STMicroelectronics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 10 speakers on the call.

Operator

Welcome to the Wolverine World Wide Inc. 2nd Quarter 2023 Earnings Call. Please note this conference is being recorded. I'll now turn the conference over to your host, Alex Wiseman, Vice President of Finance. You may begin.

Speaker 1

Good morning, and welcome to our Q2 2023 conference call. On the call today are Tom Long, Chairman of the Board Chris Hufnagel, President and Chief Executive Officer and Mike Stornit, Executive Vice President and Chief Financial Officer. Session. Earlier this morning, we issued our earnings press release and announced our financial results for the Q2 2023. Session.

Speaker 1

The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. Session will be reconciled to the most comparable GAAP financial measures and attached tables within the body of the release. I'd also like to remind you that statements describing the company's expectations, plans, predictions and projections such as those regarding the company's outlook for fiscal 2023, Growth opportunities and trends expected to affect the company's future performance made during today's conference call are forward looking statements under U. S. Securities laws.

Speaker 1

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 Tom Long.

Speaker 2

Thank you for joining today's call. Before the team discusses earnings, I'd like to address the leadership transition we announced today. Effective immediately, the Board has appointed Chris Hufnagel to to succeed Brendan Hoffman as CEO of Wolverine Worldwide. The Board recognizes that Wolverine session. Worldwide needs to deliver improved financial performance and the company must evolve to build brands that ignite consumer desire.

Speaker 2

We must ensure that everything we do begins with our product design, our brands and the people that buy them. This can't merely be words. We have to develop the business systems, the management routines and the consumer insights We also must ensure that everything we do begins with our customers. Session accordingly, the Board has taken decisive action to appoint a CEO who brings the experience and leadership required to put the company on the right course. A few words on Chris' background.

Speaker 2

Session. Chris has been an effective leader throughout his long tenure at Wolverine Worldwide, including as Global Brand President of the company's active group, session, which includes our 2 largest brands, Merrell and Saucony. Chris has covered almost every area of this company in increasingly dynamic leadership roles and he also has extensive leadership experience in prior roles at Under Armour, The Board elevated Chris to CEO for a few main reasons. Most importantly, he knows how to build brands, which is essential for our success. He's a decisive high energy leader who displays good judgment and a willingness to embrace change.

Speaker 2

Session brings the demonstrated playbook that the board believes in from his prior strategic roles, session. A clear view of what needs to be improved now. 2 specific examples help capture Chris' contributions to Wolverine over the years session and they speak to our confidence in his ability to lead the company. First, Chris led our first ever consumer insights session. I expect Chris to bring this operating philosophy to the entire business, session is building the focus on excellence and execution from the very top.

Speaker 2

2nd, as Merrell Brand President from 2021 to 2022, Chris led the brand to back to back all time record revenues, while more than doubling our e commerce business. Session. As a result of these successes and many others, Chris has built a large and loyal following inside Wolverine worldwide and with the Board. Session. We are confident he will operate with urgency and focus for our shareholders.

Speaker 2

To our shareholders, it's no secret session. Our results have disappointed recently. However, we continue to believe that Wolverine worldwide can deliver strong financial performance session and attractive shareholder returns under the right leadership. We have no time to spare and that's why we are announcing this change today. With that, I'll turn the call over to Chris Hufnagel, our Chief Executive Officer.

Speaker 3

Session. Thank you, Tom. Good morning, everyone. I'm Christoph Nagel, and I'm pleased to join you on this call as Wolverine World Wide's new President and Chief Executive Officer. Session.

Speaker 3

I'd like to express my appreciation to Tom Long and the Board of Directors for their vote of confidence in me for this new assignment, session will be a role I'm honored to take. I would also like to thank my colleagues from across the entire organization for their hard work and support for me over the past 15 years. Session. I'm ready for this next chapter in our company's 140 year story and excited to work together to navigate this challenging time session and position our brands and company for success in the future. Before getting into the numbers and our path forward, I want to briefly introduce myself to you.

Speaker 3

Session. Prior to joining Wolverine World Wide, I was fortunate to work for some amazing brands, including Under Armour, The Gap and Abercrombie and Fitch, session will be mentored by some truly great leaders, leaders who obsess daily about brand, product and their consumers. Session. Since joining Wolverine, I have developed an intimate knowledge of the company, our brands, our processes, our people, our partners and the industry. I understand both the challenges and opportunities facing Wolverine today and ready to move with pace to strengthen our footing and ultimately deliver better results for our shareholders.

Speaker 3

Session. Drawing on my experiences and more importantly, levering our talented team, I firmly believe we have the playbook and capabilities session that can get this company back on track. I've hit the ground running and excited about the work ahead. For my very first call with you, Let me start with what matters most on our journey to create shareholder value, brands. Wolverine World Wide must transform to become a great builder of brands.

Speaker 3

Session. I believe great brands do 3 things extraordinarily well day in and day out. First, they build awesome products, session. Innovative, trend right, priced right, covetable products informed by deep insights that solve for consumers' wants and needs. 2nd, great brands tell amazing stories, differentiated meaningful stories and experiences that meet their consumers when and where they want to be met.

Speaker 3

Session. Modern brands must also engage in an ongoing push pull relationship with their consumers. 3rd and finally, Great brands have great teams driving the business each and every day. A constant and relentless pursuit to build and protect their brand and to be better tomorrow than today. Session.

