WWW - NYSE

Greetings. Welcome to the Wolverine Worldwide Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to your host, Alex Wiseman, Vice President of Finance. You may begin.

Good morning, and welcome to our second quarter 2023 conference call. On the call today are Tom Long, Chairman of the Board; Chris Hufnagel, President and Chief Executive Officer; and Mike Stornant, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the second quarter 2023. The press release is available on many news sites and can be viewed on our corporate Web site at wolverineworldwide.com. This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures were reconciled to the more comparable GAAP financial measures in attached tables within the body of the release. 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 2023, 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 Tom Long.

Thank you for joining today's call. Before the team discusses earnings, I'd like to address the leadership transition we announced today. Effective immediately, the Board has appointed Chris Hufnagel to succeed Brendan Hoffman as CEO of Wolverine Worldwide. The Board recognizes that Wolverine Worldwide needs to deliver improved financial performance, and the company must evolve to build brands that ignite consumer desire. We must ensure that everything we do begins with our product design, our brands, and the people that buy them. This can't merely be words; we have to develop the business systems, the management routines, and the consumer insights that drive excellence from the very top. We also must ensure that everything we do begins with our customers. Accordingly, the Board has taken decisive action to appoint a CEO who brings the experience and leadership required to put the company on the right course. A few words on Chris' background, Chris has been an effective leader throughout his long tenure at Wolverine Worldwide, including as Global Brand President of the company's Active Group, which includes our two largest brands, Merrell and Saucony. Chris has covered almost every area of this company in increasingly dynamic leadership roles. And he also has extensive leadership experience in prior roles at Under Armour, The Gap, and Abercrombie & Fitch. The Board elevated Chris to CEO for a few main reasons. Most importantly, he knows how to build brands, which is essential for our success. He's a decisive, high-energy leader who displays good judgment and a willingness to embrace change. Be brings a demonstrative playbook that the Board believes in from his prior strategic roles; a clear view of what needs to be improved now. Two specific examples help capture Chris' contributions to Wolverine over the years, and they speak to our confidence in his ability to lead the company. First, Chris led our first ever consumer insights market intelligence team that drives customer obsession every day. I expect Chris to bring this operating philosophy to the entire business, building the focus on excellence in execution from the very top. Second, as Merrell brand president from 2021 to 2022, Chris led the brand to back-to-back all-time record revenues, while more than doubling our ecommerce business. As a result of these successes and many others, Chris has built a large and loyal following inside Wolverine Worldwide, and with the Board, and we are confident he will operate with urgency and focus for our shareholders. To our shareholders, it's not secret that our results have disappointed recently. However, we continue to believe that Wolverine Worldwide can deliver strong financial performance and attractive shareholder returns under the right leadership. We have no time to spare, and that's why we're announcing this change today. With that, I'll turn the call over to Chris Hufnagel, our Chief Executive Officer.

