Q3 2019 Earnings Call
Greetings and welcome to Wolverine worldwide third quarter fiscal 2019 results conference call.
At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If any what's required operator systems. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the conference over to your host Mr. Paul fire. Thank you you may begin.
Good morning, and welcome to our third quarter 2019 conference call on the call today, our 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 third quarter 2019.
At least is available on many new sites or can be viewed from our corporate web site at Wolverine worldwide Dotcom.
If you would prefer to have a copy of the news release that to your directly please call Francesco full Andro at 6466771 day one for.
This mornings press release included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the release.
Mr. In today's earnings call will include some additional non-GAAP disclosures, there's a document posted on our corporate website titled Www Q3, 2019 conference call supplemental tables that will reconcile these non-GAAP disclosures the gap.
Document as accessible under the Investor Relations tab at our corporate website Wolverine worldwide Dot com by clicking on the webcast link at the top of the page.
During our call we are providing adjusted financial results, which adjusts for the impacts of environmental and related costs business development related expenses reorganization 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. security laws. As a result, we must caution you that as with any prediction or projection or a number of factors that could cause actual results to differ materially.
These important risk factors are identified in the Companys <unk> SEC filings and in our press releases.
With that being said I'd like to turn the call over the Blake Krueger.
Thanks, Paul Good morning, everyone and thanks for joining us.
Earlier. This morning, we reported revenue growth of nearly 4% on a constant currency basis, which marks our highest quarterly growth rate at the year.
This growth was driven by Merrell Sperry Saucony, our three largest brands, who on a combined basis delivered over 11% constant currency growth.
Adjusted earnings per share of 68 cents.
10% increase over last year was very strong despite a much higher tax rate in the current year.
Record third quarter gross margin in a disciplined approach to managing the business drove adjusted operating margin expansion of 150 basis points.
We're extremely pleased with these results, which reflect the strength of our brand portfolio excellent global execution by our teams solid progress against our global growth agenda, and the implementation of our brand growth model.
For today's call I'll provide some additional detail on the results for our branded groups and key brands as well with an update on our global growth agenda.
Mike storing it will then provide additional details on the third quarter financial results and our updated outlook for the remainder of 2019.
Starting with the Wolverine, Michigan group.
Revenue declined 2.7% compared to the prior year and 1.9% on a constant currency basis.
Merrell grew high single digits in the quarter.
We also saw gains in Harley Davidson and high test.
Due entirely to the timing of some international shipments cat was down high teens, but is expected to show robust growth in the fourth quarter and double digit growth for the full year.
A flattish quarter from Wolverine and declines from some of the remain smaller brands led to the group's overall revenue performance in the quarter.
Starting with the Merrell brand.
Strong quarterly results were led by the EMA, Canada in the U.S. region, where wholesale e-commerce and retail store channels all saw year over year game.
Growth came from all product categories led by exceptionally strong performance in natures, Jim the brands, most athletic expression, including positive consumer reaction to new Progressive trail running styles, the Nova and tore collections.
The brands important hike and lifestyle categories also saw again, largely driven by seasonal booed offerings, along with very strong growth in work and tactical.
The brand continues to drive he through exciting product collaboration the recently introduced partnerships with dog fish had brewery stormy Cromer outdoor voices in Duluth pack have all received a great consumer reaction.
These collaborations have also been a key driver of organic traffic and strong sell throughs at Merrill Dot com, which delivered almost 20% growth in the quarter.
The momentum for Merrell is expected to continue with high single digit constant currency growth in Q4.
Cats decline in the quarter was due to the timing of some international orders.
The brands owned ecommerce business grew over 30%.
Can also launched the code collection, the brands largest product launch ever selling out on cat footwear dot com doubling our expected media conversion and driving increased global sell through.
We expect cap to return to double digit growth in the fourth quarter.
The Wolverine brands results were mixed in the quarter with nearly 10% growth in e-commerce and growth in the work safety category, largely offset by incremental store closures by a key U.S. retail customer.
Moving to the Wolverine Boston Group.
Revenue for the Boston Group was up a healthy 12.4% compared to the prior year and 13.3% on a constant currency basis as all four brands in the group delivered strong Q3 revenue growth.
Gary made the seasonal shift to fall product in delivered low teens growth and saucony exceeded expectations for the third straight quarter by delivering mid teens growth.
The Kids group delivered high teens growth and Keds grew at a low single digit pace.
Very delivered its highest quarterly growth for the year driven by increases across all regions.
This performance was fueled by the brands expanded product offerings and diversified boot styles, which gained significant market share in the quarter.
The brands Vulcanized category also saw attractive growth.
The Sperry ecommerce business was up over 20% in Q3, primarily driven by increased traffic as the brand continues to invest in this important channel.
Sperry stores drove over 20% growth with both new stores and improved conversion contributing to the Q3 increase.
We're pleased with the momentum in the Sperry business, and we expect attractive double digit growth in the fourth quarter, driven by a strong boot offering and a favorable inventory position to support this growth.
Saucony continues to experience improving top line trends and again exceeded growth expectations for the third quarter.
Brand continues to benefit from excellent e-commerce performance with growth of 30% in the quarter in over 40% year to date.
Europe was strong in the brands U.S. wholesale business experienced growing demand for Keith performance style, helping to drive mid teens at once growth in the quarter.
