Q4 2022 Wolverine World Wide Inc Earnings Call
Speaker 2: Greetings and welcome to the Wolverine Worldwide Enk's Fourth Quarter 2022 Erning Call. As this time, all participants are in a listen only mode.
Speaker 2: A request and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Wyzenman, vice president of science.
Speaker 3: Please go ahead, sir. Good morning and welcome to our fourth quarter, 2022 conference call. On the call today, our Brennan Hoffman, our President and Chief Executive Officer, and Mike Starnett, our Executive Vice President and Chief Financial Officer.
Speaker 3: Earlier this morning, we issued our press release and announced our financial results for the fourth quarter and full year 2022 and guidance for fiscal 2023.
Speaker 3: The press release is available on many new sites and can be viewed on our corporate website at WolverineWorldLide.com.
Speaker 3: This morning's earnings press release and comments made during today's earnings call include non-gap disclosures, which adjust, for example, for the impacts of non-cash impairment of spary and sweaty-beddy intangible assets, environmental and other related costs, net of cost recoveries, reorganization costs.
Speaker 3: COTS associated with the integration of sweaty beddy, receivable securitization transaction costs.
Speaker 3: gain on the sale of the champion trademark and foreign exchange rate changes.
Speaker 3: Prior year non-GAP disclosures include additional adjustments for debt extinguishment costs, non-cash impairment related to one of the company's joint ventures, and costs associated with the acquisition of the Sweaty Betty brand.
Speaker 3: On February 8, 2023, we announced the sale of the KEDS business to designer brands incorporated. The parent company of Footwear Retailer DSW.
Speaker 3: At the same time, we announced the intention to grant an exclusive license to designer brands for Hush Puppies Footwear in the United States and Canada.
Speaker 3: Additionally, as previously announced on December 8, 2022, we have started a formal process to divest our Wolverine Lothers business.
Speaker 3: As such, our guidance for 2023 reflects future financial expectations and comparable results from 2022 that exclude the full year impact of CEDS and Wolverine Lutters and include an adjustment for the second half 2023 transition of our United States and Canada Hush Puppies business to a licensing model.
Speaker 3: References to our ongoing business reflect these adjustments.
Speaker 3: These disclosures are reconciled and attached tables within the body of the release.
Speaker 3: I'd also like to remind you that statement subscribing to companies' expectations, plans, predictions and projections, such as those regarding the company's outlook for fiscal year 2023, growth opportunities, and trends expected to affect the company's future performance made during today's conference call.
Speaker 3: our forward-looking statements under US 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 factors are identified in the company's SEC filings and in our press releases. With that being said, I now like to turn the call over to Brendan Hoffman.
Speaker 4: Thank you, Alex. Good morning, everyone, and thank you for joining today's call.
Speaker 4: For the fourth quarter, we reported revenue and adjusted earnings per share in line with our expectation.
Speaker 4: Our gross margin performance in the quarter was impacted by our efforts to more swiftly clear inventory to position the company from improved performance in the year ahead.
Speaker 4: Our gap results, as Michael Cometon, include a large non-cash impairment charge that was greatly impacted by the discount rate applied to certain acquired brands.
This month marks my one year anniversary as CEO as I look back at my first year 2022 was certainly a challenging period for us and our industry as the environment shifted quickly midway through.
While our company like many others underperformed against our initial expectations. The year was also a pivotal time for our company as it shed light on key areas, where we must improve.
We recognize that our business is too complex, which limited our ability to quickly course, correct when faced with sudden changes in consumer spending.
So we set a path to simplify our business and improve our supply chain.
Agility is essential in any environment, but especially important today.
In December I shared four key priorities. They are integral to the 100 day plan, we put in place in Q4 as part of our course correction efforts.
Let me review these priorities and update you on the early progress we have made.
First the change in our brand group structure announced in November where brands with similar attributes are now grouped together, enabling them to more easily collaborate and share best practices.
Second improving efficiency, while removing costs, we established a profit improvement office that has identified $150 million in annual run rate profit improvements to at least $65 million expected to be achieved in 'twenty three.
In addition to reducing cost. The Tio is also focused on continuous process improvement initiatives, including redesigning our supply chain planning process.
We are also benchmarking, our global cost structure and operating model against our best in class best in class peers in the industry.
Third the strategic review of our portfolio.
On February eight we announced the successful sale of cats and licensing of Hush puppies for North America.
We are also moving forward with our plan to divest our Wolverine leather business.
We continue to evaluate our portfolio to focus resources on the businesses and brands that will drive the highest return for our shareholders.
This includes further investments in Merrell and saucony lifestyle businesses and expanding sweaty Betty is global business.
Fourth improving working capital and reducing leverage.
Year end inventory was down approximately $93 million versus Q3, and lower than our November guidance by $50 million Q.
Q4, operating free cash flow was nearly $300 million and the company's bank defined leverage ratio of two seven compared to three four at the end of Q3.
The meaningful progress we've made over the last 100 days sets a foundation for further improvements in 2023.
We expect to reduce inventory to normal levels in the third quarter of the year and drive significant operating free cash flow.
We also are accomplishments to share across our brands.
And with the active group consisting of Merrell Saucony, Sweaty, Betty and Chaco.
We are very pleased with the active group performance in the fourth quarter, including 17% growth on a reported basis, 23% in constant currency.
For the full year active group revenue increased 19% on a reported basis and 24% in constant currency, including a 7% percentage point benefit from lapping a partial year sweaty Betty in 2021.
Merrell finished the year strong constant currency revenue increased 31% in the fourth quarter and rose, 22% for the year to $194 million and $764 million respectively. The.
