Wolverine World Wide, Inc.

Greetings and welcome to the Wolverine Worldwide Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Wiseman, Vice President of Finance for Wolverine Worldwide. Thank you. You may begin.

Good morning and welcome to our third quarter 2022 conference call. On the call today are Brendan Hoffman, our President and Chief Executive Officer, and Mike Starnit, our 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 2022. We also issued a separate press release and filed an 8K outlining changes to our brand groups and reportable segments, which took effect in the fourth quarter. References to financial performance in today's call reflect the pre-existing structure. These two press releases are available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. If you would prefer to have a copy of the release sent to you directly, please call Allison Malkin at 203-682-8225. This morning's earnings press release and comments made during today's earnings call include non-GAAP disclosures, which adjust, for example, for the impacts of environmental and other related costs, net of cost recoveries, foreign exchange rate changes, and costs associated with the integration of Sweaty Betty. Prior year non-GAAP disclosures include additional adjustments for debt extinguishment costs and costs associated with the acquisition of the Sweaty Betty brand. These disclosures were reconciled and attached tables within the body of the release. We have added a supplemental table on our website under the investor relations tab at the webcast and presentations link to show financial results with and without adjustments for abnormal air freight levels in 2021 to facilitate year-over-year performance comparisons. 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 2022, 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 Brendan Hoffman.

Thank you, Alex. Good morning, everyone, and thank you for joining today's call. While we were pleased to deliver third quarter revenue growth of 9%, 12% on a constant currency basis, both revenue and profit came in below our expectations, reflecting ongoing supply chain disruption, heightened promotional activity, and deteriorating macro conditions. Despite these external headwinds, we saw notable strength in our international business, And within our portfolio, Merrill continued its strong momentum, delivering 34% revenue growth, 39% on a constant currency basis. Merrill's performance demonstrates that when we lead the market with product innovation, engage our consumers with powerful and relevant market storytelling, and have access to key products and inventory, we will win. We continue to strengthen the foundation of our business through a refined corporate strategy is focused on prioritizing the brands that have the highest potential for growth and optimizing the brands that create value through strong profit and cash flow contribution. As we shared in a separate press release issued this morning, last week our Board of Directors approved a new brand group and reportable segment structure that aligns with this approach. This change is effective immediately and includes new leadership appointments to guide these groups. We have also established a profit improvement office to identify and execute initiatives that will unlock margin expansion, ensure we are directing resources to areas of the business that are expected to give us a strong ROI, and enable the new structure. I am excited about these changes as they pave the way for Wolverine to become a stronger company that is more powerfully positioned. Mike and I will provide more information on this later in the call. But first, I will share the specific factors that led to our Q3 revenue and profit results. highlight some current strengths in the business, and discuss actions to normalize our inventory position. Our third quarter sales increased 9% to $691 million. Excluding the unfavorable impact of foreign exchange rates, global revenues increased 12%. Adjusted operating profit decreased 10% to $62 million due mostly to higher promotional sales in our DTC channel as compared to unusually low promotions last year. discounts in wholesale due to late deliveries, and the impact of unfavorable foreign exchange rates. I'd like to provide more context around the factors that impacted revenue in the quarter. First, starting with U.S. wholesale, which represents our largest channel and the largest miss versus our outlook for the quarter, as Sperry, Ked, Sweaty Betty, Wolverine Brand, and Saucony were heavily impacted by the following key factors. Logistics and warehouse congestion. This starts with our own distribution centers that are currently operating way over capacity, making it difficult to receive new product and process outbound shipments. Ongoing congestion within inland transportation networks also remains challenging. This is our number one operational priority. Mike will go into more details regarding our efforts to increase efficiencies in order to improve the flow of our products later in the call. Many wholesale customers are currently dealing with heavy inventories and warehouse constraints. This resulted in certain shipment delays causing some elevated cancellations and additional discounting. Logistics delays and integration timing on Sweaty Betty's U.S. wholesale business limited the brand's ability to service its U.S. wholesale orders. Sperry underperformed our expectations as logistics and warehouse congestion led to late deliveries and slowed the introduction of newness, which was further exasperated by declining trends in the boat shoe category. and with the unusual warm weather, a