Wolverine World Wide, Inc. (NYSE:WWW) Q4 2023 Earnings Call Transcript
Wolverine World Wide, Inc. (NYSE:WWW) Q4 2023 Earnings Call Transcript February 21, 2024
Wolverine World Wide, Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.25. Wolverine World Wide, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Wolverine World Wide, Inc. Fourth Quarter and Fiscal Year 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Alex Wiseman. You may begin.
Alex Wiseman: Good morning, and welcome to our fourth quarter 2023 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer; and Mike Stornant, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the fourth quarter and full year 2023 and guidance for fiscal 2024. The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures were reconciled to most comparable GAAP financial measures and attached tables within the body of the release.
References made regarding financial results for 2023 and comparable results from 2022 in each case for our ongoing business exclude the impact of Keds, Wolverine Leathers and reflect an adjustment for the transition of our Hush Puppies North America business to a licensing model. The outlook for 2024 and comparable results from 2023, in each case, for our ongoing business now also exclude the impact of Sperry, which was sold in January 2024. I'd also like to remind you that statements describing the company's expectations, plans, predictions and projections such as those regarding the company's outlook for fiscal year 2024, growth opportunities and trends expected to affect the company's future performance made during today's conference call are forward-looking statements under U.S. securities laws.
As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, I'd now like to turn the call over to Chris Hufnagel.
Chris Hufnagel: Thanks, Alex. Good morning, everyone, and thank you for joining us on today's call. To close 2023, we delivered revenue and earnings in-line with our guidance and our inventory and debt finished at levels better than we had anticipated. More importantly, we continue to make great progress in driving Wolverine World Wide's turnaround and transformation. With a clear vision, a common sense of purpose and a collective effort of our global team, I'm proud and encouraged to say that Wolverine World Wide is a much different company now than it was just six months ago, and I'm excited to share our progress with you today. As we begin 2024, our portfolio is more focused than it has been in over a decade, composed of authentic leading brands, playing desirable consumer categories, and we're confident this will continue into the future.
The organization is more efficient and more capable of building great global brands with new talent and key brand roles and new centers of excellence created to help enable our brands to build awesome products and tell amazing stories. Our business is poised to be much more profitable with an outlook to meaningfully expand operating margin this year as a result of significant gross margin improvements and our restructuring efforts late last year. We have the financial capacity to reinvest back into the business with $30 million of incremental investment planned this year for key brand growth initiatives and the tools necessary to support long-term sustainable growth. Our product pipeline is stronger with new introductions already resonating with consumers and more great collections dropping in the coming months.
Our balance sheet is much healthier with the company's lowest debt level in over 2.5 years, approximately 40% less inventory than just a year ago and a clear line of sight to drive further improvement on both metrics this year. And finally, we have a talented, aligned and motivated team driving the business every day. I'm extremely thankful for their exceptional work over the past six months and couldn't be more excited about the work we'll do together moving forward. Our bold turnaround plan, coupled with the team's urgency and effectiveness in executing that plan, has allowed us to outpace our expectations in the first chapter of our transformation. We've largely stabilized the company in just a few short months. Last November, we shared our expectations for key financial metrics with you, and I'm pleased to report we've over-delivered.
We reduced our year-end inventory by $30 million more than we anticipated. We said we'd further rationalize our portfolio and deliver $65 million of proceeds in Q4. We ultimately generated $91 million in the quarter and then completed the divestiture of Sperry in January, generating another $130 million in proceeds. We said we reduced the company's debt by around $170 million by year-end and ultimately we reduced our debt by $280 million, and that was before the Sperry transaction. As a result, our bank-defined debt leverage is better than expected. We've executed extraordinarily well on the key stabilization initiatives we laid out last fall, and we remain committed to continuous optimization efforts, and further strengthening of our balance sheet.
Today, we're in a much better position to accelerate continued transformation of the company. The second chapter of our turnaround story is focused on transforming Wolverine World Wide into a builder of great global brands. Let me take a moment to walk you through our progress and plans here. To be great brand builders, everything must start with the consumer. To shift our mindset and add capabilities within our brands, we've added more consumer-focused talent in many of our key brand roles over the last year, and we have several more searches underway today to bolster resources and expertise, we established the Collective in November. Our center of excellence created to elevate consumer insights, market intelligence, trend monitoring and innovation.
