Q1 2023 Wolverine World Wide Inc Earnings Call
Greetings and welcome to the Wolverine worldwide, Inc. First quarter 'twenty 'twenty earnings call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Alex Wiseman Vice President of Finance. Thank you. Please go ahead so.
Good morning, and welcome to our first quarter 2023 conference call 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 first quarter 2023.
The press release is available on many news sites and can be viewed on our corporate website at Wolverine worldwide Dot Com. This mornings earnings press release and comments made during today's earnings call include non-GAAP disclosures, which adjust for certain items, such as environmental and other related costs net of cost recoveries reorganization costs.
Foreign exchange rate changes and a gain on the divestiture of the kids business.
Financial results and guidance for 2023 and comparable results for 'twenty, one 'twenty two for our ongoing business exclude the impact of cats, which was sold in February 2023, and Wolverine Leathers, which is subject of a sale process and reflect an adjustment for the transition of our Hush puppies North America business to a licensing model in the second half of two.
23.
These disclosures were reconciled and attached tables within the body of the release.
I'd also like to remind you that statements describing the company's expectations plans predictions in productions, 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 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 statements.
These important risk factors are identified in the company's SEC filings and in our press releases.
But that being said.
Now I'd like to turn the call over to Brendan Hoffman.
Thank you Alex good morning, everyone and thank you for joining today's call.
We delivered first quarter results in line with our guidance and despite industry headwinds, we are reaffirming our full year guidance.
Our active group delivered 12% revenue growth on a reported basis and 15% revenue growth in constant currency led by Merrell and saucony with the strongest revenue increases coming from our international markets.
As expected our actions to expedite the sale of end of life inventory pressure gross margin have left that left us better positioned for future performance.
We are encouraged by the progress we have made to execute on our strategy for long term revenue growth and profitability increases as laid out in prior calls the strategy includes building stronger brands that resonate more powerfully with our consumers.
Starting investment to our growth brands and extending our brands from their core businesses and the large fast growing adjacent markets and categories.
Additionally, we have continued to make progress against our operational goals to remove cost and complexity, while we increase our speed efficiency and agility.
First quarter financial highlights include reported revenue from the ongoing business in line with our expectations at $580 million up 1% on a reported basis and increasing 3% in constant currency from the first quarter of 2022 adjusted diluted earnings per share of <unk> above our expectations for adjusted diluted EPS.
<unk>.
Net inventory for ongoing business declined nearly $20 million sequentially from fourth quarter of 2022 and.
And is on track to end 2023 down approximately $225 million versus the prior year during the quarter. We further improved our operational capabilities and our ability to execute against our financial and strategic goals. Three highlights include the refinement of our operating structure, specifically the new brand group structure now enables our teams to more.
Easily collaborate and share best practices across common categories and markets. We're also making great strides to modernize our supply chain and operations planning processes, including the investment in our new product lifecycle management tool set that will be operational later this year.
In March we integrated sweaty Betty into our London based international team to align them more closely with the Companys global centers of excellence, we expect.
This change will allow us to better leverage the company's logistics technology and operational expertise the harvest savings that can be reinvested in growth opportunities for sweaty Betty.
The profit improvement office remains on track to deliver $65 million of cost savings in 2023.
I'm, especially pleased to see the collaboration across all areas of the business to secure these benefits and make them sustainable going forward.
We continue to expect $150 million of annual savings from the profit improvement office in 2024.
The optimization of our portfolio continues, allowing us to focus resources on the businesses and brands that we believe will drive the highest return for our shareholders.
Recent sale of Keds and pending licensing of Hush puppies will enable this focus and these transitions are well underway.
We also continue to work towards an exit for the Wolverine leather business as we evaluate opportunities ahead for the company, we need to focus our future efforts and investments on our growth brands, Merrell Saucony and sweaty Betty.
Therefore, we have decided to explore strategic alternatives for Sperry over the coming months, while we continue the foundational work needed to position the brand for long term success.
Barry is a special brand with unique authenticity and heritage brand I was most familiar with when I joined the company.
I'm convinced that with the right focus and investments this brand has a very bright future.
