Q4 2023 Wolverine World Wide Inc Earnings Call
Greetings and welcome to the Wolverine worldwide, Inc. Fourth quarter fiscal year 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Please note. This conference is being recorded I'll now turn the conference over to your host Alison Eitan you may begin.
Good morning, and welcome to our fourth quarter 2023 conference call on the call today are Chris Hufnagel, President and Chief Executive Officer, and Mike <unk> Executive Vice President and Chief Financial Officer.
Earlier. This morning, we issued our earnings press release and announced our financial results for the fourth quarter and full year 2023 and guidance for fiscal 2024.
The press release is available on many new 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 most comparable GAAP financial measures and attached tables within the body of the release.
References made regarding financial results for 2023 and comparable results from 2022 in each case for our ongoing business exclude the impact of cats, Wolverine leathers and reflect an adjustment for the transition of our Hush puppies North America business to a licensing model.
The outlook for 2024 and comparable results from 2023 in each case for our ongoing business now also exclude the impact of Sperry, which was sold in January 2024.
I'd also like to remind you that statements describing the company's expectations plans predictions and projections such as those regarding the company's outlook for fiscal year 2020 for growth opportunities and trends expected to affect the company's future performance made during todays conference call are forward looking statements under U S security 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 I'd now like to turn the call over to Chris Hufnagel.
Thanks, Alex Good morning, everyone and thank you for joining us on today's call.
Chris Hufnagel: To close 2023, we delivered revenue and earnings in line with our guidance and our inventory and debt finished at levels better than we anticipated.
More importantly, we continue to make great progress in driving Wolverine worldwide's turnaround and transformation.
With a clear vision, a common sense of purpose and the collective effort of our global team.
I'm proud of and encouraged to say that Wolverine worldwide is a much different company now than it was just six months ago.
I'm excited to share our progress with you today.
As we begin 2020 for our portfolio is more focused than has been in over a decade.
It's always about tantric, leading brands playing in desirable consumer categories and we're confident this will continue into the future.
The organization is more efficient and more capable of building great global brands with new talent in key brand walls.
Chris Hufnagel: And new centers of excellence, great to help enable our brands to build Austin products and telling me these stories.
Our business is poised to be much more profitable with an outlook to meaningfully expand the operating margin this year.
As a result of significant gross margin improvement and our restructuring efforts late last year.
We have the financial capacity to reinvest back into the business with.
With $30 million of incremental investment plan. This year for key brand growth initiatives and the tools necessary to support long term sustainable growth.
Our product pipeline is stronger with new introductions already resonating with consumers and more great collections dropping in the coming months.
Our balance sheet is much healthier, but the company's lowest debt level in over two and a half years.
Approximately 40% less inventory than just a year ago.
And a clear line of sight to drive further improvement on both metrics this year.
And finally, we have a talented aligned and motivated team driving the business every day.
I'm extremely thankful for their exceptional work over the past six months and couldn't be more excited about the work, we'll do together moving forward.
Our bold turnaround plan.
Coupled with the team's urgency and effectiveness in executing that plan.
It has allowed us to outpace our expectations in the first chapter of our transformation.
We've largely stabilize the company and just a few short months.
Last November we shared our expectations for key financial metrics with you.
And I'm pleased to report we've over delivered.
Chris Hufnagel: We reduced our year end inventory by $30 million more than we anticipated.
We said, we'd further rationalize our portfolio and deliver $65 million of proceeds in Q4.
We ultimately generated $91 million in the quarter.
And then completed the Divesture of Sperry in January.
And another $130 million in proceeds.
Chris Hufnagel: We said, we reduced the company's debt by around $170 million by year end and.
And ultimately where do you start that by $280 million.
That was before the Sperry transaction.
As a result, our bank defined that leverage is better than expected.
We've executed extraordinarily well on the key stabilization initiatives, we laid out last fall.
And we remain committed to continuous optimization efforts and further strengthening of our balance sheet.
Chris Hufnagel: Today, we're in a much better position to accelerate that can you transformation of the company.
The second chapter of our turnaround story is focused on transforming Wolverine worldwide until builder of great Global brands.
I'd take a moment to walk you through our progress and plans here.
It'd be great brand builders everything must start with the consumer.
To shift their mindset and add capabilities within our brands. We've added more consumer focused talent in many of our key brand roles over the last year, we have several more searches underway today.
To bolster our resources and expertise we established the collective in November.
Center of excellence created the elevate consumer insights market intelligence trend monitoring and innovation.
I've been pleased by our quick pivot to a more consumer obsessed culture.
Chris Hufnagel: Our brands have already begun to incorporate more insights and consumer testing any of that go to market processes for product and marketing.
Chris Hufnagel: Ultimately the Wolverine worldwide portfolio of brands should make all our consumers' lives better.
Chris Hufnagel: Thanks to recent portfolio management efforts, our brands are tightly aligned around enabling our consumers to have healthier and more productive lives.
As a result, we have a great opportunity to increase collaboration across our brands and teams to recognized unmet consumer needs.
Spur innovation identify trends and better lever the collective talent of the organization.
Chris Hufnagel: We believe the consolidation of our office footprint, we'll continue that help we've already relocated sweaty Betty to our Kings Cross office in London.
And later this year Merrell and Saucony will be cold Lake paid here in our global headquarters.
We're also working to better equip the organization with modernized tools and processes to execute faster more accurately and with distinction.
Chris Hufnagel: We piloted new best in class digital product line management tools with Merrell and now rolling these tools out across the portfolio.
We're implementing new integrated business planning processes, this year to improve forecasting and inventory management and margin efficiency.
We've also just launched an initiative with our new digital and technology experienced team to revolutionize our digital tools and improve the direct experiences our consumers have with our brands.
In addition to redesigning the organization and reallocating resources to directly align with our vision.
We're also taking bold steps to better manage our brands in the marketplace.
In the fourth quarter, we created a new centralized brand protection team to help us monitor and address nefarious activity in the marketplace.
In a short time across our portfolio, we've already identified and shut down nearly 20 customers and partners that are participating gray market activity and approximately 400 accounts that do not align with our go forward distribution strategies with more to come.
They're also focused on achieving healthier sales mix with a stronger emphasis on full price business. This year.
