Q1 2022 Wolverine World Wide Inc Earnings Call
[music].
Good morning, everyone and welcome to the Wolverine worldwide first quarter fiscal 2022 results conference call.
All participants will be in a listen only mode.
Should you need assistance. Please you know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the floor over to Alice Washington, Vice President of Finance and Investor Relations.
Sir Please go ahead.
Good morning, and welcome to our first quarter 2022 conference call on the call today are Brendan Hoffman, our President and Chief Executive Officer, and Mike starting at our Executive Vice President and Chief Financial Officer.
Earlier this morning, we announced our financial results for the first quarter 2022.
Press release is available on many news sites and can be viewed on our corporate website at Wolverine worldwide Dotcom.
If you would prefer to have a copy of the release sent to you directly please call Jean Fontana at 646 to 771214.
This morning's press release and comments made during today's earnings call include non-GAAP disclosures, which adjust for example for the impacts of environmental and other related costs net of cost recoveries and foreign exchange rate changes. Additionally, prior year non-GAAP disclosures include adjustments for airfreight charges related to production and shipping delays.
Caused by the COVID-19 pandemic.
References to organic performance reflect the exclusion of the sweaty Betty brand, which was acquired in August 2021.
These disclosures are reconciled in the attached tables within the body of the release or in supplemental tables found on our website under the Investor Relations tab at the Webcasts and presentations link.
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 2022 growth opportunities and trends expected to affect the company's future performance made during todays conference call are forward looking statements under U S Securities law.
Right.
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.
Now I'd like to turn the call over to Brendan Hoffman.
Thank you Alex good morning, everyone and thank you for joining today's call.
We are pleased to report strong first quarter performance, despite ongoing supply chain challenges in a difficult macro and geopolitical backdrop.
Our better than expected results are a testament to our team's focus and solid execution.
Though these continued headwinds present complex challenges to our business in the near term. They are counterbalanced by sustainable changes in consumer trends and wellness outdoor performance and work that provide tailwind for future growth.
We remain focused on executing strategies to position our brands to capitalize on the industry backdrop.
<unk> market share gains in 2022 and beyond while enhancing the profitability of our business.
Now I will provide a quick overview of our first quarter results focusing on our biggest brands, where we continue to see strong demand as well as our key accomplishments.
First quarter revenue increased 20% to $615 million above the high end of our guidance, excluding sweaty Betty revenue growth was 10%.
Merrell performed in line with our expectations with revenue of $148 million down 2%.
Availability of new products in the quarter was impacted by factory shutdowns in the back half of 2021 as previously noted.
[noise] Merrill's demand remains very strong across all geographic regions and we are seeing an improvement in the inbound flow of goods.
As a result, we expect to deliver low teens growth in Q2 with anticipated sequential improvements in Q3, and Q4 as new product launches hit the market.
For the full year, Merrell Merrell should deliver high teens growth.
Merrell continues to elevate engagement with consumers supporting product successes, we launched our more or less campaign during international women's month, which resonated with consumers and fueled the 25% increase in demand for an Toura trail running style uniquely tailored for women with.
Similarly, Merrill's hyped by Haters campaign with the viral hash tag BDA Big Daddy Energy brought nearly 4 million impressions via Influencer outreach driving hydro mark to be the top unit seller on Merrell Dot com.
We plan to launch a sustainability campaign. This is home along with retread Merrill's first footwear recycle program.
The brand will be increasing investment in paid media through the remainder of the year as we rebalance our spend emphasize brand building top of funnel marketing.
So how can you slightly exceeded our expectations with revenue of approximately $106 million and growth of 4%.
While saucony entered the quarter with a good inventory position on carryover styles, new product launches were delayed as expected due to supply chain challenges.
<unk> lifestyle business continues to perform very well in Italy, a critical market of fashion relevance and we see ongoing momentum in the other international markets.
The order book for Saucony gives us good visibility to growth over the remainder of the year as new product flow improves.
As such we expect double digit revenue growth in Q2 for Saucony.
Full year outlook of high teens growth.
During the quarter, we made a strategic media shifts to broaden consumer reach at the beginning of March we launched a brand awareness campaign called as runners in connected TV across all Roku apps with the supporting social campaign on Facebook and Instagram.
We saw strong PR placements, featuring the Saucony brand campaign call us runners across multiple publications.
Examples include an international Women's day article and Ebony, highlighting our diversity efforts with the feature of J L from Black Girls run.
An endorphin pro to try them 19, and guide 14 featured in Runner's World and men's health, which was syndicated MSN and Yahoo.
We also saw endorphin pro to feature in Esquire in the UK.
In sports marketing three athletes around the Boston Marathon and Endorphin Pro three further amplifying our brand presence and sport.
Looking ahead, we will focus on core franchises for everyday active with ride guide conveyor campaign set to run on social media channels starting in May.
Sweaty Betty revenues of $54 million were down 2% on a pro forma basis, but up three 3% in constant currency.
