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Earnings call: Wolverine Worldwide raises guidance amid strong Q2 results

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-08, 05:24 a/m
© Reuters.
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Wolverine Worldwide Inc. (WWW), a global footwear and lifestyle brand conglomerate, has reported a robust second quarter of fiscal 2024, surpassing revenue and earnings expectations.

The company has announced an increase in their revenue and earnings guidance for the year, citing significant gross margin expansion, inventory and debt reduction, and improved brand management as key contributors to their success.

With a focus on driving profitable growth and strengthening their position as global brand builders, Wolverine Worldwide is capitalizing on its enhanced product pipelines and effective demand creation initiatives.

Key Takeaways

  • Wolverine Worldwide exceeded Q2 revenue expectations with $424.8 million and raised full-year guidance.
  • Sequential revenue improvement and significant gross margin expansion were highlighted.
  • The company is focusing on driving profitable growth and becoming a global leader in brand building.
  • Merrell, one of Wolverine's brands, continues to gain market share with its third consecutive quarter of acceleration.
  • Saucony's e-commerce business grew over 20% in Q2, despite inventory constraints limiting demand fulfillment.
  • Wolverine Worldwide is investing in brand innovation and expects positive reactions from the wholesale partners for the spring 2025 order book.

Company Outlook

  • Full-year 2024 revenue is projected to be between $1.71 billion and $1.73 billion, a decline from 2023 but less when excluding one-time items.
  • Adjusted gross margin is anticipated to be around 44.5%, with an operating margin of about 7.4%.
  • The company is committed to strengthening its balance sheet and improving inventory levels while investing in its brands and capabilities.

Bearish Highlights

  • Revenue for fiscal year 2024 is expected to decline by 13.7% from 2023.
  • Challenges in the U.S. wholesale marketplace and supply chain volatility, including ocean freight costs, are being closely monitored.
  • Supply chain disruptions, particularly in Bangladesh, which accounts for a significant portion of sourcing, are a concern.

Bullish Highlights

  • Merrell is gaining market share in the volatile outdoor category and has opened successful key stores in Tokyo.
  • Saucony's pivot in strategy, product line, and distribution is yielding positive results.
  • The company is encouraged by the early feedback on their spring 2025 order books, indicating strong product innovation and positive wholesale partner reactions.

Misses

  • Inventory constraints have limited Saucony's ability to meet the growing e-commerce demand.
  • The anticipated revenue decline for fiscal year 2024 reflects ongoing market challenges.

Q&A Highlights

  • The CEO emphasized Saucony's strong performance products and positive response to the Endorphin collection.
  • Chris Hufnagel highlighted the importance of extending the Merrell brand and packaging products with compelling storytelling.
  • There are no significant changes in channel assumptions for the third and fourth quarters, and the company remains focused on innovation and growth.
  • Technical difficulties occurred during the call, but representatives managed to address questions before concluding.

Wolverine Worldwide's second-quarter financial results have demonstrated positive trends, with the company successfully stabilizing the business and setting its sights on future growth. The company's strategic focus on building awesome products, telling amazing stories, and driving consumer engagement is paying dividends, as seen in the performance of its Merrell and Saucony brands. Despite the challenges presented by supply chain constraints and a competitive market, Wolverine Worldwide is showing resilience and adaptability, with optimism for continued progress and innovation in the coming years.

InvestingPro Insights

Wolverine Worldwide's recent financial results indicate a company at a pivotal moment. With a market capitalization of $1.1 billion, the company is navigating through a challenging period, marked by a significant revenue decline of 23.64% in the last twelve months as of Q1 2024. This aligns with the company's expectation of a revenue decline for the fiscal year 2024, as mentioned in the article. The revenue contraction is further emphasized by a quarterly drop of 34.12% in Q1 2024.

Despite these headwinds, Wolverine Worldwide has been able to maintain a gross profit margin of 40.11%, showcasing its ability to preserve profitability in the face of declining sales. This margin performance is likely a reflection of the gross margin expansion highlighted in the company's report.

An InvestingPro Tip worth noting is that analysts predict the company will be profitable this year, which suggests a potential turnaround from the recent performance. This is particularly relevant given the company's negative Price/Earnings (P/E) ratio of -13.94, indicating that investors have been anticipating losses. However, the adjusted P/E ratio looking forward is 41.58, suggesting that the market expects earnings to improve.

Additionally, the stock has experienced a large price uptick over the last six months with a total return of 61.83%, indicating a strong market sentiment despite the recent challenges. This is further highlighted by the year-to-date price total return of 47.27%, underscoring the company's resilience in the eyes of investors.

For those seeking more insights, InvestingPro offers additional tips on Wolverine Worldwide, which can be found at https://www.investing.com/pro/WWW. These tips may provide further guidance on the company's stock performance and future outlook.

Full transcript - Wolverine World Wide Inc (NYSE:WWW) Q2 2024:

Operator: Good day, everyone, and welcome to today's Wolverine Worldwide Inc. Second Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Please note that this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Alex Wiseman, Vice President of Finance.

Alex Wiseman: Good morning, and welcome to our Second Quarter Fiscal 2024 Conference Call. On the call today are Chris Hufnagle, President and Chief Executive Officer, and Taryn Miller, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our press release and announced our financial results for the second quarter of 2024. The press release is available on many new 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. References made regarding financial results and the outlook for 2024 and comparable results from 2023 in each case for our ongoing business exclude the impact of Keds, Wolverine Leathers, and Sperry. 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 2024, 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 forward-looking statements. These important risk factors are identified in the company's SEC filings and in our press releases. With that, I'll now turn the call over to Chris Hufnagel.