The fourth quarter performance was driven by global brand strength across categories and a relatively easy comparison to the prior year when Vietnam factory closures resulted in a lack of inventory.
We successfully repositioned the Moab franchise with one of the best innovation pipelines and years, our purpose led brand messaging amplified by Merrill's inclusivity and the outdoors study published in 2022 and the company's global impact report continues to introduce Merrill to more customers and increase the cadence of our communication with existing exists.
<unk> customers.
We were also encouraged by the strength in our own direct to consumer business, which was up 16% in the quarter and now accounts for over 40% of Merrill sales in the U S.
Beginning in the first half of 'twenty, two we did begin to strategically shift our marketing investments and Merrell moving more dollars up the funnel to expand the reach of the brand to both existing and new consumers.
This shift was rewarded with many positive results, including increases in brand awareness, attracting new cut consumers, both younger and importantly, women sequential improvement in our year over year comparisons at Merrill Dot com, along with meaningful increases in market share in the second half of the year.
We are beginning to transfer the successful marketing and direct to consumer strategies to the rest of the brand portfolio.
As we look ahead, we are confident that merrell will continue to leverage its leading positioning and its core hike business, along with increased traction and trail running.
We believe that our highest growth opportunity for merrell is to expand our lifestyle business.
Our lifestyle product line, one TRL continues to expand the brand's reach with retail partners and customers.
Most recently Merrill's, one TRL partnered with Reese Cooper's RCI reserve and earlier this month had in New York City pop up experience featuring a limited edition collaborations.
Looking ahead, we expect <unk> revenue to grow mid single digits in fiscal 'twenty, three with high teens growth in Q1 versus an easier comparison in the prior year.
Moving to Saucony constant currency revenues increased 30% in the fourth quarter and 10% for the year to $121 million and $505 million respectively.
Merrell Saucony is fourth quarter performance was driven by updated core franchises, including the endorphin in triumph.
Saucony E Commerce performance was strong in Q4 up 31% as the brand integrated a centralized ecommerce commercial team directly into the brand team.
Recall, we piloted this initiative with Merrill in early 2022 before rolling it out to the other brands.
<unk> continues to drive innovation and receive product accolades in 'twenty, two including the Endorphin Pro three which Duke GQ ready those best road running shoes and its best in Fitness Awards and the right <unk> won best cushion shoe in Runner's World.
So can he is China JV once again had a very strong quarter as sales tripled in 2022, our multichannel strategy is working well, including the addition of eight new stores during the quarter.
We expect revenue from our China JV to double in 'twenty three.
Our highest priority for saucony is to extend its reach beyond the core runner to everyday active and lifestyle consumers, we have several product and marketing initiatives to reach a compelling segment of the market.
Also within Saucony high priority and opportunity for the Corporation is the global expansion of our original business, which remains robust in Italy, the global hub for international expansion.
Looking ahead, we expect saucony revenue to grow mid single digits in fiscal 'twenty, three with high single digit growth in Q1.
Moving onto sweaty Betty constant currency revenue increased 5% in the fourth quarter.
On a pro forma basis, if we had acquired sweaty Betty at the beginning of 2021 full year constant currency revenue declined 4% to $212 million.
The retail environment in the U K remains challenging and sweaty Betty navigated the holiday quarter well.
Store comps in the UK were positive driven by new customer acquisition initiatives as well as head to toe merchandising efforts and increased units per transaction.
Through effective marketing tactics, the brand acquired 12% more new customers in the U K and 33% more new customers in the U S in the fourth quarter.
Change in the negative trend we had been seeing.
Encouragingly, our U S. Wholesale channel has begun to stabilize with improvements and logistical operations and robust reorder activity showing the continued demand from our key partners.
Brand margins were negatively affected by increased discounting to compete in the highly promotional U K market. However, we are encouraged that the brand ended the quarter with an improved inventory position.
In 2022, we opened 18, new standalone stores and concessions in the UK, Northern Ireland, Hong Kong and Singapore, We opened one pop up in China.
We plan to open 10, new stores in 2023, primarily in the UK and Ireland.
The sweaty Betty team has been collaborating with wolverine's broader EMEA team to exchange best practices.
This includes leveraging so anybody's direct to consumer and apparel expertise and further supporting sweaty Betty with Wolverine centers of excellence.
As we look into 2023, our number one priority is to stabilize so anybody's home market in the UK and Ireland, while improving profitability through synergies from stronger integration within the rest of the portfolio.
Looking ahead, we expect sweaty Betty to grow low single digits in fiscal 'twenty, three with low teen declines in Q1.
Work group revenue increased 4% and 8% in the fourth quarter and fiscal 2022, respectively in constant currency.
This growth reflects strength across its key specialty retail customers increases across the farm and fleet channel and ecommerce revenue growth with Wolverine and cat, leading the way and maintaining their number one and three positions for trade work footwear in 2022.
Looking ahead, we continue to capitalize on the growing trends within the category, including the increase in work participation from the Hispanic population.
We believe we are uniquely suited to meet the needs of the growing Hispanic participation rate with a relevant range of products and price points.
In addition, the year will see us test Bates to Wal Mart as part of its private label program.
Marketing will also be a focus as we look to engage with existing customers expand our customer reach the <unk>.
Year will see us introduce a second collaboration with Halo. Following a successful launch that drove high E mail capture rate.
Lifestyle group revenue declined 20% in the fourth quarter and 5% in fiscal 2022 in constant currency.
The lifestyle group 2022 results discussed today include Sperry Keds, and Hush Puppy brands.