Thank you, Tom. Good morning, everyone. I am Chris Hufnagel, and I'm pleased to join you on this call as Wolverine Worldwide's new President and Chief Executive Officer. I would like to express my appreciation to Tom Long and the Board of Directors for their vote of confidence in me for this new assignment, a role I am honored to take. I would also like to thank my colleagues from across the entire organization for their hard work and support for me over the past 15 years. I'm ready for this next chapter in our company's 140-year story, and excited to work together to navigate this challenging time, and position our brands and company for success in the future. Before getting into the numbers and our path forward, I want to briefly introduce myself to you. Prior to joining Wolverine Worldwide, I was fortunate to work for some amazing brands, including Under Armour, The Gap, and Abercrombie & Fitch, and to be mentored by some truly great leaders; leaders who obsess daily about brand, product, and their consumers. Since joining Wolverine, I have developed an intimate knowledge of the company, our brands, our processes, our people, our partners, and the industry. I understand both the challenges and opportunities facing Wolverine today, and ready to move with pace to strengthen our footing and ultimately deliver better results for our shareholders. Drawing on my experiences, and more importantly, levering our talented teams, I firmly believe we have the playbook and capabilities that can get this company back on track. I have hit the ground running, and excited about the work ahead. From my very first call with you, let me start with what matters most on our journey to create shareholder value; brands. Wolverine Worldwide must transform to become a great builder of brands. I believe great brands do three things extraordinarily well day in and day out. First, they build awesome products, innovative, trend-right, priced right, covetable products informed by deep insights that solve for consumers' wants and needs. Second, great brands tell amazing stories; differentiated, meaningful stories and experiences that meet their consumers when and where they want to be met. Modern brands must also engage in an ongoing push-pull relationship with their consumers. Third and finally, great brands have great teams driving the business each and every day, a constant and relentless pursuit to build and protect their brand, and to be better tomorrow than today. This is the new brand-building model for Wolverine Worldwide, a model and playbook we've put into practice at CAT Footwear and Merrell, which drove those brands to new heights. And we'll now implement this playbook across the portfolio, leading to a repeatable pattern of success. Turning to the company's current position, while I'm excited about the future, our financial update this morning is well short of expectations. Mike Stornant will cover the most recent quarter's results and the contributors of the updated outlook in more detail shortly. But we've seen softness in the marketplace and headwinds impacting the business that we now expect to continue to the second-half of the year. We expect these headwinds to abate over the coming quarters as consumers move past current economic uncertainties, inventories become cleaner at retail, post-COVID trends normalize, and we lapse tough comparisons. Despite the current situation and the near-term outlook, I believe we have a strong foundation in place at Wolverine today, with industry-leading authentic brands loved around the world, yet I know they have yet to reach their full potential. Within our Active Group, Merrell, Saucony, and Sweaty Betty are poised to benefit from long-term secular trends in big, attractive markets. Moreover, we have category-leading brands in areas, like work, where Wolverine and Caterpillar own about 20% of domestic market share, and generate strong, consistent returns. At the same time, Wolverine benefits from strong global platforms, a great global operations group, amazing partners, and corporate centers of excellence that allow our brands to focus on their consumers, products, and demand creation. Finally, we have a great team dedicated to our consumers, our brands, and each other. I believe we have a significant opportunity in front of us, and I'm confident in our ability to generate long-term growth, profitability, and shareholder value. But to deliver on that promise we need to take bolder and faster actions. Over the last 18 months, Wolverine has taken several important steps as we reposition to company. While not all these actions are benefiting our results today, the seeds are planted to drive meaningful change and improvements across the organization over the next several quarters. To quickly highlight our actions in motion, we're effectively getting our inventories back in line. I'm pleased to report that at the end of the quarter we're $25 million lower than we expected to be, and are on track to achieve a $225 million reduction in inventory, versus 2022, by year-end. Our Profit Improvement Office, designed to free capacity for increased investments in our brands, is on track to deliver its goals for 2023, along with our targeted full-year savings in 2024. Critical enterprise-wide tools and process initiatives, specifically end-to-end planning and product line management are on schedule, and will allow us to be both more accurate and more agile in managing our business. On the brand front, several of Merrell's new launches into hike and trail running are seeing positive traction. And I'm pleased to report Merrell is gaining market share in the important hike category for each of the past 10 months. Saucony is seeing early signs of strong product acceptance for recent introductions, specifically the Triumph 21, and Savior also seeing a halo effect for other styles within the assortment. Encouragingly, Sweaty Betty preformed better than we expected in the most recent quarter, and saw a positive response to the new product introductions. We've also accelerated our integration for the brand, and that work is yielding both better synergies and cost efficiencies. Finally, we have new leaders in our three key growth brands; Merrell, Saucony, and Sweaty Betty, all consumer-centric thought leaders. I'm excited about working together with these new leaders. They bring deep experience and passion for their teams and results along with a strong sense of urgency. We've also initiated other critical efforts to transform our portfolio in global operations to have a more focused approach, targeting our biggest opportunities while streamlining our organization to be more agile and efficient. Key steps we've taken include the sale of Keds, the licensing of Hush Puppies in North America, and the decision to pursue strategic alternative for Sperry and the Wolverine Leathers Group, a more strategic, integrated, and efficient approach to managing our business. To this end, this week, we announced the consolidation of our U.S. offices, including the closure of our Boston campus at year-end. This decision will drive increased collaboration across our teams and accelerate the sharing of best practices across the organization, including the implementation of the brand-building playbook. I'm excited to have all our footwear brands under one roof in the near-future. On the operations front, we're actioning a more strategic, long-term approach to our global supply chain, working with the best partners to drive improved reliability, costing, efficiency, transparency, and agility, ultimately making our supply chain a competitive advantage for our brands and partners. I would like to make it clear that we're not starting over. We have a good, sound strategy in place. We have a proven scalable playbook, authentic brands, and amazing talent. The recent challenges have only made it clear that we need to move faster and be bolder to achieve our fullest potential. As we navigate the current challenges, our focus must be to stabilize the financial footing of the company, which we are making progress on each day while also finding capacity to reinvest in our brands. And ultimately, reallocate resources to realign our competencies to become better brand builders. Focus on consumer obsession, product innovation, and modern demand creation. Despite the near-term challenges, we have a plan in place to advance our strategic priorities, deleverage the balance sheet, and maintain capacity to invest in building our brands. We remain confident in our ability to return to a 12% operating margin in a variety of economic backdrops and have a line of sight to achieving this target in 2024. Mike will walk you through a bridge here shortly on how we see this playing out over the next 18 months. But before I hand the call over to Mike, I want to emphasize three points that I hope you take away about our framework to drive shareholder value. I am excited about this new opportunity to lead the organization with a proven playbook in hand that we leveraged across our entire business with a team ready to execute. We are attacking the critical issues that face our company. And we are well-positioned to capitalize on any opportunities we have in front of us all through a commitment to being bolder and faster. Gradual improvement will not be sufficient. We have an actionable pragmatic in place to advance strategic priorities, deleverage the balance sheet, and maintain capacity to invest in building our key growth brands while accounting for the challenges we face. We look forward to sharing more updates with you on our progress in the coming months. Now, over to Mike Stornant, our Executive Vice President and Chief Financial Officer, Mike?

