Christopher E. Hufnagel - Wolverine World Wide, Inc. Blake W. Krueger - Wolverine World Wide, Inc. Michael D. Stornant - Wolverine World Wide, Inc..

Jim Duffy - Stifel, Nicolaus & Co., Inc. Edward J. Yruma - KeyBanc Capital Markets, Inc. Christopher Svezia - Wedbush Securities, Inc. Jonathan R. Komp - Robert W. Baird & Co., Inc. Corinna Gayle Van Der Ghinst - Citigroup Global Markets, Inc. Erinn E. Murphy - Piper Jaffray & Co. Scott D. Krasik - The Buckingham Research Group, Inc.

Laurent Vasilescu - Macquarie Capital (USA), Inc..

Good day, and welcome to Wolverine World Wide's Second Quarter 2017 Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine World Wide. If you anyone has any objections, you may disconnect at this time.

[Operator Instruction] I would now like to introduce Mr. Chris Hufnagel, Senior Vice President of Strategy, for Wolverine World Wide. Mr. Hufnagel, you may proceed, sir..

Thank you, Andrew. Good morning, and welcome to our second quarter 2017 conference call. On the call today are Blake Krueger, our Chairman, Chief Executive Officer and President; and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the second quarter of 2017.

The release is available on many news sites or can be viewed from our corporate website at wolverineworldwide.com. If you would prefer to have a copy of the news release sent to you directly, please call Tyler Deur at 616-233-0500.

This morning's press release included non-GAAP disclosures, and these disclosures were reconciled with attached tables within the body of the release. Comments during today's earnings call will include some additional non-GAAP disclosures.

There is a document posted on our corporate website entitled WWW Q2 2017 Conference Call Supplemental Tables that will reconcile these non-GAAP disclosures to GAAP. The document is accessible under the Investor Relations tab at our corporate website, wolverineworldwide.com, by clicking on the Webcast link at the top of the page.

Before turning the call over to Blake to comment on our results, I want to provide some additional context and information.

As communicated during the company's first quarter earnings call, beginning in 2017, the company's fiscal year will be comprised of three 13-week quarters and a 13- or 14-week fourth quarter versus a 12-week quarter for the first three quarters, and a 16- or 17-week quarter for the fiscal fourth quarter.

When speaking to revenue, Blake and Mike will primarily refer to underlying revenue, which adjusts for the impact of foreign exchange an additional week of operations, and excludes revenue from store closures and the exited Cushe business. We believe underlying growth best reflects how our global businesses are performing in the marketplace.

In addition, we will be providing adjusted financial results, which exclude restructuring and impairment costs, non-recurring organizational transformation costs, constant currency results, and the impact of the additional week of operations.

In addition to these adjustments of the type the company has made in recent periods, adjusted gross profit, adjusted operating income and adjusted earnings per share in this release are further adjusted to exclude incremental inventory markdowns related to the 180 stores that are now closed under management's previously announced 2016 store restructure plan.

In light of the large scale of closures and the compressed timeframe, management believes this treatment gives investors a better view of continuing operations. You can find tables reconciling these disclosures in our earnings release and on our corporate website.

I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine World Wide and its operations are forward-looking statements under U.S. securities laws.

As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, I'd like to turn the call over to Blake Krueger.

Blake?.

Thanks, Chris. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported second quarter revenue of almost $600 million, representing underlying growth of 1.4% and record adjusted earnings per share of $.0.43, a 70% increase over the last year on a constant currency basis.

We're obviously pleased with these results as the momentum in the business accelerated into Q2. Our proactive response to the quickly evolving global marketplace and changing consumer landscape has allowed us to sprint ahead in what remains a challenging global environment, something we've been calling the new normal for a couple of years.

Our strong second quarter results reflect these efforts and I am encouraged about what I see ahead for the company. During the second quarter, we made excellent headway across all four sprint lanes of the WOLVERINE WAY FORWARD, our holistic enterprise-wide transformation of the company.

Innovation and growth remains our top priority and we made excellent progress in becoming more consumer centric, strengthening our product innovation pipeline and reducing concept to market timeline, all aimed at driving the global growth of our brand.

At the same time, we've taken aggressive action to address the underperforming segments of our business. Notably, closing subpar retail stores, executing strategic alternatives for a few of our smaller brands, and restructuring other parts of the business.

We've also prioritized speed in everything we do with a focus on creating a nimble, faster, more efficient company. As a result of all this work, we now have a high level of confidence that we will achieve a 12% adjusted operating margin by the end of 2018, a bold goal we first introduced in April of last year.

Our progress so far is encouraging and on plan but we remain intensely focused on fully executing the WAY FORWARD transformation and harvesting the growth and operating profit benefits these efforts will deliver. We're also excited to accelerate the reinvestment of some of these early benefits in the second half of this year.

For today's call, I'll briefly review the performance of our brand groups and then provide a more in-depth update on the WOLVERINE WAY FORWARD. Mike Stornant will then provide additional detail on the second quarter financial results, our operational improvements and our updated outlook for the remainder of 2017.