This decision will allow us to put more resources behind banding merrill's lifestyle business, extending <unk> reach beyond the core to everyday active and lifestyle consumers global expansion of <unk> original business, which remains robust in Europe . It has great potential elsewhere in the world, particularly in the U S.
Stabilizing sweaty Betty its home market in the UK and Ireland, while looking for opportunities globally, including the U S and China.
Investing in technology, specifically around our e-commerce platform and user experience.
Moving on to brand results, starting with the active group consisting of Merrell Saucony Sweaty, Betty and Chaco were pleased with the group's performance in the first quarter, including 12% growth on a reported basis and 15% in constant currency. However, some of this was due to timing given last year's recovery from the Vietnam shutdown to change the order flow through.
The first half of the year.
As expected this benefited Q1 and will pressure Q2.
Merrell as revenue increased 18% on a reported basis and 20% in constant currency to $180 million in the first quarter.
This performance was in line with our expectations for high teens growth in the quarter.
Notably Merrill gained market share based on NPD data due to strength in core products and extensions and new franchises.
Most notably the strength of our core Moab franchise, which we refreshed with the launch of the Moab three reinforced our product leadership, while demonstrating our ability to drive relevance and consumer love through technological innovation.
As a result Merrill showed the biggest share gains of all brands in the highest category for the quarter.
And trail running Merrill returned to share gains in the first quarter. We are excited about merrell is expansion of its lifestyle product line and believe this is our highest growth opportunity for merrell.
In the quarter, we opened the first one TRL store in Tokyo and plan to selectively opened more <unk> stores, which provides the brand's most elevated expression around the world.
We expect Q2 revenues to decline mid teens versus 2022 caused both by the difficult macroeconomic headwinds as well as year over year product flow shifts that I mentioned earlier.
Revenue for the first half of 2023 is expected to be flat.
Before I discuss <unk> results I wanted to make you aware of a change in leadership.
<unk> previously Sotheby's brand President has left the company we thank her for her contributions and wish her well.
The process of naming a successor is well underway in the interim Chris Hufnagel President of our active group will be working more closely with our strong saucony team.
We believe having Chris more involved in the day to day operations with Saucony will allow for greater collaboration and synergies with Merrill as we look to solidify saucony is a preeminent leader in core running and leverage the brand strength in technology and innovation to build out our lifestyle offering to broaden its wear occasions and consumer reach in the first quarter <unk> revenue grew.
21% on a reported basis and 25% in constant currency to $133 million.
Revenue surpassed our expectations for high single digit growth in the quarter driven by increases in the performance core run category and early progress on our initiatives to broaden our reach to an active and lifestyle consumer along with the change in receipt flow I mentioned earlier.
In the quarter, we also launched endorphin ALLETE with a very positive consumer reaction and saw a 74% sell through in Saucony Dot com in the first week of the launch.
Despite being new to the market of the 25000 runners have competed at the Boston Marathon. It was in the top 10, most worn styles.
Overall saucony was the second highest worn shoe brand and the sub three hour category at the Boston Marathon.
Now touching on our Saucony originals business, which is approaching 20% of the brand's global revenue in the U S. Wholesale wholesale channel, we opened new accounts, including fashion lifestyle platform Shopbot never read leveraging on our classic franchises to expand reach to more lifestyle consumers.
In Europe , we featured the who is Ron Dickson campaign launched the Dx and trainer, putting the style of number one and the number one spot for multiple weeks post launch on <unk> Dot EU looked.
Looking ahead, we expect Saucony revenue declined mid single digits in Q2 grow mid single digits in H, one and grow high single digits in fiscal 2023.
Moving onto sweaty, Betty first quarter revenue decreased 3% in constant currency and 11% on a reported basis to $47 million.
These results, while disappointing were better than our expectations for mid teens decline.
Sweaty Betty results continue to be impacted by the challenging retail environment in the U K.
The recent launch of the zero gravity running bra, along with other product innovations has led to improved sales trends in April higher units per transaction and less promotional activity.
We continue to stabilize sweaty Betty in its home market in the UK and Ireland, while improving profitability through synergies from stronger integration within the rest of the portfolio. Looking ahead for Q2, we expect a low teens decline in sweaty Betty revenue for.