Chris Hufnagel: Thanks, Alex. Good morning, everyone, and thank you for joining us on today's call. For the second quarter, we exceeded our revenue and earnings expectations with broad-based contributions from across the portfolio. We saw sequential revenue improvement, again drove meaningful gross margin expansion year-on-year, and further reduced our inventory and debt. Perhaps more importantly, we continue to strengthen our brand's positioning in the marketplace with improved product pipelines, more effective demand creation initiatives, and better brand management. While the macro environment remains dynamic and challenges no doubt remain on the horizon, we've seen key elements of our turnaround effort continue to build momentum, and we're encouraged that our strategies continue to gain traction. As a result, we're raising the midpoint of our revenue and earnings guidance for the year. Taryn Miller, our new CFO, will provide more details on our second quarter results and update outlook for the year in a few minutes. But first, I want to provide an update on our turnaround journey. Just under 365 days ago, on my first earnings call as CEO, I shared a picture of the company, of the situation our company faced at the time. Wolverine Worldwide was in a precarious position, and the state of the business was extraordinarily difficult, requiring decisive action. In the weeks following that call, we outlined an ambitious turnaround plan to first stabilize the business and then transform the organization, ultimately leading to an inflection to growth. All premised on Wolverine Worldwide becoming great global brand builders. While our work is not yet finished, one year in, I'm proud of what our team has accomplished. We've done exactly what we said we'd plan to do. Our fast and bold actions have stabilized the company, streamlining our cost structure and materially expanding our gross margins. Significantly reducing the debt that constrained our ability to invest, and attacking the inventory issues that undermine our brand's position on the market and impeded our pipeline of new product innovation. At the same time we were doing this essential work, we also made great strides in transforming Wolverine Worldwide for the future. Building a new culture aligned with our vision of being consumer obsessed global brand builders, shaping our portfolio to focus on brands with the unique potential to win an attractive performance and lifestyle categories, developing key capabilities to execute our strategy, including the collective, a center of excellence specialized in consumer and trend insight, along with new in-house creative and PR resources for today's always on consumer. Implementing brand protection measures to help clean up the marketplace, fostering stronger relationships with our wholesale and distribution partners here in the U.S. and around the world, fast tracking new trend right innovative products to market, well ahead of our traditional development timelines. Investing a greater portion of our dollars in demand creation, help drive our brand's awareness and affinity with consumers, and enhancing our team with new talent, keenly focused on growth, and modern brand building skill sets. Thanks to our team's hard work and grit, combined with a clear vision and bold call to action, we find the company a much better place today. But be assured no one is content with where we stand. We've done the work necessary to position the company to turn the page to the next chapter in its 141 year history, driving the business into the inflection phase of our turnaround to begin to generate profitable growth, and doing it on a sustained basis, quarter-after-quarter, year-after-year. This next chapter in our story begins with our brands. Our brands have tremendous potential, possessing true authenticity and highly desirable categories that represent significant addressable markets today, and we believe are strongly aligned with consumer trends moving forward. More and more people are seeking to better their lives every day, graviting towards activities that help them live healthier, more productive, more fulfilled lives, physically and mentally. Our brands are well respected for making great innovative products that enable consumers to run, hike, exercise, move, and work faster and longer and more comfortably, award-winning products that are simply better and have disrupted the market over time. Our brands are recognized as originals, trailblazers, innovators, and leaders in their categories and possess unique and compelling DNA. Their product design credibility present amazing advantages to both excel in performance categories and build lasting lifestyle businesses. Today, however, the marketplace requires more than well-positioned brands and great products. Brands need to resonate beyond function and their products need to deliver style and trend as well as performance and innovation. Brands need to tell differentiated relevant stories that only they can credibly tell. And those stories need to engage our consumers where and when they want to be engaged. In short, our brands need to build awesome products and tell amazing stories that make every day of our consumers lives better. Our team is energized by the opportunity we have in front of us to drive for better. Better brands, better products, better storytelling, and ultimately better performance, culminating in greater returns for our shareholders. Our brand building model focused squarely on the intersection of awesome products, amazing storytelling, and driving the business is beginning to produce better performance. Before I hand it over to Taryn, I'd like to take a few minutes to share some concrete examples from our brands related to each aspect of our model. Beginning with building awesome products. From the very start of our turnaround effort, we prioritize bolstering our brand's product pipelines as quickly as possible to inject newness with compelling innovation and trend right design. Saucony is the furthest along on this journey. Its accelerated product life cycles in the run category, driving a 900 basis point increase in revenue contribution year-over-year in the second quarter from new product introductions. On the heels of introducing the Ride and Guide 17 and Endorphin 4 collections earlier this year, the brand recently launched its award-winning premium runner, the Triumph 22, delivering strong double-digit growth for the collection and run specialty and on saucony.com. The brand followed the strong debut with the launch last month of its most premium max cushion franchise, the Hurricane 24, featuring wearable styling for performance and lifestyle use and sell through is off to a strong start. Finally, as an early preview of the planned 2025 introduction in advance of the Olympics, the brand offered a limited release of its pinnacle franchise, the Endorphin Elite 2, a few weeks ago, selling out in just an hour. The super shoe built on a credit run, the brand's most advanced foam developed through years of lab testing, will be worn by Olympic marathoner Melinda Elmore in Paris this weekend. On the lifestyle side, Saucony has authentically leveraged its deep product archive along with influential collaborations tapped into the fast-growing retro tech trend. With styles like the ProGrid Omni, ProGrid Triumph and Ride Millennium driving strong sell-throughs and opening future distribution with the best retailers in tier zero through tier two. While Saucony is building strong momentum here in the U.S., its best expression today may just be in London. The folks are the companies and brands new key city approach. Saucony.com grew 40% in the UK during Q2, contributing to an increase of over 20% in the brand's only commerce channel globally in the quarter. In July, Saucony was the title sponsor for the London 10K, the centerpiece of a host of activations which collectively propelled the brand to record search interest in the UK. Saucony is just beginning to hit stride around the world. Moving on to telling amazing stories. As I shared earlier, I believe brands need to do more than just have great products that perform well to win. They also need to engage consumers with timely stories that only they can tell, leveraging their unique DNA. In the second quarter, based on insights from one of its consumers that women at times feel insecure about wearing shorts, Sweaty Betty inspired its history to embrace their bodies with its Wear the Dam Shorts campaign. The campaign featured full funnel messaging and activations, nearly double the sale of shorts versus last year, and helped the brand deepen its emotional connections with its consumers. During the second quarter, Sweaty Betty saw double-digit growth of its important leggings category driven by its hero franchise, Power. Earlier this year, the brand expanded its trend-right explorer collection, a light and wrinkle-free casual collection for warm weather and travel that allows the brand to further diversify its assortment, resulting in very strong double-digit growth year to-date. The Sweaty Betty team remains intensely focused on its consumer and is beginning to influence our broader portfolio's thinking in this critical way, and finishing with driving the business. An intense focus on the health of the marketplace and driving sell-through performance every day has been a critical component of our turnaround as well. We've taken action to shut down rogue selling, optimize distribution, and elevate branded shopping experiences. Merrell, for example, has cultivated a much cleaner selling environment this past season and successfully reset several of its key accounts in the U.S. with more modern assortments to position the brand more appropriately. As a result, in the second quarter, Merrell drove growth at retail and hike, despite the category headwinds and achieved its third straight quarter of acceleration and market share gains. Merrell's push to modernize the trail through key award-winning product franchises like the Moab Speed 2 and Agility Peak 5, faster and lighter styles at elevated price points, continues to drive sell-through and create momentum. The brand fueled energy and reached new consumers with several collaborations in the second quarter as well, including with Grayson, a very cool premium golf brand which quickly sold out and generated 500 million earned media impressions in the process. Internationally, Merrell, together with its partner Japan, opened several key stores in Tokyo over the last year. The stores are performing well ahead of their plan while also helping position Merrell as a relevant outdoor lifestyle brand with the younger consumers in a highly influential city. As a leader in outdoor footwear, Merrell stepping into the opportunity it has to reinvigorate the category through innovative and trend-right product and building the brand in key markets around the world. With that, I'm very pleased to hand the call over to Taryn Miller, our new CFO. Today's her 90th day with the company. She'll take you through our second quarter results and update guidance in much more detail. Taryn?