We're already less promotional in the marketplace today and on our own direct to consumer channels.
We must begin to establish more of a pull model and we must continue to strengthen relationships with valued wholesale and distributor partners.
The next few months will be critical as we continue to aggressively advance our transformation.
And I'm confident we are positioned to continue delivering on the plan, we've laid out and we're committed to delivering better results for our shareholders.
With firmer footing and a clear vision our brands are accelerating their efforts to reinvigorate growth.
Squarely on designing orphan products.
Amazing stories.
While we expect our inflection to growth will follow the meaningful margin improvement. We've outlines our brands are moving with great pace to drive improved top line performance.
Chris Hufnagel: Saucony has a proven formula for driving industry, leading innovation.
The brands are dwarfing elite collection designed its human performance lab in partnership with elite runners is among the most innovative shoes on the market today and was recognized by runners World gear of the year Awards as the best racing shoe up 2023.
Saucony is consistently one of the most trusted brand by elite runners in the world's most important marathon.
And we now have the opportunity to capitalize on the tip of spear success by democratizing the brands innovations for the larger casual running market in elevating our style to encourage adoption for a significantly larger lifestyle wearing occasions.
The brands tend to do so through a focus on its core four franchises the ride guide triumph and hurricane.
As a first step saucony launched a new ride 17 several weeks ago.
Engineered with the power, one plus foam to deliver a more comfortable fit in better ride in the brand's neutral runner.
It's been well received and sell through was up strong double digits in the important run specialty channel.
The brand followed this launch with a new introduction of its maximum comfort franchise. The guide 17, with even more cushioning and support.
The guide 17 has only been in the market a couple of weeks and sell through is already off to a very strong start.
So I can expect to launch a try 22 next quarter, followed by the Hurricanes and 24 in Q3.
And the brand plans into some of the best lifestyle distribution in the marketplace. Starting this spring with authentic trend right retro Tech designs must archives like the pro grid omni and azura.
As a result of these important launches in the brands improve storytelling, which is just getting started the brand had started to see an inflection and brand heat with consumers.
Chris Hufnagel: Moving to Merrell.
Outdoor footwear industry leader with a long history of product innovation.
Our product pipeline is improving here as well.
It's MTL Sky fire to matrix developed within the mouth test lab and elite Parka innovation incubator with rigorous testing by a trail running athletes.
It's a super lightweight played a trail runner that was named outside magazine's best Trail running shoe of 2023.
See recognition in runner's world in Israel among others.
Oral intends to continue to modernize the trail through faster more trend right design that consumers demand as well as the durability and traction the trail acquires.
The brand's agility peak five is outperforming our leading trail running shoes in the marketplace and consumer and extra good reviews on comfort quality and fit and it's up triple digits to start the year.
The product is exceptional.
Merrell plans to scale of storytelling to drive greater momentum.
Chris Hufnagel: The brand's new Mark speak to a 2023 it's felt warm winter and a key story. This year is also seeing strong early sell through Maryland.
Merrill's collaboration with Jeep in the fourth quarter drove 17 million earned impressions and the hero Blue color waves sold out to the piece the.
The brand again grew U S market share Bowtie can trail in Q4, capping a year of market share gains for our largest brand.
As a socking the broader lifestyle opportunity is significant for merrell and when we develop on brand and on trend styles like the new Raptor collection.
Disruptive look on a barefoot platform our consumers respond.
This new collection almost sold out entirely on Merrell dot com in a matter of weeks and today, we're chasing or punishment for this franchise and planning and these new silhouettes later this year.
In closing with Sweaty Betty.
Chris Hufnagel: Having built its brand of business through direct channels and the brand has always done consumer obsessed driving product innovation in response to the feedback you've received from consumers.
Our mindset and approach that can influence our other brands as we endeavor to become a more consumer focused organization.
So anybody's power franchises beloved by consumers for its best in class fit premium materials and on trend designs.
So its rapid consumer feedback and response model. The brand is building on its leading franchise through category extensions and new textures and patterns.
The newness is trending well and with recent improvements to our supply chain. The break now replenished fast moving styles in a matter of weeks.
The brand has seen excellent traction with extensions and new categories as well like outerwear mid layers and accessories with very strong double digit growth in Q4.
By styles like the Nimbus down parka and navigate quilted coke.
I am pleased and encouraged to say that today, our brands have a heightened understanding of their consumers and a clear vision for the product direction in our business. It always starts with product.
We're seeing green shoots across the business and the brand's product pipelines will build momentum throughout the year.
It is important to parts of your <unk> and your expectations for the business.
<unk>. This year, we expect the business to be much more profitable and again generate strong cash flow as our model has done so effectively in the past.
Chris Hufnagel: It's driven by significant gross margin expansion and our aggressive and proactive profit improvement initiatives, we've executed over the past few months.
At the same time, our actions have created the financial wherewithal to reinvest in our brands with.
Chris Hufnagel: With an incremental $30 million planned in 2024.
Although this investment will moderate our operating margin expansion. This year, we believe it is essential to better position our brands for long term sustainable growth, while still taking an important step in our transformation to meaningfully improve profitability.
For a variety of reasons, we expect the company's return to growth to lag our profit improvement.
Is it candidly shared with you on recent earnings calls, we have identified and own various past missteps.
Swift action to address them.
Chris Hufnagel: <unk> the product pipeline with design supported by heightened consumer and trend insights.
Reenergizing, our brands with elevated marketing and better manage the marketplace with greater distribution and pricing discipline.
Chris Hufnagel: However, the business is starting the year from a challenging position, which will weigh on full year revenue results.
Most meaningfully for Saucony, followed by Maryland Wolverine.
But we anticipate a sequential improvement in top line performance as the year progresses.
We expect the positive impact of our corrective actions will accelerate and be bolstered further in the second half by reduced road selling.
Cleaner inventories better alignment of global partners, and lapping easier year over year comparisons.
Shifting to an inflection in growth in the second half of the year and acceleration into 2025.
Finally, before handing the call to Mike I want to summarize where we are today and where we're headed.
Chris Hufnagel: Our fast and bold actions to better manage our portfolio has simplified the business and strengthened the alignment of the organization.
Going forward, we will continue to critically evaluate our organization as part of our commitment to create greater shareholder value today.