For fiscal 2023, we expect sweaty Betty has declined low single digits on a reported basis and increased low single digits on a constant currency basis.
Work group revenue declined 17% on a reported and constant currency basis to $115 million.
The revenue decline in the quarter was primarily due to normalized phasing of Caterpillar international spring product flow as well as pressure from consumers trading down to lower price point products.
Our brand teams have already responded with great offerings in the under $100 price category.
Our highly anticipated collaborations continue to resonate well with customers generating further brand awareness and loyalty.
Knowing the first launch in 2020 to Wolverine continued its journey and the Halo universe with the launch of our four boot limited edition, Wolverine and Halo Master Chief boot collaborations and sold out in less than one minute.
Finally, we are very excited about basis test launch at Walmart and over 200 stores in the second half of the year.
Looking ahead, we expect work group revenues roughly flat in fiscal 2023 with high single digit declines in Q2.
Lifestyle group, which includes Sperry Hush puppies saw a revenue decline of 8% both on a reported basis and constant currency Barry first quarter revenue declined 13% to $63 million, which was softer than our expected high single digit decline due to lower sell throughs of certain styles caused in part by the unfavorable weather during the spring season.
We are focused on stabilizing sperry with initiatives to introduce styles that more closely resemble the brand's DNA.
We remain optimistic about the growing prep fashion trend that is emerging in the market.
We expect Sperry revenues declined high single digits in fiscal 2023.
Low teens decline in the second quarter.
Now I will briefly touch on our international business revenue grew 13% on a reported basis and 18% in constant currency in the first quarter.
Our brands continue to resonate well in global markets and we see significant opportunities in both owned and JV operated markets.
Merrell and saucony across regions were the key drivers of performance with 29% and 37% growth respectively.
<unk>, China JV once again had a very strong quarter as sales grew over 100% exhibiting the strength of our multichannel strategy.
In Q1, the brand launched the endorphin lead in China, which sold through 60% and 30 days and provided invaluable activation and media opportunities for the brand.
The growth also includes the addition of 12 new stores during the quarter, bringing our total store count to 81.
We continue to expect Saucony revenue from our China JV to double in 2023.
In conclusion as we move through the year, we remain focused on driving growth across our active group leveraging our leading position in work and addressing our underperforming brands.
All while increasing the efficiency of our business model.
We are excited about newness and marketing initiatives planned for the back half of the year across our brands. We are fully on track to return to the high single digit growth in the second half of 2023, as we lap supply chain disruptions of last year.
Finally, we expect to continue to reduce inventory and take costs out of the business to free up investment for 2024 and beyond.
I will now turn the call over to Mike to discuss more details about our first quarter financial results and our 2023 outlook Mike.
Thanks, Brandon and thank you all for joining the call. Let me briefly recap certain financial highlights primarily from our ongoing business for the first quarter and then I'll cover our outlook for the second quarter full year first quarter revenue for our ongoing business of $580 million was in line with our outlook and.
Centered approximately 3% constant currency growth.
Our most important brands Merrell Saucony, sweaty, Betty and Wolverine accounted for over 70% of our revenue during the quarter.
Reported revenue was $599 $4 million adjusted gross margin of 40% was in line with our expectations adjusted.
Operating margin was five 1% and included the impact of $25 million of incremental transitory supply chain class.
The reported operating margin of seven 6% included.
The gain from the sale of keds, partially offset by reorganization costs.
Adjusted diluted earnings per share for the quarter were nine cents and <unk> 12 on a constant currency basis.
The reported diluted earnings per share of 23 reflects the gain on the sale of the Keds brand.
Inventory for the ongoing business was $726 million and improved $19 million compared to Q4 2022.
The first quarter was a good start to the year.
And we achieved nearly all of our short term objective.
We fully appreciate the importance of operational discipline.
Cost control and cash flow in this volatile environment.
And we have made important improvements in all areas.
Brendan you mentioned some of the benefits being driven by the profit improvement office.
But I want to emphasize the great work. This team is doing to accelerate and crystallized cost savings as a fundamental part of strengthening the foundation of the company.
We remain confident in our ability to deliver $150 million and profit improvements in 2024.
