Wolverine Worldwide is again actively looking for additional brands to acquire, not only in the footwear sector, but also in apparel and leathergoods, with a preference for the women's segment, where it is relatively under-represented. The multiples requested by the sellers have increased, said Blake Krueger, chairman, chief executive and president, but he feels that Wolverine has developed a certain expertise in the integration of other brands.
Meanwhile, the group is beginning to reap clear benefits from the detection of consumer insights, faster product development cycles, the development of omni-channel capabilities and other initiatives related to its transformation plan, which it calls the “Wolverine Way Forward.” The progress has started with its two biggest brands, Merrell and, to a lesser degree, Sperry.
Accelerating from the first quarter, the group's overall revenues rose by 3.2 percent in the second quarter on an organic, currency-neutral basis. In reported terms, they declined by 5.3 percent to $566.9 million, but they were up by 3.9 percent excluding store closures, the sale of Sebago and other one-off items.
Wolverine's management said it was surprised by the strength of the group's wholesale business in the U.S. It mentioned a good development in Europe across the whole brand portfolio, with Merrell and Saucony performing best in the region.
More interestingly, the company's quarterly gross margin rose to 41.3 percent from 37.9 percent in the year-ago period and was 2.5 percentage points higher on an adjusted basis. The operating margin nearly doubled to 12.0 percent, and again on an adjusted basis, it improved by 1.4 percentage points to 12.5 percent. The end result was an increase in net income of 171 percent to $55.5 million.
Merrell, the first brand in its portfolio to have adopted the new business model, recorded sales growth in the high teens in the second quarter ended June 30. It was the highest quarterly growth in several years, and the management believes that the rate of the increase could even reach a low double-digit rate for the full financial year, partly by more than doubling the marketing spend in the second half of 2018.
The brand scored strong sales results in both the performance outdoor and lifestyle segments with products such as the newest refreshed versions of the Moab hiking boot and the iconic Jungle Moc. Merrell received several awards recently for its products. It delivered a significant improvement in the gross margin thanks to a higher proportion of full-price sales.
Merrell's progress in the latest quarter was partly offset by worse results for the three other brands in the Wolverine Outdoor & Lifestyle Group: Chaco, Cat Footwear and Hush Puppies. With total revenues of $240.4 million, the division's sales rose by 4.6 percent in reported dollars and by 7.7 percent in constant currencies, but they were up by 8.6 percent on an underlying basis, after adjustments for the closing of unprofitable stores and other extraordinary items.
The more outdoor-oriented Chaco brand of sandals had an unexpectedly low sales increase due to a late start of the spring season, but it regained momentum in the second half of the quarter, and it is gearing up for a more frequent flow of new products and a stronger online presence in the second half of the year.
Cat and Hush Puppies recorded sales declines for different reasons. Cat was affected by a shift in the timing of deliveries, and it is expected to do better in the second half. On Hush Puppies, the management simply said that the brand is still very profitable and that it continues to perform well internationally.
Sales declined by 14.6 percent to $231.1 million in Wolverine's Boston Group, with declines of 2.0 percent in local currencies and 1.6 percent on an underlying basis, excluding the sale of Sebago. In this division, Sperry posted a high single-digit increase and Keds recorded low single-digit growth, but Saucony continued to be a problem.
The running shoe brand's sales declined by 10 percent due to quality and delivery problems that have now been resolved, but it continued to perform well in Europe and its online sales rose by more than 45 percent. Saucony is expected to perform better in the second half, but the revenues will be down for the year.
Aside from the positive effect of its new product initiatives, Sperry gained market share in the difficult boat shoe market. The management feels that Sperry's turnaround has been completed and that its sales will continue to grow at about the same pace for the remainder of this year.
Revenues were down by 0.5 percent to $73.7 million in Wolverine's Heritage Group, but they were up by 8.7 percent on a currency-neutral basis, lifted by new product introductions. All the brands in the division posted higher sales, thanks to new product introductions, with Harley-Davidson footwear up in the mid-teens.
The group's management sounded quite bullish about the prospects ahead, as it looks to applying its new “way forward” initiatives to more and more brands in its portfolio, after adding more resources in product development, design and marketing, improving the supply chain and developing its digital capabilities. The group's online sales revenues rose by more than 24 percent in the first half, and it is developing new content for its digital marketing programs, which are becoming more frequent.
Improving its guidance for the full financial year, Wolverine is now budgeting an adjusted operating margin of between 12.1 percent and 12.4 percent, in spite of the planned extra investments of $45 million that we have already reported about. The group has already spent $20 million.
About 30 percent of the budget is meant to enhance the group's online sales, which are generating higher profits than before. International development was noted as an area in which the company is investing, and it will soon have something to report about its expansion in China.
Growing at a mid-single-digit rate, total revenues are expected to be in a range of $2.24 billion and $2.32 billion for the year, accelerating further in 2019. The gross margin should grow by between 1.0 and 1.3 percentage points in 2018 from the adjusted level reached last year, despite a negative effect of 0.2 points from the reduction in its store fleet. The group should be able to post an increase of more than 30 percent net income for the year, reaching an indicated level of nearly $200 million, thanks in part to a reduction in the income tax rate to between 18 and 20 percent.