sluggish start to the boot season, all of which led to shipping delays, discounts, and order cancellations. Our global direct-to-consumer channels, which include Sweaty Betty, were leveraged to clear inventory during the quarter, which drove 4% revenue growth, 9% in constant currency, in line with our expectations. However, higher-than-expected promotions resulted in lower gross margin during the quarter. Challenging macro conditions And Sweaty Betty's Home Market, the UK, put extra pressure on performance in the quarter. Keep in mind that this time last year, lead times were extremely long, up to 365 days in some cases, as we faced factory closures in Vietnam, among other supply chain disruptions. We, like others, moved up deliveries, especially in core evergreen product, to ensure we had ample supply to meet our backlog, which was at a historic high. So while we have not navigated the supply chain as seamlessly as we would have liked, we have plans in place that should allow us to improve the flow of goods, increase the rate of on-time deliveries, and reduce inventory levels. These actions include reducing forward purchases with our suppliers, especially in core product that we have in the warehouse, and forcefully moving through seasonal products. Mike will walk you through our inventory actions and expectations for inventory levels during his remarks. Notwithstanding these challenges, the quarter included noteworthy accomplishments. As I mentioned, the Merrill brand continues to resonate well with customers. Third quarter revenues exceeded expectations of 39% constant currency growth. The Merrill team has done a great job extending the brand's reach to younger lifestyle consumers with targeted marketing and innovative product launches. It was encouraging to see product availability improve compared to last year when certain Vietnam factories were closed. And our international expansion continued with strong results in the quarter. International revenue was up 43% on a constant currency basis with strong growth across regions. Although we are cautious about macro and political instability in several international markets, we continue to see significant international growth potential for our key brands. Saucony.com revenue was up 30% in the quarter, 33% on a constant currency basis, reflecting not only an increase in promotional activity, but a strong consumer response to new products showcased in the quarter. Overall, we expect the environment to remain challenging, which is reflected in our updated guidance. We've already taken many proactive steps to address the situation and position the company for 2023 and beyond. We remain confident in our ability to elevate our brands and position the company for sustained long-term growth. Our go-forward brand group structure is a critical step. This new structure will allow for better collaboration and increased efficiencies across brands, especially those that are innovating in similar product categories, targeting similar consumers, and trading in similar distribution channels. The new brand structure will also allow our centers of excellence to operate more efficiently and effectively. The new groups will be active, consists of Merrill, Saucony, Sweaty Betty, and Chaco. The footwear brands will report to Chris Huffnagle, and Sweaty Betty will continue to report to me. This group includes brands with the highest future growth potential. Work, led by Tom Kennedy, consists of Wolverine, Caterpillar, Hightest, Bates, and Harley-Davidson. This group includes brands that will produce stable growth while contributing profit and cash flow to support our highest growth brands. Lifestyle, led by Catherine Cousins, consists of Sperry, Keds, and Hushpuppies. This group represents our turnaround brands. Combined, the group delivers positive cash flow, but the brands are not achieving their potential. We are evaluating the best go-forward options for each brand. Next, we also established a Profit Improvement Office that will be led by a new Chief Profit Improvement Officer who will report in to me. We are targeting annual growth savings of $150 million and expect a portion of this to be recognized in 2023. This office is an essential enabler of our new corporate strategy and long-term plans for our highest growth brands. The benefits harvest will allow us to accelerate the return to our historical peak operating margin of 12% as a sustainable foundation upon which to leverage over time and also invest in the highest growth in ROI initiatives. We believe each of our brands has potential, but our new strategy is focused on simplifying the business, prioritizing brands with the biggest growth opportunities, and optimizing brands that can create value through strong profit and cash flow contributions. The assessment of our portfolio may require some tough decisions as we address underperforming businesses. This work is one of our top priorities. Now we'll move on to discuss the performance of our largest brands. Merrill delivered a record third quarter with revenue of $199 million, up 39% compared to the prior year on a constant currency basis, with strong growth across regions, channels, and categories. As we look at the assortment, we were pleased with the performance of the long-delayed Moab 3. as well as newer innovative categories like Light Hike with Bravada, our trail-ready hiking sneaker. Lifestyle offerings, including Hydromock, and camping and trail running categories continue to be top performers. Our shift of focus to purpose-led brand messaging, as well as other community-focused ESG efforts, help broaden the brand's reach. Now I want to highlight