Today, we have a focused portfolio of great authentic brands.
I have a rich history of developing innovative private products.
All designed to help their consumers live better lives.
Our improved structure enables our brands to focus on our consumers product and marketing I, providing platforms that efficiently drive operations and back office activities.
Wolverine model also aggregates and extensive global distribution network composed of wholesale distributor relationships for the brands to leverage.
And we are further amplifying our models value by creating competitive advantages for the brands and capabilities, we deem strategically important.
Chris Hufnagel: Consumer insights trend innovation marketing and licensing.
Given the powerful combination of our brands and our platforms all enabled by a talented aligned and dedicated team moving with pace I'm optimistic about what we can achieve collectively has one wolverine.
We're confident we're taking the right steps to unlock value and deliver on Wolverine worldwide still potential for the benefit of our shareholders.
Chris Hufnagel: With that I'll turn the call over to Mike Stern at Executive Vice President and our Chief Financial Officer, who will provide more details on our fourth quarter results and our guidance for the year ahead Mike.
Thanks, Chris.
And good morning to everyone on the call.
This morning, I will start with a review of fourth quarter results, followed by our expectations for fiscal 2024.
Fourth quarter revenue for our ongoing business of $521 $2 million was in line with our outlook.
Adjusted gross margin was 36, 9%.
Chris Hufnagel: Was better than our outlook of approximately 36%.
With better gross margin and our ecommerce channel helping to drive this result.
Adjusted SG&A expense of $211 million or 44% of revenue.
Includes $5 million of incremental performance marketing investment.
Tested during key moments of the holiday season.
Which helped us deliver more full price sales and E Commerce channel.
And acquire nearly 200000 new consumers.
We also implemented a $4 million supplemental incentive program in the quarter for.
For non executive team members tied to important inventory and net debt metrics.
This program helped us deliver better than expected results for inventory cash flow and net debt in the quarter.
Our team is motivated aligned and focused on improving the company's financial performance.
Adjusted diluted earnings per share for the quarter was a loss of 30 cents.
And in line with our outlook.
Shifting to the balance sheet.
We made meaningful progress to further improve inventory.
Debt and liquidity during the fourth quarter.
Chris Hufnagel: Inventory for Sperry, and our China joint venture, which were both sold in January of 2024.
Is treated as held for sale inventory as of year end.
Excluding these businesses inventory was $374 million down nearly 40% compared to last year and approximately $30 million better than we expected.
All right.
We delivered this improvement by leveraging a rigorous inventory management process.
While operating in a more normal and predictable supply chain environment.
Chris Hufnagel: While pleased with the meaningful improvements in 2023.
We believe we can further optimize inventory levels over the coming quarters.
<unk> supply chain lead times implementation of our integrated planning processes.
And hot heightened focus on SKU productivity should allow us to drive inventory levels down by at least $70 million during 2024.
Active portfolio management has also been a key focus helped.
Helping to unlock value and narrow our focus on businesses with the highest return opportunities.
Strong working capital management, and the sale of certain noncore assets generated approximately $200 million of cash in the quarter exceeding our expectations.
As a result, we ended the quarter with net debt of $740 million in our bank.
Defined leverage ratio of two nine times.
Let me now provide details on our outlook for 2024.
The critical stabilization work executed over the last three quarters puts the company on solid footing.
As a result, our teams can more fully focus on efforts towards transforming the company, while driving an inflection to growth in the back half of 2024.
Our guidance.
It reflects the expected performance of our ongoing business, which now excludes Sperry.
Fiscal 2024 revenue is expected in the range of $1 $7 billion to $1 $75 billion.
This compares to 2023 revenue from our ongoing business of $1 $99 billion.
It represents a decline of 13, 4% at the midpoint of the range.
Discrete items in 2023 totaling $165 million in revenue will not recur in 2024.
These include approximately $70 million of extraordinary end of life inventory liquidation.
Heavily weighted to the first half of 2023.
Approximately $55 million and business model changes, including the transition of our China JV to a distributor model for both Merrell and Saucony.
And approximately $40 million and a timing shift of international distributor shipments that benefited Q1 2023.
Excluding these discrete items.
The mid point decline would be approximately five 5% for 2024.
We expect active group revenue declined mid teens.
Chris Hufnagel: Merrell is expected to decline in the low double digit range within.
With inflection to growth expected in the second half of the year.
<unk> is expected to decline in the low 20% range with sequential improvement each quarter.
Sweaty Betty is expected to be flat.
Chris Hufnagel: We expect to work or if revenue to decline high single digits with Wolverine brand expected to be down mid single digits.
Adjusted gross margin is expected to be approximately 44, 5% at the midpoint of the outlook range.
A record for the company and up approximately 460 basis points compared to 2023.
Key contributors to the gross margin expansion include approximately $50 million of supply chain transitory costs Expensed in 2023 that will not recur in 2024.
And approximately $45 million from profit improvement initiatives related to product and logistics costs.
Chris Hufnagel: In addition, we expect that healthier inventory levels and increased brand protection actions will lead to a lower promotional cadence during 2020 for especially in the back half of the year.
This gross margin benefit is expected to be offset by foreign currency headwinds that impacted inventory costs.
Adjusted selling general and administrative expenses are expected to be approximately $650 million at the midpoint of the outlook range or 37, 5% of sales.
Chris Hufnagel: Compared to $716 million in 2023 or 36% of sales.
The lower operating cost structure includes $95 million of savings from the 2023 restructuring and other profit improvement initiatives.
Chris Hufnagel: Partially offset by.
Chris Hufnagel: $30 million of incremental investments for demand creation modernization of systems and building important organizational capabilities.
25 million of normalized incentive compensation expense.
And $15 million for normal inflationary increases.
Adjusted operating margin is expected to be approximately 7% at the midpoint of the outlook range compared to three 9% in 2023.
Chris Hufnagel: Interest and other expenses are projected to be approximately $40 million down from $63 million in 2023 and.
And benefiting from the significant debt reduction achieved last year.
The effective tax rate is projected to be approximately 18%.
As a result of these assumptions adjusted diluted earnings per share is expected to be in the range of 65 to 85 <unk>.
Including a 10 cent negative impact from foreign currency exchange fluctuations.
