Michael W. Harris - Wolverine World Wide, Inc. Blake W. Krueger - Wolverine World Wide, Inc. Michael D. Stornant - Wolverine World Wide, Inc..

Steven L. Marotta - C.L. King & Associates, Inc. James Vincent Duffy - Stifel, Nicolaus & Co., Inc. Jonathan R. Komp - Robert W. Baird & Co., Inc. Erinn E. Murphy - Piper Jaffray & Co. Edward J. Yruma - KeyBanc Capital Markets, Inc. Michael Kawamoto - D. A. Davidson & Co. Christopher Svezia - Wedbush Securities, Inc.

Laurent Vasilescu - Macquarie Capital (USA), Inc. Ross Licero - Telsey Advisory Group LLC Mitch Kummetz - Pivotal Research Group LLC.

Good morning, and welcome to the Wolverine World Wide earnings 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 anyone has objections, you may disconnect at this time. I would now like to introduce Mr.

Mike Harris for Wolverine World Wide. Mr. Harris, you may begin..

Good morning, and welcome to our second quarter 2018 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 2018.

The release is available on many news sites or it 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 616-258-5775.

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 to our corporate website titled WWW Q2 2018 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 I turn the call over to Blake to comment on our results, I wanted to provide some additional context and information.

When speaking to revenue, Blake and Mike will primarily refer to underlying revenue, which adjusts for the impact of retail store closures, the transition of Stride Rite to a licensed business model, and the sale of the Sebago brand and Department of Defense business.

We believe our underlying growth best reflects how our global businesses are performing in the marketplace. Also, recall that beginning in Q1 2018, we separately disclosed the impact of changes in foreign currency on revenue to better isolate this variable.

In addition, we'll be providing adjusted financial results, which adjusts for restructuring and other related organizational transformation costs, divestitures and incremental inventory markdowns related to store closures, and the impact of foreign exchange, environmental and other costs.

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 actual 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, Mike. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported second quarter revenue of $567 million, representing underlying growth of 3.9%. 3.3% on a constant currency basis. We also reported adjusted diluted earnings per share of $0.54, a 26% increase over last year, and a record for the second quarter.

Revenue was largely in line with our expectations, and represented accelerated growth compared to the first quarter. Our growth was broad based and highlighted by strong performance from Merrell, Sperry and the Heritage Group, with Merrell growing at a high-teens rate.

Earnings significantly exceeded our expectations for the quarter, and we're especially pleased with the impressive gross margin and operating margin expansion that contributed to excellent earnings leverage. We are again raising our earnings outlook for the full year as a result of our first half performance.

During the quarter, we made further progress towards executing our global growth agenda. I'll share details on our progress here in a minute, but first, let me quickly review the quarterly results for our brand groups and key brands. Starting with the Outdoor & Lifestyle Group.

Underlying revenue grew 8.6% compared to the prior year, up 7.6% in constant currency. With Merrell growing at an impressive high-teens rate, representing its highest quarterly growth rate in several years. This robust sales growth was partially offset by low single digit declines from Cat and Hush Puppies.

Chaco revenue was essentially flat for the quarter. Merrell's growth was ahead of plan, driven by broad based increases across all regions, product categories and direct-to-consumer. Hike, the largest of Merrell's consumer territories, saw impressive underlying growth, driven by the refreshed Moab, Chameleon, Siren and MQM collections.

The Outdoor Life territory also grew at a strong rate, driven by the Jungle Moc, TERRAIN, and Encore collections. For Q2, the quality of revenue for Merrell was excellent, with a higher mix of full priced sales which helped to drive significant improvement in gross margin.

Merrell was the first brand to adopt our new brand growth model, developed through our WAY FORWARD transformation initiative, and is well positioned to deliver high single to low double digit growth in 2018. This growth is being driven by global momentum across all consumer territories, including strong retail sell-through trends.

Merrell is introducing exceptional product at an accelerated pace, and received some impressive recognition at the recent Outdoor Retailer Trade Show, including the Editor's Choice Award from Backpacker Magazine for the Thermo Rouge, Shape Magazine's Best of Show Award for the new Wayfarer (06:27), and a Top Five Best New Shoes for the Jungle Moc 20 from Footwear News.

For the remainder of this year, an accelerated cadence of new product introductions for Merrell will be supported by increased marketing investments, especially in the digital and social media areas; all of which will help to drive strong growth in the second half.

Chaco's revenue was below expectations in the quarter, as the brand was impacted by a late start to its spring sandal season, with weakness concentrated in the first several weeks of the quarter.

This trend improved during the second half of the quarter, and the brand is now focused on driving its online business and delivering a more frequent flow of fresh product and compelling stories in the back half. Moving to the Boston Group. Underlying revenue for the Boston Group declined 1.6%, down 2% in constant currency versus the prior year.

Sperry delivered low single digit growth, with high single digit growth at Keds and our Kids business. These positive growth trends were offset by a decline at Saucony of just over 10%. Sperry's growth rate accelerated in the quarter and exceeded our expectations.

This represents the second consecutive quarter of growth for the brand, driven by very good performance in the U.S. and Asia-Pacific regions, along with double digit growth in its U.S. e-commerce business. Sneakers grew at a strong rate during the quarter, led by the Crest, Lounge and Striper II collections.

And women's sandal and casual categories also experienced strong gains. Although the boat category declined in the quarter, the trend was better than expected, with Sperry gaining market share. We look forward to a more stable performance in the future from the boat category.

