WWW Q3-2023 Earnings Call

Operator

Greetings, and welcome to the Wolverine World Wide Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Weisman, Vice President of Finance. Thank you, Alex. You may begin.

A

Alex Wiseman

executive

Good morning, and welcome to our third quarter 2023 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer; and Mike Stornant, Executive Vice President and Chief Financial Officer.

Earlier this morning, we issued our earnings press release and announced our financial results for the third quarter 2023. The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com.

This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures were 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 year 2023, growth opportunities and trends expected to affect the company's future performance made during today's conference call are forward-looking statements under U.S. securities laws. As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, I'd now like to turn the call over to Christ Hufnagel.

C

Christopher Hufnagel

executive

Thanks, Alex. Good morning, everyone, and thank you for joining us on today's call. For the third quarter, we delivered revenue and earnings in line with our expectations and inventory notably better than our target. Importantly, we achieved several significant milestones in the turnaround of the company. We're executing more boldly and at a greater pace to stabilize and transform the business. While there is still much work to be done, I'm proud and encouraged by the progress we've made in a very short period of time. Mike Stornant will provide detail shortly on the performance in the last quarter, followed by an update to our guidance for the balance of 2023.

Given the headwinds we see on the immediate horizon, our results in the final quarter of the year will be less than we previously expected and certainly less than the company's full potential. And while our turnaround and ultimately, the transformation of Wolverine World Wide won't be completed in a quarter or 2, especially given the challenging environment we find ourselves in today. We expect to continue to make meaningful progress towards our transformation goals, goals which we'll be sharing with you along the way. Overall, I remain confident in our family of authentic brands, our global platforms and most importantly, our team.

I'd like to start this morning's call with my initial observations, along with an update on our recent progress in stabilizing the company and transforming us into great brand builders, delivering long-term, sustainable, profitable growth for our shareholders.

Today marks 91 days since I first spoke to you on August 10, my first day as CEO. Over those 91 days, I've had the opportunity to assess the company's current state by engaging a broad spectrum of stakeholders, our team members, our board, key domestic international partners, supply chain partners, investors and more and by digging deep into our enterprise-wide operations and scouring the market to observe how our brands and our competitors do consumers each day.

It's become clear to me we can drive meaningful improvement across our global business through better alignment, focus and investments. Specifically, here are 5 observations and the actions we're taking. First and critically, we've historically underinvested in our brands, product innovation and demand creation. And I believe our top line challenges today are in part a consequence of this fact. We intend to and already have begun to strategically invest more in our biggest growth opportunities, and we must be better protecting these brand-building investments in the future.

Second, we've relied on a push model, and we focus too much on sell-in and not enough on sell-through. We need to create a full model for our brands, driven by Austin products and amazing storytelling. Next, we must become better brand managers, how we distribute, manage supply and demand and how we relentlessly protect our brands in the marketplace. We're thinking about sustainable growth in a new way and investing in the brand protection team to help manage and monitor the marketplace.

Fourth, we haven't prioritized relationships with our key partners, both here in the U.S. and around the world. We must be more strategic and less transactional in the future. We're reengaging with them at all levels of the organization to effectively collaborate on shared growth plans. And finally, we haven't regularly updated many of the tools to help us compete and win in today's rapidly evolving marketplace, whether it be planning, product management and creation or direct-to-consumer platforms.

We're implementing a variety of solutions here to take advantage of technology, better integrate our planning processes and ensure better efficiency in our operations. New tools are already online and more we piloted by year-end. All of these challenges are solvable. And while the macro market conditions are certainly difficult today, we're choosing to focus on what we can control. In any environment, there are always winners and I believe the actions above will help us build better, stronger, more resilient brands to weather the inevitable storms.

Moving to our turnaround efforts to position Wolverine for the future. We've been focused on 2 critical efforts over the past 3 months. First, stabilizing the company by deleveraging the balance sheet, reducing our inventory, and restructuring the organization to reduce the cost structure and improve the margin profile. This work will enable us to invest more in our brands and platforms to drive growth.

Second, redesign the company. By strengthening the key strategic capabilities and talents needed to become great consumer-obsessed brand builders, focused squarely on consistently delivering awesome products and telling amazing stories and ultimately reinvigorating our brand's growth trajectories.

As it relates to stabilizing the company, let me cover 3 important topics. We continue to actively rationalize our portfolio by selling certain Hush Puppy's IP in Greater China as well as our North American leathers business this quarter. This follows the divestiture of the CBS brand and the licensing of our Hutch puffing brand in North America earlier this year. These transactions have further focused our portfolio and generated $155 million in proceeds to strengthen the balance sheet. Other current important work is currently in flight, and we expect additional deleverage in the coming months. This work includes seeking strategic alternatives for the Sperry brand, which is well underway. We're committed to aggressively paying down debt while reshaping our portfolio to become a more focused business.

Next, we made solid progress on the inventory front. Inventories for the ongoing business at the end of the quarter were down 13% compared to the prior quarter and down 33% on a year-over-year basis. We now expect to end the year with total inventory of approximately $419 million, a reduction of 34% compared to year-end 2022 and nearly $30 million better than what we guided last quarter.

Finally, we made significant progress on our cost structure, including the redesign of our global operating model announced this morning. Our fast and bold profit improvement work has provided a line of sight to approximately $215 million of annualized savings with initiatives spanning organizational design, supply chain, global infrastructure and more.

We're quickly becoming a more focused, agile and efficient company with enhanced capacity to invest in our biggest growth opportunities. As you think about the new Wolverine World Wide, let me highlight a few key actions we've already taken to redesign the company for the future. We're building new muscle behind the key brand building capabilities that we believe will generate the biggest returns in today's marketplace, including consumer insights, product design and innovation and modern demand creation.