Thanks, Chris, and thank you all for joining the call. Let me start by briefly recapping the second quarter financial highlights. I will then cover some of the challenging trends that have impacted our revised outlook. And the important work we are doing to drive significant profit improvement and debt pay down over the coming months. Second quarter revenue for our ongoing business of $578 million was in line with our outlook, and down 14% from last year. Adjusted gross margin of 39% was below our expectation. In the second of the quarter, we saw a decline in full-price sales to our U.S. wholesale customers as they cautiously tightened their open-to-buy to manage inventory. These full-price sales were replaced with lower gross margin shipments to international distributors. In addition, we accelerated the liquidation of end-of-life inventory at lower than planned prices which negatively impacted gross margin, but helped us to drive inventory levels down by $25 million more than planned. Recall that Q2 gross margin includes the negative impact of $20 million of transitory supply chain cost. These costs will decline in the back half of the year and will not recur in 2024. Adjusted operating margin was 5.8%. The strong cost management offsetting the shortfall in gross profit reported operating margin was 7.8%. Adjusted diluted earnings per share for the quarter were $0.19, in line with our guidance. Our reported diluted earnings per share was $0.30. Inventory for the ongoing business was $648 million, up 7% compared to the last year, and down nearly $100 million compared to Q4 2022. We ended the quarter with net debt of $930 million, liquidity of $370 million, and a bank-defined leverage ratio of 3.5 times. Now, let me transition to our 2023 outlook for the full-year. Our guidance reflects the expected performance of our ongoing business, which excludes the full-year projections of Keds and Wolverine Leathers and adjust for the licensing transition for Hush Puppies in the second-half of the year. We continue to evaluate strategic alternatives with Sperry. And those results remain in our outlook for 2023. Since May, Sperry's revenue outlook has declined $55 million and operating profit has declined nearly $25 million. Like many other companies in our industry, we continue to see softness in our U.S. and European footwear wholesale businesses as retailers remain cautious. Our May guidance did not contemplate the increase in order cancellations or the decline in new orders that have been experienced over the last 10 weeks. These factors have negatively impacted our current wholesale selling by approximately $90 million for the second-half of the year. During that same time, U.S. D2C trends declined more than expected. Finally, we are seeing some reduction in demand from our certain third-party distributed for the back half of the year as they adjusted a lower consumer demand in their markets and also manage inventory. We are now assuming that these most recent trends will continue for the remainder of this year. And we are therefore, taking a more conservative approach to our 2023 revenue outlook. This approach will allow us to limit inventory risk and achieve our yearend inventory target for $520 million, setting fiscal 2024 up for cleaner trading, more capacity to flow, new product innovation, and less pressure on gross margin from off-price sales. A revised outlook for revenue from our ongoing business is now expected in the range of $2.26 billion to $2.28 billion. Adjusted gross margin is expected to be approximately 40%, down from our previous guidance of 42%. The decline is a result of lower Q2 performance described earlier, a lower mix of footwear D2C sales in the overall mix, and lower revenue now expected in our full-price channels. We continue to evaluate pricing actions that could help drive stronger retail sell-through over the coming months. Please recall that the gross margin outlook includes $70 million of transitory cost and approximately $20 million of excess inventory liquidation cost. Combined, these costs represent 400 basis points of annual gross margin pressure that will not recur next year. Adjusted selling, general, and administrative expenses are now projected to be 35% of sales. And adjusted operating margin is expected to be approximately 5%. Adjusted diluted earnings per share is expected to be in the range of $0.45 to $0.55. Yearend inventory is still expected to improve by approximately $225 million compared to the prior year. Operating free cash flow is now expected to be in the range of $80 million to $100 million. In addition, we are currently pursuing the sale of certain non-core assets for at least $50 million, and expect these to be completed over the coming months. Including the proceeds from these asset sales, we expect yearend net debt to approximately $850 million. And bank-defined debt leverage to be approximately 3 times. Now, let me provide our outlook for the third quarter. We expect revenues of approximately $515 million. Down 21% compared to last year. In 2022, shipments to third-party distributors in Q3 were abnormally high by approximately $50 million due to a shift in timing. So, on a more normalized comparison, projected Q3 revenue is down about 14%. We expect adjusted gross margin of approximately 42% including $12 million of transitory supply chain expenses expected in the quarter. Adjusted diluted earnings per share is expected in the range of $0.05 to $0.10. This outlook reflects trends experienced in July and the expectation that they will continue through the quarter. Finally, let me provide you insight into the near-term improvements we now expect in the business. We remain very confident in our ability to significantly improve our profit and performance in 2024 while we pay down debt to more normal levels over the next six quarters. During 2023, we will recognize $90 million of transitory supply chain and incremental inventory liquidation cost that will not recur in 2024. The profit improvement office started in November of 2022, has secured approximately $70 million of savings for 2023. And we have line of sight to an incremental $130 million in savings for 2024, now yielding a four-year run rate of $200 million. Our confidence to deliver these full-year benefits is based on the following. $135 million is the annualized benefit from 2023 actions already secured in supply chain and indirect cost areas. $35 million relates directly to the next phase of rightsizing the organization in line with a smaller portfolio and the accelerated work Chris explained earlier. $30 million is related to further supply chain and gross margin initiatives that have been identified and are expected to be secured in the next six months. As a result of the significant cost improvements, the company is on a solid path to 12% operating margin while creating capacity to reinvest a portion of these savings into brand building and best-in-class marketing capabilities, especially for Merrell and Saucony. We are pleased to share further details of this profit improvement roadmap, and have added a page to our Investor Relations presentation summarizing the components. In addition to the projected profit improvements just discussed, we expect further inventory improvement in 2024 driven by tighter SKU management and an enhanced operations planning system. Due to these operational efficiencies and ongoing deleverage efforts; we would project net debt below $700 million by the end of next year. If accomplished, the benefit to our annual interest expense would be $10 million to $15 million. These projections do not contemplate the benefit of proceeds from a sale of Sperry or other strategic alternatives that might result in the monetization of Sperry's working capital. In conclusion, we continue to navigate a tough environment, and make fundamental improvements to the business along the way. The more challenging outlook has accelerated our work to improve the financial strength of the company and further clarified our priorities and opportunities. Profit improvement and inventory initiatives are on track, and we are creating capacity to invest in our highest priorities in 2024. Thank you to the entire Wolverine team for their ongoing commitment to the changes we are driving at the company. On a personal note, I want to congratulate Chris, someone I've worked with closely over the years. He possesses the experiences and the passion needed to lead our global team to be bolder and faster. I look forward to supporting Chris and this important work. And I'll now turn the call back over to him for closing comments.