The brand was significantly impacted by geopolitical instability, giving the given the brand's high exposure of the U K and Europe , where overall high street retail struggles.
The broader challenges, our new logistic delays had an unplanned impact on e-commerce traffic and new product launches in Q1, while store performance was relatively strong.
Sweaty Betty continues to bring category, leading innovative fashion elements to technical activewear.
This is reflected in the powerful lineup of new product introductions throughout the balance of the year.
The brand has complemented performance product launches with lifestyle product offerings to serve the broader needs of the consumer in a post pandemic world.
Over the course of the year Sweaty Betty will build on the recent success of its newly launched Super soft already the brand second biggest franchise as well as its cold weather products, such as ski outerwear and Fairmount.
We expect Q2 revenues to be down mid single digits for sweaty, Betty with a return to double digit growth in the second half of the year, resulting in low teens full year growth.
Sweaty Betty is a predominantly DTC brands and we are leveraging important learnings from the team that we can apply to our other brands. This cross sharing is reciprocal as.
As an example, sweaty Betty will be launching a new SMS trial in the U S market leveraging the work already done around this and our other brands. This functionality will support diversification and channel mix and offset privacy challenges and our current email based CRM programs.
In addition to build on the success of the insiders loyalty program, we are launching a new perk of the month to support trade and returning customer frequency.
On the brick and mortar front sweaty Betty continues to attract new customers with profitable new store openings in the U K.
In the quarter, we opened four new stores.
We have begun to investigate reentering brick and mortar here in the U S. As the next stage of their expansion.
Sperry had a very strong quarter with revenue of $67 million and growth of 19%.
The brand continues to benefit from healthier boat shoe trends and had strong performance in U S wholesale with bright signals from certain international markets.
We expect Sperry to grow mid single digits in Q2, which was partially impacted by a shift of revenue into Q3 timing of inventory receipts.
For the full year, Sperry should deliver low teens growth.
Wolverine brand delivered 12% growth in the quarter in line with our expectations our portfolio of work brands performed very well with revenue of $130 million growth of 21%.
The company has a strong market share leadership position in the U S work boot category with over 30% of share and Wolverine brand leads the way.
Wolverine continues to win with industry, leading product and creative collaborations.
We expect Wolverine to grow in the high teens in Q2 with full year growth in the mid teens.
Now an update on the supply chain in the first quarter. We continued to experience will just delays with lead times still almost twice as long as pre COVID-19 levels.
Although factory production levels have meaningfully improved freight movement in the first quarter was affected by China's zero tolerance restrictions.
Russia, Ukraine War, and ongoing U S port congestion and trucking capacity limitations.
We expect supply chain to be lessening, but still meaningful headwind throughout the year with evolving COVID-19 issues in China, presenting a new potential challenge.
At the end of the quarter, our inventory was up 36%, excluding sweaty Betty against abnormally low levels last year and consists of healthy levels of core and carryover inventory we expect.
Inventory flow of newness to improve throughout the year.
Moving on to the progress we made in the first quarter against our refined approach and support a sustainable future growth.
On our last call. We've spoken about we spoke about an important shift in our approach to deliver our growth strategies, which fundamentally means a renewed focus on our biggest opportunities.
This will mean prioritizing investments on our largest brands in global markets.
The fundamentals remain in place, leading with an acceleration of our digital and e-commerce capabilities, elevating product innovation and optimizing our international market opportunities the product.
Introductions collaborations and marketing campaigns, we are delivering in 2022 with just the beginning I am incredibly proud of what the teams have accomplished and excited for the journey ahead.
I see tremendous opportunities to unlock growth and shareholder value through a more comprehensive corporate strategy.
Our leadership team is currently focused on this work and we are excited to have Boston consulting group on board to support our efforts.
I look forward to sharing more about this initiative as we get later in the year.
Let me provide a brief insight and some of the key growth areas bigger.
Beginning with our DTC and digital focus we continued to focus on advancing our DTC capabilities and driving authentic engagements with consumers.
That said the DTC businesses for most of our brands are through the E Commerce direct channel, which had benefited significantly from consumer shopping behavior. During COVID-19, but is now seeing some reversal as consumers shift back to stores.
As a result of this change combined with the impact of delayed product launches due to supply chain challenges and shifts in consumer sentiment towards experiential spending E. Commerce sales did not meet our expectations during the quarter.
Including our newly acquired Sweaty Betty business first quarter direct to consumer revenue increased 24%.
DTC e-commerce revenue increased 16% compared to last year.
<unk> store revenue was up 60% versus the prior year.
Excluding sweaty Betty first quarter direct to consumer revenue decreased 14%, reflecting ecommerce decline of 16% and store revenue decline of 8%.
During the quarter, we focused on attracting new customers to the brands, we better balanced some of our marketing investments to top of funnel, which we believe is important to the long term growth and durability of our brands.
We are testing and learning a number of strategies <unk> also balancing higher performance marketing costs with anticipated returns.
We will continue to expand our reach through a better flow of newness and purposeful storytelling throughout the rest of the year.
