Wolverine World Wide Executive Insights: Backlog, Gross Margin Contraction

On Tuesday, Wolverine World Wide (NYSE:WWW) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.


Jim Duffy – Stifel Nicolaus: Four questions for your guys. I imagine you knew this question was coming, but Blake, I believe you said orders up at a strong double-digit pace, is that representative of what would have (been) backlog number?

Blake W. Krueger – Chairman, CEO and President: Not really Jim. As we’ve said the last couple of quarters, we did a pretty detailed study as to whether backlog was more or less of a predictor on our sales results and frankly over the last three of four years it’s been increasingly more volatile, less of a good predictor. So we just thought we ought to let you know that the pace of incoming orders, future and at-once, was up a very strong double-digits in the quarter.

Jim Duffy – Stifel Nicolaus: And then big picture question here, from the (appearance of the) headline numbers for Qs one and two it looks like a base business that’s slowing. The presumption in the investment community by some is that PLG becomes your vehicle for growth, yet the commentary on certain brand suggests otherwise. Is there anything you can do at the corporate level to kind of disaggregate the impact from hangover of a warm winter and European headwinds to represent a trajectory of the base business otherwise?

Donald T. Grimes – SVP, CFO and Treasurer: It’s frankly a little bit difficult. Europe is probably choppier and more volatile than we probably thought at the beginning of this year. It’s clearly having an impact on our businesses and the industry and frankly a lot of other industries. I would say that we develop plans every year to grow each one of our brands and businesses and it’s one of the key advantages of having a portfolio of 12, soon to be 16 brands. We’ve got preliminary plans in place to grow the PLG businesses as well as our own. We joke a little bit internally here that we’re not sure which is going to be our first billion-dollar brand, Merrell or Sperry, but that’s a good internal challenge to have at the Company. But certainly in markets like the USA, which has remained pretty robust for footwear and so the spillover effect from Europe on to USA for our industry has not yet been that negative. We’ll see what the future holds, but currently it’s pretty robust here in the United States. If you look at how our brands performed in the quarter and how we expect them to perform for the remainder of the year it’s going to be a key growth opportunity for us and it’s going to be across the whole portfolio; whether it’s Cushe, whether it’s Wolverine number one position in the USA, whether it’s Cat Footwear, whether it’s Merrell who had an outstanding Q2 here in the USA which is their largest business. We are pretty upbeat despite some of the macroeconomic choppiness.

Donald T. Grimes – SVP, CFO and Treasurer: Jim, I’ll say that we are not letting certain short-term region specific economic challenges whether it’s the macro challenges in Europe or the issues with one of our largest customers in Canada that has mitigated some of our growth in the first two quarters of the year. And again to go back to, we are comparing ourselves this year to two quarters last year in which revenue growth was 16% and 20%. But we are not letting some of those short-term factors make us believe and we don’t want anyone else listening to call (led to) believe that we don’t have significant growth opportunities in our current 12 brand portfolio. We expect to get meaningful growth from the four brands that we are going to be acquiring latter in the year. We saw plenty of organic growth opportunities in the brands that we currently have.

Jim Duffy – Stifel Nicolaus: Don could you share what growth for just the U.S. business as a whole was during the quarter?

Donald T. Grimes – SVP, CFO and Treasurer: It was high single digits.

Jim Duffy – Stifel Nicolaus: Then last question related to PLG. I believe you were initially talking about a July 31 close, you’re now talking late September, what is the current expectations for PLG’s earnings contribution in ’12?

Donald T. Grimes – SVP, CFO and Treasurer: Well, when we announced that on May 1, I think, that was a disconnect, but we talked about a close in late summer to early fall. The earnings accretion numbers that we were using was based on a 7/31 close, which would had been the thought at one point where we knew is or I guess probably a few days before the May 1 announcement date, that we were probably looking at maybe a late summer early fall close. We did say on May 1 that we expected excluding non-recurring deal cost and integration cost that we incurred in 2012 that PLG would have a minimal contribution plus or minus to 2012 EPS and we are not updating that today, so that would be still – stand by and will be set on May 1.

Gross Margin Contraction

Taposh Bari – Jefferies & Co: I wanted to ask about I guess the gross margin contraction in the quarter, surprised that the winter from two quarters ago now is still playing a role in the second quarter margin. I understand that you cleared inventories, but can you just give us a sense of whether this is the end of the collateral damage from last year’s winter or is there still a possibility of seeing some more – or gross margin contraction in the coming quarters and the event that you can clear some of the inventory?

Donald T. Grimes – SVP, CFO and Treasurer: As you know I’m sure we have closeout sales every quarter, we did have incremental closeout sales and at a lower gross margin in this year’s Q2 than last year, I would say that a part of the closeout sales, incremental closeout sales that we had Q2 was related to the hangover effect of the last fall winter, but not completely and I would say to use your term, we were through the collateral damage in terms of closeout sales and negative gross margin impact from last fall/winter, having said that, we do have closeout sales every quarter.

Taposh Bari – Jefferies & Co: I guess, maybe if I ask the question in other way, can you help as usually, Don, kind of decompose the gross margin contraction amongst closeouts versus costs et cetera?

Donald T. Grimes – SVP, CFO and Treasurer: Sure. Pricing contributed, our selling price increases was about 300 basis points of a benefit to gross margin, more than offset by higher product cost of that 320 basis points. We have the FX contract gains that helps gross margin by about 50 basis points and then we had a pretty significant, more significant than normal kind of negative mix impact, sales mix which was represented by the higher closeout sales at lower gross margin and a slightly negative mix in our volume direct business towards customers that had lower margin than other customers so the biggest components of the negative sales mix was the higher closeout sales at lower gross margin that was about 200 basis points of gross margin contraction.

Taposh Bari – Jefferies & Co: Okay and then within the closeouts, I mean how would you breakout, de facto of winter versus the steep buying within that 200 basis points is kind of 50-50 or more environmentally rated?

Blake W. Krueger – Chairman, CEO and President: I don’t have the figures in from of me. I would say our Q2 normal closeouts were consistent with prior years and the remainder was probably attributable to some leftover cold weather product and winter product.

Taposh Bari – Jefferies & Co: That’s helpful. The other question I have is, just for the rates to gross margins, Don you had mentioned that you are expecting gross margins to be up in the balance of the year, is that individually for 3Q and 4Q or in aggregate and how does that outlook compare to kind of what you are expecting as of last quarter particularly for the second half of the year.

Donald T. Grimes – SVP, CFO and Treasurer: I’d say it is consistent with our previous outlook. We are not giving gross margin guidance by quarter, we are trying to be helpful by giving you some revenue and EPS guidance for Q3, but we do expect gross margin in Q3 and Q4 combined to be up versus the prior year leading to the full-year guidance of gross margin to be modestly down versus prior year and on a year-to-date basis our gross margin is down 110 basis points. So we expect improvement on that over the balance of the year.