Greetings and welcome to Wolverine World Wide Inc Second Quarter Fiscal 2020 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the conference over to Brett Parent, Vice President of Strategy and Investor Relations. Thank you. You may begin..

Good morning and welcome to our second quarter 2020 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 2019.

The release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. If you would prefer to have a copy of the news release sent to you directly, please call Francesca Filandro at 646-677-1814. This morning's press release and comments made during today's earnings call included non-GAAP disclosures.

These disclosures were reconciled and attached tables within the body of the release.

During our call, we are providing adjusted financial results, which adjust for the impacts of environmental and other related costs and environmental cost recoveries, cost related to the COVID-19 pandemic including re-organization and credit loss expenses and foreign exchange rate changes.

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 US 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..

Thanks Brett. Good morning everyone and thanks for joining us. I hope everyone on this call is safe and well. Earlier this morning, we reported second quarter revenue of approximately $349 million and adjusted earnings per share of $0.08.

The company's performance significantly exceeded our expectations entering the quarter on virtually every financial metric. Our team's response to the challenges resulting from the COVID-19 pandemic has been extraordinary and the company is positioned to win moving forward.

At the outset of the global shutdown, we immediately developed a six-point strategic game plan to tightly focus our efforts around protecting the health and safety of our team members and customers, supporting our communities and delivering strong business results, as well as positioning the company for the future.

This plan and our team's execution behind it is working very well. And we are extremely encouraged by the company's results in the second quarter, which were led by the near triple digit growth of our ecommerce business.

We strategically invested in digital and ecommerce capabilities for several years, and quickly prioritize these channels as the best path to reach our consumers and drive profitable growth during the shutdown.

These investments enabled our online business to sustain accelerated growth throughout the quarter, with a number of brands like Merrell, Saucony, Wolverine and Cat Footwear delivering well over 100% online growth.

The relevance of our brands, product offerings and stories, combined with effective consumer acquisition efforts drove an increase in organic traffic, while new consumers grew over 100%.

The total online channel for our brands, including our own ecommerce business and the online business of our wholesale partners, accounted for about two thirds of our revenue in the US during the quarter.

Growth in this channel delivered strong profit leverage, including nearly 600 basis points of operating margin expansion, and our own e commerce business. I will share additional details on our digital strategy in our focused ecommerce efforts in a few minutes.

At the very start of the crisis, our balance sheet and financial condition were strong, but we prioritize liquidity and cash in the uncertainty surrounding the pandemic and its impact on the global market place. In the quarter the business generated over $115 million of operating cash flow, well above our highest expectations.

The company has a proven track record of consistently generating healthy cash flows in a broad range of business environments, a powerful testament to our team, the strength of our brand, and our agile and diversified business model. Mike Stornant will share more details on our strong cash and liquidity position in a minute.

A number of our brands are clearly benefiting from the underlying changes in consumer behavior. During the pandemic, there has been a significant uptick in new runners and Saucony's capturing many of these new consumers and building momentum with award winning product innovation.

More people are getting outside and participating in outdoor activities, especially younger consumers. And Merrell is the market leader in the hiking category and provides a broad range of products to help consumers enjoy the outdoors.

Finally, people are tackling more Do It Yourself home projects, in addition to continuing to work in essential jobs, spurring demand in work product, a category where we are well positioned with market leaders like Wolverine and Cat Footwear.

While we continue to expect the pandemics impact to persist in some countries and regions, we have confidence that the company is uniquely positioned for the current macro headwinds, the gradual reopening and recovery of the global economy and the new marketplace that is emerging.

I'll offer additional insight into the company's strategic outlook shortly. But first, let me briefly review the performance for brand groups in Q2, reviewing our brand groups performance, starting with the Wolverine Michigan Group.

Reported revenue was down 31.7% to the prior year and down 31.2% on a constant currency basis, reflecting the widespread impact of the pandemic and related shutdown of retail stores. Merrell and Cat Footwear were both down more than 30% and Wolverine, which benefited from several essential retail customers remaining open, was down less than 30%.

Chaco was only down mid-teens due to a tied digital penetration and the success of its new Chillos product. And our smaller brands in the group are down double digits. Ecommerce was the primary revenue and earnings driver across the portfolio in Q2.

Merrell.com grew approximately 140% during the quarter while nearly tripling new customer acquisition year-over-year. The brand effectively engaged consumers digitally, with significant increases in video views and social engagements driven by highly relevant stories and product celebrating the power and benefits of the outdoors.

The combination of compelling new product in the hiking, trail running, outdoor and at home casual categories and strong customer engagement helped generate robust online demand. The consumers responding to new product and fresh stories, and the Merrell pipeline is full with the brand also benefiting from the outdoor trend tailwind.

The brand is building equity behind new performance product, including the Antora, Nova and Ultralight offerings, as well as its industry leading franchises, such as the Moab hiking collection. On the lifestyle side, the Juno sandal collection along with trend-right slip-on, the Hut Moc, Hydro Moc and the Jungle Moc generated strong sell through.

