Q4 2019 Earnings Call
Greetings and welcome to the Wolverine worldwide and fourth quarter fiscal 2019 results call.
This time, all participants Arnaud listen only mode.
A question and answer session will follow the formal presentation.
Any much require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I'll now turn the conference over to your host Paul.
[music] good morning, and welcome to our fourth quarter 2019 conference call on the call today, our Blake Krieger, our chairman Chief Executive Officer, and President and Mike started our senior Vice President and Chief Financial Officer.
Earlier this morning, we announced our financial results for the fourth quarter 2019.
The releases are available on many new sites or it can be viewed from our corporate web site at Wolverine worldwide Dot com.
If you would prefer to have a copy of the news release set to directly please call Francesco full andro at 646677181 for.
This mornings press release included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the release.
Comments during todays earnings call will include some additional non-GAAP disclosure.
There's a document posted on our corporate website titled Www, Q4, 2019 conference call supplemental tables that reconcile these non-GAAP this quarter. The gap. The document is also accessible under the Investor Relations tab at our corporate web site 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 and this settlement business development related expenses reorganization costs foreign exchange rate changes and the estimated impact of the krona virus.
I'd also like to remind you that predictions and projections made during the 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. There are a number of factors that could cause actual results to differ materially.
These important risk factors identified and the company's FCC filings and in our press releases with that being said I'd like to turn the call over to Blake Krueger.
Thanks, Paul Good morning, everyone and thanks for joining us.
Earlier. This morning, we reported strong fourth quarter revenue growth of over 5% on a constant currency basis, which marks our highest quarterly growth rate of the year.
Our two largest brands merrell and Sperry each delivered mid teens growth.
Our teams excellent performance against each pillar of our global growth agenda drove the success.
Our new product stories for our key brands.
Nearly 21% growth from our own ecommerce platform and over 10% growth in our international markets with growth across all regions.
Q4 revenue growth drove record adjusted earnings per share a 59 cents.
13.5% increase over last year.
We're extremely pleased with these results, which reflect the strength of our brand portfolio excellent effort and execution by our teams and solid progress against our global growth agenda.
For today's call I'll provide some additional details on our Q4 results and will also provide more insight in how we are driving our growth agenda to deliver accelerated growth over the next two years.
Mike storing it will then provide additional details on the fourth quarter and full year financial results.
He will also cover our initial financial outlook for 2020 and touch on the impact of the trying to tear ups and the Corona virus.
Starting with the Wolverine, Michigan group.
Q4 revenue increased a strong 7.7 per cent compared to prior year and 8.1% on a constant currency basis.
Marilyn Cat were both up mid teens in the quarter.
These gains were partially offset by a decline from the Wolverine brand and some of our smaller brands.
Merrell strong quarterly results were led by growth in all regions, including the U.S.
Overall, the wholesale E commerce and retail store channels, all saw year over year gain.
For Merrell growth came from both the performance and lifestyle product category.
By exceptionally strong performance in hike, where the brand holds the number one U.S. market share position.
And work the brands fastest growing category, which grew nearly 50% in a corridor.
Nature's, Jim the brands goals that logic expression category, which includes the Nova and poor collections are progressing trail running styles.
Also posted nice gains in the quarter and the important lifestyle category grew up as well driven by success, a new collections like the Alpine Sneaker Bureau, clog and hot Mark.
The brand continues to aggressively pivot to digital direct channels as evidenced by the growth of the online consumer direct business of the wholesale customers and accelerated growth for Merrell Dot com.
Which was up nearly 25% in Q4.
Merrell stores also performed well in the quarter with comp store sales up mid single digits.
We expect merrells momentum to continue into 2020.
Kept increasing the quarter was driven by strong international growth in EEMA, and Latin America regions and robust growth any E commerce.
Which grew almost 55%.
The Cold collection, Washington, the third quarter is the brands largest product launch forever and it's been received very well by consumers.
New color offerings for code helped fuel continued momentum and the new Arctic grip Boot program also helped drive Q4 growth for cat.
The Wolverine brands results were down mid single digits in Q4, but would've been up slightly except for lower sales to a financially challenged U.S. retail customer.
This was partially offset by high single digit growth in E commerce and robust growth in the Wolverine apparel category.
