Greetings, and welcome to the Wolverine Worldwide Third Quarter Fiscal 2020 Results Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brett Parent, Vice President of Strategy, Investor Relations. Thank you, sir. You may begin..

Good morning, and welcome to our third quarter 2020 conference call. On the call today are Blake Krueger, our Chairman and Chief Executive Officer; Brendan Hoffman, our President; and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the third quarter 2020.

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 include non-GAAP disclosures.

These disclosures will reconcile and attached tables within the body of the release.

During our call, we are providing non-GAAP financial results, for example, which adjust for the impacts of environmental and other related costs, net of cost recoveries, costs related to the COVID-19 pandemic, including severance, credit loss expenses, certain inventory reserves and other related costs and foreign exchange rate changes.

I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine worldwide 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..

one, accelerating our digital DTC offense by engaging consumers with pinnacle brand experiences, product newness and compelling storytelling; two, driving innovation in all aspects of our business model.

Especially our product creation antigens; and three, accelerating growth in global markets by enhancing the positioning of our brands to capitalize on current trends and product categories consumers are craving. Upfront, I'd like to recognize our dedicated global team.

Thanks to them we now enter the next phase of the pandemic from a position of strength. With deep financial resources and the operational ability to service our consumers and retail customers.

Over the last eight months, the team has operated to improve liquidity, controlled discretionary spend manage inventories and generate substantial cash flow, all with an overriding focus on protecting discretionary spend manage inventories and generate substantial cash flow, all with an overriding focus on protecting our employees and customers.

I am truly grateful for their efforts. For several years, we have been investing to strengthen our digital and DTC capabilities, and this has allowed us to accelerate and optimize the global online channel. These investments dovetail perfectly with the once inter generation change in consumer behavior that we are witnessing.

Our owned e-commerce business nearly doubled in Q2 and continued its robust growth in Q3, up over 56%. In addition, the online channel of our customers has now also become our largest U.S. wholesale channel. Together, our owned e-commerce business and the online business of our wholesale partners accounted for over 40% of our revenue in the U.S.

during the quarter. We expect our global online business will be the largest source of growth in 2021. From a brand perspective, we have become increasingly optimistic about the momentum in our brand portfolio as this unusual year has unfolded.

Our brands are well positioned in high demand categories and distribution channels, and forward demand signals are healthy, both at wholesale and in our direct-to-consumer business. We have doubled down on new product and innovation during the pandemic, and we're seeing consumers respond favorably to newness and our fresh product offerings.

As a company, we are clear on our strategic investment priorities to fuel future growth. Our strong brands sit at the center of the most relevant product categories trending with today's consumers, active and athletic, including running, outdoor, at home, and work and work lifestyle. Saucony continues to sprint ahead, driving strong growth in Q3.

This momentum is fueled by Saucony's original fashion product as well as its award-winning product innovation in the running category, a support and activities that is experiencing a resurgence in the current environment. In outdoor, Merrell remains the number one hiking brand in the U.S.

offering consumers a broad range of products across many outdoor categories. We also have several work brands that are trending, including Wolverine, which remains the number warm work brand in the U.S. market. To briefly discuss how our pivot to digital and DTC will accelerate brand growth, I'd like to introduce Brendan Hoffman, our new President.

Brendan brings a strong consumer focus and a wealth of experience in merchandising, digital marketing and e-commerce, having served as the CEO on the retail, e-commerce and brand side. His background and experience will help us accelerate our transition to a DTC-first and digital organization.

Brandon?.

Thanks, Blake. It's an honor to join such a seasoned management team and family of global brands, such a great record of success and tremendous growth potential ahead. In my first two months with the company, I have focused on meeting our people, learning the nuances of each brand's business and reviewing future growth strategies with the brand teams.

Any one of our brands represents an exciting opportunity on its own. But I am particularly energized by the collective power of the company's portfolio, which is supported by centers of excellence that enable each brand to focus on the consumer and cross-pollinate best practices.

I could not be more optimistic about our future and thrilled to be part of it. Blake spoke about the advantageous positioning that many of our brands enjoy, highlighted by Saucony, Merrell and Wolverine.

I also believe Sperry, a brand that I literally learned to walk in, possesses tremendous potential as an iconic American brand as we move beyond the near term headwinds Each of these brands is poised for significant growth, which is only accelerated by the channel migration to e-commerce.

Over the last eight months, we have witnessed a dramatic shift in consumer behavior, with many years of change compressed into a short period of time. Consumers' heightened digital engagement provides an opportunity for our brands to speak to them directly through our websites, emails and social media.

We must create a constant dialogue and forge an emotional connection, rooted in our leadership positioning in areas they care about to drive growth, especially active in athletic, outdoor, at home and work.

The digital and DTC channels have been a strategic investment priority in recent years, and we plan to increase our future spend in these areas to maximize the potential of our brand. We are setting an aspirational target to achieve $500 million of revenue in our global O&E commerce business next year, more than doubling its 2019 revenue.