Taryn Miller: Thank you, Chris, and welcome everyone. I joined Wolverine Worldwide three months ago with a strong belief in the potential of our brands, our strategy to drive profitable growth, and our commitment to improve the financial health of the business and ultimately deliver greater and more consistent value to our shareholders. We are beginning to see traction from the actions taken to become a new and better company and are pleased with how we are performing at this stage of our transformation. Turning to our financial results this quarter and the outlook for 2024, we are encouraged by the sequential revenue and earnings growth our teams delivered in the second quarter, and we made further progress towards building the foundation to drive sustained profitable growth. Second quarter revenue for our ongoing business of $424.8 million was above our outlook of approximately $410 million as demand trends and supply chain execution continue to improve. Approximately $10 million of the over delivery was a timing shift between the second and third quarters. The transition of our Saucony inventory from our Louisville Distribution Center to our California Center was completed with minimal disruption, therefore avoiding the previously expected shift of approximately $5 million to the third quarter. In addition, there was approximately $5 million of wholesale orders that shipped earlier than originally expected. Revenue trends for our ongoing business improved sequentially from a year-over-year decline of 24.5% in the first quarter to a decline of 18.4% in the second quarter. We're seeing increased demand for our brands and products as we execute our consumer focused strategy. The year-over-year comparison includes more than $55 million of revenue in the second quarter of 2023 that did not repeat in the second quarter this year, including excess end of life inventory liquidation and business model changes. Adjusted gross margin of 43.1% increased 400 basis points versus last year. Gross margins were in line with our expectations and reflect a healthier sales mix, lower promotional activity, and the benefit of supply chain cost initiatives. Adjusted operating margin of 6.3% exceeded our outlook for the quarter driven by operating cost leverage on the stronger revenue performance. As a result of the improvement in revenue and operating margin, adjusted diluted earnings per share improved from $0.05 in the first quarter to $0.15 in the second quarter, adjusted diluted earnings per share was $0.19 in the second quarter of last year. We continue to make progress on strengthening the balance sheet. Inventory was $297 million, down 44% from last year for the ongoing business as we further optimize inventory levels and benefit from improved planning and execution. Net debt was $666 million, down approximately $270 million versus last year. Now turning to our updated outlook for 2024. We are raising the midpoint of our revenue and earnings guidance. While we continue to operate in a dynamic environment, our solid first half results, combined with the development of the order book for our global wholesale and distributor business have strengthened our confidence in our outlook. Fiscal 2024 revenue from our ongoing business is now expected in the range of $1.71 billion to $1.73 billion, an increase of $15 million at the midpoint versus our May outlook. This compares to 2023 revenue from our ongoing business of $1.99 billion and represents a decline of 13.7% at the midpoint of the range. As we shared in our first quarter call, there were discrete items in 2023 that will not recur in 2024 related to end of life inventory liquidation, business model changes, and a timing shift of international distributor shipments. The total revenue generated by these items was $185 million, which was heavily weighted to the first half of the year. Excluding the discrete items, full year 2024 revenue at the midpoint is expected to decline approximately 4.8%. We expect revenue to improve sequentially throughout the second half as our brands continue to build momentum behind new products and strengthening market activations. In addition, the discrete headwinds that I shared earlier will bait in the second half. We continue to expect full year 2024 active group revenue to decline by a mid-teens percentage year-over-year and work group revenue to decline by a percentage in the high single digits year-over-year. Brand performance expectations are consistent with what we shared in May and can be found in our investor presentation on our website. Turning to gross margin. As a result of the actions we've taken over the last year, we continue to expect strong expansion compared to 2023. These include supply chain and product cost savings as well as brand protection actions, the benefit of healthier inventory levels, and better mix of full price sales. Adjusted gross margin is expected to be approximately 44.5% at the midpoint of the outlook range, a record for our company, up approximately 460 basis points compared to 2023. Adjusted selling, general, and administrative expenses are expected to be approximately $640 million at the midpoint of the outlook range, or approximately 37% of revenue compared to $716 million in 2023, or 36% of revenue. The lower operating cost structure includes restructuring savings partially offset by incremental investment in our business, normalized incentive compensation, and inflation. Adjusted operating margin is expected to be approximately 7.4% at the midpoint of the outlook range, compared to 3.9% in 2023. Interest and other expenses are projected to be approximately $40 million, down from $63 million in 2023, which reflects the benefit from the significant debt reduction over the last year. The effective tax rate is projected to be approximately 18.5%. Adjusted diluted earnings per share is now expected to be in the range of $0.75 to $0.85, including a $0.10 negative impact from foreign currency exchange. This compares to adjusted diluted earnings per share of $0.15 in 2023. Working capital and cash flow optimization remains a priority in 2024. We expect inventory to decline by at least $75 million during the year, as we continue to work through specific areas of excess inventory. Operating free cash flow is expected in the range of $110 million to $130 million, with approximately $35 million of capital expenditures. We expect net debt to improve by nearly $175 million to $565 million at year end. Shifting to our outlooks of the third quarter. We expect third quarter revenue of approximately $420 million, a year-over-year decline of approximately 11%, reflecting continued improvement in revenue performance compared to the prior two quarters. Third quarter gross margin is expected to be approximately 45%, an increase of 300 basis points from last year and in line with our first half performance. We expect improvements in operating margin and earnings with third quarter adjusted operating margins of approximately 7% and adjusted diluted earnings per share of approximately $0.20. In summary, the clarity and execution of our strategy is strengthening our brands and driving improvements in Wolverine's financial position. The transformation to more consistent and profitable revenue growth coupled with strong cash flow will enable us to invest in our brands and new capabilities to become consumer obsessed global brand builders. And with that, let me hand the call back to Chris before we open it up for questions.