Wolverine and Cat Footwear grew their ecommerce businesses even faster than Merrell during the quarter with no innovative product playing a central role. Wolverine.com's top seller was the Shiftplus work boot offering with the new Duraspring technology, delivering an athletic feel and a workbook with long lasting cushioning.

The brand built on this new technology with the July launch of the innovative Hellcat workbook, powered by Ultraspring, were sold in with our wholesale customers extremely well and immediately became the top selling style on wolverine.com.

Catfootwear.com was led by the Excavator Superlight collection in work and the trend-right Intruder collection in the lifestyle category. Moving to the Wolverine Boston Group, reported revenue was down 46.9% to the prior year and down 46.7% on a constant currency basis.

Saucony had a relatively solid second quarter with revenue down a little over 25% with a strong improvement in the back half of the quarter.

Sperry and Keds, two of our more fashion-oriented brands were impacted by the stay at home realities of the pandemic and soft trends in casual footwear, finishing down approximately 60% and 50% respectively in the quarter. Saucony.com nearly tripled revenue in Q2, driven primarily by new product innovation, and significant new customer acquisition.

Product innovation also helped increase the brand's average selling prices overall and expand gross margin by 500 basis points.

Saucony as captured the running world's attention and garnered numerous awards with the speed roll designed geometry and power run midsole cushioning technology, which delivers enhanced flexibility, fit, durability, and energy return, while weighing one third less than comparable styles.

The brand continues to roll out the power run technology across its entire product line. The new Endorphin collection launched in Q2 with the pro model featuring power run and an innovative performance enhancing carbon fiber plate.

The shoe propelled Molly Seidel to a second-place finish at the US Olympic Marathon trials earlier this year, and was the top selling carbon plate running shoe in the run specialty channel in June, generating substantial buzz in the industry.

The new Ride 13, one of the brand's largest franchises, is already delivering high double-digit growth versus the previous model. The brand ended the quarter with a double-digit order backlog increase.

Saucony's products and business fundamentals are very strong, and the brand is clearly benefiting from the consumer running and health and wellness trends.

Internationally, the brand performed well in Europe and in China, the brand and its joint venture partner opened 12 new stores during Q2, which are performing above planned levels and expects to open around 40 stores by year-round. Sperry.com grew over 30% in the quarter, driven primarily by new customer acquisition.

Its new Plushwave product collection continued to gain traction, and the brand executed its top performing digital campaign in Q2. In addition, The John Legend partnership continued to resonate with consumers. The brand is planning a strong push behind the campaign this fall.

Sperry also plans to expand its iconic Saltwater boot offering into men's and diversify the women's assortment this fall with new trend-right silhouette. The brand is the leader in the rain boot category in the US and has seen encouraging category trends with retailers for the back half.

I'll now take a few moments to share our perspective on the macro environment and additional details on how the company will leverage its strengths to succeed moving forward.

Throughout the pandemic, we have been actively engaged with business, government and healthcare leaders to stay abreast of the latest global developments and adjust our own tech. From the very beginning we focused on supporting our communities and frontline responders with personal protective equipment, as well as financial and product donations.

As one example, our custom Chaco facility was converted to manufacturing protective face masks, which were provided to local hospitals and healthcare workers.

While the timing for a vaccine is still unknown in much uncertainty remains, we are increasingly optimistic about the global prospects for our brands, many of which are benefiting from the strong consumer Trim tailwinds.

Our company and business model are built to overachieve in the most challenging global conditions, which we certainly witnessed in the second quarter. We anticipate that each country will continue down a path of gradual recovery, encountering challenges and incorporating additional health measures along the way.

However, global consumers, including new consumers to our brand, are responding to relevant storytelling and fresh innovative products. During this time, we have increased our efforts and investments behind design, cutting edge technology, digital executions, and new product introduction.

New collections in performance categories like hiking and running, and need based categories like work, including work around the home, will continue to win in the marketplace underpinned by broader consumer trends related to health and wellness, as well as a more secure and comfortable home environment.

Our brands continue to accelerate new product introductions across a number of trend-right categories. Our long-term investment behind our digital capabilities and ecommerce business has positioned us well for the accelerating change in consumer behavior and our online growth.

We will continue to add to the meaningful investments made in our digital marketing platform, Big Data and AI tools, digital content, personalization and mobile experiences. During the pandemic, we have increased digital marketing spend by more than 100%, fueling growth and new customer acquisition.

And we expect to increase this investment by more than 60% for the full year. Digital Innovation is beginning to drive our entire go-to-market process as well, enabling us to get the right product, more innovative product in the right place at the right time.

In June, we wrapped up our first ever fully virtual and digital global brand conference, completed with less than two months prep time. This conference was rated best in class by our global partners who represent our brands in around 170 countries and markets. We have increased the use of digital tools to design sample and style test products.

And we're now piloting AI powered trend analysis and advanced visualization to enable our product development process to be more effective, efficient and responsive. These new tools will also deliver benefits related to demand planning, inventory management, and selling effort.