Thank you, Mike. And thanks again to everyone for joining us today. But before we open the Q&A, I also want to personally thank everyone at Wolverine Worldwide and our partners around the world for all your hard work to date, and the good, important work to come. I look forward to working with you in the days ahead. Let's go. Operator, please open the line for questions.

Thank you. At this time, we will now begin the question-and-answer portion of the call with our host, Chris Hufnagel and Mike Stornant available to answer your questions. [Operator Instructions] Our first question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Yes, hi, good morning, and thank you. Mike, I want to just to start with a financial question. Could you just clarify, in know in the press release the guidance is for your bank-defined leverage to reach approximately three times by year-end. Could you just clarify that calculation, any factors you're getting credit for above and beyond just the normal profitability? And then how do you see the leverage ratio trending into the first-half of next year?

Yes, thanks, Jon. The bank-defined leverage calculation gives us credit for some of the transitory costs and unusual costs that are embedded in the GAAP results, so we're able to adjust out some of those costs to benefit that. We also had obviously in the quarter some improvement in recoveries and some insurance recoveries related to the litigation and some other areas related to the remediation that also benefit the calculation. So, those are some of the non-GAAP adjustments. In addition, we stated the intention to sell off some assets that are non-core assets to the company. Those are reflected in the guidance for the year-end leverage targets and net debt targets. As we cycle into 2024 and start to see the full benefit of the profit improvement initiatives, and then at the -- the transitory costs that begin to fall off early in 2024, in the first quarter, we would expect to see an increase in the trailing 12-month EBITDA calculation from those benefits, and just a healthier business overall. Obviously, lower debt position given the lower inventory at the end of the year and the other deleverage activities that we're promoting. So, we'd expect, after the end of the year, that the leverage rates would continue to improve going into the first-half of next year.

Thanks for walking through that. Maybe one other just broader question, I'm curious, I want to ask in terms of your broader forecasting processes and capabilities are you planning to make any changes given the outcome this year? And as you talk about a 12% operating margin target for 2024, just I want to ask your broader thoughts of it, whether that's the right approach in a current environment that's very dynamic and hard to predict? And related to the 12% target, are you accounting for any hangover from the liquidations and inventory you've had to move this year or any factors such as continued softness in ordering patterns into spring? Thanks again.

Sure. On the latter part, I think the approach that we've taken, and again we provided a lot of detail in the materials about the operating margin bridge focused on today's outlook, the view on gross margin, and the impact that we've taken in related to monetizing excess inventory and the costs associated with that, a baseline of revenue that's really this year's realized outlook, so about $2 billion of revenue without the inclusion of Sperry in that bridge that we provided. So, as it relates to the assumptions and how we build our model to 12% is sort of based on that baseline. Realizing that we've had a significant impact this year in our gross margin on selling off excess inventory, we're confident then in taking the extra actions to make sure that the inventory at the end of the year is high-quality, and clean, and we won't have a hangover of excess inventory. And that's our plan, that's our intention, that's our expectation. So, I think it's safe to say that we can see these transitory costs and these excess inventory liquidation costs go away once we cycle through the year. As it relates to your bigger question on planning, it's well taken. I think our process today really takes advantage of the benefits we've had in the past related to our outlook on backlog, the trends in the business. But one of the challenges, I think, that we saw this year especially as it relates to our revenue plans, were the -- it was a pretty dramatic shift in trend that we saw, maybe in mid-May, early-June, they really started to impact our business. We're highly dependant on the wholesale channel for our brands, especially in the U.S. market; it's over 40% of our total revenue that's just in U.S. wholesale. Our U.S.-dependent revenue is over 55% when you include our D2C channel. So, we are very dependent on this market, and obviously this is one of the more challenged markets in our industry today. We saw declining trends, as I mentioned in my remarks, with both really accelerated cancellations, well beyond what we'd expect during a timeframe that we've navigated over the last 10 or 12 weeks. The level of new orders coming in really stalled. We saw very little new order activity for a period of time over that same time period. So, hard to predict those types of trends or challenges in the process, but I think we recognize we need to be more persistent and more frequent in our assessment of some of those trends and risks, and that's a process that we've already addressed in the company. And we will continue to be, I think, more focused on the results in our direct-to-consumer channels, and things that we can do to influence those channels as we move forward. But resetting where we are today, giving a more realistic outlook in the back-half of the year, something that we feel is properly conservative to reset the situation in the business and set ourselves up, like I said in my comments, to make sure that we do what we need to do to clean the pipeline of inventory at retail, give ourselves a clean inventory position at the end of the year, and set ourselves up for 2024 with a cleaner baseline and benchmark for the business.