This morning, we announced an important component of our redesign initiative, the creation of the collective, a new strategic center of excellence is focused squarely on the consumer, where teams dedicated to consumer insights, market intelligence, innovation, trends, marketing, public relations and in-house creative agency design studio.

The Collective is intended to support and enable our brands product innovation design as well as creative storytelling to drive brand demand and heat in the marketplace. I'm excited about this new team and what they can do for our family of brands today and into the future.

In addition to creating the Collective, we've consolidated our global licensing efforts and created a new global licensing team, tape to unlocking our brand's full commercial opportunity around the world, which we believe could be very meaningful through clear responsibilities, greater focus and improved coordination with our global partners. We've appointed strong and experienced leaders to oversee the collective and our new global licensing team. I'm excited for them to get into new assignments and help drive the company forward.

Now I'm going to turn the call over to Mike to share more detail on our third quarter results and updated guidance before returning to provide some closing comments on the future of our company. Mike?

M

Michael Stornant

executive

Thanks, Chris, and thank you all for joining the call. For this morning's call, I will start with a review of third quarter results, followed by an update on our transformation work and then guidance. Third quarter revenue for our ongoing business of $519.5 million was in line with our outlook and down 20% from last year. Adjusted gross margin of 41.2% was below our expectations.

We accelerated the liquidation of end-of-life inventory, which negatively impacted gross margin but helped to drive inventory levels down by $66 million more than planned. Sales to third-party distributors, which carry a lower gross margin were a bigger part of our sales mix in Q3 and and also contributed to the lower gross margin.

Adjusted operating margin was 4.3%, with discretionary cost management offsetting the shortfall in gross profit. Reported operating margin was 5.2%. Adjusted diluted earnings per share for the quarter were $0.07 in line with our guidance, and it includes a $0.03 unplanned negative variance from FX changes in the quarter. Reported diluted earnings per share were $0.11 and included a gain on the sale of Hush Puppies IP in China, Hong Kong and Macau, and a gain on sale of the North American leathers business. This was offset by an impairment charge for Sperry's intangible assets.

Shifting to the balance sheet. We made meaningful progress to further improve inventory, net debt and liquidity during the third quarter. Inventory for the ongoing business was $564 million, down 33% compared to last year and over 10% better than expected. We delivered this improvement, leveraging updated planning processes, new weekly reading react sessions with each business unit and a normalized supply chain environment to make better decisions that contributed to the Q3 inventory improvement. We now project year-end inventory of approximately $490 million, $30 million lower than our outlook in August.

As it relates to net debt and liquidity, we have moved quickly to sell additional noncore assets that will accelerate debt pay down. During the third quarter, we generated nearly $55 million of cash proceeds from asset sales. As a result, we ended the quarter with net debt of $930 million, liquidity of $400 million and a bank-defined leverage ratio of 3.4x, down slightly from Q2.

Efforts to monetize noncore assets continue. And we now expect an additional $65 million in proceeds from transactions that will close later this year. Including these asset sales, we expect year-end net debt of approximately $850 million and bank defined leverage of approximately 3x.

Before we cover the outlook for the rest of 2023, let me provide an update on the impact from the transformation work that Chris covered earlier in his comments. In August, we expanded a comprehensive set of operational and cost savings initiatives to accelerate the stabilization of the company. This work is being led by internal teams, including the profit improvement office with help from outside experts. In addition to the initiatives that were launched a year ago, this new work now includes a deep assessment of the company's organizational design, global cost structure and future operating model.

This work is ongoing, but has already resulted in greater expected profit improvements for the business. As Chris mentioned, we now expect an estimated $215 million of annual savings from these initiatives, including $75 million to be recognized this year and an incremental $140 million expected in 2024. A summary of these incremental benefits are listed below.

Supply chain cost improvements of $70 million, including lower product, freight and logistics costs, lower organizational costs of $50 million related to the design changes announced earlier today. Further SG&A cost savings of $20 million, including benefits from consolidating our footprint in the U.S. and Europe, synergies from further integrating the Sweaty Betty operation and other indirect savings from the global redesign of the company.

In addition to these incremental profit improvements, we also expect 2024 results will reflect a $60 million benefit from 2023 transitory supply chain costs that are not anticipated to reoccur. The cost savings and operational efficiencies generated from this work will fuel future investments in new talent, demand creation, innovation and technology platforms needed to stabilize the business and then accelerate the growth trajectory of our brands.

All areas that directly address the core business challenges Chris summarized earlier. The level and timing of reinvestment needed in these areas to quickly improve brand performance is being carefully considered as part of our 2024 planning process. While we remain committed to an operating margin target of 12% in the near term, we now expect it may take longer to achieve this run rate given the current lower cost structure to drive meaningful operating margin expansion and improved cash flow in 2024.

Now let me transition to the 2023 outlook for the ongoing business in the fourth quarter. Our guidance reflects the expected performance of our ongoing business. which continues to exclude all results during the year for Cat and Wolverine Leathers and adjust for the licensing transition for Hush Puppies for the second half of the year.

We continue to evaluate strategic alternatives for Sperry, and those results are included in our outlook for 2023. Like many other companies in our industry, we continue to experience low demand in our U.S. and European wholesale businesses. which represent approximately 50% of the company's global revenue. Over recent months, our brands have seen a slight improvement in channel inventory and sell-through performance but lower future order demand and more volatility the upcoming holiday season and they are placing orders much closer to need.

In August, our outlook contemplated second half global wholesale performance to be down mid-teens. We experienced a decline of 14% in Q3, but we now project a decline of approximately 35% in the fourth quarter. In addition to a soft macro environment, our brands have also been negatively impacted by these important factors: heavy sell-in of end-of-life product earlier in the year which has created higher promotional pressure in the U.S. market; an ongoing decline in the height category and excessive gray market selling for Merrell; vacating an entry price point segment and related distribution for Saucony; increased price point pressure from private label brands in the work category; temporary lack of product newness; and certain color and trend missteps across the portfolio.

