Q2 2023 Wolverine World Wide Inc Earnings Call

Greetings and welcome to the Wolverine World Wide, Inc. Second quarter 2023 earnings call. At this time, all participants are in a listen only mode.

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.

Please note. This conference is being recorded I will now turn the conference over to your host Alex.

Rice President of finance.

Okay.

Good morning, and welcome to our second quarter 2023 conference call.

On the call today are Tom long.

The board, Chris Hufnagel, President and Chief Executive Officer, and Mike starting at Executive Vice President and Chief Financial Officer.

Earlier. This morning, we issued our earnings press release and announced our financial results for the second quarter 2023.

This release is available on many news sites and can be viewed on our corporate website at Wolverine worldwide Dotcom.

This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures.

These non-GAAP financial measures are reconciled to the most comparable GAAP financial measures 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 and projections such as those regarding the company's outlook for fiscal 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 identified in the company's SEC filings and in our press releases.

But that being said I'd now like to turn the call over to Tom long.

Thank you for joining today's call before the team discusses earnings I'd like to address the leadership transition we announced today.

Immediately the board has appointed Chris Hufnagel to succeed Brendan Hoffman as C E O of Wolverine worldwide.

Lord recognizes the Wolverine worldwide needs to deliver improved financial performance.

And the company must evolve to build brands that ignite consumer desire.

We must ensure that everything we do begins with our product design, our brands and the people that buy them.

Just can't nearly be words, we have to develop the business systems, the management routines and consumer insights to drive excellence from the very top.

We also must ensure that everything we do begins with our customers.

Accordingly, the board has taken decisive action to appoint a CEO , who brings the experience and leadership required.

Put the company on the right course.

Yeah.

A few words on Christmas background.

Chris has been an effective leader throughout his long tenure at Wolverine worldwide, including.

Including this global brand President of the company's active group, which includes our two largest brands Merrell and saucony.

Christmas covered almost every area of this company and increasingly dynamic leadership roles.

He also has extensive leadership experience in prior roles and under armor gap and Abercrombie and Fitch.

The board elevated Chris to C E O for a few main reasons.

Most importantly, he knows how to build brands, which is essential for our success.

He's a decisive high energy leader, who displays good judgment and a willingness to embrace change.

He brings a demonstrated playbook that the board believes sand from his prior strategic roles.

A clear view of what needs to be improved now.

Two specific examples help capture Christmas contributions to Wolverine over the years.

And they speak to our confidence in his ability to lead the company.

First Chris led our first ever consumer insights market intelligence team that drives customer obsession everyday.

I expect Chris to bring this operating philosophy to the entire business.

Building the focus on excellence and execution from the very top.

Second as Merrell brand President from 'twenty, and 'twenty, one to 2022 Chris led the brand to back to back all time record revenues, while more than doubling our e-commerce business.

As a result of these successes and many others, Chris has built a large and loyal following inside Wolverine worldwide and with the board.

We are confident he will operate with urgency and focus for our shareholders.

To our shareholders, it's no secret that.

Our results have disappointed recently.

However, we continue to believe that Wolverine worldwide can deliver strong financial performance and attractive shareholder returns under the right leadership.

We have no time to spare and that's why we are announcing this change today.

With that I'll turn the call over to Chris Hufnagel, Our Chief Executive Officer.

Thank you Tom good morning, everyone.

I'm, Chris Hufnagel, and I'm pleased to join you on this call as Wolverine worldwide, New President and Chief Executive Officer.

I would like to express my appreciation to Tom long and the board of directors for their vote of confidence in me for this new assignment a role I'm honored to take on.

I'd also like to thank my colleagues from across the entire organization for their hard work and support for me over the past 15 years I'm ready for this next chapter in our company's 140 year story and excited to work together to navigate this challenging time and position our brands and company for success in the future.

Before getting into the numbers and our path forward I wanted to briefly introduce myself to you.

Prior to joining Wolverine worldwide I was fortunate to work for some amazing brands, including under armour, the gap and Abercrombie and Fitch.

And to be mentored by some truly great leaders leaders, who obsess daily about brand product and their consumers.

Since joining Wolverine I have developed an intimate knowledge of the company our brands our processes, our people our partners and the industry.

I understand both the challenges and opportunities facing Wolverine today, and ready to move with pace to strengthen our footing and ultimately deliver better results for our shareholders.

Drawing on my experiences and more importantly, levering our talented team.

I firmly believe we have the playbook and capabilities that can get this company back on track.

Hit the ground running and excited about the work ahead.

From my very first call with you, let me start with what matters, most and our journey to create shareholder value.

Brands.

Worldwide must transform to become a great builder of brands.

I believe great brands do three things extraordinarily well day in and day out.

First they build orphan products innovative trend right priced rate comfortable products informed by deep insights that solve for consumers' wants and needs.

Great brands tell amazing stories differentiated meaningful stories and experiences that meet their consumers when and where they want to be met.

Modern brands must also engage in an ongoing push pull relationship with their consumers.

Third and finally, great brands have great teams driving the business each and every day are constant and relentless pursuit to build and protect their brand and to be better tomorrow than today.

This is a new brand building model for Wolverine worldwide.

Our model and playbook, we've put into practice, the cat footwear, and Merrell, which drove those brand to new Heights.

Now this playbook across the portfolio, leading to a repeatable pattern of success.

Turning to the company's current position.

While I'm excited about the future our financial update this morning, as well short of expectations.