I've been pleased by our quick pivot to a more consumer-obsessed culture as our brands have already begun to incorporate more insights in consumer testing and to the go-to-market processes for products and marketing. Ultimately, the Wolverine World Wide portfolio brands should make all our consumers' lives better. Thanks to recent portfolio management efforts, our brands are tightly aligned around enabling our consumers to have healthier and more productive lives. As a result, we have a great opportunity to increase collaboration across our brands and teams to recognize unmet consumer needs, spur innovation, identify trends and better lever the collective talent of the organization. We believe the consolidation of our office footprint will continue that help.
We've already relocated Sweaty Betty to our Kings Cross office in London and later this year, Merrell and Saucony will be co-located here in our global headquarters. We're also working to better equip the organization with modernized tools and processes to execute faster, more accurately and with distinction. We piloted new best-in-class digital product line management tools with Merrell and are now rolling these tools out across the portfolio. We're implementing new integrated business planning processes this year to improve forecasting, inventory management and margin efficiency. We've also just launched an initiative with our new digital and technology experience team to revolutionize our digital tools and improve the direct experiences our consumers have with our brands.
In addition to redesigning the organization and reallocating resources to directly align with our vision, we are also taking bold steps to better manage our brands in the marketplace. In the fourth quarter, we created a new centralized brand protection team to help us monitor and address nefarious activity in the marketplace. In the short time, across our portfolio, we’ve already identified and shut down nearly 20 customers and partners that have participated in gray market activity and approximately 400 accounts that do not align with our go-forward distribution strategies, with more to come. Our brands are also focused on achieving healthier sales mix with a stronger emphasis on full-price business this year. We are already less promotional in the marketplace today and on our own direct-to-consumer channels.
A more disciplined approach to brand management is critical to enhancing and protecting the equity of our brands. We must begin to establish more of a pull model, and we must continue to strengthen relationships with valued wholesale and distributor partners. The next few months will be critical as we continue to aggressively advance our transformation, and I am confident we are positioned to continue delivering on the plan we've laid out, and we're committed to delivering better results for our shareholders. With firmer footing and a clear vision, our brands are accelerating their efforts to reinvigorate growth, focus squarely on designing awesome products and telling amazing stories. While we expect our inflection to growth will follow the meaningful margin improvement we’ve outlined, our brands are moving with great pace to drive improved top line performance.
Saucony has a proven formula for driving industry-leading innovation, the brand’s Endorphin Elite collection design at its Human Performance Lab in partnership with Elite Runners, is among the most innovative shoes on the market today and was recognized by Runner's World Gear of the Year Awards as the Best Racing Shoe of 2023. Saucony is consistently one of the most trusted brands by Elite Runners in the world's most important marathons. And we now have the opportunity to capitalize on this tip of spear success by democratizing the brand’s innovations for the larger casual running market, and elevating its style to encourage adoption for the significantly larger lifestyle wearing occasions. The brand intends to do so through a focus on its core four franchises, the Ride, Guide, Triumph and Hurricane.
As a first step, Saucony launched a new Ride 17 several weeks ago, engineered with the PWRRUN+ foam to deliver a more comfortable fit and better ride in the brand's neutral runner. It's been well received and sell-through was up strong double digits in the important Run Specialty channel. The brand followed this launch with a new introduction of its maximum comfort franchise, the Guide 17 with even more cushioning and support. The Guide 17 has only been in the market a couple of weeks and sell through already off to a very strong start. Saucony expects to launch Triumph 22 next quarter, followed by the Hurricane 24 in Q3. And the brand plans into some of the best lifestyle distribution in the marketplace starting this spring with authentic, trend-right, retro tech designs from its archives like the ProGrid Omni and Azure.
As a result of these important launches and the brand’s improved storytelling, which is just getting started, the brand has started to see an inflection in brand heat with consumers. Moving to Merrell, the outdoor footwear industry leader with a long history of product innovation, the product pipeline is improving here as well. Its MTL Skyfire 2 Matryx, developed within the Merrell Test Lab and Elite product innovation incubator with a rigorous testing by trail-running athletes is a super lightweight plated trail runner that was named Outside Magazine's Best Trail Running Shoe of 2023 and received recognition in Runner's World and ISPO, among others. Merrell intends to continue to modernize the trail through faster, more trend right design that consumers demand as well as the durability and traction that Trail requires.