Speaker 3

This is a new brand building model for Wolverine Worldwide, a model and playbook we put into practice at Cat Footwear and Merrill, which drove those brands to new heights and we'll now implement this playbook across the portfolio leading to a repeatable pattern of success. Turning to the company's current position. While I'm excited about the future, our financial update this morning is well short of expectations. Mike Sornet will cover the most recent quarter's results and the contributors of the updated outlook in more detail shortly. But we've seen softness in the marketplace and headwinds impacting the business that we now expect to continue into the second half of the year.

Speaker 3

We expect these headwinds to abate over the coming quarters As consumers move past current economic uncertainties, inventories become cleaner at retail, post COVID trends normalize and we lap tough comparisons. Session. Despite the current situation and the near term outlook, I believe we have a strong foundation in place at Wolverine today. With industry leading Authentic brands loved around the world, yet I know they've yet to reach their full potential. Within our active group, Merrell, Sockety and Sweaty Betty Are poised to benefit from long term secular trends in big attractive markets.

Speaker 3

Moreover, we have category leading brands in areas like work, Wolverine and Cat Footwear own about 20% of domestic market share and generate strong consistent returns. At the same time, Wolverine benefits from strong global platforms, a great global operations group, amazing partners and corporate centers of excellence that allow our brands to focus on their consumers, products and demand creation. Finally, we have a great team session dedicated to our consumers, our brands and each other. I believe we have significant opportunity in front of us and I'm confident in our ability to generate long term growth, Profitability and shareholder value, but to deliver on that promise, we need to take bolder and faster actions. Session.

Speaker 3

Over the last 18 months, Wolverine has taken several important steps as we reposition the company. While not all these actions are benefiting our results today, session. These are planted to drive meaningful change and improvements across our organization over the next several quarters. To quickly highlight our actions in motion, We're effectively getting our inventories back in line. I'm pleased to report that at the end of the quarter, we're $25,000,000 lower than we expected to be And we're on track to achieve a $225,000,000 reduction in inventory versus 2022 by year end.

Speaker 3

Our profit improvement office designed to free capacity for increased investments in our brands is on track to deliver its goals for 2023 along with our targeted full year savings in 2024. Session critical enterprise wide tools and process initiatives, specifically end to end planning and product line management are on schedule and will allow us to be both more accurate and more agile in managing our business. On the brand front, session. Several of Merrell's new launches into hike and trail running are seeing positive traction, and I'm pleased to report Merrell has gained market share in the important hike category for each of the past 10 months. Saucony is seeing early signs of strong product acceptance for recent introductions, specifically the Triumph 21.

Speaker 3

Session. And today, we're also seeing a halo effect for other styles within the assortment. Encouragingly, Sweaty Betty performed better than we expected in the most recent quarter session and saw a positive response to the new product introductions. We've also accelerated our integration efforts for the brand and that work is yielding both better synergies and cost efficiencies. Session.

Speaker 3

Finally, we have new leaders in our 3 key growth brands, Merrell, Saucony and Swadhy Betty, all consumer centric strategic thought leaders. Session. I'm excited about working together with these new leaders. They bring deep experience and passion for their teams and results along with a strong sense of urgency. Session.

Speaker 3

We've also initiated other critical efforts to transform our portfolio and global operations to have a more focused approach targeting our biggest opportunities, While streamlining our organization to be more agile and efficient. Key steps we've taken include the sale of Keds, session. The licensing of Hush Puppies business in North America and the decision to pursue strategic alternatives for Sperry and the Wolverine Leathers Group. Session will be a more strategic integrated and efficient approach to managing our business. To this end, this week, we announced the consolidation of our U.

Speaker 3

S. Offices, session including the closure of our Boston campus at year end. This decision will drive increased collaboration across our teams and accelerate the sharing of best practices across the organization, including the implementation of the brand building playbook. I'm excited to have all our footwear brands under one roof in the near future. On the operations front, we're actioning a more strategic long term approach to our global supply chain, working with the best partners to drive improved reliability, session.

Speaker 3

Costing, efficiency, transparency and agility, ultimately making our supply chain a competitive advantage for our brands and partners. I would like to make it clear that we're not starting over. We have a good sound strategy in place. We have a proven scalable playbook, Authentic brands and amazing talent. The recent challenges have only made it clear that we need to move faster and be bolder to achieve our fullest potential.

Speaker 3

Session. As we navigate the current challenges, our focus must be to stabilize the financial footing of the company, which we're making progress on each day, We'll also find a capacity to reinvest in our brands and ultimately reallocate resources to realign our competencies to become better brand builders, session focused on consumer obsession, product innovation and modern demand creation. Despite the near term challenges, we have a plan in place to advance our strategic priorities, deleverage the balance sheet and maintain capacity to invest in building our brands. We remain confident in our ability to return to a 12% operating margin in and a variety of economic backdrops and have line of sight to achieving this target in 2024. Mike will walk you through a bridge here shortly on how we see this playing out over the next 18 months.

Speaker 3

But before I hand the call over to Mike, I want to emphasize 3 points that I hope you take away about our framework to drive shareholder value. Session. I'm excited about this new opportunity to lead the organization with a proven playbook in hand, definitely leveraged across our entire business with a team ready to execute. Session. We're attacking the critical issues that face our company and we're well positioned to capitalize on the many opportunities we have in front of us, all through a commitment to being bolder and faster.

Speaker 3

Session will not be sufficient. We have an actionable pragmatic plan in place to advance strategic priorities, deleverage the balance sheet and maintain capacity to invest and building our key growth brands, while accounting for the challenges we see. We look forward to sharing more updates with you on our progress in the coming months. Now over to Mike Stornan, our Executive Vice President and Chief Financial Officer. Mike?