With a commitment to growing DTC capital investment in E. Com in store interest infrastructure is expected to more than double this year and we feel this will support growth into 2023.
We expect our DTC business to grow over 20% for the full year, 5%, excluding sweaty Betty and approached nearly 30% of total revenue in 2022.
This reflects our expectation for an acceleration of DTC growth as we move past tougher compares in each one of 2021, particularly in e-commerce improved flow of new product offerings and benefit from our top of funnel brand building marketing initiatives.
Beyond DTC, we continue to support our presence in the wholesale channel through key partnerships.
As many of you are aware DSW is testing a new format called warehouse re imagined featuring shop in shops that showcase national brands. We believe this is an opportunity to amplify visibility of brands such as our iconic Hush puppies brands.
Moving on to product innovation product is at the center of everything we do in our key strength across our brands while supply chain challenges led to product delivery delays. This was another quarter of successful successful product newness enhancements and collaborations across our brands to name a few sweaty Betty in conjunction.
With its apparel expansion in the hiking category teamed up with Merrill to introduce a limited edition Moab speed reflected of the reflective of the sweaty Betty ethos.
We are thrilled by the strong response.
As we discussed last quarter, we will leverage our brand equity and product development capabilities to expand into new categories that will broaden our customer reach and drive higher spend per customer.
At Berry, we launched Sperry sport the brand's most technically advanced performance launch yet as we return to a performance base routes the assortment.
<unk> provides the versatility of crossover from lifestyle activities to support.
We are excited to be launching those new collection that is just hitting stores. This month.
Sperry sport dive and product campaign drove new customer growth, 75% of Sperry Dot com buyers are new and significant interest from media, including travel and leisure, where we were top pick.
Our make waves brand campaign will continue to pulse and run through October .
We also launched <unk> cycled storytelling during earth month to begin activating our brand purpose offer water water for all.
At Wolverine, we had a hugely successful collaboration with Halo, bringing the videogame inspired booth to life. The boot feet featured the master chief emblem, while offering the same comfort and support inherent in Wolverine boots with a mid so that contains ultra spring technology for lightweight.
Right.
The products sold out in under one minute with 250000 visits to the Halo landing page, leading to a 22% growth in its E Mail database and a two week span.
These launches and collaborations clearly showcase the potential of these brands to excel in the innovation and creativity.
The next key growth areas, the acceleration of our international business in the first quarter International revenue grew 35% as compared to last year.
Excluding sweaty Betty International revenue grew 10% driven by growth in our third party distributor business with recovery seen in our top markets as well as strong performance in our China joint venture.
Our third party businesses in Asia, EMEA, and Latin America delivered revenue growth, excluding sweaty, Betty a 40%, 60% and 90% respectively versus 2021 and are accelerating to pre pandemic levels.
Our own business in EMEA, and Canada declined, 21% and 28% respectively. As they were impacted by supply chain constraints similar to our domestic business.
We are particularly encouraged by momentum in Latam with Cat Merrell brand growth of 66% and 137% respectively.
Our brands are well positioned to take share in this region as key markets, including Chile, and Peru recover.
Notably in the first quarter two branded sites for Saucony in Chile in Maryland, Peru were launched.
And the Merrill Cuzco, Peru store will open in Q2.
As we look out I also want to touch on the impact of the Russia, Ukraine conflict.
Our Russia business is very small historically less than 1% of revenue and.
And during this quarter, we were able to divert inventory allocated for our Russian distributor to other regions.
That said the war impacted consumer confidence in Europe , which is impacting business.
We are monitoring the situation closely and making any adjustments as necessary.
And efforts to support displaced Ukrainians and those affected by the war, we have made meaningful donations, including nearly 100000 pair of shoes to those in need.
In conclusion, while the global macro environment and supply chain challenges are likely to create headwinds in the short term, we are more confident than ever in the future of our brands.
With that I will turn it over to Mike to discuss our financial results.
Thanks, Brandon and thank you all for joining the call.
As Brendan mentioned.
We delivered strong top and bottom line performance in the first quarter and continue to see healthy demand across most brands.
First quarter revenue of $615 million was up 20% compared to the prior year and exceeded our expectations and the high end of our guidance.
The revenue performance was driven by an 11% increase from the Michigan group.
A 6% increase from the Boston group.
And an 11% contribution from <unk> revenue of $54 million.
Adjusted Q1 gross margin of 42, 5% was in line with our internal plan.
And decreased 180 basis points versus 2021.
During the quarter, we experienced higher supply chain and product costs as expected.
While certain price increases, which are phased later into the year.
Had a small offsetting benefits.
The benefit from price increases will be more meaningful in the back half of the year with.
With sequential improvement each quarter.
Gross margin was also impacted by channel mix, our international distributor business was especially strong in Q1.
And this more than offset the near term softness seen in our e-commerce channels.
The gross margin from our distributor revenue is much lower than our e-commerce gross margin.