This compares to 15 in 2023 for our ongoing business.
Working capital and cash flow optimization remains a priority in 2024.
We expect inventory to decline by at least $70 million during the year as we continue to work through specific areas of excess inventory.
Operating free cash flow expected in the range of 110 million to $130 million with approximately $40 million of capital expenditures.
We expect net debt to improve by nearly $165 million to $575 million at year end.
Shifting to our outlook for the first quarter.
We expect first quarter revenue of approximately $360 million a decline of approximately 30%.
Many of the discrete items occurring in 2023 and noted in our annual revenue outlook are especially impactful to the first quarter.
Chris Hufnagel: This includes $23 million of extraordinary end of life inventory liquidation in Q1 2023.
A $40 million shift in international distributor shipments that benefited Q1 2023.
And $13 million and business model changes.
Excluding these discrete items the projected first quarter revenue decline would be approximately 18, 5%.
Similar to the fourth quarter of 2023.
First quarter gross margin is expected to be approximately 46%.
Up 480 basis points from last year.
Significantly lower supply chain costs, lower sale of end of life inventory and our best or better distribution channel mix are all contributing to the dramatic gross margin improvement.
We expect first quarter operating margin to be approximately three 5% and adjusted diluted earnings per share to be approximately breakeven.
Before turning the call back to Chris Let me summarize the key points I hope you'll take away. This morning.
We are in the late innings of the stabilization phase of the company's turnaround.
And are ahead of schedule in many key areas, including portfolio optimization gross margin expansion operating cost improvement healthier inventory and much lower net debt.
Importantly, we expect to deliver at least $140 million of incremental profit improvement in 2024.
Chris Hufnagel: Promised in November of 2023.
Chris Hufnagel: 2024 is a year of transition for the company a significant gross margin expansion preseason inflection to growth in the back half of the year and we set our brands out to accelerate into 2025.
We recognize that improved and sustainable gross margin is necessary to create capacity for consistent brand investment into the future.
We are balancing the need for meaningful earnings and cash flow improvement with critical reinvestment required to modernize our systems accelerated demand creation and build our important capabilities.
And finally, we've instituted a new cadence and rigor in the business to improve accountability and ensure future execution of our strategy.
I would like to thank our global team for their tremendous effort over the last year. Thanks to their work. The company is now ready to pivot to growth.
Now I'll turn the call back to Chris.
Thanks, Mike.
To close our prepared remarks.
Chris Hufnagel: In a few short months, we've largely stabilize the company due to our fast bold and decisive actions.
On firmer footing now our team is focused on transforming Wolverine worldwide to a consumer obsessed builder of global brands.
Delivering improved profitability and driving long term sustainable growth.
The right way.
Chris Hufnagel: 'twenty 'twenty four will be a pivotal year and our teams are energized by our new vision and the many opportunities ahead there.
They are proving their ability to move quickly and drive change and importantly, we're passionate about winning.
I personally want to thank our global teams for the work over the past few months, you've been simply great and I couldnt be more excited to start writing our next chapter together.
Chris Hufnagel: We're committed to building great brands do awesome products amazing storytelling and driving the business each and every day and we're equally committed to delivering greater value for our shareholders.
Thank you for taking the time to be with US This morning.
Thank you at this time, we will be conducting a question and answer session. If you will.
To ask a question. Please press star one on your telephone keypad.
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.
Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
So accident each person in queue to limit themselves to only one question and one follow up question. So we can have so maybe we can have ample enough time to ask your question.
Our first question comes from the line of Jonathan.
With me.
Please proceed with your question.
Yes.
Yeah, Hi, Thank you good morning, Mike I wanted to just first ask you did a good job of highlighting year over year in the first quarter that the factors impacting comparability.
Yes, just a little more detail that underlying.
<unk>, 5% decline for the first quarter, how does that factor as you are all aligned impact the next several quarters and can you talk about.
The rate of change in the year over year or sort of underlying improvement that youre baking in.
Sure. Thanks, John.
Speaker Change: Those are important discreet items that we that we called out in the remarks.
Speaker Change: 23 was.
Year, where we certainly dealt with a number of headwinds that are behind us now.
I'll just reiterate a few of those things. So the end of life inventory that we that we cited about $70 million of headwinds mostly in the first half of the year about $23 million of that in the first quarter really related to the elevated inventories that we entered the year with.
The company did a good job of working through those in a rational way, but that certainly was an excessive amount of inventory to put into the market had a negative impact during the year.
Channel inventories and promotional cadence.
Speaker Change: But thankfully we feel like we've worked through most of that in.
Those headwinds will abate in 2024, but a difficult comparison in that respect.
We would expect most of that are we incurred most of that in the first half of the year. So we would expect the back half of the year to be a much simpler or easier.
Comparison as it relates to end of life.
Speaker Change: The business model changes that we made in the year, that's $55 million for the full year.
About $13 million in the first quarter.
Those relate to the Hush puppy licensing change that we made in 2023.
Speaker Change: And the shift in the distributor to a distributor model for our joint venture that we.
It started at the beginning of 2024 so.
Those are those are important revenue headwinds so to speak but cleaner better simpler business model for us.
That we think are going to also generate more profitability in the future.
And then the last one relates to the third party shift in shipments that we noted for Q1 last year supply chain delays and some other for some other reasons in terms of how we prioritize new product.
We shipped a lot more product into our distributor <unk>.
Network in the first quarter of 2023 versus what we normally would do so that comparison or that that reality kind of creates a tough comp for us in the first quarter.
And again I think as we go into 'twenty four we're in a more normalized state for all of these components, but the comparison it really was important to call out to clarify some of the noise. There. So when we think about the impact of these discrete items in the first half of the year about $125 million of the 165 will.
Speaker Change: The first half of the year, so putting more pressure on growth rates in an H one we already talked about the impact for Q1.
Yes, I think hopefully that answers your question, but important to clarify what those what those impacts are.
Speaker Change: Yes, that's really helpful. Mike maybe just just one follow up Mike or Chris said.
As I think about the shape to the year for the revenue guidance it looks like.
You're implying about 100 million dollar revenue pick up per quarter going forward that that looks pretty unusual compared to the historical quarterly cadence. So could you just talk a little bit more about the visibility that you may have internally and I think more importantly, maybe just reassurances that youre not.