Sperry revenues decreased 28% in the fourth quarter and 10% in fiscal 2022 in constant currency.
Although our sell throughs of certain boot styles as well as slowdown in the boat category.
<unk> and wholesale partner cancellations.
Sperry continues to experience headwinds in the U S marketplace across all channels.
In 2022, the root cause of our underperformance was product customers love Sperry for its core franchises, but we did not proactively modernized quickly enough based on trend.
Between 2018, and 2022 more focus is placed in categories not as relevant to <unk> DNA and core declined from 70% of styles to less than 50%.
As we look into 2023, our goal is to stabilize and generate consumer affection for Sperry.
Our objective is to make boat cool again through increased collaborations with designers that are relevant to our nautical theme and capitalize on the increasing consumer preference for spending on vacations and casual footwear for everyday use we know Sperry can be top of mind for application mindset with its classic and timeless style.
We expect Sperry revenue to decline high single digits in fiscal 'twenty three the similar decline in the first quarter.
Now I will briefly touch on our international business International revenue grew 32% in the fourth quarter and 42% for the full year in constant currency.
Our brands continue to resonate well in international markets, and we see significant opportunities in both owned and JV operated markets.
Fourth quarter performance was driven by our top three brands, which account for over 50% of international revenues.
In the quarter, Merrell and Saucony eats our international revenue growth of nearly 50%.
EMEA business has also been a key contributor to the international growth with Q4 revenue growth of plus 21%.
Caterpillar also continued its strong performance with growth of 40% in EMEA.
As we transition to 2023, we're focused on igniting growth across our active group continuing our positive momentum in work and quickly addressing our underperforming brands all while increasing the efficiency of our business model.
The retail environment remains volatile and we continue to see some wholesale partners delay orders to allow more time to assess consumer demand trends. However.
However, with our improving inventory position and a more responsive supply chain, we are better positioned to service the business.
We expect to deliver 1% to 3% revenue growth for our ongoing businesses in 2023.
Profitability is expected to improve sequentially as we right size inventory and as savings from our profit improvement plan builds.
We also expect to benefit as we introduce more newness and innovation across brands and continue our storytelling and full funnel marketing journey.
We are now a leaner and more agile organization better positioned to accelerate our profit growth and invest behind our core brands to enable them to reach their full potential. While we are disappointed that our performance in 2022 fell short of our original expectations. We believe we now have the organizational structure the team and the strategy in place to deliver improved.
<unk> in 2023 and return to 12% operating margins in fiscal year 2024.
I will now turn the call over to Mike to discuss more details about our fourth quarter financial results and our 2023 outlook Mike.
Thanks, Brendan and thank you all for joining the call.
The last 100 days have been critical for the company.
Our team has executed well against the short term priorities, we set to improve the health of the business while building a stronger foundation for the future.
We beat our inventory and debt leverage goals significantly reduced bottlenecks in our supply chain and secured further cost savings that will benefit 2023 and beyond.
The sale of <unk> was a major win and we are especially pleased to have that transaction already completed is this will allow for a quick transition and minimum disruption to the go forward business.
The fourth quarter revenue was $665 million was slightly above the midpoint of our guidance and represented eight 4% constant currency growth.
During the quarter, our top five brands Merrell Saucony, Sweaty, Betty Wolverine and Sperry accounted for nearly 80% of our revenue.
The performance footwear category drove the highest growth in the work category remained consistent.
We expect these product categories to be the best performing in 2023.
During the quarter, we were pleased to ship or secure future orders for approximately $4 5 million pair or 75% of end of life inventory.
Much of this will ship in the first half of this year.
This critical execution will allow us to accelerate the reduction of inventory to more normal levels.
Enhanced future cash flow and further improve the performance of our warehouse and logistics operations.
Despite this progress we incurred higher transitory handling an inventory liquidation costs that negatively impacted our Q4 gross margin of 33, 7%.
By 700 basis points.
Higher promotions in our global DTC business, and a higher mix of international distributor sales in the quarter also suppress gross margin.
Selling general and administrative expenses were $679 million, including $429 million for the noncash impairment of Sperry and sweaty Betty intangible assets.
The sweaty Betty valuation was primarily impacted by a significant.
Higher discount rate assumption.
The Sperry valuation was impacted by a higher discount rate and a slower recovery than previously anticipated.
In addition to the impairment, we also incurred approximately $10 million of severance and other separation costs related to the workforce reduction completed in December .
Adjusted selling general and administrative expenses of $238 million were 35, 8% of revenue, which is 50 basis points higher than last year.
The deleverage was mainly due to elevated warehousing and offsite storage costs related to higher inventory levels.
Adjusted operating margin was a negative 2% and below our outlook for the quarter.
Due to higher liquidation costs previously mentioned.
The reported operating margin of a negative 68, 4% includes the negative impact of the noncash impairment and separation costs recorded in the quarter.
Adjusted diluted loss per share for the quarter was 15.
At the low end of our guidance.
And a 10 cent loss on a constant currency basis.
The reported diluted loss per share of $4 59 includes the noncash impairment and separation costs recorded in the quarter.
Now, let me provide further information about working capital and liquidity.
Year end inventory, including $43 million from Cat and Wolverine leathers.
$788 million, which was down $50 million compared to our guidance in November .
We have classified the inventory and other assets of cat and Wolverine leathers as held for sale on the balance sheet.
Inventory for our ongoing business of $745 million was down $93 million compared to Q3.
As mentioned, we have secured orders for nearly 75% of end of life inventory.
As a result, the quality of inventory continues to improve.
We ended the year with net debt of $1 $2 billion and liquidity of approximately $685 million.