While, this dynamic environment will continue to present challenges and opportunities, our leaner organization, structure and enhanced digital capabilities are providing for faster decision making in a more agile and response company.

Our diversified business model helps us mitigate the pandemic related risk as we are not dependent on any single brand, targets consumer, product category, geographic region or distribution channel to drive the business and win.

We are encouraged by the company's strong performance in Q2, and believe our long-term strategy and operational rigor have prepared the company well for this unique time in the new global marketplace. Our brands are well positioned relative to the consumers evolving mindsets, and shopping behaviors.

Our balance sheet and financial position are very strong and capable of supporting accelerated investment. And our diversified and nimble business model enables us to pivot quickly as needed. We believe the company is built to deliver strong cash flow and create value for our shareholders in any market environment.

Before I hand it over to Mike, I want to stress how incredibly proud I am of our team. Their actions and hard work in response to the pandemic impact have enabled the company to not only support our communities remain on strong footing, but to exceed our expectations and emerge even stronger position to invest and win in the new global marketplace.

With that, I'll turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our performance in the second quarter.

Mike?.

Thanks, Blake. And thanks to all of you for joining us on the call today. I would like to start by briefly echoing Blake's comments regarding our global team. Their focus and hard work have driven the performance of our brands in the toughest of times. And it helped us to reinforce the financial health of the business.

This has put the company on solid ground, and I'm very grateful for their contributions. On today's call, I will start by providing details on the company's second quarter results and then share an update on current business trends.

Revenue for the second quarter was $349.1 million, down 38.6% compared to the prior year or down 38.3% on a constant currency basis. On this revenue performance, the company generated $115.6 million of operating cash flow, significantly exceeding our highest expectations entering the quarter.

While the majority of physical stores were closed for much of the quarter, our ecommerce business excelled, growing 96% year-over-year at accretive margins. Our digital and ecommerce platforms delivered a crucial payback on our multi-year investment and proved their potential to drive the business at a larger scale.

In total, these platforms represent in about two thirds of total US sales in the quarter. The company benefited from approximately $10 million of international orders that shipped at the end of the quarter instead of in Q3 as previously anticipated.

On a regional basis, North America and EMEA performed the best driven by ecommerce growth, and the performance of consumer relevant product categories like hiking, running and work.

Asia Pacific and Latin America were down more significantly, due to a greater dependence on casual lifestyle categories, and a more severe and prolonged impact from the pandemic in Latin America. Our diversified and nimble business model again played a critical role in mitigating risk.

Compared to the prior year, inventory of $386.5 million was down 5% at quarter-end and down 7% when excluding new stores, and the impact of incremental tariff costs. This compares very favorably to the projections entering the quarter of a mid-teens increase in inventory. Promotional activity was limited to certain brands with seasonal product.

And we were successful in working through this inventory. The full priced wholesale business and the increased mix of our higher margin ecommerce business helped drive gross margin for the second quarter to 42.2%, 170 basis points better than last year. Most brands delivered nice gross margin expansion for the quarter.

Adjusted selling, general and administrative expenses of $129.6 million were down nearly $38 million compared to last year due to lower sales and quick action taken to adjust to the unplanned downturn in the global economy.

Select furloughs, organizational changes in compensation changes for the company's management team accounted for nearly half of these savings. Reductions in traditional marketing and travel costs were also key contributors.

We continue to invest heavily in our growing ecommerce platform and increased Q2 marketing spend in this area by more than 100% compared to last year. We also focused more investment dollars behind Merrell, Saucony and Choco to take advantage of evolving consumer trends that started during the quarter.

An important note here on the quarterly phasing of SG&A expense for this year. Some cost savings were more beneficial in Q2, due to the timing of certain events, including furloughs, and other compensation changes, the closure of our retail stores and the significant reduction in warehouse and customer service support at the beginning of the quarter.

We remain disciplined in managing all of our costs, but project that SG&A expense in Q3 and Q4 will progressively increase from Q2 as the demands of the business increase and as we invest to support growth entering 2021. We expect approximately $22 million of such costs to come back into the third quarter.

Adjusted operating margin was 5.1%, lower than last year due to lower revenue, but well ahead of our projections entering the quarter. Net interest expense rose $3.8 million as the company took proactive liquidity measures and raised $471 million of new debt in the quarter.

We projected net interest expense will be approximately $45 million for the full year. Adjusted diluted earnings per share of $0.08, $0.09 on a constant currency basis significantly exceeded our expectations entering the quarter. Let me now shift in the balance sheet. We are very pleased with the accelerated progress made on inventory management.

Our brands has sufficient core inventory and are poised to supply improved customer [indiscernible] – prioritize future production to bring new and innovative styles to the consumer, especially through digital channels. Overall, the inventory is healthy.

And we expect progressive improvement in our inventory position as we move through Q3 and Q4, helping us to deliver solid operating cash flow during the second half. We expect normalized closeout sales in the second half of the year due to the reopening of discount retailers that were closed for much of Q2.

