Wolverine Worldwide reported a record net profit of $46.7 million for the first quarter ended March 31, up from $16.7 million in the year-ago period, thanks in part to lower taxes and a foreign exchange gain of $8 million.
Sales declined by 9.7 percent to $534.1 million, but they were up 1.8 percent on an underlying basis, after eliminating the effect of store closures, the conversion of Stride Rite to a licensed model, the sale of Sebago to Italy's BasicNet and the termination of its business with the U.S. Defense Department. Further adjusting the turnover for changes in foreign currencies, sales inched up by 0.3 percent.
Contributing to the sharp increase in the bottom line, the group's gross margin rose by three full percentage points to 42.7 percent due to lower closeout sales from inventories that were 18.5 percent lower than a year ago. The operating margin jumped to 11.5 percent from 5.8 percent, and on an adjusted basis, it reached 12.0 percent, one percentage point higher than in the first quarter of 2017.
Sales and profits were ahead of the management's and analysts' expectations, sending Wolverine's stock market value up strongly, also in view of an improved outlook for the balance of the year and an update on the company's transformation plan. The 2018 sale forecast remains unchanged at a range of $2.24 billion to $2.32 billion, with low single-digit growth in the domestic wholesale business and high single-digit growth internationally. However, the gross margin is now seen expanding by 0.5 to 0.9 percentage points - or 10 basis points more than originally predicted – while the operating margin could reach a level up to 0.3 percentage points higher than the initial 11.6 percent target.
The group's profitability is seen improving in spite of the management's decision to allocate incremental investments of between $40 million and $45 million on new and ongoing growth initiatives. Blake Krueger, chairman, chief executive and president of the group, said the investments were in line with a plan to turn it into a more “consumer-obsessed” company.
The investments will double in the present quarter from the $7 million spent in the first one. Out of the total amount budgeted for this year, about 45 percent will be spent to obtain a more frequent flow of new products based on consumer insights, new creative design capabilities and faster lead times.
Another 30 percent will go into a “digital-direct offense” program intended to interact more closely with consumers and creating more digital content to drive the company's own e-commerce platform and the online activities of wholesale clients. It should help the group to maintain or improve the growth rate of more than 25 percent recorded in its online sales during the first quarter.
The balance of nearly 25 percent will be invested in the group's international expansion, allocating new strategic resources outside the U.S., especially in China and the rest of the Asia-Pacific region. In particular, Wolverine plans to directly manage its Keds business in China, and the group is working on other initiatives on this front.
The group's international business posted growth of more than 10 percent in the first quarter, with good performance in Europe and mid-teen growth in Asia-Pacific.
Sales at the group's remaining 82 stores, mostly in the U.S., were 2.3 percent higher than one year ago in the latest quarter, compared with an estimated 1.2 percent increase for the shoe retail sector in the U.S.
On an adjusted currency-neutral basis, the revenues of Wolverine's Outdoor & Lifestyle Group declined by 1.5 percent, as a drop of 10 percent at Hush Puppies was compensated by a slight increase for Merrell, which compared with a strong first quarter in 2017, and a low single-digit increase for Chaco.
Merrell's sales were nearly flat in the U.S., but the brand achieved very strong performances in Europe and the rest of the world. Also, Merrell's gross margin improved by 2.5 percentage points with $7 million fewer closeouts, the sale of higher-end products and a more segmented sales strategy aimed at five different target groups.
The management expects Merrell to deliver high single-digit growth for the full year. Much of the growth will take place in hiking, lifestyle and performance categories, thanks to a robust product pipeline for the next months.
Chaco enjoyed strong growth in the women's segment and a boost of more than 20 percent in e-commerce. The brand would have performed better if weather conditions had been more normal for the season, and the company is expecting strong reorders from the specialty sales channel during the second quarter.
In the so-called Boston Group, where sales were off by 0.7 percent on an adjusted currency-neutral basis, Wolverine's second-largest brand, Sperry, recorded a gain of close to one percent in the quarter, the first one in a long time, with its online sales jumping by 35 percent following strong activity on social networks. The management sees the brand's new growth accelerating in the second quarter and in the second half.In the same group, Keds grew at a mid-single-digit rate in the quarter, while Saucony recorded a mid-single-digit decline due to ongoing quality control and fit issues. However, Saucony grew in Europe, the Middle East and Africa by more than 25 percent in dollars and 15 percent in local currencies.
According to Wolverine's management, it will take a couple of quarters for Saucony to recover. Meanwhile, Wolverine announced a few days ago a new president for the Saucony brand, Anne Cavassa. She comes from Brooks Running, where she has been most recently a senior vice president and “chief experience officer.” She previously worked for Timberland, Ibex and Nike.
Adjusted sales increased by 5.3 percent in the Wolverine Heritage Group, which includes the Wolverine brand and CAT footwear, among other product lines. The Wolverine brand returned to growth with the release of new products, and the overall work shoe segment gained market share in the U.S.
The management is placing a strong priority on opportunities for new acquisitions, even in the apparel or handbags sectors, particularly if they can help leverage its international sales apparatus, with a network of offices, distributors and licensees servicing more than 15,000 stores in 200 countries. It is targeting brands with heritage in high-growth categories and markets.
In response to the recent U.S. tax reform, Wolverine repatriated $230 million in overseas cash to the U.S., using some $100 million to pay down debt. It still has plenty of availability on its credit line.
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