Reviewing our brand groups' performance starting with the Wolverine Outdoor & Lifestyle Group. Underlying revenue grew 11.4% compared to the prior year, with Merrell growing just over mid single digits, Cat up strong double digits, Chaco posting mid-teens growth, and Hush Puppies down high single digits.

The Merrell business continued to accelerate in Q2, including growth of over 30% in its e-commerce business, with the brand also benefiting from the migration of a few distributors to a top line model.

The core performance outdoor category grew mid single digits due to the successful launch of the Moab 2 and the strong performance of the Nature's Gym collection.

The Merrell product and innovation pipeline is robust and we continue to see positive momentum into the second half of the year through the introduction of the new Chameleon 7 and MQM collections, while expanding the Arctic Grip assortment to capitalize on the momentum we have around this new technology.

The Merrell Work and Tactical program ramped up during the quarter and also contributed to the brand's Q2 growth. The active lifestyle category again improved moderately in the quarter, with the men's category up mid single digits. But this category remains a key priority and opportunity for the brand.

Overall, Merrell's key initiatives are connecting with consumers and I'm increasingly excited by the brand's future opportunities and growth plan. Chaco again delivered strong growth in the quarter as its e-commerce business grew almost 30%. The brand also made real headway in expanding its geographic base in the U.S.

and growing its product offerings outside of the core Z sandal franchise. Moving to the Wolverine Boston Group. Underlying revenue declined 3.1% versus the prior year with Sperry down mid-single digits, Saucony up slightly and Keds as expected down low double digits, as this brand continued to implement its strategic distribution realignment plan.

Sperry performed better than anticipated in the quarter. While the boat shoe category stabilized somewhat, this category continued to experience trend headwinds.

The Sperry team has accelerated efforts to diversify the brand's product category mix and drove strong double digit growth during Q2 in its second largest spring-summer category, vulcanized footwear, with women's styles like the Seaside, Crest, and Lounge Away all performing well.

In the back half of this year, Sperry expects to build on its success in the boot category with trend-right styles for men and women in the wet weather, cold weather, and fashion category. Sperry has also developed new programs to expand its classic casual business and the premium Sperry Gold Cup collection.

The Saucony brand achieved high teens growth during the quarter in both e-commerce and international, two areas of focus for the brand, all driven by new product innovation. The award-winning Freedom ISO continued to perform well, and the new Ride 10 is off to a strong start with robust sell through in stores.

We are expecting a solid second half for Saucony. The new Triumph and Hurricane, both with full-length EVERUN cushioning technology and the new Liberty ISO and Liteform Feel are all planned to launch over the next several months. In closing, with the Wolverine Heritage Group.

Excluding our Bates Department of Defense contract business, underlying revenue for the group was up high single digits compared to the prior year, with Wolverine up double digits and the Bates commercial business up low single digits.

The Wolverine brand saw strong revenue growth across its key categories and channels and posted strong digital growth with e-comm up over 30%. New product introductions continued to perform well and drive growth for the brand, and we're reaping the benefits from the strategic distribution decisions the brand actioned in the latter part of 2016.

While we're pleased with our overall Q2 results and continue to see steady progress from our brands, we remain focused on achieving our more aggressive long-term growth and earnings goals.

I want to take a moment to provide some additional detail on the work we've undertaken over the past year and update you on our transformation efforts under the WOLVERINE WAY FORWARD. The WAY FORWARD is comprised or four key sprint lanes, innovation and growth, operational excellence, talent and teams, and portfolio management.

We have a dedicated team leading this effort and hundreds more across the organization leaning in each day to drive results. Our strong performance in the first half and confidence in our plan for the second half will enable us to accelerate investments to drive future growth.

On the growth front, we've invested to become a more consumer obsessed company by nearly tripling our investments in consumer insights, marketing intelligence, innovation and trends resources.

Two, expanded and invested in our digital infrastructure and analytics capabilities to drive e-commerce growth and digital and social connections with our consumers. Three, implemented speed initiatives across the business to reduce concept-to-market lead times for both new and existing product programs.

Four, launched the company's first-ever unified consumer database to enable better understanding and engagement with our consumers across our brand. And five, recruited new talent and better aligned key team members against our most important transformation and growth initiatives. We've also achieved great wins on the operational front.

Addressing businesses that did not meet our future growth or go-forward strategies, all while making our best in-class global platform more efficient, faster and stronger. Specifically, we reassessed our channel distribution strategy and owned territories for several of our brands to maximize growth and profit opportunities.

Two, pursued strategic alternatives for a few of our smaller brand to maximize shareholder value and focused our teams' talent and time on our highest value growth priority. Three, continue to police and protect our brands in the marketplace. Four, closed subpar stores, leaving us with a go-forward fleet of about 80 profitable stores at year-end.

And lastly, five, reduced our factory and supply base to drive sustainable product cost improvements and help make the business faster and more efficient. While we're not done with all of the heavy lifting, we made tremendous progress at an incredible pace. All is reflected in our first half results.

