Q3 2020 Wolverine World Wide Inc Earnings Call
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Greetings and welcome to the Wolverine worldwide third quarter fiscal 2020 results call at this time all parts of that's our name listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., Brett Harris, Vice President of strategy <unk> Investor Relations. Thank you. Sir you may begin good morning, and welcome to our third quarter 2020 conference call on the call today are Blake Krueger, our chairman and Chief Executive Officer.
Brendan Hoffman, our president and Mike Stornant, our senior Vice President and Chief Financial Officer early.
Earlier this morning, we announced our financial results for the third quarter 2020.
The release is available on many news sites and can be viewed on our corporate web site at Wolverine worldwide Dotcom if.
If you would prefer to have a copy of the news release. Thank you directly please call Francesca Blondo ethics for 6677181 for.
This mornings press release and comments made during today's earnings call include non-GAAP disclosures he's.
These disclosures were reconciled and attached tables within the body of the really.
During our call we are providing non-GAAP financial result for example, which adjusts for the impact of environmental and other related costs net of cost recoveries.
Costs related to the cobot, 19, pandemic, including severance credit loss expenses certain inventory reserves and other related costs.
And foreign exchange rate changes.
I also like to remind you that predictions and projections made during todays conference call regarding Wolverine worldwide and its operations are forward looking statements under us securities laws.
As a result, we must caution you that as with any prediction or projection. There are a number of factors that could cause actual results to differ materially. These.
These important risk factors are identified in the company's SEC filings and in our press releases.
With that being said I'd like to turn the call over to Blake Krueger. Thanks.
Thanks, Brett good morning, everyone and thanks for joining us I hope, everyone is safe and well.
Earlier. This morning, we reported third quarter revenue of approximately $493 million.
Adjusted earnings per share of 35 cents and operating cash flow of over $96 million, all significantly exceeding our expectations entering the quarter.
The company continues to successfully execute our digital and DTC first strategy and the game plan, we put in place at the outset of the pandemic earlier this year.
While the environment remains uncertain and challenging it has enabled us to dramatically advance our global growth agenda, which is focused on one accelerating our digital DTC offense by engaging consumers with pinnacle brand experiences product newness and compelling storytelling.
To driving innovation in all aspects of our business model, especially our product creation engines and three accelerating growth in global markets by enhancing the positioning of our brands to capitalize on current trends and product categories consumers are craving.
Upfront I'd like to recognize our dedicated global team. Thanks to them. We now enter the next phase of the pandemic from a position of strength with deep financial resources, and the operational ability to service, our consumers and retail customers.
Over the last eight months the team has operated to improve liquidity controlled discretionary spend manage inventories and generate substantial cash flow.
All with an overriding focus on protecting our employees and customers.
I am truly grateful for their efforts.
For several years, we have been investing to strengthen our digital and DTC capabilities.
And this has allowed us to accelerate and optimize the global online channel.
These investments dovetail perfectly with the once in a generation change in consumer behavior that we are witnessing.
Our owned ecommerce business nearly doubled in Q2 and continued its robust growth in Q3 up over 56% in.
In addition, the online channel of our customers has now also become our largest us wholesale channel today.
Together, our own E commerce business and the online business of our wholesale partners accounted for over 40% of our revenue in us during the quarter.
We also have several work brands that are trending include.
Including Wolverine, which remains the number one work brand in the us market.
To briefly discuss how our pivot to digital and DTC will accelerate brand growth I'd like to introduce Brendan Hoffman, our new president.
Brendan brings a strong consumer focus and a wealth of experience in merchandising digital marketing and E. Commerce, having served as the CEO on the retail E Commerce and brand side.
A short period of time.
Consumers heightened digital engagement provides an opportunity for our brands to speak to them directly from our website E mails and social media.
We must create a constant dialogue and forging emotional connection rooted in our leadership positioning in areas they care about the drive growth.
Especially active in athletic outdoor at home and work.
3% on a constant currency basis.
This was the substantial improvement over Q2 and reflects growing strength in the face of the Pandemics headwinds.
Saucony continues its resurgence driving low teens growth in the quarter, while Sperry as expected was down around 45%, reflecting challenges in the lifestyle fashion footwear generally.
Five on the easy on off trend expanding nominates iconic jungle, Mark and it's newer hydro Mark and hut Mark styles.
All of which are seeing a strong response.