Mike starting it will cover the most recent quarters results and the contributors of the updated outlook in more detail shortly but we've seen softness in the marketplace and headwinds impacting the business that we now expect to continue into the second half of the year.

We expect these headwinds headwinds to abate over the coming quarters as consumers moved past current economic uncertainties inventories become cleaner retail post COVID-19 trends normalize and we lap the tough comparisons.

Despite the current situation in the near term outlook I believe we have a strong foundation in place at Wolverine today.

With industry, leading authentic brands loved around the world yet.

Yet I know they've got to reach their full potential.

With interactive group Merrell, Saucony, and sweaty Betty are poised to benefit from long term secular trends and big attractive markets.

Moreover, we have category, leading brands in areas like work well at Wolverine and cat footwear, I own about 20% of domestic market share and generate strong consistent returns.

At the same time Wolverine benefits from strong global platforms.

Great Global operations Group Amazing partners and corporate centers of excellence that allow our brands to focus on their consumers products and demand creation.

Finally, we have a great team dedicated to our consumers our brands and each other.

I believe we have significant opportunity in front of us and I'm confident in our ability to generate long term growth profitability and shareholder value.

To deliver on that promise, we need to take bolder and faster actions.

Over the last 18 months Wolverine has taken several important steps as we reposition the company.

While not all of these actions are benefiting our results today, that's either plant it to drive meaningful change and improvements across the organization over the next several quarters.

To quickly highlight our actions in motion, we're effectively getting our inventories back in line I'm.

I am pleased to report that at the end of the quarter were $25 million lower than we expected to be and we're on track to achieve a $225 million reduction in inventory versus 2022 by year end.

Our profit improvement office designed to free capacity for increased investments in our brands is on track to deliberate schools for 2023, along with our targeted full year savings in 2024.

Critical enterprise wide tools and process initiatives, specifically, and then planning and product line management are on schedule and will allow us to be both more accurate and more agile in managing our business on.

On the brand front.

Several of Merrill's new launches into hiking trail running are seeing positive traction and I'm pleased to report Merrell has gained market share in the important hike category for each of the past 10 months.

Socking to you're seeing early signs of strong strong product acceptance for recent introductions, specifically to try in 'twenty, one and say, we're also seeing a halo effect for other styles within the assortment.

Encouragingly Sweaty Betty performed better than we expected and the most recent quarter and saw a positive response to the new product introductions. We've also accelerated our integration efforts for the brand and that work is yielding both better synergies and cost efficiencies.

Finally, we have new leaders in our three key growth brands, Merrell Saucony and sweaty Betty all consumer centric strategic thought leaders I'm excited about working together with these new leaders they bring deep experience and passion for their teams and results along with a strong sense of urgency.

We've also initiated other critical efforts to transform our portfolio and global operations to have a more focused approach targeting our biggest opportunities while streamlining our organization to be more agile and efficient.

Key steps. We've taken include the sale of cats, the licensing of Hush puppies business in North America, and the decision to pursue strategic alternatives for Sperry in the Wolverine Leathers group.

A more strategic integrated and efficient approach to managing our business to this end. This week, we announced the consolidation of our U S offices, including the closure of our Boston campus at year end.

This decision will drive increased collaboration across our teams and accelerate the sharing of best practices across the organization, including the implementation of the brand building playbook I'm excited to have all our footwear brands under one roof in the near future.

On the operations front, we're actioning a more strategic long term approach to our global supply chain working with the best partners to drive improved reliability costing efficiency transparency and agility.

Making our supply chain competitive advantage for our brands and partners.

I would like to make it clear that we're not starting over.

We have a good sound strategy in place, we have a proven scalable playbook authentic brands and amazing talent.

The recent challenges have only made it clear that we need to move faster and be bolder to achieve our fullest potential.

As we navigate the current challenges our focus must be to stabilize the financial footing of the company, which were making progress on each day.

Also finding capacity to reinvest in our brands and ultimately reallocate resources to realign our competencies to become better brand builders focused on consumer obsession product innovation and modern demand creation.

Despite the near term challenges, we have a plan in place to advance our strategic priorities deleveraged the balance sheet and maintain capacity to invest in building our brands. We remain confident in our ability to turn to a 12% operating margin and a variety of economic backdrops and have like a line of sight to achieving this target in 2020 for Michael <unk>.

Walk you through a bridge here shortly and how we see this playing out over the next 18 months.

But before I hand, the call over to Mike.

I want to emphasize three points that I hope you take away about our framework to drive shareholder value.

Excited about this new opportunity to lead the organization with a proven playbook in hand that can be leveraged across our entire business with a team ready to execute well.

We're talking the critical issues that face our company and we are well positioned to capitalize on the many opportunities we have in front of us all through our commitment to being bolder and faster grads.

Gradual improvement will not be sufficient we.

We have an actionable pragmatic plan in place to advance our strategic priorities deleverage the balance sheet and maintain capacity to invest in building our key growth brands, while accounting for the challenges we say.

We look forward to sharing more updates with you on our progress in the coming months now over to Mike <unk>, Our executive Vice President and Chief Financial Officer, Mike.

Thanks, Chris and thank you all for joining the call.

Let me start by briefly recapping, the second quarter financial highlights.

I will then cover some of the challenging trends that have impacted our revised outlook.

And the important work, we are doing to drive significant profit improvement.

And debt paydown over the coming months.

Okay.

Second quarter revenue for our ongoing business of $578 million.

In line with our outlook and down 14% from last year.

Adjusted gross margin of 39% was below our expectations in.