Speaker 4

Thanks, Chris, and thank you all for joining the call. Let me start by briefly recapping the Q2 financial highlights. I will then cover some of the challenging trends that have impacted our revised outlook and the important work we are doing to drive significant profit improvement and debt pay down over the coming months. 2nd quarter revenue for our ongoing business of $578,000,000 was in line with our outlook and down 14% from last year. Adjusted gross margin of 39% was below our expectations.

Speaker 4

In the second half of the quarter, we saw a decline in full price sales to our U. S. Wholesale customers as they cautiously tighten their open to buy to manage inventory. These full price sales were replaced with lower gross margin shipments to international distributors. In addition, we generated the liquidation of end of life inventory at lower than planned prices, which negatively impacted gross margin, But helped us to drive inventory levels down by $25,000,000 more than planned.

Speaker 4

Recall that Q2 gross margin will not recur in 2024. Adjusted operating margin was 5.8%, with strong cost management offsetting the shortfall in gross profit. Reported operating margin was 7.8%. Session. Adjusted diluted earnings per share for the quarter were $0.19 in line with our guidance, but reported diluted earnings per share were $0.30 Inventory for the ongoing business was $648,000,000 up 7% compared to last year and down nearly $100,000,000 compared to the Q4 of 2022.

Speaker 4

We ended the quarter with net debt of $930,000,000 liquidity of $370,000,000 and a bank defined leverage ratio of 3.5 times. Now let me transition to our 2023 outlook for the full year. Our guidance reflects the expected performance of our ongoing business, which excludes the full year projections of Keds and Wolverine Leathers and adjust for the licensing transition for Hush Puppies in the second half of the year. We continue to evaluate strategic alternatives for Sperry and those results remain in our outlook for 2023. Since May, Sperry's revenue outlook has declined $55,000,000 and operating profit has declined nearly $25,000,000 Like many other companies in our industry, we continue to see softness in our U.

Speaker 4

S. And European footwear wholesale businesses As retailers remain cautious, our May guidance did not contemplate the increase in order cancellations These factors have negatively impacted our current wholesale sell in by approximately $90,000,000 for the second half of the year. During that same time, U. S. D2C trends have declined more than expected.

Speaker 4

Finally, session. We have seen some reduction in demand from certain third party distributors for the back half of the year as they adjust to lower consumer demand in their markets and also manage inventory. We are now assuming that these most recent trends will continue for the remainder of this year, and we are therefore taking a more conservative approach to our 2023 revenue outlook. This approach will allow us to limit inventory risk and achieve our year end inventory target of $520,000,000 setting fiscal 2024 up for cleaner training, more capacity to flow new product innovation and less pressure on gross margin from off price sales. Our revised outlook for revenue from our ongoing business Adjusted gross margin is expected to be approximately 40%, down from our previous guidance of 42%.

Speaker 4

The decline is a result of lower Q2 performance described earlier, a lower mix of footwear D2C sales in the overall mix set to drive stronger retail sell through over the coming months. Please recall that the gross margin outlook includes $70,000,000 of transitory costs and approximately $20,000,000 of excess inventory liquidation costs. Session combined these costs represent 400 basis points of annual gross margin pressure that will not recur next year. Adjusted selling, general and administrative expenses are now projected to be approximately 35% of sales And adjusted operating margin is expected to be approximately 5%. Adjusted diluted earnings per share is expected to be in the range of $0.45 to 0 $0.55 Year end inventory is still expected to improve by approximately $225,000,000 compared to the prior year.

Speaker 4

Operating free cash flow is now expected to be in the range of $80,000,000 to $100,000,000 In addition, we are currently pursuing the sale of certain non core assets For at least $50,000,000 and expect these to be completed over the coming months. Including the proceeds from these asset sales, We expect year end net debt to be approximately $850,000,000 and bank defined debt leverage to be approximately 3 times. Revenue of approximately $515,000,000 down 21% compared to last year. In 2022, Shipments to 3rd party distributors in Q3 were abnormally high by approximately $50,000,000 due to a shift in timing. So on a more normalized comparison, projected Q3 revenue is down about 14%.

Speaker 4

We session. We expect adjusted gross margin of approximately 42%, including $12,000,000 of transitory supply chain expenses expected in the quarter. Adjusted diluted earnings per share is expected in the range of $0.05 to $0.10 This outlook reflects trends experienced in July and the expectation that they will continue through the quarter. Finally, let me provide insight into the near term improvements we now expect in the business. We remain very confident in our ability to significantly improve our profit performance in 2024.

Speaker 4

While we pay down debt to more normal levels over the next 6 quarters. During 2023, We will recognize $90,000,000 of transitory supply chain and incremental inventory liquidation costs session will not recur in 2024. The Profit Improvement Office started in November of 2022 session has secured approximately $70,000,000 of savings for 2023 and we have line of sight to an incremental $130,000,000 in savings for 2024, now yielding a full year run rate of $200,000,000 Our confidence to deliver these full year benefits is based on the following: $135,000,000 $35,000,000 relates directly to the next phase of rightsizing the organization in line with the smaller portfolio And the accelerated work Chris explained earlier. $30,000,000 is related to further supply chain gross margin initiatives that have been identified and are expected to be secured in the next 6 months. As a result of the significant cost improvements, the company is on a solid path to 12% operating margin, while creating capacity to reinvest a portion of these savings into brand building and best in class marketing capabilities, Especially for Merrill and Saucony.