The $115.6 million of operating cash flow generated in the quarter was an outstanding result. Our team over delivered on nearly all metrics to drive this. We were especially pleased to see stronger than anticipated cash collections from our global customers.

Our overall day sale outstanding was 54 days, well below our expectation and a testament to the strong customer partnerships and the global relevance of our brands in this environment. We now expect operating cash flow to be between $200 million and $250 million for the full year.

During Q2, we amended the company's senior credit facility to provide enhanced flexibility within our capital structure, and borrowed $171 million of incremental term loan debt. We also sold $300 million of senior notes that mature in 2025.

Together, the proceeds from these actions were used to repay prior borrowings under our revolving credit facility, resulting in longer term financing and additional borrowing capacity overall, where recently in Q2, we paid down $665 million in revolver debt reducing the outstanding balance to $125 million at the end of the quarter.

Total liquidity at the end of Q2 was approximately $1.1 billion, including cash or $423 million and $669 million of revolver capacity. Our bank defined leverage ratio was 2.16 times at the end of the quarter, lower than at the end of Q1 and well below the 4.5 times ratio required by our financing agreement.

Based on our current projections, we are confident the company will remain well within its leverage ratio requirements and in full compliance on debt covenants for the foreseeable future. We have great confidence in our brands and in our ability to adjust to the dynamics of a volatile global marketplace.

The environment remains uncertain, with somewhat limited visibility. As a result, we are not providing detailed guidance at this time, but we'll revisit this issue as conditions stabilize. As we continue to manage the business to maximize growth and cash flow, we are experiencing the following trends so far in the third quarter.

Our performance and need based brands including Merrell, Saucony, Wolverine, Cat Footwear and our other smaller work brands are performing better than our lifestyle brands. We expect this to continue, especially for Saucony as it accelerates its momentum in H2. Reorder trends from our wholesale customers have been positive for the last several weeks.

Many retail stores are now open, but the traffic is still recovering as consumers become comfortable with returning to physical shopping environments. Store traffic in the US has slowed recently, as consumers react to the apparent second wave of the pandemic being experienced in several states.

Our ecommerce growth remains robust, but is moderated to about 50% in the last few weeks, as physical stores have reopened. We expect current growth rates continue to continue the balance of the quarter. Gross Margin remains healthy, but should moderate to more normal levels as stores reopen and we return to a balanced wholesale revenue mix.

Around the world, our third-party partners are managing inventory and coping with a variety of market dynamics. We expect EMEA to perform better than the other regions, partially due to the relative strength of our own businesses there, followed by Asia Pacific. Latin America will continue to lag recovering more slowly.

Overall, we do expect a sequential improvement in revenue from Q2 to Q3. Based on current trends, coupled with the current backlog and reorder trends, we expect third quarter revenue to be down less than 25%. The global economy continues the reopening process, but as we have seen here in parts of the US, not without some volatility.

As such, we remain focused on a definitely adjusting course is needed in managing the fundamentals of the business. The company has proven an ability to consistently generate earnings and cash flow for shareholders, even in severely compromised global market conditions, with Q2 providing the most recent example.

Our diversified global portfolio effectively mitigates risk. While our nimble operating model and relatively low fixed cost structure enable us to pivot quickly when faced with challenges. The company has the liquidity and the balance sheet to weather near term headwinds while we fuel future investments.

Our team is focused, experienced and determined, and I am confident in our ability to emerge an even stronger company. Thanks for your time this morning. We will now turn the call back to the operator..

Thank you. [Operator Instructions] Our first question is from Jim Duffy with Stifel. Please proceed..

Good morning, guys, terrific execution..

Good morning. Thanks Jim.

I'm sure you guys are gratified by the return you're seeing on the investments you've made in digital capabilities. I want to start by talking about the increased use of digital in your business policies and go-to-market strategies. We're seeing changes across a number of industries with the pandemic that you guys look forward.

Can you kind of shape maybe some of the P&L influence of increased use of digital capabilities in your operational strategies? How does this influence the kind of structural margin opportunity for the business?.

Well, I think it's going to – we obviously think it's going to be a benefit Jim. On the marketing side, obviously, there'll be a bit of a shift here from traditional marketing to digital marketing. But the ultimate goal here is to shorten the overall supply chain, not just for making shoes, but development, the hitting the consumers hands.

You just simply have to be closer to the consumer and especially in challenging times like this you need to do that in order to take risk out of the equation. So we see digital as being a broad enhancer when it comes to that kind of operational discipline and in shortening the supply chain.

It's hard to predict exactly the pockets and how much of the savings, SG&A savings will come out of the equation in that regard. But we believe it's going to be fairly substantial, especially when you consider traditional sourcing and product development, back and forth to China, Asia and other manufacturing centers.

We believe that's going to eventually fall by the wayside and be replaced by digital capabilities..

Yeah and Blake mentioned in his comments, the fact that we think we can take a lot of those cost, product related cost out with the digital solution, virtual solution that we're already using, but had to test in an accelerated timeframe. But also it just helps us manage the inventory.