In support of our 12% operating margin target.
Let me transition to our 2023 outlook for the full year.
Our guidance reflects the expected performance of our ongoing business, which excludes the full year projections for keds and Wolverine leathers.
And adjust for the licensing transition for Hush puppies expected in July like many other companies in our industry, we have seen some deterioration in market trends since the start of the year and.
And especially since early March macroeconomic concerns and a cold spring selling season have impacted consumer demand.
Despite this added pressure, we believe the diversity of our portfolio and global reach will help to mitigate the risks ahead of us as a result, we are reaffirming our outlook for revenue earnings and year end inventory revenue from our ongoing business is expected in the range of $2 $5 $3 billion to.
$5 $8 billion.
Constant currency growth of approximately 1% to 3% adjusted gross margin is expected to be approximately 42% adjusted operating margin is expected to be approximately eight 5% adjust.
Adjusted diluted earnings per share is expected in the range of $1 40.
The $1 60.
Compared to $1 37 in 2022.
Year end inventory is expected to improve by approximately $225 million.
Operating free cash flow is expected to be at least $200 million and year end debt leverage is expected.
To be approximately two times.
Now, let me provide our outlook for the second quarter.
Which reflects the performance of our ongoing business and excludes keds and Wolverine leathers.
<unk> second quarter 2022 revenue for these businesses.
It was approximately $40 million and the EPS contribution was <unk>.
We expect Q2 revenue of approximately $580 million.
A decline of approximately 13, 7%.
This estimate reflects the challenging trading conditions that persist in the market.
Both at wholesale and in our DTC channels. Some retailers are still working through elevated inventory levels and most are managing the flow of goods conservatively.
In addition.
It's worth noting that Q2 2022 was a record revenue quarter for the company benefited from a shift in sales out of Q1.
Cause of significant Vietnam factory closures and delays experienced last year, we expect Q2 gross margin of approximately 41% and operating margin of approximately 6% include.
Including $23 million of transitory inventory costs, we expect adjusted diluted earnings per share of approximately <unk> 20 for the second quarter, which includes a negative two cent impact from foreign currency exchange rates.
Looking beyond the second quarter, let me share some insights related to the back half of the year given the revenue performance now expected for the first half of the year.
Revenue for the second half is estimated to approach.
55% of the annual total.
Which is consistent with more normal pre pandemic phasing.
As we discussed in February .
Gross margin and operating margin improved significantly in the back half of the year.
As transitory inventory costs receipt and the benefits of our profit improvement efforts increased sequentially.
We also expect our inventory levels to continue to improve each quarter in the second half.
In conclusion.
We are successfully navigating a tough environment and making fundamental improvements to the business along the way.
While difficult.
The choices, we are making to simplify and clarify our brand portfolio, including the recent Sperry announcement.
Allow us to lean into our brand and category strength.
Ongoing changes to our supply chain processes and technology platforms are making us more nimble and accurate.
Profit improvement and inventory initiatives are on track.
We are creating capacity to invest in our highest priorities in 2024.
Thank you to the entire Wolverine team for their ongoing commitment.
The changes we are driving at the company.
I'll now turn the call back to the operator.
Thank you Paul.
You don't know.
Thank you. So we will now be conducting a question and answer session.
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The first question, we have is from IV Jenkins from Piper Sandler. Please go ahead.
Great. Thanks, so much for taking my question. So can you just talk about first year decision to pursue a sale of the Sperry business I think the previous philosophy was kind of to get the brand in a better position before you sold it. So are we there yet and obviously that's buried decline has been a drag on top line, but is there any color you can give us on the profitability of the business and the potential.
Joe impact on the P&L. Thanks.
Well thanks Savi.
We're exploring all options so it could be a sale could be a JV could be a licensing I mean, we're just starting this process, but I think that.
Fundamentally it goes back to the corporate strategy work that we've been doing over a year and a half for over a year and a half and including the segmenting of our businesses and active work and lifestyle and really focusing on the active brands Merrell and saucony and sweaty Betty.
To be our growth engines and work to support that and as we look towards 2024 and the great work. The profit improvement office is doing too.