Speaker 4

We are pleased to share further details of this property improvement road map session and have added a page to our Investor Relations presentation summarizing the components. In addition to the projected profit improvements just discussed, we expect further inventory improvement in 2024 driven by tighter SKU management session and an enhanced operations planning system. Due to these operational efficiencies and ongoing deleverage efforts, We would project net debt below $700,000,000 by the end of next year. If accomplished, Benefit to our annual interest expense would be $10,000,000 to $15,000,000 These projections do not contemplate the benefit of proceeds from a sale of Sperry or other strategic alternative session might result in the monetization of Sperry's working capital. In conclusion, we continue to navigate a tough environment And make fundamental improvements to the business along the way.

Speaker 4

A more challenging outlook has accelerated our work to improve the financial strength of the company And further clarified our priorities and opportunities. Profit improvement and inventory initiatives are on track And we are creating capacity to invest in our highest priorities in 2024. Thank you to the entire Wolverine team for their ongoing commitment to the changes we are driving at the company. On a personal note, I want to congratulate Chris, Someone I've worked with closely over the years. He possesses the experience and the passion session.

Speaker 4

I look forward to supporting Chris and this important work. And I'll now turn the call back over to him for closing comments.

Speaker 3

Thank you, Mike. And thanks again to everyone for joining us today. Session. Before we open the Q and A, I also want to personally thank everyone at Wolverine World Wide and our partners around the world for all your hard work to date and the good important work to come. I look forward to working with you in the days ahead.

Speaker 3

Let's go. Operator, please open the line for questions.

Operator

Thank you. At this time, we will now begin the question and answer portion of the call with our hosts, Chris

Speaker 3

session

Operator

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

Speaker 3

Session. Yes.

Speaker 5

Hi, good morning. Thank you. Mike, I wanted just to start with a financial question. Could you just clarify, I know in the press release, in the guidance is for Your bank defined leverage to reach approximately 3 times by year end. Can you just clarify that calculation, any factors you're getting set credit for above and beyond just the normal profitability.

Speaker 5

And then how do you see the leverage ratio trending into the first half of next year?

Speaker 4

And then we're able to adjust out some of those costs To benefit that, we also had obviously in the quarter some improvement in recoveries and some insurance Recoveries related to the litigation and some other areas related to the remediation that also benefit the calculation. So those are some of the non GAAP adjustments. In addition, we stated the intention to sell off some assets that are non core assets to the company. Those are reflected in the guidance for the year end leverage targets and net debt targets. As we cycle into 2020 And start to see the full benefit of the profit improvement initiatives and then The transitory costs that begin to fall off early in 2024 in Q1, We would expect to see increase in the trailing 12 month EBITDA calculation from those benefits, and just a healthier business overall.

Speaker 4

Obviously, lower debt position given the lower inventory at the end of the year and the other deleverage activities set that we're promoting. So we'd expect after the end of the year that the leverage rates would continue to improve going into the first half of next year.

Speaker 5

Session. Thanks for walking through that. Maybe one other just broader question. I'm curious, I want to ask, in terms of your broader forecasting processes and capabilities, are you planning to make any changes given session. The outcome this year and as you talk about a 12% operating margin target for 2024, just I I want to ask your broader thoughts of it, whether that's the right approach in a current environment that's very dynamic and hard to predict.

Speaker 5

And related to the 12 Are you accounting for any hangover from the liquidations and inventory you've had to move this year or any factors such as continued softness in order ordering patterns in the spring? Thanks again.

Speaker 4

Sure. Session On the latter part, we I think the approach that we've taken and again, we provided a lot of detail in the materials about The operating margin bridge focused on today's outlook, the view on gross margin and the impact that we've taken in related to monetizing excess inventory and the costs associated with that. A baseline of revenue that's really this year's realized outlook, so about $2,000,000,000 of revenue without the session includes the inclusion of Sperry in that bridge that we provided. So as it relates to the assumptions and how we kind of build our model to 12%, It's sort of based on that baseline. Realizing that we've had a significant impact this year in our gross margin on Selling off excess inventory, we're confident in taking the extra actions to make sure that the inventory at the end of the year It's high quality and clean and we won't have a hangover of excess inventory.

Speaker 4

And session. That's our plan. That's our intention. That's our expectation. So I think it's safe to say that we can see these transitory costs session.

Speaker 4

These excess inventory liquidation costs go away once we cycle through the year. As it relates to your bigger question session. On planning, it's well taken. I think our process today really takes advantage of the benefits we've had in the past related to our outlook on backlog, the trends in the business. But one of the challenges I think that we saw this year especially as it relates to our revenue plans where the it was a pretty dramatic shift And trend that we saw maybe in mid May, early June, they really started to impact our business.

Speaker 4

We're Highly dependent on the wholesale channel for our brands, especially in the U. S. Market. It's over 40% of our total revenue that's just in U. S.

Speaker 4

Wholesale. Our U. S. Dependent revenue is over 55 session when you include our D2C and D2C channels. So we are very dependent on this market.

Speaker 4

And session. Obviously, this is one of the more challenged markets in our industry today. We saw declining trends as I mentioned in my remarks with both session really accelerated cancellations, well beyond what we had expect during a timeframe that we navigated over the last 10 or session. The level of new orders coming in really stalled. We saw very little new order activity for a period of time session over that same time period.