As a company, we're beginning to harvest the benefits of our collective efforts and are pivoting to the offence from a strong foundation and a position of confidence.

As we look to 2018, I believe we are poised to deliver on our organic growth target, driven by a renewed obsession with our consumers that will deliver innovative products and stories that build deeper connections to our brand.

A wholesale business that is focused on more profitable and diversified distribution strategies, a fast-growing very profitable e-commerce business that we plan to double in the mid-term, greater resources devoted to key international markets, specifically regions and cities that provided the greatest growth potential and as always, an intense focus on our brands.

With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary in our performance in the second quarter, as well as provide more details regarding our expectations for the balance of the year.

Mike?.

Thanks, Blake, and thanks to all of you for joining us on the call today. Our second quarter financial results were better than expected as the benefits from our operational speed and product marketing initiatives in 2016 have actually accelerated.

We have delivered a strong first half, despite persistent global challenges that have been especially acute in the U.S. retail market. I'm proud of our performance, a result of the incredible work our team has executed to build a more profitable business and a stronger growth foundation for the company.

I'd like to discuss the details of the WOLVERINE WAY FORWARD and the new tactics and enhanced operating model that will allow the company to execute with more focus, speed, and urgency. I'm excited to share some of the future opportunities and benefits we can expect from this transformation.

But first, I will provide a brief review of our Q2 financial results. Second quarter revenue was $598.8 million, which exceeded our expectations entering the quarter. Underlying revenue grew 1.4% and revenue declined 3.3% compared to the prior-year taking into consideration an additional week of operations in 2017.

Adjusted gross margin on a constant currency basis of 39.1% was 60 basis points better than 2016 despite a negative 210 basis point impact from store closures. Great performance by our brands. Significant supply chain benefits were recognized earlier than expected due to a very clean inventory pipeline.

Our inventory was down 24% compared to the prior year, allowing lower product cost to flow through the P&L at an accelerated pace. In addition, cleaner retail distribution and lower inventory at retail have allowed us to reduce markdown and promotional exposure for many of our brands.

We expect inventory levels to normalize in the back-half of the year and anticipate a double digit improvement by year-end. Adjusted operating margin on a constant currency basis of 11% was 380 basis points better than prior year.

This was well ahead of plan driven by accelerated benefits from actions taken in 2016, including lower supply chain cost, store closures and certain restructuring changes. Q2 adjusted diluted earnings per share were $0.43 and further adjusting for currency were $0.44.

On modest underlying growth of 1.4%, we delivered approximately 70% adjusted constant currency earnings growth compared to last year. The timing of certain items shifted earnings per share of approximately $0.04 from Q3 to Q2.

We incurred $35.3 million of discrete cost related to our transformation efforts during Q2, of which $5.6 million were non-cash. These costs were incurred to execute store closures and implement other transformation activities during the quarter. Including these non-recurring costs, Q2 reported earnings per share were $0.21.

Cash flow from operations was $138.4 million during the quarter and benefited from strong working capital management. We ended the quarter with $412.8 million in cash and cash equivalents, up over 86% versus last year. Net debt of $392.5 million is down $58.4 million since year end.

Our priorities for cash remain the same – invest in organic growth, return value to shareholders through share repurchases and consistent dividends, pay down our debt and pursue value enhancing acquisitions.

Operational excellence is one of the four WOLVERINE WAY FORWARD sprint lanes that Blake discussed earlier and the area where we have made most of our early progress as we work to transform the company. In early 2016, we established an internal goal of expanding the company's adjusted operating margin to 12% by the end of 2018.

And during the first quarter of 2017, we launched the WOLVERINE WAY FORWARD in part to strengthen our ability to meet this interim target and to drive further operating margin expansion into the future.

The key drivers of operational excellence remain unchanged and includes significantly lower supply chain cost, reduced exposure to underperforming stores, portfolio management and ongoing organizational restructuring that will result in a leaner, faster and more cost-effective infrastructure.

We are tracking very well against the early targets that we set for these key areas and we have further confidence in achieving our interim 12% adjusted operating margin goal. This is a major improvement for the company, but by no means represents our ultimate goal or measure of success.

Subsequent to the end of the second quarter, we finalized some key portfolio changes that will both improve our operating margin performance and allow the company to focus on our biggest opportunities for growth.

The new Stride Rite license arrangement and the sale of Sebago will provide a relatively slight benefit to our operating profit going forward, but have freed up working capital and talent that will be redeployed into more productive areas of the business.

These brand changes coupled with significant store closures will negatively impact 2018 revenue by approximately $140 million. This estimate should provide some clarity as you update your revenue models for next year. I'd like to transition to our improved full year outlook for 2017.

While our business has performed well in the first half of the year, we don't expect global market conditions to improve meaningfully in the near term. As a result, we remain somewhat cautious in our overall view.

Despite this outlook, we are raising our reported revenue guidance for fiscal 2017 in the range of $2.32 billion to $2.37 billion or 2% underlying growth at the high end of this range. This represents a reported revenue decline in the range of approximately 7% to 5%.

