Blake’s Take: Q&A With Wolverine’s Blake Krueger

Blake Krueger likes to keep moving.

Speaking by phone from Wolverine World Wide Inc.’s Rockford, Mich., headquarters, the company’s CEO, president and chairman sounded relaxed as he reeled off his travel plans for July and early August: Africa, South America, Central America and then Salt Lake City for the Outdoor Retailer show. “I can’t let my miles slip down,” he joked.

That’s not likely to happen anytime soon. Among the executive’s chief goals is to dramatically expand Wolverine’s overseas sales. Also on his agenda is growing the Merrell brand to $1 billion, doubling the apparel business and continuing to add new names via acquisitions.

The firm has weathered the recession better than other players — second-quarter profits more than doubled, and backlogs were up 38 percent — and Wolverine is expecting more of the same for the rest of the year.

Still, there are some strong headwinds to contend with. Factory shortages and sourcing issues in China have meant longer lead times and will translate into price increases throughout the supply chain. At the same time, the consumer continues to be anxious about spending.

But Kate McShane, an analyst with Citi Investment Research, said Wolverine was well-positioned to deal with the challenges. “What this company is very good at is knowing their strengths and knowing how their brands fit into the channels and with their customers,” she said.

Denise Friend, women’s footwear buyer for Kent, Wash.-based outdoor powerhouse REI, said the firm continues to stand out, in large part due to the strength of the Merrell label, which is a top-three brand for the retailer. “Their fit is great, the cosmetics are great, the shoes perform — they just do it right,” she said. “It’s just massive business for us.”

Elsewhere in the portfolio, Friend is optimistic about Chaco, a brand she said has flourished under Wolverine. “They stayed true to the DNA of that brand while being able to do all the back-end stuff — sourcing, bringing it to market — the things Chaco wasn’t able to do,” she said. “The Chaco opportunity is huge.”

FN: You’ve emerged from the recession better than many companies. Why is that?
BK: First and foremost, we made a decision to protect our brand equity and integrity and not let our brand be discounted. That may have actually cost us some topline sales during the recession. But now we can look around at many brands that [did promote] and we can see it hurt them.

FN: Are you concerned the global recovery is slowing?
BK: I’m just trying to look out at the next 12 to 24 months, and I see gradual improvements. We’re all aware that the macroeconomic news has not been great, whether it’s debt issues with Greece and some of the European Union countries, or the unemployment figures here. But when you strip all that away, footwear is actually one of the best-performing categories around the world. Fortunately for those of us in the industry, it’s a much brighter picture [than in other segments].

FN: How much are fashion trends contributing to the strong performance across the industry?
BK: The trends are clearly at our backs right now. Coming out of the recession, consumers around the world want to focus on brands that are authentic and have some heritage. We’ve had amazing success over the past 12 months with the Wolverine brand. It’s still the authentic workboot in the U.S., but the international markets have been drawn to it because it has a 127-year heritage. It’s real and it stands for something. It’s really growing more on the fashion side than the pure work side internationally. Sebago is benefiting from that same trend and the demand for Americana fashion. The world [equates] Sebago with New England craftsmanship and handsewn heritage.

FN: Merrell also is cashing in on new trends with its minimalist collection for spring ’11. Will you look to incorporate wellness elements into other brands?
BK: You will certainly see more from the brands in our portfolio where it’s appropriate. The Barefoot Collection from -Merrell — which extends from running to casual — is absolutely trend-right. But you’re going to see an expanded Body Shoe collection from Hush Puppies, as well. We’re working on a patented, proprietary comfort technology that is not rocker-bottom but is probably more sophisticated and more effective than the rocker-bottoms you see at retail today.

FN: Do you expect the demand for wellness to continue?
BK: [There is a demand] for products — especially footwear products — that make it easier for people to walk and move. Any footwear that is more comfortable and biomechanically appropriate is going to be consistent with this trend. It’s a macro trend that I don’t see going away.

FN: Footwear is more than 90 percent of your business. Do you plan to diversify?
BK: Our midterm goal is to grow our footwear wholesale business at least two times the rate of the industry. The second leg on our stool is apparel and accessories. Consumers around the world — and our distributors — are inviting our brands to participate in more than just footwear, so we have goals to grow our apparel and accessories business to $150 million. The third leg is retail-controlled distribution, and I use the term “retail” in its broadest sense, not just our own stores but an e-commerce business and a catalog business. And that only accounts for about 7 percent of our reported sales, and our midterm goal is to take that to at least 15 percent.

FN: When do you predict you’ll achieve those goals?
BK: Like any good CEO, I try never to give a number and a date. I’ve made that mistake in the past. [Laughs.] But when I say midterm, I’m looking at two to four years.