Speaker 4

So, hard to predict those types of trends or challenges, in the process. But I think session We recognize we need to be more persistent and more frequent in our assessment of some of those trends And risks and that's a process that we've already addressed in the company. And we will continue to be, session I think more focused on the results in our direct to consumer channels and things that we can do to influence those channels as we move forward. But Resetting where we are today, giving a more realistic outlook in the back half of the year, something that we feel is properly conservative session to reset the situation in the business and set ourselves up like I said in my comments to make sure that we do what we need to do to clean the pipeline of inventory at retail, give ourselves a clean inventory position at the end of the year and set ourselves up for 2024 with a cleaner baseline and benchmark for the business. Session.

Speaker 5

Okay. Thank you.

Operator

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

Speaker 6

Session. Thank you. Good morning. Congratulations to you, Chris. I think you've got a good skill set and temperament for the role.

Speaker 6

You're not, however, stepping into an easy situation. I have two questions. The first for you, Chris. I recognize some of the challenges related to the environment. But if you're being honest about the missteps of the company that brought you here, not just in 2023, but looking back further, At a high level, where did it go wrong?

Speaker 6

And what are you going to do differently going forward?

Speaker 3

Yes. First, thanks, Jim. I appreciate the comments. It's It's a great question. I think we've spent a lot of time thinking about that internally.

Speaker 3

And I do think the combination of some long standing issues session that were exacerbated in the pandemic and then certainly some challenges as we manage the business through the pandemic. Hopefully, my prepared remarks came through clearly that I think we have to be great brand builders. And we have session will be a follow-up to find a flywheel of building great products and generating brand heat, which allow our brands to yield pricing power and consumer demand, session, which ultimately build resilient and durable brands. And right now, we have not done that across the portfolio. So for me it really starts with brands.

Speaker 3

It's where I grew up. It's what I care most about. And that starts with a deep insight about our consumer in the marketplace And then a strong product innovation engine coupled with the ability to drive demand and then thoughtful brand management and channel management after that. I think for a long time we've been very good operators and made product and sold to someone else. And I think the world changed and we need to quickly session.

Speaker 3

As it relates to sort of issues coming out of the pandemic in more recent memory, session. We walked ourselves into a pretty significant inventory issue with a lot of other brands and we're working to extricate ourselves from that. Session. And we're sort of caught in that maelstrom right now, and having a heavy dependence on the U. S.

Speaker 3

Wholesale market, exacerbates that. So, session. I can assure you that internally, and certainly with the Board of Directors, we've thought a lot about, where the company has been, where the company sits today, session and where we want to go in the future. And I think we our strategy is sound. We've done a lot of work around portfolio session.

Speaker 3

We've got great improvements coming out of our profit improvement initiatives. We're consolidating offices. There is a scalable playbook that we own that has proven to work. Session. For us now, it comes down to pace and urgency and faster and bolder execution against that agenda.

Speaker 3

So, your comments are well taken. We take those to heart, and I'm excited to get after with the team.

Speaker 6

Excellent. Thanks, Chris. Mike, a question for you on the inventory. Set. Just how do you plan to move the inventory with $250,000,000 less sales?

Speaker 6

And then if we're thinking about comparisons into 2024, What is off price going to represent as a percent of 2023 revenues? And how is it you're not concerned that all of that inventory in the channel is in the headwinds Your revenues in 2024?

Speaker 4

I think the sell in of the most of the off price product, Jim has occurred already and certainly was heavier in the first half of the year. We have some pressure in Q3. But in terms of the marketplace with our retailers, we feel like we can see that dissipating or normalizing here over the next couple of quarters. The inventory that we have today remains in the core inventory and We have, heavier coverage in some of our core styles today than maybe we would like, but I think the quality of the inventory is quite good. Session.

Speaker 4

And we continue to manage, I think the ability to manage the inventory levels down to our original targets has less to do with A little more flexibility to manage the inbound. So the inventory targets that we're achieving despite the lower revenue is really from the standpoint of me and I'm going to manage our session. This year, our end of life inventory sales will probably approach mid teens, session Which is a bit higher obviously than normal. It's more typical for us to see that in our wholesale channels to see that closer to 8% to 10%. But at the same time, the margin on those sales was quite a bit lower than what we would normally expect.

Speaker 4

That's why we think there'll be a nice margin lift In 2024 when we are not anniversarying that type of volume. So in short, I feel that the quality session. And the level of inventory should improve significantly. We expect them to improve significantly by the end of the year, which gives us more confidence that We're not going to be lapping some of these challenges.

Speaker 6

Versus the mid teens, what's the normalized level of off price for the business?

Speaker 4

Probably 8% or so.

Speaker 6

Session. Okay. Thank you, Mike.

Speaker 3

Thanks, Tim.

Operator

Our next question comes from the line of Sam Bozer with William Trading. Please proceed with your question.

Speaker 7

Thank you for taking my questions. Chris, My congratulations as well. Okay. So let's go here. Moving Closing Boston office, moving to Rockford, how many people are coming?

Speaker 7

What does that mean for talent retention and acquisition. And number 2, not related to that at all. Given the way the wholesale accounts To get to your numbers next year, the first half of the year is probably still going to be very tough and then you're going to look for from a revenue perspective recovery in the back half. But this wholesale stuff doesn't necessarily happen in a vacuum. It happens because It's tough for everybody, but it's tougher for others when they don't have like go to must have product.

Speaker 7

So what are you doing to get the must have product to get the consumers to want to buy it through your DTC and more and as importantly for your wholesale accounts to step up. Session.

Speaker 3

Sure. I'll take a swing at that. I'll start with the Boston office closure. Certainly a decision that we took Very seriously. I was in Boston that list past Tuesday to make that announcement.