Moving to the Wolverine Boston Group.
Revenue for the Boston Group was up 1.3 per cent compared to the prior year and up 1.5% on a constant currency basis.
We had a very strong boot season, and delivered mid teens growth and kids delivered low single digit growth.
As expected this growth was partially offset by saucony, which declined at a low double digit rate due to significantly lower closeout sales.
Sperry delivered its highest quarterly growth of the year driven by increases across all channels and with 50% growth into boot category.
The brands growth and boot outpaced the market, resulting in Sperry, becoming the U.S. market share leader in the rain boot category.
Sperry ecommerce business was up nearly 20% in Q4, primarily driven by increased traffic and improved conversion as the brand continued to elevated storytelling product exclusives and other investments within this important channel.
[noise] Sperry store revenue was up over 60% spurred by new stores improved conversion and a high single digit increase in comp store sales.
We're pleased with the momentum in Sperry business and expect continued growth in 2020, driven by the John legend partnership and new product offerings.
Sockets recovery has turned the corner with Q4 growth in the brands core technical category up nearly 10% due to excellent consumer reaction to new performance products.
This healthy growth was muted by significantly lower closeout sales related to the brands accelerated full price performance at retail.
[noise] sockets healthier mix and focus on more profitable distribution resulted in nearly a 700 basis point improvement in gross margin in Q4.
The brand also continues to benefit from very good ecommerce performance with growth of over 25% in the quarter.
In over 37% growth for the year.
The ecommerce channel benefited from the brands digital direct investments and increased traffic.
During the quarter Saucony also launched two new technical running shoes.
The triumph 17, and the guide 13.
Both utilize the brands new power run Midsole, cushioning technology, which provides enhanced flexibility fit durability and energy return well Wayne one third less than comparable model.
During the quarter Saucony received several industry awards across the road and trail running product categories related to the introduction of new franchise models.
Just this week the triumph 17 won the prestigious Editor's Choice Award for Mill Runner's World.
We're very encouraged by the momentum in the Saucony business and the incredibly strong pipeline of new performance and lifestyle products planned for 2020.
Where we expect to see strong double digit growth.
Turning to our growth agenda.
The strong Q4 results underscored the growing effectiveness of our global growth agenda, which is focused on a faster and more innovative product creation engine.
A modern consumer driven digital direct DPC offense.
And steady growth in key international markets.
The 2019 second half performance of Merrell, Sperry and Saucony up nearly 10% on a combined basis.
Reflects our teams excellent execution against this agenda.
The investment in our own ecommerce business helped deliver growth of over 20% across the brand portfolio for the year.
With a meaningful improvement in operating margin.
Capital investments made in 2019 for new stores, the acquisition of a distributor in Italy and in our China joint venture totaled approximately $35 million.
And a better position the company for future growth.
Our global growth agenda is focused on three primary element.
First market, leading product and compelling product marketing stories.
In 2019, we've recruited chief merchant officer to supplement the efforts of individual brands help lead innovation and elevate our product creation process.
This new role also oversees our centers of excellence for consumer in market research and advance innovation concepts.
With an emphasis on driving deeper consumer insights, increasing our learnings from big data.
And enhancing our trend analysis.
We are excited by the 2020 pipeline of on trend and innovative product offerings across our brand portfolio, which includes the saucony endorphin.
Barry Plush wave Merrell and tour and Nova Wolverine Health Cat and Chaco Chipmos collections.
These new products are supported by powerful marketing stories that are more prominent within our digital channels.
The second pillar of our growth agenda is focused on our digital correct DTC offer.
For us this means leveraging our commercial platform and optimizing demand creation investments across all channels of distribution.
Especially owns DTC channel.
In today's marketplace digital and social engagement with the consumer drives brand heat search interest and growth.
Our owned ecommerce channel, which has averaged approximately 20% growth over the last three years is expected to continue to be the highest growth channel for the company over the near term.
And is expected to generate at least $100 million some incremental revenue over the next two years.
Our efforts related to digital content creation will also help drive online growth with pure play E Tailers and our traditional customers who have also experienced accelerated growth in their digital direct channel.
Finally, the third pillar of our global growth agenda is focused on international expansion.
We have a long track record of driving brand success and growth on a global basis through a variety of business model.