Adjusted selling general and administrative expenses of approximately $211 million for Q1 were up $37 million or 21% compared to the prior year.
This was due to an increase in variable costs on higher revenue.
The addition of sweaty, Betty and higher labor costs in our distribution centers.
More importantly, we continued to invest in our teams and strategic marketing aimed at consumer acquisition and brand heat during the quarter.
Our reported SG&A expenses include $30 million of net costs relate.
Related to our legacy environmental matter.
We expect that this charge will substantially cover the current pending lawsuits.
And we are pleased to be making such meaningful progress towards resolving this matter.
Adjusted operating margin was eight 1% and in line with our expectation and guidance for the quarter.
Excluding sweaty Betty adjusted operating margin was nine 1%.
Compared to 10, 2% in the prior year.
Adjusted diluted earnings per share for the quarter were <unk> 41.
Compared to <unk> 40 in the prior year growth.
Growth of two 5%.
Reported diluted earnings per share of 12 <unk> includes the impact of net litigation costs already mentioned.
Turning to the balance sheet and in Q1 inventory of $483 $3 million.
<unk> grew about 50% and 36% excluding sweaty Betty.
This increase reflects abnormally low inventory levels last year due to excess of supply chain challenges.
Our available inventory on core and carryover styles is currently very healthy.
Importantly, the flow of new products for our key brands is now improving and we expect this will support the important product launches planned for Q2 and into Q3.
I will now to turn to our outlook for 2022.
The first quarter provided a solid start to the year and we continue to experience strong global order demand that gives us good visibility to projected revenue for the rest of the year.
As mentioned our inventory levels have improved.
While supply chain challenges persist.
We are in a more stable position moving into the back half of the year.
As a result.
We are reiterating the fiscal 2022 guidance on revenue and EPS provided on our last call.
We continue to expect to deliver record revenue in the range of $2 77 $5 billion.
To $285 billion in fiscal 2022.
Growth of 15% to 18%.
Including double digit growth.
For our organic brands.
We continue to expect our four largest brands Merrell Saucony, Sperry and sweaty Betty to contribute approximately two thirds of our revenue in 2022.
Despite the ecommerce decline in the first quarter we.
We expect our direct to consumer businesses to approach 30% of global revenue.
In our international markets to be over 35% of global revenue for the full year.
We now expect adjusted gross margin to be approximately 43% and selling general and administrative expenses to be approximately 32% of revenue.
This outlook now reflects a shift in revenue from our DTC channels to our accelerating international distributor business.
We still expect adjusted operating margin of approximately 11%.
Our revised outlook now reflects an effective tax rate of approximately 21%.
Net interest and other expenses of approximately $44 million.
And an average share count of approximately $81 4 million shares.
This revised share count reflects $2 1 million shares repurchased since the beginning of the year.
Adjusted diluted earnings per share are still expected to be in the range of $2 50.
To $2 65.
And reported diluted earnings per share are still expected to be in the range of $2 30.
To $2 45.
We expect Q2 revenue of approximately $735 million to $745 million or growth of approximately 16% to 18%.
Gross margin is expected to be approximately 42, 5%.
Operating margin is expected to be approximately 10, 5%.
And adjusted earnings per share are expected to be in the range of 63 to 66.
Looking at the second half of the year, we expect high teens growth.
The quarterly phasing is based on the alignment of our strong future order book the.
The improved new product pipeline mentioned earlier and the phased benefit of price increases.
Before I pass the call back to Brendan for closing comments I wanted to share information about some very important work underway at the company.
Yes.
Since the beginning of this fiscal year the.
The leadership team has been working on a number of initiatives specifically focused on accelerating total shareholder return for fiscal 2022 and beyond.
The first priority is the execution of this year's financial plan in line with the outlook just provided.
Beyond the financial performance.
Here are some of the initiatives worth noting.
First as Brendan mentioned earlier.
We are working to reset the corporate strategy of the company with the support of Boston Consulting group.
This includes developing new enterprise level and brand level strategic goals and initiatives.
Geared towards the optimization of our portfolio and capital structure to maximize value.
To complement this work.
We are also in the early stages of a comprehensive cost and efficiency review and.
We may partner with some outside experts to help us accelerate these opportunities.
Next.
To provide greater clarity into the performance of our business. We will continue to provide more detail on the performance of our biggest brands.
And plan to further enhance our reporting structure in the second quarter.
Last.
As a culmination of the work noted above we plan to host an investor day to share insights on our company's biggest growth and value creation opportunities.
We will provide a more specific timeframe for this event in the coming months.
In closing I'd like to thank our global team for their outstanding execution during an incredibly volatile time.
I'll now turn the call back over to Brendan.
Thanks, Mike Operator, we'll now open it up to questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Can I ask a question you May press Star and then one using a touch tone telephone.
Enjoy your questions you May press star two.
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Once again Thats Star then one to join the queue.
We will pause momentarily to assemble the roster.
Our first question today comes from Jim Duffy from Stifel. Please go ahead with your question.