Okay, thank you.

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Thank you, good morning. Congratulations to you, Chris. I think you've got a good skill set and temperament for the role. You are not, however, stepping into an easy situation. I have two questions, the first for you, Chris. I recognize some of the challenges related to the environment, but if you're being honest about the missteps of the company that brought you here, not just in 2023, but looking back further at a high level, where did it go wrong, and what are going to do differently going forward?

Yes, first, thanks, Jim. I appreciate the comment. It's a great question, and I think we've spent a lot of time thinking about that internally. And I do think it's a combination of some longstanding issues that were exacerbated in the pandemic, and then certainly some challenges as we manage the business through the pandemic. Hopefully in my prepared remarks, it came through clearly that I think we have to be great brand builders. And we have to find a flywheel of building great products and generating brand heat which allow our brands to yield pricing power and consumer demand which will ultimately build resilient and durable brands. And right now, we have not done that across the portfolio. So, for me, it really starts with brands, it's where I grew up; it's what I care most about. And that starts with a deep insight about our consumer and the marketplace, and then a strong product innovation engine, coupled with the ability to drive demand, and then thoughtful brand management and channel management after that. I think, for a long time, we've been very good operators and made product and sold to someone else. And I think the world changed, and we need to quickly catch up to that. As it relates to issues coming out of the pandemic in more recent memory, we walked ourselves into a pretty significant inventory issue with a lot of other brands, and we're working to extricate ourselves from that, and we're sort of caught in that maelstrom right now, and having a heavy dependence on the U.S. wholesale market exacerbates that. So, I can assure that, internally, and certainly with the Board of Directors, we've thought a lot about where the company has been, and where the company sits today, and where we want to go in the future. And I think our strategy is sound. We've done a lot of work around portfolio rationalization, we've got great improvements coming out of our profit improvement initiatives, we're consolidating offices. There is a scalable playbook that we own that has proven to work. For us, now it comes down to pace and urgency, and faster and bolder execution against that agenda. So, your comments are well taken. We take those to heart. And I'm excited to get after with the team.

Excellent. Thanks, Chris. Mike, question for you on the inventory, just how do you plan to move the inventory with $250 million less sales? And then if we're thinking about comparisons into 2024, what is off-price going to represent as a percent of '23 revenues? And how is it you're not concerned at all that inventory in the channel isn't a headwind to your revenues in 2024?

I think the selling of most of the off-price product, Jim, has occurred already, and certainly was heavier in the first-half of the year. We have some pressure in Q3, but in terms of the marketplace of -- with our retailers, we feel like we can see that dissipating or normalizing either over the next couple of quarters. The inventory that we have today remains in the core inventory, and we have heavier coverage in some of our core styles today than maybe we would like, but I think the quality of the inventory is quite good. And we continue to manage -- I think the ability to manage the inventory levels down to our original targets has less to do with higher level of liquidation and more to do with how we manage the pipeline of inbound inventory here in the back-half of the year. We were very cautious about that. Lead times are shorter than they were before, and we have a little more flexibility to manage the inbound. So, the inventory targets that we're achieving despite the lower revenue is really from the standpoint of being able to manage our open to file a bit more tightly. This year, our end-of-life inventory sales will probably approach mid teens, which his a bit higher, obviously, than normal. It's more typical for us to see that in our wholesale channels to see that closer to 8% to 10%. But at the same time, the margin on those sales was quite a bit lower than what we would normally expect. That's why we think there'll be a nice margin lift in 2024, when we are not anniversarying that type of volume. So, in short, I feel that the quality and the level of inventories should improve significantly. We expect them to improve significantly by the end of the year, which gives us more confidence that we're not going to be lapping some of these challenges.

Versus the mid teens, what's a normalized level of off-price for the business?

Probably 8% or so.

Okay, thank you, Mike.

Thanks, Jim.

Our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Thank you for taking my questions. Chris, my congratulations as well. Okay, let's go here. Moving closing Boston office, moving to Rockford, how many people coming, what does that mean for talent retention and acquisition? And number two, not related to that at all, given the way the wholesale accounts are writing orders right now, and given that spring orders, I believe, are due as we speak, to get to your numbers next year, the first-half of the year is probably still going to be very tough. And then you're going to look for, from a revenue perspective, recovery in the back-half. But this whole sort of stuff doesn't necessarily happen in a vacuum, it happens because -- it's tough for everybody, but it's tougher for others when they don't have like go-to, must-have product. So, what are you doing to get the must-have product to get the consumers to want to buy through our D2C, and more -- and as importantly for your wholesale accounts to step up?