The ecommerce and wholesale channel benefited from the brands digital direct off fence, including social media partnerships and a steady stream of new product.
Year to date Saucony is received over 20 industry awards across a number of new product platforms in the road and trail running product categories.
We're encouraged by the momentum and Saucony, its business and the pipeline of new performance and lifestyle products planned for 2020.
The Kids group delivered high teens growth in Q3 led by increases in the us market from nearly all children's brand with owned ecommerce expanding over 40%.
At an enterprise level, let me provide a quick update on our global growth agenda.
Where we continue to make important investments to create a faster and more innovative product creation engine drive our digital direct off fence and expand our international business.
Third quarter investments against these initiatives totaled approximately $10 million and we expect to invest approximately $38 million for the full year.
The targeted investments in our owned ecommerce business have delivered strong topline growth of over 20% across the brand portfolio in 2019, along with a meaningful improvement in operating margin.
In addition capital investments related to new stores and the acquisition of a distributor business in Europe and investment in our trying to joint venture are still expected to total approximately $40 million this year.
Now let me provide some information on the recently enacted tariffs on Chinese imports into the us.
For several years, our sourcing strategy is focused on moving China production to other regions of the world.
These efforts have positioned us extremely well to mitigate long term exposure.
We expect overall imports into the us from China to decrease by an additional 50% in 2020 and continued to decrease at that rate in 2021, as we execute our sourcing strategy.
We do expect some impact from the new tariffs this year.
Including approximately $3 million in additional costs in Q4.
For 2020, we continue to develop our mitigation strategy to offset these new costs and expect to neutralize the future impact through negotiated product cost reductions some wholesale price increases new product introductions and further supply chain improvements.
We're obviously pleased with our performance in the third quarter and the growth of our largest brands.
Our diversified business model is resilient and is gaining momentum. Despite some of the macro uncertainties created by FX tariffs geopolitical events and global economic conditions.
US consumer remains relatively strong and we've seen a significant uptick at retail in October , including our own stores and E Commerce businesses.
While we still have some of the most important weeks of the year in front of US our largest brands continued to deliver growth and we expect high single digit constant currency growth for Merrell, Sperry and saucony on a combined basis in Q4.
With that I'll now turn the call over to Mike Stornant, Our senior Vice President and Chief Financial Officer, who will provide additional commentary on our third quarter financial performance, along with an update outlook for Q4 and the full year.
Mike.
Thanks, Blake and thank you all for joining us today.
During the third quarter, we delivered revenue of $574.3 million, resulting in growth of 2.8% for 3.6% on a constant currency basis.
This growth was led by our three largest brands Merrell Sperry and saucony, when a combined basis delivered constant currency growth of 11.5% to.
The Companys owned direct to consumer businesses were also strong achieving mid teens growth driven by both e-commerce and stores.
Our ecommerce growth exceeded 20% year to date.
As we focus our efforts on customer retention. This business is becoming more efficient leading to operating margin expansion of nearly 300 basis points in Q3.
We delivered record Q3 gross margin of 42.4%.
It was up 80 basis points from the prior year and better than expected.
Gross margin benefited from favorable product mix within our global wholesale business.
Including an increase in higher margin boot sales.
The impact of our European Saucony business and strong growth within our higher margin DTC businesses.
This was partially offset by slightly higher closeouts sales and a shift in business model.
Related to some of our international distributors.
Adjusted selling general and administrative expenses of $162.8 million were slightly lower than expected and down approximately 60 basis points as a percentage of revenue due to our solid revenue increase.
Discipline discretionary spending and lower year over year incentive compensation costs.
As a result of these factors adjusted operating margin of 14.1%.
Expanded 150 basis points over the prior year and was the highest quarterly operating margin rate since 2011.
The third quarter reported effective tax rate came in and a more normalized rate of 20.3% versus 7.8% in the prior year.
The prior year effective tax rate benefited primarily from the favorable impact of $40 million of voluntary pension contributions.
Third quarter adjusted diluted earnings per share of 68 cents exceeded our expectations.
And was an all time record for the company.
Reported earnings per share were 57 cents and included the impact of in dryer environmental related costs as well as certain severance and other costs.
During the quarter.
The board approved a new 400 million dollar share repurchase program.
Incremental to the program approved earlier in the year.
In Q3, we repurchased $107 million of our stock at an average price of $25 in 13 cents per share.
Bringing our year to date total to $314 million.
We have approximately $513 million still available under existing repurchase authorizations.
As discussed in previous quarters, we took a stronger inventory position in the first three quarters of this year.
This was in response to very lean levels for much of 2018, and the need to mitigate the cost of new tariffs implemented late in the year.
Total inventory at the end of the third quarter increased 28.8% over the prior year.
Which is slightly better than our expectations and includes approximately $8 million from new stores, and our Soc Saucony Europe business.
We expect inventory to further moderate to more normalized levels by the end of Q4.
With a year over year increase of 5% to 10% projected at year end, including approximately $8 million for new stores and Saucony Europe .
We ended the quarter with net debt of $809 million, which increase versus last year, mostly due to.
To our opportunistic share repurchases.
$35 million of strategic capital investments, including Saucony, Europe Joint ventures, new stores and investment in core inventory ahead of tariffs.
We ended the quarter with a leverage ratio of 2.48 times, which is comfortably within our targeted range.