Thank you good morning, Mike Good morning, Brandon.
So let me start by asking about the comprehensive corporate strategy review and engaging the Boston consulting group.
Is everything on the table here, including active brand and portfolio management or do you foresee this to be more operationally focused and then Mike I'm curious is the consulting fees.
Within the budget or is this something we should be looking for is incremental.
In the P&L.
Now those costs those costs are embedded in.
And the outlook here.
I can give some comments and then Brendan can kind of top it up but I would say the work here is really focused on.
Sort of corporate level strategy and in evaluating where the opportunities are for the business as we kind of pivot out of.
Does this COVID-19 time frame and look for opportunities that are relevant to white space within our brands and other portfolio options that are certainly on the table as we move forward and I think.
Mentioned last time in my remarks.
Focusing the organization on prioritization and so I think that.
They will help us expand on that and really where we want to focus on our resources.
Sure.
Fair enough.
Well look forward to.
Okay.
Hearing more about that in the future.
Onto more near term dynamics I was hoping you could speak to demand indicators that youre seeing in the outdoor and running categories very strong categories. During the pandemic. There has been some supply disruption not only through your brands, but for others in the space.
What do you channel inventories look like at this point what type of demand indicators are you seeing within your own direct to consumer business and how do you see this unfolding across the year.
In these categories.
I mean, we're still bullish on the categories, we still see tremendous strength in our order book.
It really comes down to supply chain the closure in Vietnam.
The eight H two last year, just really came back to haunt us as we expected in the first half of this year just with the lack of newness. So when you speak to our own direct to consumer demands.
Demands it fell off as evidenced by our results because we had no newness. So we were just showing the same core product over and over we also missed out specifically in narrow on cold weather boots.
So we were out of stock there so.
Thats, what youre seeing in our own direct to consumer and that's why we expect that to pick up as we get further along in the year, but we're really excited and enthusiastic.
Susie asked about what we're seeing in our wholesale partners, whether it be the family channel.
Boot barn reporting yesterday or the sporting goods channel, where we continue to see strong demand.
Both in stores and online and a healthy order book that is the good flow make us very optimistic I think on the inventory side too Jim Theres been some.
Certainly bottlenecks in certain retail.
Stores are channels, but overall for the categories.
That were strongest in the channels have been has been good and healthy.
The opportunity for us to accelerate here with our wholesale business into Q2, and certainly for Q3 as new product arise to Brendan's point, not just filling in on core I think.
The added catalyst for additional growth as we move forward, but I feel good about our inventory position as it stands today and and obviously still see strong demand in terms of bringing in newness and new product from our retailers too.
Great and then lastly for me and I'll, let someone else jump in you mentioned.
Some softness in European consumer trends.
Presumably some softness in Asia Pacific as well are you seeing any cancellations related to this from wholesale partners or distributors or is the order book and tax.
I'd say on the distributor side has been especially strong and no cancellations really there continue as we have been to chase.
Supply against the demand that they're seeing in those markets.
From a cancellation standpoint, it's been pretty stable, Jim and then lucky to see that for several quarters in a row here. During this timeframe where supply chain has been a little more challenging and so so far we've been able to hold in there.
The outlook as we mentioned before for the future orders is still very strong with a strong commitment from just our domestic retail partners, but our international partners distributors and wholesalers alike.
Thank you.
Thanks, Jim.
And our next question comes from Jonathan Komp from Baird. Please go ahead with your question.
Yes, hi, good morning, everyone, maybe a follow up on the corporate strategy review your initiate and Brendan I'm curious as you look across the brand portfolio do you expect any.
Brand or our set of brands in particular to benefit from the review and <unk>.
Maybe it's too early for this but do.
Do you have any thoughts when you look at the brand portfolio today.
Youre directionally, what sort of organic growth potential as a portfolio.
Possible on an ongoing basis.
Yes.
Think as I said, it's making sure we put our resources behind our growth priorities and whether it would be.
Our biggest brands or whether it be the work boot group that we under Tom Kennedy I think.
Are starting to think like more like that as an organization and I think thats going to hopefully unlock.
Future growth and make sure that our brand strategies and our corporate strategies are all aligned.
And the nice thing about our brands that we have today, they're all they're all profitable. So it's really just a matter of balancing the resources from the time, rather than having any of that.
Not thrown off profit and I think.
We'll have better clarity into that as we go through this process exactly I mean, John we shared it today, but literally the process is just kicking off and.
We're excited about what we will be able to focus on and share share with you in the near future here, but.
In terms of any.
Outward looking projections are for outlooks, so little early to put that on the table quite yet.
And maybe as a follow up on the Sweaty Betty brand could you just expand a little bit more on some of the shifts you might be making too.
The market marketing tactics and does any of that change your outlook for the growth potential beyond the next quarter or a few quarters here.
Well again, I think they've had some product delays not quite as severe as as we have in the hue hue side of the business, but things that they were planning on for Easter The guide here post Easter.
But they're very sophisticated when it comes to working directly to consumers, So Julian and the team are <unk>.
