Q2 2022 Wolverine World Wide Inc Earnings Call
[music].
Ladies and gentlemen, greetings and welcome to the Wolverine worldwide, Inc. Second quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A 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.
I will now turn the conference Silver do Mr. Alex Wiseman Vice President of Finance.
Please go ahead Sir.
Good morning, and welcome to our second quarter 2022 conference call.
On the call today are Brendan Hoffman, our president and Chief Executive Officer, and Mike <unk>, Our executive Vice President and Chief Financial Officer.
Earlier this morning, we announced our financial results for the second quarter 2022.
The 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.
Prior year non-GAAP disclosures include adjustments for costs related to the COVID-19, pandemic, including airfreight costs severance expenses and other related costs.
References to organic performance reflect the exclusion of the sweaty Betty brand, which was acquired in August 2021.
These disclosures were reconciled and attached tables within the body of the release and supplemental tables found on our website under the Investor Relations tab at the webcast and presentations link.
I'd also like to remind you that statements describing the company's expectations plans predictions and projections such.
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 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 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 Brendan Hoffman.
Thank you Alex good morning, everyone and thank you for joining today's call.
We delivered operating margin ahead of our expectations and EPS at the high end of our guidance despite softer than expected revenue.
Sales were impacted by unplanned headwinds related to elevated wholesale channel inventory foreign exchange rate pressures and some lingering supply chain delays.
As a result of these headwinds which are likely to persist through the back half of the year. We are revising our guidance to reflect higher promotional activity and challenges related to moving inventory through our wholesale channels.
While we are reducing our margin outlook for the second half we are taking actions to reduce costs increase efficiencies in marketing spend and take strategic price increases all of which will contribute to improved longer term profit.
Overall, we are encouraged by a strong second quarter performance in our international business, 14% growth in Merrill and a favorable response to product and marketing initiatives across several brands.
We will continue to build on the meaningful progress we've made on the corporate strategy work. We started earlier in the year and remain excited about the future growth potential of our business.
Looking at our second quarter results revenue increased 13% to $714 million, including sweaty, Betty and was up 5% on an organic basis.
We saw notable strength in international which was up 45% driven by strong demand in our organic business.
We saw sales pressure in the U S where revenues declined 2%.
Unfavorable foreign exchange rates impacted reported revenue growth by $19 million or three percentage points.
Now I'd like to provide more context around two factors that impacted revenue.
First starting in June we began to experience order postponements as certain U S retailers were faced with excess inventory and distribution centers and stores.
We are working closely with partners to move through product and in some cases, turning to drop shipping direct to store shipments to help alleviate this current pressure.
As such some of these sales will shift to later in the year, which Mike will speak to is your views our financial results and outlook.
Second as with others, we experienced softness in the E Commerce channel.
E Commerce revenue was down 7% on an organic basis as compared to the second quarter last year and up 20%, including sweaty Betty.
We believe this is largely attributable to a change in shopping behavior from what occurred during the pandemic with consumers now partially reverting back to in store shopping and shifting toward towards experiential spending.
We also recognize the impact of inflation is having in certain consumer segments.
Given our limited number of stores, which excluding sweaty Betty are almost exclusively outlets.
Not able to take full advantage of the spending shifts between stores and e-commerce and our own DTC channel.
Our E Commerce remains a critical part of our growth story.
Since 2019, the organic business is almost doubled and including sweaty Betty ecommerce as a percentage of global sales is now approximately 20%.
Now before we move onto brand highlights I also want to provide a quick update on the supply chain. We are seeing a normalization in production levels at our core factories transit times, which had been elevated and volatile are starting to improve and there is greater visibility in the supply chain.
Through our efforts earlier in the year, we were able to receive a majority of the fall inventory in time for the fall selling season.
Moving to brand highlights starting with Merrill.
Merrell delivered on our expectations coming into the quarter with revenue growth of 14% versus 2021.
Choppiness in the flow of goods in the U S retail during the quarter was partially mitigated by stronger than expected revenues from international markets.
As anticipated lack of product newness was a headwind for merrell in the quarter as supply chain delays push new product launches into Q3.
Despite this challenge the team has continued to generate excitement around the brand with marketing Activations and sustainability initiatives launched during the quarter, which included.
This is home a new multi year sustainability initiatives designed to inspire consumers to protect the nature that shapes their everyday lives.
To kick off the inaugural year Merrell launched a multinational product take back and resale program called Merrill Retread, which will keep 300000 pairs of footwear out of landfills.
Moab step further nature's, calling and more or less marketing Activations were also a catalyst for continued strength in sell through on core products, such as the Moab embark and alpine.
Turning to Q3 in July we launched Moab, three an update to the number one light hiker and the market with improvements in comfort and traction and we're very pleased with the early reads even as we promote moab two my web three is selling above expectations.
Given the injection of new products, improving brand heat continued growth in emerging performance styles like Moab speed in stock inventory levels and easy comps versus last year's supply chain disruptions, we expect merrell to deliver over 30% revenue growth in the third quarter and full year revenue growth in the high teens.
Moving to Saucony, Saucony grew 7% to approximately $135 million, but fell slightly short of our expectations, primarily due to lower closeout sales related to excess inventory in the channel.
