in the U.K. alone - the group still had 413 directly operated brick-and-mortar stores as of March 28, including many Merrell and Sperry mono-brand stores. An additional 85 stores should be closed by next January.
The group also had 63 consumer-facing web stores making up its retail network. The group made strong progress in the deployment of its omni-channel retail platform, with a goal of migrating all its web stores to a Demandware platform by the end of this year. Wolverine is moving forward with a unified consumer database across its portfolio of brands that will be easy to manage, providing consumers with “endless aisle” access to its entire inventory. Many of the group's key brands will offer new and exclusive products online.
On the international front, Wolverine said it continues to make progress expanding the reach of the four brands - Sperry, Saucony, Keds and Stride Rite - it acquired from Collective Brands at the end of 2012. The four brands are in 50 more countries than they were in 2013 through 80 new distribution agreements and the opening of 400 new points of controlled distribution in the last two years.
The gross margin improved during the first quarter by 0.6 percent percentage points to 41.4 percent across the group, thanks mainly to strategic increases in selling prices and lower close-out sales. The reported operating margin was flat at 10.1 percent of sales. The company reported a net profit of $40.1 million excluding exceptional items for the quarter, up by 7.8 percent from the year-ago period, beating Wall Street analysts' estimates. The higher profitability was achieved in spite of a planned 18 percent increase in marketing expenses, especially for Sperry, and secondarily for Merrell, plus a non-cash pension expense of $3.5 million.
The company warned that foreign currencies would have a more significant impact on its results for the second quarter. For the full financial year, Wolverine confirmed its sales forecast, based on orders in hand, but reduced its guidance for earnings, leading to a drop of more than 6 percent in the share price. The management is projecting net earnings of between $146 million and $154 million for the year, up from $133.1 million in 2014/15, on a sales increase of between 2 and 4 percent in dollars to a range of $2.82-2.87 billion. In local currencies, the growth would lie between 5 to 7 percent.