As more of our business is done through our own branded sites, we will use the consumer insights we were able to gather to make better and quicker decisions, which will help not only our own DTC business, but also benefit our retail partners and their omnichannel efforts.

I've already met some of you on today's call virtually via Zoom and look forward to the time when we can meet in person. With that, back over to Blake..

Thanks, Brendan. I'll now provide a brief recap of our brand group's Q3 performance and some additional detail on our largest brand.

For the Wolverine, Michigan Group, reported revenue was down 9.9% to the prior year and down 10.2% on a constant currency basis, reflecting a significant sequential improvement despite the continued impact of the pandemic. Merrell and Wolverine performed well, with revenue down mid-single digits and high single digits, respectively.

Chaco also outperformed, growing nearly 30% as a result of the outdoor category tailwind, the brand's high digital penetration and the continued success of its Chillos product introduced earlier this year. For the Wolverine Boston Group, reported revenue was down 19.7% to the prior year and down 20.3% on a constant currency basis.

This was a substantial improvement over Q2 and reflects growing strength in the face of the pandemic headwinds. Saucony continued its resurgence, driving low teens growth in the quarter, while Sperry, as expected, was down around 45%, reflecting challenges in the lifestyle fashion footwear generally.

DTC e-commerce once again was the primary driver of growth across the brands. Merrell's strong performance was led by merrell.com, which grew nearly 80% in the quarter. The brand's digital marketing has now driven almost 3.5 times as mini social media engagements year-to-date compared to 2019.

Owned stores also performed well, down only mid-single digits, despite significant traffic declines related to the pandemic's impact on physical shopping trends. For Merrell, the performance category delivered solid growth due to a strong mix of trend-relevant icons and compelling new collections.

The industry-leading Moab collection delivered high-teens growth and fresh merrill.com exclusives, like the Honey Stinger collaboration, field revenue and consumer buzz, the Merrell product pipeline is full.

At the end of the quarter, Merrell launched the Antora two and Nova 2, continuing to build equity behind these important trail running franchises. And the exclusive on guide collection, the brand's most sustainable collection to date is off to a strong start.

Starting in the spring of 2021 and Merrill plans to launch faster, lighter and more athletic offerings in the Moab line, harnessing current momentum and innovating on the brand's biggest franchise.

The brand also plans to further capitalize on the easy on off trend, expanding on its iconic Jungle Moc and its newer hydro Moc and hut Moc styles, all of which are seeing a strong response.

To support these launches and elevate digital content and storytelling at an accelerated pace moving forward, Merrell is focusing the majority of its global marketing spend on consumer-facing digital content and execution, which will include a new mobile app to elevate the consumer experience on mobile devices.

During Q3, demand for the Wolverine brand outpaced our expectations as the work in rugged outdoor categories continue to trend. Wolverine.com's revenue doubled in Q3 and as did the brand's engagements in social media. Wolverine continues to evolve the work category with innovation that integrates lightweight athletic technology with rugged durability.

The brand launched the Dura Spring technology earlier this year with the shift plus workout offering and then built on this technology with the July launch of the health cat collection, powered by Ultra Spring.

The health cat immediately became the top-selling style on wolverine.com and now is on track to become the brand's third largest franchise in its first year. Looking ahead to 2021, Wolverine plans to introduce a new version of its largest franchise, the radar collection, in addition to expanding on the success of the health CAD offering.

Saucony's strong growth in the third quarter was driven by award-winning product innovation and exceptional digital activation that resonated with consumers. Saucony is just beginning to realize its potential as a lifestyle brand.

While Europe has a fast-growing Saucony Performance business, it is also the foundation for our significant and growing Saucony Originals business, which is based on heritage retro running styles that are featured in top-tier fashion and apparel accounts. The leading market for originals is Italy.

One of the world's most prominent and important trend in fashion market. Balcony is using the Italian success and Business Hub, which includes product creation and marketing leadership and capabilities to expand this highly profitable lifestyle business in other global markets, including China, the U.S. and additional European countries.

The originals lifestyle business is already significant in terms of size for Saucony, but it's still in its early days, and we are confident that global opportunity is large and trend right. On the performance side of the business for Saucony, the Endorphin collection continued to drive momentum in Q3.

And the brand recently added to this success with the launch of the Endorphin for the fall. The Triumph 18 was launched earlier in the quarter as well, leveraging the brand's power run missile cushioning technology and building on the Triumphs franchise's recent success.

The brand's rollout of power run and its speed roll technology across its product line continues to fuel brand growth. Product innovation is fundamentally driving brand heat, sell-through and continued gross margin expansion for the brand, with over 300 basis points of improvement in Q3.

Saucony.com, in particular, nearly doubled in Q3, and the brand delivered a significant increase in average retail selling price. Saucony has also experienced success outside the U.S. with its performance product, with accelerating growth in Europe and China, where it opened another 17 stores during the quarter.