We can be closer to the consumer, the decisions we're making about the inventory and when we make those really helps us drive down our exposure there. So we're seeing some really immediate benefits from that approach..

Great and one number that really jumped out at me, you guys mentioned 600 basis points operating margin leverage in the owned ecommerce business.

How about gross margins for the ecommerce business in the quarter, was it promotional? And can you speak to some of those leverageable expenses? I'm curious how much of that leverage related to add rates, which I think were depressed during the quarter, which may have helped customer acquisition costs..

I think there are a couple of big drivers for us. Gross margins were up actually year-over-year nicely. It wasn't a – I mean, we were promotional with a couple of brands that needed to move some seasonal goods. But overall the promotional cadence was better than sort of normal.

And I would say, from that standpoint helped us on the gross margin line along with the fact that we were introducing some new products in the quarter, which were at higher margin. So that was positive. The drivers on leverage really are a couple things, the way we run our e-com business, right; we have a platform that supports our entire portfolio.

And that cost structure definitely is variable to a certain degree, but we were very much able to support the e-com demand, both in terms of the infrastructure with the e-com center of excellence and our warehouse customer service and other support services very well and that helped leverage the results there.

And then you right, we did get some benefits from some depressed advertising costs but overall, the organic interest in our sites really allowed our marketing money to work a lot more effectively in the quarter.

So our role as on that spend was with higher because we saw some very healthy organic – interest in organic search drive traffic to the site..

Great, I'll leave it at that. I look forward to following up after the call..

Thanks Jim..

Our next question is from Chris Svezia with Wedbush. Please proceed..

Good morning, everyone. Thanks for taking my question. Hopefully you're well.

Just first I want to go to Saucony for a moment, just to go there – just would you expect that to return to growth in the back half of the year just given the double – the strong backlog increase what you're seeing on e-com in response to product, just further color on that based on what you said about the backlog?.

Yeah, thought that that would be our goal, obviously affected somewhat by the timing of new product introductions. You can – there are a number of new product introductions that could fall at this point into Q4 or Q1. So it's a little bit up in the air.

But Saucony has tremendous momentum right now driven fundamentally by innovative product and a lot of buzz in the marketplace. So we would expect certainly a return in Q3 to growth for Saucony..

Okay, thank you. And just I guess Mike for you, just the exit rate for Q2 on revenue seems to be somewhere in that – somewhat less than 25% for that preliminary thought process you gave for Q3, which doesn't really imply too much of an improvement sequentially in terms of what you're seeing.

Is that just because of a – just your concerns about COVID spikes in certain markets, how quickly that in America and some international markets come back, exact nature, just based on some of the other comments that you made hotel, sale seems to be slowly moving in the right direction is such as more caution about how this all unfolds or just any additional thought..

For sure, I mean, we continue to be cautious here Chris. The wise thing to do, I think it served us really well, how we managed the business in Q2. June saw some improvement. We came out at the beginning of June with sort of our outlook at the point – at that point in time for the rest of the month and things proved out a little stronger.

July was an improvement over June. But at the end of the day we still have some uncertainty that we were not able to control.

So now, I would say overall though the trends in the business and the shift, it's probably most prominent and obviously, move from e-com growth to more traditional wholesale channels, but the demand there's been good in our at-once order trends in the last several weeks have been positive there. So there's been a kind of surge recovery there.

And obviously, we'd expect that to maybe settle down a little bit in the back part of the quarter..

Understood, final thing just for me real quickly, just on gross margin, I'm just curious, what you would characterize as normal or maybe you can break apart how much of the call 170 basis points improvement in Q2 is just high strength and mix.

I'm just curious, does it turn negative or is it just normalized in terms of less of a game because you're selling in still full price product or not, don't have to be promoted?.

Yeah, that's a good question. Because I mean, I think normal for us it was really to just kind of talk about a normal mix. But we're – there was there was suppressed close out demand in the second quarter and some of that's going to shift into Q3. So that'll have a negative impact on gross margins just for the quarter.

It's just a little bit of a timing shift there. But when you look at sort of the gains that we had in Q2, 170 basis points, two thirds of that, more than two thirds that was really from e-com mix and just first quality versus closeout mix.

So I think we're going to see a big portion of that kind of come back in Q2 and get back down into the 40% to 41% range for the second – for the third quarter not Q2, Q3..

Understood. Okay. Thank you very much, all the best..

Thanks.

Our next question is from Jonathan Komp with Baird. Please proceed..

Yeah, hi, I appreciate the color on the recent transit. I just wanted to dig in a little bit more on the casual brand there, what you're seeing there just given a couple of them that lagged in the second quarter, maybe just the start there. If you could give more color what you're seeing..

I think its several things Jonathan, I think one, everybody is aware of consumer trends right now. So there's some distinct consumer trends for us right now that are tailwinds for many of our brands and there's a few that are headwinds.

So I would – a couple of our Boston brands, more than the rest of the portfolio, have a bigger US department store base in their business for example, that obviously, was not very robust in Q2. So that's having an impact.