To support these launches and elevate digital content and storytelling at an accelerated pace moving forward Merril is focusing the majority of its global marketing spend on consumer facing digital content and the execution, which will include a new mobile app to elevate the consumer experience on mobile day.
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During Q3 demand for the Wolverine brand outpaced our expectations as the work and rugged outdoor category continued to trend.
Wolverine Dot coms revenues doubled in Q3 as did the brands engagements and social media.
Wolverine continues to evolve to work category with innovation that integrates lightweight athletic technology with rugged durability.
The brand launched the jurors spring technology earlier this year with the shift plus work food offering and then built on this technology with the July loss of the Hellcat collection powered by Ultra spring.
The Hellcat immediately became the top selling style on Wolverine Dot com and now it's on track to become the brands third largest franchise in its first year.
Looking ahead to 2021 Wolverine plants to introduce a new version of its largest franchise. The radar collection. In addition to expanding on the success of help cat offering.
Saucony strong growth in the third quarter was driven by award winning product innovation and exceptional digital activation that resonated with consumers Saucony is just beginning to realize its potential as a lifestyle brand.
While Europe has the fast growing saucony performance business. It is to also the foundation for our significant and growing Saucony original business, which is based on heritage retro running styles that are featured in top tier fashion and apparel accounts.
A leading market for original is Italy, one of the world's most prominent an important trend in fashion market.
Saucony is using the Italian success in business tub, which includes product creation and marketing leadership and capabilities to expand this highly profitable lifestyle business and other global markets, including China. The us an additional European countries.
We will launch the new float collection, a fun and affordable injected version of the boat shoe. This.
This collection is already receiving a very strong response from retailers and consumer trend groups.
On the people side Sperry is already seeing the impact of new talent recruited to lead the product creation and marketing areas.
Ill now hand, it off to Mike Stornant to review the financial results in more detail Mike.
Thanks, Blake and thanks to all of you for joining us.
Let me start by providing further insight on the company's third quarter results and then share an update on current business trends.
Revenue for the third quarter exceeded our expectations and finished at $493.1 million down.
$1 million in cost reductions from actions taken earlier this year.
With $7 million redeployed towards digital an E commerce marketing.
Adjusted operating margin was 10.6%.
Down from last year due to lower revenue, but well ahead of our expectations entering the quarter net interest expense was up four $6 million versus last year. As a result of the proactive liquidity measures taken earlier this year in response to the uncertain market conditions.
The effective tax rate of 28, 5% was up nearly 800 basis points versus last year due to certain discrete items and some impact from changes in geographic revenue mix.
Adjusted diluted earnings per share of 35.
Our digital business remains strong.
And we continue to develop and invest in our capabilities there.
The product franchise launches and other product introductions for Saucony Merrill our robust for Q1.
Finally, wholesale customers and global distributors are choosing to rely more heavily on brands and companies like Wolverine.
We'll have proven to be especially relevant and resilient during the last eight months.
For our business. This has translated to a substantial increase in global order demand for Q1 compared to last year.
Our early proactive response to the challenges of the pandemic are now paying dividends instead.
Instead, our brands up for growth in 2021.
Many of our brands are now benefiting from the strong consumer trends and tailwinds related to the pandemic.
We have many opportunities in front of us and a balance sheet to provide flexibility and capacity to invest in our biggest 2021 growth initiatives.
Im now going to hand, it back over to Blake.
To conclude our remarks Blake thanks, Mike.
Before concluding I'd like to share some perspective on the macro environment and our position looking ahead to 2021.
While the global environment remains uncertain, we have a much better understanding of the marketplace and a stronger handle on the consumer and the shift in category tailwind attributable in part to the pandemic.
We expect the impact of the pin damage to persist into 2021, but shifting consumer behavior and trends have also created some opportunities for our brand portfolio.
The company is poised to perform in the new environment that has emerged and as Mike mentioned, we currently expect a strong start to 2021.
Please limit yourself to one question and one follow up if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line as in the question queue. You May press start to if you'd like to have your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys one moment. Please.
We pull for your questions.
Our first question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Good morning, everyone.
Well.
Cause like a few questions on the kitten, she business 7 million more investment, but yet you're EBIT margin improved by three on a basis points from understanding that correctly, what's behind the margin improvement is it more full price selling or is that just leverage does the expense space and then I have some follow ups.