We finished the quarter with approximately $1.1 billion of total liquidity, providing considerable flexibility to drive long term shareholder return.
Now, let me cover our outlook for the remainder of 2019.
Our full year revenue outlook remains unchanged at $2.28 billion or constant currency growth of approximately 3%.
For the full year, we're expecting gross margin of approximately 41%.
Adjusted operating margin of approximately 12%.
In an effective tax rate of approximately 19%.
Diluted weighted average shares outstanding are now projected to be approximately 86.4 million shares.
For the full year based on repurchases executed throughout the year.
The projected adjusted earnings per share of $2 in 25 cents.
Now reflects three cents related to new tariff costs.
Reported diluted earnings per share expected to be approximately $1.96 cents.
Fourth quarter revenue is expected to be approximately $615 million, representing nearly 7% constant currency growth.
We expect the momentum for Merrell, Sperry and Saucony to continue in the fourth quarter.
With projected constant currency growth on a combined basis of approximately 9%.
The outlook for our U.S wholesale and direct to consumer businesses remained strong.
We do see some additional risk with one key where customer in the us.
And a few discrete headwinds in our international business.
Including incremental FX translation risk.
Potential factor delays on spring product as we accelerate the migration out of China.
And continuing political unrest in Chile and Argentina.
Gross margin in Q4 is expected to be approximately 39.5%.
A slight decrease from the prior expectation due mostly to approximately 50 basis point negative impact of new tariff costs not previously included in our outlook.
Fourth quarter adjusted operating margin is expected to be approximately 11.5% 80 basis points better than last year, but down slightly from our previous outlook due to the additional tariffs.
And a shift in certain operating cost between Q3 in Q4.
The tax rate for the quarter is now expected to be 20%.
And the share count is now expected to be 81.6 million shares.
Our adjusted earnings per share outlook of 59 cents reflects a three cents impact from new tariff costs and a five cent timing shift between Q3 and Q4.
In closing I want to emphasize that growth continues to be our primary focus.
The progress we are seeing from our largest brands in our DTC platform.
As evidenced that the brand growth model is working.
We will remain disciplined in managing operating costs in working capital to leverage revenue growth and deliver strong future cash flow.
Thanks for your time this morning, and we will now turn the call back over to the operator.
Thank you at this time, we will be conducting a question and answer session. If you will attest question. Please press star one on the telephone keypad a confirmation total indicate your line is in the question Q. You May proceed start to fuel lets turn move your question from the Q.
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Our first question comes from the line of Matthew Douglas with Keybanc capital markets. Please state your question.
Good morning, Thanks for taking your questions.
So it seems like you you met and exceeded your third quarter guidance, but can you talk about if there any surprises positive or negative in the quarter either by brand or channel and can you also comment on the comp composition of inventory heading into holiday.
Yes. This is Blake I'll take the first one no real surprises.
In Q3.
Obviously September was exceedingly warm here in the us.
We think that did have an impact on.
On the retail market in general.
Thats, obviously changed I am looking out my window right now our PON does have frozen and we have two or three inches of fresh snow on the ground here in Michigan, but.
Other than that.
Maybe the only.
Not a surprise, but continuing.
Continuing issues has been the volatile global volatility whether its geopolitical risks and some region weather tariffs, whether its seeing increasing strength of the us dollar or whether its Brexit, whether it's some economic retail consumer.
Situations in a few countries like South Korea.
Maybe I wasn't really a surprise, but that sort of volatility on an international basis continue at I'd add to the.
To that in terms of both your first and second question I think on the inventory side that volatility in the U.S.
As reflected in.
Inconsistent at once but as we talked about last time, we expected some of that we factored that into our outlook for the quarter and for Q4 as well we continued to see that I think a lot of it at the end of September early October was driven by weather as Blake mentioned.
But we managed to do that with our retail partners I think our inventory positions continue to strengthen our improve at retail just given the the better weather conditions and just.
Some stronger holiday traffic that we're seeing across the business. So I think inventories today are better than they were when we started the quarter and appear to be continuing to improve week by week.
Maybe maybe the only other a bit of a surprise was how strong our boot business was in Q3.
I know a number of other companies have struggled given the weather situation, but.
Our boot sales, whether merrell work in tactical or Wolverine brand work and safety or.
Sperry were pretty good and continued to take market share.
Thanks, and one follow up if I could.
Can you talk about the.
What capabilities, having a chief merchant officer brings to the company and.
I just want to understand.
I guess, how how does changes things, what's his role mostly handle that the brand level before and now it's being centralized.
No not at all the brands are still fundamentally responsible for.
Trend white space thinking design.
Growing their brands, but in today's world you cannot have enough.
Merchant commercial merchant experience, so Angelo joined us.
Obviously has 25 years of experience in fashion and apparel.
With Levi's Dockers in Europe America Asia, Nike in Europe and.
His main job is to make sure we have kind of a continuous flow of on trend craveable product. That's also the brands primary responsibility that that has not been.
Centralized I would think of Angelo function think of it as being additive to the efforts of the brand and a partner with our brands.
So we we believe it's a critical function to shape the future.
He is also going to be in charge of our consumer insights market intelligence group trend advance concepts and he's already taken on a few special.
Projects like the saucony lifestyle business for the world maximizing that opportunity.
Great. Thank you.
Our next question comes a lot of Mitch Kummetz with pivotal research. Please state your question.