Our bank defined leverage ratio was two seven times down from three four times at Q3 and slightly better than expected.
Operating free cash flow was nearly $300 million in line with our guidance.
Overall, we are pleased with the progress made to reduce inventory and improve liquidity in the fourth quarter importantly supply chain operations have stabilized and.
And we expect continued working capital and cash flow improvement throughout 2023.
Now, let me transition to our outlook for 2023.
Our guidance reflects the expected performance of our ongoing business.
Which excludes the full year projections for cat and Wolverine leathers and adjust for the licensing transition for Hush puppies expected on July one.
For reference these businesses had revenue of $150 million and a diluted EPS contribution of <unk> in fiscal 2022.
Revenue is expected in the range of $2 $5 3 billion to $2 $5 $8 billion in 2023. This.
This compares to 2022 revenue of $2 $5 3 billion from our ongoing business and represents constant currency growth of approximately 1% to 3%.
We expect the strongest performance from our active group with mid single digit growth.
Work group is expected to deliver consistent low single digit performance and finally, our lifestyle group is expected to decline high single digits.
Gross margin is expected to be approximately 42% compared to 39, 9% in 2022.
Certain transitory costs related to higher inventory are expected to have a 370 basis point negative impact on gross margin and will be most prominent in the first half of the year.
More specifically.
$45 million of transitory supply chain costs from 2022 that will be expensed in 2023 approximately.
Approximately $20 million of ongoing handling costs.
And approximately $30 million from a higher mix of closeout sales.
To offset these incremental transitory costs or profit improvement office has secured product and logistics cost savings of approximately $20 million that will benefit gross margin more heavily in the second half of the year.
During 2023, our supply chain team will continue to drive improvement in operational planning product engineering.
SKU optimization and speed to market.
These actions will set a stronger foundation for future cost savings and more reliable performance.
Adjusted selling general and administrative expenses are expected to be approximately 33, 5%.
Or essentially flat with 2022.
Higher incentive compensation costs, and offsite storage cost for inventory will be offset by the benefits from profit improvement office initiatives, including $30 million from the December workforce reduction and $15 million from other indirect expense reductions.
Adjusted operating margin is expected to be approximately eight 5% compared to six 6% in 2022.
Interest and other expenses are projected to be $59 million.
And the effective tax rate is projected to be approximately 21%.
As a result of these key assumptions.
Adjusted diluted earnings per share is expected to be in the range of $1 40 to $1 60.
This compares to $1 37 in 2022 for our ongoing business.
As you will recall, we sold the champion footwear trademark last year for $90 million and also recognized <unk> 12 per share of royalty earnings in 'twenty, two that will not reoccur in 2023.
Yeah.
We remain keenly focused on working capital and cash flow optimization in 2023, we expect inventory to improve by approximately $225 million during the year due to the accelerating accelerated sale of end of life inventory and much lower intake of well inventories core styles.
In addition, <unk>.
Cash from divestitures and tight expense control should allow us to generate operating free cash flow in the range of $200 million to $250 million.
As a result, we expect year end net debt of approximately $750 million in bank defined leverage of approximately two times.
Our outlook for the first quarter.
Reflects the performance of our ongoing business and excludes cat and Wolverine leathers.
For reference the first quarter 2022 revenue for these businesses was approximately $40 million in the 2022 EPS contribution was <unk>.
We expect Q1 revenue of approximately $580 million constant currency growth of approximately 4% and reported growth of approximately 1%.
We expect Q1 gross margin of approximately 40% and operating margin of approximately 4%, including $17 million of transitory inventory costs from 2022, and $8 million of incremental holding and liquidation costs related to elevated inventory.
The Q1 projected tax expense of approximately $5 million is unusually high due to the timing of a $3 $5 million or <unk> <unk> per share stock compensation true up required for tax purposes.
We expect adjusted diluted earnings per share of approximately <unk> <unk> for the first quarter.
Which includes a negative <unk> <unk> impact from foreign currency exchange rates.
In conclusion, the strong work executed by our teams in 2022 will allow us to navigate 2023 with clear priorities and fewer supply chain and working capital obstacles.
Changes made to our sourcing logistics and warehousing operations.
And systems will make us more nimble in the future.
We expect profit and cash flow performance to improve sequentially throughout the year.
Profit performance in the first half will be more challenging due to cost and inventory hangover from 2022.
However, we should move beyond these headwinds by Q3 at the same time that profit improvement initiatives kick in.
We have added a supplemental table to this morning's earnings press release to show the quarterly timing of transitory costs and profit improvement savings initiatives.
Finally, we have strong line of sight to a $150 million of annual cost savings for 2024, giving us future capacity to invest strategically in our growth brands, while expanding our operating margin to our target of 12%.
I'll now turn the call back to the operator.
Yes.
Thank you we will now be conducting a question and answer session.
Like to ask the question widespread star one on your telephone keypad.
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Any additional questions. Please re enter the question. Thank you one moment, please while we poll for questions.
Yeah.
Our first question comes from Dana Telsey with Telsey Advisory group.
Good morning, a lot to unpack there.
Think about 2023, both Brendan and like the cadence of the business and obviously the compares in the first half of the year versus the second half of the year what.
What are you seeing from your wholesale accounts in order trends how is that looking how are you planning promotions and at the gross margin reduction in the first quarter is more of a due to the businesses that are going away well, how youre seeing the promotional levels.
Any color there would be helpful. Thank you.
Yeah, Thanks, Dan and good morning.
Like others with the wholesale business around the world, It's a little bit choppy, it's all been inconsistent.
As retailers get their inventories.