We're very encouraged by Sperry's first half performance and expect revenue growth to continue into the second half. Keds' high-single digit growth was primarily driven by nearly 37% growth in e-commerce, including much improved performance within the core Champion product line. The high single digit growth for our Kids group was driven by the U.S.

business and impressive growth in the EMEA region. Saucony results were in line with our expectations and continue to be impacted by the quality and delivery challenges we referenced last quarter. These issues are now largely behind us.

In Q2, Saucony continued to drive attractive underlying growth in the important EMEA region, and its e-commerce business grew over 45%. The recently introduced Ride ISO received the Editor's Choice Award from Runner's World magazine and will be featured in their September/October issue.

And Saucony also received the Best Trail Shoe Award from Women's Health magazine. We expect improving year-over-year revenue trends for the second half of the year related to the launch of several new collections.

We're especially pleased to announce that Anne Cavassa joined Saucony in the second quarter as its new President, and is already having a meaningful impact on the Saucony business. In closing with the Heritage Group. Underlying revenue for the group was up 9%.

Up 8.8% in constant currency compared to the prior year, as all brands in the group experienced year-over-year growth. The Wolverine and Bates brands were both up mid-single digits, HYTEST grew strong double digits, and Harley-Davidson grew at a hid mid-teens rate.

The growth in revenue for the Wolverine brand was driven by successful recent product introductions including the I-90, Ranchero, and Floorhand collections, which sold well across multiple channels. The brand continues to perform well in the U.S. Work category where it achieved a number one market share position this quarter.

Wolverine apparel also grew at a strong rate in the quarter. In general, the Work category was the source of high single digit growth across relevant brands in our portfolio, including Wolverine, Cat, Merrell, HYTEST and Bates.

I'll now provide an update on the progress against our GLOBAL GROWTH AGENDA, which is focused on a more innovative and fast product creation engine, a digital-direct offense and accelerated international growth.

We've been making investments across all three key elements of our growth agenda and we're excited to see the benefits of the new tools, processes and capabilities from our WAY FORWARD transformation initiative helping to drive better top line performance. Merrell was our first brand to take full advantage of these new tools and capabilities.

We continue to expect these incremental investments to be approximately $45 million for the full year 2018.

The first element of our GLOBAL GROWTH AGENDA is focused on a more powerful product creation engine with Q2 investments helping to drive a more streamlined product development process and a deeper talent pool in areas to drive the new growth model.

Specifically, we've added new resources in the product development, product line management and marketing areas to create a more innovative, robust and faster product pipeline. We expect to commit about 45% of our incremental investments in 2018 to this area.

To advance our digital-direct offense, investments are focused on optimizing our social prospecting capabilities, while improving our ability to connect with consumers through compelling new content, brought to market on a more frequent basis.

These efforts are reflected in our owned e-commerce business which has been our fastest growing channel over the last two years, with growth accelerating to nearly 24% during the first half of 2018.

We are also seeing a positive impact on our overall business as fresh and enhanced content is driving brand interest and sell through at our retail partners. Approximately 30% of our 2018 incremental investment is planned to be spent on our digital-direct offense.

Lastly, to support accelerated international growth, we are directly attacking international opportunities to make our products and brands more relevant in key global markets and have added strategic and operational resources to our regional, international teams, especially in China.

We anticipate spending nearly 25% of our 2018 incremental investments to support international growth where we anticipate a high single digit revenue increase this year. The company made nearly $20 million in key incremental investments to drive growth during the first half of 2018 as part of our GLOBAL GROWTH AGENDA.

We remain committed to this enhanced investment strategy to help drive accelerated growth in the back half of the year and into 2019. I'm very pleased with the company's first half performance, with revenue in line with our expectations and gross margin and earnings significantly exceeding our outlook entering the year.

The significant operating margin expansion and earnings leverage reflects the efforts by our team over the last two years to transform the business to deliver in the new normal global retail landscape. We are now in an enviable position to invest for the future, drive organic growth, and add new brands to the portfolio.

With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who'll provide additional commentary on our Q2 2018 financial performance and further insight into our expectations for the remainder of 2018.

Mike?.

Thanks, Blake, and thank you all for joining us today. We are very pleased with our second quarter results, which reflect accelerated revenue growth and another quarter of better than expected earnings leverage.

Our brands are gaining momentum from recently introduced growth initiatives, which are underpinned by the new tools and capabilities developed as part of our transformation. We are certainly encouraged by the early impact of these initiatives on revenue growth and earnings leverage.

During the first half of 2018, we achieved our revenue plan and delivered adjusted operating margin well over 12% and ahead of our expectations. During the second quarter, the company delivered revenue growth of $566.9 million, resulting in underlying growth of 3.9%, 3.3% growth on a constant currency basis.

Reported revenue declined 5.3% versus the prior year due to the impact from store closures and the portfolio changes made in 2017. Merrell and Sperry exceeded our expectations in the quarter for both revenue and earnings. In Q2, Merrell delivered high teens underlying revenue growth and Sperry delivered low single-digit growth.

As expected, the implementation of our brand growth model has fueled acceleration of growth in our two largest brands and is beginning to impact the performance of the rest of our portfolio. Second quarter adjusted diluted earnings per share of $0.54 represents excellent leverage and 25.6% growth over the prior year.

Reported earnings per share was $0.57 and benefited from a one-time FX gain from the remeasurement of an intercompany loan early in the quarter. Gross margin of 41.3% was well ahead of our expectations and improved 250 basis points compared to last year, despite a 30 basis point negative mix impact from store closures.