Yes, thanks for taking my questions I guess I got a few.
Quick first I was hoping you could quantify a couple of things for me first on Saucony, the incremental revenue impact of.
Position, how much as I was in Q3 and then also of the benefit you received in Q4, and then can you talk a little about the cat timing it sounds like there was a.
Some delivery timing bear that hurt quarter.
So you could quantify that is that just.
Q4.
Yes, let me.
First talk about saucony.
The Saucony Europe .
The business that we really integrated at a fast pace did have a beneficial impact.
On Q3 for Saucony I am trying to remember I think it was in the $12 million to $14 million range.
At the same time saucony inventories extremely tight right now.
Lean and their closeouts sales were less than half of the prior year. So when you factor both of those together saucony.
On an organic business property was about flat in the quarter.
One of the things that we specialty though like about saucony.
Continuing momentum as the out wants trend as you know Q1 Q3 tend to be a little bit more.
Future order driven but the saucony.
At once trend on their performance product was up mid to high teens.
In the quarter.
And then.
With respect to cat timing, yet Kent had some orders that slipped into Q2 and they're going to have some orders.
That are going to slip into Q4, it's really just a timing issue given the migration out of China in factory capacities. So when we look at the second half for Caterpillar, we we expect it's going to have.
Mid single digit growth for the second half and and as a brand it's going to be up double digits for the year, yes, so it'll be up strong double digits in Q4, Mitch just based on that shift.
Got it and then just lastly.
You talked about your business was good in the quarter and it sounds like out once as well, but I'm curious I've heard other companies talk about just given how little inventory there was coming into this fall holiday season that some retailers pulled up some orders I was wondering if you saw any.
Fall order book kind of deliveries shift out of Q4 into Q3.
Now we haven't really seen that are at all despite the warm September we didnt any of our key retailers, we didnt see them panicked, we did I on the boot situation or fall product in general.
It was pretty much steady on and.
Maybe collectively we have all been rewarded to little bit.
In October here in early November , Yes, I think that Mitch I think the reality is we had a really solid commitment on the future order bookings that we had especially in in Sperry and we delivered on that in the third quarter, but as you know thats all sell Landon.
We saw some some good early signs that sell through is we're going to we're going to be good for for Q4, but those are just improved over the last couple of weeks.
Okay. That's got some turgeon alright, thanks, guys.
Thanks.
Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.
Hi, guys that Eric Johnson on this morning for air and thanks for taking the questions.
First.
Yeah, Hey, I was just wondering on saucony.
It did beat your plan the last three quarters.
It sounds like Reorders have been good but.
Can you kind of quantify the order of magnitude in upside between reorders better selling of new product.
Or.
Distribution gains ahead of plan.
Yes.
I think I would I would kind of characterize the Soc any improvement.
As you mentioned right in that first quarter, the business was down mid teens, and we've seen progressive improvement in the organic business every quarter.
Blake mentioned, it a little earlier, our inventories and saucony, especially in some of the.
Access price point product is a little bit leaner this year and we were running data on a lean level.
Deliberately.
So the upside to really chasing any of that business is somewhat limited in the fourth quarter, our close out demand.
It is down because we don't have close out inventory right now in Saucony, which is another great sign of their health and improvement in the business.
And so the the fundamental drivers as we kind of shift into next year for them are going to be this improving trend with their performance.
Category, which has.
Has shown some really strong at once demand in Q3 and continues in Q4, they've got some new products launching that just launched the triumph a couple of days ago, the new new new version of the triumph, which is performing well already and obviously, our lifestyle business and originals business. We're just going to be a focus for us as we move in.
The next year, so I think the.
The saucony business is kind of move beyond stable or stability and onto a growth trajectory as we kind of pivot to next year.
And I think it's in all the right categories in based on a much healthier baseline business as well.
Great Thats helpful did you guys during a period of supply chain product quality challenges did you lose any distributors or key accounts. There that you have to recapture or are we kind of on the same playing field as we work.
I think we're really on the same Plainfield, we just got back from the.
Global brand conferences that we held across our portfolio and I would say.
International distributors and community as well as our domestic salesforce, they're very excited.
The most excited I've seen in the last three years about pipeline a product in ideas that are flowing out of saucony. So.
We didnt have really in the kind of.
Adverse impact.
That's good to hear one and one final one for me.
I was wondering if you could provide an update on Chaco I know you're attacking next year with some lower priced entry priced products curious how those are.
Looking into bookings and how you feel about the brand over the next 12 months here.
Yes, I think I think the issue.
Support to hand enthusiasm of the Chaco nation has not dissipated at all.
For Chaco, it's simply a question of diversification.
Beyond the Z sandal disease Sandal business as you know has been a little.
Challenge still a great highly profitable business, but.
Chaco is expanding with some slides lighter weight sandals close tone footwear some water.
Product that there will be introducing in 2020, so our focus and Chuck I'll really has been about expanding.
The product range and the price point availability to the consumers. So the response so far has been very positive there.
Good order demand for that category as well.
Eric.
Okay. Thanks, guys I'll pass along appreciate it thank you.
Our next question comes a lot of Steve Marotta would see okay. It's true question.
Good morning, leak and Mike like as far as Q4 revenue expectations go has there been any material changes in the expectations for at once business.
Revenue composition standpoint.
Not really I mean is the things that we.
We called out in the prepared remarks.