The changes in our portfolio, timing of store closures and updated currency assumptions all impact our underlying revenue results.

The negative impact on full year 2017 revenue from these items is currently estimated at $175 million, including $120 million related to store closures, $40 million related to the Stride Rite license model and $15 million related to foreign currency.

For 2017, the sale of Sebago has a minimal impact on revenue as we will sell off inventory and manage certain orders through the end of the year. During the first half of the year, we saw an improvement in adjusted operating profit and operating margin, driven in large part by early benefits from our 2016 action plans.

As we entered the second half of 2017, we plan to reinvest some of these early benefits in new talent, enhanced capabilities, supply chain and e-comm infrastructure and demand creation to drive future growth. As a net result of these changes, we now expect better full year adjusted operating margin in the range of 10.4% to 10.9%.

We are raising our adjusted earnings outlook for 2017 with full year fiscal 2017 adjusted diluted earnings per share now expected in the range of $1.55 to $1.65 which includes the negative impact from foreign currency of approximately $0.07 per share.

On a constant currency basis, adjusted earnings per share are expected to be in the range of $1.62 to $1.72, growth of 19% to 27%. The net impact of all restructuring and non-recurring costs for 2017 is now estimated to be approximately $0.73 per share, compared to $0.77 per share projected last quarter.

This includes the net impact of store closures, transformation activities and divestitures. As a result, 2017 reported earnings per share are now expected in the range of $0.82 to $0.92.

The change in our quarterly calendar, accelerated store closings and brand changes have all impacted the quarterly flow of revenue and earnings for this year and future years. In addition, our retail partners continue to place orders closer to need.

As a result of all these factors, we now expect third quarter revenue in the range of $545 million to $555 million. This includes lower Q3 revenue due to the Stride Rite transition.

This outlook also reflects the current phasing of our order book between Q3 and Q4 under the new calendar and assumes no meaningful improvement in replenishment orders from our experience over the last several months. For Q3, we now expect adjusted earnings per share in the range of $0.34 to $0.37.

This shift in calendar will have a negative impact on Q3 earnings because of the lower shipping volume in September that will now be included in Q3. The adjusted tax rate in 2016 was abnormally low due to timing of discrete adjustments. We expect the Q3 2017 adjusted tax rate to be 750 basis points higher as a result.

The WOLVERINE WAY FORWARD has created a strong platform for our team as we work to rewire the company to succeed in the new normal. Our diversified brand portfolio is now stronger and our team is focused on speed, growth, innovation, and consumer connections.

Our operating platforms are more efficient and our global network of partners remains one of our key strategic advantages. I believe we are in excellent position to win over the balance of this year and into 2018. Thanks for your time this morning and we will now turn the call back to the operator.

Operator?.

We will now begin the question-and-answer session. The first question comes from Jim Duffy of Stifel. Please go ahead..

Thanks. Good morning, guys..

Good morning..

Hi, Jim..

A lot going on on these numbers here, all part of adjustments, changes to the run rate of the business. Clearly you guys have been busy.

Maybe just to start, can we take a step back, Mike, and itemize the lost revenue run rate from discontinued businesses? Anything you've done since 2015 including Cushe stores, Stride Rite license, Sebago, if we could itemize those out, I think that would be helpful..

Yeah. Since 2015 Cushe is a small number. This year that's probably a $4 million or $5 million impact in the 2017 numbers. And we kind of itemized out the store closure impact..

Hey Mike?.

Yeah..

Can I interrupt you for a second?.

Sure, sure..

Let's not talk 2017 because a lot of this cost is over years. I think it will be helpful for people in the investment communities just understanding how big each of these chunks of businesses are in total..

Okay.

As it relates to sort of the discontinued businesses that we've had over time?.

Correct..

Yeah, Cushe is about a $20 million business that is no longer obviously operating. When we think about the stores that we've closed, it will be about 425 stores over a four-year horizon for the company. I don't have the exact four-year or the impact of all those stores.

I can tell you this year it will have about a $120 million impact on the 2017 revenue numbers, Jim, but over that three-year horizon, I don't have the cumulative number here in front of me.

I think I remember from last quarter you mentioned a wrap around hit next year of $65 million from additional stores to close..

Right. Yeah. So when we talk about that 2018 impact from all the kind of the changes that we're going to be implementing this year, now we've got about $65 million to $70 million for the stores that we did operate this year that will no longer operate next year.

So when you think about 2018, we gave some estimates in the prepared remarks for about $140 million impact next year from that in total. And $65 million to $70 million will come from store closures.

The other impact obviously for us that we won't anniversary next year is about $40 million from the Stride Rite business and then $30 million from the Sebago business that we're going to recognize revenue this year that we won't recognize that next year. So just trying to set a new -.

So those are partial year figures then, right, the Stride Rite license and the Sebago numbers?.

Right. Yeah. So if you're trying to -.

Trying to annualize them..