Sure, I'll take a swing at that. I'll start with the Boston office closure; certainly a decision that we took very seriously. I was in Boston, this past Tuesday, to make that announcement. I think we fundamentally think that ultimately having all of our footwear brands under one roof, here in Rockford, is the right decision for the company. The ability to find synergies, share best practices, use common tools, implement a consistent playbook I think makes a lot of sense. At the same time, the Boston office, as we've done the portfolio work, that the need for that campus sort of came down as we manage through the portfolio. We are planning to maintain a creative hub in Boston because we realize that Boston, there's a tremendous amount of talent. And especially as we think about our brands going forward, our ability to recruit and retain and have great homes for amazing product designers, developers, and marketers is really important, and we recognize Boston is an epicenter for that, so -- and we are excited about the -- of the opening of a hub in Boston. I'll let Mike talk a little bit about the wholesale business. I will talk a little bit about new product introductions though. It is critically important to us and for our key brands to maintain enough open-to-buy in the current inventory situation to bring newness. And where and when we've been able to deliver newness to the market, whether it's on our own channels or in our wholesale partners, we are seeing traction. So, as we navigate through the inventory situation, I think brands that can innovate and deliver newness and freshness to the consumers are going to win, and that is top of mind for our brand teams as we think about navigating both the near and the mid-term.

I think the trends too that you're asking about, Sam, you're absolutely right. We've obviously reflected that in a much more conservative outlook for the back-half of the year. We're not going to expect those trends to reverse immediately in the first part of 2024. So, the approach we're taking here on all fronts, in terms of operations planning, working capital management, inventory planning and certainly the profit improvement work that we're doing I think is really paramount right now as we bridge from now until we get into the back-half of 2024, to continue to be able to deliver positive results both from a profit and a leverage standpoint, but also create the capacity that Chris is talking about. I think as we pivot immediately to our brands and the investments in marketing and marketing capabilities that we need in the business and brand-building capabilities in the business, we can't wait until the back-half of 2024 to do that. So, luckily, we have started this work much earlier than maybe we've needed it. And we're on track to overdeliver the profit improvements this year, and have accelerated the urgency of that into next year. And we'll be pulling forward some of the initiatives that were slated for '24 into 2023 so that we give ourselves absolute capacity and room to not only grow and invest, but also to create that better result for the shareholders in the first-half of '24.

Well, I understand. What I'm really talking about is the top line though because, I mean, you sort of to get to the $2 billion in revenue next year you've got to expect a significant acceleration in sales in the back-half of next year. And what -- I could see that happening through your D2C coming out with the right product, but given the retailers to take a big enough bite of the apple to really make that happen within this preliminary $2 billion guidance seems a bit optimistic perhaps?

Yes, want to be careful that we're not giving guidance for 2024 in any way. We're showing the path -- the necessary path for the business for us to deliver that 12% operating margin, and where those savings would come from. So, we're not giving, quote, guidance for '24, we're going to navigate through the next two quarters here. We're going to make the changes that are necessary and investments that are necessary to turn the business back into the growth trajectory that it needs to be on. And there is a lot of work ahead of us to do that work, and then come back to our shareholders and our team with an action plan that can show what those milestones are going to look like. So, we have work to do on that. We're not giving guidance today, Sam. What we're trying to show is the confidence that we have in our profit improvement work and the areas of focus that are going to give us those tools that we need to be able to drive the business.

And I think just to add on to that, Sam. I think while we're not giving guidance, I do think as we work through the remaining months of this year I think our brand teams are laser-focused on what the product pipeline looks like for 2024. And the new introductions -- both some introductions we have this year that we already have confidence in, and certainly what we have in the pipeline for next year, whether it's -- Moab Speed for Merrell, which has shown initials, I guess, out of the gate, continuation of the Agility Peak 5, the Triumph 21 just dropped in Saucony, which we're excited about, and we've got Ride and Guide 17s coming out for next year. So, right now, the brand teams, with urgency, are looking at the product pipeline to make sure that there is newness and freshness in that innovation pipeline.

Thank you very much.

Thanks, Sam.

Our next question comes from the line of Mauricio Serna with UBS. Please proceed with your question.

Great, thanks. Good morning, and thanks for taking my question. Congratulations, Chris, on the new role.

Thank you.

I just wanted to ask maybe if you could elaborate a little bit more on when you're thinking about the outlook for the second-half, how should we think about that in terms of the D2C versus wholesale, and also just for the Q3, interesting to know what you're expecting for main brands in terms of revenue growth? And lastly on that, also just if you could elaborate more on the D2C trends you saw across each brand -- the main brands during the quarter, that would be super helpful?

We don't really disclose the D2C trends, per say, at the brand level. But I would just say that the overall outlook for the full-year guidance here is to be down about 10% at the midpoint of that range in revenue for the business. And our D2C channel will be down about 12%. So, that includes Sweaty Betty, which actually is performing quite well right now in their direct channels. And so, if you just look at our footwear brands or especially our U.S. D2C, we'll see a decline in the current year that's in the mid teens, so, in line with the overall growth or declines that we're seeing for the business. Our D2C channels have been impacted by the promotional environment for sure. We've tried to be more focused on maintaining our margins and our profit performance into direct-to-consumer channels, but that's come at the cost of some top line revenue. But again as Chris mentioned, I think the investment and the right creative content but also the right new product, as we focus on that area as a quicker turnaround area for the business, is going to be critical as we get into the fourth quarter and into next year.