I would sort of be the additional risk areas for us not really at once I mean, we were fairly conservative in that regard.
With our previous outlook back up back in August .
But we are seeing some a little bit more risk as it relates to.
Shipments of what happened very late in the quarter, mostly towards international distributors and that's just really timing.
Demand related so I'd, probably be that one area of risk to two to kind of isolate.
A fundamentally while again slower start to the quarter I think as we look at.
We're seeing less volatility volatility in at once orders over the last few weeks and and just better overall demand and encouraging kind of signs on in terms of sell through from our retailers as well, obviously thats a big part of the equation here. So I think overall.
The items that we talked about earlier I really to the areas to focus on as it relates to any risk for the quarter.
Great and follow up question is I know that you do not publicly comment on future order books, but can you talk at all about how spring summer of 2020. The first half is looking where you think your strengths are you did comment earlier in the call about being defined as a platform for growth and you.
We expect growth.
The.
First half would be going up against of course easier comparisons and from a margin standpoint, any sort of commentary that.
And without being specific about first half of next year would be helpful.
Yes, I mean.
Yes, we do not give out quarterly backlog guidance are those numbers I guess.
Maybe just to focus on Q4, which is in front of us in a bit of a precursor for next year.
This quarter's we currently have it planned.
To be our highest growth quarter of the year.
We think boot momentum is going to continue throughout.
Q4, but over the last several years boots civil.
Also become an increasingly important item category for retailers and to us in the first quarter.
So we we've moved the industry in the consumer certainly has moved beyond discounting all boots and clearing the mob by a Christmas time, because there is substantial demand.
It is going on throughout Q1 for that particular category.
Certainly last year, we were probably caught a little bit short handed in the.
On the inventory side.
On.
So theres a number of other we've certainly seen a pickup in retrans retail traffic retail performance, our mid single digit comp store performance early on in.
Q.
Four and also our e-commerce business, which in the 10 period was up over 25%. So that's all encouraging.
Maybe one other thing I can say is it's still early and the boat category for Sperry has never been.
A significant Q4 business, but in the earlier, we early weeks of this quarter just see boat.
Be flat, that's very encouraging for Sperry in our our business overall, we know of at least one major customer we have that is.
Planning on making both there number one story for the spring spring season, So thats.
That's pretty encouraging.
That's very helpful. Thank you very much for the color.
Our next question comes a lot of Jim Duffy with Stifel. Please proceed with your question.
Thanks, Good morning, guys.
Good morning detailed.
Couple of detailed questions for me and then.
I'd like to get in to some high level stuff on international markets.
Mike the three cents from tariffs in the guide what's different from the last guide are you still expecting three and a half million pairs impacted for 2019.
It's similar to assist similar number I think to change and we kind of four shattered a slightly higher impact than that when we were talking about it before.
Before anything was specifically implement ed or anything else for us, it's really the timing of when that product comes in and sells cells and so now were.
We're we're not going to have a precise estimate on that as you know Jim until we're ending the quarter, but we think overall, we were a little conservative in our outlook the outlook or foreshadowing that we gave back in August and.
Not much has really changed particularly other than the fact that we did bring in more inventory that spring merchandise and some of that merchandise won't ship until January .
And in so that we won't see the tariff costs impacting the piano until the first quarter.
Okay.
Side from the three cents related to tariffs, what's the additional change in the GAAP EPS guide.
The other additional items we added.
Some more coverage for.
Some environmental related cost litigation and other costs related to.
To that.
That legacy issue that we continue to work through and we also had a fairly meaningful.
Reorganization of sorts that took place late in the third quarter middle of the third quarter.
We had some severance cost related to that and we typically treat does is adjusted out of our results. So we.
We included about two and a half for $3 million costs in that category and about $5 million related to some additional legal and other costs for the for the environmental issue.
Okay, then Mike on the last quarter, you did a really nice job of Itemizing. Some of the things, which you expected we're going to be contributors to acceleration in the second half of the year talked about 10 to 15 million from additional outlet stores 14 to 15 million from the Talya and saucony distributor how much of that.
How does that split between Threeq and Fourq Q.
Yeah, I think that Blake mentioned that the Soc any impact to the Italy impact is a little more prominent quite a bit more prominent in the third quarter.
Almost all of that is and that's just based on the timing obviously as we go through the shift from a distributor business to an owned subsidiary business. The timing of when are we recognize the revenue is just kind of different and it's going to be a little more clunky this year than it will be going forward, but.
A big chunk of the Saucony piece was in Q3 and that'll be a smaller benefit in Q4 as it relates to the stores. It's split about 50 50.
We still think that in h. to between those two factors new stores and the acquisition of Italy, It's still in that $25 million to $30 million range, which is what we expected when we gave that guidance before.
Okay. Great then last one you mentioned improving trends in October I guess Im curious are there any notable changes in trends in national markets. The highlights specifically.
Curious or their international regions to be concerned about as we look into 2020.
And then related to that maybe police in some comments on what to expect from X step in 2020.
Yeah I mean.
Let me take ex step first.
Except probably isn't going to have a meaningful impact on on 2020, it's going to be a foundational year, but strategically X step is going to have a big impact on.
Supplemental liner product for Saucony performance footwear for example developed in China. That's been done that only took four months a complete.
Trying to line of apparel for that brand and similar efforts on the Merrell side. So, although it's not going to be big on the number side XF and 2020.