Free up investment dollars, while hitting our profit margins. It just became just became apparent that Sperry was going to continue to require investment that was going to.
The takeaway from where we think the upside is and so it's certainly a very difficult decision because as I've said, it's the brand.
But most resonated with me when I when I joined here, but I think it just became apparent to all of us that.
We should start this process and much like kids look for a result, that's best for the company and also best for the for the brands.
On the on the.
Sort of impact to the business and certainly correct in saying it's been a drag on.
On revenue growth over the last couple of years.
At the same time.
Given those challenges in the market and the distribution kind of profile of that business.
The operating margin for this business is below below what we would <unk>.
Require of a brand like this so it's also been dilutive to that operating margin performance overtime last thing I'll say is when you mentioned.
Brendan mentioned it is just that.
Made such great progress in quick work on keds, and that transition and being able to get that behind us in such a quick timeframe.
<unk> really allowed us to.
Move onto this important next step so the timing of this works in respect to that.
Because it's because of our success on the Keds transaction.
Got it that makes sense and just one more can you just talk about the wholesale partner behavior that you're seeing in the current environment and I know you gave some to Q guidance, but I guess what level of caution or you're seeing and then in turn like what gives you confidence in returning to that growth in the second half. Thanks.
I mean, we're certainly seeing tremendous caution right now real time, although our at once orders are up as we know they are chasing business, but now I think everybody's seen business softened since early March and with the.
The weather trends, so definitely definitely apprehension that we factored into our guidance, but also starting to see some orders pick up in the back half of the year, Our order book our order coverage.
Isn't very good position to support.
Our back half of the year goals and guidance.
It also gets us to a.
Penetration, that's a little bit more of a historical in terms of a little bit more back half weighted but.
Right now having been out in the market. The last few weeks at various industry events and it seems pretty consistent that.
People are very cautious in the moment.
Great. Thank you.
Thank you. The next question we have is from neuro question.
<unk>. Please go ahead.
Good morning. Thank you very much for taking my question I just wanted to follow up on <unk> question with regards to.
Sperry.
I know, there's you're probably looking at different options, but theoretically.
If you sold this business.
What is the EPS contribution for this year I know, it's not exed out, but the dollars $40 60, just so we can kind of back out the EBITDA implications.
It is the contribution of Sperry embedded for this year's guidance around seven to 10 cents does that makes sense and then if you sold it the proceeds whatever they may be.
Would you what would you use those proceeds for would you reinvest in the business or would you look to pay down debt.
The last part of that question is easy we will be using any proceeds from any monetization of the business to pay down our debt.
And continue to drive that leverage down to the levels that we are targeting.
As far as a contribution to overall performance, it's a little more than 10 cents, but.
Again on that operating margin basis.
Diluted dilutive to that operating margin rate so.
But also just important to know that as we move forward with these different options will just be evaluating how the simpler portfolio is going to allow us to simplify the infrastructure of the company as well.
Now to employer brands that will we are addressing here and keds and Sperry.
We're still moving forward with our Wolverine leathers divestiture. So at the end of the day, we're going to be left with a really strong portfolio of active and work brands.
And a much simpler infrastructure supporting those businesses, which will make the cost structure more efficient.
Very helpful. Mike and then my second question following up on Merrell Saucony, It sounds like Youre still youre reiterating the mid single digit growth for both brands for the year.
<unk> a little bit lighter.
And can you maybe just talk a little bit about the state of inventories in the athletic space, what you're seeing are they starting to.
Yes, I think as I said in my remarks, we definitely saw some cadence shifts from last year with Vietnam being.
Being shut down that the comps in Q1 were soft and we took advantage of that by the way that business shifts shifted to Q2 last year and so.
That combined with the a weaker wholesale environment. We just talked about is pressuring Q2.
I think out at retail our inventories are in good shape there.
Really moderated so I don't see that as a problem for us I think a lot of retailers are still dealing with their own private brands that is clogging up some of the <unk>.
Some of the open to buy but I think specifically.
Typically for.
For our brands, we feel like based on how much the flow slowed down in Q4 of last year that.
We're not over inventories I think that's why we're starting to see some orders.
Pick up in the back half of the year and also I think in the value channel starting to get some phone calls as well.
