Wolverine says consumer shopping behaviour is “evolving dramatically, especially in the US”

Wolverine says consumer shopping behaviour is “evolving dramatically, especially in the US”

Wolverine Worldwide has said it is paramount the US clothing and footwear company evolves to meet and exceed the demands of the new consumer, after it revealed plans to close 140 stores as part of a strategic realignment.

In a bid to accelerate growth and improve overall profitability, the company yesterday (15 July) announced it will close 60 stores by the end of its fiscal, with the balance to close by the end of 2015. Around 75% of these will be Stride Rite stores and a small percentage Trak 'N Trail stores.

Wolverine will also implement organisational and infrastructure changes in a bid to make further savings, and ultimately improve its bottom line.

Consolidating certain consumer-direct functions, specifically store operations and field support teams, to allow for a more effective and efficient management of the retail fleet; and implementing additional organisational and infrastructure changes designed to realise further synergies.

Consumer behaviour
Speaking on the firm's second-quarter earnings call, CEO Blake Krueger told analysts that consumer shopping behaviour is "evolving dramatically, especially in the US".

"Consumers have embraced the ease and convenience of online shopping, a trend that has only accelerated for the last several quarters. Today's consumers demand a sophisticated omni-channel shopping experience and have the available technology to make informed shopping and purchasing decisions.

"As a company, it is paramount that we evolve to meet and exceed the needs and demands of this new consumer."

CFO Don Grimes noted that the market shift in consumer shopping preferences was what led the company to implementing the strategic realignment.

He added "we believe that closing retail locations that do not meet our profitability requirements" will enable the retailer to reduce infrastructure cost and redeploy most of those savings to build the "best-in-class" omni-channel consumer shopping.

Financial effects
The realignment plan is expected to result in annual pre-tax benefits of around US$11m, which will primarily be used to build its omni-channel capabilities and grow wholesale operations.

Drilling down further, Krueger told analysts the firm anticipates reinvesting much of this into e-commerce, mobile, and other omni-channel capabilities and "opportunities intended to enable our consumers to engage with our brands anywhere anytime".

Wolverine, however, is also estimating pre-tax charges in the range of $30m to $37m, which will be recorded between now and the end of fiscal 2015.

As a result, the company has cut its full-year earnings outlook, and now expects earnings of $1.32-1.38 per share, down from its previous guidance of $1.48-1.54. Wolverine also cut its revenue outlook, but cited "continued soft retail environment in the US" as the reason for this. 

Grimes was unable to give an exact forecast on the impact the realignment plan would have on revenues.

"A lot of it is sort of fluid. The number of stores to be closed at the number of this year will negatively impact 2015 reported revenue but obviously held profitability for the course on those savings that we don't reinvest in other areas of the business, and then the closures that occurred during the course or at the end of 2015 will have an impact on 2016 revenue."

The CFO said Wolverine will have more details of the impact on revenues as it moves forward, but added "clearly a very positive impact on profitability both from the avoidance of four wall operating losses on the stores that are losing money, as well as the efficiencies that we can gain and the supporting infrastructure."

Margin squeeze
During the second quarter, Wolverine saw earnings and sales increase, but a narrowing of gross margin - down to 40.1% from 41% in the prior year, due to increased promotional activity.

Despite this, Grimes told analysts he was confident of modest margin expansion for the full year.

"[The] second quarter was tough due to this kind of promotional activity at retail. We do believe that the product cost exceeding the benefit from selling prices increases in [the] second quarter with one quarter kind of a timing issue.

"We'll also get the benefit in the second half of the year of the closure late last year of our Dominican Republic facilities that we referenced as having an annualised benefit of about $4.5m. So that benefit will start flowing through cost of sales in the back half of this fiscal year.

"Those are all things that lead us to believe that when all is said and done, without giving you specific gross margin commentary on [the] third quarter versus [the] fourth quarter, that will deliver very modestly your gross margin expansion recovering from negative position year-to-date."

Further restructuring
Finally, questioned on whether the business saw any other "lingering pockets of unprofitable revenue to target in the future", Krueger said Wolverine was confident it had "captured most of the low-hanging fruit".

"There are always further future efficiencies you can generate but most of the low-hanging fruits been taken care of."

Grimes added: "As we cycle through this store closure, there is no significant pocket of the business that is money losing, that we think, okay, once we get to the retail structuring that we're going to do this in 2016, but no one can predict the future for sure."

Click here to read our initial coverage of the cuts.