In the second half of the quarter, we saw a decline in full price sales to our U S wholesale customers.

Say cautiously tightened their open to buy to manage inventory.

These full price sales were replaced with lower gross margin shipments to international distributors.

In addition, we accelerated the liquidation of end of life inventory at lower than planned prices.

Which negatively impacted gross margin, but helped us to drive inventory levels down by $25 million more than planned.

Recall that Q2 gross margin includes the negative impact of $20 million of transitory supply chain costs.

These costs will decline in the back half of the year and will not recur in 2024.

Adjusted operating margin was five 8%.

With strong cost management offsetting the shortfall in gross profit.

Reported operating margin was seven 8%.

Adjusted diluted earnings per share for the quarter were 19.

In line with our guidance, but reported diluted earnings per share was <unk> 30.

Entry for the ongoing business was $648 million up 7% compared to last year and down nearly $100 million compared to the Q4 2022.

We ended the quarter with net debt of $930 million liquidity of $370 million.

And our bank defined leverage ratio of three five times.

Now, 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 of cat and Wolverine leathers.

And adjust for the licensing transition for Hush puppies in the second half of the year.

We continue to evaluate strategic alternatives for Sperry.

And those results remain in our outlook for 2023.

Since may <unk>.

<unk> revenue outlook has declined $55 million and operating profit has declined nearly $25 million.

Like many other companies in our industry, we continue to see softness in our U S and European footwear wholesale businesses as retailers remain cautious.

Our may guidance did not contemplate the increase in order cancellations.

The decline in new orders.

That have been experienced over the last 10 weeks.

These factors have negatively impacted our current wholesale sell in.

Approximately $90 million for the second half of the year.

During that same time U S DTC trends and declined more than expected.

Finally.

We have seen some reduction in demand from us from.

From certain third party distributors for the back half of the year.

As they adjust to lower consumer demand in their markets and also manage inventory.

We are now assuming that these most recent trends will continue for the remainder of this year and we are therefore, taking a more conservative approach to our 2023 revenue outlook.

This approach.

It will allow us to limit inventory risk and achieve our year end inventory target of $520 million.

Setting fiscal 2024 up for cleaner trading.

More capacity to flow new product innovation.

And less pressure on gross margin from off price sales.

Our revised outlook for revenue from our ongoing business is now expected in the range of $2 $26 billion to $2 $2 $8 billion.

Adjusted gross margin is expected to be approximately 40%.

Down from our previous guidance of 42%.

The decline is a result of lower Q2 performance described earlier.

A lower mix of footwear D to C sales and the overall mix.

And lower revenue now expected in our full price channels.

We continue to evaluate pricing actions that could help drive stronger retail sell through over the coming months.

Please recall that the gross margin outlook includes $70 million of transitory costs and approximately $20 million of excess inventory liquidation costs.

Combined these costs represent 400 basis points of annual gross margin pressure that will not recur next year.

<unk> selling general and administrative expenses are now projected to be approximately 35% of sales and.

And adjusted operating margin is expected to be approximately 5%.

Adjusted Diluting earnings per share is expected to be in the range of 45 to.

To 55.

Year end inventory is still expected to improve by approximately $225 million.

Paired to the prior year.

Operating free cash flow is now expected to be.

In the range of $80 million to $100 million.

In addition.

<unk>, we are currently pursuing the sale of certain noncore assets.

For at least $50 million and expect these to be completed over the coming months.

Including the proceeds from these asset sales.

We expect year end net debt to be approximately $850 million in.

And bank defined debt leverage to be approximately three times.

Now, let me provide our outlook for the third quarter.

We expect revenue of approximately $515 million down 21% compared to last year.

In 2022.

Shipments to third party distributors in Q3 were abnormally high by approximately $50 million due to a shift in timing.

So on a more normalized comparison projected Q3 revenue was down about 14%.

We expect adjusted gross margin of approximately 42%, including $12 million of transitory supply chain expense expenses expected in the quarter.

Adjusted diluted earnings per share is expected in the range of five to 10.

This outlook reflects trends experienced in July and the expectation that they will continue through the quarter.

Finally.

Let me provide insight into the near term improvements, we now expect in the business.

We remain very confident in our ability to significantly improve our profit performance in 2024.

While we pay down debt to more normal levels over the next six quarters.

During 2023.

We will recognize $90 million of transitory supply chain any incremental inventory liquidation costs that will not recur in 2024.

The profit improvement office started in November of 2022.

Has secured approximately $70 million of savings for 2023.

And we have line of sight to an incremental $130 million in savings for 2024.

Now, yielding a full year run rate of $200 million.

Our confidence to deliver these full year benefit is based on the following.

$135 million is the annualized benefit from 2023 actions already secured and supply chain and indirect cost areas.

$35 million relates directly to the next phase of right sizing the organization in line with a smaller portfolio and the accelerated work Chris explained earlier.

$30 million is related to further supply chain and gross margin initiatives that have been identified and are expected to be secured in the next six months.

As a result of the significant cost improvements the company is on a solid path to 12% operating margin, while creating capacity to reinvest a portion of these savings into brand building and best in class marketing capabilities, especially for Merrell and Saucony.

We are pleased to share further details of this profit improvement roadmap.

And have added a page to our Investor relations presentation summarizing the components.

In addition to the projected profit improvements just discussed.

We expect further inventory improvement in 2024, driven by tighter SKU management and an enhanced operations planning system.

Due to these operational efficiencies and ongoing deleverage efforts.

We project net debt below $700 million by the end of next year.