We continue to see strong response to newness in June we launched Tempus, which marries the energy of a ratio and an everyday trainer and we are encouraged by early sell through.
International grew 32%, reflecting strong reception of the brand as we continue to expand our presence during Paris fashion week Saucony took over a gallery and the more to showcase the house of speed in house of originals, bringing together performance and lifestyle segments of the brand.
Houses speed celebrated the launch of the Endorphin pro three and endorphin speeds III. The latest evolution of the brands Award, winning Endorphin collection, which launched in July .
House of originals focused on the rich heritage of speed and innovation and lifestyle elements of Saucony.
During July I visited the Saucony original headquarters in Italy, and walked away very excited for the newness coming in the second half I was energized by the merchandise presentations at retail and I'm excited to see this influence incorporated in the U S.
Looking ahead saucony remains focused on driving market share globally across road and trail running categories as well as expanding our lifestyle originals business.
In Q3, we expect saucony to deliver low single digit revenue growth and mid teens growth for the full year.
Moving on to Sperry Sperry saw a negative shift in sales with revenue of $70 million declining 13% versus last year.
Significant order postponements from retailers combined with isolated cancellations due to late arriving product were the primary drivers on the revenue Miss.
We continue to work towards diversification in the wholesale channel, while working closely with our department store partners.
Despite these challenges our focus on innovation remains a priority.
A good example is the Sperry sport, which exceeded our expectation.
This line of highly innovative footwear uses lightweight breathable materials, offering multipurpose solutions, including fishing paddle boarding boating and sailing.
When we introduced truly differentiated products that reflect the functional core of the brand we see very positive reaction from customers.
Importantly, this category also accepts extend sperry customer reach driving robust new consumer growth on Sperry Dot com.
Additional product catalysts for fall include expansion of the successful torrent boot collection, the launch of the innovative duck float.
We now expect Sperry revenue to grow mid single digits in Q3, and deliver mid single digit growth for the full year.
Now turning to sweaty Betty revenue of $47 million was down 23% versus the prior year pro forma and down 11% in constant currency.
Q2 revenue was up 96% versus 2019 on a pro forma basis.
Continued macro headwinds in Europe , and the U K, specifically, where discretionary spending, especially for apparel is under pressure weighed heavily on <unk> performance.
On the supply chain side product as well as continuing to disrupt flow of inventory, although we expect this to improve in the second half.
While we are seeing some headwinds in this business. Currently we are confident in the brand's long term potential given the $45 billion Tam, our global potential and the opportunity to expand into other categories.
The team is currently focused on penetrating the U S market, where we are in early stages of growth.
In the U S. A recent study showed strong affinity for the brand among attractive consumer segments.
We plan to relaunch stores in 2023.
The brand also experienced continued strong momentum in China exceeding expectations in the first half despite COVID-19 lockdown.
We continue to explore the opportunity in China, where we see strong demand for active and performance apparel.
Turning to product our swim line, which include a broader range of performance and lifestyle products, all fully sustainable delivered sales growth of 40% compared to the second quarter last year.
Sweaty Betty also launched its first power abroad, using the same exclusive fabric that is used in the power legging franchise, which sold out in just three weeks.
In the third quarter Sweaty Betty will we'll be building on the success of the new Super soft leggings franchise launched in the first quarter.
We will also launch a broader range of options and outerwear with a new climate three in one jacket, which is highly versatile fully waterproof breathable jacket made from recycled materials.
Sweaty Betty team is also partnering with our other brands and sharing its retail expertise to help the brands design and build modular flexible pop up retail environments, primarily in the UK This concept provides an ideal opportunity for us to test and learn different retail variations in terms of locations and combination of <unk>.
Rands Overset periods.
We plan to use this experience to help inform our future DTC strategy.
On a pro forma basis, we now expect sweaty Betty third quarter revenue to be down mid teens for the full year. We now expect revenue to be down mid single digits, but up mid single digits on a constant currency basis.
Wolverine is the foundation of our work boot brands and continues to deliver consistent growth in the second quarter. Wolverine revenue was in line with our expectations at $58 million, reflecting growth of 16%.
The flow of new products is stabilizing for Wolverine with the Hellcat Ultra spring heavy duty, which launched in Q2 and the women's torrent rain boots set to launch in Q3.
Wolverine also has a strong alignment lineup of collaborations planned for the back half, including Ram trucks and Lucky brand.
We expect we will remain to deliver growth in the high single digits for Q3 and mid teens for the year.
Now I'd like to speak to our recent strategic assessment.
As you recall, we started this work several months ago to identify and prioritize the biggest growth opportunities within the portfolio and create an achievable roadmap to deliver consistent best in class shareholder returns in.
In May we brought and BCG to accelerate the process.
We are encouraged by what we've learned so far and we plan to unveil our strategic plan at our Investor event.
First time brands, we are conducting a thorough assessment of the role of each brand in the portfolio to determine where to prioritize our investments, including our market and peer analysis to help us identify the largest tam opportunities for key brands in the portfolio that will inform the brand specific strategy work that is now underway.
When we finalize the portfolio work. This will also inform our organizational and external reporting structures to create more clarity and drive optimal results.