The brand's Agility Peak 5 is outperforming the leading trail-running shoes in the marketplace in consumer and expert gear reviews, on comfort quality and fit and is up triple digits at the start of the year. The product is exceptional. And Merrell plans to scale its storytelling to drive greater momentum. The brand's new Moab Speed 2, a 2023 ISPO award winner and a key story this year, is also seeing strong early sell-through. Merrell’s collaboration with Jeep in the fourth quarter drove 17 million earned impressions and the Hero Blue Color was sold out to the piece. The brand again grew U.S. market share in both hiking trail in Q4, tapping a year of market share gains for our largest brand. As with Saucony, the broader life opportunity is significant for Merrell.
And when we develop on brand and on-trend styles like the new wraps collection, a disruptive look on our barefoot platform, our consumers respond. This new collection almost sold out entirely on merrell.com in a matter of weeks. And today, we are chasing replenishment for this franchise and plan to reduce new silhouettes later this year. In closing with Sweaty Betty, having built this branded business to direct channels, the brand has always been consumer obsessed, driving product innovation in response to the feedback we received from consumers, a mindset and approach that can influence our other brands as we endeavor to become a more consumer-focused organization. Sweaty Betty’s Power franchise is loved by consumers for its best-in-class fit, premium materials and on-trend designs.
Through its rapid consumer feedback and response model, the brand is building on its leading franchise through category extensions and new textures and patterns. The newness is trending well and with recent improvements to our supply chain, the brand can now replenish fast-moving styles in a matter of weeks. The brand is seeing excellent traction with extensions in new categories as well like outerwear, mid layers and accessories with very strong double-digit growth in Q4, driven by the styles like the Nimbus Down Parka and Navigate quilted coat. I am pleased and encouraged to say that today, our brands have a heightened understanding of their consumers and a clear vision for their product direction. In our business, it always starts with product.
We are seeing green shoots across the business and the brand's product pipelines will build momentum throughout the year. It's important to pause here and set the near expectations for the business. Encouragingly, this year we expect the business to be much more profitable and again, generate strong cash flow, as our model has done so effectively in the past, driven by significant gross margin expansion and our aggressive and proactive profit improvement initiatives we've executed over the past few months. At the same time, our actions have created the financial wherewithal to reinvest in our brands, with an incremental $30 million planned in 2024. Although this investment will moderate our operating margin expansion this year, we believe it is essential to better position our brands for long-term sustainable growth, while still taking an important step in our transformation to meaningfully improve profitability.
For a variety of reasons, we expect the company’s return to growth to lag our profit improvement. As we've candidly shared with you on recent earnings calls, we've identified and owned various past missteps, and we're taking swift action to address them, strengthening the product pipeline with design supported by heightened consumer trend insights, reenergizing our brands with elevated marketing and better managing the marketplace with greater distribution and pricing discipline. However, the business is starting the year from a challenging position, which will weigh on full year revenue results, most meaningfully for Saucony, followed by Merrell and Wolverine, but we anticipate a sequential improvement in top line performance as the year progresses.
We expect the positive impact of our corrective actions will accelerate and be bolstered further in the second half by reduced Rogue selling, cleaner inventories, better alignment with global partners and lapping easier year-over-year comparisons, while contributing to an inflection in growth in the second half of the year and acceleration into 2025. Finally, before handing the call to Mike, I want to summarize where we are today and where we’re headed. Our fast and bold actions to better manage our portfolio has simplified the business and strengthened the alignment of the organization. Going forward, we will continue to critically evaluate our organization as part of our commitment to create greater shareholder value. Today, we have a focused portfolio of great, authentic brands that have a rich history of developing innovative products, all designed to help their consumers live better lives.