They have needs again so.
At healthier margins than than we would have seen a few months back.
Very helpful. Thank you very much for taking my questions. Thanks, Laura.
Yes.
The next question is from Mitch Cummins from Seaport Research. Please go ahead.
Mike on the inventory you mentioned that you would expect it to improve each quarter through the year.
Could you be a little bit more specific on that is there any way you can kind of give us.
Sort of where do you think the inventory kind of goes by quarter on a year over year basis, and also could you give us an update on the $150 million of end of life inventory I think that was the number at the end of the year like where does where is that now and I think you basically had orders against that I was just hoping maybe just sort of a status update.
On that.
Hello.
Yeah, we actually added a table in the press release, Mitch that kind of give some of those quarterly inventory numbers, which should help you answer that question, but you'll see.
Nice sequential improvement every quarter the biggest thing.
From quarter are the biggest improvement in Q3.
On the end of life inventory that's.
<unk> shipments in the first quarter and some additional here yet in the second quarter there'll be a little bit of that that will ship out in Q3, but I would say the vast majority of that end of life product will be kind of out of the inventory and out of the warehouses by the end of the second quarter.
Okay.
And then my follow up.
I apologize for missing that table in the press release, but.
The tables that I did.
We're the ones on the on the transitory expenses than on the profit improvement savings. So it looks like some of the timing there.
<unk>, particularly on the on the gross profit side on the transfer expense it looks like some of that's getting kind of pushed out a little bit from Q3, Q and then also on the profit improvement side. It looks like maybe some of the benefits on gross profit or accelerating or at least moving forward. So can you talk a little about some of those shifts sure yeah and on the transitory.
Cost I mean, a lot of that as you know we came into the year with us with those costs in their inventory related costs. So they flow through the P&L when we get inventory shipped.
So given given some of the softer.
Our expectations for Q2 in terms of timing of shipments some of those shipments are shifting into Q3, and so the transitory cost six months just shifts at the same time, so overall our outlook for the benefit from that and the timing of that.
<unk> is still intact. The estimates overall really haven't changed it's just the phasing of timing and then on the profit improvement initiatives, just the ability to kind of secure those benefits a little earlier than we had expected not necessarily more for the full year, but just being able to crystallize those.
Crystallize those earlier.
Just kind of what's driving some of that earlier benefit that you're calling out so.
Obviously next quarter, we might see a slight phasing change again as all of this stuff is not dependent on a number of different factors that drive the timing of expense and the benefit.
Got it alright, thanks, good luck.
Thanks.
Thank you. The next question we have is from Dana Telsey from Telsey Group. Please go ahead.
Everyone as you think about the second quarter and maintaining the guidance the back half of the year. When you think about the profit improvement initiatives that are taking effect, how do you parse out the.
Revenue expectation versus the margin expectation any more color you can put to that and then Brendan any updates on <unk>.
Sweaty, Betty and what Youre seeing there given leadership changes, where you are on that state and how that business is doing. Thank you, yes, thanks, Dana I'll start with sweaty Betty.
When we were able to control the presentation through stores and E. Commerce, we were able to get credit right away for that for that new products. So it's been really good to see the last four or five weeks of sweaty Betty in.
In terms of the leadership change.
Julia is still there she has another month or so before she relocates back back to you.
With our family but.
<unk> is about Soriano, our head of international are partnering very closely and so I think I said I think I alluded to the it's really been a very positive.
Movement in terms of having them report up to international I think that they were a little bit isolated on their own being integrated into Wolverine without that kind of direct connection. So it's been nothing but positive and allowing us to look for synergies to gain efficiencies in the business by utilizing our international team that.
Reinvest back into the sweaty Betty business, but.
Some real positive signs there and we're in the final stages of.
Naming a new brand leader reported up to Isabel So excited about that Mike you can comment yes, I think I think the question was just on like the sequencing or the phasing of the gross margin.
It gets slightly better in the second quarter as we guided to.
A lot of that has to do with both the timing of the transitory costs that the the.
Out of.
End of life product that we're shipping in the mix.
In the back half of the year Dana we'd expect gross margins to approach, 43% really in both quarters. So.