Gonna be stretching to reach a revenue goal.
Given the stage you're at really investing in the brands to drive longer term profitable growth.
I think thats Super important I'll start I'll, let I'll, let Chris kind of finish off.
First quarter is typically a lower a lower revenue quarter for the business. So that's not necessarily unusual.
But we are we're continuing to work through and improve on some of the macro factors and self imposed factors that have impacted the business in the last half of.
2023, the first and second quarter, we're still dealing with some of the excess inventory, although it's improved dramatically, we're still working through that and some of the headwinds around brand.
Speaker Change: Brand health and brand protection in the marketplace.
There are going to be more acute in the first half of the year John So.
Speaker Change: The actions and improvements and corrections that have been made in the business over the last six months are starting to take hold.
But we're seeing those continue to linger a little bit in the first half of the year and then with the product pipelines really kicking in with new product introductions, starting in Q2 and beyond.
The health of that and the magnitude of that new product in the marketplace as a reason to.
I believe in the improvement or the increase in revenue by quarter, but those are some of the highlights I think Chris probably could add to that yeah. Thanks, Jon I think it's a great question talking about the shape of the business and how we're thinking about it and importantly, how we're trying to manage the portfolio going forward and we had talked a couple a couple of weeks ago about sort of tempered expectations in the first half and we sort of provided some claire.
<unk>.
On both the internal and external factors that are sort of suppressing growth in the first half, but I do think that there are a number of reasons to believe in the second half I think certainly the corrective actions, we've taken internally as it relates to product.
I think we're encouraged by the product pipeline and we talked about and what Saucony has delivering the right guide 17 that triumph 22, the Hurricane 24, all of those things are a really good product introductions and I think the saucony pipeline is much stronger this year than it was last year I think Merrell Merrell is similar the moab speed to just dropped.
Really good pick up on that really good reception the agility peak five and then some of the lifestyle collections are around wrapped when merrell can.
Speaker Change: Develop on trend on brand product that looks different consumers respond so same.
The same time, we're also need to invest back in our brands, we talked about constraining some of the operating margin expansion this year and the spirit of investing back into our brands and back into our tools.
Speaker Change: I think we will begin to see the fruits of those investments in the back half of this year and then just in the marketplace. I think certainly continuing to have cleaner inventories, which is encouraging we're seeing inventories come down we're seeing our asps go up we are attacking rogue selling.
I think from a brand protection standpoint, we got lax and we didn't do a good enough job protecting our brands and we're not.
We're beginning to see the benefit of that.
And then just frankly, we're going to lap some easier comparisons in the back half of the year for some of the reasons that that might called out so I'm optimistic looking into the back half of the year I understand the question around the shape of the business at the same time I think there are a number of reasons to believe our ability to go execute against that.
That's really helpful color. Thanks, Thanks again thanks.
Speaker Change: Thanks, John.
Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Well thank you.
Morning, guys a lot of evidence of hardened.
Just going to say a lot of evidence of hard work and the support.
With that I'm going to start on the positive side guided gross margin for 44, 5% in fiscal 'twenty four that's an all time high is that.
Mike do you see as a new normal or do you think that's still subdued relative to potential given some of the impediments in margin in the first half of the year as you continue to work through inventory.
I think thanks for recognizing that Jim.
There's been a lot of work.
Speaker Change: A lot of focus of the team across across the organization and functions.
We think there's upside in the future given the fact that we are still dealing with some lingering inventory issues certainly smaller than we had to deal was coming in 'twenty three but.
We're going to continue to drive those inventory levels down we said another $70 million in 2024.
So we feel there is upside potential.
And the gross margin, it's a healthier mix of business, we have a bigger direct to consumer mix in that profile for the gross margin including.
The inclusion of our sweaty Betty business and so Thats one reason for that for the higher margin, but I just think in every and every area stronger full price selling and supply chain costs being addressed.
Obviously lingering in hangover transitory costs that we had to contend with in 2023 those are all behind us and so.
Feel like this is a really good baseline for the future and feel like we can build on that as we move into 2025 and then Jim Let me just let me just add on to their Jimmy you followed our story for a long period of time and sort of know where we've been as a company and the work we had to do coming out of this fall I think importantly, we really put our heads down and I. Appreciate you recognizing the hard work to really stable.
As the organization attack the inventory pay down the debt restructure of the business. The biggest restructuring in history of the company. We did last fall and then we've said that margin improvement will lead inflection to growth because we want to grow the business the right way and we did the hard work around the margin.
We certainly are encouraged by what we have line of sight to when we can deliver this year.
Everyone is pivoting towards the inflection to grow so that's where the story that we've laid out for the last six months and we're going to keep that keep working against that plan.
Thanks, guys just follow up on the topline and Jonathan dug in on this.
But a little bit more difficult for you on the top line what are the lines that you have two inflection for the growth brands in the portfolio Merrell and Saucony, specifically do you have also orders in hand to support the second half inflection assumptions.
We don't disclose backlog.
We have not have not done that I do think and we're getting continue to see encouraging signs on the new products and obviously a lot of the growth that we have planned for the back half of the year and the inflection to growth and the improvement of the business is really driven by the new product introductions.
Speaker Change: Coming out of the pandemic and the supply chain issue, we were having in core and I think we all know that newness and innovation is winning with the consumer and I do think our product pipelines weren't as innovative as they need to begin in 2023, so that focus and saucony on the core forests are early indications and the right Guide 17 are positive and we'll launch the <unk> 22 in the Hurricane 24.
Quarters, two and three.
Sequentially, and then we'll come back and Merrell Moab speed two was already out we're really encouraged by initial sell throughs and the feedback.
And then agility peak five in a handful of other collections and the Moab <unk> III, we don't talk a lot about the moab free but that continues to check.
And we're encouraged by that so I think from a wholesale landscape perspective, we're staying very close we all know that wholesalers are continuing to act differently. I think we also to know that for some brands of the challenged macro landscape in wholesale but I think it's part of our turnaround effort too is just re engaging those wholesale partners in a more meaningful way the number of top to tops. We've done over the past six months has I think has been.
Speaker Change: Critically important I've done.