I just want to highlight that the Sweaty Betty business, since we've integrated that into our international group and we have a new leader in place, there are some really positive synergies happening, finding better efficiencies across the business. At the same time, recent product introductions are checking. So, we're encouraged by the initial results out of Sweaty Betty.

The other part of your question, Mauricio, was about wholesale outlook for the full-year. So, in the U.S., it'll be low teens decline. And overall in terms of our wholesale businesses globally, it'll be down closer to 11% or 12%. So, we see that as an area of pressure for the business. I won't overstate it, but I will say that we've seen a nice improvement over the last two or three weeks in order trends for the first time in a while. We talked about the challenges that we saw with cancellations and new orders over the previous 10-week period, but starting to see a little bit of green shoot there. So, but for sure, taking a conservative view of our wholesale trends for the rest of the year, and that's resulting in a full-year decline in that channel of over 10%.

Got it, that's very helpful. And just wanted to make sure, because I think you usually provide top line expectations for each brand in Q3. And also, I don't know if you provided the EBIT margin expectation for the third quarter as well?

Yes, we provide a lot of that information in our Investor Presentation that's posted on our site. All the other information we share today, we didn't put it into our remarks, but it's available there.

Okay, thank you very much, and congrats again.

Thank you.

Thanks.

Our next question comes from the line of Mitch Kummetz with Seaport Global Securities. Please proceed with your question.

Yes, thanks for taking my questions. On the U.S. wholesale, so you guys talked about how challenging U.S. wholesale is. And I do find it somewhat interesting on the revisions to the brand guidance; you raised Merrell, you lowered the other brands. So, is the takeaway there that U.S. wholesale is impacting all those brands equally but Merrell is gaining market share? And are the other brands potentially losing market share or are they just getting caught up in the downdraft of U.S. wholesale?

No, and just to clarify, maybe what you're looking at, Mitch, that the guide for the outlook for Merrell is high single-digit decline for the --

Oh, I'm sorry --

-- which is higher or worse than we had --

Yes, I'm sorry, I did misread that. So, let me re-ask the question. Are you guys -- is it just the macro and U.S. wholesale or do you feel like you guys are -- do you think you're holding share on your brands or do you think you're losing share?

Yes, I'll answer that question, and I'll start with Merrell. Merrell has 10 consecutive months of gaining share in hike. And for the trailing 12 months, we've gained 130 basis points of share. The challenge there though is that we have a hike category that's currently contracting. But in my total tenure at Wolverine Worldwide, Merrell has never had 10 consecutive months of share gains, and we're encouraged by that. Saucony, on the other hand, is losing share right now, and that's something that we have to address quickly and we are working to go do that. But from a share perspective, Merrell is currently gaining and Saucony is losing a little bit of ground.

Okay, that's helpful, Chris. And then I guess my question, maybe for Mike. When I look at the transitory costs in '23, you said it's $16 million supply chain. And I'm guessing that's mostly rate, and is that -- are you seeing that this year because of the timing of the inventory? I know other companies have patched out, starting to see some freight benefits this year. Is that all just timing of the inventory and is it all freight, and is that kind of the line of sight that you have to suggest that it goes away next year?

Yes. Actually, almost $50 million of those costs were incurred in 2022. But they were capitalized on the balance sheet along with the inventory rate. So, the costs we are talking about are certainly the excess freight and premium freight cost that we incurred in the business. There is a nice table in the earnings release that kind of spells this out a little bit too, Mitch, if you want to refer that later, but these are costs that either were incurred last year and the first part of this year. They are now being expensed through the P&L as we work through the inventory and obviously accelerate the reduction of the inventory. And we are now in contract on ocean rates that are much lower than they were a year ago. We have implemented through these profit improvement initiatives other logistics-related saving. But as it relates to the transitory cost, yes, they are essentially behind us, and just lingering effects in terms of working through the inventory. But as we into 2024, those will go away. Excess liquidation that we talked about in terms of the level of end-of-life inventory we had to work through, that's about $20 million of headwinds in '23. Those costs go back to normal. That's not the total costs of what we incurred. That's the incremental cost that we incurred. So, both of those things we feel very strongly are behind us, and are things that we can plan against in terms of improvements next year.

All right. Thanks. Good luck.

Thanks, Mitch.

Our next question comes from the line of Abbie

Hi, thanks for taking my question. Chris, congrats on the new role. Can you just comment on like your view on like the underlying health of the main brands which I think we understand the soft wholesale, but what's happening in DTC? And then, I guess what in your view what are the biggest near term opportunities to return to growth? Thank you.

Okay. So, thanks, Abbie. I appreciate that. I think the underlying health of our big brands remains good. Brands are coming off of a record years in 2022. Certainly, 2023 is a step back and a disappointment as far as the current trends. But as the underlying health, I think Merrell and Saucony specifically are leaders in the respective categories. They are authentic. They are original. They are heritage brands with great tradition and strong product pipeline. I think it comes down to our ability as an organization to really make a very very fast pivot to becoming better brand builders and to build more durable, more resilient brands that can weather tough situations. Basically, the current environment is exacerbated by a lot of factors. Whether it's the overhang of the pandemic and the inventory button, promotional pricing, whether it's consumer slowdown. Certainly, we are not the only one to talk about some level of malaise in U.S. And we are certainly seeing that. But I think underlying health and our one of our greatest asset is our brand portfolio. And certainly at the top of that list are Merrell and Saucony. And we've got new leadership in place. There is a very heightened sense of the need to move bolder and faster. Specifically, around continued product innovation, but certainly around how we build these brands through modern demand creation. So, every team is working on that. And it's sort of top of mind as we think about the transition in my first day.