Actively shifting.
Where they're investing their marketing dollars and how theyre going after new customers combined with the existing customers.
The different tools they are using so they.
They did some things over the last few weeks that generated some nice.
Pushing business and.
So we will continue to work through that so.
Likely will be a little bit choppy over the next quarter or so you've seen that in other DTC brands, but doesn't.
Sure.
Golar enthusiasm for their long term.
Our expectations and I would and I would add John .
<unk> performance for Sweaty Betty was.
Fairly strong in the quarter was comping up against a really tough Q1 in 2021, but in line with what we would've expected and certainly.
The benefit for this brand, even though it's strong D to C. It has the omnichannel opportunities that some of our other brands don't have so there's a lot of learnings coming out of that as well as we look at.
How does kind of refocus on the brick and mortar opportunities as the consumer shifts their shopping habits, a little bit.
And our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead with your question.
Good morning, everyone.
Thanks, Tom package with some slight delays in the arrival of goods in the first quarter impacted the new net how do you see the flow of goods, continuing and how you're thinking about air freight expense and then also just.
Stores from ecommerce switch reopening how are you thinking about that as we go through the quarters.
The back half of the year with indicated upticks.
Products are new things that we should be looking for to drive demand. There. Thank you. Yes. Thanks, David I mean, I'll start and then Mike can follow up I mean, I think again.
The lack of new deliveries for a mono brand like our brands.
Basically one category is just.
Just too difficult to overcome we just have nothing to engage the consumer with and so in Merrell. The Moab three continue to get delayed.
It was supposed to launch last year and then in Q1 now we are firm to have at launch in June .
So we're excited about that.
In Saucony.
There are new franchise with Tempus was meant to launch.
In Q1, along with the campaign calls runners that's going to be now in Q2 and I can go on and on down the list as these goods are on the water or in the air and so we have better line of sight into when they'll be here in Q2, Q3, Q4, which is also when last year, we started to see inventory.
<unk> B B challenge, so now Thats really what.
Is giving us the confidence in kind of the uptick in business in the back half of the year in terms of stores. You know you have to remember and Mike mentioned in his comments, we're really not an omnichannel business in terms of our own DTC. Our stores are all outlets. So I don't think of those in the same way as I would full price stores in terms.
Of how they interact with.
With our e-commerce business and so.
As others have gay have had the full price store business to mitigate some of the E Commerce Miss.
We just don't have that opportunity so even more pressure on us an opportunity to get the flow of goods into the last three quarters in and see.
Give ourselves the opportunity to market to our customer with something new and and to engage them.
The key to that Dana has visibility to this which we which we had in February when we gave our outlook that we knew there were going to be some launch delays here, we have much more confidence in the timing based on the status of production and the flow of the logistics et cetera, So from that standpoint, even though it's shifting a little bit.
Barry I think we have really good visibility there and it's stabilized.
Not leaning excessively on airfreight, certainly not more than we had planned to two to get the goods here faster. So again I think it's all of this is fairly in line with with what we had expected coming into the year and so as we delivered on Q1.
Overall that was positive but some of the pressure. It has had on our on our directly on our E. Commerce business has been a little more acute than we expected, but obviously diversity.
The diversity of our business model helped us mitigate that in other places.
And then just on price increases.
Thank you.
Great.
Magnitude.
<unk>.
We are we've got price increases that.
Are impacting.
Sort of in the market, starting starting now more and more.
More meaningfully and we will have an even bigger impact in Q3 and Q4.
What we're what we're seeing unfortunately linked to the delay in some of the launches is with some of the new product, where we took more meaningful increases those those were delayed a bit. So the benefit of that is also delayed but overall.
Very meaningful price increases I think very much in line with competitor brands that we've seen in the market and from a from Adidas C standpoint, so far no resistance on the on the higher pricing that we're passing through so overall very I think very comfortable with that approach and we have even though as Mike said a lot of it is phased in.
Throughout the balance of the year you know Merrell for example has taken up to their core franchises. The moab by $10, one general amount by $5 and again, we haven't seen any any pushback from the consumer that being said, we're doing it selectively because we know.
We have to watch how it impacts demand.
And our next question comes from Lorraine.
<unk> from BNP Paribas. Please go ahead with your question.
Good morning, and thank you for very much for taking my question, Mike I think you hinted that you.
But you might provide enhanced disclosures in <unk> just so we're prepared.
Any any guardrails on that matter.
Well I think it's part of all the work that we're doing right now to sort of.
Now look at the business and how to organize the business a little bit more efficiently and so.
No foreshadowing at this point Lauren I think just more in line with the focus and the prioritization that Brendan mentioned before obviously continuing to emphasize.
Sure the performance of our biggest brands, which continue to represent two thirds of our global revenue.
And focusing in on Adam.
Our grouping or are in the organization of the business. That's the most helpful to investors and helps us tell our growth story in a more efficient way.
Very helpful. Okay, and then I think you mentioned, maybe 30% of your revenues for this year will come from DTC.