And there's been just on the consumer side a general focus on outdoor run, work, at home comfort, probably at the expense of dress, casual fashion and traditional casual shoes and we're certainly seeing that in a couple of our brands.

We think that's probably going to continue here until the pandemic runs its course here over the next six or nine months..

And just to maybe clarify, I assume those brands expect down more than 25% the whole – just given the – some of the positive call outs you had in the other performance driven brands. Just trying gain –.

Yeah, that's correct. Yeah, that's correct. I would expect those brands to be down in that range. Certainly down more than some of our other brands that are benefiting from the tailwinds..

Okay, great and maybe bigger picture, when you look out with your crystal ball.

Maybe this is a broader industry discussion, but just trying to think about how you're planning to fill – capture the lost sales here, maybe any thoughts on kind of big picture timeline? And related to that just with some of the cost discipline, do you think you need to get back to the prior sales levels to get - to achieve the same level of profitability? Or do you think some of the cuts that you're making are going to be permanent here?.

I think some of the structural changes will be permanent. I think there's been significant changes over a very short time in consumer behavior. Maybe five years of consumer behavior compressed down to six or nine months, especially around the use of technology and the changes that that's enabled. So we think that's going to be permanent.

That requires our business and all businesses frankly, to be adjust and be agile and be fast and operate with some pace. And a broader picture with respect to the pandemic, it really varies by region-by-region and in the United States, state-by-state or even labor shed within a particular state.

So we believe there's going to continue to be some volatility until there's a universal vaccine. I don't have a crystal ball though, I've been on a committee, advising our state's governor on with health experts and other CEOs on approaches to address the pandemic and lower the curb.

But I think it's going to be six or nine months, a little bit of fits and starts. One of the things that has been surprising to us has been the quick spike in consumer trends, whether it's to the outdoor or running.

Even in the running category there's been a tremendous influx, for example, of new consumers to the sport and subsequent surveys have shown that they're going to – the vast majority of those new consumers are going to remain with the sport. So we see some of those trends continuing on well past, probably the lifeline of this particular pandemic..

Okay, that's helpful color..

Thank you. Thanks..

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed..

Hi, good morning and congratulations on the progress..

Thank you, Dana..

As you've seen the ecommerce channel and digital accelerate, what do you think the opportunities are for gross margin potential versus the other channels? And how do you see it as being operating margin accretive? Thank you..

Yeah, I would think one it's going to be gross for us anyway. I know it's different for certain companies, but our ecommerce business has always been accretive to our overall bottom line results. We do not even know we're going to have increased our investments in e-com and digital. We think that is going to be continuing to be the case.

So we would see this shift to a more DTC ecommerce model benefiting gross margin over the long run more than we may have seen it have an impact a year or two ago and certainly a beneficial impact on our bottom line as well. And that – again frankly, that's taking into account increased investments that we know are going to continue..

Yeah. And Dana, you just – all you have to do is look at the second quarter results that we talked about earlier and really the ability at these levels at this scale, to enhance the operating margin by 600 basis points was pretty tremendous. And we had to chase some things and change some things in the middle of the quarter to respond to that demand.

So I think it bodes well for our ability to leverage as you're inquiring about..

And then if you think about inventory, which showed also nice improvement too. How do you think about inventory by brand as you move through to the holiday season? What are you seeing out there in terms of demand? Thank you..

Sure..

We're certainly seeing spikes in demand behind certain consumer trends in some brands. We've got a few brands that are – a couple of brands that are chasing some inventory right now. We believe for Q4 obviously, when you have something as white hot as Endorphin is for Sperry, I mean Saucony right now, you never have enough inventory.

So we're chasing some inventory for Saucony for sure, some of the more fashion boot product probably and the new boot product for Sperry as well. Overall though, the team did a pretty tremendous job of keeping the company in business, keeping our supply chain operational and hats off to the team obviously, for all those efforts in Q2.

I would think with this – we are going to see at least domestically here probably continued shift to at once from future orders for a quarter or two at least.

So it just puts a little more burden on us to have the right core inventory for those retailers and really over communicate with those retailers like we have been so we can really manage our business with them. Many of those retailers remain in a state of flux right now..

Thank you. Look forward to seeing the continued progress..

Thanks..

Thanks, Dana..

Our next question is from Matthew DeGulis with KeyBanc. Please proceed..

Good morning. Thanks for taking our questions. So with e-com up almost 100% and wholesale down, that's a pretty big delta. So I'm wondering your thoughts on it if this is more of a permanent shift and you'll be a much bigger DTC company moving forward.

And what this does to your business on a predictability and inventory ordering perspective?.

I think it's going to be a permanent shift. It may not be as dramatic in the short-term as Q2. But we see that as a permanent shift, accelerating shift. I've read some predictions that overall consumer online will be up 50% or more this year in the US market, for example.

So we don't see the consumer retreating from the use of technology, digital and in online. Certainly, the company is going to shift to have more of a DTC focus as we look forward here. And that's frankly, one of the reasons why we're investing so much in digital capabilities.