Process also includes a reevaluation of which decision rights lie within the center of excellence versus at the brands and business units.
Our first area is ecommerce and we are already piloting this within the Merrell team.
Finally, we have been focused on aligning our cost structure to the evolving business model and portfolio that we're building for the future our company looks much different today than it did in 2019.
Our DTC and digital businesses have accelerated quickly.
Wired and apparel business and our global footprint continues to expand.
As I said earlier, while we focus on global growth through all of the relevant channels. We are also putting a significant emphasis on profitability and cash flow.
The work to streamline the business and organize more efficiently will help us right size, our cost structure and better manage working capital.
This is especially important today as we face more macro uncertainty in the near future.
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, Brendan and thank you all for joining the call. Despite an unexpected slowdown in June shipments and a strengthening U S dollar.
We were pleased to deliver record revenue in the second quarter with solid earnings supported by healthy gross margin.
The well documented buildup of inventory in various retail channels.
Resulted in order postponements and some cancellations for our U S wholesale business late in the quarter.
International markets performed well in Q2.
And helped to mitigate the U S market challenges.
The second quarter revenue performance included a 10% increase for the Michigan group.
At 2% decrease for the Boston Group.
And a 7% contribution from sweaty bodies revenue of $47 million.
Our third party distributor business was especially strong and grew 36% which exceeded our expectations.
Adjusted Q2 gross margin of 43% was slightly better than our internal expectations.
Mostly due to a lower mix of closeout sales.
Adjusted gross margin declined 150 basis points versus last year due to a higher mix of international distributor shipments and higher supply chain costs, partially offset by selling price increases higher royalties and the contribution from sweaty Betty.
Adjusted selling general and administrative expenses of approximately $229 million were up $27 million or 13% compared to last 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.
Excluding sweaty Betty.
SG&A as a percent of revenue improved 180 basis points.
Adjusted operating margin was 11% and exceeded our expectations and guidance for the quarter.
Excluding sweaty Betty adjusted operating margin was 12, 2%.
Reported operating margin of 23, 5% included a $90 million gain on the sale of the champion footwear trade name, which was executed on June 28.
Proceeds from this sale were used to pay down debt.
Adjusted diluted earnings per share for the quarter were <unk> 66, compared.
Compared to <unk> 67 in the prior year.
We reported diluted earnings per share of $1 53.
Included the benefit of the champion trade names sale.
Turning to the balance sheet.
And in Q2 inventory of approximately $640 million grew 93%.
While factory capacity and delivery performance have improved logistics lead times and volatility are still impacting our business.
Excluding sweaty Betty organic inventory increased approximately $265 million or 80% compared to last year when inventory levels were abnormally low.
One third of this increase or $95 million.
It relates specifically to much higher in transit inventory.
Organic inventory versus 2019 is up 47%.
Our brands are prioritizing inventory investment on core and carryover styles.
Leaving us with a healthy position moving forward.
Approximately 85% of current inventory is expected to be sold through primary wholesale and digital channels.
Later, this year or during the 2023 selling seasons.
We plan to liquidate the remaining excess inventory pragmatically over the next several months.
I will now turn to our full year outlook for fiscal 2022.
We remain very positive about the growth potential of our brands and are pleased with a strong start in the first half of the year.
As we revisit our guidance for <unk>.
We are taking a prudent view of the business.
Due to the evolving macro headwinds that have recently emerged.
The following factors have impacted our outlook.
Well, our global order book is up nicely compared to last year.
We are now assuming a higher level of cancellations and postponements for the rest of the year, especially.
Especially in our U S wholesale business, which is more exposed to elevated retail inventory.
We now expect that global inflationary trends may further impact consumer spending and we anticipate a higher level of promotional activity in most markets.
Especially given higher inventory levels.
We expect the consumer shift back to brick and mortar stores to continue.
Suppressing full year ecommerce growth.
Finally, a stronger U S. Dollar is expected to negatively impact reported revenue growth and profit in the second half.
Despite these emerging challenges.
We still expect to deliver record organic revenue for the full year.
With sequential growth acceleration in the second half.
Some of our brands anniversary easier comparisons versus last year.
We now expect the following fiscal 2022 results based on our revised outlook.
Full year revenue in the range of $2 $74 billion to $2 $79 billion.
Representing approximately 14% to 16% reported growth.
17% to 19% constant currency growth.
And 10% to 12% organic growth excluding sweaty Betty.
Our granite organic growth versus 2019 is expected to be 11% to 13%.
Foreign currency is.
It is expected to have a $72 million negative impact on full year reported revenue.
Which is approximately $42 million higher than originally planned.
Our largest brands Merrell Saucony, Sperry Wolverine and sweaty Betty are expected to contribute approximately 75%.
Of our global revenue in 2022.
We expect our direct to consumer business to approach, 25% of global revenue in our international markets.
To be over 35% of global revenue for the full year.
Full year adjusted diluted earnings per share in the range of $2 10.
To $2 20.
Including an unfavorable FX impact of <unk> 11 versus last year.
Full year adjusted gross margin of approximately 42, 5%.
Down from our prior guidance of 43% and reflecting higher promotional costs and a higher mix of revenue coming from our lower margin international distributor business.
