Wolverine Worldwide posted lower-than-expected sales in the second quarter ended on June 29, but its profitability slightly exceeded forecasts. The management largely confirmed its previous projections for the full financial year, predicting a strong second half, with a 5.5 percent currency-neutral increase driven by gains of nearly 10 percent for Merrell, Sperry and Saucony during the six-month period. Sales are expected to recover in Europe and Latin America from a relatively poor second half of 2018.
The group's total revenues inched up by 0.3 percent to $568.6 million in the second quarter, with growth of 1.1 percent in local currencies. International sales were up by 7 percent, but this was offset by unfavorable weather conditions and a sluggish retail climate in the U.S., which led to volatile re-orders by wholesale clients.
On the other hand, four of the group's top brands exceeded expectations in the quarter, and e-commerce went up by more than 25 percent across the whole brand portfolio. In line with expectations, the reported gross margin declined by 0.8 percentage points to 40.5 percent as compared to the year-ago period, and the adjusted operating margin dropped by 1.4 percentage points to 11.1 percent.
Margins were affected by higher close-out sales, environmental costs of $4 million and investments related to the previously reported takeover of the distribution in Italy and the establishment of a joint venture with Xtep for Greater China. The company also opened nine new stores, mostly Sperry factory outlets in the U.S.
Net earnings fell by 27 percent to $40.2 million, but stock repurchases moderated the drop in earnings per share. The guidance for the full year calls for a flat gross margin of 41.0 percent and an operating margin (Ebit) of 11 percent on total revenues of $2.28 billion, up from $2.24 billion in 2018. The Ebit margin should improve to 13 percent in the last two quarters. Indicatively, the net income should decline to around $181 million for the year from $200.1 million in 2018 because of higher taxes.
The guidance factors in a hit of about $5 million if the U.S. administration delivers on its promise to raise import duties on shoes and other products from China on Sept. 1. In view of this possible move, Wolverine has inflated its inventories by 38 percent, bringing in more merchandise than needed from China, but it expects that they will be up by only between 5 and 10 percent by year-end.
The group has already reduced its imports into the U.S. from China by 25 percent since 2014. The process will continue this year with imports into the U.S. budgeted to decline to 3.5 million pairs in the last four months of 2019, falling then further to 7.5 million pairs in 2020 and 3.5 million pairs in 2021. About three-fourths of the reduced volumes will be moved to factories in other countries controlled by the same companies that have been making the products in China.
During the second quarter, only Wolverine's so-called Michigan Group registered a sales increase. Its revenues went up by 1.3 percent to $318.2 million, rising by 2.4 percent in local currencies. Within this division, Merrell recorded mid-single-digit growth, powered by new product launches and a 27 percent increase in e-commerce. Caterpillar grew by almost 25 percent, with particularly strong performance in Asia-Pacific, but Chaco suffered from poor weather conditions and the Wolverine brand was affected by the closure of many Sears stores.
Merrell is accelerating, the management said. The order books show that Merrell is poised for strong high-single-digit growth in the back half of this year, driven by the brand's momentum in the direct-to-consumer (DTC) arena and by new product launches in performance and lifestyle.
The group's quarterly revenues declined by 0.2 percent to $230.7 million in the so-called Boston Group, but they rose by 0.3 percent in constant currencies. Sperry, the biggest brand in the group, had “flattish” sales, performing significantly better than in the first quarter. Saucony suffered a mid-single-digit decline from a year ago, with problems in the U.S. and Europe, but its lifestyle business improved by 27 percent. A smaller brand in the group, Keds, experienced good growth in the mid-teens.
Saucony is expected to improve in the second half of this year, thanks to the launch of new products and the previously reported takeover of the distribution in Italy, which will generate extra sales of $14-15 million and better margins during the six-month period. Sperry, whose e-commerce scored an increase of 30 percent in the second quarter, is expected to rebound in the back half with to a double-digit increase in sales of boots.