If I look at the K you had 143 stores right, which includes a sweaty Betty just curious to know how.
How do we think about the store count for the end of the year.
And within that how do we think about E. Commerce performance I think you gave US a stated goal to get to $500 million, how do we think about that for 2022.
Right. So we'll I think by the end of the year, including our sweaty Betty stores and the additional stores that were seeing added across the portfolio, we should be approaching somewhere between 155 or 160 stores.
Across the fleet Brandon mentioned, a lot of our organic or legacy brand stores are outlet stores most of them are.
From an ecommerce standpoint.
We expect to see.
An inflection in the second half of the year in terms of growth more stable performance in Q2 on a year over year basis.
And then an inflection in the back half of the year aligned with <unk>.
Aligned with the new product launches that we talked about.
We do expect.
Good growth for the full year on E Commerce.
But including when we talk about 30% direct to consumer that includes sweaty bodies store and E com business as well so that acquisition really enhances our.
Our overall mix as it relates to direct to consumer versus versus wholesale.
Very helpful. And then last question gross margins organically they were down 280 bps, but Mike I think you mentioned mix was a real way on that performance could you, possibly parse that out and then yeah.
What's the driver for the gross margin guide down 50 to 100 basis points was it mix or was it just incremental freight incremental costs any color on that would be helpful. Thank you Oh really is it really is mix Lauren I mean, as we're looking at the business today and as we kind of model. The first quarter those margins came in line essentially.
With what we would've expected for Q1 just based on.
The tougher compares on DTC and then.
The overall mix, but it was the mix was worse slightly worse than we expected in the plan as we mentioned in the prepared remarks, but I will say that the gross margin performance in our core business and our wholesale markets was quite a bit better than expected and that also helped us sort of offset some of that.
The mix issue overall, so the change in the guide there on gross margin and also on the SG&A expense line is really due to the mix shift between those different channels and really everything else around pricing overall cost increases that we had contemplated in our plan et cetera.
Pretty well consistent from what we thought a few months ago.
And our next question comes from Jay sole from UBS. Please go ahead with your question.
Great. Thank you so much.
My question is on share buybacks, you did some buybacks in the quarter.
Can you remind us how much authorization, we have left maybe what your plans are for buybacks for the rest of the year and Thats included in your updated EPS guidance for the full year right. Yes, we have over $400 million authorized on the current plan still remaining.
We the outlook that we gave reflects.
Just over 2 million shares we bought back so far this year and some some buybacks at the end of last year that will benefit this year as well, but we don't we haven't modeled in J any additional meaningful share buybacks that doesn't mean, we won't do them, but.
And this outlook right now we are only factoring in the buybacks that we've completed so obviously at today's valuation.
We'll be seriously considering.
Our position on that as we move into the rest of the year.
Okay, and then if I can ask one more just on China. It sounds like the JV has been going really well everybody is talking about the impact of the Lockdowns in China can you just remind us.
How large the China business is from Paris, <unk> from a sales perspective.
As it stands today, and how lockdowns might be impacting it so far.
No.
Yes, no I mean overall in our business there is still relatively small I mean, it's we're continuing full steam ahead with the JV.
Saucony.
Is doing great.
Merrell is a little bit slower there as was planned.
But amazingly despite the lockdown, we are still seeing them find a way to do business. So we're certainly anticipating some slowness.
As.
Covid spreads through China, if that's what happens but right now it's.
It really hasnt had a big impact.
That's largely due just to the small size of the business. We're certainly keeping an eye on it in terms of manufacturing and while we don't have a lot of manufacturing left in China, we still have materials that come from there a couple of our brands like Keds and kids still have some exposure there so thats more where our emphasis is right and the focus the focus on channel mix in our <unk>.
<unk> venture has obviously shifted to be very heavy on the.
On the e-commerce side of that business, which is outperforming for both brands.
Tempering our outlook for stores, a little bit this year, just wait wait a little bit more wait and see on the potential impact that COVID-19 might have on <unk>.
Lockdowns, but.
Overall, I think coughing.
Confident in the outlook for that joint venture and the progress that we're seeing in our two largest brands in the portfolio.
Okay. Thank you so much.
Thanks Jay.
And our next question comes from Susan Anderson from B Riley. Please go ahead with your question.
Hi, good morning, Thanks for taking my question.
Just wondering if maybe you could give a little bit more color on what's going to accelerate slightly better back to double digit in the back half and then also I'm. Just curious if you saw any differences in Europe versus the U S. I know the U S is small, but just curious how the brand is doing in the U S.
Yes, so I think again with sweaty Betty they start to see products slowed down in the back half of last year and as they see a better flow of goods of newness.
That's giving us the confidence but.
You'll start to get back to double digits in terms of the U S versus the U K. It is very different because in the U S. They don't have any stores. So it's purely e-commerce.
They do have a nice wholesale business with nordstrom's and have expanded into bloomingdale's as well as some specialty shops.
