Wolverine Worldwide is projecting an increase in its total reported sales to about $4.1 billion by 2018 from around €2.7 billion this year, implying an annual growth rate of around 8.5 percent. This doesn't include the revenues of its licensees around the world.
Together, its two biggest brands, Merrell and Sperry Top-Sider, are expected to grow to a combined total of $2 billion by 2020. Merrell, which was only a $23 million brand when Wolverine took it over in 1997, is now approaching a level of $600 million. It is budgeting to grow at the group's average rate of 8.5 percent a year. Sperry, which was acquired by Wolverine one year ago along with three other brands, will likely become a little bigger than Merrell, judging from its recent sales trends and its big potential outside North America, where it still generates about 95 percent of its sales.
To help achieve its sales goals, the group is going to increase its marketing spend to 6.5 percent of sales by 2018 from 4.8 percent this year – a level that was already higher than the 3.9 percent ratio of 2012 – excluding the marketing investments of the group's distributors and licensees. Nevertheless, the operating margin of the group is projected to inflate to 12.5 percent from 8.9 percent, thanks largely to an increase in the gross margin to 42.1 percent from 40.2 percent at present. Merrell, which is already the most profitable brand within the group on an absolute basis, has a higher-than-average gross and operating margin right now, and its marketing investments will remain at the group's average.
Foreign expansion and own retailing are going to be among the growth drivers for the group's 16 brands. Sales in Asia and Latin America are due to rise at 15 and 17 percent a year, respectively. Adding annual growth of 7 percent in the European countries where Wolverine owns the distribution of its products, sales outside the U.S. should come to represent 31 percent of reported revenues by 2018. Sales through corporate stores and e-commerce are set to grow by 9 and 13 percent a year, respectively.
The group's net profit per share is due to grow at an annual rate of 15.8 percent until 2018, or twice as fast as revenues. The management feels that these goals are achievable in view of the company's track record. Its revenues have increased at a compound annual rate of 7.1 percent since 2002, delivering average increases of 11.5 percent a year. This has translated into a 475 percent boost in the company's stock market capitalization over the same period.
These and other projections were made by Wolverine's top management at an Investors Day, a few days after the release of excellent results for its third quarter ended last Sept. 7. Quarterly revenues nearly doubled to a record level of $716.7 million as compared to a year ago and went up by 9.0 percent on a comparable pro-forma basis, assuming that it had been managing the so-called PLG brands - Sperry, Saucony, Stride Rite and Keds – during the corresponding period of 2012.
In the past quarter, Merrell, Sperry, Saucony, Keds, Chaco and Cushe stood out with double-digit sales increases as compared to a year ago. Merrell and Sperry made the biggest contribution to the quarterly growth.
At Merrell, which was not doing so well before, the growth was well balanced across its various categories during the third quarter. Its Active Lifestyle segment finally turned around. The brand's performance in the U.S. was described as “encouraging,” and it did very well in Europe, in contrast with the past, as well as in Latin America. The order backlog is positive across all channels and the brand's momentum is likely to continue for the rest of the year, resulting in a high single-digit increase for the full financial year.
For the entire Performance Group – consisting of Merrell, Patagonia Footwear, Saucony and Chaco – the group's total sales rose by 67.0 percent to $254.1 million, or by 13.4 percent on a comparable basis. In this group, Saucony is growing strongly, generating annual sales of around $300 million.
In the latest quarter, sales jumped by 678.4 percent to $295.8 million in the company's Lifestyle Group (Sperry Top-Sider, Stride Rite Children's Group, Hush Puppies, Keds, Cushe and Soft Style), up by 9.6 percent pro-forma. Sales expanded at a double-digit rate for Cushe, thanks in part to wider distribution at REI and Dillards. Sales rose by only 0.8 percent to $144.6 million for the Heritage Group (Wolverine, Caterpillar Footwear, Bates, Sebago, Harley-Davidson Footwear and HyTest). The group should see the lowest growth rate in the future.
The company saw its net profits jump by 65.9 percent to $54.4 million for the quarter, excluding extraordinary items, leading the management to forecast higher earnings than previously expected for the full financial year. The gross margin improved by 0.7 percentage points to 39.9 percent for the quarter as compared to the year-earlier period thanks to a better mix and in spite of foreign exchange losses. Strong at-once orders pushed the level of inventories down. With a double-digit increase, sales were better than expected in Europe, Middle East and Africa (EMEA), indicating that the worst may be over in the region.
The management also said that the group is ahead of schedule in the integration of the PLG brands in terms of back-office functions and sourcing. Wolverine completed the integration into its SAP platform at the wholesale level in the past quarter, with retail likely to follow by year-end.
The management is now predicting an increase in net profits before extraordinary items of between 30.0 and 34.8 percent for the full financial year. It has revised its sales forecast downwards, predicting an increase in the range of 6.4 to 7.1 percent on a pro-forma basis because the back-to-school period has been “tepid” in the U.S., especially for Stride Rite, and the holiday season will probably not be much better. Sales should be stable overall in EMEA for the year as compared to the previous one.
Blake Krueger, chairman, president and chief executive of the group, told investment analysts yesterday that Wolverine would like to acquire a “significant” apparel company in order to help Merrell and other brands to build up their own apparel collections. He said that Merrell's efforts in apparel have much improved recently, the aim being to create a wider range of products for its lifestyle stores. There are now nine websites and about 200 stores in operation for Merrell around the world. However, no major acquisition is expected until 2015 or 2016 as the focus until then will be on paying down debt.
Wolverine has just concluded a refinancing of its debt at better conditions through a new term loan of $775 million, maturing one year later than a previous loan, and a revolving credit of $200 million.
Company managers indicated that Wolverine is able to obtain better conditions from raw materials suppliers and from its 110-odd partner factories around the world as it is now placing orders for some 100 million pairs of shoes annually. Sourcing costs have become stable for the group, which is trying to put through price increases on more innovative models. Another source of additional revenues and profits is going to be the gradual internationalization of the recently acquired brands, he also indicated.
The group, which already has a presence in more than 150 countries, has signed 34 new distribution agreements covering 67 countries. One of most recent deals has been struck for Sperry and Keds with E-Land, the powerful Korean group. It calls for the opening of many standalone Sperry shops and shop-in-shops starting this autumn, the first of which is opening in Shanghai (more in Shoe Intelligence).