Gross margin benefited from portfolio changes made in 2017, which provided about 100 basis points of expansion in the quarter. Adjusted operating margin was a very strong 12.5% and improved 140 basis points compared to the prior year.

The higher than expected Q2 gross margin was related to certain product cost benefits from our transformation initiatives, better mix from the strong growth in our e-commerce business and lower closeout sales in the quarter compared to the prior year. Most brands in the portfolio saw meaningful gross margin expansion in Q2.

Adjusted selling, general and administrative expenses of $163.3 million decreased $2.6 million compared to 2017 and included over $11 million in incremental investments related to growth initiatives.

We expect a slightly higher level of incremental investment spend in the third quarter and remain on track to spend up to $45 million in 2018 to fuel growth initiatives. The second quarter effective tax rate was 18.1%, which includes the favorable impact from voluntary pension contributions and other discrete items.

We expect the rate to further normalize in the second half and we now expect our full year tax rate to be in the range of 18% to 20%.

Transitioning to the balance sheet, recent progress made on improving SKU productivity, along with our speed to market initiatives, have driven continued improvements in our inventory position, even as we accelerate revenue growth.

At the end of Q2, inventories were down nearly $40 million, or 12%, with the majority of this decrease attributed to store closures and portfolio changes executed last year. The company remains intently focused on efficiently managing working capital. We expect inventory levels to increase slightly in Q3 and Q4 as our brands invest to support growth.

In Q2, we repurchased $5.3 million of our stock, bringing our year-to-date total to $50 million at an average price of $29.73. We ended the quarter with $350 million in cash and $1.6 billion of capacity to execute future actions intended to drive total shareholder return.

Total debt improved over $140 million and the company recently received a ratings upgrade from Moody's in response to ongoing improvement in cash flow, balance sheet metrics and operating performance. Now, let me cover our updated outlook for the remainder of 2018.

We expect fiscal 2018 reported revenue to be in the range of $2.24 billion to $2.32 billion with underlying growth of approximately 4% expected in the third quarter. Full year gross margin is now expected to expand by 100 to 130 basis points, up from our original outlook.

The expected ongoing improvement in gross margin is a direct result of successful, higher margin product introductions, supply chain discipline, product cost reductions, and other pricing initiatives implemented as part of the transformation.

We expect second half gross margin expansion to be lower than H1 due to more challenging comparisons including moderation of the impact from 2017 portfolio changes and certain accelerated WAY FORWARD benefits that were recognized in the second half of 2017.

We remain committed to making up to $45 million of incremental investments in 2018 to drive future growth. Including these investments, adjusted operating margin is now expected to be in the range of 12.1% to 12.4%.

Reported operating margin is expected to be approximately 11.6% to 11.9%, including $8 million to $12 million of cost to manage the company's legacy environmental matter. These cost estimates and other remediation activities remain unchanged from our Q1 assessment. We now expect 2018 net interest expense of approximately $23 million to $25 million.

Full year fiscal 2018 adjusted diluted earnings per share are now expected in the range of $2.08 to $2.15, an increase of 31% over last year at the high end of the range. Reported diluted earnings per share are expected in the range of $2.05 to $2.12.

The activation of our new brand growth model and other transformation initiatives are working, and we remain on pace to deliver mid-single digit underlying growth in 2018. We expect to exceed our stated 12% adjusted operating margin goal well ahead of schedule.

2018 is shaping up nicely and we expect that it will set the stage for an even stronger fiscal 2019. Thanks for your time this morning, and we will now turn the call over to the operator..

We will now begin the question and answer session. And our first question comes from Steve Marotta from C.L. King Associate (sic) [C.L. King & Associates]. Please go ahead..

Good morning, Blake, and my congratulations on a great second quarter and also on the updated guidance. Mike, just per your last comment, you expect an even stronger 2019.

Can you expand on that a little bit? Do you mean top line growth? Do you mean earnings growth, margin expansion? Can you talk a little bit about why you would expect an even stronger 2019?.

Sure. I mean, I think when you look at the performance we've had this year Steve, it's been progressively improving each quarter. We're still in the early innings of many of the improvements and benefits that we expect to gain from the WAY FORWARD transformation work, as well as the new brand growth model that we're implementing across the portfolio.

So the momentum we're seeing in the business and sort of just the time that we'll have invested in this new model I think will bear well out in 2019. And we would expect that to contribute to ongoing performance on both revenue and earnings performance..

Thank you, that's helpful.

As it relates to Merrell, is the first one on this new brand growth model, can you talk a little bit about when they went on and when others have gone on and when others will go on, just setting the stage a little bit for the other brands in the portfolio's growth similar to what Merrell is performing now?.

Yeah, Steve. A number of our brands had an excellent quarter, even though they may be lagging Merrell in adoption of all the attributes of the brand growth model. Merrell started to go on this model in 2017. Sperry probably followed a quarter or two later, and some of our other brands are lagging after that.

So as Mike said, it's still kind of early innings. I think the discipline and success we're seeing in Merrell is encouraging to the rest of our brands in accelerating also their adoption of some of these same skill sets and processes and capabilities..

Okay. Can you delineate Merrell and Sperry's expected growth in the third and fourth quarter? You mentioned there's going to be, obviously, continued growth in both brands.

Is Merrell more mid-single digit in the back half of the year? And is that evenly split between the third and fourth quarter? And if you could again maybe delineate Sperry as well, that'd be helpful..

Yeah, I mean, we don't normally give that kind of detail by brand for obvious reasons, but I think we're expecting a good second half out of Merrell even though, as you recall, Merrell had a great Q4 last year. Even given that fact and that harder comparison, we're expecting a very good second half out of Merrell, maybe a little bit more Q4-weighted.