Yeah, if you're trying to reset the 2018 baseline, the $140 million is the amount you'd have to adjust out of the 2017 numbers to kind of reset for 2018 growth. So I know we're jumping around a little bit, but fundamentally for us the Stride Rite wholesale business is about a $85 million to $90 million revenue full year.

We've recognized about half of that this year.

Sebago is about $30 million, we're going to recognize most – all of that this year because of just the nature of how we entered into that arrangement and the sale that we'll be able to recognize in the back half and the full year impact from store closures even though we called out a $120 million this year and another $65 million for next year, so it's about $180 million to $190 million from the store closures.

So that's the full year impact from 2017 to 2018. And then the incremental impact from all those things that we called out is about $140 million against the 2017 results..

Very helpful. Thanks for indulging me in that..

Sure..

And then, it looks as though fewer stores closing this year than you had originally anticipated, is that just how negotiations with landlords are progressing, timing of things....

Yeah, we're still closing the same number of stores, it's really just the timing of that and really it is a result of some of the negotiations we entered into after our last call during the quarter. So we phased the timing of some of those stores a little bit differently and that's reflected in the new guidance..

Yeah. By year end, Jim, we'll be – we'll have about 80 go-forward stores..

Okay. I'll leave it at that, guys. Thank you..

Thanks..

Thanks, Jim..

The next question comes from Ed Yruma of KeyBanc Capital Markets. Please go ahead..

Hey. Good morning, guys and thanks for taking my questions. I guess, first, I know you've been actively trying to introduce new newness into the Sperry business. I guess how would you score your performance there and maybe some color on the performance of 7 Seas.

And then just as a modeling follow-up, I know that you excluded the markdowns at the closed retail stores, was the revenue removed as well or? Thank you..

I can answer that second question first. So the revenue and the normal operating losses for the stores that we were in the process of closing this year, those are all reflected in our results, so we did not adjust for the revenue or the normal operating losses.

We did adjust out about for the first and second quarter I think it amounted to about $7.5 million of accelerated markdowns that we took to move inventory and just the – when we made the decision to close the stores at a kind of short notice basis, we really had to accelerate those markdowns to move the inventory through.

So that $7.5 million is adjusted out, Ed, but the normal operating losses are still in the results, as are the revenues..

And Ed, with respect to Sperry, we continue to see a large appetite from retailers and consumers for the Sperry brand. Probably we haven't – over the last couple of years we haven't frankly been as good as we had hoped with hindsight in feeding that beast.

We made some leadership changes as you know earlier this year and the brand now is on an accelerated track to offer casuals, Gold Cup, other categories and replicate the success of the Saltwater Boot program in several other categories. 7 SEAS had mixed performance at retail.

It was very good in more performance, marine account, less good in traditional casual shoe retailers, but interestingly strong in several international markets. So overall I would say didn't quite meet our overall expectation for that introduction and it was mixed by channel..

Great. Thanks so much, guys..

Thanks..

Thanks, Ed..

The next question comes from Chris Svezia of Wedbush. Please go ahead..

Good morning, everyone. Thanks for taking my questions. I guess first, I'm just curious what was the $0.04 thereabout shift coming out of Q3 to Q4.

Can you clarify what that was, what's the driver?.

It's actually out of Q3 into Q2..

Right..

So it's really just timing of some of the expenses that we had phased differently, some impact from some shipments that moved around for certain brands. We opened our distribution center on the West Coast in late June or late July, so there were some distant movement there on some things like that.

Not one in particular is meaningful or significant, not one item, but just a number of timing items that just sort of phased out differently in our plan..

Okay.

And then when I think about the third quarter of the earnings guidance that you gave and the revenues, can you just maybe parcel out how much of Q3 revenues is being impacted by no longer having Stride Rite and how much is being impacted by shifting probably later into the fourth quarter, just on the revenue side? And then from an earnings perspective, I would assume operating margins are down year-over-year.

So I'm just curious is that just due to the fact gross margins are down, because you have less retail stores, offsetting supply chain and then operating expenses are higher because you're reinvesting. Just maybe walk through some of those exits though..

Yeah. Sure. Sure. It's about $20 million impact on revenue from the Stride Rite change that we – the new license arrangement, so that's $20 million impact to revenue. Operating margins will be about flat in the third quarter on that revenue. And then there certainly is a shift in the revenue between the quarters and the calendar change.

And more importantly, and we talked a little bit about in the remarks, I mean we're just seeing a different shift in terms of our order book in the way that customers are ordering – continuing to order close to need. When we look at our order book today and the way it phases in the back half of the year, we're seeing some strength supporting our Q4.

And the timing of some of the orders in Q3 are little bit softer. So we're just kind of reflecting that here. Some of that has to do certainly with calendar change and some of it has to do with just sort of the nature of the flow of our business right now..

Okay. And then....

As far as the gross margin goes, again, the gross margin will actually improve a bit. It still has that same headwind related to store closure mix. We had about 210 basis points of headwind in the second quarter. We didn't have all those stores closed yet. Obviously, we operated some of them for the first period of the quarter.