Outside of our global wholesale business, we expect our DTC channels to be down mid-teens in Q4, just slightly lower than Q3. We now expect mid-single-digit growth for our third-party international business in Q4. Based on these trends and factors, we now expect fourth quarter revenue of $515 million to $525 million, down approximately 18% compared to last year at the midpoint and comparable to 20% decline in Q3.

Adjusted gross margin for Q4 is now expected to be approximately 36%, impacted by $13 million of transitory supply chain costs that won't reoccur next year. The significant drop in wholesale revenue, a higher mix of sales to international distributors, a higher promotional environment around holiday and further efforts to liquidate inventory to achieve our lower year-end targets.

Adjusted selling, general and administrative expenses for Q4 are now expected to be approximately 38% of sales. The rate is up slightly from Q3 due partially to a much higher mix of D2C revenue expected in Q4. In addition, we've made some Q4 investments that we feel will benefit future results, including higher performance marketing spend for our e-commerce sites to optimize new consumer acquisition and meaningful co-op support for key partners to drive faster sell-through at retail in Q4.

Fourth quarter adjusted diluted earnings per share are now expected to be a loss of approximately $0.30 to $0.25. For the full year, [indiscernible] is now expected to be $2.19 billion to $2.20 billion. Adjusted gross margin for the full year is now expected to be approximately 39% and adjusted selling and general and administrative expenses for the full year are expected to be approximately 36% of revenue.

Full year adjusted diluted earnings per share are now expected to be in the range of $0.05 to $0.10. 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 and has further clarified our priorities and opportunities.

Profit improvement and inventory initiatives are accelerating, 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. Now I'll turn the call back to Chris.

C

Christopher Hufnagel

executive

Thanks, Mike. I'm going to finish this call where I start my very first call as CEO, where we're going in the vision for the new Wolverine Worldwide. Our vision is to become great global brand builders. To do this, we must be closer to our best leaders to head up our key brands over the past year and are investing in increased consumer research, innovation and trend support to inspire and guide our brand teams.

We're planning to bolster the development of products and marketing by fully integrating insights into our consumers throughout the go-to-market process across the entire enterprise from ideation to concept and product testing to create development and optimization and marketing effectiveness. Equipped with these new insights, our brand teams can more successfully execute the 3 priorities outlined in our brand-building model: building often products, selling amazing stories and driving the business.

Wolverine World Wide has a great history of building Austin products, and I'm eager to see our brands push that innovation even further, empowered by greater consumer insights and the investments we're making in advanced digital product development and management tools, which Merrell is piloting now for eventual deployment to the rest of the organization. One area in which I think we have an opportunity to improve is style and trend, especially for her.

Trend design and color represent significant opportunities for our brands in the future. and we're both enabling our brands to take advantage of these opportunities with resources like the collective and also implementing measures within the brand's processes to drive improvement. Our brands also need to excite consumers with more compelling brand and product storytelling as well.

We believe our investment in consumer insights, along with in-house creative capabilities will help our brand teams meaningfully elevate our marketing concepts and the creative expression of them to our consumers. Guided by in-depth external benchmarking analysis, we plan to strategically increase brand marketing investments as well as engage more consumers with our messaging, both in our own channels and wherever our brands are sold.

I'm especially excited to announce today that we've concluded through recruiting processes and have hired new Chief Marketing Officers for Merrell, Saucony and Sweaty Betty. Each of whom are starting in the next few weeks. These new talents and skill sets for modern demand creation will be critical to our future success.

We must also drive the business more effectively. This starts at a foundational level. We must get better at planning our business, and we're implementing an improved planning process for integrated demand, inventory and supply chain management. We're also implementing stronger SKU management and product segmentation within the brand's core to-market processes and piloting a new digital PLM system to better enable strategic management of our product lines.

We expect these initiatives to further enhance the company's effectiveness and operational efficiency. As modern brand builders, our brands need to presented with a distinction in the marketplace, wherever consumers want to shop. This includes our own direct-to-consumer business, and we plan to upgrade our own digital platforms.

We must also intensify the prioritization of our key domestic and retail partners, partnering with them to more closely drive growth together. We've initiated a series of top stop meetings to engage with them and rejuvenate our strategic partnerships both here in the U.S. and around the world.

Finally, to be great brand builders, it's incumbent on us to become better brand managers. This includes how we distribute, how we manage supply and demand and importantly, how we protect our brands in the marketplace, included bolstered tracking and invest capabilities to combat gray market sellers.

Finally, our turnout efforts will take time and I expect the brand headwinds we're experiencing now to persist into the new year. At the same time, the efforts noted above will require incremental investment, the full extent of which is still being assessed. We're fortunate to have identified and secured significant profit improvements so quickly.

These savings will help fund the needed investments while also driving meaningful operating margin expansion in 2024. We will strive to find a responsible balance between delivering improved bottom line results while ensuring we're investing appropriately to help realize the full potential of our portfolio in the long term.

I want to confirm that we remain committed to delivering mid-teens operating margin in the future. Over the past 91 days, we've actioned aggressive initiatives across many fronts, parallel efforts to both stabilize the company and redesign Wolverine World Wide for the future.

There is significant work to still be done, but our team is talented, experienced and motivated. And importantly, we're moving at a new pace. We have a shared vision to become consumer-obsessed brand builders, and we have an extraordinary portfolio of authentic industry-leading brands positioned in the right categories, supported by a strong global distribution network and powerful enabling platforms.

I'm incredibly encouraged by what the team has accomplished in a few short weeks and what I believe we can do together as one Wolverine in the future. Despite the near-term challenges, I'm optimistic about our future and have deep conviction to make our vision a reality for our brands, our teams and our shareholders.