Really strong improvement from all the factors, we've talked about leading into the year.
Not the least of which obviously is the profit improvement timing and improve improved cost structure.
Cost improvements and then just a better mix of business healthier mix of business in the back half of the year. So all of those things are still on track.
Gave us confidence to keep our margin outlook intact.
Got it and any more color on the DTC channel.
Yes, I mean, the DTC channel has been tough.
It's definitely slowed down.
Since early March.
So that's.
Influencing our Q2 guidance.
That being said, we know last year business slowed down around end of May early June and so we have some softer comps that we start to anniversary across the business. So along with some of the new product launches that.
That will be.
Launching.
I think the trends will get better, but certainly the last four or five weeks have been.
Been challenging.
Thank you.
Okay.
Thank you Andy.
Ladies and gentlemen, just a reminder, she would like to ask a question. Please press.
And then one wow.
Next question, we have is from Sam Poser.
From Williams trading.
Yes.
Thanks, very much for taking my questions I've got two one you.
You talked about the year over year increases you're expecting by brand for the quarter and for the year, but we don't we have the year, but we don't have the quarters by brand from 'twenty two.
Could you give them to us or could you tell us by.
For the second quarter by segment sort of how you're thinking about.
<unk> work lifestyle.
Yes, Sam this is Alex we have we have those stats in the IR deck I can I can send that to you real quickly. So it's right at hand, but we lay that all out for 2022 and 2021 by quarter by by the brands that we disclosed so far there.
I was looking forward in the Q, sorry about that okay.
And then Mike do you anticipate that the.
Yeah.
That's the gross historically the gross margin has been higher in Q4 because of mix than it has been in Q3, and just sort of looking at the way you're guiding Q2 do you anticipate that the growth that that will continue.
And the big the big year over year pop in gross margin not only will be higher in the fourth quarter, but also that gross margin number will be significantly higher in the fourth quarter, you say, averaging 43, but it probably needs to be higher than that.
In the fourth quarter, it'll be a little bit stronger.
A lot of moving parts as you know, though this is just not a normal year because of the timing of some of these incremental benefits that are flowing through so.
We're getting some of those.
More prominently in the third quarter, but the mix is better in the fourth quarter balances things out a little bit but.
Directionally, what Youre, saying is right Sam we would expect fourth quarter to be a strong gross margin quarter, because it's a quarter, where our direct to consumer business is heaviest in the mix and obviously sweaty body has a big impact on that mix in Q4.
Just one last thing there I mean do you I mean do you expect you.
You said around 43, but based on the guidance you gave for Q2, it's got to be sort of like approaching 44. So do you have or is there a 44 handle on either quarter do you foresee that or is it sort of high 40 threes.
Yes, it's in that range that I disclosed.
Alright, thanks very much.
Sam.
The next question is from Jim Duffy from Stifel. Please go ahead.
Hello, Thank you.
I'm going to start with an observation I'm just shocked at salmon niche arent reviewing our releases more carefully.
Two in particular are always so good that it's really out of character for you though.
No.
A few questions on Sperry for me.
First is this an easy lift from the portfolio or are there are dis synergies that we should be considering with respect to the financials.
I mean.
Got it.
I wouldn't say, it's easy obviously.
This was mostly a hard decision, but I think.
As along with Keds It gives us more clarity in terms of how we can.
Optimize the.
The expenses in Hush puppies is really fully license now so that's in a very profitable model. So we're learning from the Keds die.
Divestiture.
How this goes and as we said earlier, we don't know what shape. This will take whether it'll be a sale or JV or licensing so that will a lot of that will depend on what we ultimately do that.
You know this very well.
Knowing how we've operated the business and we've said for a year now our ability to <unk>.
Focus prioritize and invest on the right things.
Beyond the cost structure in the sort of.
Spirit direct Sperry implications to the P&L.
The ability to really emphasize our resources on those opportunities with so.
That's going to put more pressure on our active and work groups to deliver more consistent growth, but also to be able to invest behind that in a more productive way and we've been able to do before.
So to me, that's an important and unlocked for this decision.
Brandon mentioned, it before but I think it's worth repeating that.