Full year adjusted operating margin of approximately nine 5%.
Reflecting the gross margin declined just discussed.
And finally, a full year effective tax rate of 21, 5%.
Net interest and other expenses of approximately $45 million.
And an average share count of $80 million.
Our third quarter revenue is projected in the range of $710 million to $725 million.
Our growth of approximately 12% to 14%.
Gross margin is expected to be approximately 41, 5% and adjusted earnings per share are expected to be in the range of 56 to 59.
Including operating margin of approximately nine 5%.
Before I pass the call back to Brendan for closing comments.
I wanted to elaborate further on some of the strategy, where we are undertaking.
This effort has proven to be very timely for the company.
As it has helped to more clearly define our priorities.
While simultaneously, putting more focus on operational efficiency.
As a result.
We are currently assessing how best to address underperforming business units.
Launching an important operational efficiency initiative this month.
We expect the current environment will remain challenging for months to come.
And we are fortunate to have initiated this work to help protect profit and cash flow during a time of uncertainty.
We expect the current phase of the corporate strategy work will be completed this quarter.
This will allow us to provide more clarity on our organizational and reporting structure during our next earnings call.
We are still planning to host an investor event in the near future and we will provide specific timing later this year.
In closing I'd like to thank our global team for their outstanding execution.
In an incredibly volatile time and I'll now turn the call back over to Brendan.
Thank you, Mike and with that operator, we'll open it up to questions.
Thank you Phil.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
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All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
One moment, please while we poll for questions.
Our first question is from the line of <unk> <unk> from Piper Sandler. Please go ahead.
Hi, Good morning. Thanks for taking my question can you just comment on any differences between apparel and footwear trends in there.
Analytic space and then on the and thank you so anybody on the P&L. Obviously, there is a tailwind to your gross margin, but a headwind to SG&A, but is there any timeline, where we should think about seeing some of that and David lasting impact decline as the business guys. Thank you.
Yeah. Thanks, Amy I'll take the first part and then let Mike take the second part I mean, I think more broadly.
We're seeing a slowdown in apparel we're.
We are seeing in our sweaty Betty brand Thats really the only.
Place, we have big exposure in apparel, but just as consumer sentiment is changing momentarily.
Clearly that's impacting apparel in the casual and leisure space versus the more dress up space.
On the footwear side, we continue to see strong consumer sentiment for the categories, we're in particularly in outdoor and work.
So we feel pretty well positioned there Mike you sure on the SG&A question.
As you know 85% of the sweaty Betty business as a direct to consumer.
Model and so higher just by its nature carries a higher SG&A.
Burton.
Obviously, we're seeing an investment phase for the brand right now as we continue to invest in future growth in new markets for for Sweaty Betty.
But as far as the operating margin performance in the future, especially as we start to think about crystallizing. Some of the synergies we have for the business next year, we'd expect a sweaty Betty to contribute at a higher level from a both a profit and cash flow standpoint as early as next year.
Great. Thank you.
Yes.
Thank you.
Our next question is from the line of Jim Duffy from Stifel. Please go ahead.
Thank you good morning, Thanks for taking my questions and let me start by recognizing the issuance of the progress sustainability initiatives with word characterize.
I wanted to ask Mike.
Outlook for the second half of the year isn't a terribly large redemption relative what was implied.
In the prior guidance.
Just explain your call today, and the ability to deliver to us.
Expectations for channel inventory flows.
Yeah.
Hello.
Channel partners may be able to manage through that without losing.
Yeah, it's important too.
Clarify Jim the shift that we're seeing in the business from.
From a channel mix standpoint.
So you'd be correct I think our outlook on the on the wholesale side of the business and in the U S market in particular.
Also including our stores and our E com businesses, which were.
We're going to continue to see some challenges there as well.
So we brought down our outlook internally on that side of the business to reflect some of the uncertainty that youre talking about and the current trends, especially the trends has sort of accelerated in June .
Our order book is still very very healthy relative to those channels, but we've taken a more aggressive position on the potential cancellation or postponement rates that we could expect in the back half of the year we haven't.
Seen that level of cancellation, yet, but I would say, we're just being cautious in that way and and predicting that in our outlook offsetting that though is just a really strong.
Performance and outlook for our international distributor business, which.
We're now seeing some upside to our original plan.
<unk> goods as much better. These are these are distributor partners that have brick and mortar stores in their foot traffic has been has been solid so.
The reason you are not seeing as much of a maybe downside on the revenue is really related to that shift, but certainly appreciate the concerns and the realities of the U S and European wholesale markets right now.
So our channel as far as channel inventory real quick again, working through that I think I'm trying to be very pragmatic with our approach here.
Retailers for our core brands, especially our bigger brands in outdoor and work are performing.
Are performing okay in terms of wholesale sell throughs at retail sell throughs.
And again some of that is impacting our consideration of what the sell in will be in the back half of the year, but I think a practical approach to sort of how we see the goods flowing and the inventory sort of working through over the next three to four quarters.
Okay, two more quick ones, if I may 1st we're messaging.
U S trends versus a small fleet.
Sure.
Others in the marketplace I'm curious just why it is you feel international businesses are holding up better.