Speaker 3

I think we fundamentally think That ultimately having all of our footwear brands under one roof here in Rockford is the right decision for the company. Session. The ability to find synergies, share best practices, use common tools, implement a consistent playbook, I think we make makes a lot of sense. At the same time, the Boston office, as we've done the portfolio work, the need for that campus, sort of came down as we managed through the portfolio. Session.

Speaker 3

We are planning to maintain a creative hub in Boston because we realize that Boston there's a tremendous amount of talent. Session. And especially as we think about our brands going forward, our ability to recruit and retain and have great homes for amazing product designers, developers, marketers, is really important and we recognize Boston is an epicenter for that. So we are excited about the opening of a hub in Boston. I'll let Mike talk a little bit about the wholesale business.

Speaker 3

I will talk a little bit about new product introductions though. It is critically important to us For our key brands to maintain enough open to buy in the current inventory situation to bring newness. And where and when we've been able to deliver newness to the market, whether it's on our own channels or in our wholesale We are seeing traction. So as we navigate through the inventory situation, I think brands that can innovate and deliver newness and freshness to the consumers are going to win, And that is top of mind for our brand teams as we think about navigating both the near and the midterm.

Speaker 4

I think the We're not going to expect those trends to reverse immediately in the 1st part of 2024. So the approach we're taking here on all fronts in in terms of operations planning, working capital management, inventory planning and certainly the profit improvement work that we're doing, session I think is really paramount right now as we bridge from now until we get into the back half of twenty twenty four To continue to be able to deliver positive results both from a profit and leverage standpoint, but also create the capacity that Chris is talking about. I think As we pivot immediately to our brands and the investments in marketing and marketing capabilities that we need in the business and brand building capabilities in the business, We can't wait until the back half of twenty twenty four to do that. So luckily we have started this work session is much earlier than maybe we needed it. And we're on track to over deliver the profit improvements this year And have accelerated the urgency of that into next year and we'll be pulling forward some of the initiatives that were slated for 2024 into 2023, session.

Speaker 4

So that we give ourselves absolute capacity and room to not only grow and invest, but also to create that better set result for the shareholders in the first half of twenty twenty four.

Speaker 7

I understand. What I'm really talking about is the top line session because you're I mean, you sort of to get to the $2,000,000,000 in revenue expiry, you've got to expect a significant acceleration in sales in the back half of next year. Session. And what I can see that happening through your DTC coming out with the right product, but Given the retailers to take a big enough bite of the apple to really make that happen session. Within this preliminary $2,000,000,000 guidance seems a bit optimistic perhaps.

Speaker 4

We want to be careful session We're not giving guidance for 2024 in any way. We're showing the path, the necessary path for the business for us to deliver That 12% operating margin and where those savings would come from. So we're not giving guidance for 2024. We're going to navigate through the next two quarters here. We're going to make the changes that are necessary and investments that are necessary to turn the business back into the growth trajectory that it needs to be And there's a lot of work ahead of us to do that work and then come back to our shareholders and our team with An action plan that can show what those milestones are going to look like.

Speaker 4

So we have work to do on that. We're not giving guidance today, Sam. Session What we're trying to show is the confidence that we have in our profit improvement work and the areas of focus that are going to give us those tools that we need to session will be able to drive the business.

Speaker 3

And I think just to add on to that Sam, I think while we're not giving guidance, I do think As we work through the remaining months of this year, I think our brand teams are laser focused on what the product pipeline looks like for 2024. And the new Both introductions we have this year that we already have confidence in and certainly what we have in the pipeline for next year, whether it's The Moab speed for Merrell, which has shown initials, I guess, out of the gate, continuation of the Agility Peak 5. The Triumph 21 just dropped in session which we're excited about and we've got Ride and Guide 17 coming out for next year. So right now the brand teams with urgency are looking at the product pipeline session to make sure that there is newness and freshness in that innovation pipeline.

Speaker 7

Thank you very much.

Speaker 3

Session. Thank

Operator

you. Our next question comes from the line of Mauricio Serna with UBS. Please proceed with your question.

Speaker 8

Great. Thanks. Good morning and thanks Congratulation, Chris, on the new role. Thank you. I just wanted to ask maybe if you could elaborate a little bit more on when When you're thinking about the outlook for the second half, how should we think about that in terms of DTC versus wholesale?

Speaker 8

And also just for the Q3, interesting to know like what you're expecting for the main brands in terms of revenue growth? And lastly on that, just like also just if you could elaborate more on kind of like the DTC trends you saw across each brand, I mean, brands during

Speaker 4

session. We don't really disclose the D2C trends per se at the brand level, but I would just say that The overall outlook for the full year guidance here is to be down about 10% at the midpoint of that range of revenue session for the business and our B2C channel will be down about 12%. So that includes Sweaty Betty, which actually is performing quite well right now in their direct channels. And so if you just look at our footwork, Our brands are especially our U. S.

Speaker 4

D2C, we'll see a decline in the current year That's in the mid teens. So in line with the overall growth or declines that we're seeing for the business, Our D2C channels have been impacted by the promotional environment for sure. We've tried to be more focused on maintaining our margins and our profit performance in direct to consumer channels. But that's come at the cost of some top line revenue. But again, as Chris mentioned, I think the investment and the right creative content, but also the right new product As we focus on that area as a quicker turnaround area for the business, it's going to be critical as we get into the Q4 and into next year.

Speaker 3

Session. I just want to highlight that the Sweaty Betty business, since we've integrated that into our international group, and we have a new leader in place, there's some really positive synergies happening, I'm finding better efficiencies across the business. At the same time, recent product introductions are checking. So, we're encouraged by the initial

Speaker 4

The other part of your question Mauricio was about wholesale outlook for the full year. So In the U. S. That will be low teens decline in overall in terms of our wholesale businesses globally That will be down closer to 11% or 12%. So we see that as an area of pressure for the business.

