Wolverine Worldwide has decided to streamline its operations, terminating its footwear license with Patagonia after delivery of the autumn/winter 2014/15 collection and closing down about 140 under-performing stores in the next 18 months. About 75 percent of the stores, which have seen a slowdown in mall traffic, belong to the company's Stride Rite Children's Group. A few others trade under the Track and Trail banner.

The Patagonia footwear line contributed very little to the group's sales and profits. We estimate that it was generating annual revenues of only around $20 million. A spokesperson for Patagonia indicated that no decision has been made as to whether it should be brought in-house, licensed to other partners or terminated for good.

The planned store closures will take place in 2014 and 2015, and they will cost between $30 million and $37 million. The management has decided to reinvest the expected annual pre-tax savings of $11 million from this move in the development of omni-channel retailing, in line with the evolution of the consumers' shopping habits.

Wolverine Worldwide
Consolidated Income Statement
(Million US$, 2nd Quarter ended June 14)

 

2014

2013

%
Change

REVENUES

613.5

587.8

4.4

Cost of Sales

367.7

346.7

6.1

Restructuring Costs

0.1

-

-

SG & A*

196.0

196.2

-0.1

Integration Costs

2.5

7.9

-68.4

Interest Expense

10.5

12.5

-16.0

Other Expense

-

0.6

-

Pre-Tax

38.5

23.9

61.1

Tax

10.9

5.8

87.9

Minority Interest

0.1

0.2

-50.0

NET INCOME

27.5

17.9

53.6

Earnings/Share (Diluted)

0.27

0.18

50.0

* Selling, General and Administrative Expenses.

Retail still generates only about 15 percent of the turnover at Wolverine, but the company has already invested strongly in e-commerce, developing a common platform based on Demandware for all its brands, which it is rolling out in the U.S. first and then internationally. Mobile applications have already grown very rapidly and now represent around 25 percent of all transactions going through Wolverine's e-commerce platform.

Blake Krueger, chairman, president and chief executive of Wolverine, announced the new strategic realignment while reporting a slight rebound in the group's revenues, which grew by 4.4 percent to $613.5 million for the second quarter ended June 14, after dropping by 2.8 percent in the first quarter.

Keeping the momentum recorded in the first quarter, sales grew at a double-digit rate in Europe, the Middle East and Africa (EMEA) as well as in the Asia-Pacific region, offsetting softer increases in the U.S. and Canada.

Wolverine's Performance Group reported a 5.8 percent sales increase to $211.2 million, with Chaco and Saucony contributing most of the growth. Chaco, which is sold mainly in the U.S., enjoyed strong demand for its classic Z sandal, especially among younger people. The MyChaco customization program is running 50 percent ahead of last year.

Merrell's turnover increased by less than 5 percent as compared to one year ago, when it was partly fueled by the launch of the M-Connect range. The brand performed nicely in the EMEA region but its sales were soft in the U.S. and Canada.

Within Merrell's product range, the performance segment posted a double-digit increase. In the lifestyle segment, Merrell's sales were up in men's shoes and down in women's footwear. The outdoor athletic segment declined.

According to the management, Merrell should do better in the next two quarters, but more in the fourth one than the third one. Wolverine's managers are forecasting a 3 percent increase in the group's total revenues for the current financial year, with flat sales in the third quarter and a strong increase in the fourth one.

It will probably have to review downward its sales projections through 2018, which last called for a compound average annual growth rate of 8.5 percent, but no change is expected in the outlook for the group's profitability.

Wolverine Worldwide
Pro Forma Revenue by Operating Group
(Million US$, Second Quarter ended June 14)

 

2014

2013

%
Change

Lifestyle Group*

264.1

255.2

3.5

Performance Group**

211.2

199.7

5.8

Heritage Group***

113.5

110.6

2.6

Other

24.7

22.3

10.8

Total Revenue

613.5

587.8

4.4

* Sperry Top-Sider, Stride Rite, Hush Puppies, Keds, Soft Style

** Merrell, Chaco, Patagonia Footwear, Cushe, Saucony

*** Wolverine, Cat Footwear, Harley-Davidson Footwear, HyTest, Bates, Sebago

In the second quarter, Wolverine's net income improved by 54 percent to $27.6 million, with a 34.8 percent increase excluding extraordinary items. The gross margin declined by 0.9 percentage point to 40.1 percent, due to higher input costs and stronger promotions in the U.S. Modest expansion in gross margins and an increase of 10 to 14 percent in earnings per share are expected for the full year.