Looking ahead, Saucony has paced the introduction of new innovation and moving two key franchise updates from Q4 2020 to the first quarter of 2021, and the branch will launch new products across many of its biggest franchises in the first half of next year, including the Kinvara, Guide and Ride along with exciting expansions of the Endorphin series.

The start of 2021 looks like a blockbuster for Saucony. Sperry.com grew in the high teens in Q3, driven by new consumer acquisition and a substantial 65% increase in social media engagement. The brand's Q3 results were ancely impacted by the pandemic and shipping delays for some boot product.

Sperry has expanded its iconic saltwater boot offering into men's and diversified the women's assortment with new trend right silhouettes, which will be supported through the holiday with a ramp-up of the brand's partnership with John Legend.

As the clear market leader in the boat shoot category, Sperry is focused on reinvigorating this market with product innovation, product collaborations, including John Legend, and new category executions. For example, in 2021, Sperry will launch the new float collection, a fun and affordable injected version of the boat shoe.

This collection is already receiving a very strong response from retailers and consumer trend groups. On the people side, Sperry has already seen the impact of new talent recruited to lead the product creation and marketing areas. I'll now hand it off to Mike Stornant to review the financial results in more detail.

Mike?.

Thanks, Blake, and thanks to all of you for joining us. Let me start by providing further insight on the company's third quarter results and then share an update on current business trends. Revenue for the third quarter exceeded our expectations and finished at $493.1 million, down 14.1% compared to last year.

Our own e-commerce business continued to outperform with robust revenue growth of over 56% and operating margin expansion of nearly 300 basis points. Our owned stores also performed relatively well, down less 12% in Q3 and and improving each month in the quarter.

Wholesale reorder trends, a key indicator of sublevel city at retail were better-than-expected and up nearly 10%. As Blake detailed, Merrell and Saucony continued to outpace the macro environment and helped drive a solid sequential improvement in EMEA, highlighted by mid-single-digit growth in our own business there.

Asia Pacific and North America also drove meaningful improvement, both down mid-teens for the quarter, followed by Latin America, which improved despite facing the most significant regional headwinds from the pandemic and finished down less than 40%. Gross margin was 41% in the quarter at the high end of our expectations down from last year.

Healthy gross margin expansion from product and elevated DTC mix was more than offset by lower royalties in our international business, more closeout volume resulting from the reopening of this retail channel and the impact of higher tariffs.

Adjusted selling general and administrative expenses of $151.5 million were lower than the prior year by $11 million, reflecting $18 million in cost reductions from actions taken earlier this year. With $7 million redeployed toward digital and e-commerce marketing.

Adjusted operating margin was 10.6%, down from last year due to lower revenue, but well ahead of our expectations entering the quarter. Net interest expense was up $4.6 million versus last year as a result of the proactive liquidity measures taken earlier this year in response to the uncertain market conditions.

The effective tax rate of 28.5% was up nearly 800 basis points versus last year due to certain discrete items and some impact from changes in geographic revenue mix. Adjusted diluted earnings per share of $0.35 significantly exceeded our expectations entering the quarter. I will now shift to the balance sheet.

Inventory management has been an operational priority this year, and inventory was down 22% in Q3 versus last year. We are entering Q4 and with a lean inventory position for some key items as a result of stronger demand in Q2 and Q3 that have outpaced projections made earlier in the year when inventory commitments were set.

Our supply chain has already adjusted quickly, and we expect the availability of goods will improve to meet the projected strong demand for the first quarter of 2021. Cash generated from operating activities in the quarter was $96.5 million, much higher than expected and over $84 million more than last year.

We've generated over $210 million in cash from operating activities during what might be the two most challenging quarters in the company's history, a testament to our diversified portfolio and a nimble operating model.

We now expect cash from operations to exceed $250 million for the full year as we remain disciplined in managing our working capital and operating costs during this volatile time. During Q3, we paid off the $125 million balance on our revolver and made a discretionary $21 million term loan payment.

As a result, we finished the quarter with $57 million less debt than we had at this time last year. Total liquidity at the end of Q3 was more than $1.1 billion, including $342 million of cash on hand and $794 million of revolver capacity.

Our bank-defined leverage ratio continued to improve, finishing the quarter at two times, well below the 4.5 times ratio required by our credit facility. We are encouraged by the company's performance in this challenging environment.

Many of our brands continue to resonate with consumers as evidenced by an increase in wholesale orders, continued success in our owned e-commerce business and better DTC store performance. In Q4, we expect these trends to continue, and we are off to a very good start.

October revenue was nearly flat to last year, partially a result of earlier sell-in due to a length and holiday selling season. But other order trends also remain solid.

However, there are certain factors that will negatively impact Q4 revenue later in the quarter, including lower December sales to our international distributors for spring 2021 product due to the heavy carryover of inventory from spring 2020 and a partial shift of deliveries into Q1.