Chris Hufnagel: Thanks, Taryn. For concluding our prepared remarks and as I reflect on my one year anniversary in this role tomorrow, I want to extend a sincere and heartfelt thank you to our global teams. I've asked a lot of you and you've delivered. You've been simply great. Thanks for your work and your support this past year. You've helped write the first chapter and what I believe will be a great turnaround story. Over the last 364 days, our team has executed an extensive list of initiatives as a part of a comprehensive plan to stabilize and begin to transform the company. I'm inspired by what we've accomplished as one Wolverine, but I believe there's so much more in front of us. While we're excited by our brand's positioning and potential and motivated by the early proof points we've seen that give us confidence in our strategy, we know we must strive for better. Better brands, better products and storytelling and better performance, all leading to greater returns for our shareholders. That's our next chapter and time for us to turn the page. Thank you for taking time to be with us this morning.

Operator: [Operator Instructions] We'll take our first question from Jim Duffy with Stifel. Please go ahead.

Jim Duffy: Thank you. Good morning, Chris, Taryn and Alex. I want to start a big picture.

Chris Hufnagel: Good morning Jim.

Jim Duffy: Hi, Chris. Good to speak with you. Chris, there's good evidence you're executing the plan. There's some tangible proof points of brand elevation in the marketplace. I guess firstly, is the marketplace reset complete? And then secondly, can you give us an update on the dialogue you're having with channel partners and speak to how your efforts are translating to a forward visibility?

Chris Hufnagel: Yes, for sure. Thanks for the question. I would not say that the resets are fully complete. I mean, I think we are still working hard as part of the transformation phase of our turnaround plan. So I think I don't want to get out ahead of ourselves and say that it's done, that there is still certainly more work to do. At the same time, I think we've accomplished a tremendous amount in a very short period of time. And its efforts from just re-engaging our wholesale partners, both domestically and our distributor partners around the world in a very constructive manner over the past year. I think it's becoming more thoughtful about segmentation and distribution. I think it's about attacking rogue selling and really working to bring our inventory levels down and really not work so hard to push product out, but really begin to pivot to a stronger pull model. And I think the feedback and the results are early proof points that we're doing the right things. At the same time, no one here is declaring victory or that we're all the way through. I think the feedback from sort of key partners on where the product pipeline is in demand creation is certainly positive. I think Saucony is certainly out in front of that. We've made a pretty hard pivot as we think about Saucony's strategy, the product line, where we want to sell and how we want to talk about those products. And I'm really encouraged by the reception that Saucony has had in the marketplace. And we're doing the same thing with Merrell, really modernizing that hike lighter and faster away from that traditional hike business, which you know, that outdoor category has been challenged. At the same time, I'm encouraged that Merrell is leading from a market share gain perspective and really accelerating its market share gains in what continues to be a pretty volatile market. And then from a work standpoint, I'm encouraged by the progress our work group has made, really getting more product from a trend-right standpoint, really working with the wholesale partners on what that distribution looks like. So I would not say the reset is complete, but I think the early actions we've taken have proven successful and we're going to keep driving that business forward each day.

Jim Duffy: Thank you. I'll jump back in the queue.

Chris Hufnagel: Thanks, Jim.

Operator: Our next question comes from Mauricio Serna with UBS. Please go ahead.

Mauricio Serna: Great. Good morning and thanks for taking my questions. Congratulations on the results. Nice to see also the progress on the overall DTC growth of the company flat year-over-year on a recurring basis. Maybe could you talk a little bit more about the DTC trends by brands? And maybe also could you help us out, maybe bridge out the EPS implications for the second half? I'm just looking at the guidance. I think it implies for the fourth quarter, you will be making like more than at the higher end, you would be making more earnings there than in all the three previous quarters combined. So just want to understand what are the drivers behind that? Thank you.