A little bit of both Jim, but primarily just increase in full full price selling.
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Increased demand from the consumer some for some of our higher priced products like the stock in the Endorphin for example.
Feeling good about the start to the quarter John.
And you saw that coming in with in terms of both the future order demand in some of the reorder trends that we've been seeing in Q3. So it was good to see that continue.
The biggest impact is for the quarter is going to be in December it relates to that international on shifted that we're talking about.
We're about $60 million of third party distributor sales.
Given some of the comments on the macro piece place but.
How are you thinking about the overall recoverability of your business.
And then when you think about both on the cost side some of it the actions you've taken and then the mix shift towards here your own digital business.
How should we think about kind of the revenue level that you might need to get back toward year here.
11, and 12% operating margin that you've had in the past.
Yeah, I mean, when we look at 2021 right now we're pretty bullish even.
Even though we're in the midst of what appears to be a global second wave with respect to the pandemic.
Frankly, we kind of separate the pandemic into international markets. The us market. The international markets have addressed the pandemic on a country by country wide basis, that's obviously not what we've done here in the us.
Europe right now is shutting down hard again, but they are doing that so that they can have a quote normal.
Thank you. Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.
Morning, everyone. Thanks for taking my questions. So nice job on the quarter I guess, just two things just regard to Q4 I guess first are you what are you expecting for the European business, specifically, just given a the locked down to be kind of factor that into your thought process and also just the extra week and I got about go back to.
2014, when you had that but the business is much different it was stride rite retail stores now you've got a very profitable ecommerce business stores continue improve just how do we think about the extra week.
In Q4, that's first question, yes, I mean.
Quick snapback during the December and the holiday season.
Okay got it and just.
I just saw on saucony for a moment.
Maybe we just talk about what are you I mean, obviously you have a good growth trajectory. This year, obviously potentially it could be your fastest growing.
Large brand I'll call it going into next year.
Maybe just help us understand the visibility into that how the original business maybe plays into the growth opportunity, whether specifically I guess in the us and just the margin profile for for the brand itself just to help us understand where it stands today and with the original business coming on I assume that's quite high margin.
Just how that plays into the thought process Saucony, Brian next year.
Ah soccer knee is really going to benefit not just from all the work stone on the performance side industry, leading color technology, new models, but it's also going to benefit.
Clearly under the current trends from your original product, which it's hard to believe but some of these shoes people ran marathons and I'm 2025, 30 years ago, but now they're they're more fashion oriented. So we really view saucony is having a one two punch here.
And the original business is biggest in Europe and by far the largest country. Currently is Italy, obviously, a leading country when it comes to fashion and.
And and.
And luxury.
And.
There's opportunities we're expanding the originals business based on the Italy model throughout Europe, and we're going to use that same model throughout the rest of the world. We have a relatively small business today in China in the U S. So and some other significant market. So we kind of view that is is all upside.
The saucony as you guessed the stock in the original business is a a very profitable business or the brand and the company and then on the performance side.
Whether it's the endorphin or some of the product updates that are coming in the first half next year.
The signs are all very positive for saucony sock in the next year will probably be our largest fastest growing brand in terms of percentage growth on the revenue side.
Okay.
Alright, Thank you very much all of that fixed Griffith.
Going forward and Matt you mentioned the impact on a wires and margins that in both in both cases.
That's the strongest category the boot categories. The strongest category for Sperry Q4 will be the best performing quarter for Sperry. This year, they've had some challenges obviously given the headwinds from the pandemic, but the Q4 performance for Sperry will be relatively the strongest and.
They don't they don't have the international exposure.
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Would relate to some of these these spring related timing shifts that we talked about either so.
All in all I think that will will deliver a decent quarter in Q4 for Sperry.
Makes sense, thanks, and one follow up.
Organic growth is at the very high end of our priority list as well.
And those would be kind of our focus areas for now.
Thanks, Paul Festival.
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good morning, everyone. Brendan welcome. It's certainly been a short time that you've been at Wolverine and from your experience as a digital first executive what did you see as the implications both quantitatively and qualitatively, but for Wolverine and then just I wanted to confirm on the operating cash flow my.
In summary, even before I got here and to see how quickly were going to be able to get it up and executed and hopefully as a test for for the other brands as a way to not just communicate regularly with our customer but to also help facilitate.
