While continuing to scout the market for possible acquisitions, Wolverine Worldwide's management is considering another possible review of its brand portfolio, after its recent termination of the Patagonia footwear license and the divestiture of Cushe.
Meanwhile, it is doubling investments in market intelligence as it sees the need for product innovation and “big story” marketing initiatives as the most critical elements of its business. It is setting up an integrated consumer research, innovation and design center for all its brands at its headquarters in Grand Rapids, Michigan.
Wolverine reported a 56.6 percent decline to $17.6 million in its net profit for the first quarter ended March 26 on a drop of 8.5 percent in total revenues, down to $577.6 million. The results were better than expected in terms of sales, earnings and inventory management, considering the fact that many of the group's clients in North America and Europe were left with high inventories at the end of last year.
Excluding the impact of foreign currency exchange rates, and the shutdown of retail stores, the underlying sales of Wolverine's continuing operations were down by 6.6 percent in the period. The gross margin fell by 1.8 percentage points to 39.6 percent, with 1.2 percentage points attributed to exchange rates and non-recurring royalties collected in the year-ago period, which more than offset the benefits from price increases and cost savings in the supply chain.
The operating margin fell sharply to 5.9 percent from 10.1 percent in the same quarter of a year ago. On a constant-currency basis, the gross margin rose by 0.2 percentage points to 41.6 percent, but the adjusted operating margin excluding restructuring costs declined by 0.2 percentage points to 9.7 percent.
Stating that the group is making progress in improving productivity rates, especially in its retail operations, the management said it is still targeting a return to the former 12 percent operating margin by 2018.
As previously reported, Wolverine has reorganized its broad brand portfolio into four new business units. It has also provided recalculated historical sales and profit data for them in 2014 and 2015. The biggest unit is now the Wolverine Outdoor & Lifestyle Group, consisting of Merrell, Chaco, Sebago, Hush Puppies and CAT footwear. It was also the most profitable one last year with an operating profit of €197.7 million, although its turnover shrank to €957.5 million following the exit of Cushe and Patagonia footwear.
In the first quarter of this year, the same unit performed better than the others. It saw its revenues decline less than those of the other units, falling by 5.8 percent to $217.7 million, with a drop of 2.8 percent in local currencies. High double-digit growth for Chaco and a low single-digit increase at Sebago were more than offset by declines in the mid-single digits at Merrell, in the low single digits at Hush Puppies and in the high teens for CAT.
Merrell's decline was lower than expected. It came in spite of an increase of more than 30 percent in its online sales. The brand's active lifestyle segment continued to be soft. Furthermore, the brand suffered from the elimination of Merrell apparel from the wholesale distribution circuit, limiting it to its single-brand stores. Wolverine has closed Merrell's store in Portland, but it still has 55 stores and outlets operating under the brand in the U.S. and about 250 others in the rest of the world. The brand's former apparel office has been consolidated into the global Merrell team.
On the other hand, the management indicated that it is enjoying good early sell-through at retail in the current season, particularly for the Capra Bolt, Moab Edge and All Out Crush styles as well as for women's sandals. Wolverine is relatively confident about Merrell's imminent recovery, targeting annual sales increases in the mid-single digits for the brand. However, its revenues may be impacted this year by a change in its sales structure in China, where the group has formed a joint venture with Merrell's long-time distributor.
Sperry, Saucony and Keds are now part of the so-called Boston Group because they are run out of Boston, where they were located prior to their acquisition from the former Collective Brands. Their combined revenues increased to $942.8 million last year, delivering a steady operating profit of $132.9 million, but in the first quarter of this year their revenues fell by 10.8 percent to $209.1 million. On a comparable basis, they were off by 10.1 percent, with declines for every brand.
Saucony was down by a high single digit because of the bankruptcies of several major sporting goods retailers in the U.S. and earlier deliveries of its Everrun line in the fourth quarter of last year. Keds declined by a low single digit. Sperry's decline in the low teens was attributed to strong comparable sales a year ago and the soft boat shoe market, but its turnover was better than expected.
Wolverine's other business segments are smaller. The Heritage Group, which comprises Harley-Davidson footwear and the Wolverine, Bates and HyTest brands, made a small profit of $5.2 million last year on relatively stable sales of $370.5 million, but in the first quarter of 2016, the segment's sales fell by 11.8 percent to $71.8 million, due especially to a big drop in safety and work boots due to the soft oil patch market. Underlying sales fell by 11.5 percent in this segment.
The Multi-Brand Group of Wolverine, which comprises the Stride Rite brand of children's shoes and the group's multi-brand consumer-direct business, had a profit of $5.6 million on sales of $351.2 million last year. In the latest quarter, its sales declined by 4.9 percent to $68.4 million, but they were up by 0.9 percent on a constant-currency basis. Much of the decline was due to the closing of Stride Rite stores, but the remaining ones showed higher same-store sales.
The group is still planning to close down a total of about 100 physical stores this year, while refreshing the look of those it retains. Combined with the reorganization of the group, weaker currency headwinds and better prices being negotiated with suppliers, this should lead to improved earnings for this year.
The management confirmed its guidance for a total turnover of between $2,475 million and $2,575 million for the current financial year, indicating flat revenues on a currency-neutral basis and an overall sales decline in dollars of between 4.3 percent and 8.0 percent. The forecast is regarded as being conservative in view of the better-than-expected first quarter and a certain pick-up in orders and reorders in the first few weeks of the second quarter.
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