Inventories in line, there's certainly not placing orders in the out months like we've seen over the last couple of years, but those orders a lot of them didn't materialize anyway. So I think they are looking for brands, who are going to be able to chase the business with them as they see the trends and I think given our inventory situation.
One of the positives we have is the ability to do that so we're seeing more at once orders than we are.
Over the last couple of years.
But we've we've taken a cautious outlook to the way wholesales going to look.
As we think through the year.
I think on the.
The gross margin.
Certainly saw a lot of promotions.
Through holiday and into January but that's not a typical this time of year.
As we get past Presidents' day, we start to.
Focus on more regular price.
One real time anecdote was yesterday, we launched the endorsement elite on Saucony full price and had a gangbusters day in response to it and it's only in one color.
So I think when we have newness and innovation customers are still going to respond to that and I think as we.
Get into the main selling season, we will see more and more regular price and certainly as we get to the back half of the year far less promotional than than what we just came out of and for US. Our gross margin has not only impacted positively as we go throughout the year.
And less promotions, but also just as we sell through this inventory and as Mike said in the first half of the year, we still have the low margin inventory thats burdened on the balance sheet and as we get to this back half of the year.
That's behind Us and we start to take advantage of the input costs like freight and containers that have come way down that.
That will dramatically benefit gross margin in the back half of the year.
Did I Miss anything.
No you got it and just on the new product introductions in the mid single digit growth for example for Neville and Wolverine and Saucony, how are you thinking about pricing the new products compared to maybe what your price is.
Do you have for new products.
Yeah.
I don't think youre going to see too much of a change there I think over the last year and a half we've tried to price more as merchants and really trying to understand what the product attributes are and what we think the customer can pay for it rather than just do a strict.
IMMU calculation, that's going to be even more valuable for us with the profit improvement office and the the cost were taking out of our input margins and making sure we still price what we think the goods or worse more of my concern is just what we alluded to is just getting the promotions out of there that have taken whatever price we started.
And discounted it so I think I think all of those brands are in a much better shape and using more analytics to help.
Price the figure out what the initial price should be.
Thank you.
Thanks, Dan.
Yes.
Our next question comes from Jay sole with UBS.
Hi, Good morning. This is Molly just starting out on behalf of Jay So.
So we're taking our questions I guess I wanted to ask about the gross margin outlook.
It just seems like the to get to that 42%.
Guidance that you provided.
Should we be should we think about the you know.
The gross margin by a half's, implying like maybe you could talk about like a 40%.
Around 40% in the first quarter and like how should we think about the cadence second quarter and like why does that imply actually for the second half gross margin and then.
Specifically on the Sperry brand, how should we think about the brand's turnaround plan given you know high single digit decline guidance or you know for fiscal year 'twenty three thank you.
Yeah, I'll start with the gross margin, let Mike top off and then going back to Sperry, but I think it was a lot of what I just said to the previous question was the first half is burdened with all of these.
Hi costs from last year that we paid for but didn't recognize in the P&L when containers were over $20000 and we were air freighting, everything in and et cetera, et cetera, and the storage costs. We're dealing with now so as we get to the back half of the year, we see a double opportunity one as I just mentioned all of those are gone and have really flipped.
The other way, but plus we're also going to start to get the benefit of the work that profit improvement office during the last six months as we are.
Really work on input cost on materials in.
Other margin components, so I feel I feel good about the.
The opportunity to not only recapture what we have given away over the last 12 months, but really set ourselves up for the future with <unk>.
New new improved margin base, but Mike you want to Tushar.
Importantly, too we mentioned it in the script, but.
In the press release and in the last section we added a supplemental table that helps I think explain the flow of these costs as well as the benefits that we're seeing from the.
The supply chain improvements to cost reductions from the profit improvement office. So I think it really helps to guide you.
Both to the expected improvements from.
Cycling away from the transitory costs in the back half of the year and seeing those those profit improvements.
Savings start to benefit in Q3.
But the margin rates kind of in the back half of the year would start to be in the certainly in that 43% to 44% range.
Given given that timing and really important to emphasize that a large amount of the cost that we're expensing in 2023, especially in the first part of the year.
Nearly nearly.
$50 million.
Is related to costs that are on the balance sheet are coming through in 2022 or I'm sorry in 2023, so cost that we have great visibility to we know the timing of those expenses will be behind us by the middle of the year. So that's one of the major issues that are depressing gross margin in the first half of the year.
I think the second part of your question is on Sperry in the trajectory there I'll, let Brendan.
With Sperry I mean, we've really done a lot of work over the last three or four months to be.
Introspective on what what's wrong with the business, what we've done wrong, what we need to do differently and really focusing on Sperry is recovery and we realized over the last few years, we've taken some missteps in product we've been chasing product that others had success in but really werent relevant to our customer.
We need to refocus on boat and making boat cool again and that includes focusing our co labs and marketing around boat with some new updated styles that really resonate to the core.
We were late to recognize that the DUC, both trend was declining and replacing it with more fashion boots like the Torrance that provide function.
As well as updating our marketing to focus on what our core is looking for we took some big bets with people like John Legend, and one we didn't have enough money to then go ahead and amplify the.
<unk>.
Collaboration but also it wasn't it wasn't core to what we were trying to do so I think we've uncovered a lot about getting back to the core we let fashion go here.
Historically core was 70% of our business focused around both boot.
Boot and bolt that dropped to 50% over the last couple of years and just did not work out there in the marketplace. So I think the team has done a great job now understanding that better and using 2023 to reset.
Reset the mix.
And one very positive thing if you saw the New York fashion shows.