In closing, I want to express my gratitude to every member of our global team. The work you've done and continue to do each day is sincerely appreciated. We've made tremendous progress to stabilize Wolverine World Wide and we're in early days of transforming our 140-year-old company. I firmly believe our very best days are ahead, but the only way is through. Let's go.

Operator

[Operator Instructions] Our first question is from Jim Duffy with Stifel.

J

Jim Duffy

analyst

So on the plus side, it seems like you're making some good progress. I guess I'm Curious if you could just share some thoughts on kind of the glide path to stabilization in this U.S. wholesale channel, which has been such a challenge not just for Wolverine but for others across the category. Are you seeing glimpses that channel partners are getting into a more normalized inventory position. I don't -- I jumped on the call a little bit late. I don't know if you made any comments about your spring orders. What's a kind of reasonable expectation for the investment community for that channel getting to a point of stabilization?

C

Christopher Hufnagel

executive

Sure. Well, thanks, Jim. I appreciate the question. I'll hit it first, and then Mike can add on. Certainly, as we think about the turnaround of the company, and I think about it across 3 important time horizons. There's a stabilization work that we've really, for the last 91 days have leaned heavy into because we needed to. And I'm tremendously encouraged by the progress we've made in a very short period of time for that. And I think a lot of the work we've done was detailed in our release this morning, along with the other release we issued. That certainly is the transformation of the organization as we work to sort of pivot from who we were to who we aspire to be and investing in those needed talents and capabilities and tools to allow us to go be great, great brand builders. And then there's the inflection point where we would pivot to growth. Obviously, the U.S. wholesale channel, it's critically important on us as an organization. And I think our challenge is there are certainly well noted. And I think certainly from an industry standpoint, and there's lots of reports about the U.S. wholesale channel is 1 of the most sort of fraud right now from an industry standpoint. So we're working to get much closer to our partners. Hopefully, that came through in the prepared remarks, I'm sort of understanding where things are, where our brands sit in those channels, how inventory looks in those channels. and then how the various pieces are actually performing. So U.S. wholesale is a critical piece of our business. And I think that is 1 of the places that we've spent a lot of time in the first 91 days, both sort of assessing that channel, addressing some of the issues, rekindling important relationships with key partners. Talking about working our own inventory through from a liquidation standpoint and then importantly, investing in that channel to help sort of stabilize inflect the growth. So I think you hit on a key point, Jim. It's a critical channel for us, and I will assure you that we are leaning into that channel to improve the performance of our brands.

M

Michael Stornant

executive

And the thing I'd add to that, Jim, is that as it relates to the order book, which is I mentioned in my comments, retailers are buying so much closer to need right now. So the visibility into Q1 in the first half is pretty similar to the visibility we had into Q4. And so the order trends aren't necessarily changing much. What I would say is last year, we sold in about $20 million of end-of-life product in the first quarter. Obviously, that's not going to repeat again, but that wasn't really low margin. So we're not going to anniversary that. But when we think about the health of the business and the improvements we're seeing in terms of channel inventories and our sell-through rates and things, hopeful that, that's going to start to accelerate in the first part of the year. But as we plan the business, more around the stabilization that Chris was talking about, about $50 million of those profit improvements that we expect to incrementally achieve next year will be achieved in the first quarter. That's the transitory cost going away and the profit improvement initiatives that we've laid out.

So really feel like we'll see sequential improvement on the P&L from a profitability standpoint. Inventories are going to be much cleaner. So things that are under our control that we mentioned at length in the prepared remarks, I think, are going to give us a nice start to the year from the standpoint of sequential improvement in profitability and balance sheet metrics and so on. So the wholesale opportunity in the U.S. and Europe is an absolute focus for the teams. And I think hopefully, we'll have more to talk about as we make more progress here as we lean into 2024.

J

Jim Duffy

analyst

Very good. And just a bigger picture strategic question, Chris. I'm encouraged that you and the team are taking a fresh perspective on appropriate distribution. Clearly, you had elevated off-price sales this year. But as you look more broadly across your wholesale distribution, do you think it's appropriate to abdicate any of your legacy distribution in the interest of building healthier brands going forward?

C

Christopher Hufnagel

executive

Yes, it's a great question, Jim. And I sort of point you back towards the initial observations that I've made since assuming the share. I think we ultimately have to go better brand managers, and we have to build resilient covetable brands that create a pull model versus us just pushing it more focused on sell-through not just on sell-in. And that's new muscle for us as an organization. But that is critical for us. And we have to become better brand managers, we do a better job managing supply and demand, and that will be a critical evaluation from who we distribute to and then certainly how we protect our brands in the marketplace. So you know us well. Hopefully, you can appreciate the transformation we're trying to do here in a tough environment. And then honestly, exerting new muscle as an organization for how we manage and protect our brands in the marketplace. But all of those things are and we certainly are taking this moment where business is challenged to take it as a moment to step back and say, how do we want to run our brands in the future? How do we want to grow and protect our brands in the future. So all of those things are on the table and all those things -- we'll be making those decisions, and I appreciate you picking up on that.

Operator

Our next question is from Laurent Sales with BNP Paribas.

L

Laurent Vasilescu

analyst

I wanted to follow up on the press release. In the press release, it says that, obviously, you're looking to sell Sperry at some point. But it also says that you're looking to at other noncore assets. Maybe can you just unpack that a little bit? Is that with regards to brands? Or are there any buildings that you're looking to sell? Any color on that regard, that would be very helpful.