A planned timing shift in key franchise launches for Saucony from Q4 2020 to Q1 2021. Some pockets of lean inventory for certain brands, due to the stronger-than-expected revenue during the last two quarters. And finally, a resurgence of the pandemic that has started to impact certain global markets and could create headwinds for our U.S. business.

Based on these factors, we project Q4 revenue to be down no more than 25%. We currently expect Q4 gross margin of approximately 41%, reflecting a decline in royalty income from the lower international distributor demand previously mentioned.

We also expect a sequential increase in SG&A expense from Q3 to Q4 of $15 million to $20 million, related mostly to higher DTC mix and the extra week in this fiscal quarter. After a few months of consistent market conditions, the pandemic is now entering a new disruptive phase, making it a bit more challenging to project the business beyond Q4.

However, we are seeing very encouraging trends that support our growing confidence in returning to meaningful year-over-year growth in Q1 2021 Our digital business remains strong, and we continue to develop and invest in our capabilities there. The product franchise launches and other product introductions for Saucony and Merrell are robust for Q1.

Finally, wholesale customers and global distributors are choosing to rely more heavily on brands and companies like Wolverine, who have proven to be especially relevant and resilient during the last eight months. For our business, this has translated to a substantial increase in global order demand for Q1 compared to last year.

Our early proactive response to the challenges of the pandemic are now paying dividends and set our brands up for growth in 2021. Many of our brands are now benefiting from the strong consumer trends and tailwinds related to the pandemic.

We have many opportunities in front of us and a balance sheet to provide flexibility and capacity to invest in our biggest 2021 growth initiative. I'm now going to hand it back over to Blake to conclude our remarks.

Blake?.

Thanks, Mike. Before concluding, I'd like to share some perspective on the macro environment and our position looking ahead to 2021. While the global environment remains uncertain, we have a much better understanding of the marketplace and a stronger handle on the consumer and the shift in category tailwinds attributable in part to the pandemic.

We expect the impact of the pandemic to persist into 2021, but shifting consumer behavior and trends have also created some opportunities for our brand portfolio. The company is poised to perform in the new environment that has emerged, and as Mike mentioned, we currently expect a strong start to 2021.

We expect the acceleration of online purchasing to continue and this channel could account for almost 50% of our U.S. business in 2021. We also expect consumers will continue to covet product newness, especially in the active and athletic outdoor, at home and work categories.

These consumer trends have been significantly accelerated by the work from home and social distancing experiences of the last eight months. And we expect these trends will continue beyond the pandemic horizon. This is great news for us as our portfolio includes brands that offer industry-leading product in all of these categories.

We have prioritized our focus on the consumer, our product pipeline and our digital capabilities, investing in digital tools to help us move faster, continuously engage with our consumers and deliver more innovative product. We have also invested in people and talent, especially digital product design and merchandising talent.

The past year has been challenging, but the team has responded in an incredible way, helping to catapult the company forward on our strategic path.

I continue to be incredibly proud of their hard work, dedication and adaptability, which has enabled the company to navigate the pandemic and position us for future growth, all while supporting our communities along the way. With that, I'll now turn it back over to the operator.

Operator?.

[Operator Instructions]. Our first question comes from the line of Jim Duffy with Stifel..

Thank you and good morning, everyone. Blake, a few questions on the DTC business. $7 billion more investment, but yet your EBIT margin improved by 300 basis points from understanding that correctly. What's behind the margin improvement? Is it more full price selling? Or is that just leverage of the expense base? And then I have some follow-ups..

A little bit of both, Jim, but primarily just increase in full price selling and increased demand from the consumer for some of our higher-priced products like the Saucony, Endorphin, for example..

Okay.

And then the $500 million aspirational goal for next year, what type of growth does that represent off of 2021? And then given the strength you've seen in your DTC business, do you have any statistics you can share on customer acquisition this year for those D2C customer files? I'm curious how you're planning to improve communication with that audience.

And then you mentioned making incremental investments.

Can you be more specific about where those dollars are being allocated to the D2C platform?.

Yes. I mean, basically, when we look at digital DTC, we're investing in talent tools and the ability to interface directly with consumers. Those are kind of some of the broad categories. Obviously, digital marketing is a key investment. The use of Big data, AI is also relevant. Personalization, just additional digital content.

So we're really -- we've been investing across that of areas for a number of years, and we plan to continue that investment. With respect to our aspirational goal from -- for next year, that would be about a 50% increase in our owned e-commerce business.

Obviously, the owned e-commerce business, coupled with the online businesses of our wholesale customers would be significantly larger. And I don't have the stats. I had a few of them in my call models regarding social engagements for some of our brands, Merrell, Saucony. They were way up 65% to 100%.

And but we can get you some additional statistics there as well in our follow-up..

Great. Thank you, guys..