There was a lot around prep and Thats, a big pillar for for Sperry in fact, they were.
They were showcased in the food and food show, which is Elizabeth Hilfiger us.
Product line, she she really leaned into prep and nautical and styled everything with <unk>. So there is some real opportunities out there that we need to take advantage of but I think the biggest thing for us is recovering some of the missteps we made.
Great Great and if I may not just a very quick one on capital allocation you mentioned that the plan is to get to you know how.
How about you know how healthier balance sheet by the end of the year.
<unk> focus on deleveraging, but how can we think about that in terms of the <unk>.
Buybacks.
It hasn't been really they haven't really been taking place you know I think second half 2022 so how should we think about that in 2023.
And beyond try anyway.
Our primary.
Our priority now is to continue to pay down debt for the balance of the of the coming year here.
As we see opportunities certainly we will consider those other opportunities, but the primary focus will be on deleveraging.
Thank you very much.
Yeah.
Thank you.
Next question comes from Jim Duffy with Stifel.
Well. Thank you guys. Good morning, Hey, some very helpful details in the release on the quarterly cadence of transitory Boston planned savings. Thank you for that.
I'm trying to get a handle on the expected revenue cadence across the year. It sounds like good growth from Merrell and saucony in the first quarter, but I'm curious what's the revenue contribution of the 405 million pairs of end of life inventory I would pencil out like a 100 million plus how much is that flattering the first quarter and the Merrill.
And softening of growth in the first quarter.
Then related to that the active segment guide implies deceleration for the balance of the year other promotional and clearance revenues to consider in the second half of 'twenty two base that keep you conservative on the revenue outlook for the balance of the year.
I'll take the first part.
Some of that product at $4 5 million, we referenced some of that was shipped in Q4, a little more than we expected. So it is not quite the impact that U S.
Estimated Jim.
The product that we have on order now, which was which is a great developer.
Development for us to be able to secure those orders and we have good visibility to when we can move those goods out of the warehouse those are spread over Q1, and Q2, so not especially impactful to Q1 actually a little bit more so in Q2.
And for the for the phasing of revenue just remember that with Merrell and saucony, having the biggest impact in 2022 from the closure of the Vietnam factories. They were they were coming into the year with very low inventories and sort of chasing business.
And kind of delivered depressed results in the first quarter of last year. So the growth rates for for Sperry and Saucony in the first quarter, probably going to outpace the rest of the year just based on that so.
I think in terms of phasing in the first half versus the second half of the year.
Our outlook for constant currency growth at the high end as it was 3% growth in very similar growth in the first quarter, it ebbs and flows a little bit differently by brand.
Because of the supply chain disruption in some of the inventory issues that we saw in 'twenty. Two it's not it's not a normal year from that standpoint, and the comparisons are a little bit.
Different by brand, but I think overall with similar growth rates in the first half versus the second half of the year.
And again in 2022, our performance in the back half.
Certainly under our expectations right.
We had come into the back half of the year with a more optimistic view and then the market changed quite a bit.
So our outlook in the back half of 'twenty three is very cautious given given some of the volatility in retail.
Inconsistency is that we're seeing out there but.
Very practical given the visibility of the business and the trends that we're seeing especially in the performance brands.
Merrell Saucony, and our work business, which continues to be consistent.
So we're comfortable with that kind of view of the back half of the year.
Thanks for that was the second part of your question second part of your question, Jim I am sorry, I missed that.
No I think you covered it.
Just directionally around.
Cadence of revenue over the course of the year and how those factor in.
Pairs of them to voice inventory and the impact to them I did also wanted to ask one on cost savings and then I'll pass it along.
I really appreciate the detail outlined in the release.
$30 million.
Cost savings planned in the fourth quarter should we think about that as kind of a quarterly run rate that continues.
Fiscal 'twenty two baseline into fiscal.
Fiscal 'twenty four.
Yes, I think Thats, a fair, obviously, the numbers ebb and flow a little bit in terms of.
Some of the one time benefits that we'll get to kind of get pushed into the fourth quarter based on the flow of inventory, but for the most part I think thats a safe assumption.
Great. Thanks, so much thanks.
Thanks, Jim.
Our next question comes from Jonathan Komp with Baird.
Okay.
Thank you.
Hi, Good morning. Thank you I wanted to just ask can you give any more color on the DTC and wholesale assumptions that you're embedding for the year and then maybe just to ask directly if I go back to August .
You were back then still projecting 2022 to be above $2 a share in earnings and operating margin above 9%. So could you maybe just address more directly.
What's changed today, that's giving you more visibility than maybe you had.
Six months ago, and how youre thinking about overall.
Overall visibility for both 2023 and in the comments out in 2020 for margin.
Yes.
I'll start with that second part first I think because we've really.
Taking control of the through the profit improvement office of taking out costs and improving our margin through the input costs.
Feel like the team over the last four months has made so much progress on this that we do have line of sight and more confidence.
In.
And those being real and obtainable I think the 100 day action plan I talked about.
In December is really galvanize the organization to really move together an ROE in the same direction understanding what needs to get done and so the progress we've made in such a short period of time.
It gives us tremendous confidence that.
We will be able to achieve that and we need to for the long term health of the business and to be able to not only provide a more profitable business, but also as a free up investments to be able to.
Expand our reach.
On your D to C question John .
Or channel question, I guess, we would expect D to C to be.
Positive contributor to growth this year, probably in the low single digit range.
We are on a comp basis, we are adding some storage for sweaty Betty.
2023 in their home markets. So that will also help drive a little bit of growth in the DTC channels.
Wholesales planned up low single digits as well.
Probably the area of pressure on.