a number of differentiating factors that contributed to Merrill's results. We believe we can leverage our learnings from Merrill and transfer them to other brands to help them grow awareness and shape their digital marketing efforts. First, MTL, Merrill Test Lab, is our innovation incubator where all our top products come to life. We test and refine right on the trail, using nature as our guide and elite athletes as our North Star to produce our best performing products. Next, we began building a more agile and nimble marketing structure 18 months ago, which included a new in-house photo studio and the addition of key creative talent, which are contributing to the brand's global growth. The agility built into the model has paid dividends, especially as we managed through the volatility in product launches and resulting marketing activation shifts due to supply chain instability over the past year. Finally, increased ETC distributions. Over 40% of Merrill's U.S. business is now direct-to-consumer. We have more control over the Merrill brand and how it is positioned when being operated in our own environment. Earlier this year, Merrill piloted the integration of a centralized e-commerce commercial team directly into the brand team to more closely connect marketing product and digital functions to maximize agility and speed. This has been very successful, and we are rolling the structure to our other brands. The culmination of our efforts led to Merrill being named Brand of the Year by Footwear News and will be recognized at the Footwear News Achievement Awards Gala on Wednesday, November 30th in New York City. Footwear News editors selected Merrill as the Brand of the Year for leading the way in promoting a more diverse vision of the outdoors through various efforts, including forming a women-centric hiking club, investing in Big Brothers Big Sisters of America to make the outdoors more accessible to youth, and supporting the National Recreation and Park Association. to help create more urban green spaces. Merrill has been recognized recently with numerous product awards, including its newly introduced Moab 3, receiving an Innovation in Design honorable mention from Fast Company. It's Moab Speed Thermal Mid-Waterproof being selected for Outside's Best in Hiking Boots in the 2023 Buyer's Guide. And it's MTL Skyfire 2 and Rogue Hiking Boot receiving ISPO Awards for Product Excellence in the Outdoor Industry. As we look to Q4, we are very excited about the product pipeline and expect Merrill to deliver over 20% revenue growth and full-year revenue growth in the high teens. Moving on to Saucony, third quarter revenue came in below our expectations at $130 million, down 1% compared to last year, but up 4% in constant currency, primarily due to late deliveries caused by congestion in our warehouse and inland transportation network and weakness in the U.S. wholesale distributions. We were encouraged to see that consumer reaction in new product launches when we were able to introduce newness was very positive. To this end, both Tempest and Triumph 20 launched in the quarter and had strong sell-throughs reflecting the demand and interest in Saucony. However, limited flow of newness pressured revenues. Our goal with Saucony remains focused on expanding the brand's reach to everyday active consumers. When we are visible to these consumers, we see strong results. We are particularly focused on our own digital channel and those of our partners, especially digital titans, given the ability to gain share with these everyday customers. We are also seeing success with our efforts to target a younger lifestyle-driven consumer with Saucony Original's business, which continues to perform really well around the world. Saucony's international business was another positive story. Saucony's sales through China JV more than doubled in the quarter. And in China, our multi-channel strategy is working well, including the addition of 16 new stores during the quarter. Efforts to drive brand awareness and excitement around the brand in China include a sponsorship of the Hood to Coast relay that took place in August. The Saucony team launched its House of Speed consumer activation booth at the start and finish lines to reach 2,500 runners and over 100 media outlets. Saucony sponsored 250 runners, including 15 athletes, and one previous Olympic champion, as well as social influencers. As a result of this activation, we saw a significant uptick in the search index for Saucony on Tmall. Saucony's e-commerce third quarter revenue growth of 30% significantly outpaced the portfolio and was fueled by strong sell-through on the Adorphin 3 and Triumph 20 launches. Looking ahead, Saucony remains focused on driving market share globally across road and trail running categories, as well as expanding our lifestyle originals business. In Q4, we expect Saucony to deliver over 20% growth. Moving on to Sweaty Betty, third quarter revenue declined 3%, but increased 13% on a constant currency basis. On a like-for-like performer basis, Sweaty Betty's revenue was down 28%, 16% on a constant currency basis. This performance was below our expectations due to logistic delays that negatively impacted shipments of U.S. wholesale orders. Performance was primarily challenged by tough macro environment in its home market, the UK, where consumer sentiment continues to deteriorate significantly. Despite near-term macro challenges, we're very excited by Sweaty Betty's long-term global expansion potential. Two weeks ago, Sweaty Betty opened its first concept store in London at Battery C Power Station, one of the most covetable new retail developments