Yes.
Perhaps that proves gradual as the economy plays forward, particularly in Western Europe .
Some of the challenges from Ukraine conflict and then Mike.
Can you give us a view on cash flow for the year.
Hey, Jim just to clarify because its little hard to hear it sounds like youre on a boat.
Did you say are international forecasting is different or similar to what similar.
Similar yeah, yeah. So.
Just got back from about three weeks with our European team seeing quite a bit of.
Of the region and it was really energizing to see.
Outside of London, I would say just how powerful the consumer was shopping brick and mortar and one of the things you I know you know, but to remember is a lot of our international business is done through three <unk>, where they have their own direct to consumer business. They have their own brick and mortar stores. So I think what we're seeing is.
Both of them needing to get.
Get back into inventory position to fill their stores and then seeing the consumer traffic that.
We don't get the benefit of and our DTC business here in the U S. Because we don't have stores, but with our partners overseas. We do so as Mike said, we have pretty good visibility into that in both passes the test from what I saw last month and from what our forecasts are and working with our partners.
And then on the cash flow question, Jim we're expecting to see inventories will be up year over year, as we had predicted and slightly higher than our original plan here.
By the end of the year I would say in the $250 million range.
But with some other actions that we've been able to take I think.
Cash flow operating cash flow for the full year is expected to be around $100 million.
Plus or minus so I think managing the balance sheet well in this environment still a lot of liquidity in the business and expect to be able to drive our debt leverage down a little bit.
Now and the end of the year based on some of that activity. So.
That's kind of the current outlook for cash flow and trends there.
Thank you guys. Thank.
Thank you Tim.
Thank you.
Our next question is from the line of Lauren <unk> from BNP Paribas. Please go ahead.
Oh good morning, Thanks, very much for taking my question Brent.
Brendan.
I think you've mentioned there is elevated inventories with your U S. Wholesale customers can you, maybe unpack that a little bit more in terms of.
What channel are you seeing this and if it's really the mass channel family channel Sporting goods channel or is it just really agile.
Nation of all channels.
Yeah. Good morning, well I think we saw it in their last quarter results I mean, everybody. It seemed like plus 40 was the new flat in terms of inventory levels and I would say that was broad based and then you know in the mass retailers in the sporting good channels on the department stores. So.
Thats the empirical data we have and then the anecdotal data. We have is just what we're seeing throughout but throughout the quarter.
Of people, just not having space to process. The merchandize. So one of the things our teams got very.
Nimble on an agile on I was very proud of them was figure out ways to work around the warehouse themselves and.
More than a few of our partners said, if you can bypass our warehouse and ship directly to our stores.
We can take fresh goods, which we need and want and so while we're not set up to do that on the fly we found workarounds and we're able to get some goods.
To their to their stores that way as well as leaning more on dropship. So it'll be a lot of those retailers reported over the next few weeks around so I. My expectation is there inventory levels will continue to be elevated.
And we're going to kind of have to work through this together I think you also heard some of the big box retailers talk about it's not just having too much inventory, it's having the wrong inventory and just particularly in the home goods area where.
That.
Clogs up the warehouse so I think it is.
It's a lot of different things that we've been very proactive on you know we've had for the last 18 months now withstanding all hands Thursday meeting, where we talk about the different supply chain issues and so I think that's given us a leg up on finding ways to work with our partners to get some forget the merchandize moving.
That's very helpful. Thank you Brendan and then Mike just said.
Multi part question here I'm, sorry, but first on the third quarter gross margin.
I think it's down 300 basis points implied or guidance for how much of that is driven by promos.
Two.
In their presentation Sweaty Betty was down 21%, maybe can you give us that number for <unk> on a constant currency basis.
Three.
I think last call you said.
Look we might see additional disclosures for the <unk> press release.
I don't know if that's maybe we should look for the 10-Q for that for additional data points on that great. Yeah. Let me, let me discuss the Q3 gross margin view here.
I would say it turn parsing it out in terms of some of the headwinds certainly a stronger promotional cadence we're seeing it in our direct to consumer business, which frankly, we're seeing some nice growth in July on our own e-commerce sites relative to the previous quarters up low.
Low teens, so far in the quarter, but a lot of that's being driven by some promotional activity and just trying to be more aggressive to drive traffic there.
So I would say a good portion of the of the gross margin headwind in Q3 is that.
But a more healthy reason frankly is again the strong demand that we're seeing in our in our international distributor business, which is going to be up significantly in the quarter. It carries a lower margin, but I think the growth there and the demand there is a really strong signal.
Last year as you know at this point in time, we had.
Kind of an inability to service that business given some of the supply chain challenges that we had in and those have improved. So we are in a position to be able to kind of really drive our strong growth there on the distributor business, but that comes at a lower margin. So those are the really really the two factors for Q3 as far as the disclosures are concerned.
I would say that.
We are still working through and we mentioned this in our remarks still working through the corporate strategy work, we expect to have that.
As of the work done this this quarter.
And we would expect to address some additional disclosures and potentially some segment changes and our third quarter.
Report.
We are adding some additional disclosure on into the Investor relations deck, that's posted on our site that Youll see this morning.