The conversion on our websites and almost 70% of our traffic comes through a mobile device. The phone I should say, so I think having something like the mobile app for big brands like Merrell is going to be.
The exciting too to help facilitate the growth.
Thank you.
Thanks, Dana. Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, good morning, Alec leg on for Susan Thanks for taking our question just quickly on the work category did that grow this quarter and if so what were the key drivers of that performance.
Yeah, we had our work had a pretty it was a pretty good quarter for us in Q3 of fundamentally growth is being driven by.
Exciting new product and product innovation may held cash.
Collection for example in the Wolverine brand.
I would say one other thing we've seen in work here over the last couple of quarters is a significant incremental shift to soft BPO work product not steel toed not composite totals.
Our our research has indicated a lot of that is being driven by the pandemic at home environment people are working around the yard people are working at home people are working at their cottages or vacation homes and.
So I think the work category is also benefiting from.
Consumers that may not be.
In the traditional work consumer.
Plas, we expect work will continue to.
Benefit from not just the pandemic, but it's really for us being driven by new product.
And.
New product creation.
Perfect. Thank you and then I guess just a follow up I know you mentioned before that back to school is not really a.
Big portion of your business, but with this year being.
Pretty unprecedented have you seen any maybe different trends related to the back to school season.
No no different than you've heard frankly from other brands and companies back to school started soft.
It Didnt have a normal bell curve to it given the pandemic situation and the fact that K 12, and universities across the United States at least are all operating on different models some virtually some.
Combination of in class and virtual and some totally in class. So I think it was a muted back to school season overall for consumer soft goods and for.
Footwear, but as you know.
Back to school is is not that portal.
A time period for our our company or brands.
Perfect. Thank you.
Thank you. Our next question comes from the line of Mitch Kummetz with pivotal research. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
I guess to start with Mike I'm, sorry, Q4, I'm just trying to understand if you adjust for the ships, which I guess the big ones are international oven, Saucony, and maybe even adjusting for the extra week.
Yes, the underlying growth rate kind of a normalized growth rate that you're expecting for Q4 as previously thought to be better than Q3 are worse than Q3 and.
To what extent pandemic sort of factored in.
I think the pandemic is always factored into our outlook right. Now every day. So it's fully baked in as much as we can see and we're trying again to be conservative there but.
Yeah I think.
It would without without these very meaningful.
Items that we that we quantified the.
The sequential improvement in Q4 would be pretty meaningful from Q3 to Q4. So got it let you can't you can't set those aside all the time, we wish it could but yeah I think the fundamentals of the business are strong. The order demand is strong if we had all of the the core styles that we wish we had right now coming into Q4.
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We'd be able to service that demand at a higher level than we then we will be able to and thats going to improve in Q1, which is great. But for Q4 I think we've got it at those those three issues kind of converging to put quite a bit of headwinds into the quarter. Okay.
Okay, and then on owed to E. Commerce, you know really strong growth in the quarter you know not.
Not not quite as strong as last quarter totally understandable given up a lot of wholesales open up in the meantime.
I understand kind of the cadence of that business, maybe as it flows through the quarter and maybe even into October I assume all months were up double digits, but as that business continues to sort of.
Hello, and and where do you think it'll Atlas maybe for the full year or for the fourth quarter as a percentage of sales.
Yes, I mean, if you if you start with Q2 and then in the real start in peak of the pandemic for US we had almost 100% growth in own E. Commerce that has gradually come down over the last two quarters, we were up little more than 56%.
Q3.
Q4 would normally be a higher demand quarter, especially in today's environment. When a large percentage of the consumers are still not keen about coined the regional malls are shopping centers. So we would expect that.
To hold up fairly well into Q4.
We think just a lot of consumer behavior shifts have been consolidated in the last 678 months and it's going to continue I cant really predict where it's going to come out in the future but for us.
We would like to achieve 50% growth.
In 2021.
And.
As some states in areas close down a little bit as some countries kind of closed down a little bit again, you could see.
A continuing shift to online purchasing.
Obviously pretty dynamic and hard to predict precisely at the moment, but.
Digital in DTC is going to be one of our main focus has been for several years, but one of our main focus areas going forward.
Okay. Thanks, good luck.
Thanks.
Thank you. Our next question comes from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.