So in the third quarter we're going to have a similar headwind of about 200 basis points, and the same in Q4 against gross margin. But even with that, we expect gross margins to expand a little bit. And then just the phasing of Q3 and Q4 SG&A would kind of get us to flat to slightly better operating margins in the third quarter..

Okay.

Two final things for just e-commerce, how much did it grow and roughly what percentage of the business is it running at? And lastly, Blake, for you, just when you think about the organic growth rate for 2018, I know you've kind of threw out $140 million headwind related to these factors, but what are you – how are you still thinking about that, do you have better visibility around that? I think you've said before mid single digits.

Just curious about that..

Yeah. Yeah. Let me address your first question. On e-comm, today I would say on an annual basis it's about 7%, 7.5% of our overall revenue. We would really – we're looking – we're putting a lot of resources behind digital, social and e-comm and new capabilities, we would look to double that over a period of time.

Probably by 2020, it will certainly be north of double digits given our overall revenue for the company. So, like a lot of brand owners, we're obviously focused on DTC and in particular digital, social, and e-comm. And in the quarter, that grew high teens. As far as our organic growth goals, they really haven't changed for 2018.

They probably have solidified a little bit. So we're still looking at mid single digit organic growth next year across our entire brand portfolio and obviously driven primarily by innovation, increased speed and just about everything we do, but product innovation. And we've got greater line of sight to that today than we had three months ago..

Okay. Thank you. And all the best. Appreciate it..

Thanks..

Thanks, Chris..

The next question comes from Jonathan Komp of Robert W. Baird. Please go ahead..

Yeah. Hi. Good morning. First, just I want to follow-up on the last answer you gave on the e-commerce business and then another topic. But first on the e-commerce, could you just comment, I know you gave the 7% to 7.5% penetration for your own e-commerce.

What do you think the total e-commerce ecosystem is when you include third-party e-tailers, if you will, and what type of growth rate are you seeing there?.

It's a very good question. A little hard to determine. We don't get that kind of breakout from every retailer. But I would say right now, overall for the company, we're probably in the 25% range. We would probably range higher than that for certain of our brands in their biggest markets, especially when their biggest market is the United States.

But overall for the company, I would guess about 25% and growing obviously..

Okay. Thank you for that. And then I wanted to ask a couple of questions on the margin outlook.

But first, Mike, just wanted to ask, I know you mentioned some incremental investments planned for the second half, are you willing to quantify the level of investment you are making?.

Yeah. I mean it's – we're still in development a little bit on a few of the items, Jon. I mean I think as we have been able to harvest some of the early wins, we've been looking at the opportunity to accelerate some of those.

But I would say sort of in that $0.04 to $0.05 range of incremental investment that we wouldn't have had originally in our plan that we were probably going to see kind of spread between Q3 and Q4..

Okay, great. And then, if you look at the increase to the margin outlook on a net basis, you raised the operating margin goal. I'm just wondering you also talked about accelerated timing of some of the benefits from your initiatives.

And I'm just wondering when you look at that, even the net increase to the guidance, how much of that is kind of accelerated timing of recognizing the benefits versus maybe unlocking new layers of savings? Curious for any perspective..

I think it's about 50-50, frankly. I think part of the over-delivery, certainly a good chunk of the over-delivery in the first half of the year is driven by the fact that we had healthier business, we've got a cleaner inventory, we've been able to recognize those improved product costs in our margins earlier than we sort of had initially expected.

Our pipeline at retail is cleaner so our markdowns and our promotions have been lower. So that's really a function of groundwork we laid last year and before last year to kind of improve the business.

And then when I think about the improvements coming from WAY FORWARD work and being able to accelerate some of that activity is probably contributing about half of the remainder of the upside, but obviously netted with the investments that we're talking about..

Okay, great. And last one for me then still on the margin topic, but the 12% goal by the end of 2018, I just want to ask on that. I know you mentioned I think another incremental $70 million revenue headwind next year from Stride Rite and Sebago and the moves there.

And you said that would be slightly accretive to profit, so obviously there is a margin percent benefit to that.

I'm just wondering is that margin percent benefit incremental to your 12% goal or how do we think about that effect?.

No, no. I think as we work through the sort of the business and the different models and the strategic alternatives, that's always been part of our target – establishing our targeted 12%..

Okay.

And are you baking in some other kind of unforeseen, at least to us, strategic actions into that 12% or is that based on what we see today?.

Yeah. The view we have, it's based on what we see today. I mean the work we are pursuing in WAY FORWARD is I would say halfway through the identification phase. I think there are plenty more opportunities that we haven't crystallized and are certainly not ready to plan for in 2018. We're going to deliver our strong 2017 back half year.

That's our primary focus. Our ability to turn into 2018 with some momentum and some really key wins behind us is also important and we're just really confident at this point that 12% is something we can achieve..

Okay, great. Thanks for taking my questions..

The next question comes from Corinna Van der Ghinst of Citigroup. Please go ahead..

Thank you. Good morning..

Good morning..