C

Christopher Hufnagel

executive

Sure. I'll open that up, and I'll let Mike give some more specifics. But I think certainly, as this period of transformation, sort of where we see ourselves, the company we want to go be and the needed work we have to do from a stabilization standpoint. I would say we're looking at everything. We're looking at all options. And we previously announced the plan to seek alternatives for Sperry. That work is well underway. We've sold some intellectual property. We're evaluating all of those things. And we also previously announced the office closure and sort of consolidation of offices. And I think across the enterprise, across our global footprint, where can we do things differently both is in the effort to stabilize the company, but then I think more importantly, the future of Wolverine Worldwide. How do we run a less complicated business, how do we run a more efficient business, how do we focus on our biggest brands with the biggest opportunities. And then importantly, this cost-saving effort I really want to emphasize is that all of the work here is really -- is underpinned with the goal towards pushing more back towards our brands, product innovation and then modern demand creation. So in total, Laurent, where we are and having been able to get in this chair, I would say everything is on the table right now as we consider what we want the next chapter of the company to be.

M

Michael Stornant

executive

A little bit more specifically, Laurent, we announced earlier that we were still working through the non-North American portion of our leathers business, that's still in play, and we're hoping to move that forward in the fourth quarter. We have some real property, some real estate and some properties that we're also looking to to sell and monetize. And we have some smaller opportunities in different markets around the world. We did an important transaction with one of our sub distributors in China for the Hush Puppies brand. and we're looking at some opportunities similar to that, that are not quite as meaningful. But as Chris said, everything is on the table. I think we're taking a really prudent approach to the way we're monetizing these noncore assets.

L

Laurent Vasilescu

analyst

Super helpful. And then maybe as a second question, with regards to the $215 million annualized cost savings program, can you maybe -- Mike, can you kind of unpack that across cost of goods sold versus SG&A for 2024. When does that materialize? Do you expect some meaningful cost savings of $215 million in the first half of the year or is it more in the second half? And then lastly, just on this point, how much cash charges or noncash charges do you expect on this $215 million?

M

Michael Stornant

executive

So a large portion of the $215 million, $75 million of it is recognized this year. So the incremental benefit in '24 is going to be $140 million or so. We announced today earlier today a pretty meaningful organizational redesign and restructuring of the workforce. And that's going to have a meaningful impact right away on 2020 for cost structure. That's about $50 million of benefit and that's $50 million of the $140 million that we talked about. There's another $20 million or so of other SG&A expense benefits that that will recognize incrementally in 2024. That comes in the form of a number of different things, including how we're co-locating our teams and reducing our footprint in North America and Europe and some other just synergies and benefits that we're getting from the work that's been underway for quite some time in the profit improvement office. And then importantly, $70 million of savings from supply chain and product cost related negotiations and work that's been ongoing for some time. But that number continues to be our primary focus as we try to drive our gross margin and create more capacity, as Chris to create more capacity to put behind our brands in terms of demand creation and other things. So the breakdown is also kind of summarized in our IR deck, too, Laurent, if you want to see some of the details. But that's -- those are the highlights. I also mentioned that we have about $60 million of transitory costs this year for some of the extraordinary expenses we incurred related to the supply chain in late '22 and early '23. Those are not going to anniversary again next year. So to answer your question about the phasing and the timing of this, about $50 million of profit improvement between the initiatives we talked about and the transitory costs in the first quarter and a similar number in Q2. So really, really strong improvements and benefits early in the year from the work that we've laid out.

Operator

Our next question is from Mitch Kummetz with Seaport Global Securities.

M

Mitchel Kummetz

analyst

I guess my first one is somewhat housekeeping in nature. You guys had previously given sales guide by your 5 key brands. I was hoping you could update that either for the full year or maybe just give it to us for the fourth quarter. How are you thinking about that?

A

Alex Wiseman

executive

Mitch, this is Alex. We have -- in our IR deck, we outlined that. It's in Page 5 of that deck.

M

Michael Stornant

executive

Let's just mention the fourth quarter stats there.

A

Alex Wiseman

executive

Yes. So for fourth quarter for Merrell, I'm looking at a high teens decline; Saucony, mid-teens decline; Sweaty Betty, high single-digit decline; and Wolverine, high 20s decline. .

M

Mitchel Kummetz

analyst

Okay. That's helpful. And then, Chris, you mentioned the importance of sell-through versus sell-in. I mean they're both obviously important. But can you talk a little bit about what you're seeing right now in terms of sell-through on kind of your product line because it sounds like some of the revised guidance, a lot of that is the macro, but it sounds like some of it is a bit self-inflicted as well. So I was hoping you could address that.

M

Michael Stornant

executive

Yes. Yes, for sure. I mean, I will address that. I think we're sitting here today. There's a lot of things we could be reacting to in the news. We could be talking about weather or student loan repayments or a lot of things in the channel. And what we're choosing to do is really focus on the things that we can do better. And once we get all of our things in order, then you'll probably hear us talk about some of those more macro factors. But certainly, it's a challenged marketplace, but we're focusing on what we can do better. I think as an organization from a product standpoint, we haven't had our strongest introduction this year across much of the portfolio. And for us, it begins with product. We ultimately have to deliver innovative, trend-right, colored right price, right place, right products in the marketplace. And I would say we're not firing on all cylinders as an organization, which is why 1 of the things that we announced today was this establishment of a new center of excellence to really help our brands help us build comfortable, amazing, awesome products. And I think that's going to benefit us tremendously as we get closer to the consumer and the marketplace. Certainly, for us is our brand, it's all a little bit different. And we certainly are seeing some green shoots out there. Some recent introductions by Saucony have checked, and we're encouraged by that. the Moab 3 for Merrell, which is the #1 hiking build in the world, and we're actually seeing some good sell-throughs of that at our key partners. But in total, I would say we are certainly underperforming. And I think as we work to both stabilize the organization, we have a heads up, a focus on what we can do to drive and improve product pipeline and then certainly ultimately drive brand heat in the marketplace. So those are the things that we're focused on. Obviously, what we're seeing in the marketplace is reflected in our guide. But I can assure you, as we think about 2024, the products, especially for our big brands, Merrell, Saucony, improvements that we're seeing out of SwediBetdy, which we're really encouraged by. We certainly see an improved product pipeline and then our ability to reinvest in that demand creation engine for those brands, which is why this cost takeout work that we've done is so critical. And I'm thankful that we started that work early and we're going to be able to reap those benefits for the full year in 2024 and be able to divert more funds towards demand creation, where historically, we have not been as good of that.