Speaker 4

I won't overstate it, But I will say that we've seen a nice improvement over the last 2 or 3 weeks in order trends For the first time in a while, we talked about the challenges that we saw with cancellations and new orders over The previous 10 week period, but starting to see a little bit of green shoot there. So But for sure taking a conservative view of our wholesale trends for the rest of the year and that's resulting in a full year decline in that channel of over 10%.

Speaker 8

Session. Got it. That's very helpful. I just wanted to make sure, because I think you usually provide like top line expectations for each brand in Q3. And also, I don't know if you provided the EBIT margin expectation for the Q3 as well.

Speaker 4

Yes. We provide a lot of that information in our investor presentation that's posted on our site with all the other information we shared today. We didn't put it into our remarks, but it's available there.

Speaker 3

Okay.

Speaker 8

Thank you very much. Thank you.

Operator

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

Speaker 9

Yes. Thanks for taking my questions. On the U. S. Wholesale, so you guys talked about how challenging U.

Speaker 9

S. Wholesale is, and I do find it somewhat interesting on the Revision to the brand guidance, you raised Merrell, you lowered the other brands. So is the takeaway there That U. S. Wholesale is impacting all those brands equally, but Merrell gaining market share and are the other brands Potentially losing market share or are they just getting caught up in the downdraft of U.

Speaker 9

S. Wholesale?

Speaker 4

Now just to clarify maybe what you're looking at, Mitch, the guide for the outlook in the for Merrell is high single digit decline for the

Speaker 6

Oh, I'm sorry.

Speaker 4

Year, which is higher or worse than we had. Session.

Speaker 9

Yes. I'm sorry. I did misread that. So let me re ask the question. Is that I mean, are you guys is it just The macro in U.

Speaker 9

S. Wholesale or do you feel like you guys are I mean, do you think you're holding share in your brands? Or do you think you're losing share?

Speaker 3

Session Yes. I'll answer that question. I'll start with Merrill. Merrill has 10 consecutive months of gaining share in hike. And For the trailing 12 months, we've gained 130 basis points a share.

Speaker 3

The challenge there though is that we have a high category that's currently contracting. But session In my total tenure at Wolverine World Wide, Merrill's never had 10 consecutive months of share gains, and we're encouraged by that. Session. Saucony, on the other hand, is losing share right now, and that's something that we have to address quickly, and we are working to go do session. From a share perspective, Amaro is currently gaining and Saucony is losing a little bit of ground.

Speaker 9

Okay. That's helpful, Chris. And then I guess my second question, session. Maybe for Mike. When I look at the transitory costs in 2023, you said it's $60,000,000 supply chain.

Speaker 9

And I'm guessing that's mostly freight. And is that Are you seeing that this year because of the timing of the inventory? I know other companies You're starting to see some freight benefits this year. Is that all just timing of the inventory? And is it all freight?

Speaker 9

And is that kind of The line of sight that you have to suggest that it goes away next year?

Speaker 4

Yes. Actually almost $50,000,000 of those costs were incurred in 2022, but they were capitalized on the balance sheet along with the inventory, right? So The cost we're talking about are certainly the excess freight and premium freight costs that we incurred in the business. There's a nice table in the earnings release It kind of spells us out a little bit too, Mitch, if you want to refer to that later.

Speaker 3

But,

Speaker 4

these are costs that either were incurred last year or in the 1st part of this year. They're now being expensed through the P and L as we work through the inventory and obviously accelerate the reduction of the inventory. Session. And we are now in contract on ocean rates that are much lower than they were a year ago. Session.

Speaker 4

We have implemented through these profit improvement initiatives other logistics related savings. But as it relates to the transitory costs, yes, They're essentially behind us and just lingering effects in terms of working through the inventory. So as we get into 2024 those will go away. Excess liquidation that we talked about in terms of the level of end of life inventory we had to work through, that's about $20,000,000 of headwinds in $23,000,000 Those costs go back to normal. That's not the total cost of what we incurred.

Speaker 4

That's the incremental cost that we incurred. So both of those things we feel very strongly are behind us and are things that we can plan against in terms of improvements next year.

Speaker 3

All right. Thanks. Good luck. Session. Thanks, Mitch.

Operator

Our next question comes from the line of Abi session is Genex with Piper Sandler. Please proceed with your question. Hi.

Speaker 3

Yes, thanks for taking

Speaker 4

my question. Chris, congrats on the new role. Can you just session. Comment on like your view on like the underlying health of like the main brands. Obviously, I think we understand the soft wholesale, but What's happening in DTC?

Speaker 4

And then I guess what in your view, what are the biggest kind of near term opportunities session to return to growth. Thank you.

Speaker 3

Yes. Sure. Thanks, Abigail. I appreciate that. I think the underlying health of our big brands remains good.

Speaker 3

Session. Brands are coming off of record years in 2022. Certainly, 2023 is a step back and a disappointment as far They're heritage brands with great tradition and strong product pipelines. I think it comes down session. Our ability as an organization to really make a very, very fast pivot to becoming better brand builders and to build More durable, more resilient brands that can weather tough situations.

Speaker 3

Obviously, the current environment when it's exacerbated by a lot of factors, whether it's The overhang of the pandemic and the inventory glut and promotional pricing, whether it's a consumer slowdown, certainly, we're not the only one talk about some level of malaise in the U. S. And we're certainly seeing that. But I think underlying health, one of our greatest assets is our brand portfolio. And certainly at the top of that list are Maryland Saucony.