Today about 34% of our global revenue is generated outside the U.S. and over 50% of our parents are sold outside the U.S.
We will continue to partner with our current international distributors to drive growth, but will also focus on exercising more direct control over select global markets to enhance the global reach and pull up our brands.
We believed that our international business will add a $150 million up incremental revenue over the next two years.
The foundation, we built over the last several years to drive the business has never been better.
We own one of the strongest brand portfolios in the footwear industry and have an efficient operating platform and sufficient scale to drive innovation and speed.
We have a strong balance sheet and a profitable operating model that provides us with the flexibility to invest in growth, while creating value for our shareholders.
Let me spend a few minutes, providing our current view of the dynamic Corona virus situation.
Our first priority is the safety and well being of our employees and partners in China, and we are making every effort to support them.
From a business standpoint, we separate the emerging impacts of the Corona virus into two buckets revenue and supply chain.
As it relates to revenue well the China market is a significant unlocking our international growth strategy. We are still in the early stages of development generate in country revenue.
And our estimated revenue exposure from China is relatively insignificant less than 2% of our totaled 2020 revenue is planned to come from China.
The broader Asia Pacific region represents less than 10% of our global revenue and we know that very low retail traffic in China and other markets coupled with reduced tourism activity in the region will likely have a meaningful impact on certain countries in the short term.
We have also assessed the global supply chain implications for products produced in China and nearby countries.
We are fortunate to have greatly reduced our reliance on China sourcing over the last five years. However, we expect some production delays from China factories, and a potential slowdown in the supply of some raw materials told by China vendors to manufacturers outside of China.
This is being closely monitor but will be difficult to quantify until our factory partners have more clarity on the return of workers from Chinese new year.
So far the return rate of workers factories has been better than expected and it's not it's expected to have a material impact on production in Q1.
None of our factories are in the EU Han region.
Mike store and it will provide more details on how the situation could impact our financial results and the flow of revenue growth in the first half the year.
We currently estimate that the first half revenue impact could be up to $30 million and the first half profit impact could be up to $10 million.
Well this impact is relatively insignificant compared to the overall sides of our business.
This remains a very fluid situation.
We will continue to work closely with our international teams in sourcing partners to mitigate the impact of the Corona virus, but recognize the situation is fairly dynamic and subject to change.
In summary, we're very pleased with the momentum and performance of our brands in the fourth quarter and our strong finish to the year.
We are confident in the strength and diversification of our brand portfolio and most importantly, we're seeing positive results related to the implementation of our global growth agenda.
With that I'll now turn the call over to Mike starting at our senior Vice President and Chief Financial Officer will provide additional commentary on our fourth quarter and full year financial performance along with the initial outlook for 2020, Mike.
Thanks, Blake and thank you all for joining us.
We're very pleased with fourth quarter growth of 5%, especially in light of relatively weak us retail conditions.
The impact of one key work boot customer and some delivery delays for our international business late in the court.
Our diverse portfolio broad geographic reach in multiple distribution channels allowed us to deliver a strong quarter.
As Blake noted in his comments, our two largest brands delivered mid teens growth.
Our own DTC businesses grew nearly 25% and our international businesses grew over 10%.
Gross margin for the fourth quarter of 37.8% was lower than expected entering the quarter.
This was due mostly to higher than expected close out sales and retail promotional activity during the holiday season.
Which helped us to reduce our inventory and improve inventory positions at most retail channels.
A shift in mix across brands and regions, coupled with FX trends also negatively impacted the quarters gross margin.
We did see nice gross margin expansion for saucony.
E Commerce and stores.
Adjusted selling general and administrative expenses of $168.1 million were significantly lower than expected. Despite a higher year over year increase in advertising to support DTC growth and our new business in Italy.
The lower quarterly expense structure was a result of disciplined expense management and lower year over year incentive compensation costs.
As a result of these factors adjusted operating margin was 10.1% in the quarter.
The adjusted effective tax rate was 8.7% versus 11.8% in the prior year.
And benefited mostly from lower state income tax expense and other discrete items.
Fourth quarter adjusted diluted earnings per share were 59 cents a record for the fourth quarter.
During Q4 of the company resolve to meaningful litigation matters.