And Sperry as well. We continue to see – anticipate top line growth, accelerated top line growth in Sperry. As you know, we got growth this year a couple of quarters, frankly, earlier than we expected from Sperry. We didn't really expect growth to hit until Q3, but I think that momentum is going to continue for the back half of the year..

Yeah. I would only add that for both for Merrell and Sperry, so the performance here for Merrell is encouraging, and as Blake said, a little ahead of schedule. But I think for Q4 the number of new collections that are being introduced into the global market for Merrell is very strong.

They've really kind of shifted a lot of their media and demand creation spend into the back half of the year as well to align with some of these new product introductions. And then for Sperry, as you know, our women's boot business is very strong and that's going to be a great source of growth, especially later in the year towards the fourth quarter.

So between the momentum we've seen in both brands so far this year and the new product initiatives that are on tap for later this year, and the support and investment behind those initiatives, and that's where we see the continued performance there for both of our big brands..

The really encouraging news for Merrell is we're seeing growth not just on the performance's side, Nature's Gym, Hike, and Work, but in Q2 we saw strong performance on the Lifestyle side, and we expect both of those to continue..

Great. One last....

Thanks, Steve..

...follow up – yeah, one last follow up.

The digital penetration in total sales in the second quarter and the expectations for the year?.

Yeah, our e-com business continues to accelerate. So as you recall, we were approaching 20% last year. So far through the first half of the year our eCom business is up about 24%, almost 25%, and we see that continuing to accelerate into the back half..

Thank you..

And our next question comes from Jim Duffy from Stifel. Please go ahead..

Thank you. Good morning, guys..

Good morning..

Question specific to 2Q.

I didn't hear you give digital growth rates in the second quarter, and also the international growth rates?.

Yeah, I mean....

And if you would, would you talk about the brands leading growth in each?.

Yeah, I mean, our brands – overall, I think our e-commerce growth was in the low 20s..

23%. Yeah..

Yeah, 23% in Q2. About the same as Q1. We frankly expect that with our planned investments to accelerate in the second half. Certainly, our biggest brands delivered strong double digit growth in their direct eCom businesses, Merrell, Sperry, but we had great growth. Maybe on a little bit smaller base from Sperry and Keds, especially.

So, a lot of the things we're doing to drive our own e-commerce business, focusing on retention, but especially on creating some continuous content, is also benefiting our retail partners. Because when we look across at least the domestic landscape, the fastest growth segment for a lot of our retail partners is their online business.

So, a lot of the money investments on continuous content, and more steady product flow, and a bigger story is to tell the consumers are really also benefiting their business..

Great. And I wanted to ask you about the content. Blake, you spoke enthusiastically about that in your prepared remarks as well.

Can you maybe give an example of some of the content that's been very successful for you?.

Yeah, I mean, it covers the wide range. In today's world, you could have something like the New Print Shop for Chaco, and the creation of an interim product line on the Tie-Dye Chaco sandals, which sold out in less than a week. It creates excitement around the brand. Yes, it drives some top line revenue growth, but it really creates brand interest.

Another good example would be, and I must admit I probably wouldn't have chosen this one myself personally, the Saucony collab with Dunkin' Donuts. The impressions, the news, the consumers that that collab reached was, frankly, much more important than the actual sales that were driven online.

So that's just a couple of samples of content generation, which, in today's world, almost has to be in real time. You have to have the staffing. You have to have the ability to respond almost in real time when something happens..

Cool.

And then the International?.

Yeah, international in the quarter was up. We had a pretty balanced quarter really across our regions. There were some timing aspects on Asia-Pacific. So there was a slight decrease in Asia-Pacific. Interestingly enough, we were a bit surprised by the strength of the core U.S. business.

As you know, across our industry, in consumer soft goods in general, U.S. wholesale has been, for a couple of years now, kind of a lagging channel and region. For us this past quarter, our U.S. business, which includes most of our owned e-commerce business, was our leading growth generator.

So, a little bit of a surprise, and I think just reflective of the product pipeline and the stories we're bringing to market..

Mid-single digit growth in the U.S. I mean, that's the strongest growth we've seen in that region for a long time. And our wholesale business was up too, so it wasn't just being driven by our DTC businesses. But having strong performance from a brand like Sperry and Merrell's performance in the U.S. was certainly good.

Our Boot business overall, as Blake mentioned in his comments, were up high single digits, which that Work business was very much U.S. centric. So, encouraging. And I would say, Jim, too, the performance, even though Asia-Pac was down a little bit, the performance there was pretty much unplanned.

Our Leathers business was a little softer in the quarter and at the low margin business for us. But just given some of the demands, pricing pressures in the Leather category right now in the industry, there was a little bit of top line pressure there for the Leather business that kind of hurt us a bit in Q2..

Okay, and then just a couple of the larger international brands. Cat and Hush Puppies were down.

Anything to call out there going on with those brands?.

Not really. The Hush Puppies International business remains very profitable, annuity-type business. And the Cat business really, on the international front, that was as much a timing issue with some distributor shipments as much as anything else. We would expect improved performance from both of those brands in the second half, on the revenue side..

Okay. Thank you, guys..

Thank you, Jim..

And our next question comes from Jonathan Komp from Robert W. Baird. Please go ahead..

Yeah, hi, thank you. Wanted to start off, Mike, just a couple of clarifications. Q3, I think you said underlying revenue growth of about 4%.

