Lady of Leisure InvestCo Limited (WWW) Earnings Call Transcript & Summary

Greetings and welcome to the Wolverine Worldwide call to discuss the acquisition of women's apparel brand, Sweaty Betty. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Brett Parent, Vice President, Strategy and Investor Relations. Thank you. You may begin.

Good morning and welcome to the call today to discuss Wolverine Worldwide's acquisition of the Sweaty Betty brand. On the call today are Blake Krueger, our Chairman and Chief Executive Officer; Brendan 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 adjusts, for example, for the impacts of environmental and other related costs, net of cost recoveries, acquisition-related costs and costs related to the COVID-19 pandemic. These disclosures were reconciled in tables at the end of the presentation deck. I'd also 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 Worldwide 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 first 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 a few minutes from our European and EMEA headquarters is an additional plus. Mike Stornant will 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 Sweaty 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 Straus to the Wolverine Worldwide 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 billion 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 and 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 on empowering 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 of 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 U.K. market and 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 now 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 brand's portfolio growth -- 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 million. The transaction is expected to be accretive in earnings in year 1. To update the company's fiscal year 2021 outlook, including the impact of the acquisition, we now expect consolidated net sales in the range of $2.44 billion to $2.5 billion compared to the $2.34 billion to $2.4 billion 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 million is attractive with an implied multiple of approximately 16x 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 2.2x. I will now turn the call back over to the operator to open it up for questions. Operator?

[Operator Instructions] Our first questions come from the line of Jim Duffy with Stifel.

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 did the growth trajectory look like pre-COVID? How does the assumed $250 million run rate for '21 compare to '19 as a baseline? And then what regions have been driving the growth? Is the U.K. 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, it's been really strong as it relates to the -- their home base in the U.K. but also as they started to expand into the U.S. market a little bit. So the opportunity there for that continued double-digit growth potential is 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. See -- yes, 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-com 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 store. 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 about.

Yes. Jim, just to add on to that. I mean I get excited about this 3 different ways. One, 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, Merrell. 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 3 of -- any 1 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 of brands.

Our next questions come from the line of Jonathan Komp with Baird.

I guess, first, if you can 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 Sweaty Betty has distinguished itself. It's -- it uses a lot of color, a lot of patterns. It's a lot more exciting, very feminine. Also, the end users 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 U.K. versus globally?

Well, it's clearly much higher in the U.K. I mean that's for sure. But I think it just shows the opportunity to grow their brand worldwide. They've already entered China -- or Hong Kong, I should say, and 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 fifth floor. So they're getting great exposure there. So it's one of the things Julia, Blake and I have spoken about, is quickly leaning into U.S. real estate to add brick-and-mortar in gateway markets, then 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, very positive. The upside growth rates here that we're -- that we've modeled out are very strong, double-digit growth rates because they -- 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 then some of the key markets around the world, including China. Today, the EBITDA margin reflects the investment profile of the business as they've -- in that almost 40% or 40%-plus CAGR over the last several years. And they're investing in these new markets that we referred to, et cetera. So the expansion in EBITDA margin with, I think, the benefit of our centers of excellence and support on the back office side of things is 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 I'm certainly excited about those 2 options.

And that $0.15 to $0.20 for next year, is that incremental to the $0.04 this year? Or is that in total adding to 2022?

That would be in total and factoring in all the other costs related to the deal as well as any integration costs, et cetera.

Our next questions come from the line of Erinn Murphy with Piper Sandler.

Just a couple for me. First, just on the genesis of the conversations with Sweaty Betty and L 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, and 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 L 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 U.K. 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 U.K.?

Yes. 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 talked about just leveraging some of their 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 integrating this 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 stand-alone 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 2 companies unbeknownst to anyone in this process, which shows the connection and relationship there. And I think, first 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, Erinn. We're a $2.5 billion, $2.4 billion company this year. We have leverage and economies of scale that they can immediately take advantage of and, in 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 Walgreens is able to bring. They're like kids and 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. Are you a fan of the brand?

Yes. I have seen it actually. They have really good displays actually in the U.K., at Harrods in particular. So I'd say that's where I've seen it most prominently and well displayed.

Great.

Our next questions come from the line of Mitch Kummetz with Pivotal Research.

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 in this business? Or maybe can you talk about the $100 million over the third and fourth quarters?

Actually, the first 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. But I think what we've seen here is stronger revenue growth -- or stronger revenue performance in the first 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 $250 million. 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 affiliations. 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, a store design and a retail product flow.