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

Hi. Good morning, thank you. I wanted, first, just to ask a little more about the fourth quarter. Mike, I know you mentioned October revenue close to flat.

I guess I just wanted to see if you would maybe unpack some of the assumptions for the balance of the quarter to get down to the revenue outlook you gave in the quarter? And then how should we think about the moving pieces? Like how much is lower demand on the international piece versus how much might shift kind of one-for-one into that first quarter of '21?.

Sure. Yes. For sure, we obviously feel very good about the start to the quarter, John. And saw that coming in with -- in terms of both the future order demand and some of the reorder trends that we've been seeing in Q3. So it was good to see that continue. The biggest impact is, for the quarter is going to be in December.

It relates to that international shift that we're talking about, where about $60 million of third-party distributor sell-in, if you will, is coming down in the quarter, especially related to December, about, I'd say, $5 million to $10 million of that will shift into Q1.

But just overall, those distributors have strong carryover inventory positions right now. They're solid in terms of their end market demand, but they just don't need new merchandise right now. So that one time hit to us, I think, is about a $50 million to $60 million downside for the quarter, and it's not going to impact us until December.

So that's the primary shift. We also have -- we're chasing some inventory in some of our key brands. That's been more meaningful in Q4 here as we run ahead in Q2 and Q3 above our expectations. And then a very intentional shift for Saucony.

They've chosen to really launch some of their better franchise updates into Q1, more relevant to the running season as opposed to launching them in Q4, like they've done in the last couple of years. So that was a -- not so much in the inventory issue, but an intentional shift on their part. That could be $15 million or so that shifts into Q1 as well.

So those are pretty meaningful. Those are really the major headwinds for the quarter. Otherwise, our order book is super solid. The trend so far in the business are holding up nicely, and we're kind of poised for a pretty substantial improvement in Q1 as we shift into the New Year..

Okay. That's really helpful. And maybe one follow-up, thinking more broadly about 2021, especially given some of the comments on the macro piece, Blake.

But how are you thinking about the overall recoverability of your business? And then when you think about, both on the cost side, some of the actions you've taken and then the mix shift toward your own digital business how should we think about kind of the revenue levels that you might need to get back toward your your 11% to 12% operating margin that you've had in the past?.

Yes. I mean, when we look at 2021 right now, we're pretty bullish, even though we're in the midst of what appears to be a global second wave with respect to the pandemic. Frankly, we kind of separate the pandemic in the international market, the U.S. market. The international markets have addressed the pandemic on a country-by-country wide basis.

That's obviously not what we've done here in the U.S. Europe right now is shutting down hard again, but they're doing that so that they can have a normal December. And Europe snapped back much quicker than normal. So we're hopeful with respect to Europe, which has been one of our strongest international markets here over the last couple of quarters.

So overall, we feel pretty bullish. We like where our order book is positioned. Certainly, we're benefiting from some of the tailwinds and outdoor, athletic and Active that have been created by the pandemic or accelerated by the pandemic.

And then what was your other question?.

It was operating margin. Yes, if you think about the improvements we've made to the cost structure this year with respect to some of the restructurings we've done and the healthier mix in the business, not just through the DTC channels, but also just improvements in our better, more profitable brands.

I think that we would feel comfortable getting back to 2019 operating margin levels. At a relatively modest revenue level, so lower than 2019 revenue levels, Jon. Just based on some of the improvements in the overall cost structure and leverage that we can get out of the growth we're seeing..

Our next question comes from the line of Chris Svezia with Wedbush..

Good morning, everyone. Thanks for taking my questions. Nice job on the quarter. I guess, just two things, just regards to Q4.

I guess, first, are you -- what are you expecting for the European business, specifically just given the lockdown? Have you kind of factored that into your thought process? And also, just the extra week, and I go back to 2014 when you had that, but the business was much different. It was strike by retail stores.

Now you've got a very profitable e-commerce business. Stores continue to improve. Just how do we think about the extra week in Q4? That's the first question..

Yes. I mean, I'll address your last question first. The extra week, we -- this year, for obvious circumstances, we don't think that's going to have a normal beneficial impact on the top line. Most of the online shopping we think is going to -- the level probably isn't going to change in the aggregate.

It may be spread over another week or another week to return goods or exchange goods, but we're not anticipating now with our store base, for example, that's under 100 owned stores, under 100 stores, that it's going to be material in that regard. The first part of your question was....

I think it related to Europe in Q4, obviously, given the stronger start to the quarter, we're a little cautious about Europe in the markets where -- especially the own markets that we're in, Italy and the U.K., in particular. So even though the business got off to a really good start, the sell-ins have been good.

Part of the reason for some of our cautious outlook for Q4 is exactly that, Chris. And so we are so far not seeing a significant impact. Still very early. But overall, we're being a little bit cautious given the unknowns there..