I've listened a lot too to what what the wholesalers and our partners are looking for Wolverine from what they're getting from other brands and how we can ultimately better I think that has been very well time spent and so I think in general I think what the back half of the year.
Largely driven on the innovation that we're bringing in.
And that is also why I'm encouraged by what we have line of sight to in 'twenty five.
Excellent. Thank you guys.
Jim.
<unk>.
Jim: Thank you. Our next question comes from the line of Abbvie.
Jim: <unk> with Piper Sandler. Please proceed with your question.
Great. Thanks for taking my question I have one and then a follow up just on Merrell just basically I mean, just on the comments on taking share and Hakan trial I mean, I guess, you wouldn't think that with the business down the road that both this year and projected to double next year can you just talk about kind of what's happening in that he can tell spacing.
And where you think that that market will evolve and how can Maryland grew.
So that market, but assets there.
Jim: There you know adjacencies to that great.
Speaker Change: Great question.
I'll hit it straight on I think at the highest level. The outdoor category has been pressured in probably one of the worst performing categories in the market for the past 12 months I think as and we're not going to sit behind that and say, it's just a category issue as the category leader, which Merrell is merrell has to innovate and help to help lead lead that category, which is why I'm encouraged.
By some of the new product introductions, the moab speak to which I've already referenced a lighter faster more athletic version of the world's number one hiking boot, which is the Moab I think agility peak five it's the evolution of the trail. The trail is certainly evolving specifically market share gains.
Speaker Change: Last quarter, Merrell gained 30 basis points to 60 basis points and hiking trail run respectively and for the full year up over 100 basis points to 70 basis points, respectively, and both of those categories. So.
Speaker Change: That is share gains, albeit in a contracting category I think the future of the outdoor category is lighter and faster and more athletic and more versatile and I think certainly predicated on not just function, but also style and I think thats and Merrell, we can work harder as really hitting that style piece in designing great looking shoes that are versatile.
That not only not only be one of the trail, but also can be worn for everyday wear. So I think the onus is on a category leader to help reinvent I think the reinvention is lighter and faster and I think the work we've done on the pipeline as important another reason why the Merrell test lab is so important to US you know this elite trail running incubator for great product. The design words, we won in mail for the past handful.
<unk> of years around that run the MTL product.
Is is as critical and important and honestly some of the best some of the best products in the market. So tough category leader has to lead gaining share and we have to be out in front of the evolving trends.
Got it that's helpful and then Mike maybe on the.
Michael D. Stornant: You said that the.
Profitability improvements will precede an inflection in growth that kind of how can we think about you know if there are more challenges.
Consumer macro environment gets worse topline trends are lower than you projected your ability to still make those profit improvement.
I think that's.
<unk> indicated in the in the strong first quarter gross margin guide, which is 46%.
Higher than that than the.
And the full year guidance for gross margin I think that's an area, where we feel we've got a really strong base and we have a lot of those.
Michael D. Stornant: Sort of relative headwinds behind us.
Michael D. Stornant: High confidence that we can maintain that or even improve that as we move forward. So on the on the downside we feel like we've taken a really prudent approach to this guidance and to the extent, we always have levers to pull in terms of discretionary spend and contingencies in our operating plan to make sure that.
Michael D. Stornant: We protect that flow through in that profitability and also the cash flow performance of the business. This year. So we'll continue to manage that as we have in the past the biggest pressure on the business over the last couple of years has been gross margin.
And driven by that high inventory level and the fact that we've got the inventory in a much healthier place today we.
We have much more predictable gross margin performance coming into 2024.
Speaker Change: Makes sense. Thank you. Thanks.
Speaker Change: Thanks Amy.
Thank you. Our next question comes from the line of.
Owens with Keybanc capital markets. Please proceed with your question.
Speaker Change: Yeah.
Great. Thanks, so much so I just wanted to focus on really quickly can you talk about any specific concentration there.
Giving the high single digit declines what's factored into the outlook. After 24, and then just how you're sizing the opportunity for that brand over the coming years, given increasing competition in athletic right in general.
Yeah, I'll hit it and then Mike can add on we.
We have new leadership in sweaty, Betty, which we're very encouraged by I think we've worked hard on the integration for the past.
Year, and I think certainly feel much closer to that business and I've spent a lot of time, a sweaty Betty over the past handful of months I'm trying I'm trying to understand that business I think the decline in the first quarter is really driven by just becoming less promotional business and that business was very promotional last year and I think that that rings to for a lot of our brands.
I'll come back to sweaty Betty but.
In the latter part of last year, we pulled back on promotions at our own dot com businesses, and we saw meaningful improvements in gross margin running a healthier business and we're actually in the same strategy in the first half of this year to be less promotional as well and that's also why you're seeing some of the uptick also a contributor to our overall gross margin improvement, but ultimately running running better brands and <unk>.
<unk> and protecting brand equity so the drag drag in the first half first quarter for sweaty, Betty really as being less promotional business I was encouraged by the way that team performed in the back half of last year over the holiday season.
Really some really strong product a reception.
That brand has a very fanatical strong following of our female consumers, who love that brand if they stay very close to that the power franchise.
Best in class fit premium materials on trend designs and then their ability to extend beyond just that core bottoms business.
Really encouraged by the outerwear business, the nimbus and navigate.
Speaker Change: Really good styles force up strong double digits year over year, and then the ability to grow in adjacent categories mid layers accessories and stocks are all very encouraging so I am excited by the potential of that brand. It is a very competitive market no doubt that is well noted we understand that at the same time I think sweaty Betty has a very unique positioning at primo.
<unk> brand largely direct to consumer predicated on great design, great materials, Great Research and development and then great fit and then just cultivating a very loyal fan base. There's a lot of things we can learn across the Wolverine portfolio from sweaty, Betty and I think the Wolverine worldwide organization is bringing a lot of benefits of sweaty Betty as well.
Plugged into our supply chain, we've done some gross margin improvement initiatives within that have really helped and we're speeding up the supply chain. We now have the ability and sweaty about eight to react to fast moving styles in a matter of weeks to replenish those things.
Speaker Change: I love coming from retail apparel backgrounds, just that fast reaction time, I think is a competitive advantage. So there's still work to go do for sure in that brand hopefully that explains a little bit of the first quarter first quarter drag, but certainly optimism moving from there.
Great that's super helpful color. Thank you.
Thanks Ashley.
Okay.
Speaker Change: Thank you. Our next question comes from the line.
Speaker Change: Okay.
We'll do it.
Speaker Change: Greeting.
Please proceed with your question.
Thank you very much for taking my questions I have a question about what about the Wolverine brand in the work business.
Speaker Change: That's been a can you give us some idea of why that became so tough and how are you.
How do you intend to get it.
Turned around.
I think as you know the the where customer is very very loyal.
And so if they.
Speaker Change: How hard will it be if they've gone to somebody else on the downtrend and then getting them to swing back over it.
Yeah, Great question, Sam and I appreciate it and I appreciate you talking about our work group.
No doubt our work group is struggling a bit right now we've talked about that on the Wolverine brand. Specifically has had it has been an industry leader.
Speaker Change: But we still we had a tough year there for sure and we have lost share.
Speaker Change: Looking really closely with that team to understand where those share losses are happening and we're seeing more at the premium price points and then at that 90 to $120 price point.
There are new introductions coming this year to bolster that that more premium positioning dura socs.
Speaker Change: The surge the Colorado equipped and we feel good about those and our ability to gain back at that 140 to 60 price point, we think inventories are much better now in the channel.
And in some places I think our sell throughs are outpacing sort of the restock and our ability to get close to that market and replenish that business. When do you think the category is going to grow but.
Sam to your point that has been sort of a very sort of steady on business for us very consistent.
We struggled there a little bit over the past year.
There is an intense focus to get that work group back back to its more historical range I think the team is diagnosed issues. What we did what was self inflicted.
Speaker Change: Our ability to both understand both channel and price point and category and then capitalize on those trends Theres a strong western trend right now and the brand is pushing pushing into that western trend as well, but we certainly think that premium price point is where the brand has felt some pressure.
Thanks.
Speaker Change:
Can you give us a little more die.
Dissecting of that and then.
And then and then just sort of.
Delve into sort of.
How it gets there.
Speaker Change: Well again in the guide we provided Sam this is Mike.
Maryland expected to inflect growth in the back half of the year.
We saw.
This measured on sweaty Betty.
A contraction in Q1, and so that again, we will see that sequentially improved and inflect growth in the back half of the year as well.
Speaker Change: Our saucony business will improve each quarter, but for the full year will be down. So we're not expecting an inflection in growth there, but just sequential improvement it's important and important to underscore too many of the certainly the business model change that we called out some of the other changes that.
We mentioned in our previous discussion.
Heavily impact our saucony, but that joint venture changes is about a $30 million impact to the saucony revenue, specifically, but overall for the year.
Seeing sequential improvement in saucony, but not an inflection in growth in the back half so.
The growth brands, that's sort of the trajectory of the business and I think Chris touched on some of those reasons to believe as it relates to the product pipeline and some of the easier comparisons but also.
Just the abatement of some of the headwinds that we've been contending with for the last couple of quarters and I think also just the build out. We've also made some tough decisions as it relates to how we're going to manage our brands.
I think how we want.
Our ability to reset the business and just manage the portfolio differently. Another thing working against Saucony is they had they had a very low margin sort of value channel product.
That we're moving away from that wasn't helping build brand equity that was was not accretive to the brand's margin in total.
And we're making the tough decisions to move past those businesses. So there's a lot. There's a lot of different reasons why the business is where it is but in total as we think about how to best manage the portfolio how to best be great brand stewards, I think we're making a lot of those very tough decisions right now.
And then working to really improve the product pipeline investments back into marketing to ultimately come.
Really good brand builders. So that's just another reason why.
Speaker Change: Trying to explain some of the color behind the numbers.
Well. Thank you and then one last thing on the gross margin.
I understand so the non repeating.
Pieces with freight and so on and so forth, but but with promotional activity and I understand inventories are much cleaner and so on and I understand what's going on today, but you're you're anticipating it looks like for gross margin really.
Two.
Well I mean, the guidance is gross margin is going to look a lot better for a whole year and specifically in the back half when it did get very promotional.
I doubt it will be as promotional as it was a year ago, but.
I mean, how confident are you even with clean inventory that the new product you put out there is going to be good enough not to get caught up or should you be being even more conservative with sales to sort of guarantee that that doesn't happen.
Speaker Change: I'll take it and then Mike can add on I think it certainly to your point Sam I think we are viewing the marketplace differently in how we manage the brands I do think the product we have is really good.
And I would say the product winters in 'twenty three I think our innovation fell flat in 'twenty, three and I think the consumer responding to newness and we were having in core styles that didn't check which put a lot of pressure on 'twenty three and certainly continue to put pressure on us in the first quarter of this year, but when I look across the portfolio and the work that we've done around the product pipeline I am encouraged by what.
We have both what we have hitting the marketplace today. The Ryan Guide 17 Saucony is a good example, the triangle quickly follow at the Moab speed two out of the gate is very good the new rap collection, which I keep referencing.
Really selling out with almost no marketing because it is just visually disruptive and just looks different and Andy and his very on brand. So I think the product pipeline is much much stronger than where we had been historically and I'm excited to sort of continue to work through those those those older core styles and get to the newness, that's where the consumers responding thats, what our retailers are telling us is worth.
Speaker Change: What they want.
And in fact, we have a new a new protocol every Tuesday, or just a full deep dive into the business and we had our our session yesterday and we're having different conversations we're talking about chasing new products. We're talking about chase perception that we have seen feedback that we're getting and we're actually talking about chasing products and our supply chain today, where we haven't had those conversations for a while.
I got on a plane next week with the president of Merrell and Saucony to go to Vietnam to go to our biggest factories both to accelerate products that are in development.
And talk about how we how we can can you chase chase other items so.
The fact that we're talking about chasing new new good styles and chasing products that we want to accelerate into the pipeline I think is a very encouraging place for us to be right now and the only thing I'd add to that Sam is.
Really important part of the margin expansion as the as the hard work that the profit improvement team has done over the last year to get product costs and freight rates and things down not just the transitory costs that go away, but just on the go forward business and the new styles that Chris was talking about coming in at a much higher gross margin. So.
Really secured that and see that in the in the gross margin bridge.