We need that digital analytics, AI powered predictions to help us make the very best decisions when it comes to inventory. So they really – both of those go hand in hand at least for our best business..

Thanks. And in the wholesale channel, I'm wondering if you can give us any color on how you're thinking about the back half of the year and if you could break that down by store type like family, sporting goods, online only, and the others..

Yeah. We've seen stores are actually open up here throughout Q2, but we know that some states now in the United States, for example, I'll restrict my comments right now to the domestic market are experiencing a second wave or something approaching a second way.

We have seen store traffic overall decrease in some of those markets in some of those states. And we think that probably will continue until trends reverse with respect to the virus. A little bit surprising in Q2, we had the rural channel, the Farm and Fleet's remained open fairly much as the central businesses throughout the country.

I think that contributed to our relatively strong work boot performance in Q2. We continue to see the case. We think the sporting goods channel will continue to remain open and perform well. Mall based retailers it's a little bit more of a mixed bag there, depending on the state and in some cases, the city.

So we know the consumer still has a level of fear or concern about going into crowded environments. You would know that from the news when you look at the beaches and some of the younger millennial parties, but we know that exists generally for consumers right now. So we think those environments will continue to be a bit challenged here for a while.

And likewise, I think the family channel is a little bit mixed as well. Some areas open and doing fairly well and then some areas and states not so well. So we think we're going to see gradual improvement here across all channels as we roll forward. The big spike I think is going to be tied to a vaccine and some real headway on that front.

But longer term and short-term we see the consumer continuing to focus online and they're using technology to make their life more safe and convenient..

And Matt, one more thing, our digital pure play customers, right, they continue to do very well in this environment and were strong contributors in Q2.

And as part of our traditional wholesale business that's become a bigger and bigger part of the overall mix and helped us deliver two thirds of our US revenue through the online channel in the second quarter..

Helpful..

So our next question is from Erinn Murphy - Piper Sandler. Please proceed..

Great, thanks. Good morning. I guess two questions for me. First, just around the uncertainty of school starts and just the broader back to school season, could you just speak to how you see that impacting Sperry and Keds in particular in the portfolio and then I have a clarification on Saucony..

I mean, the, unfortunately the – families with younger children and even kids going back to universities, the patchwork of approach to school openings this fall is causing a lot of concern and a lot of volatility. We do not anticipate any kind of universal approach there.

As you know, Erinn, back to school is not really material to our company overall as a selling event. Our Keds business, our Keds Group, even that is more focused on younger children. So we don't think it's going to have much of an impact, but we think it's going to be from a consumer standpoint, a more volatile back to school season.

We see parents investing in technology as many schools are focused on a virtual only format at least for the first semester or first couple of months. We see parent's spending on their home, whether it's a desk or to create a little bit of a school slash work environment.

I think some of that is going to come at the cost of traditional consumer soft goods, especially in the apparel sector and a little bit in footwear. So it's a challenging environment. And it's different for every state. In Boston, our offices are open, but our onsite daycare is not open. In Michigan, our offices technically are not open now.

We have still some pretty restrictive guidelines there, but our onsite daycare here is open. So there's going to be a number of challenges for parents and kids certainly this fall..

Okay, and then my follow up and maybe Mike, this is for you just on Saucony. I believe you're laughing, but taken up your Italian distributor, how did that impact the second half growth rates that you were speaking about earlier on the brand? Thank you..

Yeah, I mean, we definitely saw a nice benefit last year from the addition of Italy as the equator that distributor. So yeah, we're anniversaring some really nice numbers there in Q3. As Blake mentioned, we still expect Saucony to return to a growth position in the third quarter based on the momentum there.

The order book, the trends that we're seeing in the category, so it's good that you called that out because we think that even strengthens the Saucony story that we're copying up against the addition of that business a year ago..

Great, thank you both..

Our next question is from Susan Anderson with B. Riley FBR. Please proceed..

Good morning. This is Alec Legg on for Susan. Thanks for taking our question. Just a quick follow up on wholesale orders. You mentioned they were trending positively the last few weeks. I remember last quarter you mentioned reducing inventory receipts by about 300 million this year.

But as retailers have started opening it up, have you seen any categories or wholesale partners that have started chasing on categories? And do you anticipate that inventory receipt reduction to be less than 300 million this year?.

Well, we took cancellations back at that time, based on the uncertainty back in really March, April timeframe. And since then, obviously, gained more confidence, more certainty, more clarity from our customers to be able to go back and replay some of those cancellations.

So overall, I think as I mentioned our outlook for inventory is still very positive. And we expect by the end of the year to still be down over $40 million year-over-year in inventory.

But we have the ability to surge – if our spring demand were to pick up over the next 60 days and we needed to bring in some more spring merchandise for December and January deliveries and we still have some time to do that. So I would say that we have inventory – we have brands that – many of our brands have season less inventory.