Helpful. Thanks, and I recognize it may be difficult to get too specific here, but just thinking about the Sperry infrastructure. If Sperry goes to I mean, do you need a Boston headquarters that seems a glaring area for cost savings opportunity and it's just the saucony brand if I'm right operating out of that.
If you no longer have Sperry.
All of the all of the options that we have to look at yet and consider it will be will be driven off of the ultimate choice that we make so it's premature to make that conclusion, but.
There are examples like that across the global infrastructure for the company, where you know depending.
Depending on the the alternative that we choose I think we're going to be able to create a much more efficient and much more streamlined cost structure and support system.
Fair enough.
And Mike you mentioned, the second half 55% of the revenue guide, which is more typical seasonality historically earnings weighting has been more aligned with revenue in the fiscal 'twenty three guidance implies the second half more like 80% of the annual earnings power.
Clearly theres some impediment to.
Margin in the first half of the year.
But is it right way to think about that that your run rate in the second half of the year is representative of your annual earnings power on a go forward basis.
I think thats right yes.
And I.
Yeah.
For sure, but in the back half of the year I think we are going.
I think the back half of 2023 is going to be representative of.
The business will cycle into 2024, and we're going to sequentially see those improvements each quarter.
But I think as we've discussed here.
<unk> of some of these these extra costs.
And the phasing of some of the profit improvement make the quarterly phasing of earnings very very distorted.
As we get into the back half of the year, I think youre going to see a much more normalized.
Cost structure, a much more normalized operating margin.
Performance.
And we're still opportunities obviously as we as we go into 'twenty four to get the incremental benefits that we talked about from the profit improvement office. This year, we're going to get to $65 million of savings that are all embedded in the in the 'twenty three guidance and next year the full year run rate for that will be.
$150 million so.
A meaningful incremental amount of savings that are support next year's operating margin target I think what's energizing for me and the team is.
These transitory costs that will go that are going away as we get to the back half of the year and certainly into 'twenty four.
As Mike said, all the work that profit improvement office has done which I couldnt be more enthusiastic about the progress, we're making there and the ability that gives us to deliver the targets. We have discussed but also have real investment dollars that we can invest back into our brands as we focus the business.
Thank you guys. Good luck.
Jim.
Thank you.
Question is from where you just carry that from UBS. Please go ahead.
Great. Good morning, Thanks for taking our questions.
Wanted to ask about the first quarter. If you could talk about the exit rate on the direct to consumer channel No and what do you expect like in terms of like the guidance the sales guidance for the year, what does that imply for growth across all channels.
For the second half of the year, and then and on inventories could you talk maybe a little bit more about any pockets, where you believe theres more work to be done than others in terms of bringing it to more normalized level should we expect <unk> inventory growth to be in line with sales growth based on the commentary you provided.
Thanks.
Regarding DTC as I said, we've seen a slowdown over the last last few weeks, but.
As we get later on into the quarter and really into Q3, that's when we start to anniversary the slowdown from last year. When some of these macro headwinds started to.
Potential upside in terms of trends.
In our direct to consumer and our direct to consumer business.
Last year at this time, we were.
Working through and planning for.
Inventory.
And a positive for for 2023 on the inventory side I'd say in terms of where we were a little heavier on inventory. It's in the areas where the business has been the softest with Sperry, we have a little more inventory in that business than we would like.
But overall.
We're working through the inventory right on schedule.
Our inventories at the end of the third quarter will actually be down over 30% year over year.
And so obviously.
Much different than what we expect our growth rates to be but obviously working off of elevated inventory. So.
That's the progress that we're seeing as we not only as we sell through the core inventory that we own today.
It worked through the end of life inventory, but we've obviously adjusted our supply chain.
Inflow of new product on core merchandise.
In the back half of the year to get the inventories.
<unk> right sized by the end of the year.
Got it thank you very much.
Thanks.
Thank you Erinn.
Now I'd like to turn the floor back over to Brendan Hoffman for closing comments. Please go ahead.
Well, thank you everyone for joining us today.
We look forward to discussing our Q2 results with you in August .
Good day.
Thank you so ladies and gentlemen that does conclude today's conference. Thank you for joining US you may now disconnect your lines.
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