I just wanted to start with the some of the commentary that you had in the remarks about your brand performance in the quarter. Sounds like Merrell is still trending up nicely up mid single digits and Sperry was down mid single digits.

I just wanted to clarify within your updated guidance, are you assuming any adjustments to your outlook for these brands as we enter the back half of the year?.

Well actually, our guidance for the second half of the year takes into account our current view across the whole portfolio. So certainly, we're looking at the outlooks of not just Sperry and Merrell, but the other brands in our portfolio..

Okay.

But any specific changes to those two brands and how you are guiding those two brands for the year?.

Not really. Maybe with respect to Sperry, they had a boost last year in the fall season, were a little weak for the industry, but Sperry had a very strong second half in boots. So that puts a little bit of a question on the Sperry performance and it's going to depend a little bit on at-once performance in the boot category for Sperry.

We expect Merrell on our revenue basis to probably be stronger than Sperry in the second half as we continue to see the rollout of new product innovation and new collections. Sperry will probably lag Merrell a little bit..

And does Todd Spaletto's coming on board, has that impacted the Merrell performance in your view this year? When should we kind of start to see some of the fruits of his hiring?.

Yeah. I think we've added Todd Spaletto and Sue Rechner over the last four, five months, great leaders, great talent. We couldn't be more pleased with their attitude and take charge mantra.

I would say a lot of the benefit we're frankly seeing in Merrell the first half of the year and into this fall it's from initiatives that were started a year ago, given the nature of the timing of our product pipeline.

So we really haven't seen, we haven't yet really experienced some of the dollars and cents benefits that are going to roll forward from Todd and Sue..

Okay. Great. And then my second question was just, how do you feel that your brand portfolio is now positioned given some of the recent changes you made with Stride Rite going to a license model, the sale of Sebago, and I also noted that you guys are soliciting M&A as a priority for cash.

So, just given some of recent deals that we've seen in footwear and what you are seeing in the environment, maybe you could comment on kind of how you're looking at the M&A environment right now, if you're seeing any opportunities..

Sure. I would say we're going to continue to look at our portfolio and sometimes that work is never done when you're operating a dozen different brands across 200 countries and territories. But on the acquisition M&A front, I think we're aggressively reviewing opportunities right now and we have been for some time.

Our impression is maybe the multiples have, despite the recent announcement on the one large transaction, but the multiples have maybe come down a little bit, but we're aggressively looking at opportunities. We have plenty of dry powder and we're looking for the next right strategic fit.

We have a pretty long history and successful track record when it comes to integrating brands into the business and plugging and playing them into our international network..

Okay, great. Thank you..

The next question comes from Erinn Murphy of Piper Jaffray. Please go ahead..

Great. Thanks. Good morning..

Good morning..

I had a question on – good morning. I had a question on Europe. I think lot of the market or some of the markets there you're moving back to distributor models versus owned markets.

Can you just talk about which markets those are? How much of the European portfolio that is and kind of what you anticipate the end result will be as you think about driving that 12% EBIT goal over the next year? Thanks..

Yeah. We have moved some of our smaller, measured in terms of revenue markets to third-party distributors that just frankly made economic sense and freed up our talent and team to focus on bigger markets and bigger opportunities. As you know, we do about half our payers in Europe, in the UK market, so that market is key for us at this point.

We've moved some of our smaller brands in the EMEA, the EMEA region to third parties, recently a few smaller countries for Keds and Sperry and Hush Puppies, but we view EMEA in general as a real growth opportunity for the company.

And when we look around the world, certainly Asia Pacific, Latin America and EMEA all increased kind of at a double digit pace for us this quarter. And as we've said for some time that the toughest market geographically continues to be the U.S. market..

Got it, Blake.

Can you share some of the countries that you are doing it to? It sounds like UK you are still doing directly, but is it Spain or Eastern Europe?.

Yeah, UK, we still do, yeah, in the UK, we still do it directly all of our brands, all of our significant brands that are meaningful. And really it's just some of the smaller countries and smaller brands throughout Europe. I don't have a matrix right here in front of me, but we've been actively managing that side of the portfolio as well..

Got it. Okay. And then you guys have talked about some of the progress you've made on reducing product cycle times. I think the Chameleon 7 is a good example of that.

How much product maybe within the Merrell brand you have on this kind of shorter cycle time, I guess pipeline, and then how much more do you think you can derive off some of these initiatives over time?.

I think we're kind of early on the continuum here. With respect to Merrell itself, not enough. I would say that across our whole brand portfolio. Retailers and consumers are clearly buying closer to need. You need to be faster and act with some speed here and condense the development time period. So, we have established pretty aggressive goals.

We have a process in place for both new concepts and existing collections in our pipeline across the portfolio. And now it's just a matter for us to roll it out over time..

Got it. And then just last question.

With Sue there as the president of Merrell, have there been new opportunities that she's been able to identify? I know she's only been there a few months, but maybe you guys weren't looking at previously for that brand?.

Yeah, I think both Sue and Todd bring an interesting and fresh perspective for the business, and I don't want to put too much of a burden on Sue's shoulders couple months into the job, but certainly we love her leadership and we love her fresh ideas..