M

Mitchel Kummetz

analyst

And I guess maybe just a real quick follow-up on that because you've identified a lot of significant cost savings opportunities, but you just mentioned the need to reinvest. You talked about that earlier in your prepared remarks. How should we think about sort of redeploying some of those savings into more investment in the business and the brands.

C

Christopher Hufnagel

executive

Yes. And I want to make sure, as we talk about the cost savings and the improvements we're going to see, as we did this redesign work over the last handful of weeks, we were very focused on protecting our big brands and our growth engines as we did this work. And as we're building our 2024 plan, we are really setting aside the marketing dollars that we need to reinvest. So as I think about investments still this quarter, we're making incremental investments this year to get our brands moving again. We're talking about how we're spending on our own direct-to-consumer channels and how we're spending on performance marketing to have a better holiday cultivate new buyers that will help us in 2024. We're working across the U.S. wholesale channel, both as we sort of liquidate and move inventory faster and then how we're engaging with our key wholesale partners to get our brands performing better in those things. So I think hopefully, one of the takeaways that everyone will have from this call is certainly a restructuring effort that was critical. And frankly, probably a little late, and we probably should have done some of these things much earlier than we did. But we did them now. They will impact the full year of fiscal 2024, which I'm encouraged by. But I want to make sure that the cost saving effort isn't just going to go to the bottom line. We fundamentally have to invest back in our brands, amazing products, awesome stories. And then I know that we're capable of driving the business.

Operator

Our next question is from Abbie Zvejnieks with Piper Sammer.

A

Abigail Zvejnieks

analyst

I'm just looking at Slide 9 of the Investor deck quickly about some of the aspirational growth target. So I guess, for the active group, this lays out 7% to 10% revenue growth. That's like a long-term financial aspiration. What gives you confidence in like what you're seeing today with the health of the brand that you can get back to that point? I understand making a lot of investments in brand building and products, but just anything that you're seeing today that gives you confidence there?

C

Christopher Hufnagel

executive

Yes. I'll start. I mean -- and I'll talk about the active group. I mean -- we'll start with Merrell, the company's biggest brand, coming off of the best year in the brand's history in 2022 and 2023 is a difficult year for sure. I think some of the Merrell challenges right now are self-inflicted. We did not manage the Moab to MOBI transition well, coming out of the supply chain crisis, how we manage that. Really put that brand under a lot of pressure, pressure that we're working ourselves out of. But that transition of the #1 hiking goods in the world has certainly been problematic. Encouragingly, though, the MoAb 3 continues to perform. And as it relates to market share, other than the last quarter, and we've had a year's worth of market share gains. Merrell's biggest category though, which is outdoor, is under pressure. In fact, it's the worst-performing category as tracked by NPD. So there are certainly some wins headwinds there for Merrell. At the same time, from a brand standpoint, I think the brand is very healthy. We have a very good team in place. I mentioned we have a new CMO joining the company as well. I feel good about the product pipeline as we begin in next year. We are seeing some green shoots in trail run, which is an important piece. But ultimately, we have to be better and expand beyond being so dependent upon just that core height category. And that's when I talk about resilient brands that can grow in any environment, we have to become less dependent and move beyond functional footwear.

As it relates to Saucony, that category, there are some very hot players in that category right now and it's ultracompetitive. Saucony arguably competes in the most competitive market of all of our brands. That really comes down to a phenomenal product pipeline than how we drive demand. I think from a Saucony perspective, I'm encouraged by the product pipeline we have in 2024 coming. New introductions for the Ride Guide 17, the Triumph 22 and the Hurricane 24. You're going to see our investments behind those core programs for next year. And then this year, when we innovated with Trium21, we actually saw a really nice pickup right when that product hit and there actually was a halo effect to the balance of the brand. Saucony ultimately, though, has to open the aperture a little bit. We certainly have to maintain the edge as an elite running brand. But I think we've been too focused on a channel and a core runner and Elite core runner. And there's a big -- much bigger market opportunity for Sonpony, and I'm encouraged by the progress there.

And then from a Sweaty Betty standpoint, I think certainly, as you look at our results. I think we're really pleased by the turn that Sweaty Betty has made over the last handful of months. We have a new leadership team there. as well, really sort of driving the retail fundamentals. We're seeing a nice pickup in sort of core products. And then new categories like outerwear to them, every Tuesday, we sit and analyze every brand of the company, how everything performed last week, and we're seeing new categories, premium price points for Sweaty Betty checking, which I'm excited by. And I get in a plane on Sunday morning to fly to London to visit with the wide-body team into a retail and I can't wait to get on the ground there and see what's happening there. So that's how we're thinking about the active group in total. It's a little bit different story by brand. certainly challenged right now as it looks at it. But as we think about 2024, I think there are plenty of things to be optimistic about.

A

Abigail Zvejnieks

analyst

Great. And just one more, that was helpful. On just like morale, I mean, given the results, the stock price. I know Chris, we talked about when you joined kind of had an all hands, and it seems like everyone was really excited about the changes being made. Now that you've had a round of layoffs and everything. Can you just talk about the morale of the team?