Does that imply pretty close to flattish on a reported basis?.

On a reported basis, yeah, it does. Getting back to that.

And, obviously, as we cycle out of the first half of the year, where we were operating stores, and we were operating the Stride Rite business, and our Sebago business that transitioned mid-year last year, we'll get much closer to the reported and underlying numbers being consistent in the back half of the year..

Okay, great. And then sticking on the third quarter, on the earnings.

Just since you've shifted to 13 week quarters last year, it looked like Q2 and Q3 had pretty similar earnings, and I'm wondering if there's any major moving parts to call out that would cause that to be different this year?.

Not really. We had much stronger expansion in margin this quarter, year-over-year, in Q2. We would expect good performance in that category. In other words, good strong gross margin expansion again in Q3. Maybe not quite as strong as Q2.

And then it levels off in the fourth quarter, because as we mentioned in our comments, we started to see some of the benefits of our transformation work a little early last year, late in 2017, both from a product cost and gross margin standpoint and some of the benefits from some of the structural changes we were making to the business and divestitures and so on.

So, Q4's expansion won't be quite as good, but I think that consistency between Q2 and Q3 is going to hold up nicely..

Okay, great. And then, maybe just a bigger picture for the balance of the year, obviously the fourth quarter, I think the midpoint of the revenue guidance implies better underlying growth, kind of the higher end of mid-single digits and just wanted to maybe clarify that.

And then also, as you think about the drivers, you highlighted Merrell as a big driver for the fourth quarter, just any additional thought on the drivers and kind of the visibility to the growth as you sit here today..

Yeah, Jon, as we've said from the beginning of this year, we expect our revenue to build throughout the year. That is certainly playing out for us. We expect that revenue increases to play out in that regard. I would say Merrell and Keds are going to have kind of a tougher Q4 comp.

But when we look at their product pipelines and some of the initiatives they have in place, we feel very comfortable. I think you have to remember that last year in Q4, Hush Puppies, Saucony, Keds, Wolverine, Bates, they had a bit of more of a lackluster quarter and are going to, frankly, have an easier compare.

So, we kind of have confidence up and down the brand portfolio..

It's good to see for Merrell, too. It's very good to see the early demand on the new programs that Blake is talking about that are going to start to launch maybe later this month, but mostly in the fourth quarter.

And the demand that we're seeing from our global distributors and our domestic retailers is pretty strong on those new programs, all incremental to obviously the base from last year. So, that's very encouraging. And we're seeing the same thing, as I mentioned before, we're seeing the same thing with the Sperry Boot business for fourth quarter.

And important for both of those brands, many of these products are not cold weather-specific products. They're not heavily dependent on cold or wintry weather to be successful.

The lines around our seasons have definitely blurred, as we've been more deliberate about bringing product to the marketplace a lot faster, and are responding to consumer demand and consumer needs in real time, as Blake mentioned.

So, the products that we're referencing here, for instance, for Merrell, their Nature's Gym business is going to be up dramatically in the back half of the year, based on the demand they're seeing in that category.

And that certainly isn't considered to be cold weather product, so good to see just good widespread, diversified demand across the business, and certainly not overly dependent on any sort of cold weather in the future..

Okay, great. I appreciate the perspective..

Thanks, Jon..

Thanks..

And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead..

Great, thanks, good morning..

Good morning..

You hit on it a little bit, Blake, one of your responses to Jim's question earlier, but can you just speak a little bit more about how you're thinking about the North American retail environment as we go into kind of fall and holiday season, from an inventory perspective, how the retailers are sitting? And then, anything to comment on thus far on back-to-school season, or any tidbits from the Nordstrom Anniversary Sale? I know you had some products displayed there, vis-à-vis your Sperry brand..

Yeah, I mean, first on the macro retail environment in the United States, the new normal environment hasn't really changed, right? Consumers are kind of focused on convenience, experiences. Consumers and retailers are buying closer to need. That requires us as brand owners to be more agile, faster, operate with some speed.

We continue to believe that store traffic, brick-and-mortar store traffic, is going to be challenged. There's been some ups and downs all year, but we think that's going to continue. And the one thing that was reiterated again in Q2 is if you've got great product, it kind of trumps a lot of things, right? It trumps the retail environment.

It lets our U.S. business as a region kind of overperform against a number of competitors, and it kind of starts with great product and compelling stories. And that's been our focus throughout our transformation initiative, and it continues to be our brand focus. As far as back-to-school, it's really not that important to our brands.

I would say it's important in the Kids business, our Kids Group, but really, over the last 10 or 15 years, we've seen a flattening out of that back-to-school peak, at least for our brands in the footwear market..

Okay. Fair enough.

And then on the Saucony business, can you just unpack a little bit more about some of the challenges you've had with the delivery quality issues? And I think you said it's now behind us, but I'm curious if some of those issues have impacted the relationship with the retailers or kind of shelf space that maybe they had on – need to pull back on, just given some of those challenges.

And then is your assumption that it will grow, the brand will grow in the second half?.

Yeah, I mean, that's a very perceptive question. When you have issues, like a few quality issues and a few fit issues – and I've said in the past, this wasn't all third-party response or responsible.

A lot of – some of this was self-inflicted, and we're now in the position where we've got to earn some of that momentum back with especially the run specialty crowd. And certainly the Ride ISO, the Kinvara introduction, the Switchback introduction, Best Women's Trail Running Shoe. Saucony has been on this since Q4, Q3 of last year to fix these issues.

We think Q2 kind of represents a low point, and we're coming out of the bowl now. We certainly expect Saucony's revenue performance to be much better in the second half..