Our improved structure enables our brands to focus on their consumers, product and marketing by providing platforms that efficiently drive operations and back office activities. The Wolverine model also aggregates an extensive global distribution network composed of wholesale and distributor relationships for the brands to leverage. And we are further amplifying our model’s value by creating competitive advantages for the brands on capabilities we deem strategically important, like consumer insights, trends, innovation, marketing and licensing. Given the powerful combination of our brands and our platforms, all enabled by a talented, aligned and dedicated team moving with pace, I’m optimistic about what we can achieve collectively as one Wolverine.
We’re confident we are taking the right steps to unlock value and deliver on Wolverine World Wide’s full potential for the benefit of our shareholders. With that, I’ll turn the call over to Mike Stornant, Executive Vice President and our Chief Financial Officer, who will provide more details on our fourth quarter results and our guidance for the year ahead. Mike?
Mike Stornant: Thanks Chris, and good morning to everyone on the call. This morning, I will start with a review of fourth quarter results followed by our expectations for fiscal 2024. Fourth quarter revenue for our ongoing business of $521.2 million was in line with our outlook. Adjusted gross margin of 36.9% was better than our outlook of approximately 36%, with better gross margin in our eCommerce channel helping to drive this result. Adjusted SG&A expense of $211 million or 40.4% of revenue, includes $5 million of incremental performance marketing investment tested during key moments of the holiday season, which helped us deliver more full price sales in the eCommerce channel and acquire nearly 200,000 new consumers. We also implemented a $4 million supplemental incentive program in the quarter for nonexecutive team members tied to important inventory and net debt metrics.
This program helped us deliver better than expected results for inventory, cash flow and net debt in the quarter. Our team is motivated, aligned and focused on improving the company’s financial performance. Adjusted diluted earnings per share for the quarter was a loss of $0.30 and in line with our outlook. Shifting to the balance sheet. We made meaningful progress to further improve inventory, net debt and liquidity during the fourth quarter. Inventory for Sperry and our China joint venture, which were both sold in January of 2024, is treated as held-for-sale inventory as of year-end. Excluding these businesses, inventory was $374 million, down nearly 40% compared to last year and approximately $30 million better than we expected. We delivered this improvement by leveraging a rigorous inventory management process, while operating in a more normal and predictable supply chain environment.
While pleased with the meaningful improvements in 2023, we believe we can further optimize inventory levels over the coming quarters. Shorter supply chain lead times, implementation of our integrated planning processes and heightened focus on SKU productivity should allow us to drive inventory levels down by at least $70 million during 2024. Active portfolio management has also been a key focus, helping to unlock value and narrow our focus on businesses with the highest return opportunities. Strong working capital management and the sale of certain noncore assets generated approximately $200 million of cash in the quarter, exceeding our expectations. As a result, we ended the quarter with net debt of $740 million and a bank-defined leverage ratio of 2.9x.
Let me now provide details on our outlook for 2024. The critical stabilization work executed over the last three quarters puts the company on solid footing. As a result, our teams can more fully focus on efforts towards transforming the company while driving an inflection to growth in the back half of 2024. Our guidance reflects the expected performance of our ongoing business, which now excludes Sperry. Fiscal 2024 revenue is expected in the range of $1.7 billion to $1.75 billion. This compares to 2023 revenue from our ongoing business of $1.99 billion and represents a decline of 13.4% at the midpoint of the range. Discrete items in 2023 totaling $165 million in revenue will not recur in 2024. These include approximately $70 million of extraordinary end-of-life inventory liquidation, heavily weighted to the first half of 2023, approximately $55 million in business model changes, including the transition of our China JV to a distributor model for both Merrell and Saucony, and approximately $40 million in a timing shift of international distributor shipments that benefited Q1 2023.
Excluding these discrete items, the midpoint decline would be approximately 5.5% for 2024. We expect Active Group revenue to decline mid-teens. Merrell is expected to decline in the low double-digit range with inflection to growth expected in the second half of the year. Saucony is expected to decline in the low 20% range with sequential improvement each quarter. Sweaty Betty is expected to be flat. We expect the Work Group revenue to decline high single digits, with Wolverine brand expected to be down mid-single digits. Adjusted gross margin is expected to be approximately 44.5% at the midpoint of the outlook range, a record for the company, and up approximately 460 basis points compared to 2023. Key contributors to the gross margin expansion include approximately $50 million of supply chain transitory costs expensed in 2023 that will not recur in 2024 and approximately $45 million from profit improvement initiatives related to product and logistics costs.