Got it. Thank you.

Thanks, Abbie.

Our next question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Yes. Hi, thanks for taking a couple of follow-ups. Just for modeling, Mike, could you walk through the third and fourth quarter outlook, the dip down in revenue that you outlined for the third quarter and the bounce back for the fourth quarter, could you just highlight some of the factors that you are embedding there?

Yes. There is an important shift in our international business between Q3 and Q4. And again, like I mentioned in my remarks about the comparison from Q3 to last year, that included some significant international revenue from a timing standpoint that really fell into Q3 and those were abnormal timing. In Q4 this year, we're selling our spring line into our international distributors much earlier than we normally do or certainly much earlier than [indiscernible]. Let's say it that way. And so, there is some growth there, but also, the benefit of that revenue kind of lifting the performance of Q4 versus last year to a decline more in the mid-single digit range. So, if you exclude some of the noise or timing around international, the rest of the business is planned or forecasted to be down about 10% or maybe a little bit higher. And so, that's much more consistent with again the normalized trends that we were seeing in Q3. The other factor for us in Q4 is the D2C channels are bigger part of the overall business. Sweaty Betty is a big percentage of that as well. And that business is a little bit more stable. So, we get the benefit of bit more predictable business in D2C in Q4 versus the other quarters.

Okay, great. And then, just two last ones from me. I just wanted to clarify. I believe that prepared remarks alluded to potential pricing actions to drive sell through. So, could you just more specifically talk about what you are referencing? And then, into 2024 sort of the path you outlined, what sort of pricing relative to the increases you have taken a last few years does that assume? And then, just lastly on Sperry, the performance obviously very challenged now for the full-year. How does that impact your plans, or the strategic actions that you are contemplating underway for that brand?

Yes. I'll take that. And then, Mike can add comments. I think regarding the pricing one, that's something that we paying really close attention to what's happening in the marketplace. And what did everyone do sort of in the pandemic, coming out of the pandemic. And then, what's happening today in the marketplace. And make sure that our products are properly placed and priced. And at the end of the day from a pricing standpoint, it comes down to the power of your brand. And then, what is your pricing power. So, something we spent a lot of time thinking about to make sure that that we are both protecting margin at the same time having good place and price where consumers can engage in them. As it relates to the Sperry transaction, obviously we announced the decision for strategic alternatives a little bit ago. We continue to manage the business and monitor its trends. That process is ongoing, but we still plan to pursue those alternatives. And certainly, do the very best thing for the portfolio and for the shareholders.

Importantly, on that front, John, we are -- we should be hitting the market with a formal marketing document in the next couple of weeks. That hasn't transpired yet. And so, a much more formal process will be underway. We also have received good importer feedback from interested parties who obviously know about the process that the process is going to be underway. So, we feel good about that. It's a very strong brand. We feel that our strategic alternatives for that business would be around a licensing opportunity or other form of business model that could allow us to benefit from, like I said in my remarks, monetizing the working capital, the business, and maybe benefiting from the strong brand in the future. So, we are looking at all those options. But we are not down the path quite far enough yet on the sale process to really make decision on what the best alternative is at this point.

Okay. Thanks for taking all the questions.

Thanks, John.

Thanks, John.

[Operator Instructions] Our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

I just want to follow-up on the conversation about sort of the weakness in wholesale and the weakness in your DTC business and the promotional environment out there. How much of this is the environment? And how much is this not having the appropriate stuff that the consumers really really want right now? In which -- that's the question.

Yes. It's a fair question. I think -- I don't think this is quite black and white of that. I think there is a shade of grey and I think it's combination of both. I think certainly from an environmental standpoint, there is lot of products in the marketplace and it's very promotional. And certainly some of our brands have some category headwinds. At the same time, the onus goes to the brands to deliver newness and freshness and innovative products that are solving consumer's needs, and make sure we got a pipeline of that ready to go. And I think as we think about where our brands stand today, I think we always need to be very critical of our own product pipeline, and sort of hold ourselves accountable for what's in the mix. So, we're not standing here today saying it's just the environment, we are sort of looking deep into our teams to make sure that we can build durable and resilient brands that can weather the storms. So, Sam, to answer your question simply, I think it's a little bit of both. Right now we are mostly focused on fixing our internal house to be able to weather storms like these.

And we have reached the end of the question-and-answer session. I will now turn the call back over to Chris Hufnagel for closing remarks.

Thanks again everyone for joining us today. It was nice to be with you, and the first time in this capacity, and look forward to sharing updates with you in the future. As a reminder, Mike and I will be with the analysts who are having call backs later this afternoon and later this morning. And we are pleased to be joined by Wolverine's Chairman of the Board, Tom Long. So, look forward to those calls in little bit. Thanks everybody. Have a great day.