It's going to be a very important foundational year, they've they've turned out to be.
A very good a great working.
Partner.
We've got a great relationship with them.
With respect to internationally hit.
A little bit drove.
Where do you start it's the the new normal right. So certainly on the European region the impact of Brexit.
Whether that occurs if it occurs when it occurs and the details of that that will have some impact probably on overall business.
It certainly is going to have.
A negative impact on the overall GDP in.
Economic conditions macro economic conditions in Europe , but.
But interestingly enough Europe was one of the strongest regions for us and in Q3, so although I keep reading reports that the consumer.
Kind of standing on the sidelines little bit certainly for our brands Merrell Caterpillar.
And in some of our other brands it's been a.
And certainly saucony as it was a very good quarter.
I would say Latin America, we continue to see some political shifts to the left historically.
That's been a little bit challenging when that occurs.
Just to business in general and and the consumer so we don't see that.
That situation.
Changing overnight, we've got some countries that are doing just fine.
And then we've got some other countries that like Chile that our experience so little unrest in an uncertainty really for the first time in in decades, but.
Still a very important region for us, but the shift to the left on the political side, it's a little bit concerning and then Asia Pacific.
Tremendous there's some ups and down certainly China remains a very important market. Many of those markets are important we all know that the.
South Korean consumer has been pressured over the last 18 months or so certain sectors in that economies. So there's plenty of upside in the Asia Pacific and we've got some I would call and discrete challenges here and there is you know we had a couple of the distributors go into bankruptcy in Korea.
Over the past year so.
A lot going on on the international front, but.
You, we've got 12 brands in we're diversified and I think that plays to our strength.
Thanks for that perspective.
Thanks, Jim.
Our next question comes a lot of Christmas you with Wedbush. Please proceed with your question.
Good morning, everyone and thanks for taking my question.
Hey, I've got a that's helpful.
For you I guess for.
Just on that Terra can you maybe explain what's the difference is relative to when you gave guidance in August at that point timing you about 10% just.
Because of the additional 5% and timing.
That you have that additional fleet then relative to when we talk back in August and I guess back that up a little bit I look at a three cents.
I look at how much would just look at share repurchases non stop you bought back and.
Super Q4, more than offset fat that three cats and I know in Q4, you brought a lot of cash so maybe the revolver down their interest expense, but I'm not.
Sure Yes.
GAAP just a couple of clarifications to Chris first of all we Didnt include any and were pretty clear about this in our outlook last last quarter. We didnt include any impact.
For the new terrace, because they weren't implemented yet when we gave our guidance and we weren't sure what the timing would be what the rate would be or any of those factors. So I think we mentioned in our comments that we might have more than three three and $5 million of risk.
At that time and it was just based on some different estimates than what we have today, we just have more clarity around that as we talked about before so wasnt in our outlook at all.
Just to be clear and now that it is at that as a three cents impact the other factors that you're talking about related the share count at really being offset by some other factors, but mostly interest expense as we borrowed on the revolver to too.
To enter into those buybacks and obviously have.
The rest of the quarter here to generate cash and pay that down but our outlook includes some some relatively.
You know two to three cents of higher interest expense than we had in our outlook before mostly related to the buyback strategy. So that did the lower share count in higher interest expense or sort of netting each other off and the outlook on the terraces just incremental to what we had before.
Did you.
Thank you could you just maybe how Tom.
Yes, you're talking about five cents, what that implies pumping and ask DNA or.
What color.
Yes, some of its SGN as some of it isn't any in the gross margin areas. While I would say, we had really good and better than expected gross margin performance in the third quarter.
We're going to be somewhat.
Prepared to move through the inventory that we have here. Obviously, we're we're not expecting to have a significant close out risk or exposure in the quarter, but we always want to give ourselves room to move the inventory. So we brought our estimates in Q4 down a bit on the gross margin side and then typically we will put marketing money behind our big.
Just opportunities and our biggest growth areas and as as that shifted out of Q3 into Q4, especially on the E. Com side of the business in some of our international markets. We shifted some of that spending from Q3 ended the fourth quarter. So really just a shift in operating cost to certain degree.
And a little bit a shift in gross margin assumptions quarter by quarter based on those trends.
Okay.
And then when you when you talk to October .
You know what you're seeing in October relative to your plan is it fair to say it's in line with flat or is it tracking probably better than planned by Hey, we've got a lot a lot to get through in the quarter I'm just trying our stand relative to plan.
Our our outlook on revenues they stayed fairly stable.
So I think thats, a good indication of kind of how we feel about the trends so far relative to our previous outlook and I think in addition to that you know again, we did call out some some of those factors that are sort of late in the quarter factors that we would certainly be keeping our eye on and those are those the areas that have any kind of exposure or downside.
Risk, we might have into quarter, but yeah, I think the trends in the business the sell through activity. We're starting to to see you know the best indicator for our business right now is our own DTC platform and when we see comp sales up the way that they are in our own stores the performance of of Sperry.
Ill boots, which obviously you know as an important category for us in the quarter. Our Merrell stores are performing well our E. Com business is trout trailing ahead of plan a little bit.
Those are the best early signs for us, especially this time of year and.
So I think thats, another kind of data point for reference.
Okay final thing for me versus real quickly when we think about some of the brand trends that you're seeing here Q4, what our stock any Sperry Merrell caterpillar.