Related to its legacy tannery operations.
Net cost of $58 million were recorded in Q4 related to settlements with the state of Michigan.
Two local townships.
And the three M. company.
The reported loss per share was one cents and includes the settlement costs and other nonrecurring items.
For the full year.
Revenue of $2.27 billion represented constant currency growth of 2.3%.
Full year adjusted operating margin was 11.5%.
Net interest and other expenses for the year were $25.1 million.
And the adjusted effective tax rate was 15.7%.
Full year adjusted diluted earnings per share were $2.25.
A record results for the company.
Our full year reported earnings per share were one dollar and 44 cents.
Reflecting the litigation settlements noted above and other onetime charges.
Our operating model has consistently generated healthy cash flows and in 2019, we generated over $220 million of operating cash flow.
Which includes $35 million of cash spent on legacy environmental matters.
Given our strong balance sheet and further cash generation.
We continued to invest in organic growth throughout the year, which directly benefited our accelerating DTC businesses and momentum of our biggest brands.
Now, let's turn to the balance sheet.
As discussed in prior quarters, we built up our inventory position throughout the year to mitigate the impact of potential new tariffs.
Support our new Saucony, Italy business in stock, our new stores for the holiday season.
Strong growth in the fourth quarter, coupled with proactive close out liquidations allowed us to reduce inventories down to normalized levels.
As expected inventory was up less than 10% over the prior year, but up only 5% when adjusting for the impact of new stores, the new Italy business and the incremental cost of higher tariffs.
This improved inventory position helped contribute to strong cash generation in the quarter and also reduces our markdown exposure in 2020.
We ended the year with net debt just under $618 million, which was up versus last year as we strategically deployed capital to enhance shareholder value.
Including $320 million of opportunistic share repurchases.
$34 million in dividends paid to shareholders and $35 million strategic capital investments to drive growth.
At the end of 2019, our bank defined leverage ratio was 2.05 times down nicely from the previous quarter.
Total liquidity was approximately $1.3 billion.
The company has significant flexibility to execute future actions to drive total shareholder return and we expect that our leverage ratio will improve throughout 2020.
We are encouraged by the strong finish to 2019.
With resulting accelerated revenue growth.
Very good earnings leverage strong cash flow and a healthy balance sheet.
Now, let me shift to our 2020 outlook, including the estimated impact from two important topics China tariffs.
And the current Corona virus health crisis.
Despite some positive us China trade negotiations in Q4.
The footwear industry will still incur significant new tariff costs on us imports from China during 2020.
Less than 20% of our us imports will be sourced from China in 2020, and our transition of production to other source countries remains on schedule.
Despite our proactive efforts.
Still expect to incur about $15 million, an incremental costs associated with this trade dispute, including $12 million of incremental tariff expense and $3 million of discrete China migration costs.
This 2020 cost includes about $5 million related to incremental tariffs that were incurred on product at the initially higher 15% rate in 2019.
But won't be Expensed until this inventory is sold in Q1 of 2020.
Our sourcing teams continue to work on initiatives to Minerva minimize these costs, while our brands have selectively implemented price increases throughout the year.
As Blake noted.
The Corona virus health crisis, as a developing situation.
Reduced reliance on China sourcing and relatively small commercial exposure to the China market.
I will help limit our direct risk related to this issue.
Our healthy inventory position on core product should also help to mitigate the near term exposure, especially for our wholesale and own DTC channels.
However, this is a dynamic situation and the future implications are difficult to fully measure, especially behind beyond the first half of the year.
The president estimated impact on first half revenue of $30 million and pre tax profit of $10 million.
Is incorporated into our full year outlook, which I will cover now.
The strategic investments made in 2019 bode well for our global business moving forward.
These drove progress in key areas, including accelerated momentum for our largest brands in the back half of the year.
And strong full year performance in DTC businesses.
The key regional investments made in Europe and China.
We will support ongoing international growth.
We're well positioned for the future and we have refined and prioritized investments focused on the key pillars of our global growth agenda.
We have a mid term goal to grow our own DTC businesses to 30% of global revenue.
As we continue to leverage the investments made in our ecommerce platform and mono brand stores.
We're also committed to annual double digit growth from our international businesses over the mid term as we leverage investments in Europe, and Asia Pacific and look to other market markets for further expansion.