We are expecting some impact from the hard European shutdown in November, but most countries have stated they're doing that, so they can have a quick snapback during December and the holiday season..

Okay. Got it. And just on Saucony for a moment, maybe you could just talk about what do you -- I mean, obviously, you have a good growth trajectory this year. Obviously, potentially it could be your fastest-growing large brand, I'll call it, going into next year.

Maybe just help us understand the visibility into that, how the originals business maybe plays into the growth opportunity? Whether specifically, I guess, in the U.S. and just the margin profile for the brand itself. Just to help us understand where it stands today.

And with the originals business coming on, I assume that's quite high margin, just how that play into the thought process of stocking next year?.

Yes.

Saucony is really going to benefit not just from all the work it's done on the performance side, industry-leading color, technology, new models, but it's also going to benefit clearly under the current trends from their originals product, which it's hard to believe, but some of these shoes people ran marathons in them, 25, 30 years ago, but now they're more fashion-oriented.

So we really view Saucony as having a 1, two punch share. And the originals business is biggest in Europe and by far, the largest country currently is Italy, obviously, a leading country when it comes to fashion and luxury. And there's opportunities.

We're expanding the originals business based on the Italy model throughout Europe, and we're going to use that same model throughout the rest of the world. We have a relatively small business today in China, in the U.S. So -- and some other significant markets. So we kind of view that is all upside.

The Saucony, as you guess, the Saucony original business is a very profitable business for the brand and the company. And then on the performance side, whether it's the Endorphin or some of the product updates that are coming in the first half next year, this is a very positive first Saucony.

Saucony next year will probably be our largest -- fastest-growing brand in terms of percentage growth on the revenue side..

Okay. All right, thank you very much. All the best..

Our next question comes from the line of Matthew Degulis with KeyBanc Capital Markets...

Good morning. And congrats on a really nice quarter. So Sperry has built up such a strong rainbow business over the last couple of years.

Can you comment on your expectations for Sperry and other weatherized boots in your portfolio for the fourth quarter? Any callouts positive or negative? And how do I shift any businesses? How would the shift in that business affect AURs and margins for the quarter? Thanks..

Yes. I think the Sperry boot business is probably one of the areas where we got caught with some lean inventory with the shutdown and some of the order inventory adjustments and order cancellations in Q1 and Q2. I would say our Sperry boot business remains very strong, but we are limited by lean inventory.

Some of it in the more fashion product in that line. I know that Sperry in the corner gained market share in the rain boot category, where it has the number, by far, the number one position. So we feel bullish about that category for Sperry going forward. And Matt, you mentioned the impact on AURs and margins in both cases.

That's the strongest category. The boot category is the strongest category for Sperry. Q4 will be the best-performing quarter for Sperry this year. They've had some challenges, obviously, given the headwinds from the pandemic. But the Q4 performance for Sperry will be relatively the strongest. And they don't have the international exposure.

That would relate to some of these spring related timing shifts that we talked about either. So all in all, I think that we'll deliver a decent quarter in Q4 for Sperry..

Makes sense, thanks. And one follow-up. Another quarter of really strong cash flow.

Can you update us on your priorities for cash as should we head into next year?.

Absolutely. I mean we're going to -- we're obviously continuing to be super diligent around managing the cash and working capital positions of the business. We've done a great job this year. The team has been above and beyond in terms of their performance here. We're not taking our foot off the pedal at all.

I continue to remind our teams, we're certainly in a better place, but we're not out of the woods yet. Having said that, we're already investing pretty heavily in inventories, getting back to a much more normalized pace and level of inventory allowed to support what we're seeing in the business going into next year.

And so that will have a negative effect, relatively speaking, on cash flows in the first part of the year. But super important for us to be investing behind these new programs that Blake has been highlighting in his comments.

I think as it relates to other priorities, and we've gotten our debt down to a more normalized level, our leverage ratio is in a good place. We're going to continue to maintain that at 2 times, hopefully or better.

And we're always going to be looking for the opportunity to seize the growth initiatives for Sperry, Merrell, Saucony and our work brands, in particular right now. As we already mentioned in Brendan's remarks that we're also going to be investing heavily on the DC capabilities for next year.

So organic growth is at the very high end of our priority list as well. And those would be kind of our focus areas for now..

Thanks. Best of luck..

Our next question comes from the line of Dana Telsey with Telsey Advisory Group..

Good morning, everyone. Brandon, welcome. It's certainly been a short time that you've been at Wolverine.

And from your experience as a digital-first executive what do you see as the implications, both quantitatively and qualitatively for Wolverine? And then just I wanted to confirm on the operating cash flow, Mike, is it still guidance for $200 million to $250 million for the year or is there an adjustment there?.

Why don't I give you the bad answer and then Brandon can fill in. [indiscernible] now that the operating cash flow the full year will be a $50 million and as we continue to really manage the inventory flow and maybe bring in some inventory a little bit earlier for some of the spring shipments. That might be the only headwind that we're seeing.