With some added disclosures around our bigger brands, so that should be incremental and helpful. But that's the status. There last question was on sweaty Betty constant currency growth for Q2 was down about 11% on a constant currency basis.
Very helpful. Thank you very much.
Thank you.
Next question comes from the line of Jay sole from UBS. Please go ahead.
Great.
My question.
We're good.
June shipments.
Okay.
Okay.
Totally.
J J, we're going to interrupt you sorry, we can't hear you on this side.
Can you hear me.
Pretty broken up.
I wanted to try to call callback, NGA and get a better connection and we'll move to the next call and then we'll come back to you.
Okay.
Okay.
Thank you.
Our next question comes from the line of Jonathan Komp from Baird. Please go ahead.
Yes, hi, Thank you I appreciate all the color on the inventory if I could maybe just follow up on that the actions that you're planning to clear some of the excess could you just be a little more specific in terms of what what Youre planning and then.
How are you thinking about risk that higher levels in the channel carryover into 'twenty two 'twenty three.
There is more of a lasting impact on your sales and margin.
Yes.
John So just quickly from my end being fairly new the shoe industry. One of the things I noticed right away was the difference between shoes and apparel was just.
How much better shoes age and how much longer how much more carryover franchises there are.
Inherent in our business. So I think that's a big piece as we look at.
The composition of our inventory and the elevated levels is recognizing that.
The majority of this the great majority of this will have a home and it's just a matter of time and so we don't want to panic and <unk>.
The market with discounted goods that we know over time, we can.
We can sell at a higher price I mean that being said, we do our conscientious of the inventory.
Inventory levels in the physical needs of the business. So.
We're kind of trying to balance that but I think it gives me great comfort knowing that the that there. It's not the same sort of obsolescence concerns that I've had in past businesses and I'll pass it onto Mike just I.
Just for context to John when we look at the mix today, the quality of the inventory.
I would say if 15% of our inventory at any point in time is considered to be either.
End of life or in a closeout position that's pretty typical in fact, it's relatively low it's probably no more normally closer to 20%.
So in that respect I think the quality and health of the inventory kind of holds up well all of the things that Brendan said about.
The ability to kind of.
Carryover. These course core franchises in our bigger brands is really important and.
As you know with the lead times that we have right now frankly coming out of factories and the ability to kind of plan the business even for next year on those core franchises in that core carryover product I think we are.
We're quite comfortable that theres, not going to need to be any kind of dramatic liquidation around the core and so we're going to focus on that 15% to 20% or so of inventory that we can typically need to work through and that's some of that cost of doing so is reflected in this year's guidance.
We will be able to give you more insight into next year. If there's any any hangover of that later in the year, but at this point, we feel really good about the forward coverage or forward coverage right. Now is probably about 40% to 45 days higher than it normally is which isn't necessarily surprising given the supply chain lead times that we're dealing with in this environment. So.
We're very comfortable with the outlook here and the ability for our brands to work through through the inventory.
Okay. That's really helpful. And then my one follow up question on the margin.
Back to <unk>.
95% operating margin would be back to levels that you last saw prior to the way forward initiatives a number of years ago. So I'm just curious.
To help out a little bit in terms of what what you view as temporary this year and then any perspective as you look forward just some of the some of the efforts that are being contemplated and any thoughts on sort of a longer term aspiration.
Sure Yeah, I think it's important you're calling out some really.
Sort of transitory or.
At least acute issues that we're seeing in the short term here related mostly to the supply chain.
When you look at our overhead spend given the mix of the business and our new emphasis on direct to consumer I think.
You'll notice that the overhead and SG&A expense has been managed really well.
Some of the pressures that we're seeing right now you have to do with these incremental costs, whether it's holding goods at the port or extra freight costs or.
Just some of the handling costs that we're dealing within our distribution centers right now as we have excess inventory on hand, so we don't expect those to be long term are sustained.
And to your point about what are kind of interim goals would be obviously, we achieved 12% operating margin pre pandemic and I think that for sure is going to be an R. R.
Kind of future outlook here in the short term and with the work that we're doing alongside the corporate strategy work, we're going to be very focused on expansion of our gross margin and operating margin as we continue to invest in our growth initiatives.
We will be able to provide a little more color on that here in the next call, but I think the outlook as it relates to visibility to that for next year is quite strong in.
The 95%. Unfortunately reflects some of the short term challenges that we're seeing in the business.
Understood Best of luck. Thanks.
Thanks.
Thank you.
Ladies and gentlemen.
Cause you to really stick to one question and one follow up question.
Our next.
Comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.
Good morning, everyone.
Do you think about the current environment and the changes on the panel side, what do you see on the consumer side.
Noticing anything is there anything you could see by brand by income level.
Spend by the consumer and their reaction to innovation and newness versus the evergreen product and then just on SG&A.
Jasmine and guidance.
How is marketing spending plan. Thank you.
Yeah. Thanks Dana.
I think obviously a lot of this is happening real time in terms of the way we all as consumers are changing given the macro environments out there and then move to experiential I would say that the thing I would gravitate towards right. Now is just how newness is working and.
We've seen a pretty nice change in our own e-commerce business from where it was trending in.