Chris Hufnagel: Sure. I'll take the first DTC question and then I'll hand it over to Taryn to touch on the EPS. We did see a nice inflection in the second quarter from an e-commerce perspective and both an inflection to growth from where we were in the first quarter, which we talked about, which is encouraging, also working to be more thoughtful and how we manage those sites in the promotional cadence. So I think we have seen a nice pivot in that business. Obviously, we have a big couple of quarters ahead of us from a DTC perspective, but specifically, Saucony's e-commerce business was up over 20% in the quarter, which we were certainly encouraged by. And we've seen other businesses tick improvement as well. So it's a business we're spending a lot of time on. It's a business that is near and dear to our hearts. It's important. We think it's a very good expression of the brand. And certainly us, as we think about proof points for the broader wholesale business, it's important that we get traction there. So encouraged by the DTC work, although we have two big quarters ahead of us, but certainly progress from where we had been in the first quarter and certainly at the latter part of last year. And over to, Taryn, to talk about the EPS expectations.

Taryn Miller: Yes, thank you. You're right. At the midpoint, earnings per share will increase from $0.20 in the first half to $0.60 in the second half of the year. And this is really the higher revenue that we're expected to be the primary driver of that step up in the second half. Supply chain cost savings and SG&A reductions are also driving a step up. Those are already in place and we're starting to see them, but we see a bigger impact from those in the back half. The revenue, we're executing our plan and we're seeing the momentum in the brands from the increased new product introductions that we have in the market, improvements in our product design and a cleaner and lower inventories at retail. And that momentum that we're seeing is showing up in our wholesale and international order book as expected. So I think that revenue is the primary driver of that step up in the earnings in the second half of the year, and it's augmented by the supply chain cost savings and SG&A reductions.

Mauricio Serna: Got it. Super helpful. And then, one last one. Maybe do you have any thoughts or any commentaries that you can give us on -- preliminary reviews on the spring 2025 order books? Thank you.

Chris Hufnagel: Yes, I appreciate that question. Obviously, it's still very, very early in those order windows for first half of '25. But I can say we're really encouraged by where the product pipelines are. The innovation we brought specifically in Saucony, I think is very strong. Reactions have been positive there. And the same things can be said in Merrell around the evolution of that brand from a traditional outdoor brand to a modern outdoor brand. And then even some of the pivots we've made in the workgroup. So, too early to provide in any color on the first half order book, other than to say that I am encouraged by where the pipeline sits. And then the early reads we've gotten from how we've shown that product to the wholesale partners is encouraging. But we'll see that order book develop more over the next handful of months. And we'll have a much clearer picture when we speak to you in November.

Mauricio Serna: Understood. Thank you very much and congrats on the results again.

Operator: The next question comes from Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Hi, good morning, everyone. Welcome, Taryn and nice to see the progress.

Chris Hufnagel: [indiscernible]

Dana Telsey: You too. As you think about the wholesale channel of distribution, what did you see domestically? What did you see internationally? Does it break down differently by types of wholesale account? And then with inventory levels coming down as they have, how do you think about inventories going forward down by at least $75 million for year end? Any differences in puts and takes? And also anything on supply chain or freight costs that you're seeing? Thank you.

Chris Hufnagel: Yes, of course, Dana. I'll hand over the first part and I'll let Taryn speak to the supply chain costs and what we're expecting for the back half of the year. Certainly, we run a very large global business and it's different both by region and certainly different both by channel in which we operate. Our inventory health in the U.S. market has come down materially and in Wolverine inventory at retail today is down materially, which is a key part of this turnaround phases, we've to clean up the marketplace. I think it varies a little bit by brand and certainly a little bit by channel. I think some of the challenges in the U.S. wholesale marketplace are well-documented and I don't think we are immune from all of those challenges. At the same time, there are winners in every market. And where we are bringing innovative products with strong storytelling, we are getting really strong reactions, which we're encouraged by, which is why it was so important for us to work through the inventory as fast as we did, because it was impeding the innovation in our product pipeline. So, where we have been successful? Specifically a brand like Saucony, there is appetite both for new product introductions, very fast at once for punishment as things begin to check, and then even expansion of door count in new retailers as we bring products that satisfy their needs. But I don't want to underestimate the challenges that are in the U.S. wholesale landscape and we don't necessarily see those abating in the short term, certainly from where the consumer is and what's on the horizon. Around the world, I think the brands are all in a little bit different place as well, but encouraged, particularly by what we're seeing out of EMA, really led by Merrell and Saucony, really strong reaction. I was just in London a couple of weeks ago and met with some key customers and also was getting ready for the London Saucony 10K, which was a fantastic event. Again, when brands can bring innovative products that solve consumers' needs and we can package them with compelling storytelling, there is an appetite there, certainly in a category like run, which has some momentum. So I think, again, it's hard to paint with a broad stroke given how diversified our portfolio is and the regions of the world we operate in. But again, U.S. wholesale is not the easiest marketplace right now, but when brands can deliver, there is receptivity. And certainly, I think the consumer continues to buy things that inspire them, and they have shown a remarkable level of resilience given some of the headwinds they face. I hand it over to Taryn to talk about the supply chain question.

Taryn Miller: Yes, on the supply chain point, I would say we don't have a lot of new news to share based on what we've talked about in the May guidance. As I shared earlier, we do expect in the second half to benefit from the cost initiatives, both in terms of our logistics as well as on our sourcing that we have in place to benefit us in the second half. We are closely monitoring the supply chain dynamics and the volatility that's going on right now and the ocean freight in terms of could it have impact in terms of deliveries or cost based on the contracts we have in place and based on how the supply chain is operating right now. We aren't anticipating a meaningful impact from that.

Dana Telsey: Thank you.

Chris Hufnagel: Thanks, Dana.

Operator: We'll take our next question from Sam Poser with Williams Trading. Please go ahead.

Sam Poser: Thank you for taking my questions. Good morning, everybody. I'd like to know a couple things. One, on Saucony, how are you seeing the breakout between performance and lifestyle? You brought up both. And I'll stop there and move on in a moment. Let's start there.