in the UK. The powerhouse store is a perfect physical expression of the brand's distinct positioning. Stores received a lot of positive publicity and early response from consumers. In the quarter, Sweaty Betty rolled out a new POS system across the entire fleet of stores, which is mobile first, and a great tech kit that allows for more seamless transaction in stores. We are exploring ways to leverage this technology in the near term across the other brands in our portfolio. Looking ahead, we expect Sweaty Betty to be pressured by macro challenges in the near term and expect Q4 revenues down high single digits. Pivoting to the work brands, Wolverine's third quarter revenue came in below our expectations at $59 million, down 1% compared to the prior year. Congestion in our Beaumont, California distribution center resulted in some customer order cancellations and shift in deliveries to Q4 for certain customers. Cat's third quarter revenues grew 36% on a constant currency basis, driven by strong growth outside of North America. Cat also experienced shipping delays in the U.S. market. The work category remains a steady source of growth, underpinned by current industry trends. Warehouse footwear is one of the areas we experience continued tailwinds, particularly from female and Hispanic warehouse workers. We continue to leverage strong market share of Caterpillar and Wolverine, which account for 20% of the work boot market. All of our boot brands continue to attract younger consumers on digital channels, including Amazon and Zappos. From a marketing standpoint, Wolverine has been very successful with collaborations. The brand's third collaboration with old Rip Van Winkle bourbon launched on October 25th and sold out in less than 48 hours, earning 500 million media impressions. This month, we are launching our third collaboration with Rawlings, celebrating the iconic Gold Glove Awards. All recipients of the Gold Glove Awards will be sent to pair. Later this year, we will launch our fourth Metallica Scholars Collection, as well as second Halo Collection, following Q1's limited launch sold out in minutes and produced plus 20% email list growth. We expect Wolverine's Q4 revenues to grow high single digits, partly driven by a timing shift of some of the shipments into Q4 from Q3 due to logistic issues we cited. Moving to Sperry, Q3 revenue was down 12% as compared to the prior year, fell short of our expectations. Congestion in our distribution centers and delays in the U.S. Inland Freight Network were more pronounced in our Louisville distribution center, where Sperry resides. Kedge is also in this distribution center and faced these same challenges, resulting in a revenue miss in Q3 versus our internal plan. Demand trends in the U.S. boat category and women's sneakers softened in the third quarter compared to earlier in the year. Retailers are being more cautious on buying into these categories as evidenced by order cancellations we experienced in Sperry and Keds during the quarter. Their tolerance for accepting late deliveries on these categories is relatively low. Sperry continues to possess high-aided brand awareness at 57% and is seeing a notable increase in search engine interest. We will leverage as we work aggressively to improve logistics and warehouse efficiencies so that we can bring in innovative product stories, including our Jaws, sea-cycled, and mock cider boat lines. And in boots, we also expect our who, what, where, warm and wonderful, and the Herschel Supply Company brand offerings to be favorably received by consumers. Overall, we expect improvement in the U.S. to take time as Sperry continues to face inconsistent trends in the overall boat shoe category. That said, Sperry continue to make progress on increasing relatively low international penetration. Third quarter revenue from Sperry's international business increased over 250% versus the prior year. We are seeing some green shoots from our efforts to build brand awareness outside the U.S. Looking ahead, we are planning Sperry's Q4 revenue to be down in the mid-20s range, giving softer start to the boot season and a more conservative growth expectations in boat and women's sneakers category. Before I conclude, I'd like to point out that we remain committed to supporting our communities, protecting our planet, empowering our team, creating a diverse workforce, and managing responsible sourcing and supply chain operations. I am very pleased with the progress we have made and invite you to read through our Global Impact Report, published in August, which can be found on our Corporate Responsibility section of our website. In conclusion, while the global macro environment and inventory challenges are expected to attract from our performance in the near term, we're more confident than ever in the future of our brands. We are actively working on improving our inventory positions across our brands to ensure we return to more normal levels as early as possible in 2023. Additionally, our review of the brand portfolio, improvements in planning across the business, enhancements to technology, and DE&I and ESG initiatives are embedded in the business as continued processes. Today, we shared with you the resegmentation of our brands, leadership changes, and the Profit Improvement Office. We look forward to sharing more details with you at our Investor Day sometime in the first half of 2023. We will emerge from current challenging macro conditions as a stronger, more efficient, simpler company with a portfolio of brands ready to service our customers around the world. With that, I will turn it over to Mike to discuss our financial results.