Julian and her team were here last week doing a site tour.
As we've mentioned before look at opening back up stores in the U S. They had.
Think about a dozen stores at one point and they shut them down during COVID-19, but it gives us pretty good Intel into the top line number opportunity.
We're able to get out of leases, but between that and where their ecommerce business is happening we think.
And there is an opportunity later this year or early next year to start to open back up stores in green.
Gained some more brand awareness for slightly better here in the states.
And that growth rate is heavily heavily <unk>.
Heavily focused in the back half of the year, but also includes the.
Expansion of new stores, both in their home markets in Europe , as well as some new stores here in the U S. With some of the some of the growth that we'll see comes from that expansion as well as just the heavy weighting that's traditionally part of.
The sweaty Betty business in the fourth quarter and as I said, we've already seen a small sample, but a little bit of an uptick based on some of the.
Some of the marketing changes they were able to make on the fly post post Easter.
And our next question comes from Mitch <unk> from pivotal research. Please go ahead with your question.
You guys have some old info at Seaport research, So I've got a few questions.
Just to follow up on Sweaty, Betty Mike could you say what kind of dollar sales are embedded in your Q2 and full year outlook.
Dollar sales for the full year first sweating for sweaty Betty Sweaty offers.
Yes, yes, yes.
In Q2, I think we're right around $60 million.
And for the full year outlook is like $2 72 to 75, okay.
EBIT was negative in Q1 or are you expecting.
An operating loss in Q2, and I assume youre not for the full year right now for the full year, but yes, it typically would.
See those sales flow throughs be a little more challenging in the first two or three quarters of the year just given the volume that we do.
Through especially through the e-commerce business so.
Back weighted in terms of the timing of profitability because that's consistent with what the business has delivered in the last few years.
And then you've referenced the strength of your order book is one reason to give you confidence.
And the acceleration of the back half I mean I assume at this point you've got a <unk>.
Fall order book I know you typically don't.
Give the numbers on that but I was wondering if maybe you could make an exception.
At this time like are you are you looking at like 20%, 30% increase in your fall orders year over year.
Well I would I would say consistent with what we've been saying really for the last several quarters.
The order book is historically high we've seen it continue to grow.
Or in some cases for some brands, which have been especially high maintain that level the amount of coverage that we have.
The order book versus our revenue outlook is incredibly high and certainly at historic levels. So while we won't quote the percentage changes and some of that has to do with the timing of the orders coming in and everything else, but fundamentally I think it is just the consistency we've seen in the order book and the ongoing kind of reliance that we feel we can have based on.
<unk> performance year to date performance over the last couple of years that gives us real confidence in the outlook for the rest of the year that includes our wholesale accounts and our third party distributor businesses, which is as we mentioned <unk>.
Accelerating right now and very strong part of the story.
And our next question comes from Sam <unk> from Susquehanna. Please go ahead with your question.
Got it.
Right.
Williams trading I guess old list.
Yeah.
Lot of my questions have been answered I have two one on sweaty Betty you talk about opening stores, but with the supply problem. I mean is this something that's really going to be sort of.
Our next year thing because.
The supply.
Catching up issue.
I wouldn't say it will be based on supply chain in the back half of the year, Sam I think it's more dependent on the sort of a real estate opportunities that are out there I mean.
Learn from the hard way of getting into bad real estate deals and think that Julian and the team have the right support system to make sure with with an open playing field not having stores anywhere right now.
We're very surgical about where we open stores in the leases we enter into so I think that'll be more of a driver than supply chain issues by the back half of the year, but not going to force a couple of stores to be opened in Q3 or Q4 of Q1 or Q2 of next year makes more sense I think it's not going to be meaningful to the overall business, it's more about setting.
Thats up for the future.
Thanks.
Two more questions one.
Like what is the in transit inventory look like right now.
Well at the end of the quarter. It was about 20% of the total inventory.
Which is which is higher than normal Sam but.
Not incredibly excessive I think I would say over the last month, Thats, probably improved a little bit.
And it will continue to improve as some of the bottlenecks were seeing in the ports and things like that improved and the flow of goods is a little more consistent.
How does that compare to last year.
The end of the first quarter.
I don't know honestly I think it's probably again I think it's in a very similar place.
If not slightly better frankly, it came down a little bit from the end of the year level I think it.
At the end of last year, our in transit was over 20% at the end of Q1, it came down to high teens or just under 20%.
Great and then lastly could you just give us what the DTC or wholesale revenue was by by the Michigan Group Boston Group other somewhat.
Sweaty Betty.
Yes, we don't have them because I don't think its going to come out.
Yes, yes, it's going to come out in the queue.
Yes.
Yes, we will provide that then I don't have it right in front of me.
Alright, well I think all of my questions have been answered continued success. Thank you Sam Thanks Sam.
And ladies and gentlemen, with that we will be concluding today's question answer session I would like to turn the floor back over to management for any closing remarks.
Well, thanks, everyone for joining us today, and we look forward to updating you on our next call in August .
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.