The first half of the year to the last six weeks being positive and really double digits driven by our bigger brands now some of that promotional activity for sure but a lot of it is just newness and the customers. It's been so long since we've been able to deliver newness and have marketing messages that speak to newness that it's nice to see.
How the customers reacting to that and I think that as we're able to get that.
Of that newness out to our retail partners will start to see some of that as well I think in terms of how the consumers shifting her behavior I think thats going to continue to be a moving target whether it has to do with gas prices coming up and down and just some of the changes towards experiential.
Spending, but again I continue to say, we are really well placed with our brands to even as people start to travel again are our traveling again, taking their barrels or Theyre saucony is.
With them to continue their newfound love of the outdoor running so.
Let Mike comment on ESG.
SG&A, Yes, I think we continue to invest nicely in marketing in.
At an elevated level. This year, we've committed to that and we're still seeing our our marketing as a percent of revenue at or around eight.
8% across the business and that's up as you know Dana that's up nicely from previous years.
The way that where we are.
<unk> for that from month to month has a lot to do with the effectiveness of the performance marketing and the cost of performance marketing and we're certainly moving up the funnel as much as we can to try to get more spend around brand awareness and brand related marketing activities, which have shown some success in terms of the brand <unk>.
And that we're doing internally, but obviously thats going to start to kick in more heavily in the back half of the year now that we have some of the new product that Brendan talked about so.
I think on course, there to continue to support our brands and invest behind the.
Brand initiatives that we expect to have success with.
One last thing on pricing overall, how you're pricing your product had you taken price increases.
Finally, and how it's changed how you're thinking about pricing.
Yeah, I mean, we certainly did that.
Back half of last year, the middle of last year start to take price increases strategically not across the board really looking with our merchandising eye on what we thought the product should.
Should retail for us.
Unfortunately in the first half of the year, we didn't get much <unk>.
Credit for that because the product was so late.
On where we have taken the price changes so that's embedded in the back half of the year, we'll start to see some of that is this newness comes in and we're continuing to look at it as we go into 2023 and again looking at it from a merchant point of view on what do we think this the <unk>.
Customer will pay for this what is the what is the competition pricing at now it's gotten a little bit.
Fuzzy just with the promotional environment. That's out there you know macro so on one hand, we're taking price changes on the other hand on some product there's a lot of discounting out there so I guess.
It's good we were able to make those price changes it provides a little bit more.
Cushion on some of these promotions that are just going to be I think rapid throughout the back half of the year and you.
You and I have talked a lot about this.
We're seeing the business get back to regular price during the pandemic, but also anticipating that that wasn't going to last very long and it's just kind of has happened a lot quicker than we all.
All in all all hoped.
Thanks Dana.
Thank you.
Next question comes from the line of Susan Anderson from B Riley. Please go ahead.
Hi, it's Alex Wang on for Susan Thanks for taking my question.
Just digging into SG&A I think your updated guidance implies SG&A cost to be a point higher than initially expected I guess can you provide any puts and takes with the increased spending that line. Thanks.
Sure, Yes, most of the most of the increase there in the back half of the year is related to.
Some of these incremental distribution costs, and holding and handling cost that I referred to before.
As we as we work through the elevated inventories those costs become a little bit more acute.
But we continue to lean in and support our marketing initiatives as I mentioned before so.
That remains a priority, but we did have some incremental costs that werent originally planned around.
Some of those distribution costs.
Okay.
Thank you the next question operator.
Thank you.
Our next question comes from the line of Steve Marotta from CL King and Associates. Please go ahead.
Good morning, Brendan Mike and Alex Mike could you talk a little bit about your ability to cancel orders overseas and also if you could put a little bit of a finer point on you mentioned I believe in the prepared comments.
Some carryover inventory into fiscal 'twenty three is that expected to be.
So that more aggressive promotions than in the back half of this year or is it considered carryover inventory, which would be simply more normalized margins in the first half of 'twenty three thanks sure.
Yeah and on the cancellations I mean, obviously, we watch we watch the trends in the business every week Brendan talked about our weekly meetings with the entire leadership team on this important topic of just managing the supply chain and inventory flow et cetera. So we've been in we've been in the process of making those adjustments.
I think in a very good position, where we feel we are not in need of noncore inventory, we've canceled and will continue to be able to either cancel or postpone inventory flow as needed as we went through.
The rest of this year and into the early part of next year as far as the carryover is are concerned again about 85% of our current inventory would be considered in the core carryover category right now.
And by definition for me that means that that's going to be sold.
At or near normal selling prices, we will I'm sure have moments, where we're off map and doing some things to to move some excess inventory, but for the most part we would expect those to be sold at normal prices and because we're already we've packed and held a lot of spring merchandise from last year for instance, Steve that will sell in spring of 'twenty three.
So just putting ourselves in good position on core <unk>.
A lot of pressure off of the incremental costs, we have had to incur this year around expediting the freight and doing some of those other things the inventory position, we have right now allow us to prevent that next year.
And that will continue to watch the marketplace I can't predict that but I think overall.
We have a we have an opportunity to see some benefit from having a strong inventory carrying into next year and just to top that off.
Alluded to this before just the difference between apparel and footwear I think the Best example is in our Merrill.