If accomplished benefit to our annual interest expense would be 10 million to $15 million.

These projections do not contemplate the benefit of proceeds from a sale of Sperry or other strategic alternative that might result in the monetization of <unk> working capital.

In conclusion.

We continue to navigate a tough environment.

And make fundamental improvements to the business along the way.

The more challenging outlook has accelerated our work to improve the financial strength of the company.

Further clarified our priorities and opportunities.

Profit improvement and inventory initiatives are on track.

And we are creating capacity to invest in our highest priorities in 2024.

Thank you to the entire Wolverine team for their ongoing commitment to.

The changes we are driving at the company.

On a personal note.

I want to congratulate Chris.

Someone I have worked with closely over the years.

He possesses the experience and the passion needed to lead our global team to be bolder and faster.

I look forward to supporting Chris and this important work.

And I'll now turn the call back over to him for closing comments.

Thank you, Mike and thanks, again to everyone for joining us today, but before we open the Q&A I also wanted to personally thank everyone at Wolverine worldwide and our partners around the world for all your hard work to date and the good important work to come I look forward to working with you in the days ahead, let's go.

Operator, please open the line for questions.

Yeah.

Thank you at this time, we will now begin the question and answer portion of the call with our host Chris Hufnagel and Mike started.

Available to answer your questions.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

So participants using speaker equipment, it may be necessary to pick up your handset before question to Star Keys. Please.

Please limit your questions to one question and one follow up and then re queue for any additional questions.

Okay.

Our first question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Yeah, Hi, good morning. Thank you Mike I wanted just to start with a financial question could you just clarify I know in the press release.

And the guidance is for you.

Your bank defined leverage to reach approximately three times by year end could you just clarify.

That calculation any factors youre getting credit for how about above and beyond just the normal profitability and then how do you see the leverage ratio trending into the first half of next year.

Yes.

Thanks, John .

The bank defined leverage calculation gives us credit for some of the transitory costs and unusual costs that are embedded in the GAAP results. So we're able to adjust out some of those costs.

To benefit benefit that we also had obviously in the quarter some improvement in recoveries and some insurance.

Recoveries related to the litigation and some other areas related to the remediation that also benefit the calculation. So those are the other some of the non-GAAP adjustments.

In addition, we stated our intention to sell off some assets that are non core assets to the company.

Those are reflected in the guidance for the for the year end leverage targets and net debt targets.

As we cycle into 2024.

And start to see the full benefit of the profit improvement initiatives and then.

The transitory costs that begin to fall off.

Early in 2024 in the first quarter, we would expect to see an increase in the trailing 12 months EBITDA calculation from those benefits.

And just a healthier business overall, obviously lower.

Debt position given the lower inventory at the end of the year and the other deleverage activities that were.

Promoting so we would expect after the end of the year that the deleverage rates would.

To improve going into the first half of next year.

Hey, Thanks for thanks for walking through that maybe one other just a broader question I'm curious.

I want to ask you in terms of your broader forecasting processes and capabilities or are you planning to make any changes given the.

The outcome this year.

And as you talk about a 12% operating margin target for 2024.

I wanted to ask your broader thoughts of it.

Whether that's the right approach.

Current environment, that's very dynamic and hard to predict and you know related to the 12% target or are you accounting for any hangover from the liquidations and inventory you've had a move this year or any factors such as continued softness in order ordering patterns into spring.

Thanks again.

Sure.

On the latter part I think the approach that we've taken any again, we provided a lot of detailed in the materials without.

The operating margin bridge focused on today's outlook the view on gross margin and the impact that we've taken and related too.

Monetizing excess inventory and the costs associated with that our baseline of revenue that's.

Really this year's realized outlook.

So about $2 billion of revenue without the inclusion of Sperry in that bridge that we provided so as it relates to the assumptions and how we kind of build our model to 12%.

It's sort of based on that baseline.

Realizing that we've had a significant impact this year in our gross margin on selling off excess inventory.

We're confident that we can take any extra actions to make sure that the inventory at the end of the year is high quality and clean and we won't have we won't have a hangover of of excess inventory.

And that's our that's our plan that's our intention thats our expectation. So I think it's safe to say that we can.

See these transitory costs in these excess inventory liquidation costs go away once we cycle through the year.

As it relates to your bigger question on planning, it's well taken I think are our process today.

Really takes advantage of the benefits we've had in the past related to our outlook on backlog the trends in the business.

But one of the challenges I think that we saw this year, especially as it relates to our revenue plans worthy yeah. It was a pretty dramatic shift in trend that we saw maybe in mid May early June they really started to impact.

Our business.

Highly dependent on the wholesale channel.

For our brands, especially in the U S. In the U S market, it's over 40% of our total revenue. That's just in the U S wholesale are U S.

Dependent revenue is over 55%. When you include our D to C and.

D to C channel. So we're you know we're very dependent on this market and obviously this is one of the more challenged markets.

In our industry today, we saw declining trends as I mentioned in my remarks with both.

Really accelerated cancellations.

Well beyond what we would expect during a timeframe that we we've navigated over the last 10 or 12 weeks.

The level of new orders coming in really stalled we saw very little new order activity for a period of time.

Over that same time period so.

Hard to predict those types of trends or challenges in the process, but I think.

We recognize we need to be more.

More persistent and more frequent and our assessment of some of those trends and risks and that's a process that we've already addressed in the company.

And we will continue to be.