Okay. Thanks..

Thanks,.

The next question comes from Scott Krasik of Buckingham Research Group. Please go ahead..

Hi, thanks. So just a couple of follow-ups on Merrell. You mentioned that Merrell actually benefited from moving from a distributor to a top-line model. Can you explain what that was? And then, I think Work is a all-new category this year, so just wondering how big of a contributor that was..

Yeah. I think, addressing your first question, Scott, I think as you know we have a – we do business in 200 countries and territories around the world, every year we have migration from joint ventures to owned to royalty based and top-line model changes.

They tend to certainly not be material for the whole year as a back-and-forth changes for the company. We only called out Merrell in the quarter because they did switch a couple of the distributors to – much earlier to top-line model changes, and for Q2 it seemed to have an impact on the overall Merrell reported revenue.

Merrell was up kind of at the high end of mid single digits. And when I factor out the model change for this particular quarter, it would have probably been up low single digits..

Okay..

But that we would expect that even for the Merrell brand to kind of even out over the course of the year..

Okay. And then....

With your second part....

Yeah, Work..

Oh, Work, yeah, been a great opportunity. Work and Tactical for Merrell, it's just beginning to ramp up, kind of a new business model focused on our e-commerce site for this initiative and certain key retailers. So it's certainly meeting our expectation.

Overall for the $500 million or thereabouts Merrell brand, we wouldn't expect it to be very material in its first year, but we do expect it to grow. The feedback has been very positive on into 2018 and beyond..

Great. And then just if I can follow up.

You mentioned stabilization in the boat shoes or maybe somewhat stabilization, I forget your wording exactly, so what does that imply and then when you think about mid single digit growth next year, does that suggest boat shoes inflect positively?.

No. Right now we all get the same market data and the boat shoe silhouette continues to have some trend headwinds and decline. We wouldn't assume any – or our expectations for 2018 do not assume any rebound in the boat shoe silhouette.

Frankly, we're starting to see a lot more preppy and boat shoe silhouettes on runways around the world, but we'll just see how that rolls out with the consumer. We're not expecting any big uptick there..

Okay. And then, Mike, just lastly on the inventory comments, you said normalize in 2H..

Yeah..

But maybe down double digits at year end. So just trying to clarify that, please..

Yeah, well, we have been just – for the last few quarters here, we've been running at that mid-20% improvement..

Right..

And we had a really good results at the end of year, down over 25% at the end of 2016. So even though we've made some additional portfolio changes and additional store closures, I didn't want you to think we were going to continue at that forward pace.

So we'll still have really healthy improvement at year end, but will be anniversarying a really good Q4 in 2016, so..

Okay, great. Good luck, guys..

Thanks, Scott..

Thanks, Scott..

And we have time for one final question. And the final question comes from Laurent Vasilescu of Macquarie. Please go ahead..

Good morning, thanks for taking my question. I wanted to follow-up on the store closures and the impact to revenues. I think it was called out that store closures will impact the FY 2017 revenues by $120 million..

Right..

So far this store closures have impacted 1H 2017 revenues by $39 million, leaving us another $80 million to account for.

How should we split that in dollar terms for 3Q and 4Q?.

Yeah. We have about $65 million to $70 million left in Q3 and Q4 for the stores that will be closed this year. There will be some additional closures at the end of the year that will impact next year, but about $65 million to $70 million and that splits pretty evenly between the two quarters..

Okay. And then, I want to follow-up on the re-calendarization. The first quarter had a $43 million gain for the extra week.

I was curious to know why the extra weeks are guided so much smaller for 2Q and 3Q in this mornings' press release, considering the overall top line is roughly equal across the first three quarters?.

Yeah. It's really the calendar. I mean the way we estimated the impact for both revenue and EPS in that table which is reflected in the earnings release was very specifically related to the activity in those particular weeks last year.

So, we're not trying to smooth anything, we're just taking the actual result and redistributing them into the right periods. So that – we thought that would be additional information that would be helpful. We have obviously some questions on the calendar change from the past two quarters.

And so the table in the earnings release should be helpful to reset everyone's expectations..

Very helpful. Thank you. And then last question, I wanted to ask about the underlying growth for the Wolverine Outdoor Group, up 11%. I think this compares to the flat year-over-year result in 1Q.

Just curious to know what drove that, is there any shift in timing between quarters?.

Not really. There really wasn't any significant shift. Some of the warehouse shift in revenue, several million dollars that Mike mentioned earlier, really was more focused on the Wolverine Heritage Group, but the Outdoor & Lifestyle Group, it was pretty much normal course of business.

Just stronger performance by Merrell, Chaco, by Cat, that was the main drivers..

Okay. Thank you very much. And best of luck..

Thanks..

Thanks, Laurent..

Thank you. The question-and-answer session has now ended. I would now like to turn the call back over to Mr. Chris Hufnagel..

On behalf of Wolverine World Wide, I'd like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until December 6, 2017. Thank you and good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..