Moab, but we're talking about the Moab, three which we're launching now all that's been around for 20 years and this is only our third iteration of it. So it just speaks to the long life that these franchise shoes have and generally they are in core colors that that lasts as well. So I think that gives us real comfort that the majority of this inventory.
Will.
We will have a life beyond this this year.
Thank you.
Our next question is from the line of Jay sole from UBS. Please go ahead.
Great. Thank you so much.
So my question is just about visibility into the order book for the rest of the year. Obviously, some June shipments sounds like they moved around a little bit but here in August.
What percent of the order book for Q3, and Q4 would you consider at risk and how much sort of is pretty much nothing is guaranteed but very likely to be delivered as expected.
Yes.
I don't think we're going to give exact numbers I'll just give you some anecdotal stuff, though jay might can tap it off I think I think one thing that happened in June is.
Retailers generally in their quarter at the end of July . So I think there was tremendous they're under tremendous pressure to drive their inventory levels down for reasons, we've talked about before so I think so.
Flipped into August we've seen a little bit of movement.
Hopefully thats.
That's positive.
The only other thing I'll tell you is we.
We have.
On an order book that exceeds our forecast that we've given out there and we've given them and we have.
We've taken an aggressive stance on what we think the cancellation will be to get to the forecast and the guidance we've given.
It's not something we see today, but given the current environment. We thought it was prudent to take a much bigger discount than we ever would have in the past recognizing that the worlds.
World's a little bit unstable right now and having said that I mean, the other thing that I think from my vantage point. That's important is the brands are working day daily.
With our key customers to kind of work through this its real time stuff and so I think our the quality of our order book is remains quite high, but we're still being very conservative and I've been very impressed with our leadership team and our sales team just the relationships. They have out there here in the U S and now that I was traveling spent the month in Europe seeing it in Europe as well.
Just.
The amount of travel they do the amount of onsite visits they do that I feel really good that that's a competitive advantage for us in terms of the relationships, we have with our wholesale partners.
Thank you.
Our next question comes from the line of Sam Poser from Williams trading. Please go ahead.
Good morning. Thank you for taking my questions I have three number one Mike can you just give us what the wholesale growth or sales were.
Or by.
Merchandise group outdoor Boston and other.
Yes.
Breaking down the.
The group's bottomed out in the cube.
No just wholesale wholesale wholesale and direct to consumer.
Our U S wholesale business.
Our tour, our global wholesale business was up in the quarter.
About 9%.
And our D to C business given the.
Yeah.
We can give that to you later later Sam.
We'll provide some detail on a follow up but.
We don't typically provide all that information in the call.
Alright, so just two more questions number one the retailers are they are they taking like well late deliveries and the stuff that was running late because of the supply chain stuff. You said those were getting pushed or canceled is that still going on or they appear.
With product are they being more on the big guys, the big retailers being more.
Less receptive taking orders and then there is that yes for sure I mean, they're there they need to get out of inventory and so theyre being stricter about looking for ways to do that if it's product. They want if it's newness there being much more receptive if its not theyre looking for ways ways too.
To alleviate their bottleneck they have in their warehouse, so I mean I.
I would say that's a fair comment.
Thanks, and then lastly, you talked about.
How comfortable you are with the core carryover and you just talked about the Moab.
And it's new colors, but how but then you also said newness is selling great. So how much of these core well.
Or what sort of what portion of these core platforms. These core like the moab or Sperry boat shoe and so on are there really new updates there that are gonna generated versus core carryover.
Just based on the way you talked about newness is selling but if you have core.
Will that necessarily do as well as you anticipate it will yes.
The Moab and olive and Brown are always going to be the foundation of what we sell but you need the the new colors to provide some interest in and generate excitement I mean, you know that as well as I do and then we do have some new franchise launches throughout our.
Different.
Brands that are just that many that were supposed to come in earlier this year, even last year, they're just coming in now so their life is just starting so theres no concern about any any obsolescence obsolescence there and then obviously we have cascaded.
Follow up deliveries appropriately so that we can better manage the flow going forward now that factories are up and running I mean, let's not forget this time last year, Vietnam shut down I mean.
As difficult as some of the headwinds are right now at least we have product coming and now we just have to manage it and flow. It. So I think we're in a much better shape now with the amount of inventory, we have and the ability to balance the franchises with with the newness and I would just add one thing Sam I mean, when we talk.
About core inventory, we're also talking about the new versions and the updates as well as new products that are coming into the core assortment. So.
It's not all the older versions that were talking about especially right now and on the last couple of months, we've been able to bring in a lot of the new product for Saucony Merrell.
Sperry are new work branded offerings are starting to kind of hit hip market now so there's enthusiasm about that we're a little bit tempered given the environment, but we talk about 85% of our position today being in core it includes a lot of new stuff. Thanks.
Thanks Sam.
Thank you ladies and gentlemen, we have reached the end of the question and answer session.
And now I would like to turn the conference over to Mr. Brendan Hoffman CEO for closing comments.
Yes. Thank you everyone. We appreciate your participation today and we look forward to updating you in November on our next quarterly call and to provide more information on R. R.
Our analyst event, thanks very much.
Thank you the conference of Wolverine worldwide, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
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