I think more focused on the results in our direct to consumer channels and things that we can do to influence those channels as we move forward, but now resetting where we are today, giving a more realistic outlook in the back half of the year something that we feel is properly conservative to reset the situation in the business et cetera.

Sales up like I said in my comments to make sure that we do what we need to do to clean the pipeline of inventory at retail.

Give ourselves a clean inventory position at the end of the year and set ourselves up for 2024 with.

With a cleaner than baseline and benchmark for the business.

Okay got it thank you.

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

Oh, Thank you good morning.

Congratulations to you Chris I think you've got a good skill set and temperament to rule.

However, stepping into an easy situations.

I have two questions. The first for you Chris I recognize some of the challenges.

Ironman.

If you're being honest about the missteps of the company that brought you here not just in 2023, but looking back further at a high level, where do they go wrong.

What are you going to do differently going forward.

Yeah first thanks, Jim I appreciate the comments.

It's a great question I think we've spent a lot of time.

Thinking about that internally and I do think it's a combination of of some long standing issues.

That were exacerbated.

And in the pandemic and then certainly some challenges as we manage the business through the pandemic.

Hopefully my prepared remarks.

Came through clearly that I think we have to be great brand builders.

And we have defined a flywheel of building great products, and generating brand heat, which allow our brands to yield pricing power and consumer demand, which ultimately build resilient and durable brands.

And right now we haven't have not done that across the portfolio.

So for me it really starts with brands, it's where I grew up that's what I care, most about and that starts with a deep deep insight about our consumer in the marketplace and then a strong product innovation engine, coupled with the ability to drive to drive demand and then thoughtful brand management and channel management after that.

I think for a long time, we've been very good operators.

And made product and sold to someone else and I think the world changed and we need to quickly quickly catch up to that.

As it relates to sort of Hum.

Issues.

Coming out of the pandemic and more recent memory.

We we walked ourselves and into a pretty significant inventory issue with a lot of other brands and we are working to extricate ourselves from that and we're sort of caught caught in that mail strong right now and having a heavy dependence on the U S wholesale market.

Acerbate is that so.

I can assure you that our internally and certainly with the board of directors, we've thought a lot about where the company has been where the company sits today and where we want to go in the future and I think we are our strategy is sound.

A lot of work around portfolio rationalization, we have got great improvements coming out of our profit improvement initiatives were consolidating offices. There is a scalable playbook that we own that has proven to work for.

For US now it comes down to pace, and urgency and faster and bolder execution against that agenda. So.

Your comments are well taken.

Take those to heart.

And I'm excited to get after with the team.

Excellent. Thanks, Chris Mike a question for you on the inventory just how do you plan to move the inventory with 250 million less sales and then if we're thinking about comparisons into 2024.

What is off price going to represent as a percent of 2023 revenues.

How is it that youre not concerned that all of that inventory in the channel isn't the headwinds too.

Your your revenues in 2024.

I think the sell in of the most of the off price product Jim.

As occurred already and certainly was heavier in the first half of the year we have some.

Pressure in Q3.

But in terms of.

The marketplace with our retailers, we feel like we have.

We can see that.

Dissipating or normalizing here over the next couple of quarters the.

The inventory that we have today.

Remains in the core inventory and we have.

Heavier coverage in some of our core styles today than maybe we would like but I think the quality of the inventory is quite good and we continue to manage I think the ability to manage the inventory levels down to our original targets has less to deal with higher level of liquidation and more to do with how we manage the pipeline of inbound.

Inbound inventory here in the back half of the year, we were very cautious about that lead times are shorter than they were before and we have a little more flexibility to manage the inbounds. So the inventory targets that we're achieving despite the lower revenues really from the standpoint of being able to manage our open to buy a little bit more tightly.

This year, our end of life inventory sales will probably approach mid teens, which is which is a bit higher obviously than normal.

More typical for us to see that in our wholesale channels to see that closer to 8% to 10%.

But at the same time.

The margin on those sales was quite a bit lower than what we would normally expect thats why we think there'll be a nice margin lift in 2024, when we're not anniversarying that type of that type of volume.

So in short I feel that the quality and the.

And the level of inventories should should improve significantly we expect them to improve significantly by the end of the year, which gives us more confidence that we're not going to be lapping some of these challenges.

Versus the mid teens, what's a normalized level of off price.

Blake, probably 8% or so.

Okay. Thank you Mike.

Thanks, Tim.

Our next question comes from the line of Sam Poser with Williams trading. Please proceed with your question.

Thank you for taking my questions Chris.

My congratulations as well.

Okay, so less Cisco here.

Moving closing Boston office moving to rock Rockford.

How many people are coming what does that mean for talent.

Retention and acquisition.

And number two not related to that at all.

Given the way the wholesale accounts.

Getting orders right now and given that spring orders I believe are due as we speak.

To get to your numbers next year. The first half of the year is probably still going to be very tough and then youre going to look for from a revenue perspective recovery in the back half, but how.

But this wholesale stuff doesn't necessarily happen in a vacuum it happens because you know it's tough for everybody, but it's tougher for others. When they don't have like go to must have product. So what are you doing to get the must have.

Product to get the consumers to want to buy it through your DTC and more and as importantly for your wholesale accounts this step up.

Sure.

I'll take a swing at that I'll start with the Boston Office closure certainly decision that we took very seriously I was in Boston that list past Tuesday to make that announcement.

I think we fundamentally think that.

Suddenly having all of our footwear brands under one roof here in Rockford.

It was the right decision for the company.

The ability to find synergies share best practices used common tools implement a consistent playbook I think we make it makes a lot of sense at the same time, the Boston office as we've done the portfolio work the need for that campus sort of came down as we manage the portfolio.

We are planning to maintain.

Creative hub in Boston, because we realize the Boston, there's a tremendous amount of talent and especially as we think about our brands going forward, our ability to recruit and retain and have great homes for amazing product designers developers and marketers.

Is really important and we recognize Boston is an epicenter for that so and we are excited about the opening of a hub of a hub in Boston I'll, let Mike talk a little bit about the wholesale.

I will talk a little bit about new product introductions, though it is critically important to us for our key brands to maintain enough open to buy and the current inventory situation to bring newness and where and when we've been able to deliver newness to the market whether it's on our own channels are in our wholesale partners. We are seeing traction. So now as we navigate through the inventory situation.

I think brands that can innovate and deliver newness and freshness that the consumers are going to win and that is top of mind for our brand teams as we think about navigating both the near and the midterm.

I think the trends to that Youre, asking about Sam you're absolutely right. We've obviously reflected that in a much more conservative outlook for the back half of the year.

We're not going to expect those those trends to reverse immediately in the first part of 2024.

So the approach we're taking here on all fronts in terms of operations planning working capital management inventory planning and certainly the profit improvement work that we're doing I think is really Paramount right now as we bridge.

From now until we get into the back half of 2024 to continue to be able to deliver positive results. Both from a profit and leverage standpoint, but also create the capacity of that Chris is talking about I think.

As we pivot immediately to our brands and the investments in marketing and marketing capabilities that we need in the business and brand building capabilities in the business.

We can't wait until the back half of 2024 to do that so Luckily we have started this work.

Much earlier than maybe we needed it.

We're on track to do over deliver the profit improvements this year and have accelerated the urgency of that into next year, we'll be pulling forward. Some of the initiatives that were slated for 'twenty four into 2023, so that we give ourselves.

Absolute capacity and room to not only grow and invest but also to create that that better result for the shareholders in the first half of 'twenty four.

Well I I understand I'm, what I'm really talking about is the topline, though because you're I mean, you're starting to get to the $2 billion in revenue ex Barry you've got to expect a significant acceleration in sales in the back half of next year.

And and and what I can see that happening through your DTC coming out with the right product, but but but given given the retailers to take a big enough bite of the apple to to to to really make that happen within your.

This preliminary $2 billion guidance themes.

So a bit optimistic perhaps want to be careful that we're not you know, we're not giving guidance for 2024.

Anyway.

We're showing that.

Past the necessary path for the business for us to deliver.

That 12% operating margin and where those savings will come from so we're not giving guidance for 'twenty four we're going to navigate through the next two quarters here where to make the changes that are necessary in investments that are necessary to turn the business back into into the growth trajectory that it needs to be on and there's a lot of work ahead of us.

Do that work and then come back to our shareholders and our team with the <unk>.

<unk> plan that can show what those milestones are going to look like so we have work to do on that.

Not giving guidance today Sam.

What we're trying to show is the confidence that we have on our profit improvement work and the areas of focus that are going to give us those tools that we need to be be able to to drive the business and I think just one.

Just to add on to that Sam I think while we're not giving guidance I do think you know as we work through the remaining months of this year I think our brand teams are laser focused on what the product pipeline looks like for 2024 and the new introductions. Both of introduction that we have this year that we already have confidence then and certainly what we have in the pipeline for next year on whether it's a moab.

And youre not updating the moab speed for Merrell, which has shown initial tickets out of the gate continuation of agility peak five.

<unk> 'twenty, one just dropped in saucony on which we're excited about and we've got riding guide Seventeens coming out for next year. So right now the brand teams and with urgency or looking at the product pipeline to make sure that there is newness and freshness.

And then in that innovation pipeline.

Thank you very much.

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

<unk> Sirona with UBS. Please proceed with your question.

Great. Thanks.

Thanks, and good morning, and thanks for taking my question Congratulations Chris on the new role.

I just wanted to ask maybe if you could elaborate a little bit more on when youre thinking about the outlook for the second half how should we think about that in terms of DTC versus wholesale and also just for the Q3 interesting to know like what you're expecting for the main brands and in terms of revenue growth.

And lastly on that just like also just if you could elaborate more on timeline.

Interesting trends you saw across each brand brands during the quarter that'll be super helpful.

We don't really disclose the <unk> trends per se at the brand level, but I would just say that the <unk>.

Overall outlook for the full year guidance here is to be down about 10% at the midpoint of that range in revenue.

For the business and our D to C.

Our D to C channel will be down about about 12%.

So that includes sweaty, Betty, which actually is performing quite well right now in.

And their direct channels and so if you just look at our footwear, our brands, our especially our U S D to C.

<unk>.

We'll see a decline in the current year.

That's in the mid teens so in line with the overall growth.

Or declines that we're seeing for the business Archie our DTC channels have been impacted by the promotional environment for sure. We've tried to be more focused on maintaining our margins and our profit performance into direct to consumer channels.

But that's come into cost of some topline topline revenue.

But again as Chris mentioned I think the investment.

And the right.

Creative content, but also the right new product as we focus on that area has a quicker turnaround area for the business is going to be critical as we get into the fourth quarter and.

And into next year.

I just wanted to highlight that the sweaty Betty business since we've integrated that into our international group and we have a new leader in place, there's some really positive synergies happening I'm finding better efficiency.

Is it efficiencies across the business at the same time recent product introductions are checking so we're encouraged by the initial results.