But fundamentally, we'd expect to exceed $250 million..

And Dana, thanks for the welcome. Yes, it's been a great two months here so far, as I said in my remarks. And as I mentioned, great to be able to put a stake in the ground for next year's e-commerce business to fire to get to $500 million, which Blake said, it would be almost another 50% increase.

I think it's very doable and achievable based on what I've seen in my short time here. I think these brands lend themselves to the pivot to e-commerce. I think they've been doing a great job.

Getting the message out and really leaning into some of the categories that, as Blake mentioned, are so important during the pandemic, whether it's Outdoors, Athletic, Work so I think that gives us a lot of tailwinds to continue to accelerate our pivot into e-commerce.

I think the team has already been on that path prior to me getting here, and Blake and the Board have teed that up very nicely and me coming on to help provide some additional leadership, I think, will allow us to continue on that path and hopefully a little bit faster.

I'm thrilled that the company has the ability to make some investments and do things quickly. So Blake mentioned the mobile app that we're going to be launching in Merrell in early 2021. I mean, that's something I've been championing since even before I got here and to see how quickly we're going to be able to get it up and executed.

And hopefully, as a test for the other brands as a way to not just communicate regularly with our customer, but to also help facilitate the conversion on our websites. And almost 70% of our traffic comes through a mobile device, the phone, I should say.

So I think having something like the mobile app for a big brand like Merrell is going to be exciting to help facilitate the growth..

Next question comes from the line of Susan Anderson with B. Riley FBR..

Hi good morning. Alec Legg, on for Susan. Thank you for taking our questions.

Just quickly on the Work category, did that grow this quarter? And if so, what were the key drivers of that performance?.

Yes. We had a -- Work at a pretty -- was a pretty good quarter for us in Q3. Fundamentally, growth is being driven by exciting new product and product innovation, the Hellcat collection, for example, in the Wolverine brand.

I would say one other thing we've seen in Work here over the last couple of quarters is a significant incremental shift to soft to work product, not steel toe, not composite toe. Our research has indicated a lot of that is being driven by the pandemic at home environment. People are working around the yard. People are working at home.

People are working at their cottages, their vacation homes and so I think the work category is also benefiting from consumers that may not be in the traditional work, consumer class. So we expect work will continue to that's it from not just the pandemic, but it's really, for us, being driven by new product and new product creation..

Perfect. Thank you. And then I guess just a follow-up. I know you've mentioned before that back-to-school is not really a big portion of your business.

But with this year being pretty unprecedented, have you seen any maybe different trends related to the back-to-school season?.

No, no different than you've heard, frankly, from other brands and companies. Back-to-school started soft. It didn't have a normal bell curve to it, given the pandemic situation and the fact that K-12 and universities across the United States, at least, they are all operating on different models.

Some virtually, some combination of in class and virtual and some totally in class. So I think it was a muted back-to-school season overall for consumer soft goods and for footwear. But as you know, back-to-school is not that important of a time period for our company or brands..

Perfect, thank you..

Our next question comes from the line of Mitch Kummetz with Pivotal Research..

Hi thanks for taking my questions. I guess to start with Mike on Q4.

I'm just trying to understand if you adjust for the shifts, which, I guess, the big ones are international and then Saucony and maybe even adjust for that extra week, is the underlying growth rate kind of the normalized growth rate that you're expecting for Q4? Are you getting that to be better than Q3 or worse than Q3? And to what extent is the pandemic sort of factored in?.

I think the pandemic is always factored into our outlook right now, every day. So it's fully baked in as much as we can see, and we're trying, again, to be conservative there. But yes, I think it would -- without these very meaningful items that we quantified, the sequential improvement in Q4 would be pretty meaningful from Q3 to Q4.

So you can't set those aside all the time, I wish you could. But I think the fundamentals of the business are strong. The order demand is strong. If we had all of the core styles that we wish we had right now coming into Q4, we'd be able to service that demand at a higher level than we'll be able to. And that's going to improve in Q1, which is great.

But for Q4, I think we've got those rating issues kind of converging to put quite a bit [indiscernible] in the quarter..

And then on one commerce, really strong growth in the quarter, not quite as strong as last quarter, totally understandable, given that a lot of wholesale has opened up in the meantime.

I'm just trying to understand kind of the cadence of that business, maybe as it flowed through the quarter and maybe even into I assume all the months were up double digits.

But as that business continue to sort of swirl? And where do you think it lands maybe for the full year or for the fourth quarter as a percentage of sales?.

Yes. I mean, if you start with Q2 in the real start and peak of the pandemic, for us, we had almost 100% growth in owned e-commerce that has gradually come down over the last two quarters. We were up a little more than 56% in Q3.

Q4 would normally be a higher-demand quarter, especially in today's environment when a large percentage of the consumers are still not keen about going to regional malls or shopping centers. So we would expect that to hold up fairly well into Q4.