Erinn, the other thing to remember about Saucony here, too, is it's grown to be a very strong global brand. And I think Blake mentioned nice performance in EMEA in Q2. Year-to-date, our international growth has been pretty solid. They have a nice Lifestyle business, especially in those international markets.

So this is a brand that has other levers, including e-commerce growth. It was up over 45% in the second quarter, to help kind of reset or recover from some of the challenges we've seen here in the last few quarters. But, as Blake says, I think we're starting to see that.

We would expect to see that in the second half, but I think it's helpful to know that we have that diversification for Saucony that'll help it rebound more quickly..

Okay, and then just my last question is you talked about digital. I think you said it was up 21% in the quarter.

Is there – can you split out what you saw with your pure-play online performance versus your own dot-com, the Merrell.com, Sperry.com, just kind of show does that split?.

Yeah. That was – actually, it was up a little over 23% or right around 23% for the quarter, and that's just our online business. That's just our owned businesses. When we refer to that we're always talking about our – the deep, direct-to-consumer component that we control.

It's hard to get specifically from all of our retail partners exactly how their online businesses are trending. Some, we have some very good insight to, others we don't. I would say against the industry in general, our growth rates are a little higher than the industry.

For some of our retail partners, I would say that's probably in line with what they're experiencing, too..

Okay. Great, thank you guys so much..

Thank you, Erinn..

Thanks..

And our next question comes from Edward Yruma from KeyBanc Capital Markets. Please go ahead..

Hey, good morning, guys. Thanks for taking the questions.

I guess first on the inventory, commentary about inventory build in the back half, is it fair to assume that you'll still leverage inventory as a percent of sales, or will inventory grow in excess of sales? And can you give us a little bit of color on the composition? Is this new product, carryover product? And then as a follow-up, obviously you guys have put up some very nice gross margin gains.

I know you're indicating that in the fourth quarter, you'll have more difficult compares. How should we think about gross going forward? Do you still have longer term gross opportunity given from maybe changes in mix? Thanks so much..

Sure. I think on the inventory it's an important call out. Appreciate the question because we're continuing to see improvement there. Frankly, our second quarter results were a little better than we expected, but in our core business, inventories were down about 1%.

So a lot of that improvement was from store closures and brands that we don't operate or own anymore. So it's certainly – Q3 will be a much more normal comparison. When we think about the growth rates and inventory in the back half, they'll be below our expected growth rates for the brands.

We've just got a better and different discipline in the business around SKU management and inventory management right now. And the speed initiatives that we've been able to put in place, which are still being implemented across many our brands, have helped us really manage the lead times, which has also helped us manage our inventories.

So when I think about the back half here, our ability to service the retail market and our own e-commerce demand has never been stronger despite the fact that we're operating with much less inventory.

So our SKU reduction, our SKU productivity, our focus on new programs, new initiatives, and making room for those on our Test-and-React strategy around those but to make sure that we're not having to make as big a bet on some of these new initiatives has been pretty successful.

So I'd say where we are going to see increases, it's going to be in new programs, new product, and/or really important core programs that are now gaining more momentum that we want to kind of have a lean and deep position on in the back half of the year.

And as far as gross margin expansion or gross margin performance into the future, we've always said that the WAY FORWARD initiatives in some cases take time to fully implement. We would expect there's more to harvest there, but there are also some other challenges out in the marketplace that we don't completely control.

So it's a little early to give any kind of guidance on next year's gross margin, but I would say we're in very good position. You think about Spring 2019 and maybe the first portion of next year at least around product costs, those are pretty stable right now. We don't have a lot of exposure there.

So there are a lot of other factors out there that, like I said, we don't control, but overall we feel good about being able to maintain our margins going into next year..

Thanks so much..

And our next question comes from Michael Kawamoto from D.A. Davidson. Please go ahead..

Yeah, hey, guys. Thanks for taking my questions. So you mentioned the Saucony partnership with Dunkin' Donuts for a special edition Kinvara.

Do you think you'll do more collaborations like this going forward and maybe generate some additional brand heat there?.

Absolutely. It's a focus, certainly not just in our Saucony brand, but in all of our brands..

Awesome, thanks.

And then coming out of outdoor retailer, can you just share a little bit about what you learned based on your discussions with retailers this season, and maybe some of the products that resonated well at the show?.

Yeah, I would say it was just reconfirmation of what we all know. If you have some new, fresh and dazzling product, you're going to get – you're going to have an enthusiastic consumer response and a take up from our retail customers, and we certainly experienced that at the show.

I think, in the case of Merrell, I think the breadth of the new product offerings and the quality of the offerings on both of the performance side and the Lifestyle side were, surprised some retailers. So we, as a company and especially as the Merrell brand, has had a very positive response to those introductions.

I would say the second half pipeline is probably more robust than the first half pipeline. But again, we continue to see, for example, a movement towards more transitional footwear. Yes, there's strict cold weather footwear. There's sandals. There's a great sandal business out there to be had, but transitional footwear. So, lighter, faster.

We're seeing more color. Certainly, even in the outdoor space a little bit, we're seeing a little bit of this dad's 90's overbuilt trend flow over, even into the outdoor category. So, it was certainly an encouraging, great show for us..

Great to hear. Thanks for your time and good luck for the rest of the year..

Okay. Thanks..

Thanks, Michael..

And the next question comes from Chris Svezia from Wedbush. Please go ahead..

Thanks for taking my questions, and nice job on the quarter..

Thanks..

I guess, first, with regard to the 4% underlying growth for Q3, you did 4% roughly in the second quarter. You've talked about accelerated growth for some of your brands. Why the 4%? Because that implies high single underlying for Q4.

Is that just timing of product launch relates to Merrell? Similarly for Sperry? Just any – just want to be clear about that..

Yeah, I think that, in a nutshell, kind of captures a lot of it. There's certainly a strong trajectory for our international business later in the year as well. So, as the pipeline of new products becomes broader and stronger, our international partners – we have our November conference.

There's spring product that'll be launched in the fourth quarter for our global distributors. So, some of the growth in Q4 is certainly being driven by an acceleration there, in a stronger pipeline of product that would be supporting our international business. But our two biggest brands are expected to grow nicely in Q4.

And as Blake said, when you look at the performance of our Boot business in 2017 and some of the other brands that did not grow in 2017 in Q4, we're just seeing an easier comparison for them. So I think it's really a combination of the acceleration in the business, the pipeline itself, and then the comparisons to last year..

And on gross margin, Mike, I want to circle back to what you said earlier. You made a reference to a similar improvement year-over-year in Q3 relative to Q2, which would imply, call it flat year-over-year for Q4. Correct me if I'm wrong in that..

Not exactly flat, but not near the improvement in Q4 that we've seen for the other quarters in the year..

Okay..

We had a very good performance last year with our gross margin. We had, again, some of those WAY FORWARD benefits that started to materialize a little earlier than we expected last year.

And the fact that we're just comping against a cleaner business in Q4, where we had our stores closed and some other things that were behind us that will make the Q4 comparison a little tougher..

Okay, but for Q3, you could be up somewhere close to 200 basis points. I just want to be clear about that..

It'll be a very strong, yeah, expansion. We were up almost 250 basis points in Q2. I don't think it'll be quite that strong, frankly, but it'll be – we'll have a good performance in Q3..

Okay. Just from an SG&A expense perspective, you have seen declines for a long time in total dollars. Is any inflection Q3, Q4, we would expect to see increases in expense dollars year-over-year because of some of the investments that you're making in the business and the comparison? Just any color about that..

When you look at our $45 million of 2018 incremental spend, about 40% of that amount was made in the first half, and we expect to make the other 60% of that spend, in particular, in the second half of the year..

I think the thing to think about there, Chris, is more about the run rate we're seeing so far this year, and how that – the timing of that will impact the back half, in terms of overall SG&A spend. Not just the incremental investments, but some of the other fundamental structural changes that we made to the business.

So I would expect SG&A to ramp up a bit in the back half compared to the first half, just based on that but nothing significant..

Okay. Final thing just here on e-commerce.

Remind us what percentage of the business e-commerce is, and remind us from a working (00:56:03) structure, from an EBIT perspective, where that stands relative to the corporate average?.

I mean, really on the profitable side, our owned e-commerce business remains one of our most profitable channels. So when we grow our e-commerce business, that not only has a great impact on the top line, it also has an impact on the bottom line..

It's about somewhere between 8% and 9% of our total revenues in our owned eCom business, but that's continuing to grow because obviously the growth rate in that channel is outpacing the other channels. We have a midterm sort of goal for that to be a much larger percentage of our total global revenue in the future..

Okay..

When you look at the e-commerce business of our retail customers and add that in, we don't have perfect insight or information there, but it's been a significantly growing part of the business. We've got some brands like Sperry, where it's certainly over the average of last year.

And last year about 27%, 28% of all footwear sold in America was online..

Okay. All right. Thanks very much and all the best..

Thanks..

Thanks, Chris..

And our next question comes from Laurent Vasilescu from Macquarie. Please go ahead..

Good morning, everyone, and thanks for taking my questions.

Mike, I was curious to know, how much did currency benefit the second quarter gross margin, and how much should currency be a benefit for the full year gross margin of 100 basis points to 130 basis points?.

Yeah, the impact in the first half of the year from currency was relatively small, and for the full year, the same. So, again, we have long-term hedge contracts, and just the timing and the flow of those contracts against the position we had last year are pretty consistent on the product cost side.

And that's where the majority of the earnings impact would come, both from a margins and earnings standpoint. So, very small. Less than 20 basis points..

Okay, very helpful. And then shifting to SG&A.

Regarding the $20 million incremental expense in the first half, can you parse out how much flow through SG&A for the first two quarters? And then, regarding the $45 million incremental investments for the full year, how much of that should flow through in SG&A in the back half?.

Yeah, almost all of the SG&A flow – or all of the incremental spend is SG&A. In both the first half and the back half..

Okay. Very helpful. And then, maybe on marketing, I think last year in your 10-K, marketing was $107 million, or like 4.6% of revenues.

Where do you think that will shake out for this year?.

It will be a higher percentage. I mean, a meaningful portion of the incremental investment here is going specifically towards media and demand creation, and certainly a higher percentage related to our e-commerce business, dedicated to social prospecting and other things that are supporting the growth there.

So, the overall media spend and the overall advertising spend for the company's going to increase. And we even mentioned I think that Merrell will kind of shift a lot of that in 2018, and shifting that into the back half of the year.

And so you'll see an increase in that category for Merrell, almost doubling, probably doubling more than doubling there, their media spend in the back half of the year compared to last year..

Okay, that's great. And then my last question, I think you talked about Saucony EMEA doing well this quarter. A number of vendors have expressed caution, to some degree, on softening Europe. Just curious to hear your take on the state of the European consumer..

Yeah, I mean, right now, just taking a look at Q2, it was pretty much steady on. We had good increases across our home businesses and third party businesses throughout EMEA.