Our results out of Sweaty Betty.

The other part of your question <unk> was about wholesale wholesale outlook for the full year. So.

In the U S that will be.

Low teens decline in overall in terms of our wholesale business is globally that'll be down closer to the 11 or 12%. So.

We see that as an area of pressure for the business.

I won't I won't overstate, it, but I will say that we've seen a nice improvement over the last two or three weeks.

And in order trends for.

For the first time in a while we talked about the challenges that we saw with cancellations in new orders over the previous 10 week period, but.

Starting to see a little bit of.

Green shoot there so but for sure I have taken a conservative view of our wholesale trends for the rest of the year and that's resulting in a full year decline in that channel of over 10%.

Got it that's very helpful. Just wanted to make sure because I think you usually provide like a top line expectations for each brand in Q3.

And also I don't know if you provided the EBIT margin expectations for the third quarter, while we provide a lot of that information in our in.

In our Investor presentation, that's posted on our site with all the other all the other information we share today, we didn't put it into our remarks, but it's available there.

Okay. Thank you very much.

Thank you good afternoon.

Thanks.

Our next question comes from the line of Mitch comments with Seaport Global Securities. Please proceed with your question.

Yes, thanks for taking my questions.

On the U S. Wholesale so you guys talked about how challenging U S wholesale and I do find it somewhat interesting on the revision to the brand guidance you raised Merril you lowered.

The other brands. So is the takeaway there that you.

Wholesale impacting all those brands equally but barrels.

Gaining market share.

Are the other brands.

Essentially losing market share or are they just getting.

Caught up in the downdraft of the U S wholesale.

No just to clarify maybe what youre looking at.

Mitch the guide for the outlook.

Primarily as high single digit decline for the.

Oh, I'm, sorry, here, which is which is which is higher or worse than we had.

Yes, I'm sorry.

I did listen to read that so let me ask the question is that is that I mean are you guys is it just the macro and U S wholesale or do you feel like you guys are.

We're holding share in your brands or do you think you're losing share.

Yeah, I'll answer that question I'll start with Merrill.

Merrell has 10 consecutive months of gaining share and hike and for the trailing 12 months, we've gained 130 basis points of share.

The challenge there, though is we have a high category Thats currently contracting but.

And my total tenure and Wolverine worldwide, Maryland never had 10 consecutive months of share gains.

Encouraged by that.

Saucony on the other hand is losing share right now and that's something that we have to address.

Ah quickly and we are working to go do that from a share perspective, Merrill's currently gaining in talking to us about losing a little bit of ground.

Okay. That's helpful. Chris and then I guess my second question.

For Mike when I look at the transitory costs.

In 2003, you said 60 million supply chain.

And I'm guessing that.

Mostly right and is that are.

Are you seeing that this year because of the timing.

Some of the inventory I know other companies have talked about.

Starting to see some benefit this year or is that all just timing of the inventory and is that all freight and we've got kind of the line of sight that you have to suggest that it goes away next year.

I actually almost $50 million of those costs were.

In 2022, but there were capitalized on the balance sheet, along with the inventory right. So.

The costs, we're talking about are certainly the excess freight and premium freight costs that we incurred in the business.

There's a nice table in the earnings release to kind of spelled this out a little bit too Mitch if you want to refer to that later, but.

These are costs that either were incurred last year in the first part of this year.

They're now being expense through the P&L as we worked through the inventory and obviously accelerate the reduction of the inventory.

And we are we are we are now in contract on ocean rates that are much lower than they were a year ago.

We have implemented through these profit improvement initiatives other other logistics related savings.

But as it relates to the transitory costs, yes. They are.

There are essentially behind us.

Just the lingering effects in terms of working through the inventory.

We get into 2024 of those will go away.

Excess liquidation that we talked about in terms of the level of end of life inventory, we had to work through.

That's about $20 million of.

Headwinds in twenty-three those those costs go back to normal that's not the total cost to what we incurred that's the incremental costs that we incurred so yes.

Both of those things, we feel very strongly are behind us and are things that we can plan.

Against in terms of improvements next year.

Alright, Thanks, good luck.

<unk>.

Our next question comes from the line of Abbvie.

<unk> with Piper Sandler.

See with your questions.

Hi, yes, thanks for taking my question and congrats on the new role can you just comment on your view on like the underlying health of like the main brands.

We understand the soft wholesale but what's happening in DTC and then I guess what in your view what are the biggest kind of near term opportunities to return.

So returning to growth. Thank you.

Sure. Thanks, Avi I appreciate that.

The underlying health of the health of our Big brands remained remains good.

Brands are coming off of record years in 2022, certainly 2023.

As a step back and a disappointment as far as the current trends but.

As the underlying health I think merrell and Saucony specifically.

Our leaders in their respective categories. They are authentic the original their heritage brands with great tradition.

And and strong product pipeline, so I think it comes down to.

Our ability as an organization to really make a very very fast pivot to becoming better brand builders and to build more durable more resilient brands that can weather.

Whether whether tough situations obviously, the current environment when is exacerbated by a lot of factors, whether it's the overhang of the pandemic and the inventory glut in promotional pricing, whether it's consumer slowdown certainly were not the only one to talk about some level of malaise.

In the U S.

And we're certainly seeing that but.

But I think underlying health.

One of our greatest assets is our brand portfolio and certainly the top of that list, our Merrell and Saucony and we've got new leadership in place. There is a heightened sense of of the need to move bolder and faster.

Specifically around our continued product innovation, but certainly around how we build these brands through modern demand creation. So.