It's very good core product that sells year round and I think for some of our brands, like Blake mentioned around Sperry's both business – our boot business that did get pushed into Q4 a little bit, but other than that, our inventories are strong, our positions are and I think we're in a very good position, certainly for Q3.

So far in the quarter, we've been able to fulfill the unexpected demand at a very high level. So we're confident in the inventory trends..

Perfect. Thank you..

Our next question is from Mitch Kummetz with Pivotal Research. Please proceed..

Yes, thanks for taking my questions. I just wanted to – Mike, I want to drill down on your outlook a little bit. First on sales and then I got a follow up on margins. So you mentioned that Q3 sales, you expect them to be down less than 25% and you also made the comment that July was better than June.

My sort of back of the envelope calculation is that June was maybe down around 20%.

So I'm kind of curious as to what you saw in July was sort of down teens or?.

June was down much higher that. But July was – and again, I won't quote the specific trends by month, but I would just say we saw a progressive improvement, especially in the wholesale side of the business in July, as we just started to see more and more reorder demand come as stores were opening or after the stores were open.

So we saw that occur and saw some good trends and consistent trends for the month of July.

In the same kind of – in the same ballpark as what we're talking about for the full quarter, slightly better in July than that, but overall, I think gives us good confidence because the out of the gate trends were in line, if not a little bit better than the overall look we're providing for the quarter..

Got it, so what explains kind of the deterioration – the expected deterioration over the balance of the quarter? Again, is that just being cautious or is there something you're seeing that suggests that –.

No, I don't think there's significant deterioration, I think there's just – again, there's just – we know what the timing and phasing of when we sell a new product in the quarter and that just happens in certain months. And we're also – there's a dose of caution in there Mitch for sure.

We just don't know what the last few months of the quarter here or the last six weeks at this point, will not fairly hold as it relates to all this uncertainty, but we feel good about the outlook based on where we are so far in the quarter..

Got it just trying to better understand that and then on margins, I think you made the comment that on SG&A that 22 million in cost come back in Q3.

So are you basically saying that from a dollar standpoint that like Q3 SG&A should be 22 million higher than Q2 or are there other factors to consider there?.

No, that's about the right way to think about it. I mean, part of that 22 million is obviously, variable cost though, right, as we serge up with wholesale revenue and our warehouse and customer service teams and all this infrastructure, more commissioned sales in the quarter things like that, marketing spend with our wholesale brands.

But yeah, that's essentially the way to think about. It's not fixed costs coming back in, but much of the variable costs related to the new demands of the business in Q3 versus Q2..

Got it. Thanks and continued success..

Thanks, Mitch..

Thanks..

And our final comment is from Laurent Vasilescu with Exane BNP Paribas. Please proceed..

Good morning. Thanks for taking my question. Mike, I wanted to follow up on – I'm not sure if I heard it right, but are you projecting sequential improvement through 3Q to 4Q? I think you called out about 10 million of pull forward revenues to 2Q from 3Q.

Are you anticipating any pull forward from 4Q into 3Q, just maybe some color on that would be very helpful?.

Sure. No, not at this point, we don't necessarily view there to be any major opportunities at the end of the quarter. And we tend to – in this particular case in Q2 is nice to see that we have some strong customer demands specifically in Europe, the International Business tends to be where we have some of that timing shift.

And for us in the in the second quarter, it was really the strength of our European business that pulled some of that demand into Q2. But at this point, the outlook that we have wouldn't contemplate any significant shift from Q4 to Q3..

Okay, very helpful. And then as you push forward with your DTC strategy, I noticed in your filing this morning, you parsed out $4.5 million in new store inventory.

Just curious to know what your store count is currently, is it still 96 or – and how many stores do you plan to open for the full year?.

We're not planning to open any additional stores for the rest of the year. I think the store count is in the low 90s right now. We've had a couple stores come off their lease naturally.

And we wouldn't plan to be opening any new stores in the environment we're in today, but pretty good stable position at just over 90 stores and actually seeing as Blake mentioned, for all the reasons whether it's state-by-state or otherwise, but in the aggregate between our Merrell, Sperry and multi-brand stores, they're operating at a little above 70% of what the plan levels were for the third quarter, coming into the year.

So not a complete return to normal, but in many cases with conversions being much higher than they were a year ago performing at about that 70% plus level right now..

Very helpful and then as a last question, following up on Chris's question on gross margins, I think you mentioned briefly that we should think about 40% to 41% range for 3Q.

I understand that mix might be an impact, but just curious to know is FX cost anything we should think about as a downside to the gross margin?.

Not compared to Q2 really Laurent, it's really the mix for the common wholesale that will drive the gross margin and as well as I mentioned just some shift on closeout from Q2 to Q3. More there are some suppressed demand in Q2 and we just – stores weren't open, the retailers weren't open and we expect that to kind of come back in Q3..

Very helpful color, thank you very much..

Thanks Laurent..

We have reached the end of the question-and-answer session. I would like to turn the conference back over to Brett Parent for closing comments..

On behalf of Wolverine worldwide, 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 5, 2020. Thank you and have a good day..

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation..