After a relatively good first quarter, Merrell registered a decline in the second quarter ended on June 16, as compared to the same period a year ago, in spite of high double-digit growth for its new M-Connect line. However, the management of its parent company, Wolverine Worldwide, is confident that the brand will turn around for the balance of this year as its orders are up in the U.S. as well as in Europe, and even more strongly in Canada and other foreign markets.
In particular, Merrell's orders are up by between 15 and 20 percent in the Outdoor Performance and Outside Athletic segments, which represented about 40 and 20 percent of its global revenues last year. The growth in orders is lower in the remaining Active Lifestyle segment of Merrell's business, but the recent reorganization of the production development teams and the promotion of a company veteran, Martin Dean, as head of product creation, is expected to revitalize it.
Graduated from an English design school, he designed shoes for Fila, Marks & Spencer and Doc Martens. He was associated with the Cat footwear brand at Overland Shoes prior to its acquisition by Wolverine. He then set up a design consultancy, working for Merrell and other Wolverine brands until he started up Cushe in 2005. That brand was recently acquired by Wolverine, too.
According to Blake W. Krueger, chairman and chief executive of the Wolverine group, the order backlog reflects a shift in consumer preferences over the last 18 months to lighter and more athletic styles of outdoor shoes. In a conference call to discuss the quarterly results of the group, he also said that consumers are moving away from pure barefoot shoes to minimalist lightweight shoes with some cushioning, as shown by the strong performance of Merrell styles such as the Pro Terra.
With revenues of more than $500 million last year, including royalties on licenses, Merrell remains the largest brand of outdoor shoes in the world. Market research by NPD in the U.S. indicates that Merrell continued to raise its market share there recently, reaching more than 18 percent of the total market, with stronger gains in the specialty retail channel.
To explain Merrell's sales decline in the second quarter, Krueger said that the outdoor market seems to have contracted a little lately, especially in the discount sector. He said that the brand suffered also from a shift in shipments to foreign distributors from the second to the third quarter.
He said that Wolverine is still budgeting a high single-digit sales increase for Merrell this year, although the forecast implies a more conservative attitude for reorders in the second half than for other brands in the group's portfolio such as Sperry Top-Sider, which is enjoying the fastest growth at the moment.
Merrell belongs to Wolverine's so-called Performance Group, whose total revenues declined by 4.8 percent from a year ago in the second quarter on a comparable basis, with a drop also for Patagonia footwear and Cushe. Another brand in this group, Chaco, almost reached double-digit growth. Saucony went up at a double-digit rate in the quarter.
Saucony, Sperry, Keds and Stride Rite were previously part of the so-called PLG Group of Collective Brands, which was acquired by Wolverine last October. Their acquisition helped Wolverine to push its total revenues up by 88.0 percent to $587.8 million for the quarter, but on a pro-forma basis, excluding PLG's takeover, they went up by 5.5 percent.
The growth was driven by Sperry and other brands in Wolverine's Lifestyle Group, whose total sales went up by 20 percent in the quarter. The Heritage Group was down slightly during the period (more on these two segments in another publication of ours, Shoe Intelligence).
The Wolverine group managed to raise its overall gross margin by 3.2 percentage points to a record level of 41.0 percent during the quarter, but about two-thirds of the improvement came from the integration of the PLG brands. The rest was due in part to higher average selling prices and to better manufacturing efficiencies.
The bottom line showed a better-than-expected 12.2 percent increase in net earnings per share excluding acquisition-related transaction and integration expenses, but adding those, the company's net profit went down to $47.9 million from $515 million a year ago.
The company was also able to generate record operating cash flow of $165.1 million in the quarter, allowing the group to reduce its debt to $1,014 million, $159 million below the level reached at the time of PLG's takeover. The management is confident that it will be able to reduce it further in the course of this year, down to two times projected earnings before amortization (Ebitda) of between $345 million and $395 million.
Raising its previous profit forecast, Wolverine is now predicting growth of 13.5 to 20.1 percent in adjusted earnings per share for the full financial year, with even stronger growth after adjustment for a non-recurring tax benefit enjoyed in the past year. The group's total revenues should be in a range of $2.70 to $2.77 billion, representing a rise of between 6.0 and 8.9 percent on a pro-forma basis.