Every team is working on that and it's sort of top of mind as we think about the transition and my first day.

Got it thank you.

Thanks Eddie.

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

Yeah, Hi, Thanks for taking a couple of follow ups just for modeling Mike could you walk through the third and fourth quarter outlook.

Dip down in revenue that you outlined for the third quarter and then a bounce back for the fourth quarter could you just highlight some of the factors that you are embedding there.

There's an important shift in our international business between Q3 and Q4.

And again.

I mentioned in my remarks about the comparison.

Q3 of last year that included some significant international.

Revenue from a timing standpoint that really fell into Q3 and those were abnormal abnormal timing.

In Q4 this year.

We're selling in our spring line into our international distributors much earlier than.

Than we than we normally do we're certainly much earlier than we did a year ago, let's say it that way.

So there is some growth there, but also the benefit of that revenue.

Kind of lifting the performance of Q4 versus last year to a decline more in the mid single digit range. So if you exclude some of the noise or timing around international.

The rest of the business as planned.

Or forecasted to be down about.

10% or maybe a little bit higher.

And so that's much more consistent with that.

Again, no normalized trends that we're seeing in Q3.

The other the other factor for us in Q4 as the D to C channel is a much bigger part of the overall business sweaty bodies, a big percentage of that as well and that business is a little bit more stable.

So we get the benefit of.

A bit more predictable business, indeed to see in Q4 versus.

Versus the other quarters.

Okay, Great and then just two last ones from me I just wanted to clarify I believe the prepared remarks.

<unk> to potential pricing actions to drive sell through so could you just more specifically talk about what you were referencing and then.

Into 2020 for sort of a path you outlined what sort of sort of pricing relative to the increases you've taken the last few years does that assume and then just lastly on Sperry. The performance obviously very challenged now for the full year, how does that impact your plans or the strategic.

<unk> that you were contemplating underway for that brand.

Yeah.

Take that and then Mike can add.

Comments I think regarding the pricing one that's something that we're paying really close attention to what's happening in the marketplace.

Everyone do sort of.

In the pandemic coming out of the pandemic and then what's happening today in the marketplace.

And make sure that our products are properly placed in price.

And at the end of the day from a pricing standpoint, it comes down to the power of your brands.

What is your pricing power. So something we spent a lot of time thinking about to make sure that we're both protecting margin at the same time, I'm, having goods placed and priced where consumers can engage in them as it relates to the Sperry transaction, obviously, we announced the decision to pursue strategic alternatives.

A little bit ago, we continue to manage the business and monitor its trends that process is ongoing.

But we still plan to pursue those alternatives in and certainly do the very best thing for the portfolio.

And for the shareholders importantly on that front, John we are we should be hitting.

The market with a formal.

Marketing document in the next couple of weeks.

That hasnt transpired, yet and so.

Much more formal process will be underway. We also have received good.

Employee feedback from.

Interested parties, who.

You, obviously know about the process that the process is going to be underway. So we feel good about that.

It's a very strong brand we feel that the other.

Our strategic alternatives for that business.

Would be around a licensing opportunity or other other form of <unk>.

<unk> business model that could allow us to benefit from.

Like I said in my remarks, monetizing the working capital of the business.

And may be benefiting from that.

There's strong brand in the future. So we're looking at all those options, but we're not down the path quite far enough yet on the sale process to really make a decision on what the best alternative is at this point.

Okay. Thanks for taking all the questions. Thanks, Tom Thanks, Jim.

And as a quick reminder.

We ask that you limit yourself to one question or follow up questions.

Actually the limit yourself to one question win win rejoining the queue for follow up questions. Our next question comes from the line of Sam Poser with William Trading. Please proceed with your question.

I just wanted to follow up on the conversation about sort of the weakness in wholesale and the weakness in your DTC business in the promotional environment out there.

How much of this is the environment and how much is this not happening.

The appropriate.

Stuff that the consumer's really really want right now.

Which.

That's the question, yes. It is.

Fair question I think.

I don't think it is quite black and white as that I think it's a shade of gray anything as a combination of both.

Certainly from an environmental standpoint, there's a lot of product in the marketplace and its a very promotional and certainly some of our brands have some some category headwinds.

At the same time.

The onus goes to the brands to deliver newness and freshness and innovative product theyre solving consumers' needs and make sure. We've got a pipeline of that ready to go.

And I think as we think about where our brands stand today I think we always need to be very critical of our own product pipeline.

And sort of hold ourselves accountable for what's in the mix. So we're not standing here today thing.

It's just the environment we're in.

Sort of looking deep into our teams to make sure that we can build durable and resilient brands that can weather weather. These storms. So Sam to answer your questions are simply I think it's a little bit of both.

Right now we're most focused on fixing our internal house to be able to weather storms like these.

Sure.

And we have reached the end of the question and answer session now I'll turn the call back over to Chris Hufnagel.

Nagle for closing remarks.

Thanks again, everyone for joining us today.

Nice to be with you on the first time in this capacity and look forward to sharing updates with you in the future as a reminder, Mike and I will be with the analysts now having callbacks later this afternoon and later this morning.

And then we're also we're pleased to be joined by Wolverine's Chairman of the board on Tom Long. So look forward to those calls a little bit thanks, everybody have a great day.

Yeah.

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

[music].

Okay.

[music].

Okay.

[music].

Hum.

Mhm.

[music].

Uh huh.

[music].

Mhm.

[music].

Hum.

Oh.

[music].

Oh.