So it may be a little bit tougher on the apparel side and some other consumer categories right now, but again if you have great new product, dazzling product, that kind of trumps everything..

And Merrell and Saucony were the two strongest brands there for us in that region..

That's great. Thanks so much..

And our next question comes from Kristina Westura from Telsey Advisory Group. Please go ahead.

Oh, hi. This is Ross Licero on for Kristina. Great quarter, guys..

Thank you..

Thanks..

Just – you mentioned in your prepared remarks that you're in a position to add new brands to the portfolio now.

Just wanted to know if you could provide any color on that? Where you're looking and the potential timing on that?.

Well, yeah, I mean, we're very active, let's put it that way. We're looking at some properties that are publicly available, and then we're also looking at some brands that maybe are not at that stage right yet. We have a proven skill set, we're good at integration.

Acquisitions has been a major driver of growth and profit for the company over the last two decades, and we really haven't changed our mindset in that regard. We think it's going to be a driver of future growth as well.

So multiples have ticked up here in the first half of this year, maybe compared to the second half of 2017, but we're focused on making the right strategic acquisition. So we like brands with some heritage that stand for something.

As a company, we probably skew a little bit more on the men's side, so gender-wise a women's brand would have some appeal to us. But we're not just looking in the footwear space. We're looking in packs and bags, footwear, and we're looking at the right direct-to-consumer opportunity, or apparel space as well..

Okay, great, thanks. And on the last call, you mentioned a couple significant international partner initiatives that were in the works.

Do you have any updates there?.

We've made great progress. Nothing that I can talk about today, but hopefully something I can talk about in the near future..

Okay.

And then, one last question, the inventory, it certainly looks very clean, but could you give any color on out of stocks that you're seeing, and maybe are you leaving any revenue on the table there?.

Not really. I mean, our fulfillment rates have been very strong, probably as good as they've ever been. We always have those occasions where we wish we had a little more of something that really hits and maybe performs a little beyond our expectations.

But overall – and really, this is across the portfolio – I think our performance there has been really good. We're keeping a close eye on that, but much of the improvement that we're seeing here has been to eliminate unproductive inventory and unproductive SKUs.

And, as you know, from the first half of the year, closeout sales for us have been a driver of gross margin expansion because we have fewer closeouts to sell. We're less promotional on our sites.

And so, overall, the benefit of this has been great, but, at the same time, I think we're in a smart position right now with our inventory position and the way we're fulfilling our orders..

I would also say that I think our speed initiatives have really helped here. So when you think of the traditional, we're working three seasons out to bring a new product collection or a big idea to market, our speed initiatives are focused on cutting that time in half to two-thirds. And it's certainly not all of our brands now.

We're just kind of in the middle starting to implement that across our brand portfolio, but it makes our whole inventory situation much more efficient and profitable. In addition, we have initiatives that in order to get back into something, we have some initiatives to really cut our lead times in half.

And we're just beginning, frankly, to implement those across the portfolio..

Okay. Thanks a lot..

Thank you..

And we have time for one more question. And the last question comes from Mitch Kummetz from Pivotal Research. Please go ahead..

Yeah, thanks for taking my questions. I guess I've just got some housekeeping ones. So, Mike, I think on the last earnings call, you were guiding to full year growth for Sperry, up low singles, and Saucony also up low singles.

Have those changed?.

I think the Sperry momentum is a little bit stronger, but I would still say in that same range for the full year. We started to accelerate that into Q2 a little faster. But I think a solid performance there, and expect that to kind of continue in the back half at a similar pace, probably accelerating a bit.

Yeah, the challenge in Q2 was, down 10% for Saucony is a challenge and it's a bigger hole for the first half of the year for us in Saucony. We expect strong improvements there in the back half of the year.

Whether we will achieve growth for the full year is maybe not in the cards for the brand, but really strong improvement in the back half for Saucony..

Okay. And then, on FX, can you say kind of what's embedded in your revenue guidance for the year? I mean, are you still expecting a little bit of an FX tailwind? Has that changed since you provided the last guidance? I know your sales guidance hasn't changed, but I'm wondering if your underlying assumption on FX has changed..

There's actually a table that calls that out in the earnings release, but it's basically unchanged. A slight tailwind for the full year. It was certainly a tailwind in the first half the year for us, but we expect that to reverse in the last two quarters..

Okay. And then, the pro forma earnings that you guys reported, that excludes this foreign currency remeasurement gain. Is that....

Yes..

...in other income, and can you say how much that was?.

Yeah. It was a little less than $6 million. We had an outstanding – it was kind of all related to the cash repatriation that we did from all of our foreign entities. And so we had an intercompany loan there. Just the timing of it and the change in the rates related to that balance resulted in a almost $6 million remeasurement gain.

It's all in other income on our reported P&L, and we obviously didn't include that in our adjusted results..

I hate to be nit-picky, but if we're pulling it out, is there any way you can give us the exact number? I guess, a little less than $6 million, but....

Like $5.8 million or something like that..

$5.8 million. Okay.

And then, lastly, on share count, what's the share count that you guys are using for the earnings guidance?.

A little over 95 million, I think 95.2 million or 95.3 million, something in that range..

Okay. That's all I needed. Thank you..

Thanks, Mitch..

Thanks, Mitch..

And the question-and-answer session has now ended. I would like to turn the call back over to Mike Harris. You may proceed..

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 September 8, 2018. Thank you and good day..

The conference has now concluded. Thank you and good day. You may now disconnect..