C

Christopher Hufnagel

executive

Yes. Great question. People and culture are at the very top of my list, things that I care about most. And I think we're going to hang up with you here in a couple of minutes, and we're going to -- in 15 minutes after we finish, we're doing another global town hall with all our associates around the world. I've been really clear with the teams that we are in a turnaround and it's really a turnaround 3 chapters. There's a stabilization work. There's the transformation work of the team. We have been over communicative. We've had global tools every couple of weeks. I'm doing coffee hours, both in person with the teams here, along with virtual coffee hours with the teams around the world. We just completed an internal pulse survey Certainly, yesterday, as part of the restructure was a hard day for the team. And those are some of the most difficult decisions we make. But I do think that there is an energy in the company right now of we know what we have to go do. And now we have to go get after that work. And the only way to get out of this back to what we know that our company's potential is is through the work. So I'm staying super close to the team. I'm very thankful of the way the team has leaned in. In the last 3 months, it certainly has been extraordinary 3 months for us from the transition to navigating a bumping environment. And at the same time, all the change that we're asking the teams to go through. But this is a resilient team. They take tremendous pride in the company and their brands. and the fact that we're the team to lead this 140-year-old company out of the current situation into better days is not lost in anyone here. But I'm very thankful and something we're saying very close to.

Operator

Our next question is from Sam Poser with William Trading.

S

Samuel Poser

analyst

So Chris, you talked about the need to get back to a push model -- pull model, excuse me, from a push model. And you talked about working with your major accounts to sort of to -- for everybody to support what you're doing. Now how do you -- given where things stand today, how do you get -- like isn't it going to take like through next year to get to a pull model because you're going to have to pull sort of way back to sort of find out what demand is rather than there are certain shoes you know to do well like the mob. But where you really have to sort of figure out what that demand is and take that very cautiously moving forward so you can really get a pull model going. And then I would think that might come through just very strict product allocation, even though that might sound counterproductive at the beginning?

M

Michael Stornant

executive

Yes. No, it's a good question. That's certainly not lost on us. And Sam, we've talked a lot over the years about managing brands and Wolverine Worldwide and how we manage the marketplace. Certainly, our envisioned future of the things that I've talked about and what we want to go do. Those things are going to take time. And we're not going to wake up a quarter or 2 from now and saying we've somehow mysteriously created a pull model. But that ultimately is where the company has to get to and certainly, to be a great global brand builder, those are the efforts that we have to take. I think there are some easy things that we can do along the way to help us achieve that. And I think certainly, Sam, as we talk about the expectations for growth, I think we are approaching those things cautiously. And that's why you've seen us work so quickly on the cost structure to fundamentally improve the profit contribution that we have, at the same time, finding a balanced approach to reinvesting in our brands. I'll tell you, over the last 91 days, I've had the privilege of talking to a lot of our -- they are encouraged by that. We're talking about building a more strategic relationship and being less transactional. At the same time, we're reassured. We're lucky. The Wolverine portfolio, the brands that we have, Merrell the #1 outdoor footwear brand in the world. brands. Between Wolverine and Cat and the brands, we have a great portfolio. And when I talk to those partners, they talk about the strength of the portfolio and the consumers that come in and ask for them and the the places that we hold in their assortments. So I think it's not going to happen in a quarter or 2. That is certainly what the Envision future is. But we're starting today with that approach. And I think for us, fundamentally, we think that ultimately is the charge and mission for the organization.

S

Samuel Poser

analyst

I have 2 more things. One, I mean, doesn't that -- just a quick follow-up on that. Doesn't that mean though -- situation means that revenue in 2024, almost for the entire year has to be down, even though you might see some gross margin -- some margin improvement on significant revenue decreases to improve the health of the brands? And then secondly, you talked how do you -- I mean, what are you going to do to measure demand? Because that product that ended up in the gray market, as you mentioned, had to be excess goods sold to somebody that -- how do you prevent something like that from happening again? Or -- and if you're going to cut back distribution to get with the right partners, will you have to take those goods back to prevent more gray market situations. We've seen this from a few other brands as well.

C

Christopher Hufnagel

executive

Yes. Good question. We're not giving any guidance in 2024. But as we're sort of building our plans and building our models, we view 2024 as a low growth year, both in what we have to go do from the portfolio standpoint, and frankly, sort of just what we're seeing on the horizon, which is what sure drove all of the work over the last handful of months to best position the company to dramatically improve the margin profile of the organization, both from a gross margin standpoint in which we've made tremendous progress on, and what we anticipate to happen from an operating margin standpoint, due to the SG&A work. So no guidance yet, but I think there is a cautious approach to how we're viewing the year. And I'm really viewing 2024 as a bridge of '25 and '26. We believe this company is capable of a mid-single-digit consistent revenue growth of achieving operating margins in the mid-teens, and we're building plans towards that.

As it relates to the gray market, those things have always sort of existed to a certain extent. It's certainly worse for us right now sort of given the inventory challenges that were resulting of the supply chain issues as a result of COVID. But that is plaguing some of our brands today, and we're seeing it obviously both in our own DTC performance. And I'm also getting very direct feedback from our wholesale partners about that. And we're taking some aggressive action with how we better manage actually how we monitor that and then how we manage that. And then the consequences when we do find a violator and what the consequences are. So Sam, you talk a lot about how companies manage brands. I think about that through distribution choices we make allocations managing supply and demand. But then certainly how our brands show up day to day, it's critically important to ultimately becoming great brand builders.

Operator

Our last question is from Mauricio Serna with UBS.

M

Mauricio Serna Vega

analyst

Great. I just wanted to -- maybe if you could touch a little bit more on the 2 largest brands. It seems that Saucony is reselling in a better shape compared to Merrell. So maybe you could just provide a little bit more details about facing headwinds from a demand perspective. Do you believe that, that is something that could inflect in '24? Or do you think that's like a challenge. And I'm sauce how is -- why do you think that brand are doing relatively better than than Merrell.

And also just on Sweaty Betty, just a point of clarification because I see the guidance for Q4 is a decline when in Q3 revenues were actually up again. I just wanted to understand the dynamics happening there? And then just lastly, on the savings for next year, $250 million I know you talked about the margins taking a little bit longer to get to the 12% EBIT margin, so not happening next year. Is that really more reflective of a slower top line growth for slower top line expectations for next year? Or how should we think about employed operating margin for fiscal year 2014?

C

Christopher Hufnagel

executive

Yes. Thanks, Mauricio. I think there's 3 questions there, and I'll answer a couple of them and turn it back to Mike. I'll hit the operating margin question first. And then Mike can add on and then we'll go back to Merrell and Saucony and Sweaty Betty. Obviously, the growth expectations that we currently see for 2024 will be more modest than what we initially thought. At the same time, I fundamentally think as a company, we have to balance -- find the balance between operating margin expansion and sufficient investment in our brands to catalyze long-term sustainable growth. And certainly, we could do a lot of draconian things and achieve a higher operating margin next year. That would feel good for 1 year, but at the same time, would not best position the portfolio. be the best for our brands and ultimately I think not in the best interest of our shareholders. So we're going to walk that line very closely. We feel good about the operating margin expansion that we can deliver next year. At the same time, we know we fundamentally know that our brands need a greater level of investment behind product innovation, modern demand creation. And then we've got some tools that need to be updated. We have to update our e-commerce platform is very old. It's hard for our consumers to engage. It's hard for our teams to manage. So there are some fundamental investments that we need to make as an organization that that are prudent in the long-term best interest of the company.

As it relates to Merrell and Saucony, and then I'll turn it back to Mike to talk a little bit about Sweaty Betty because you have some specific questions on growth and then he can sort of put a finer point on the operating margin question. those brands operate in 2 different categories. Performance run both in the last quarter and trailing 12 months, that run category is up. In fact, one of the best performing categories in the U.S. as NPD tracks it. In fact, I think dress is only slightly better off of a much, much smaller base and coming off of lots of headwinds related to the pandemic. So Saucony is just playing in a different category. And that is heavily dictated by brand heat and then product introductions. And like I said, I think the product pipeline for the first half of the year for Saucony probably decisions around exiting some core franchises that I think are in the long-term best interest of Saucony. But I think the product pipeline wasn't as strong. And then Saucony is such a great, fantastic authentic running brand. We drop a really good to the Triumph 21 in the mid part of the year, and we see some green shoots to growth. And like I said before, I think there's reasons to believe next year from a Saucony standpoint as it relates to the product pipeline. Ultimately for us, it's how do we sort of win back greater share of mind and share a closet with that consumer, given how competitive it is.

On the flip side, Merrell is operating in the toughest as MPD tracks at Merrell is operating the single toughest category. Outdoor has been down double digits for the past year, and that puts a lot of pressure. We can't, however, just say there's category headwinds and sort of call it a day. We have to build more resilient durable brands that are more elastic that can play beyond just 1 single category that allow us to endure the inevitable storms that will come. And that comes down to us growing into categories like Terran, which we are seeing some really good green shoots. The Merrell test lab has been a fantastic product innovation incubator. The Agility Peak 5 out of the gate is very strong. We're excited about that. And then there are some new lifestyle products. We launched a wrapped collection, which is essentially a barefoot casual shoe with almost no fanfare at merrell.com over the summer and 83% sellout with her actually buying more than him. So how our ability to sort of move the move beyond core outdoor is going to be critical to Merrell's success in the long term.

So again, I think sometimes we paint with big broad strokes to say what's happening at Wolverine 1 in reality, we have to go a couple of layers deeper and say what's happening in Saucony, what's happening in their channel, what's happening in their category, what's happening in me, what's happening in their channel? And then it's different by the world, too. I spent a lot of time talking to international partners, and they still feel the Merrell brand is very strong. I think they feel good about the product pipeline. We're just going through some challenges right now as it relates to the category. But ultimately, we have to do a better job building beyond that core business. So we're not dependent upon tailwinds. And then over to Mike to answer some of the Sweaty Betty-specific questions.

M

Michael Stornant

executive

Sure. The Sweaty Betty growth in Q3, Mauricio, we had a strong wholesale performance in Q3 versus the prior year. Some of that was really because of some timing issues we actually had a year ago in transitioning that business. So there's a flip between Q3 and Q4 on the wholesale side that's affecting those growth rates in each quarter. The other thing I'd say about Q4 for Sweaty Betty is slightly lowered business, but much healthier less promotional business than a beta a year ago, but the gross margin performance for the brand in Q4 this year is much better, much healthier. And despite a little bit of top line pressure, I think the right outcome for the business here in the back half of the year. The only thing I'd add to the 12% comments that Chris mentioned is we are definitely reevaluating not just the the magnitude of reinvestment, but the different areas that are going to require it. Sometimes we talk about reinvestment in terms of demand creation and innovation, but there's some fundamental things that we're investing into, and we mentioned some of those new planning processes, new PLM systems and certainly the platforms for our e-comm business. So that the extent of that is still being evaluated, but the timing is really critical that we're not going to phase those out, and we're going to get after those early in the year. We're going to make sure that we give ourselves the lead time we need to get those things in place so that we can see the benefits in the back half of the year. So as I said, that's all under very serious consideration as we plan the business for next year, but we're giving ourselves a lot more room to kind of rethink how we need to invest and when we need to reinvest the the needed resources and back into the business to inflect in the back half of '24.

Operator

There are no further questions at this time. I would like to hand the floor back over to Alex Wiseman for closing comments.

A

Alex Wiseman

executive

Thanks again to everyone for joining us today. Have a great day.

Operator

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

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Wolverine World Wide Inc
NYSE:WWW

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Wolverine World Wide Inc

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2023-Q3

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Wolverine World Wide Inc NYSE:WWW

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Wolverine World Wide Inc
NYSE:WWW

Q3-2023 Analysis
Wolverine World Wide Inc

Earnings Call Transcript
2023-Q3