Q3 2022 Wolverine World Wide Inc Earnings 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.

This conference is being recorded.

I would now like to turn the conference over to your host.

Wiseman Vice President of finance for Wolverine worldwide.

You may begin.

Good morning, and welcome to our third quarter 2022 conference call on.

On the call today are Brendan Hoffman, our President and Chief Executive Officer, and Mike started our executive Vice President and Chief Financial Officer.

Earlier. This morning, we issued our earnings press release and announced our financial results for the third quarter 2022.

We also issued a separate press release and filed an 8-K outlining changes to our brand groups and reportable segment, which took effect in the fourth quarter.

References to financial performance in today's call reflect the pre existing structure.

These two press releases are available on many new 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 Allison Malkin at 2036828 to two five.

This morning's earnings 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 foreign exchange rate changes and costs associated with the integration of sweaty Betty.

Prior year non-GAAP disclosures include additional adjustments for debt extinguishment costs and costs associated with the acquisition of the Sweaty Betty brand.

These disclosures were reconciled with attached tables within the body of the release.

We have added a supplemental table on our website under the Investor Relations tab at the webcast and presentations link to show financial results with and without adjustments for abnormal air freight levels in 2021 to facilitate year over year performance comparisons.

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 laws.

As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward looking statement.

These important risk factors are identified in the company's SEC filings.

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.

While we were pleased to deliver third quarter revenue growth of 9%, 12% on a constant currency basis, both revenue and profit came in below our expectations, reflecting ongoing supply chain disruption heightened promotional activity deteriorating macro conditions.

Spite these external headwinds we saw notable strength in our international business and within our portfolio Merrell continued its strong momentum delivering 34% revenue growth, 39% on a constant currency basis.

Minerals performance demonstrates that when we lead the market with product innovation engage our consumers with powerful and relevant market storytelling and have access to keep products in inventory we will win.

We continue to strengthen the foundation of our business through our refined corporate strategy is focused on prioritizing the brand said the highest potential for growth and optimizing the brand to create value through strong profit and cash flow contribution.

As we shared in a separate press release issued this morning last week, our board of Directors approved a new brand group and reportable segment structure aligns with this approach this.

This change is effective immediately includes noodle leadership appointments to guide these groups.

We've also established a profit improvement office to identify and execute initiatives that will unlock margin expansion ensure we are directing resources to areas of the business that are expected to give us a strong ROI and enable the new structure.

I'm excited about these changes as they paved the way for Wolverine to become a stronger company that is more powerfully position.

Mike and I will provide more information on this later in the call.

But first I will share the specific factors led to our Q3 revenue and profit results highlight some current strengths in the business and discuss actions to normalize our inventory position.

Our third quarter sales increased 9% to $691 million, excluding the favorable or unfavorable impact of foreign exchange rates global revenues increased 12%.

Adjusted operating profit decreased 10% to $62 million due mostly to higher promotional sales in our DTC channel as compared to unusually low promotions last year discounts in wholesale due to late deliveries and the impact of unfavorable foreign exchange rates.

I'd like to provide more context around the factors that impacted revenue in the quarter.

First starting with U S wholesale which represents our largest channel and the largest miss versus our outlook for the quarter, our Sperry Keds Sweaty, Betty Wolverine brand and Saucony were heavily impacted by the following key factors.

Logistics and warehouse congestion this starts with our own distribution centers that are currently operating way overcapacity, making it difficult to receive new product and process outbound shipments.

Ongoing congestion within inland transportation networks also remains challenging.

This is our number one operational priority Mike will go into more details regarding our efforts to increase efficiencies.

To improve the flow of our products later in the call.

Many wholesale customers are currently dealing with heavy inventories and warehouse constraints. This resulted in certain shipment delays, causing some elevated cancellations and additional discounting.

Logistics delays and integration timing on sweaty Betty is U S wholesale business limited the brand's ability to service its U S wholesale water.

Barry underperformed, our expectations as logistics and warehouse congestion congestion led to late deliveries and slow the introduction of newness, which was further exasperated by declining trends in the boat shoe category.

And with the unusual warm weather a sluggish start to the boot season, all of which led to shipping delays discounts and order cancellations.

Our global direct to consumer channels, which include sweaty, Betty we leveraged to clear its clear inventory during the quarter, which drove 4% revenue growth, 9% in constant currency in line with our expectations.

However, higher than expected promotions resulted in lower gross margin during the quarter.

Challenging macro conditions and sweaty Betty its home market, the U K, but extra pressure on performance in the quarter.

Keep in mind that at this time last year lead times are extremely long up to 365 days in some cases as we faced factory closures in Vietnam. Among other supply chain disruptions, we like others moved up deliveries, especially in core evergreen product to ensure we had ample supply to meet our backlog, which was at a historic.

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So while we have not navigating the supply chain as seamlessly as we would have liked we have plans in place that should allow us to improve the flow of goods increased the rate of on time deliveries and reduce inventory levels.

These actions include reducing forward purchases with our suppliers, especially in core product that we have in the warehouse and forcefully moving through seasonal product.

Mike will walk you through our inventory actions and expectations for inventory levels during his remarks.

Notwithstanding these challenges the quarter included noteworthy accomplishments.

As I mentioned, the Merrell brand continues to resonate well with customers third quarter revenues exceeded expectations of 39% constant currency growth the.