And we're being cautious on the promotional cadence to your point, we don't control.
Or have complete visibility into the back half of the year, we expect it to improve because of healthier inventories, but we're still being cautious in this guide as it relates to promotions. So I think overall we're way.
At a very achievable gross margin outlook for the business.
Thank you. 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.
Mitch: I guess, a couple of things on the Merrell inflection to growth I just wanted to better understand that I know you don't give backlog, but does the order books support that growth or is this more.
Your assumptions around GTC your at once based on the product pipeline.
And our retailers are are you starting to see kind of a bottoming.
Around the outdoor space in terms of in terms of retail orders I got a follow up.
Yeah, I think I'll hit it I'll, let Mike add some color I think.
Part of part of the turnaround in one of the things that I talked about on the last quarterly call was just how closely we're to the wholesale market how closely we're to the partners I do think the conversations are different today than they were just a handful of months ago. As we think about the output of our outdoor calix specifically in <unk>.
Frankly, how they view merrell within their assortment I think we all know that the pressures are well documented outdoor category continues to be the leader continues to gain share.
And we keep seeing retails, keeping keeping protecting Merrill I think the important thing for the Merrell brand is to have all behind that sort of that classic Moab, III silhouette and become lighter and fashion athletic which is why we're so excited about how the Moab speed has been received and then our entre into trail run and the fact that we're gaining share in trail run is very <unk>.
<unk> I think we're paying very close attention to our own direct to consumer business doing whats happening in our 46 Merrell outlet stores, whereas traffic what are they buying what are they responding to where we're going to be less promotional merrill dot com and we're seeing sort of great great increases in profit margin to be less promotional and certainly to create less less disruption in the marketplace.
And I think in the Merrell has new introductions coming for the balance of the year and then continued healthy and we've got continued health of the Moab Moab franchise, we talked about the Jeep launched last year's 70 million impressions. The hero color race sold out to the piece and we saw a 12% lift across the rest of the Moab franchise, just by just by bringing that new heat to that category.
So I think like I said, I think the pressure and outdoor is it remains hopefully that will bottom out and they'll begin to resuscitate at the same time, we just can't sit back and say it. It is what it is the leader has to innovate and I think we're bringing product to market that that is that it is very good.
And then Chris on Saucony, you see particularly encouraged not just from a product standpoint, but also in terms of the brand heat.
Just trying to reconcile that with the guidance that the brand doesn't inflect to growth in the back half.
If you adjust for those business model changes.
And if not is really the issue that you need to get there.
Like.
The order book is the order book, the hope is that with better product stronger brand heat the sell through will dramatically improve and that will eventually drive better sell in.
Yes, Great question Saucony is near and Dear to my Heart right now I think saucony has probably some of the greatest potential entire portfolio just to have to break out.
Mitch: I think theres a lot of things working against Saucony from a topline standpoint, we talked about some of them the end of life transactions the low margin business.
We talked about the model changes.
I'm encouraged by Saucony, because I think the product pipeline is very good.
And I think the brand has a very very long period of time been sort of myopically focused on sort of the both the elite the elite runner. The elite and then lead channels products and I think the democratization of innovation.
It is where there is a tremendous opportunity.
So I think the new products, we've launched are resonating well.
Back, we're getting and we're pre lining new styles is very positive and there is frankly, just a broader lifestyle opportunity beyond beyond beyond that core runner. We've worked hard on colors and materials to make our shoes more approachable and we're opening the aperture as we think about distribution as we think about some of our new product launches they've placed in sort of top 10 list in run specialty where saucony hasnt.
Then for years.
So we're encouraged by those and then if you just go back to the elite runner.
When you look at Saucony counts at the prominent marathons Saucony is one of the top brands day in day out.
And in those leading marathons and then just the broader lifestyle opportunity as well and I think that as we think about lifestyle. It's not just that original as a retro tech. It's also just everyday saucony run.
Mitch: Which I think has tremendous opportunity so I'm very bullish on softening that category has the most momentum.
There are some brands that have done phenomenally well there we know that we have underperformed at the same time I think we've attacked the product piece first and that is encouraging and we will be turning on the marketing and I think as we think about $30 million of incremental investment.
I think a significant portion of that will be directed to saucony. So I'm bullish on saucony I'm bullish on that team.
Mitch: I think the opportunity opportunities there.
Thank you.
Our next question comes from the line of Wuxi on Sterno UBS. Please proceed with your question.
Great Good morning, and thanks for taking my questions.
Just a clarification on the margin guidance for first quarter 'twenty four I think I heard a three five operating margin how much would that imply in terms of like an expansion versus.
The ongoing business in 2023, and then if I think about it.
Revenue guide when you talk about an inflection in the second half does that imply like.
Sales grown already happening as a total a total company level by third quarter.
And then just lastly on the adjustments that you provided in the presentation I just want to make sure like you know the.
The $35 million in the active group is that mainly.
Because of the.
Because of the ex Tac JV sale that you announced.
Late last year. Thank you.
Yeah, Let me take the last question first that's correct so $35 million referenced is.
Mitch:
Is it related predominantly for for the step change that we've moved to a distributor model there with that partner effective January one.
The operating margin I think was your first question the operating margin.
Relative to the ongoing business growing going forward is down in the first quarter versus last year.
Gross margins up dramatically.
Mitch: But as we cycle through the year, obviously, we expect the operating margin to go.
Mitch: From that three 5% rate, which we're seeing in Q1 on the lower revenue base.
Q1 will be our lowest revenue quarter of the year to 7% for the full year. So we'll see obviously sequential improvement there, but importantly mauricio.
The focus for us has been.
To drive that gross margin expansion have that would be a sustainable improvement for the business that gives us the confidence and capacity to reinvest behind our brands.
46%, obviously for the first quarter is well above the full year guidance of 44, 5%. So.
Mitch: Really strong outcome for the first quarter, even on that lower.
Lower revenue base, but importantly, much cleaner base of revenue in the first half, which is helping to drive that margin expansion.
Alright, Thank you very much.
Thank you Marcia.
Thank you we have reached the end of our question and answer session and this also concludes today's conference and you may disconnect. Your lines at this time thank.
Thank you for your participation.
Yes.
Mitch: Okay.
Mitch: Okay.
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Mitch: Okay.