FN: How much of your business is in apparel now?
BK: I would say this year, we’re going to be in the 
$30 million-to-$40 million range, with the bulk of it being in Merrell apparel and Wolverine apparel, which is sold primarily here in the U.S. We’ve put the majority of our resources behind Merrell apparel, and we see that — in the near-term and midterm — as the biggest opportunity. We think Merrell apparel is going to be one of the cornerstones of helping us make Merrell our first billion-dollar brand. We’ve also got a test program for Sebago apparel. One thing we’ve learned is that apparel seems to have a slingshot effect on footwear: We see a healthy and significant uptick in footwear sales from those retailers that also carry apparel.

FN: Have you been happy with the progress in Merrell’s apparel business?
BK: We launched Merrell apparel about three years ago, probably at the exact worst time, when retailers were contracting the number of brands they were carrying. But we have forged ahead, and we’ve made great progress just in the last 12 months. Our order backlogs are up significantly. And more important, the apparel is checking out at retail as performing for that very loyal Merrell consumer.

FN: Wolverine does more of its business outside the U.S. than it does domestically, and you’re already in 180 countries. Are there any consumer markets you’re still hoping to grow?
BK: We’ve been in China for years, but we’re looking to expand our presence. India is another country that we’re really focused on now. We’ve had some distributor partners in Russia, and they’re doing an excellent job, but we need to put more resources there so they can accelerate their business. And those are all markets that are growing at a high-single-digit or double-digit pace in their economies.

FN: Are there opportunities for all of your brands, or just selected ones?
BK: We have programs for most of our brands in those countries, but the smaller brands we’re just getting started with — Chaco and Cushe, for example — wouldn’t make the top of the priority list. But those would be key countries and focus areas for brands such as Merrell, Hush Puppies and Sebago.

FN: Will increased overseas retail be part of the plan?
BK: It’s important to recognize that most of our distributors around the world are retailers. They may also be in the wholesale business, but fundamentally, many of them are retailers. So as we sit here today, we have more than 6,200 dedicated points of sale around the world for our brands. We had over 23 percent growth each year over the last six years in the points of distribution around the globe, and we want that to continue. We want to take the number of international doors today and double it with our distributors around the world.

FN: How important are acquisitions to your plan?
BK: We’re actively looking now to add to our brand portfolio. 2009 was a record year of cash generation for our company, something that very few companies can say. So we have plenty of resources, and when we find the right fit, it’s something we will pursue.

I’ve said publicly before that we like brands with some heritage, that stand for something, that are purposeful. That’s the type of business we’re looking at. The one good thing our business model does is, when we acquire a brand, we can let the management and the creative teams focus on their product, their marketing and their sales. We have central infrastructure to serve that brand behind the curtain. It can be sourcing, distribution, logistics, finance, human resources, legal, so they can devote a much higher percentage of their time to the things that are fun and really count with the consumer.

FN: On the manufacturing front, there are a lot of concerns about higher costs in China, as well as labor shortages. What are you doing to adapt to the situation?
The supply chain for us, and for the industry as a whole, is going to have to become more diverse, more flexible, more complicated. And that is going to mean that all companies and the factory owners themselves are going to have to put more resources into it. We saw this coming, so we went out to our retailers and our distributor partners around the world six and nine months ago and asked them to get their orders in early, and [worked with] our own brands to reserve space at the factories.

FN: Are you looking to expand your supply chain into 
areas outside China?
BK: We still operate a factory here in the U.S. — it mostly makes product for the Department of Defense and for our Bates brand — and we also have significant Dominican Republic operations. We are in the process of expanding both of those. And as [our Chinese factories] expand inland and go to Bangladesh and other countries to open operations, we’re working very closely with them. But you also have to remember that last year about 87 percent of all footwear consumed in America came from China. So the infrastructure is largely in China. You may see that come down over time, but you’re not going to see a dramatic [decrease] in that percentage in just a year or two.

FN: You spent last year focusing on cost-cutting. Are you continuing to do that?
BK: We took the opportunity to reset the table. With all businesses over time, there’s always some waste and inefficiencies that creep into your system, and we addressed a lot of those last year. We are seeing the payback now. In key areas, we’re going to continue to up the spend. You already saw it in our first-quarter marketing spend. We have the ability to do that without really increasing our overall [sales, general and administrative expenses].

FN: Part of that restructuring effort involved eliminating about 450 positions. Are you looking to begin hiring again?
BK: When you look at our brand portfolio, we’re leaders. We’re not fashion followers. We’re always looking to come out with something that is fresh and exciting, and that puts a premium on talented product development teams, talented designers and management. So certainly when it comes to product, we will continue to invest in product and product people.




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