Thanks, Good morning, I guess I have two questions first just on holiday with retailers heading holiday early earlier. This year are you actually seeing that consumer come out and shop differently than they have in the past and then what are you seeing as it relates to shipping surcharges and how are you kind of procuring or six.
During an excess capacity to meet kind of the online demand.
Yes, I would say, it's holidays, a little bit up in the air I have seen consumer surveys that are all over the board a little bit overall less spending during the holiday season. Some other consumer surveys show. It is increasing I think it's going to be spread out this year.
I'm I don't believe we're going to have the high peaks.
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That we've experienced historically, maybe some of that is due to Amazon shifting its prime day and kind of kicking off the holiday season in October.
Certainly, we know that black Friday, and cyber Monday is not a three or four day occasion anymore as well so.
We're going to see it ramp up I know that.
There has been some communication by the shippers to consumers in general and by Amazon to get your orders in early because theres going to be some.
Some constraint on in inland shipping and delivery as we near the.
That is a key dates in the holiday season that did not to expect to be able to for example receive an order.
That youve ordered on December 23 by Christmas and some people in the past have expected that so.
As far as costs.
There is clearly some congestion.
At the port of entries and a little bit of constraint.
On inland shipping, we expect that to continue for that.
Holiday season for Ross.
When we started in May we were very proactive we wanted to stay open for business and the team did a great job adjusting our our supply chain, we're a little bit of that being the size. We are in the pairs. We source, we're at a little bit of it at an advantage over smaller companies and.
Smaller brands here, but.
To support footwear industry supply chain is in pretty good shape right now.
Probably a little better shape than that for for US right now we're scrambling for a couple of collections in areas, but it's in pretty good shape. If you're a smaller brand were smaller company you may be experiencing some tougher goal of it.
To rightsize your inflow.
Just to play off of Blake said airing on Prime day, I was particularly encouraged by the outsized growth we had on prime day far exceeded what I saw Amazon clothing, and it was some of the brands that we don't always talk about here were front and center for Us and so I think our team did a great job leaning in with Amazon.
To ensure we were ready to go and I think it gives me even greater confidence across our portfolio of brands, how well they lend themselves to E commerce and having the right inventory in the right messaging.
The explosive or for even some of the brands, we don't always talk about.
Great. Thank you both.
Thank you. Our final question comes from the line of Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.
Hey, guys. This is the on on for the Hot.
I was just wondering as you continue to increase investments in E. Commerce can you maybe talk about how it impacts the margin structure, particularly as you think about it in the context of 50% growth next year actually de levering less there.
How should we think about absolutely sure I mean, we've already proven how powerful this channel is in Q2 and Q3, both quarter saw pretty explosive operating margin expansion in that channel.
Blake mentioned the stronger.
Product margins are higher selling prices, we see consumers trading up a little bit on the new especially on new product that our brands are offering to market.
So all those things had been beneficial but were able to.
Take a us a platform a center of excellence platform that we have in the business today that service is all our brands and that kind of cost structure. Once we drive the level of growth. We're talking about is both scalable and provides a lot of leverage so yes.
Yeah, we would continue to see this this area expand in terms of margin, but also gives us more opportunity more capacity to make even further investments accelerate some of the investments that.
That we need to make in our digital capabilities, along the way so being able to do is both of those things simultaneously is is.
It is.
There is a luxury I think it is certainly in this environment.
Yes, Thats great Awesome, and then just maybe just one follow up you've talked about increasing digital marketing.
I was just wondering.
How are you thinking about that whole like marketing Holistically are you shifting traditional spend into digital such that overall marketing maybe like flattish or are you just overall.
Marketing spending going up.
Yes.
We're really looking at it from from the first dollar spent you know and yes, it's shifting heavily into digital away from out of home into performance marketing into marketing a quick right to the website or one of our selling prices. So we're taking a hard look at that from the ground up I think the team has always been very.
Diligent about going through their SDMA and their AD spend but the business has been totally reimagine through the pandemic in our acceleration in the DTC, so kind of doing that real time now to figure out how we make sure we optimize.
Just the last dollar we're spending the first dollar we're spending.
Okay. Thanks, guys.
Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Brett Paris for any closing remarks.
On behalf of Wolverine worldwide I'd like to thank you for joining us today.
As a reminder, our conference call replay is available on our website at Wolverine worldwide Dotcom replay will be available until December 5th 2020, Thank you and have a good day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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Okay.