In addition, we expect that healthier inventory levels and increased brand protection actions will lead to a lower promotional cadence during 2024, especially in the back half of the year. This gross margin benefit is expected to be offset by foreign currency headwinds that impact inventory costs. Adjusted selling, general and administrative expenses are expected to be approximately $650 million at the midpoint of the outlook range or 37.5% of sales, compared to $716 million in 2023 or 36% of sales. The lower operating cost structure includes $95 million of savings from the 2023 restructuring and other profit improvement initiatives. Partially offset by $30 million of incremental investments for demand creation, modernization of systems and building important organizational capabilities, $25 million of normalized incentive compensation expense and $15 million for normal inflationary increases.
Adjusted operating margin is expected to be approximately 7% at the midpoint of the outlook range compared to 3.9% in 2023. Interest and other expenses are projected to be approximately $40 million, down from $63 million in 2023 and benefiting from the significant debt reduction achieved last year. The effective tax rate is projected to be approximately 18%. As a result of these assumptions adjusted diluted earnings per share is expected to be in the range of $0.65 to $0.85, including a $0.10 negative impact from foreign currency exchange fluctuations. This compares to $0.15 in 2023 for our ongoing business. Working capital and cash flow optimization remains a priority in 2024. We expect inventory to decline by at least $70 million during the year as we continue to work through specific areas of excess inventory.
Operating free cash flow is expected in the range of $110 million to $130 million with approximately $40 million of capital expenditures. We expect net debt to improve by nearly $165 million to $575 million at year end. Shifting to our outlook for the first quarter, we expect first quarter revenue of approximately $360 million, a decline of approximately 30%. Many of the discrete items occurring in 2023 and noted in our annual revenue outlook are especially impactful to the first quarter. This includes $23 million of extraordinary end of life inventory liquidation in Q1 2023, a $40 million shift in international distributor shipments that benefited Q1 2023 and $13 million in business model changes. Excluding these discrete items, the projected first quarter revenue decline would be approximately 18.5% similar to the fourth quarter of 2023.
First quarter gross margin is expected to be approximately 46%, up 480 basis points from last year. Significantly lower supply chain costs, lower sale of end of life inventory and a better distribution channel mix are all contributing to the dramatic gross margin improvement. We expect first quarter operating margin to be approximately 3.5% and adjusted diluted earnings per share to be approximately breakeven. Before turning the call back to Chris, let me summarize the key points I hope you will take away this morning. We are in the late innings of the stabilization phase of the company's turnaround and are ahead of schedule in many key areas including portfolio optimization, gross margin expansion, operating cost improvement, healthier inventory and much lower net debt.
Importantly, we expect to deliver at least $140 million of incremental profit improvements in 2024 as promised in November of 2023. 2024 is the year of transition for the company. A significant gross margin expansion precedes an inflection to growth in the back half of the year and we set our brands up to accelerate into 2025. We recognize that improved and sustainable gross margin is necessary to create capacity for consistent brand investment into the future. We are balancing the need for meaningful earnings and cash flow improvement with critical reinvestment required to modernize our systems, accelerate demand creation and build our important capabilities. And finally, we've instituted a new cadence and rigor in the business to improve accountability and ensure future execution of our strategy.
I would like to thank our global team for their tremendous effort over the last year. Thanks to their work, the company is now ready to pivot to growth. Now I'll turn the call back to Chris.
Chris Hufnagel: Thanks Mike. To close our prepared remarks, in a few short months we've largely stabilized the company due to our fast, bold and decisive actions. On firmer footing now, our team is focused on transforming Wolverine World Wide into a consumer-obsessed builder of global brands, delivering improved profitability and driving long-term sustainable growth, the right way. 2024 will be a pivotal year, and our teams are energized by our new vision and the many opportunities ahead. They are proving their ability to move quickly and drive change, and importantly we're passionate about winning. I personally want to thank our global teams for their work over the past few months. You've been simply great, and I couldn't be more excited to start writing our next chapter together.
We're committed to building great brands through awesome products, amazing storytelling and driving the business each and every day, and we're equally committed to delivering greater value for our shareholders. Thank you for taking the time to be with us this morning.
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