M&A Announcement

Aug 3, 2021

Greetings, and welcome to the Wolverine Worldwide Call to discuss acquisition of women's apparel brand, Sweaty Betty. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brett Parent, Vice President of Strategy and Investor Relations. Thank you. You may begin. Good morning, and welcome to the call today to discuss Wolverine World Wide's acquisition of the Sweaty Betty brand. On the call today are Blake Krieger, our Chairman and Chief Executive Officer Brennan Hoffman, our President and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we issued a release announcing the company's acquisition of Sweaty Betty. The release is 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 news release sent to you directly, please call Allison Malkin at 203-682-8225. In addition to the release, we also posted a presentation deck on our website for your reference, supporting much of this morning's comments. Comments made during today's call include non GAAP disclosures, which adjust, for example, for the impact of environmental and other related costs, net of cost recoveries, acquisition related costs and costs related to the COVID-nineteen pandemic. These disclosures were reconciled in tables at the end of the presentation deck. 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 2021 and beyond, 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 Blake Krueger. Thanks, Brett. Good morning, everyone, and thanks for joining us on short notice this morning. We're very excited to share that Wolverine World Wide has completed the acquisition of Sweaty Betty, an incredible high growth women's active and lifestyle apparel brand that will further boost the company's growth potential, bring a host of strategic competencies to our combined organization and deliver financial accretion in the 1st 12 months. As you know, we take a very disciplined approach to acquisitions and Sweaty Betty checks off all of our strategic criteria. The brand offers a spectrum of growth opportunities in line with the tailwinds of prevailing consumer trends, especially in performance product category. Sweaty Betty's strength in direct to consumer channel also aligns perfectly with our focus here. Sweaty Betty is a unique opportunity and a wonderful strategic fit for our company. I'm especially excited about the global potential As Sweaty Betty is a vertically integrated brand and brings what I call a complete package that will quickly provide market leadership in a key segment for many of our global partners. The brand comes with a proven store design and concept, a tremendous online business with a wealth of digital assets and a DTC retail product flow. The fact that Sweaty Betty is located in London, only provide additional detail on the transaction and its impact on our financial expectations in a few minutes. But first, Brendan Hoffman will share further insight on Sweti Betty and the valuable strategic advantages resulting from its addition to our portfolio. Brendan? Thanks, Blake. Our leadership team could not be more excited about adding the Sweaty Betty brand and its extremely talented team led by Julia Strauss to the Wolverine World Wide family. Sweaty Betty is a disruptive fast growing brand in the enviable premium women's activewear market. The total addressable global activewear market Represents over $200,000,000,000 in revenue and is currently growing mid to high single digits with accelerated growth in key international markets. Sweaty Betty's core market focused on the premium women's activewear segment is growing even faster, approaching double digit. This market segment is benefiting from several established macro trends, including consumer focus on health and wellness and casualization, which have helped spur accelerated growth for Merrell, Saucony and several of our other brands and are expected to continue. There is also an ongoing trend towards more premium product incorporating higher quality materials, cutting edge innovation and design and sustainability. The Confluence of all these powerful trends is contributing to Sweaty Betty's accelerated growth. And Sweaty Betty is taking market share within its competitive set, growing much faster than its core market. Since it was founded just over 20 years ago in London, Sweaty Betty has grown through a differentiated brand position distinctive product offering. The brand designs and develops high quality and innovative women's activewear incorporating exceptional fit and fashion forward patterns and colors. Sweaty Betty is an authentic purpose led brand focused powering women through fitness and beyond through its social media channels, in store experiences, classes and events, charitable causes and more. Importantly, Sweaty Betty has brought this compelling combination of brand and product directly to consumers, fueling much of its growth through DTC, with over 80% of its business in DTC channels, a significant majority of this in e commerce. The team has invested in its digital capabilities and is driving impressive engagement online with its consumers, further strengthening our portfolio's digital competencies. The brand has developed a thoughtful and influential footprint of wholesale distribution as well with select partners like Nordstrom here in the U. S. This game plan has produced a highly relevant brand with strong brand equity and an aspirational passionate consumer. Sweaty Betty's net promoter score with consumers is well above market average in applicable markets. In addition, the Sweaty Betty consumer skews more affluent, spends considerably more on activewear than competitors' consumers and has a higher intent to purchase the brand in the future. Sweaty Betty has incredibly strong foothold in its home UK market It has only begun to accelerate its growth in key markets like the U. S. And China. This gives us the opportunity to leverage our robust U. S. Presence and infrastructure to support Sweaty Betty's growth here and as Blake stated, to utilize our global network of regional teams and partners to support expansion around the world. We also believe several of our brands will leverage the team's apparel expertise. Sweaty Betty has nailed design, fit and materialization in one of the fastest growing apparel categories in the market. And we believe many of our brands, Merrell and Saucony in particular will benefit from these capabilities. With this acquisition, we have simultaneously strengthened our Our brand's portfolio's growth profile improved Sweaty Betty's already robust prospects for growth and significantly bolstered our strategic competencies, all while adding a tremendously talented team to the organization. Today, we have an even bigger performance business and a bigger DTC and e commerce business. With that, I will hand it over to Mike to provide some of the financial details of the transaction and its impact. Mike? Thanks, Brendan. First, I would like to echo Blake and Brendan's excitement. Our team has been diligent in our review of this opportunity for several months And we are incredibly impressed with the Sweaty Betty team and the business' bright future. As Brendan mentioned, Sweaty Betty has recently generated considerable sales growth and EBITDA margin expansion. Revenue for the stub period of August through September is expected to be approximately $100,000,000 The transaction is expected to be accretive in earnings in year 1. To update the company's fiscal year 2020 outlook, including the impact of the acquisition, we now expect consolidated net sales in the range of $2,440,000,000 to $2,500,000,000 compared to the $2,340,000,000 to 2,400,000,000 pre acquisition outlook shared last week during our earnings call. We now expect adjusted earnings per share of $2.24 to $2.34 an increase of $0.04 compared to last week's outlook. We believe the enterprise value of approximately $410,000,000 is attractive, with an implied multiple of approximately 16 times estimated 2021 adjusted EBITDA. Due to our very healthy balance sheet, our strong cash flow generation and the incremental EBITDA contribution during the stub period, We now expect year end net leverage as defined by the company's credit facility to be less than 2.2 times. I will now turn the call back over to the operator to open it up for questions. Operator? Thank you. We will now be conducting a question and answer Thank you. Our first questions come from the line of Jim Duffy with Stifel, please proceed with your questions. Well, thank you. Good morning, everyone. Congratulations to the team on this deal. Congratulations to the Sweaty Betty team as well. Can you guys help us some with the revenue history here? It's difficult to Tell historical growth rates from the slides, what does the growth trajectory look like pre COVID? How does the assumed $250,000,000 run rate for 2021 compared to 2019 as a baseline. And What regions have been driving the growth? Is the UK business still growing? Just give us a feel for the growth composition. Yes. The growth rate on this business has been really strong double digits for the last 4 years or so, Jim. And We're in 2021, we're seeing over 35% growth versus the 2019 baseline. So It's been a strong acceleration. And I would say pre COVID, we saw those Trends begin and as far as the regional growth is concerned, that really strong as it relates to their home base in the UK, but also as they started to Into the U. S. Market a little bit. So the opportunity there for that continued double digit growth potential It's quite strong and obviously part of the reason we've pursued this opportunity. And if you guys had to List in terms of your order of excitement, the growth opportunities for the business, How would you start that list? Well, I personally give this a 9.37, I guess. So That's high on my excitement list for sure. I see high. When you look at The international opportunity and for example, our own markets and distributor markets around the world, Sweaty Betty really kind of comes with a complete package, right? Vertically integrated, proven store design And financial impact, 70% of their business is e comm and digital and they have tremendous digital assets. And most importantly, their product flow is on a DTC basis, a continuous flow of product to their stores. So this brand grew up dialoguing with their consumers every day, dealing with their directly with their consumers every day. So We think the category opportunity is special and certainly the management team is terrific And the growth for this brand around the world, especially with our help, we're very excited Yes. Jim, just add on to that. I mean, I get excited about this 3 different ways. 1, if we were just the financial sponsor of Sweaty Betty, we love the trajectory they're on. They've more than doubled their business since 2019. So to that alone, there we think it's a great value. Then you add, as Blake said, what we can lean in to help them on, whether it's adding footwear to their assortment, whether it's helping them in the U. S. Reenter the market from a brick and mortar standpoint, and of course, our expertise around the world. And then, maybe last but certainly not least, what they're going to do to us in terms of leveraging their apparel expertise on our brands. We mentioned it's Saucony, Merrill, I will tell you my Keds team has already reached out. Can we talk to them about apparel? Likewise, they're digitally native and digitally first Mindset and the way they message the customer flow product, as Blake said, and collect data and utilize that data. So I think All three of any one of those things would make this a great deal. Combined, I think as Blake said, it's a 10. Great. That's exciting guys. Last one, Mike, should we assume given the direct to consumer nature of the model that it's gross margin accretive? It is, yes, very high gross margin and I'd add even higher than the strong rates we're seeing in our existing portfolio brands. Excellent. I'll let someone else jump in. Thank you, guys. Thanks, Jim. Thank you. Our next questions come from the line of Jonathan Komp with Baird. Please proceed with your questions. Yes. Hi. Thank you. I guess first, if you could maybe just expand a little bit more. When you look at the competitive set of some of the larger global peers, maybe just more on What you view as the key differentiators for Sweaty Betty versus some of those? And then I don't know if you're willing to share or have metrics around Brand awareness or market share in the home market versus some of the newer markets like the U. S. Or in Asia? Yes. I think when you talk about the big competitor in this space, I think Swaty Betty has distinguished itself. It uses a lot of color, a lot of patterns. It's a lot more exciting, very feminine. Also the end uses are different. They have Ski, they have swim, they have biking. So I think there's a lot of different ways. And then I think the other piece, We're really excited with their whole management team, including their Chief Product Officer, who joins them from a couple of years back from the contemporary market and you can see that in the way they've evolved their product to be beyond just performance activewear, but to be more lifestyle, which we think Nails the way the trends are moving with everyone going back to work, but still wanting to stay very comfortable. So I think there's a lot of ways this brand differentiates itself. And any perspective on awareness or market share levels in the UK versus globally? Well, it's clearly much higher in the UK. I mean, that's for sure. But I think it just shows the opportunity to grow the brand worldwide. They've already entered China or Hong Kong, I should say, in Singapore with some stores. They used to be here in the U. S. In gateway markets. And quite frankly, They took advantage of the pandemic and negotiated out of those leases. So the opportunity to start with a blank slate now, with a brand that has established itself here in the U. S. Through e commerce and also the strategic partnership I mentioned with Nordstrom. And I was in the New York City Nordstrom store yesterday and they have the best space on the 5th floor. So they're getting great exposure there. So it's one of the things Julie, Blake and I have spoken about is Quickly leaning into U. S. Real estate to add brick and mortar in gateway markets and supercharge the overall direct to consumer business. Okay, great. And then any thoughts to providing some framework how we should think about longer term sales opportunity or growth rates and The EBITDA profitability that we should expect for this business? Yes. I think the outlook for the brand is, as I said Before very positive, the upside growth rates here that we've modeled out are very strong double digit growth rates because We see the opportunities that Brendan just mentioned, the new markets that they're entering certainly here in the U. S. Where we think there's a tremendous opportunity and in some of their key markets around the world, including China. Today, the EBITDA margin reflects the investment profile of the business as they've Seen that almost 40% or 40% plus CAGR over the last several years. And they're investing in these new markets that we referred to, etcetera. So the expansion in EBITDA margin was I think the benefit of our centers of excellence and support on the back office side of things It's definitely there, John. Our outlook for next year, for instance, would be for that EBITDA margin to improve. We would expect EPS benefit on the accretion side to be at least $0.15 maybe as high as $0.20 next year. So And that's still with a very strong investment profile in the overhead structure, but really, really healthy gross margin for this business and great potential for growth and certainly excited about those two options. And that $0.15 to $0.20 for next year, is that Incremental to the $0.04 this year, is that in total adding to 2020? That would be in total and factoring in all the other costs related to the deal as well as any integration costs, etcetera. Okay. Thanks for taking all the questions. Thank you. Thank you. Our next question has come from the line of Erinn Murphy with Piper Sandler. Please proceed with your questions. Great. Thanks. Good morning. Just a couple for me. First, just on the genesis of the conversations with Swadhi Betty and Elle Catterton. Can you just share a little bit more about how Competitive the process was, who else was at the table and maybe just how long this has been in the works? It was a fair go ahead, Blake. I mean, it's a brand we've been looking at for several years. It's always had our interest. The new management team starting about 3 years ago Really changed the trajectory of the business for the better. Al Catterton, I assume ran a robust process and we felt very fortunate to come out The winner. Certainly, the management team was rooting for us. Yes. Great. No, that's good to hear. And then just on I was looking at Slide 15 and it looks like the NPS score in the UK is lower than that of the U. S. Could you just share why you think that is just given the dominance that the brand already has in the UK? We'll have to get back to you on that. I don't have a quick answer on the comparative there. We just Overall, we're very impressed with their net promoter scores around the world. Okay, got it. And then maybe just a little bit more in your prepared remarks, you About just leveraging some of the capabilities with Merrell and Saucony. If you think about women's in particular, Can you just I know it's very early days given that this just closed yesterday, but kind of how you're thinking about Rating, that's within the portfolio and anything else we need to be mindful of on the supply chain as well. Well, I think the nice thing here is this was a Standalone business yesterday and it's not a carve out like we've done in the past. So there's the luxury of time to Figure out how to do it strategically. And Blake mentioned that there are already collaborations going on between the two companies unbeknownst to anyone in this process, which shows the connection and relationship there. And I think 1st and foremost, we want to see how they can lean in, as I mentioned, With apparel in the brands I mentioned, and how we can help them with footwear. And then there are just some obvious things, Aaron, where we're $2,400,000,000 company this year. We have a leverage in economies of scale that they can immediately take Advantage of and talking to Julia and her team, being able to relate, as you know, my background coming from a mono brand of about that size, the luxury of having A infrastructure like Wolverine is able to bring. They're like kids in candy shop just looking to see what can we leverage on to within our global operations group. So I'm going over next week to spend time with the team and start that process of the onboarding and the back and forth collaboration. That's great. Thanks so much. Are you a fan of the brand? Yes. I have seen it actually they have really good Blaze actually in the UK at Harrods in particular. So I'd say that's where I've seen it most prominently in welded blades. Great. Thank you. Our next question has come from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question. Yes, thanks. Could you maybe speak to the seasonality? I guess I'm a little surprised the stub period isn't higher. I would have just thought that Q4 would be an outsized quarter. So is there really no seasonality of this business or maybe can you talk about the $100,000,000 over the 3rd and 4th quarters? Actually the 1st part of the year is a little stronger period for this particular for the brand. I wouldn't say it's highly seasonal business per se, I think what we've seen here is stronger revenue growth or stronger revenue performance in the 1st 6 or 7 months of the year. And I think that's reflected in the overall mix that we shared. Okay. That's helpful. And then But $250,000,000 that obviously they're doing this deal. What are their biggest needs and what is it that you guys Really bring to the table, is it systems analytics, kind of how do you see that? Yes. I would say it's all the backroom operations that you listed, but I think it's our U. S. Expertise, quite honestly, and how strong our brands are here in the United States and Our connections and our business affiliation and then especially on the international front, it's the global potential here. They can bring kind of a complete package to our international distributors and that's something that very few brands can with digital assets, store design and retail product flow. And Blake and I are already getting notes from our partners around the world how excited they are about this. Okay. And then I guess lastly, I don't know if it was in the I didn't see it in the slides or the press release, but You mentioned the opportunity to add a real estate. Can you tell us what the store footprint looks like and kind of what the geographical What is of that? Is it primarily in the UK? Right now, it's almost exclusively the UK. They have a couple of stores in Hong Kong and Singapore, but I it's about 65 stores in the UK, but the opportunity to do it here in the U. S, again, they were here in the right locations. They just Really high occupancy costs given when they had entered into those stores. So Julia and the team did an amazing job negotiating their ways out and Clearing the decks for us and now to be able to go back and we all know there's lots of vacancy out there and I've already got hit up from a couple of the big landlords wanting to chat. I think there'll be no lack of opportunities at great opportunistic pro formas for both us And the landlords. Okay. All right. Thanks, guys. Good luck. Thank you. Our next question has come from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your questions. Good morning and congratulations on the acquisition. As you think about Sweaty Betty and its women's offering, obviously compared to The men's stuff that you guys have, the apparel merchant expertise, how are they staffed, any additions or Enhancements that you look at making there, when do you see category expansion into footwear coming into play? And then how would you differentiate Sweaty Betty with Lululemon? How do you think of the difference between the 2? Thank you. Yes. Well, as I mentioned, we've been really impressed with the team we've met and we've met we've gone pretty deep into the organization. Their Head of Product, as I mentioned, came from the contemporary world. So she's already skewing them, expanding their Elasticity into more of a lifestyle brand, which we think is wonderful. What were the other? Yes. I mean, on the differentiation point, I would say Dana, that it always comes down to product, product, product, right? And if you look at their fit, their graphics, their design, their colors, their expansion, they're Obviously in bottoms, but that's been expanded over the years to mid layers and outerwear and bras and tops, A pretty spectacular product line and a great product team. That they think is multi Sport, not just yoga. You know that as we've gone through with them, they have run, they have cycling, they have ski, they have swim. So I think it's more robust than Lulus. Got it. And as you think about the geographic expansion, what are you most excited about? I saw they launched on Tmall this past year. How do you see their Geographic expansion growing. Again, I mentioned the U. S. Is an obvious one because of their e commerce strength and the As I just mentioned, to expand brick and mortar, which we know will supercharge their e commerce business. Excited that they've put their toe into China And we're a few years ahead of them with our Saucony and Merrell JVs. So we will look there to See how we can help accelerate that. And then again, around the world, Blake's mentioned our history with partners around the world and our expertise there. And As I just mentioned, we're already starting to get notes from our partners around the world with their enthusiasm for what Sweaty Betty can mean. Terrific. And just lastly, where do they source most of their product? Asia, Southeast Asia. Thank you. Thanks, Dana. Thanks. Thank you. Our next question has come from the line of Susan Anderson with B. Riley. Please proceed with your questions. Hi, good morning. Congratulations on the acquisition. I wanted to maybe follow-up on the margins. I think you said the gross margin was accretive. I think just based on the math, maybe the EBITDA is a little bit lower than what you're forecasting for your core this year. So I'm assuming SG and A is A bit higher percent. So I'm curious if maybe that can come down closer towards your average or are you expecting to spend a little bit more as you ramp The brand and maybe ramp up marketing there? Yes, I think it's absolutely in an investment mode right now, Susan. But you characterized it correctly that The gross margins are very strong. It's an affluent higher priced product, which is Helpful to the gross margin in a digital or a direct vertical model. And the SG and A investments right now are around these emerging markets And driving brand awareness in those new markets as well as just adding the team and resources necessary to catch up to the growth that's happening in the business. So Yes. We would expect over time that that would normalize closer to our normal op margin rates. But right now, given the growth profile of the business, we like the investment efforts that we're making there. Great. Thanks. And then just on the product offerings, it sounds like Sweaty Betty already has Kind of a whole host of product offerings that maybe there's opportunity. I think footwear is highlighted in your presentation. Maybe if you could talk about just a timeline Potentially of rolling out some more product offerings. And then also not sure if I missed this, but your thoughts around the mix of digital to retail to wholesale longer term. Yes, I would say on the product offerings, I think some of that will occur fairly quickly next year, Probably more on the collaboration front versus standalone Sweaty Betty footwear line, for example. So the collaboration opportunities across Merrell, Saucony and a few of our other brands are pretty dramatic. And what was the 2nd part of the mix? I think the mix in the direct to consumer and digital components of that. Yes, I think we're thrilled that they're so dominant in DTC and led by e commerce. As I've said a few times, And then here in the U. S, we're thrilled with the strategic partnership they have with Nordstrom and Just got a text from a senior executive at Nordstrom saying how they feel they are with the partnership. So I think they are very well situated in the multiple channels. Great. Thank you. Thank you. Our next question My question and congrats on the acquisition. Mike, I have a couple of questions here on the guidance for EPS, dollars 0.04 Which I think would imply about $4,000,000 of EBIT on $100,000,000 of revenues. I think that would obviously imply 4% operating margin. Is that right way to think about it. And why does the transaction multiple apply a 10% EBITDA margin? Is there that much DNA that we should Center for this business? No, there's some additional costs in that $0.04 guidance including the interest costs and some of the integration costs we're going to incur this year. But no, your assumption about operating margin or EBITDA margin at that 10% range plus is accurate Laurent. Thank you. For the 4th sense, it includes some of those incremental costs that we're incurring as part of the deal. Okay. That's helpful. And then slides, Appreciate the slides. Slides 813 would imply that your stores represent about 10% of revenue. So simple math, right, dollars 25,000,000 across 65 stores. Can you talk about the sales density of these stores? I mean, are they small format? Are there is there an opportunity to Prove the margin in that business because maybe it's because of COVID, any thoughts on the store Yes. I mean, Lauren, I mean, I think the last thing, I mean, COVID has obviously reduced the productivity of these stores. But I think the square footage, they've done a great job being very efficient with the square footage, having seen the ones in the U. S. And pictures of the ones in the UK. I think they've nailed the format and as people start getting back out into stores, we'll see that number Dramatically increased. So very comfortable and very impressed with how they are rolling out their store footprint. Very helpful. And then last question, I think going back to last week's call, I think it was talked about that next year we should anticipate double digit growth. I think you called out during the Q and A session that that's organic. Is that still the right way to think about it that the Sweaty Betty acquisition would be added to that? That's correct. That's right. Yes. Okay. Thank you very much and best of luck. Thanks, Lauren. Thank you. Our next question has come from the line of Jay Sole with UBS. Please proceed with your questions. Hi, good morning. This is Mauricio Serna on behalf of J. Soul. Thanks for taking my question. The first thing I just wanted to understand, if you could Provide a little bit of context on the sales growth implied given this year's forecast versus 2019 2020, I just wanted to confirm those numbers. And just thinking about the way you're going to roll out The brand in U. S. And abroad, will that continue to be very focused on direct to consumer? And if that is the case, will that be like more through stores or E commerce, just trying to understand that. Thank you. Yes. On the growth rate, again, against the 2019 base, growth is over 120% in that 2 year stack. So really healthy growth. I think on the international front, Virtually all of our international distributors, for example, operate a DTC business. They may have some very Solid wholesale businesses in their countries and markets, but fundamentally, they're a store and digital DTC driven operation. So an opportunity like Sweaty Betty is really exciting for them. Okay. And then in terms of very quickly on operating margin opportunities, I mean, is there like a Target that you guys have in mind. I mean, I know you didn't disclose the operating margin, but even on an EBITDA margin basis, any thoughts on that? We haven't stated a target. I mean, again, we're continuing we see the investment kind of profile of this business right To be where it should be, we're going to continue to fuel that and support that. And we would expect over time that like with the rest of our portfolio, the benefits of our operating model and our back office support structure will benefit the contribution that The Sweaty Betty business can make to the portfolio. It's well positioned to do that. It's a standalone business that's not going to Acquire a high degree of integration effort or cost over the next 12 to 18 months. There's just a lot of Opportunities for that team now to be able to focus on growing the business and for us here at the company to support them in doing that. Okay. Thank you and congratulations. Thank you. Thanks. Thank you. There are no further questions at this time. Would like to turn the call back over to management for any closing remarks. On behalf of Wolverine World Wide, I'd like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until September 3, 2021. Thank you and have a good day. Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.