And we think just a lot of consumer behavior shifts have been consolidated in the last 6, 7, eight months, and it's going to continue. I can't really predict where it's going to come out in the future. But for us, we would like to achieve 50% growth in 2021.

And as some states and areas closed down a little bit as some countries kind of closed down a little bit again, you could see a continuing shift to online purchasing Obviously, pretty dynamic and hard to predict precisely at the moment, but digital and DTC is going to be one of our main -- has been for several years, but one of our main focus areas going forward..

Okay thanks. Good luck..

Our next question comes from the line of Erinn Murphy with Piper Sandler..

Great. Thanks. Good morning. I guess I have two questions.

First, just on holiday, with retailers setting holiday early earlier this year, are you actually seeing the consumer come out and shop differently than they have in the past? And then what are you seeing as it relates to shipping surcharges? And how are you kind of procuring or securing excess capacity to meet kind of the online demand?.

Yes. I would -- it's -- holidays' a little bit up in the air. I have seen consumer surveys that are all over the board a little bit. Overall less spending during the holiday season. Some other consumer surveys show it is increasing. I think it's going to be spread out this year.

I don't believe we're going to have the high peak that we've experienced historically. Maybe some of that is due to Amazon shifting its Prime Day and kind of kicking off the holiday season in October. Certainly, we know that Black Friday and Cyber Monday is not a 3- or 4-day occasion anymore as well. So we're going to see it ramp up.

I know that there has been some communication by the shippers to consumers in general and by Amazon gets your orders in early because there's going to be some constraint in shipping and delivery as we near the the key dates in the holiday season that not to expect to be able to, for example, receive an order that you ordered on December '20 by Christmas.

And some people in the past have expected that. So as far as costs, there's clearly some congestion at the port entries and a little bit of constraint on inland shipping. We expect that to continue for the holiday season. For us, when we started in May, we were very proactive. We wanted to stay open for business.

And the team did a great job adjusting our supply chain we're a little bit of it being the size we are and the pairs we source, we're at a little bit of an advantage over smaller companies and smaller brands here, but the footwear industry supply chain is in pretty good shape right now, probably a little better shape than that for us right now.

We're scrambling for a couple of collections and areas, but it's in pretty good shape. If you're a smaller brand or a smaller company, you may be experiencing some -- a tougher goal of it to rightsize your inflow..

Just to play off what Blake said, Erinn, on Prime Day, I mean, I was particularly encouraged by the outsized growth we had on Prime Day far exceeded what I saw Amazon quoting. And it was some of the brands that we don't always talk about here were front and center for us.

And so I think our team did a great job leaning in with Amazon to ensure we were ready to go, and I think it gives me even greater confidence across our portfolio of brands, how well they lend themselves to e-commerce and having the right inventory and the right messaging could be explosive for even some of the brands we don't always talk about..

Thank you. Our final question comes from the line of Laurent Vasilescu with Exane BNP Parabas..

Great. Hi guys, this is Ian, on for Laurent.

I was just wondering, as you continue to increase investments in e-commerce, can you maybe talk about how it impacts the margin structure, particularly as you think about it in the context of 50% growth next year? Should you be kind of levering this? Or how should we think about that?.

Absolutely. Sure. I mean, we've already proven how powerful this channel is in Q2 and Q3, both quarters saw pretty explosive operating margin expansion in that channel. Blake mentioned the stronger product margins, the higher selling prices.

We see consumers trading up a little bit on the new -- especially on new product that our brands are offering in the market. So all those things have been beneficial, but we're able to take a platform -- a center of excellence platform that we have in the business today that services all our brands.

And that kind of cost structure once we drive the level of growth we're talking about is both scalable and provides a lot of leverage.

So yes, we would continue to see this area expand in terms of margin, but also give us more opportunity, more capacity to make even further investment and accelerate some of the investments that we need to make in our digital capabilities along the way.

So being able to do both of those things simultaneously is a luxury, I think, is certainly in this environment..

Yes, that's great. Awesome. And then just maybe just one follow-up. You've talked about increasing digital marketing.

I'm just wondering how you're thinking about that -- like marketing holistically? Are you shifting traditional spend into digital, such that overall marketing may be like flattish? Or are you just -- is overall marketing spend going up?.

Yes. Well, we're really looking at it from the first dollar spent. And yes, it's shifting heavily into digital away from out-of-home into performance marketing into marketing that clicks right to the website or one of our selling places. So we're taking a hard look at that from the ground up.

I think the team has always been very diligent about going through their SG&A and their ad spend, but the business has been totally reimagined through the pandemic and our acceleration in the DTC.

So kind of doing that real-time now to figure out how we make sure we optimize not just the last dollar we're spending, but the first dollar we're spending..

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Brett Parent for any closing remarks...

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 December 5, 2020. Thank you, and have a good day..

Thank you, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. Have a wonderful day..