Wolverine Steps Over Down Times

June 23, 2008
| By Pete Daly |
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ROCKFORD — Rising energy costs worldwide, a weaker U.S. dollar overseas, increased costs of labor and materials in China, timid consumers here at home …

But Blake W. Krueger isn't too worried about Wolverine World Wide, one of the world's major marketers of footwear, even though China is the primary source for the $1.199 billion worth of shoes it sold last year.

"I've been around the company for three decades now," said Krueger, president and CEO. "I've seen a lot of ups and downs in our industry; I've seen a lot of ups and downs in the economic environment of the world. I'm pretty optimistic (that) we are going to be able to come out of our current situation."

The first quarter of this year marked the 23rd in a row for record revenues at Wolverine. In 2007, its earnings per share increased over the prior year by more than 15 percent, to $1.70. (In mid-June, the stock was selling for about $27.50.)

But Krueger said last week he could not predict if the second quarter of 2008 will be the 24th record quarter in a row. Results will be reported July 9, he said.

Krueger said that "obviously" the high energy costs are "having a real impact" on the footwear industry — "like almost every other industry" — and on consumers around the world, too.

Wolverine's primary response to energy costs, he said, is to look for opportunities for greater efficiency in its vast supply chain. Wolverine’s strength lies in its business model, he said, describing it as "multi-brand, multi-country, multi-consumer groups" — and even a "kind of multi-distribution channel."

"It really mitigates against risk," he said. "(It) enables us to perform well in a variety of different economic environments, including the tougher times we are currently experiencing in the U.S.A."

While many other companies are relative newcomers to the global marketplace, Wolverine has been international since 1959, when it took its one-year-old Hush Puppies brand to the European market — "an unusual move at the time," he noted. "That's given us a 30-, 40-year head start on the competition," he said.

Wolverine brands are now sold in about 200 countries and territories around the world, which, in the current economic environment, Krueger said, has served the company in good stead. In the first quarter of 2008, about 70 percent of Wolverine's profits were generated outside the U.S.

What's happening in China has a huge impact on the footwear industry. Krueger said that in 1980 half the shoes used in America were made in America. "Last year, that was less than 1 percent."

More than 85 percent of the shoes consumed in America last year were made in China. China supplies about 65 percent of all shoes sold in the world today.

The phenomenal economic growth in China in the last several years is now marked by "quite substantial" increases in costs in China for labor, food, energy and more.

"That's having an impact on anything made in China, especially on the footwear industry, where we are going to see increased prices for product," he said.

In 2008, Wolverine has managed to keep its price increases to a range of 3 to 5 percent, but many other companies are raising prices by double digits.

Compounding the increased costs within China is the drop in value of the U.S. dollar against the Chinese yuan, which overall has been a drop of about 20 percent in the last 18 to 24 months, he said. Of course, that makes Chinese-made goods sold here more expensive, but it is good for factories in the U.S. that supply markets overseas.

Critics claim China keeps its currency artificially low to help boost exports. The Wall Street Journal reported last week that Congress will "undoubtedly" force the next president to continue urging the Chinese to allow their currency to appreciate.

In view of what he calls "the rocket ship" of the Chinese economy, "I can't say necessarily that they've had any unfair currency practices against the rest of the world," said Krueger. "I'm not surprised by the current strengthening of the Chinese yuan against the U.S. dollar and other international currencies."

Wolverine tries to reduce that pricing pressure in several ways, said Krueger. One is to keep its sourcing network flexible as to where shoes or materials are coming from. A second method is a "keen focus on product engineering" to take costs out of the shoe.

From time to time, Wolverine does increase prices on select products, carefully watching the market response.

Merrell is the company's hottest brand, especially in Europe. Merrell was once known for its leather hiking boots popular among youthful backpackers a generation ago. Wolverine bought Merrell around 1998, said Krueger, when it was about a $26 million business.

"Merrell will be about a $450 million business for this year," said Krueger.

"We believe Merrell is going be our first billion-dollar brand," he said, of the eight brands Wolverine currently has.

How soon?

"Obviously, not soon enough for me," he said with a laugh. "Sometime in the near future," he added.

"We are a very international company," he said. "Our people have a high degree of international acumen.

"We may have a tough year in a particular country, or may be experiencing tougher times in the U.S.A. right now, but our footwear is on fire in places like Chile, Russia, Japan, Hong Kong and many other countries around the world."

While the U.S. is still Wolverine's largest market overall, the company has a great advantage being spread out around the world.

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