From a channel standpoint is in our in our distributor business, which was up as you know it was up tremendously in 2022.
We caught up on some timing of sell in in the first part of 2022 and that helped drive some outpaced growth for that channel.
Overall, that's going to that's going to kind of correct itself and even though our own businesses in Europe and in Canada are expected to grow nicely.
The third party distributor business will be down a little bit on a year over year basis.
Okay I appreciate that color and maybe just one follow up.
Looking at the the lifestyle brands could.
Could you just comment sparing sweaty Betty are you expecting both to deliver positive operating profit this year and just given the actions you took for keds and leathers.
Are the criteria you're using for all of the brands looking across the portfolio. Thanks again.
Yeah, well I mean, just to be clear Sperry is in the lifestyle groups. So anybody's in the active group.
I mentioned before some of the thoughts around <unk>.
Sperry it will be positive in terms of operating profit won't be as positive as it has been in the past and Thats part of the.
Recovery, we need to do.
In terms of sweaty Betty a lot of a lot of their headwinds are market related and the U K.
So theyre working hard too.
Utilize different tools and levers to combat that.
As I mentioned in my remarks.
Acquired new customers for the first time in Q4, all year, so that was showing that some of the things we're doing.
<unk> are paying off the nice thing for them is.
The stores, which is a big part of their business.
Are all four wall positive and so they as they see opportunities to open up some more stores in the U K market.
That helps their overall profitability.
A lot of their bottomline will depend on currency.
And how that moves but.
We have a <unk>.
Three year plan to get them to much more profitable than.
Then they are today part of that is just utilizing some of the Wolverine opportunities and synergies and some of it is just some of the new.
Tactics, they're putting in place.
Last part of your question John was just on kind of criteria, we still as we said right.
Sperry is in that turnaround mode and that recovery mode right now and the focus is to get first to a more stable and healthy business from a contribution profit contribution standpoint, and then the futures about the credibility viability of the growth potential of the brand. So I think the moves we may.
With cat and Hush puppies, where certainly the step in the right direction, because we were focusing on those types of.
Improvements in the portfolio and we're going to continue to use a similar criteria for the future.
Okay. Thanks again.
Okay.
Yes.
Our next question comes from Sam Poser with Williams trading.
Good morning. Thank you for taking my questions I have a handful I'll just read them off.
You mentioned in the prioritized the top two Sam.
Alright.
Alright. So you mentioned that you would return to normal inventory levels in the third quarter.
Can you define what youre going to regard as normal.
Number one.
Sure No I think that by the by Q3, we would expect inventories to improve by another $150 million.
In that regard obviously part of that is from the end of life product that we're moving through in the first half of the year.
A big portion of that is the reduction in just intake of core franchises that we have reduced.
Supply chain the sourcing network. This year, so I think good visibility to being able to achieve that Sam and get the inventories down to a level, where we are supporting direct to consumer as that grows more prominently in the mix of our revenue and our channels and supporting the forward coverage growth.
Our of our brands. So yes are we down to an optimal level by the end of Q3, probably not but I think normalized level certainly as it relates to end of life product will be in a much healthier and more normal position by the end of Q3 and the other thing I just want to say, we talked about last time, one of the big goals of the 100 day.
<unk> plan was to reduce the grid lock in our warehouses given all of this excess inventory and team has done an unbelievable job putting in new processes and procedures that have allowed us to despite the inventory levels get close to a normal flow to service, our customer and I think thats going to pay huge dividends when we do get the inventory down to be much.
More leaner and efficient in the way, we are able to service the customer.
Go ahead, Sam what's next.
Okay.
Well I.
I don't know what you want to do here.
Would you consider I mean.
You alluded to the fact that ICR that that I think somebody asked you.
Given an appropriate offer would you would you sell Sperry and too.
You just what forward weeks of supply would be optimal for you from an inventory perspective.
Follow up to the other thing.
Well, we can't it's different by brand we have some some.
<unk> like our work business, where forward coverage can be very tight because it's very tight assortment and in other brands it needs to be a little bit longer lead times impact that we try to be in that 100 day to 120 day range is optimal but I don't think will be to that level until the end of the year.
And as far as the other question is first as far as Sperry goes as I mentioned I think we've uncovered some stuff that can help us recover some of what we've lost over the last few years and that will just make the business healthier for whatever track.
We decided to take it.
Right now I don't think would be a prudent time to.
Do anything we're still working through the <unk>.
The <unk> transition, which we were thrilled with that outcome.
<unk>.
Like there is some opportunities in Sperry that given the macro conditions, we should.
We should focus on and then reassess.
Alright, Thanks, I'll jump back in.
Thanks Sam.
Yes.
Thank you.
Our next question comes from Mitch comment with Seaport research.
Yes, thanks for taking my questions.
I guess starting on the gross margin I, just wanted to better understand the 42% because youre starting at 39 nine in the supplemental tables, if you kind of net the two pieces together it looks like it's a negative 45 million.
Gross margin. So obviously there is there is an offset there and I'm trying to better understand that is it really that in Q4, you should see a big year over year pick up.
Some reversal of Q4 'twenty two transitory expenses.
And maybe get back to a gross margin in Q4, that's maybe more similar to Q4 of 'twenty. One is that kind of the way you get to the 42 I think.
The biggest the biggest piece, it's not represented in those tables as frankly.
The higher whether it's promotion or just sale of closeout end of life inventory in.
The mix impact that has on the gross margin Mitch at least 100 basis points alone and we see that improving.
Sequentially through the year and as we as we worked through the end of life product.
We know that there'll be a more.
