To protect its international business from the strong increase in the value of the dollar, Wolverine Worldwide selectively adjusted the price of some products upwards outside the U.S. earlier this year, recognizing that this could put pressure on sales. As company officials feel that the strength of the dollar will persist, the product development department is working hard on lower-priced products for its foreign clients.

In the third quarter ended Sept. 12, the U.S., Canada and Europe were the “most challenged” region, the management said. In the U.S., sales were affected by declining footfall in the stores and by the retailers' propensity to order closer to their needs, said Blake Krueger, chairman, chief executive and president of the group, indicating that orders were not buoyant lately.

About half of the 100 million pairs sold under the group's various brands each year are marketed outside the U.S., partly through distributors and licensees. The group's sales in Europe, the Middle East and Africa were more or less flat overall in terms of local currencies, in spite of declines in Italy, Russia and some other countries. They were up by more than 20 percent in Latin America and Asia, where Wolverine operates mainly through distributors and licensees.

Globally, Wolverine's consolidated revenues were down by 4.5 percent in dollars to $676.9 million during the quarter, but they were up by 0.7 percent on an adjusted basis, i.e. in constant currencies and excluding the impact of store closures and the exit of the Patagonia footwear license. The quarterly net income fell by 21 percent to $45.8 million.

Adjusted revenues grew by 3.8 percent in the company's Performance Group, where Chaco continued to generate strong double-digit growth, Merrell moved up at a low single-digit rate and Saucony up by a mid-single-digit rate. Outside the U.S., Saucony's turnover rose by more than 20 percent. The segment's revenues increased by 1.4 percent in terms of local currencies, but foreign exchange rates depressed the reported revenues by $11.6 million in the quarter, leading to a drop of 3.1 percent to $249.1 million in reported terms.

For the full financial year, Merrell's sales are expected to be flat on a constant-currency basis due to softness in its athletic leisure segment, which will continue to offset its strong growth in the performance outdoor sector, and to some “specific regional challenges,” the management said, probably referring to Russia.

Wolverine Worldwide Income Statement

(Million US$, Third Quarter Ended Sept. 12)

 

2015

2014

%
Change

Lifestyle Group

250.6

277.9

-9.8

Performance Group

249.1

257.1

-3.1

Heritage Group

150.2

151.3

-0.7

Other

29.0

24.8

16.9

REVENUES

678.9

711.1

-4.5

Cost of Goods Sold

407.2

426.3

-4.5

SG&A*

191.0

186.8

2.2

Restructuring Costs**

4.8

8.0

-40.0

Net Interest and Other Income

11.1

9.7

14.4

Pre-Tax

64.8

77.9

-16.8

Tax

18.8

20.0

-6.0

NET

46.0

57.9

-20.6

Cent/Share (Diluted)

0.44

0.57

-22.8

       

*Selling, General and Administrative

**Acquisition Related Transaction and Integration Costs

In the other two segments of Wolverine, which we are going to analyze in greater detail in Shoe Intelligence, adjusted revenues went down by 5.1 percent in Lifestyle and rose by 2.9 percent in Heritage. The Lifestyle segment was pulled down by a high single-digit drop for Stride Rite, the leading American brand of children's shoes, while Sperry declined by less than one percent and Keds suffered a temporary low single-digit decline. Hush Puppies recorded a drop of more than 10 percent due to the realignment of its U.S. business, but the brand grew at a double-digit rate abroad through its foreign licensees.

Margins were better than expected for the period. The gross margin remained flat at 40 percent of sales, as compared to the year-ago period, despite a negative impact of 0.6 percentage points from foreign exchange rates. The recent drop in cost of leather and other commodities helped to keep down production costs, offsetting higher labor costs, and the management indicated that it may lead producers to reduce footwear prices by one to two percent next year.

Wolverine‘s operating margin increased by 0.6 percentage points to a level of 11.9 percent, but on an adjusted basis it was off by 1.9 percentage points because of a planned 26 percent increase in demand creation and higher pension costs. The advertising effort was in line with a three-year $100 million investment program, but there will be no increase in the fourth quarter, the management said. Most of the incremental spending has been allocated this year to Sperry, but the focus will shift to Merrell in 2016.

The management is predicting an increase of between 2.1 and 2.8 percent in adjusted revenues for the full financial year, but on a reported basis, they should be down by 2 to 2.5 percent, declining to a range of between $2.69 and $2.71 billion – below earlier projections.

Adjusted earnings per share are expected to increase by between 3 and 13 percent, again less than previously budgeted. Much of the shortfall will be due to incremental costs related to the closure of additional Stride Rite shops and other organizational changes across the group's brand portfolio.