Hard to extrapolate this into next year these growth rates, but.
Maybe walk through where you feel like the most comfort level with what brands potentially you can get broken out as we start to think about.
Next year.
Got it.
Yeah, I would say that we expect next year growth in our big Greek to continue that's been a focus of ours.
We've got some pretty robust new ideas product pipeline. So we feel.
Comfortable about that I think with some of our.
More annuity brands.
We'll be focusing on those as well to bring them.
Back into.
The growth situation. Those brands are are have been very good for us as you know, we kind of pruned our post portfolio, a couple of years ago, but whether chaco or or Wolverine or or Hush puppies. Those are all very profitable brands for us.
Some of them, maybe a bit more of a annuity in our portfolio but.
We've got plans to bring those brands back to consistent growth as well.
Thank you all that.
Thanks, Chris.
Our next question comes from on a symposium with Susquehanna. Please proceed with your question.
Hi, guys. This is well on for Sam.
So I just wanted to dig in a little bit to the DTC business. So can you just I think you said your E. Commerce performance is 20% for so year to date can you just talk about in the quarter and.
What the current penetration as of the business.
Yes, I mean.
We've had a lot of focus.
On ecommerce for example, the last several years, it's been our highest growth.
Channel for the company, we frankly don't.
See any change there this year the profitability of that channel, which is accretive to our bottom line performances has gone up significantly.
Year to date, we're about to 20% growth across our crawl brand portfolio there.
Thats accelerated some here in Q4.
And maybe some of that's the whether some of that.
Maybe a result of our efforts as well but.
It's accelerated a little bit.
In Q4, certainly going forward, we would we would hope to.
Be able to grow that business on into the future at the 20% leveler or maybe a little better yes, I think to penetration question, you're asking well too is in a year to date the.
The ecommerce part of our business and our own stores combined is sort of in the 12% to 13% range in terms of global revenue.
In Q4 will be closer to 15% of the mix and ill sort of trending up closer to 14% for the whole year. So Q4 s are really important quarter for that platform obviously.
And as I mentioned earlier off to really get started in the quarter. So far and continues to achieve planned for the year, which is encouraging as we.
Highlight that is one of our key levers in our growth agenda, but also an area, where we've put a lot of investment.
Over the last two years as part of our investment strategy.
Great. Thanks, and then just want to work business. So it sounded like cat was a bit of a drag just from timing issues, but can you just talk about how that business is performing overall and I know you've got you've seen some momentum with some new merrell product.
Can you just sort of.
Give us some more color on on how that business is performing.
Yes, I I know some other companies reported that was an area of softness for them and in Q3, and certainly I think.
Whether it's the weather some other consumer factors may have had a.
A bit of an impact on that category for us our work business work and tactical across.
Our five brands that really participate in that area was pretty good and we took a pretty significant.
Market share for example, Wolverine and cap both both increased their market share in the quarter as narrow merrell was up a very strong double digits. In Q3, we continue to continue to see that is very important category for the company, we're we're giving that time and attention across the portfolio and.
We can continue to see that as a growth area.
Great and just one housekeeping thing here, So you mentioned what.
You mentioned for Q performances for the three brands are you still are you still reiterating guidance for Merrell up high singles Sperry up mid singles and I guess when do you think saucony is going to to positively impact on organic basis.
Yes.
We reiterated all those estimates for US we think.
2020 is going to be a bit of the breakout year for saucony I agree with that I'd organically.
There are always puts and takes right for for a business is going through some transformation like saucony is but if you sort of normalize it for the level of closeouts and sort of lower end product that.
Our holding back that are organic growth in the back half of this year.
On the organic business for Saucony would be positive in Q4, even without the impact of the acquisition that we made so I'd say, it's safe to say, we're sort of at that point and to Blake's point sort of encouraged by the opportunities we see for next year in Saucony in particular.
Great. Thank you I'll pass it off thanks, thanks, well.
Our next question comes on line of Jonathan Komp with Robert W. Baird. Please proceed with your question.
Hi, Thank you I'm just wanted to follow up given me the shape of the growth in 2019 became very backend driven and some of this specific drivers behind that you think forward to next year or any kind of high level thoughts on how we should be planning.
The shape of growth next year, if it's significantly first half weighted or if you think there's a strong pipeline that you can cycle some of what you're done and sustain growth.
At healthy levels into the second half for next year.
I think I think you're going to see some very consistent more consistent.
Quarterly growth from the business next year.
Some good factors that help us in the first half include the acquisition that we talked about in Europe and even the addition of the stores that we have this year that were added later in the year. So that'll be that'd be helpful to the to the first half but.
I think.
This year, we saw that benefit the back half and it'll be more of a first have positive for us in 2020, but the improvement overall in saucony, which we continue to point to I think is also going to be a nice headwind for us are up tailwind for us in the first half of the year versus the headwind that it represented in 2019.
And and I think those are factors as sort of allows to think about next year is a much more balanced year from quarterly growth standpoint.
Okay, and just to follow up I mean, the pipeline as you look forward or you're really into the second half of next year do you think theres enough to sustain momentum even then.
We believe so I mean, when we looked at.
Just as one example, the product.
Pipeline for Saucony, we've got Guy we have some great first half introductions plan, but I would say even their product pipeline leans a little bit more to the second half the year and we have.