Quote unquote promotional environment to contend with out there throughout the year through our all of our channels, but we took an especially hard hit in Q3 and Q4, just selling off the excess inventory. So that's not reflected in the table and that is going to be a major source of margin improvement as we work through.
Especially in the back half of the year.
Okay, and then Mike from a from a freight standpoint on the gross margin.
Year over year, adding containers in the airfreight and all of that.
Is there any way to you.
To quantify the impact there or is that does that better than 23, then 22.
It's better off for sure. However, we had in the first half of 'twenty to me a lot of air freight. So there's some puts and takes there but I would say again continue continue to see improvements there we actually are.
<unk> our contract with our ocean carriers in the next month or so and so.
So we will have more information exactly how much better that could be but we're seeing.
Strong improvement on the Ocean freight and then certainly as we get through the year here.
Hope to see even more improvements as we solidify those contracts.
And it's certainly part of the savings that we're counting in our in our table there as it relates to supply chain cost but.
Potentially some upside to that number.
Okay, and then maybe last thing real quick.
I might have missed it in your prepared comments, but did you guys provide a cash flow from operations target for the year.
And if so what is that.
The target the target was between two and $250 million of operating free cash flow for 'twenty three.
And then driving inventory inventory is down 2% to $225 million or so kind of at the middle of that range.
Okay, great. Thanks, and good luck.
<unk>.
Yeah.
Yeah.
Thank you. Our next question comes from Abbvie intervention with Piper Sandler.
Great. Thanks for taking my question how are you navigating fueling growth in the active group as the state becomes increasingly competitive and particularly I'm sorry body do you see the same strategic benefits that you did at the time of the acquisition and then how are you planning a bigger expansion into the U S.
Well I think thats.
One of the growth levers, we have with sweaty Betty when we bought it and certainly feel now.
Our main focus right now is stabilizing the U K market, that's where we're opening up the stores I mean, thats, where their foundation is.
A year ago I would've expected to have opened up a few sweaty Betty stores in the U S. But just given the climate, we decided to focus.
Focus on the UK market, while we focus here in the U S on our wholesale business.
I think I mentioned last time, the nice relationship they have with nordstrom's as well as some other.
Special specialty stores, and we move them into our U U S. Warehouse previously they have been servicing it from from the UK and while we had some hiccups in the in the fourth quarter, we think thats going to in 2023 allow them to be much more agile in terms of.
Servicing the U S wholesale market, which we also believe we'll give them exposure to drive more U S E Commerce business, while we contemplate what a.
When a store rollout looks like there.
I think in terms of the broader question of the active group in terms of the market trends you talked about.
As we mentioned as I mentioned in my remarks, two of our biggest priorities.
For the company, our Merrill expanding into lifestyle and sweaty Betty moving beyond the core and so I think that.
And by the way the overall trends in these categories are still very strong when you think about where we were a few years back. So we feel like there's ample room for us to.
To grow continue to grow these growth brands.
And ultimately will come down to product and innovation as I mentioned earlier and I know Youre Saucony fan. We just had a tremendous launch last night with the endorphin elite. So I think that gives us even more confidence quite frankly that despite the environment still being a little bit too promotional that when you do bring in newness and innovation, which Merrell does of course, a great deal of as well.
Well the <unk>.
Customers going to response.
Okay, and then just a follow up on that on that bringing in new products such as indoor if at all.
Drive that consumer demand like while working through inventory, how do you balance that and do you think that limits topline growth or are you just prioritizing that on like a brand by brand perspective, yes.
Well I think I think for sure and a brand by brand perspective, and making sure that where we see the growth is where we're where we're flowing the goods more aggressively but as we've said even three months ago.
Lot of the overage and the shoes and our inventory is in core products. I mean that was when we made the decision a year and a half ago to try and chase.
Chase sourcing when Vietnam, a shutdown we for the most part did in core products. So that's where we don't have to bring in product the newness.
Is still able to flow we have some newness in collaborations across the brands that we didn't get here in time last year. So.
A couple of the brands are actually chock full of great collaborations. So we recognize that newness and innovation is what's needed to help drive the core so I think.
That hasnt been as challenging as maybe it sounds given given the approach we took.
Got it thank you.
Yeah.
Thank you.
Our next question comes from Carla Casella with JP Morgan.
Hi, Good morning. This is Mike on for Carla and thanks for taking our questions I'll be quick because it can.
Quick question did you guys say how much of your inventory was currently in transit I know you just go to that last quarter, but I'm wondering if.
There was an update for <unk>.
We didn't add that but it's come down quite substantially from a quarter ago I think it was down over $100 million, it's still elevated.
As we continue to work through some.
Some of the logistics bottlenecks in container storage, but has improved tremendously in the last three months and we would expect the in transit to normalize.
Sequentially throughout the year.
Great. Thank you and then did you guys ever give a disclosure on the timing.
Kind of as the weathers divestiture sale.
Yes.
How much of that.
How is that baked into the guidance.
Sure Yeah, well, we've taken we've taken the leathers business kind of as a held for sale operation we've taken it out of our guidance on.
That we shared today.
But it's a very active process, we have a couple of interested strategic.
<unk>.
Were evaluating the opportunity.
We did not give a specific timeframe because we don't have one yet, but we would expect some resolution by the middle of the year.
Okay.
Thank you that's all from us.
Thank you.
Thank you ladies and gentlemen, there are no further questions at this time I would like to turn the floor back over to Brendan Hoffman for closing comments.
Yes. Thank you everyone for joining us today and your continued interest in Wolverine, we look forward to providing you another update at our earnings call in early may thanks very much.
That does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.
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