Chris Hufnagel: Sure. Good morning, Sam. I think on both fronts we're encouraged by the progress we've made in short order in Saucony. And again, I think there certainly is the performance run piece of Saucony. I think there's a performance run lifestyle piece of Saucony. And then I think there's a broader lifestyle really related to the retro tech. And I think congratulations to that brand in very short order. We brought great innovation to that performance run piece. Whether it's introductions of the Ride and Guide 17, the Hurricane 24, the Triumph 22, those sell-throughs are very strong. It really has been a pivot in how we used to manage the Saucony brand. And I really give the team credit for how they've approached the product line architecture and how they're thinking about distribution colors and materials. I'm really pleased about the innovation in the endorphin collection. We have a marathon runner in the Olympics running next weekend in the Elite 2 on a new and credit run platform, which is years in the making. And we sold out in just a couple of hours when we dropped it early just a month ago. So we're encouraged by that. And then certainly Saucony benefits from a very large archive. And certainly retro tech is having a moment now. We think about what we've done around collaborations to build brand heat and then how that can extend down in the business. We're seeing a really nice pickup. That's really is being led by selectively opening additional distribution that we've largely not played in before and having strong sell-throughs. And I also think it speaks to the nimbleness of what we're trying to adjust from a supply chain standpoint, really beginning to chase opportunities in a way that we probably wouldn't have been able to chase before. But as we work to pivot to become a more consumer obsessed organization, really nimbleness and agility are key to that. And I'm encouraged by the way the supply chain has been able to react. And honesty, there's lots of categories right now and product lines within Saucony that we're actually chasing, chasing trying to expedite that supply chain right now. That is a good problem to have considering where we were just a year ago. So, encouraged by the progress in Saucony and I can't say it's one or the other. It's a little bit of both.

Sam Poser:

I'm more of:

Chris Hufnagel: Yes, I think nimbleness is relative too. I would say we have not always been the fastest organization and we're working to become a faster organization and be more reactive and chase more opportunities. So I think we're evaluating all of that. Again, and I think also, Sam, and you've been thoughtful on this with us before, we're going to try to manage our brands a little bit differently. And we're not just going to jam sell in. We're going to focus on sell-through and we're going to have some level of selectivity on how fast we want to grow. We ultimately want to pivot to be able to drive long-term sustainable growth and returns for the shareholders and not just obsess about immediate sell-in to the detriment of how we manage our brands. So we will chase responsibly. We will open responsibly. And we're also working to be that we can be more reactive. The world certainly is moving quicker. Wholesalers are behaving differently. Consumers are behaving differently. And we have to build a better company that can react to how the world has moved.

Sam Poser: I'm sorry to bother you for two more. One, on Wolverine, on the boot business, that was better, significantly better than anticipated, but you really didn't adjust the numbers that much. So I was wondering why, and was part of that the pull forwards or whatever? And then secondly, when you look at Merrell, Saucony, Sweaty Betty, and Wolverine, I guess, but really the boot business overall, which of those do you think is farthest along? It sounds like it's Saucony, but which of those with progress being made you think has the longest way to go to right there?

Chris Hufnagel: Yes, good question. I'll answer the latter part of that first. I'm really pleased by the progress Saucony has made in very short order. Some very thoughtful and significant shifts in how we've managed that brand from a strategy standpoint, but also really, really quick execution. Saucony also, in all fairness, benefits from operating in a category that has tailwinds. And I think in that market that has fragmented, there is space for brands to grow. And I think that is just a structural shift in that category. And I think Saucony is benefiting from that. Sweaty Betty, a ton of credit to that team. We've worked really hard with Sweaty Betty team over the past half a year. We have a new leader in place. I've spent a lot of time with Sweaty Betty, really encouraged by how they're running that business, the largely direct consumer business, which is where I grew up and what I love, because every single day the consumer votes and you have a lot of control how the business goes. But a really nice foundation for that Sweaty Betty team and encouraged by the progress we've made, along with really getting that integration done of the company, which honestly we were slow to do after the acquisition. Merrell, I'm encouraged by the progress we've made in Merrell, but certainly that category is facing some headwinds. And it has incumbent upon the market share leader. We gained another 210 basis points the last quarter to really innovate. And that's really what Merrell is working hard to do. And you've seen us really get after lighter and faster, more athletic trail styles, whether it's the Agility Peak 5, whether it's the Moab Speed 2. We're seeing really positive sell-throughs, and I'm encouraged by. But there are headwinds there. And you know, and you've called us on this, is when Merrell is at its best, it's not just a trail brand, it's an outdoor lifestyle brand. And frankly, we have more work to go do there specifically for her. And that's what that team is focused on. And then from a work perspective, I think we probably missed a couple of trends in work. And I think we honestly sort of assessed where those brands were, what we were doing. And I think we had a model that we didn't pivot fast enough to consumer sentiment, particularly around the Western boot trend. And I think we've made some progress there. We've also worked hard on that marketplace. So, to answer your question, I think Saucony is the furthest along, albeit benefiting from tailwinds. At the same time, I think there's broad-based advancements from a product pipeline standpoint that encourage us in our back half guide, and as we think about the first half of '25 and the second half of '25.

Operator: Our next question comes from Laurent Vasilescu with BNP Paribas (OTC:BNPQY). Please go ahead.

Laurent Vasilescu: Okay. Good morning. Thank you very much for taking my question, and congrats on the continued execution on the business. Chris, I wanted to ask -- I appreciate that you quantified on the call and prepared remarks about a $5 million shift from 3Q into 2Q. And clearly there are some disruptions around supply chains. Are you anticipating that there might be a shift in revenues from 3Q into 4Q? And if so, what kind of numbers should we assume?

Chris Hufnagel: At the headline, certainly there are disruptions in supply chain, whether it's what's happening in the Red Sea (NYSE:SE) with shipping, whether it's where containers are, or what's happening in Bangladesh right now, where we do source footwear from. I think we have our eyes wide open to all of those realities and working to manage them, at the same time, really working to control weak control. As it currently stands based on how Q3 and Q4 play out, we're not expecting any sort of material shifts between those quarters due to that disruption, at the same time, it's something that we're monitoring extraordinarily closely. And we talk about every single week. And I think one of the things that we've done as an organization has really worked hard over the past year to really tie all the parts of the organization together much more closely. And this notion of working together is one Wolverine. So I think our supply chain and our brands and our corporate functions are working as closely as they ever had. It doesn't mean that we're immune from some of those macro challenges. At the same time, I think we've got visibility to them and working collectively to solve them as best as we can. So we're paying attention. We've got a great leader in the global supply chain. We're very connected to the brands. And we're going to do our very best to navigate through those challenges.

Laurent Vasilescu: Chris, that's very helpful. And maybe on the supply chain, on Bangladesh, can you maybe quantify? I think your last impact report was from 2022. Maybe can you quantify how big is Bangladesh as a percentage of your sourcing? And then, if we think about China tariffs potentially for 2025, I think the last impact report showed that China was about 20% to 30% of your mix. Maybe can you give us some updates on those exposure for both countries?

Chris Hufnagel: Bangladesh is about 19% as it sits today, and China is less.

Laurent Vasilescu: Okay, very helpful. And then, as we think about gross margins, it's great to see the 44.5 for the year. Absent of any increase in tariffs or shipping rates, how do you think about longer term the gross margin? Is there a new ceiling that we should contemplate longer term for the business?

Taryn Miller: I think that we're pleased with where we're at in the first half. The midpoint of our guidance, gross margins in the second half are consistent with the first half, so right at that 44.5, 44.7 in the first half, 44.4 in the second half. And the expected benefit from that being, as I called out earlier, in terms of those supply chain savings and the SG&A reductions. I would say in terms of you think longer term, the range that we have put out there that we're targeting is in that 45% to 47% range. Based on what we see right now, I think that's still range that we're looking at for the business in terms of gross margins.

Laurent Vasilescu: Okay, very helpful. Thank you very much and best of luck.

Chris Hufnagel: Thanks, Laurent.

Operator: The next question comes from Mitch Kummetz with Seaport Research.

Mitch Kummetz: Yes, thanks for taking my questions. Chris, if I heard you correctly, I think you said that Saucony e-com business was up 20% or over 20%. So correct me if I'm wrong there. But I guess my real question is, what can you say about wholesale sell-through? I know you're probably constrained in terms of your inventory and the sell-in, but what do you see at retail with your wholesale partners in terms of how the brand is performing? Is it kind of comparable to what you're seeing on the e-com business or do you have much intel on that?

Chris Hufnagel: Yes, good question. Thanks, Mitch. Yes, Saucony.com on the quarter was up, I said over 20%, it was actually 21% year-on-year, which we're encouraged by. And honestly, probably could have been better. We certainly have holes in the assortment today because things have sold out sort of faster than we anticipated. And we really went into this year with a very mindful thought on how we wanted to manage inventory. And I think given where the company was a year ago, we all sort of held hands and say that we will chase opportunity versus the risk of continuing some of the inventory challenges that we've had. So we're encouraged by the progress there, we're encouraged by where that business is. I wish we had a little bit more inventory today to chase more of that demand, but it certainly is a better place than we were a year ago. And then wholesale sell-throughs, I think specifically in run specialty, which has been such a core part of that Saucony business for so long. I think we're encouraged by the sell-through rates we're hearing and the feedback we're getting from that run specialty channel. Again, when Saucony delivers innovation, it's a over a hundred year old brand, it is a favorite. And we clearly know when we deliver something that works because the initial reactions are strong. So we're encouraged by sell-throughs, Triumph 22, Ride and Guide 17, which I talked about. Hurricane 24 just dropped last month, and we're seeing sort of high single digit or better sell-throughs in the first couple of weeks. So I think certainly from a Saucony perspective, and I talked about this in the February call, we're still obviously in the throes of the turnaround then. And I said I was a bullish on Saucony's prospects. And I think Saucony today continues to elevate its product line. And I think the changes we've made there have been positive. No one's declaring victory. We have to get to a place where we're stealing share again. But the initial steps we've taken there from a brand perspective and how we thought about that brand, how we want to manage the brand, I think give us some very early initial stages that we're on the right path.

Mitch Kummetz: And then on Saucony, any early reads for back-to-school, particularly like in the South where a lot of kids have already gone back. And have you done more in terms of kind of gearing your marketing for back-to-school this year, particularly around kind of the lifestyle portion of the assortment?

Chris Hufnagel: Yes, good question. Nothing too early to report in back-to-school, other than we are seeing, and Mitch, you track this as well as anyone who covers us. I think from a brand perspective, we're seeing really good search interest in Saucony, which is continuing, particularly in the UK. I said in the prepared remarks, I think right now one of the best expressions of Saucony is what's happening in EMA and the activations we've done and certainly the sponsorship of the London 10K. We're seeing sort of record search interest for Saucony there. I was just there a couple of weeks ago and I thought the activations, the run clubs around the Saucony 10K, the London 10K sponsored by Saucony were fantastic. But we are seeing sort of broad-based search interest improvements, which we're encouraged by.

Mitch Kummetz: And then maybe last question. On the wholesale order shift. I think it was $5 million. How much of that is like a true order shift versus maybe just pulled forward demand? And if demand were to stay strong through the third quarter, kind of what's your ability to supply that just given kind of some of your inventory constraints and supply chain considerations?

Taryn Miller: Yes, no, I think the $5 million that we said, it really wasn't shipped earlier than we had expected. We've been working to become, as Chris talked about, to strengthen the execution in our supply chain. And I think that as we've been able to do that, then as the customer orders are coming in, we're more able to respond to that. And that's really -- we were able to ship it earlier than we had originally anticipated we'd be able to. So I don't -- in terms of the $5 million. When you're talking about the broader point on our ability to respond, I think Chris really hit that point earlier in terms of we're getting better. I would say the environment that we're in though, is probably getting a little choppier in terms of supply chain. So I think we're looking to balance the strength in our execution with the overall market backdrop that we're in.

Mitch Kummetz: All right, thank you and good luck.

Chris Hufnagel: Thank you, Mitch.

Operator: The next question comes from Ashley Owens with KeyBanc Capital Markets.

Ashley Owens: Hi, good morning. So, just a few from me. One, can you help us unpack and kind of what led to the results versus the outlined expectations from last quarter for Sweaty Betty? I think it was flat versus upload single digits. And then on Merrell, the plans to inflect looks like 4Q could be the turning point there given the guys today. Was this always the expectation or just any shifts relative to three months ago that you're seeing or expect to play out?

Taryn Miller: I think in terms of Sweaty Betty, the being -- approximately flat in the quarter was roughly in line with our expectations for the Sweaty Betty team. I think they -- in terms of the UK stores and the broader e-com, we've seen while the stores have been a little softer, e-com has compensated for that. So broadly in line with what we expected for Sweaty Betty. Regarding Merrell, when you look at the -- I'd say I'd take a step back and talk about the Q4, Q4 on the inflected growth. It's really -- I'll come back to it. That was the plan, and so we're executing against the plan that we laid out in February. And the momentum that we're seeing across the brands, we spent time on this call talking about Saucony, but I'd say the momentum and it was called out work earlier, but as well in Merrell. So we're seeing the momentum in our brands really coming from those new products that we talked about, as well as healthier inventory levels across the portfolio. Inventories are probably a little lower in Saucony and probably a little higher than the other two on that balance. And so when you think of more work to do in terms of when we've called out more work to do on inventory, it's probably more in the Merrell and workspace. But with that, I'd say that feel good about the plans we have and the momentum we're seeing in the order book, as well as cleaner inventories across the page that would set us up for that inflected growth broadly in the fourth quarter.

Ashley Owens: Okay, great. And then just one more. So with the new product collaborations, any early learning, we saw the Jae Tips come out. Merrell's been doing some with new colorways and more to come next year, obviously. Are you starting to see that intended effect of expanding beyond just specialty into more lifestyle wear occasions?

Chris Hufnagel: Yes, good question. Yes, I'm really encouraged by some of the progress you've made around the collaborations. And I think certainly Saucony, again, has done a fantastic job. The Jae Tips collaboration last year, which was named collaboration of the year, which was fantastic. I think we're doing more this year. We're following that up, which we're encouraged by. Just that those rate of drops are critically important. We did a minted ProGrid Triumph collection with Saucony as well. It's a three-hour line for the launch event and sold out in just about 10 minutes. We sold out to the pair. So those things, those special moments where you can capture a consumer's attention, build brand heat, brand love, brand affinity, and always sort of be on that radar screen with that consumer is critically important. And the same thing can be said for both what Wolverine brand has done. They just dropped a great thousand mile collection with the University of Michigan celebrating this year's team. And then even in Merrell, whether it's the Parks project, which was a great collaboration, or something that I love, which is the Grayson collaboration. We make fantastic shoes for the trail. And those shoes are equally good for the course. And a great little brand, another Michigan-based brand, Grayson. We did a fantastic collaboration with that drove a tremendous amount of interest. It was very polarizing, which we loved. At the same time, now people are beginning to talk about the extensions of Merrell as well. So those things are important as we manage these brands. And again, it's not just about building awesome products, because we build great products. It's also being able to package them with great storytelling and give consumers a reason to pay attention to what we're doing. So those are all important things. You'll see only more of that from us in the future. And we're excited about where we can go from here.

Ashley Owens: Great. Thanks so much.

Operator: We will take our last question from Jonathan Komp of RW Baird. Please go ahead.

Jonathan Komp: Yes, thanks. Good morning. Hoping, Taryn or Chris, you might be willing to give a little more color on the channel assumptions embedded in the fourth quarter inflection to growth. And then, Chris, just curious as you look forward, I know it's early, but are there scenarios already next year you might be approaching your aspirational revenue growth targets or any other directional color as you look forward?

Chris Hufnagel: Yes. Thanks, John. I think no material changes in how we're thinking about channel assumptions. I think Taryn said it well a little bit ago. We set out an ambitious plan as part of the turnaround. And then we talked about the full year and what our expectations were for 2024. And we're very much on that plan right now and sort of doing what we said we're going to go do. So there's no material changes as we think about Q3 and Q4. And at the same time, as I think about 2025, right now we're very focused on continuing to strengthen innovation in that product pipeline and really trying to generate that brand heat as wholesalers think about where they're going to go, both domestically as well in the U.S. So the order book for 2025 will be coming together here in the next handful of months. Every brand is a little bit different from an order window standpoint. And every region and channel is actually a little bit different, too, just based on when those orders are placed. But I would say, I'm encouraged by the innovation we have seen and certainly encouraged by some of the reactions that we've seen and then encouraged by some of the sell-throughs that we've seen as well from a wholesale perspective. But at the same time, I can't underscore. We still have a lot of work to go do. No one's declaring victory. We're happy with where we stand. But the work we've done over the past year has only given us the privilege to really keep driving the company forward and keep driving for growth. So we are, while again, we're [Audio Gap]

Operator: Please stand by. We are experiencing technical difficulties. Your program will resume shortly. Please stand by. We are experiencing technical difficulties. Your program will resume shortly. Thank you. You may now resume your program.

Chris Hufnagel: I think we got disconnected, but I think Taryn also answered John's last question, unless there's a follow-up. Okay, operator, I think we're good.

Operator: All right. This does conclude today's question-and-answer period. I will now turn the call back over to our presenters for any additional or closing remarks.

Chris Hufnagel: Thanks very much. Thanks for joining us. We appreciate the questions and we'll look forward to the follow-ups. Look forward to speaking to you in November. Thanks, everyone. Be well. Be safe.

Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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