Speaker 3

And we've got new leadership in place. Session. There is a very heightened sense of the need to move bolder and faster, specifically around continued product innovation, session. But certainly around how we build these brands through modern demand creation. So, every team is working on that, and it's sort of top of mind as we think about the transition

Operator

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

Speaker 5

Yes. Hi. Thanks for taking a couple of follow ups. Just For modeling, Mike, could you walk through the 3rd and 4th quarter outlook, the dip down in revenue that you outlined for the 3rd quarter and then the bounce setback for the Q4, could you just highlight some of the factors that you're embedding there?

Speaker 4

Yes. There's an important shift In our international business between Q3 and Q4, and again, I mentioned in my remarks about the comparison From Q3 to last year that included some significant international revenue from a timing standpoint set that really fell into Q3 and those were abnormal timing. In Q4 this year, We're selling in our spring line into our international distributors much earlier than we normally do or session. Certainly much earlier than a year ago, let's say it that way. And so there's some growth there, but also the benefit of that revenue Kind of lifting the performance of Q4 versus last year to a decline more in the mid single digit range.

Speaker 4

So if you exclude some of the noise or Timing around international, the rest of the business is planned or forecasted to be down about 10% or maybe a little bit higher. And so that's much more consistent with again the normalized trends that we were seeing in Q3. Session. The other factor for us in Q4 is the D2C channel is a much bigger part of the overall business. Sweaty Betty is a big percentage of that as well and that business is a little bit more stable.

Speaker 4

So we get the benefit of A little bit more predictable business in B2C in Q4 versus the other quarters.

Speaker 5

Session. Okay, great. And then just two last ones for me. I just wanted to clarify, I believe the prepared remarks alluded to potential Pricing actions to drive sell through. So could you just more specifically talk about what you were referencing?

Speaker 5

And then into 2024 sort of the path you outlined, What sort of pricing relative to the increases you've taken in the last few years does that assume? And then just Lastly on Sperry, the performance obviously very challenged now for the full year. How does that impact your plans or the Strategic actions that you're contemplating underway for that brand?

Speaker 3

Yes. I'll take that and then Mike can add comments. I I think regarding the pricing one, that's something that we're paying really close attention to what's happening in the marketplace. And what did everyone do sort of In the pandemic coming out of the pandemic and then what's happening today in the marketplace and make sure that our products are properly placed and priced. Session.

Speaker 3

And at the end of the day from a pricing standpoint, it comes down to the power of your brands and then what is your pricing power. So something we spend a lot of time thinking about to make sure that We're both protecting margins at the same time, having goods placed and priced where consumers can engage in them. As it relates to the Sperry transaction, Obviously, we announced the decision to pursue strategic alternatives, a little bit ago. We continue to manage the business and monitor its session. That process is ongoing, but we still plan to pursue those alternatives and certainly do the very best thing for the portfolio session And for the shareholders.

Speaker 4

Importantly on that front, John, we are we should be hitting the market with a formal marketing document in the next couple of weeks. That hasn't transpired yet. And so a much more formal process will be underway. We also have received good, importer feedback from interested parties, who session will obviously know about the process that the process is going to be underway. So we feel good about that.

Speaker 4

It's a very strong brand. We feel that there session. Our strategic alternatives for that business would be around a licensing opportunity or other form session. Business model that could allow us to benefit from, like I said in my remarks, monetizing the working capital of the business And maybe benefiting from the strong brand in the future. So we're looking at all those options, but session.

Speaker 4

We're not down the path quite far enough yet on the sale process to really make a decision on what the best alternative is at this point.

Speaker 5

Okay. Thanks for taking all the questions.

Speaker 3

Thanks, John. Thanks, John. Session.

Operator

And as a quick reminder, we ask that you do limit yourself to one question for follow-up questions. Session. We've asked to limit yourself to one question when we join in the queue for follow-up questions. Our next question comes from The line of Sam Poser with William Trading. Please proceed with your question.

Speaker 7

I just want to follow-up on the conversation about sort of the weakness in wholesale and the weakness In your DTC business and the promotional environment out there, how much of this is the environment And how much is this not having the appropriate stuff that the consumers really, really want right now? And which

Speaker 6

that's the question?

Speaker 3

Yes. It's a fair question. I think session? I don't think it's quite black and white of that. I think it's a shade of gray.

Speaker 3

I think it's a combination of both. I think certainly from an environmental standpoint, there's a lot of set. To the brands to deliver newness and freshness and innovative products that are solving consumers' needs and make sure we've got a pipeline of that ready to go. Session. And I think as we think about where our brands stand today, I think we always need to be very critical of our own product pipeline, and session.

Speaker 3

And sort of hold ourselves accountable for what's in the mix. So we're not standing here today saying, it's just the environment. We're sort of looking deep session into our teams to make sure that we can build durable and resilient brands that can weather these storms. So Sam to answer your question succinctly, I think it's a little bit of both. Session.

Speaker 3

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

Operator

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

Speaker 3

Thanks again everyone for joining us today. It was nice to be with you and the first time in this session look forward to sharing updates with you in the future. As a reminder, Mike and I will be with the analysts having callbacks later this afternoon later this morning. Session. And we're also pleased to be joined by Wolverine's Chairman of the Board, Tom Long.

Speaker 3

So look forward to those calls in a little bit. Thanks everybody. Have a great day.

Operator

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

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STMicroelectronics Q2 2023
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