We think boots are going to continue to be very important again in the second part of the year, we've got some new programs across the portfolio. So.
We feel comfortable about the set growth in the second part of the year excited about the momentum in cat that was very strong. This year 20 will have double digit growth in 2019 in that in that business and a lot of that's being driven.
In some core work categories, but much of it is lifestyle driven globally, which is encouraging in that pipeline is strengthening.
And the Merrell pipeline as you know with Chris Hufnagel at the range, there being able to transfer some of that.
That that strategy and approach that we applied to cat in the will in the Merrell business here I think we were seeing it quick improvement there and a quick acceleration of some big product ideas for Merrell going into next year as well.
Yes excellent great to hear and then maybe just a follow up on the tariffs and I know even today the headlines are our fast and.
Highly unpredictable, but and just wanted to maybe ask logistically when you think about.
Any of that mitigation efforts that are kind of planned to be put in place maybe maybe any thoughts on kind of timing of those and then.
If you had a scenario where you went down the path of.
Put in place so some of those mediation some of those offsets.
And then terrorists for phase down like logistically, how would you think about the ins and outs or some of those scenarios.
Yes, I would say.
We have a little more time, we had a little more time to plan for 2020 than we did for Q3 in Q4. This year and we know that we appreciate that the news in the direction can change.
Overnight, but once you start the migration out of China, something we've been on for five years, you really don't reversed course, we know it adds a little bit to lead times, we have not seen on increase in product costs in fact, they've actually gone down so when we look at what at this point.
Maybe.
The tariff exposure for next year, we would hope to be able to neutralize that it won't be easy.
We've negotiated hard we have some lower prices, we have new product that will.
Take.
The tariffs situation into account in the gross margin category.
We are going to take some selective price increases.
When necessary cost star brand, so as the industry and we're going to look for other efficiencies in the supply chain. So.
Again, we don't know what's in front of us it can change, but we've been very proactive here to kind of neutralize those costs for 2020, John I think.
Clearly our approach is to just go full steam ahead on this.
And we're doing a lot of these things for all good reasons that aren't even related to tariff increases right. So the diversification out of China is something that we just need to do as a global company and it's really going to help us in the in the long run.
You know, we're factoring into our thinking for next year some of the some of the other costs related to this transition right, we're going to have other costs for.
Just continuing to move out of China, and and there may be some impacts enthuse like for eight in.
Lead times that Blake mentioned, but fundamentally we're doing the right thing we're staying the course.
And I don't think we're holding back on any of those mitigation initiatives at this point we're just.
On a lean in 100% and make them happen.
Okay. That's that's helpful. Thank you.
Thanks, John .
Our final question comes on line of Ross This room with Telsey Advisory. Please state your question.
Yes, Hi, good morning, just had a question on the Merrell strategy going forward, you said, Chris Nagel would transfer the strategy that he was using a cat over to Merrell I just wanted to see what kind of implications that had how is the merrell strategy going to change.
Well I think.
Yeah.
Chris has been with as it's hard to imagine 10 years already done is that a number of positions at the company head of strategy.
Head of consumer direct he was also one of our co chair transformation officers in our Wolverine way forward. He was one of the people really responsible for developing the the new tools skill sets and processes that.
We'll be applied against the brand growth model. So in in just a year and a half we saw an unbelievable progress and cat footwear, and we think he's going to bring that same skill set and discipline.
Two merrell you may not see any huge immediate ship product categories or overall strategy.
For the brand which is focused on.
Not just work and tactical but kind of owning the trail but.
He is one of our best and brightest and we're putting them behind our our biggest opportunity and we've already seen the impact of that and cat footwear. So.
Hats off to Chris and the the overall Merrell team, we really couldn't be more excited about that move.
Okay, great. Thanks, and just on the digital growth strategy. You noted that that was focused on customer retention.
Can you give a little bit more color on what you're doing on that front and it do you expect that focus to continue where are you going to shift towards new customer development at some point.
Well I wouldn't say that we're not we're not focused on new new customers I think what we're seeing is it just in terms of the cost of acquiring new customers. We can take.
We're seeing improvement in that area because of the improvements in our retention rates and those of those have doubled over the last 12 months or so and.
It's still a smaller percentage of the overall.
Of the overall traffic in into the sites, but as we get better at.
Enhancing the consumer experience on our sites using the Toolsets, we've invested in to make sure that we're engaging with that consumer and a more regular basis with the right messages were just seeing a good organic improvement there, which is which means that we we can spend less on new new consumer acquisition. So that's helped us drive.
A better operating profit in a better result for the E. Com business gives a little more to work with as we think about the next level of investments, we want to make to drive growth there.
Okay, Great and then just one more on guidance.
You guided to six or three cents lower just do the terrorists where's that being reflected.
Like you kept the gross margin guidance about the same.
Yes, we always see we always use approximate references to those margin rates right. We said 41, approximately 41% gross margin approximately 12% operating margin, which is what we said in our last outlook, but.
That those those ranges can can shift.
10, or 20, or 30 basis points and Thats really that's really where the difference is coming through I think is still see.
Even with that $3 million of additional tariff costs still a very very close to 12% estimate that we gave.
Okay. Thanks, a lot.
Thank you.
We have reached the end of our question answer session and I would like to turn the call back over to management 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 web site at Wolverine worldwide Dotcom. The replay will be available until December 720, 19, Thank you and good day.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.