The Merrell team has done a great job of extending the brand's reach to younger lifestyle consumers with targeted marketing and innovative product launches.

It was encouraging to see product availability improved compared to last year when certain Vietnam factories were closed.

And our international expansion continued with strong results in the quarter International revenue was up 43% on a constant currency basis with strong growth across regions.

Although we are cautious about macro and political instability in several international markets. We continue to see significant international growth potential for our key brands.

So any dot com revenue was up 30% in the quarter, 33% on a constant currency currency basis, reflecting not only an increase in promotional activity.

Consumer response to new products showcased in the quarter.

Overall, we expect the environment to remain challenging which is reflected in our updated guidance. We've already taken many proactive steps to address the situation and position the company for 2023 and beyond.

We remain confident in our ability to elevate our brand and position the company for sustained long term growth. Our go forward brand group structure was a critical step.

This new structure will allow for better collaboration and increased efficiencies across brands, especially those that are innovating in similar product categories targeting similar consumers and trading and similar distribution channels.

The new brand structure will also allow our centers of excellence to operate more efficiently and effectively.

Our new groups will be active consists of merrell saucony sweaty, Betty and Chaco footwear brands will report to Chris Hufnagel and Sweaty Betty will continue to report to me. This.

This group includes brands with the highest future growth potential.

Work led by Tom Kennedy consists of Wolverine Caterpillar High test Bates and Harley Davidson. This.

This group includes brands that will produce stable growth, while contributing profit and cash flow to support our highest growth brands.

Lifestyle led by Catherine cousins consists of Sperry Keds and Hush puppies. This group represents our turnaround brands combined the group delivered positive cash flow, but the brands are not achieving their potential we are evaluating the best go forward options for each brand.

Next we also established a profit improvement office that will be led by a new chief profit improving officer, who report into me.

We are targeting annual gross savings of $150 million I expect a portion of this to be recognized in 2023.

This office is an essential enabler of our new corporate strategy and long term plans for our highest growth brand the.

The benefits benefits harvest will allow us to accelerate the return to our historical peak operating margin of 12% as a sustainable foundation upon which to leverage over time and also invest in the highest growth in ROI initiatives.

We believe each of our brands has potential but our new strategy is focused on simplifying the business prioritizing brand. So the biggest growth opportunities and optimizing brands that can create value through strong profit and cash flow contribution.

The assessment of our portfolio make requires some tough decisions as we address underperforming businesses.

This work is one of our top priorities.

Now I'll move on to discuss the performance of our largest brands.

Merrell delivered a record third quarter with revenue of $199 million up 39% compared to the prior year on a constant currency basis with strong growth across regions channels and categories.

As we look at the assortment we were pleased with the performance of the long delayed Moab, three as well as newer innovative categories like light hike with provider our trail ready hiking sneaker.

Lifestyle offerings, including hydro, Mark and camping and trail running categories continued to be top performers.

Our shift of focus to purpose led brand messaging as well as other community focused ESG efforts helped broaden the brand's reach.

Now I want to highlight a number of differentiating factors that contributed tomorrow's results.

We believe we can leverage our learnings from merrell transfer them to other brands to help them grow awareness and shape their digital marketing efforts.

First M T L Merrill Test lab is our innovation incubator, where all our top products come to life.

We test and refine right on the trail using nature as our guide and elite athletes as our north star to produce our best performing products.

Next we began building a more agile and nimble marketing structure 18 months ago, which included a new in house photo studio and the addition of key creative talent, which are contributing to the brand's global growth.

The agility built into the model has paid dividends, especially as we manage through the volatility in project launches, resulting marketing activation shifts due to supply chain and stability over the past year.

Finally increased DTC distribution.

Over 40% of Merrell U S business is now direct to consumer we have more control over the Merrell brand and how it is positioned when being operated in our own environment.

Earlier this year Merrill piloted the integration of our centralized ecommerce commerce commercial team directly into the brand team to more closely connect marketing product and digital functions to maximize agility and speed.

This has been very successful and we were rolling the structure to our other brands.

The culmination of our efforts led to Merrell being named brand of the year by footwear news and will be recognized that the footwear News achievement Awards gala in one.

Wednesday November 30th in New York City.

Footwear news editors selected Merrell as the brand of the year for leading the way in promoting our more diverse vision of the outdoors through various efforts, including forming a women's centric I can club investing in Big Brothers Big Sisters of America to make the outdoors more assessable to youth and supporting the National Recreation and Park Association to help create more urban green spaces.

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Merrell has been recognized recently with numerous product awards, including its newly introduced Moab, three receiving an innovation and design honorable mentioned from fast company.

Speed Thermo mid waterproof being selected for outsides, best and hiking boots in the 2023 buyers Guy.

MTL Sky fire too and Rogue hiking boots, receiving is full of awards for product excellence and the outdoor industry.

As we look to Q4, we are very excited about the product pipeline and expect merrell to deliver over 20% revenue growth and full year revenue growth in the high teens.

Moving on to Saucony third quarter revenue came in below our expectations at $130 million down 1% compared to last year, but up 4% in constant currency, primarily due to late deliveries caused by congestion in our warehouse and inland transportation network and weakness in the U S wholesale distribution.

We were encouraged to see that consumer reaction and new product launches when we were able to introduce newness was very positive.

To this end, both Tempus and triumph 20 launched in the quarter and had strong sell throughs, reflecting the demand and interest in Saucony, However limited flow of newness pressured revenues.

Our goal with Saucony remains focused on expanding the brands reached everyday active consumers when will your visible to these consumers. We see strong results. We are particularly focused on our own digital channel and those of our partners, especially digital Titans, given the ability to gain share with these everyday customers.

We are also seeing success with our efforts to target a younger lifestyle, driven consumer with Saucony originals business, which continues to perform really well around the world.

<unk> International business was another positive story saucony sales through our China JV more than doubled in the quarter.

And in China, our multichannel strategy is working well, including the addition of 16 new stores during the quarter.

Efforts to drive brand awareness and excitement around the brand in China included sponsorship of the Hood to coast realize that took place in August .

Welcome to the team launched its how speed consumer activation tools at the start and finish lines <unk> 2500 runners and over 100 media outlets.

So how can we sponsored 250 runners, including 15 athletes and one previous Olympic champion as well as social Influencers.

As a result of this activation we saw a significant uptick in the search index for Saucony on Tmall.

So how can these ecommerce third quarter revenue growth of 30% significantly outpaced the portfolio and was fueled by strong sell through in the orphan <unk> and triumph 20 launches.

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 Q4, we expect saucony to deliver over 20% growth.

Moving onto sweaty, Betty third quarter revenue declined, 3%, but increased 13% on a constant currency basis.

Our like for like pro forma basis, <unk> revenue was down 28%, 16% on a constant currency basis. This.

This performance was below our expectations due to logistic delays negatively impacted shipments of U S wholesale orders.

Performance was primarily challenged by tough macro environment in its home market.

UK, where consumer sentiment continues to deteriorate significantly.

Despite near term macro challenges, we are very excited by sweat anybody's long term global expansion potential.

Two weeks ago Sweaty Betty opened its first concept store in London at Battery C power station.

One of the most comfortable new retail developments in the U K.

Power House stores, a perfect physical expression of the brands distinct positioning.

<unk> received a lot of positive publicity and early response from consumers.

In the quarter Sweaty, Betty rolled out a new Pos system across the entire fleet of stores, which is mobile first and a great tech kept that allows for more seamless transaction in stores.

We are exploring ways to leverage this technology in the near term across the other brands in our portfolio.

Looking ahead, we expect sweaty Betty would be pressured by macro challenges in the near term and expect Q4 revenues down high single digits.

Yeah.

Pivoting to the work brands Wolverine's third quarter revenue came in below our expectations at $59 million down 1% compared to the prior year congestion in our Beaumont, California distribution center resulted in some customer order cancellations and a shift in deliveries to Q4 for certain customers.

<unk> third quarter revenues grew 36% on a constant currency basis, driven by strong growth outside of North America.

<unk> also experienced shipping delays in the U S market.

The work category remains a steady source of growth underpinned by current industry trends warehouse footwear is one of the areas. We experienced continued tailwind, particularly from female and Hispanic warehouse workers.

We continue to leverage strong market share of caterpillar and Wolverine, which account for 20% of the work boot market.

All of our boot brands continue to attract younger consumers on digital channels, including Amazon and Zappos.

From a marketing standpoint will remain Wolverine has been very successful with collaborations the brand third collaboration with old Rip Van Winkle Bourbon launched on October 25th and sold out in less than 48 hours, earning 500 million media impressions.

This month, we are launching our third collaboration with rolling celebrating the iconic Golden Globe Awards, all recipients of the gold Glove awards will be sent to pair.

Later this year, we will launch our fourth Metallica scholars collection as well as second Halo collection. Following Q1's limited launch sold out in minutes and produce plus 20% email list growth.

We expect Wolverine's Q4 revenues to grow high single digits, partly driven by a timing shift of some of the shipments into Q4 from Q3 due to logistic issues we cited.

Moving to Sperry Q3 revenue was down 12% as compared to the prior year fell short of our expectations.

Congestion in our distribution centers and delays in the U S. Inland freight network were more pronounced in our Louisville distribution Center, where Sperry resides.

Keds is also in this distribution center and face the same challenges, resulting in a revenue Miss in Q3 versus our internal plan.

Demand trends in the U S boat category in women's sneakers softened in the third quarter compared to earlier in the year.

Retailers are being more cautious on buying into these categories as evidenced by order cancellations, we experienced in Sperry and keds during the quarter their tolerance for accepting late deliveries on these categories is relatively low.

Sperry continues to possess high aided brand awareness at 57% and is seeing a notable increase in search engine interest we will leverage as we work aggressively to improve logistics and warehouse efficiencies. So that we can bring in innovative product stories, including our jaws C cycled and Mark Saad your boat lines and in boots.

We also expect our who what wear warm and wonderful and our Herschel supply company brand offerings to be favorably received by consumers.

Overall, we expect improvement in the U S to take time as Sperry continues to face inconsistent trends in the overall boat shoe category.

That said, it's very continue to make progress on increasing relatively low international penetration.

Third quarter revenue from Sperry International business increased over 250% versus the prior year and we are seeing some green shoots from our efforts to build brand awareness outside the U S.

Looking ahead, we are planning as various Q4 revenues to be down in the mid twenties range given softer start to the boot season, and a more conservative growth expectations and boat and women's sneakers category.

Before I conclude I'd like to point out that we remain committed to supporting our communities protecting our planet pairing our team, creating a diverse workforce and managing responsible sourcing and supply chain operations.

I am very pleased with the progress we have made and invite you to read through our global impact report published in August which can be found on our corporate responsibility section of our website.

In conclusion, while the global macro environment inventory challenges are expected to detract from our performance in the near term, we're more confident than ever in the future of our brand.

We are actively working on improving our inventory positions across our brands to ensure we return to more normal levels as early as possible in 2023.

Additionally, our review of the brand portfolio improvements and planning across the business enhancement statistic technology and Eni in ESG initiatives are embedded in the business as continued processes.

Today, we shared with you the re segmentation of our brand leadership changes and the profit improvement office, we look forward to sharing more details with you at our Investor day sometime in the first half of 2023.

We will emerge from current challenging market conditions as a stronger more efficient simpler company with a portfolio of brands ready to service our customers around the world.

With that I will turn it over to Mike to discuss our financial results.

Thanks, Brendan and thank you all for joining the call today.

Brand and provided a thorough overview of our Q3 results and I will add some additional insight. However, I will focus most of my comments on actions to normalize our inventory position our outlook for the fourth quarter and margin opportunities from the newly formed profit improvement office.

The third quarter revenue performance included a 20% increase for the Michigan group and a four 3% increase for the Boston Group.

And at three 2% decrease for Sweaty Betty.

In this morning's press release, we provided pro forma information for the quarter to show what the results for our new reportable segments would've been including historical reference for 2021 and 2020.

For Q4, we will be reporting results under the new structure.

Adjusted Q3 gross margin of 43% was below our outlook, mostly due to higher promotions in our DTC channels and lower than expected wholesale revenue for Sperry Keds, Sweaty, Betty and Wolverine brand.

We took measures in the quarter to both seasonal and end of life inventory.

Particularly through our DTC channels.

Our international distributor sales were a larger percentage of our overall mix in the quarter compared to last year.

Adjusted selling general and administrative expenses of $216 $4 million were up $8 $7 million or four 2% compared to the prior year, including one additional.

Additional month of Sweaty Betty expenses, this year and higher marketing spend for Merrell and saucony.

Adjusted operating margin was 9%.

And below our outlook for the quarter driven mostly by the gross margin shortfall previously noted.

Adjusted and reported diluted earnings per share for the quarter were 48 cents.

And 56 on a constant currency basis.

This compares to 56 cents in the prior year.

Now, let me provide some insight regarding our inventory.

Third quarter inventory of $881 million grew 114%.

Compared to unusually low levels last year and represents our peak level for 2022.

Higher logistics handling and other product costs.

At present, approximately 15% of the increase.

In transit inventory of $281 million was up from $57 million last year.

This heavy in transit position was caused by inland logistics congestion and limited capacity in our distribution centers.

At this time last year we.

We faced significant manufacturing challenges, including the shutdown of key factories in south Vietnam, the heavily impacted our merrell and Saucony brand.

The volatile sourcing environment resulted in an extremely long lead times for over one year.

At a time when we saw very strong demand for most brand supported by and historically high order book for our wholesale businesses.

In the fourth quarter of 2021, we committed to invest in core inventory for our biggest brand as a way to mitigate the long lead times and ongoing supply chain volatility.

During the first half of this year, we saw manufacturing lead times stabilize well logistics lead times lengthened due to vessel capacity port congestion and inland trade challenges.

These logistics issues combined with congestion at our own distribution centers have hampered our ability to receive new product, resulting in delayed shipments and increased order cancellations.

Since late June we have seen demand moderate for our brands, especially in our U S. Wholesale business. This is partially due to the logistics delays just mentioned, but also to a more difficult retail environment and backlog of inventory for certain wholesale customers, especially in North America.

All of these factors contributed to the Q3 inventory position.

The quality of inventory remains high with over 80% representing core and carryover styles that will be carried into 2023.

Importantly, nearly 60% of our own inventory is for Merrell, Saucony, Sweaty, Betty and Wolverine brand.

We have reset monthly inventory targets with the goal of normalizing inventory by Q3 of 2023.

We expect year end 2022 inventory of approximately $840 million $40 million improvement from the end of Q3.

Yeah.

Our key actions to reduce inventory include the following.

We've identified approximately $125 million of end of life inventory to be liquidated through our DTC channels and key partner relationships.

This action will negatively impact our gross margin in the near term, especially in the fourth quarter.

That will improve the operations of our distribution centers and improve our ability to receive new product for spring 2023.

Now the logistics lead times have shortened we are working with our supply chain partners to re flow goods over the next few months.

This action will allow us to reduce the level of in transit inventory and reduce gridlock.

In addition, we've established alternate processes to circumvent the logistics congestion to ensure that our key spring product is delivered on time for our customers.

Because of the high quality of core inventory, we are carrying into 2023.

We are comfortable reducing our 2023 production levels significantly.

Currently our pipeline of in transit and on order inventory is down over 35%.

We have also reduced our forward coverage targets for certain brands with lower growth potential.

We are implementing a new integrated inventory planning process that is designed to allow us to be more nimble and responsive to changes in demand or future supply chain disruption.

This new process includes people and tools that will improve our visibility and accountability.

We are confident in our ability to manage the current inventory situation.

We have an experienced supply chain team and our brand leaders are focused on this as a key priority brand.

And I will continue to prioritize this work and expect to see continuous improvement over the coming months.

Now I will turn to net debt and liquidity.

We ended the quarter with net debt of $1.35 billion and liquidity of $400 million.

Our bank defined leverage ratio was three four times.

This leverage position is the peak for this fiscal year and relates mostly to the increase in inventory in the quarter.

In the first month of the fourth quarter net debt and liquidity have improved by approximately $100 million.

We expect to generate $250 million to $300 million of operating free cash flow in the fourth quarter.

Our bank defined leverage ratio down closer to three times.

Now, let me cover our Q4 outlook and our full year outlook.

Our revenue outlook of $650 million to $675 million represents growth of approximately 4% at the midpoint of the range.

And approximately 9% in constant currency.

This performance includes over 20% growth for Merrell and approximately 20% growth for our international business.

We now expect fourth quarter, adjusted gross margin of approximately 38% compared to 42% last year.

The decline reflects the aggressive inventory reduction plan and overall higher promotional environment.

Higher logistics and handling costs carried in our on hand inventory.

And foreign currency.

Adjusted selling general and administrative expenses are expected to be approximately 37% of sales in the fourth quarter.

This is higher than Q3 of 2022 because of the higher mix of Q4, <unk> revenue, including Sweaty Betty.

Adjusted diluted earnings per share is expected to be in the range of a loss of 15.

To a loss of.

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For the full year, we now expect revenue of $2 $67 billion to $2 $6 $95 billion.

Approximately 14% constant currency growth at the midpoint of the range.

We now expect adjusted diluted earnings per share of $1 41 to $1 51.

I will now add some details regarding our profit improvement office.

This new office will provide the leadership structure and rigor to identify and harvest savings and margin for the company.

The <unk> will be responsible for profit improvement initiatives and will report to Brendan.

Our internal goal is to identify $150 million in profit improvement initiatives.

With a goal of recognizing at least $65 million of this benefit in 2023.

We expect the office to unlock savings and efficiency opportunities in the following areas.

Supply chain costs.

This represents about 65% of the company's cost structure.

We believe the simplification of the business.

Prioritization of our biggest brand and.

And deeper focus on product costs will yield significant savings.

Our operations team has engaged Alex partners to support our cost savings project related to raw material procurement.

Which is expected to yield savings for <unk> 2023.

As we streamline our factory and supply base. We are also negotiating for better cost and on time performance, which will benefit 2023.

S SKU management.

Our focus will be placed here, we expect this will directly benefit our inventory management and warehouse operations.

Reducing product development and sample costs.

There will also be more emphasis on allocating new skus to our growth brand.

Portfolio assessment.

The <unk> will support our efforts to address the underperforming segments of our business.

This will include organizational and cost savings initiatives that best align with the company's go forward corporate strategy.

Each brand now has a clear role to play in the portfolio. In this context will help us to make more effect effective resource and investment decisions for the future.

Indirect costs.

Outside of the supply chain, we are identifying certain cost areas.

Be better leveraged across the various business units.

We believe our ability to aggregate spend and negotiate through a central procurement process should provide cost savings improved improved accountability and higher quality vendors.

Another key element of the new performance improvement office is the ability to maintain the identified savings inefficiencies into the future.

We plan for the performance improvement office to be a permanent part of our business and to be very visible in the organization.

Brendan and I believe that this added level of accountability will be fundamental to accelerate and embed the savings we realize.

We are also excited about the work that is already underway and the early successes we are seeing.

In closing I'd.

I'd like to thank our global team for their commitment and execution during an incredibly volatile time.

And I'll now turn the call back over to the operator.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue.

All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

In the interest of time, we ask that you each keep to one question and one follow up thank you.

Our first question comes from the line of Jim Duffy from Stifel. Please proceed with your question.

Well. Thank you good morning, guys a lot to ask about here I'll get things started.

I wanted to start by talking about the advantages of the realignment of the segments and some of the early initiatives of the profit improvement office first on the profit improvement office.

Have you stopped and additional executive.

Or is that something that falls under your responsibility Mike.

We're going to it's Brendan <unk> Jim.

We're in the process of identifying or looking outside for a chief profit improvement officer that will report directly to me.

Mike will obviously be very involved but.

That's the way we're going to structure. This so the whole organization knows how important this is and this person has direct pipeline.

Okay and thanks for mentioning.

Some of the areas of focus like the SKU management portfolio management and direct costs and so forth.

You also mentioned potential for some hard decisions on the brands. When do you expect to declare that you have the brand restaurant roster, where you want it to be in.

You have the team on the field that you want to play the game with.

I think it's an ongoing process now that we've established a new segments and put the leaders in place and we.

We've identified which brands or our growth brands, which brands of our fund your brands on which brands are a turnaround brands and so through that lens.

We will make decisions that helped.

Help us achieve our objectives going forward.

Okay.

Very helpful. Maybe I'll leave it at that and let others ask questions on the fundamentals.

Thanks, Jim.

Thank you. Our next question comes from the line of Amit <unk> with Piper Sandler. Please proceed with your question.

Hey, guys. Thanks for taking my question and I have two the first one is on your inventory levels are obviously higher than you would like and I understand about 80% of that can be carried over into next year. And then you were able to reduce some of it is foreign orders, but how old is impact newness across the brands and then how are you thinking of balance and working through the current inventory position.

Balancing that with pairing product innovation.

Well I think it affects newness in the sense that we know we needed to get more focused and prioritized, our SKU management and use newness as a weapon to that excitement and provide energy stories for our brands and our marketing, but I think we got.

This will force us to be more disciplined I think it will actually help our.

Servicing the customer because we will be more focused on core which is the lion's share of what with our customers looking for from us.

<unk>.

I think at times over the last couple of years, we've neglected.

Expanding our core at the expense of trying to get newness and enter into new categories that maybe the customer isn't looking for us from I think in the in the short term in terms of the inventory levels as.

As you said, 80% of it is carryover and we won't have to produce a moab for a year, but the real challenge for us and why we're getting so aggressive in liquidating.

The 20% that's not carryover is just the grid lock it's caused in our in our warehouses and just how much that's impacting our ability to service our customers, particularly through our wholesale channel. So that's that's the main focus there as opposed to perhaps other categories, where it's more heavily fat.

Italy fashion and you have a big obsolescence concerns.

Got it and then secondly, we're talking to are being down slightly I think so.

Most of that was due to order cancellations at U S. Wholesale a lot due to that congestion in Pcs. So I guess what are you. What are you seeing in terms of different wholesale partner behavior or are there certain channels I mean, especially brand family channel. We are seeing significant order cancellations and then how do you feel about the underlying demand of this Atkins brand.

Yeah, I mean, I think it's fairly broad based.

We're seeing the challenges in terms of keeping orders moving I think most retailers are we not all have come off their forecasts over the last 12 months and have some of their own inventory challenges certainly some categories are doing better than others, but.

Socket Saucony is in a very competitive space.

Right now given the.

Self inflicted wounds that we have in some of the grid lock combined with the macro challenges.

Our wholesale partners are great partners, but they're just a very low tolerance for.

Or any sort of delays or.

Missteps and they're either looking for really large discounts to still take the orders are just just just cancellations in general we feel good about the growth we have in saucony for this quarter as some of the newness.

Comes in we also I'm.

I'm encouraged by the performance of Saucony Dot Com in Q3, which was up like 30%.

Some of that was promotion, but some of that was just.

There, we have the ability to control the newness in the flow.

And showcase it to the customers I think that's one of the other things that in this current moment, where a little disadvantaged stop out as our DTC penetration is lower than most of our peers, because we don't have a store base like others do so.

Overly reliant on the wholesalers and at this moment in time, that's a little more challenging to get the goods moving I would just add one thing I'd just brand health two outside of that.

The core U S wholesale distribution that we just talked about the international business is quite strong for saucony has been for quite some time.

We continue to see strength in the lifestyle originals business, which is mostly.

In Italy, Europe based business for us our growth in Asia Pac and some of the other regions that Brendan already talked about so.

Fundamentally a nice recovery in the fourth quarter for Saucony in terms of growth and continue.

Continued strength in the international markets, which is about 40 over 40% of the total revenue for the brand right. Now. So there are some there are some solid positive there underpinning the saucony business.

Got it thank you.

Thanks Avi.

Thank you. Our next question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Yeah, Hi, good morning. Thank you just a couple of margin related question.

First gross margin.

The second half it looks like Youre guiding.

Maybe about 80 basis points below the second half of 2019 I'm just wondering as you look at some sort of a baseline how much of that might be temporary versus sort of a multiple decline going forward.

And my comments on SG&A, I think theres still implying a pretty big uptick.

Uptick third quarter to fourth quarter in terms of the dollars.

I'll quickly what do you expect to be able to impact that and.

'twenty 'twenty three are there scenarios, where SG&A dollars will be down year over year.

Yes, let me start with the margin comparison to 2019 I think for all the reasons that we talked about.

The big drivers for us relate to.

The much more aggressive on the promotions certainly through our direct channels.

Focusing on trying to accelerate the reduction of inventory is.

Yes.

Quickly and rationally as we can.

It's going to have a more prominent impact on 2022 and certainly the back half.

And we don't see we will see some pressure carrying into the first part of next year for sure as we look at some of the liquidation that will do in the first quarter, but.

Thank you.

The emphasis here is to try to capture as much of that exposure as we can in the fourth quarter.

We have.

Some other cost transitory costs that are impacting us this year.

Related to handling costs and some of the grid lock that Brendan talked about.

Which is adding to our logistics handling costs. This year some of that will be recognized next year in the P&L, but a lot of it is being recognized in 2022.

We will get the full year benefit of the price increases that we that we've put into place this year some of them didn't.

It didn't occur at the very beginning of the year. So that'll be a positive for us as we think about next year and the gross margin run rate moving forward.

But really importantly, the profit improvement work that we've already started focus is very much on very much on gross margin in product costs and supply chain costs. We think the unlock there can be quite meaningful it's going to take a little bit of time to expect to realize that in the P&L just based on how we turned the inventory but.

The savings visibility that we have in that particular categories very meaningful on the SG&A side.

In the back half of the year, we continue to invest behind our big brand from a marketing standpoint, that's still for the full year and in the back half of the year exceeds 8% of revenue that's a sort of a high point for kind of a more recent comparison and then certainly compared to 2019 when it was much lower.

And we are.

Through the through the work that we've done on the organization and group structure.

And the other profit improvement work that we've already started we would expect to see.

Improvement in the in the SG&A.

Profile next year, John we're not giving guidance as to what that number will be but I think you'll.

Youll see us share that with more detail very soon and as we kind of.

Unlike some of the profit improvement initiatives and share those more specifically.

Yeah, that's really helpful. Thank you and just one follow up we noticed last week, we announced changes to some of the corporate bylaws Brendan there Mike.

Youre willing to comment any any perspective, you can share on the rationale and just the summary of the changes that were made thank you.

Yeah, No just just basic maintenance as we were working through the bylaws. The board of directors really nothing to call out a report on that change.

Understood. Thank you guys.

Thank you. Our next question comes from the line of Mitch <unk> with Seaport Global. Please proceed with your question.

Yeah, Thanks for taking my questions.

I guess first question as I'm thinking about next year, so Mike It sounds like some of this end of life liquidations going to carry into next year maybe.

Maybe on the on the top line can you speak to your kind of where the the spring order book sits on it sounds like you expect.

Product to flow better for spring and what you've been experiencing for fall and how would you access.

Assess maybe the cancel patient cancellation risks to spring orders next year.

Well, it's been a major focus match and we probably should have mentioned that in our prepared remarks that the focus on.

Scrubbing, the order book and validating the order book has been a key priority as we looked at not only the guidance for Q4, but how we see ourselves working through the inventory and so there's a high confidence level. There is a very.

Sort of practical approach to cancellation or delay assumptions built into the outlook for Q4, and we will be kind of viewing it that way for spring as well.

You are right in saying that we feel better about how goods will flow.

As we enter into spring and we are making room, especially for our growth brands for new product and making sure that that doesn't become continue to be a headwind for our for our growth brands in the spring season.

And so from that standpoint, we're feeling more positive.

And more and more confident as we as we focus on the first half of next year.

The overhang on the on the inventory.

It's a relatively small percentage of the total that we called out in our.

In my in my comments that we have about $125 million.

Inventory that we're focused on moving to.

To relieve that pressure in the warehouses, but also to get get that behind us and really open up the.

The opportunity for our growth brands to bring in new products in the middle to latter part of next year. So.

In that respect.

We would expect Q4 to have a bigger margin impact for that type of activity, whether it's moving faster through some of the the oldest product or reserving for any future sales that might impact us next year.

But there'll certainly be some pressure in the first quarter on margins based on that.

Got it okay. Thank you for that and then on on the gross margin so.

You guys are now looking for around 40%, 41% this year I know that freight.

There has been a drag it sounds like with container rates and things like that.

Improving maybe less airfreight I can't remember how much are afraid you guys were using.

A year ago, but is there any way to kind of full.

Frame the drag.

From freight that's in that's embedded in that 41%, especially if you kind of anchor it back to kind of pre COVID-19 levels before.

Got it got a bit crazy so.

Well the airfreight. This year is about $8 $5 million that was spent mostly in the first half of the year.

But certainly part of that 41% margin that you're referencing.

That's about double what it would normally be in AR.

Whatever normal is anymore about pre COVID-19 time frame.

The increase in our ocean freight the extra handling costs that we're dealing with demurrage and detention costs that are kind of part of our logistics costs those are significant and I.

I would say.

The <unk>.

Incurred costs, there are probably anywhere between 40 and $50 million higher than last year and that includes holding containers right at in the parking lot as we work through as we work through receiving and things like that some of that is on the balance sheet and impact our inventory cost at the end of the third quarter.

But we're starting to work through that inventory and starting to.

Recognize that through the P&L and that's one of the reasons Q4.

Margins are down a bit and so some of that will carryover into next year, but when you think about the run rate of costs.

And the transitory nature of especially of the detention and demurrage costs that we're experiencing right now.

Those are those are important and I see that significantly improving by the middle of next year.

For sure.

Okay. That's all for all the good one.

Thank you one more comment on the Fray too is just as we're seeing the market rates improve.

We're starting to see good improvement in the standard ocean rates, even compared to our contracts that we entered into in May and so we would expect that.

To carry into next year as well.

Some improvement year over year on an ocean freight side.

Next year.

Got it okay. Thanks again.

Okay.

Thank you. Our next question comes from the line of Jay sole with UBS. Please proceed with your question.

Great. Thank you so much.

Just take us into a little deeper dive into sweaty, Betty what youre seeing in that business sort of what what trends look positive give me confidence for future growth, maybe where it's been a little bit of a disappointment.

Helpful. Thank you.

Yeah, well I mean.

I think it starts with their 80% based in the U K and we all know what's happening in the UK right now.

In General high streets, where they do most of their trading are way down so.

I would say Jay that that's that's the single biggest factor for them I mean, they've had some shipping delays as well that has have delayed some of their newness, but.

And then just an overall decline momentarily and search for leggings.

More broadly so I think there's a lot that was working against them.

They have a.

A great runway ahead of them with the market they play in and as we get through the next year in the UK along with the world starts to heal itself I think theyre going to be well positioned to not only expand their business in the UK, but we're seeing really good momentum in China, albeit on a small base.

Asset light base, particularly through Tmall, So we think theres opportunity there and in.

In the U S. Some of the wholesale a big part of the wholesale Miss as I called out was self inflicted on our part there were just some.

Integration problems that we did not anticipate with systems and just some of the mechanics of a.

Being an apparel business that that cost us here in the U S. But the good news there was their primary partner still wanted the goods. So we haven't provided discount on some of that will shift but shows that there is that appetite here in the U S for sweaty, Betty and while we likely won't open stores in 2023, as we had originally kind of.

Teased out there just due to the shifting economics.

We'll focus on the digital business here in the U S and still with an eye towards.

Opportunistic stores, if not in 'twenty three in the future.

Got it thank you so much.

Thank you. Our next question comes from the line of.

TV.

<unk> with BNP Paribas. Please proceed with your question.

Hey, guys.

Thanks for taking my question, maybe on a first.

There were some shifts in wholesale from <unk> for Q, maybe could you quantify that and help help us think about <unk> revenue guidance by channel it.

It sounds like wholesale benefiting maybe some share yes.

Okay.

That'd be a little careful there I mean, it is shifting but I think we've said it's shifted for the last six quarters just as this thing has been so.

Inconsistent so I don't know if we're going to provide that level of guidance at this point, but certainly.

Trying to get it to the wholesalers in time for Christmas has been a priority over the.

Last few weeks as Mike said, particularly with our growth brands, where we know we can get the response so.

And I'd also I mean, just to reiterate when Brandon said about the brand performance in Q4 Merrell.

Maryland, saucony, delivering at or above 20% growth in the quarter, our international business will be over 25%.

I expect it to be over 25% in the fourth quarter again saw another strong quarter from that.

From that region or that channel of our business.

And as we saw in Q3, we think we think.

The headwind or the pressure will continue to be in the U S wholesale business and <unk>.

Expecting to see our D to C business grow at a similar rate in Q4.

Okay very helpful. Thanks, and then maybe just to dig in a little bit more on the $125 million.

End of life.

Clear it sounds like to the next two quarters or so.

Is there any way to think about I guess revenue growth ex some of those liquidation.

Quotations.

Because obviously, that's a boost to revenue.

Yeah, how do you think we're not we're not providing Q1 guidance yet so we wouldn't necessarily parse that out, but I think youre thinking about it as we are that we certainly have an order book today on the core business and the global business.

That would not include some of that incremental.

Inventory reduction so as we sort that out and have more clarity on the timing of all that we'll share it.

Okay. Thanks, guys.

Thank you. Our final question. This morning comes from the line of Sam Poser with Williams trading. Please proceed with your question.

Thank you for taking my questions.

I guess I'd like to know if you could talk about maybe.

The margin by brand I mean, you know the Merrell business was really good but how was its EBIT.

EBIT on a year over year basis, or our gross margin as compared to the other brands and I have a follow up.

We don't necessarily talk about margin by brand, but Merrell performance overall was the strongest in the quarter.

Including their ability to deliver.

Normal levels of gross margin as we would've expected.

And some of the other brands.

Our channels are more impacted by the promotional environment and Merrill Lynch.

Also the need to discount wholesale orders due to the lateness I think.

Changes based on the kind of health and growth of the brand right now we're in a position to.

So you didn't face those same kind of.

Well need to order cancellations and discounts with the Merrell brand that you did with the other brand is that would that be accurate assessment I would say I'd say, it's a sliding scale I mean, there was certainly actions that needed to be taken but but it.

It gets progressive changes based on as I said, the health of the brand and the inventory position of the brand So Sperry would.

It would be more challenged there and has to provide.

Greater incentives.

So I guess I guess the question is is.

How much of what what occurred.

Outside of Merrell was macro versus how much of it was.

You know.

We should've done a better job with the way we.

Executed these brands and I'll just use that in a general sense from.

Shifting to product marketing and so on and so forth.

I'm not going to handicap it I think.

There is both in there we certainly are.

High insight is 2020 and there are things that we would have done differently in some of these brands, particularly with the inventory flow.

When we saw business start to slow down over the summer at that point in time we.

In hindsight, we would have been more aggressive with cancellations, even though that would have created some liabilities on raw materials. If we knew what we knew then what we do now so certainly looking back on that and figuring out how we can.

Correct that going forward with better processes and better better reporting I think specific to Sperry Sandwich. I know is your is your favorite I think in retrospect, we try to extend ourselves into too many categories and weren't as focused on our core business and just freshening up our core and <unk>.

Pending our corn both in boots.

And got a little bit fragmented and I can see it now in our in our SKU management, how it kind of got out of whack. So.

That's something that in hindsight that wasn't a macro issue that was a that was a self inflicted issue that obviously got exposed more because of the macro issues, but.

I think when we see in a few weeks you know we can walk you through a little bit more of our line architecture and I think youll see some of the changes, we're making going forward, but obviously given the lead times.

There is work to be done to get there.

Okay, and then lastly, I know you report this in the Q, but can you give us the wholesale or the direct to consumer sales for each of the.

I guess the Q3.

The segment's, Michigan Group, Boston Group and so on.

For modeling purposes, even though because that'll change this way.

That is changing going forward.

Yes.

And the 10-Q comes out tomorrow so.

We're not going to we will probably won't spend the time right now to go through that and provide that.

Detailed we typically don't so.

Alright, thanks, very much and.

Good luck.

Yeah.

Okay.

Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Hoffman for any final comments.

Okay. Thanks to everyone for participating in the call and we look forward to keeping you updated and speaking again in the spring.

Thank you.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.