We will prioritize our biggest brands.
And expect to see consistent growth for Merrell, and Sperry and a much stronger growth path for saucony as the brand accelerates its recovery.
Well the prospects for growth in 2020 are very promising.
Our outlook is tempered by first half headwinds from the Corona buyer situation and some continued softness in the U.S. wholesale channel.
We expect 2020 reported revenue to be in the range of $2.29 billion to $2.34 billion.
Including $30 million of negative first half impact.
On the Corona virus and $10 million in negative impact from foreign currency.
This represents constant currency growth of nearly 3.5% at the top end of the range.
The most prominent growth drivers for 2020 include 20% growth from our global DTC business.
5% to 10% growth from our international markets, Despite the negative Corona virus implications.
And 4% to 8% combined growth from our three largest brands Merrell Sperry and saucony.
Supported by a very strong global recovery from Saucony.
Gross margin is expected to be approximately 41% up 40 basis points versus last year.
Strong improvement despite approximately $30 million of cost headwinds from three key areas, including $15 million that incremental costs related to higher tariffs and China migration costs.
$10 million related to foreign currency.
And $5 million related to a significant increase in ocean freight surcharges.
We plan to offset these headwinds with lower negotiated product costs.
And strategic price increases.
That will be most prominent starting in June of this year.
Total adjusted selling general and administrative expenses as a percentage of revenue.
Are expected to be roughly flat to up slightly compared to the prior year.
This includes over $20 million of increased costs related to incentive comp and employee benefit costs.
Nearly $20 million in additional costs related to new stores, the full operation of our Saucony, Italy business and ongoing investment in our China joint venture.
We will also increase investment in our global ecommerce platform.
Adjusted operating margin is expected to be approximately 12%, representing a 50 basis point improvement over last year.
Reported operating margin is expected to be approximately 11%, including.
And an estimated $50 million for legal and consulting cost to manage the company's legacy environmental matter.
We expect 2020 net interest and other expenses of approximately $31 million.
The effective tax rate is expected to increase to approximately 19%.
And diluted weighted average shares outstanding are projected to be approximately 82.5 million shares.
The ratio of net earnings available for EPS is expected to be 98%.
Full year 2020, adjusted diluted earnings per share are expected in the range of $2.25 to $2.40.
6.5% growth at the top end of the range.
Which represents strong leverage on plan revenue growth.
Excluding approximately 10 cents from FX.
And 10 cents from the Corona virus impact.
Full year adjusted diluted EPS would be projected in the range of $2.45 to $2.60 or growth of 15.5% at the top end of the range.
Reported diluted earnings per share expected in the range of $2.05 to do dollars in 20 cents.
Our balance sheet position is very good entering the new year, and we expect another strong year of cash generation in 2020.
Operating cash flow is projected to be approximately $240 million up from 220 million in 2019.
Based on the recent litigation settlements noted above we've included an information table on our website covering related multiyear cash flow projections.
In 2020.
We expect a positive cash impact of approximately $13.5 million related to these settlements.
We expect our bank define leverage ratio to be under two times at the end of the year.
Capital expenditures are expected to range between 30, and $35 million with depreciation and amortization forecasted to be approximately $34 million.
Before we conclude let me update you on our outlook for Q1.
Solid mid single digit combined performance for Merrell, Sperry and Saucony will once again be the highlight of the quarter supported by 20% growth from our own DTC businesses.
However.
The impact from Corona virus will result in flat Q1 revenue for our international business.
In addition, some of the Q4 softness in the U.S retail market has continued into Q1.
As a result, we expect revenue in the quarter to be approximately $500 million, including an estimated $15 million of direct impact from the Corona virus health crisis.
We expect gross margin of approximately 41% and operating margin of approximately 8%.
First quarter earnings per share expected to be 30 cents to 32 cents. This.
This reflects certain headwinds that will moderate in future quarters, including five cents from the Corona virus health issue five cents from higher tariffs.
Three cents from higher incentive compensation and employee employee benefit costs and three cents from FX.
Our revenue outlook for Q2 is much stronger and we are projecting mid single digit growth after factoring in the Corona virus impact of approximately $15 million.
In closing I want to emphasize that growth continues to be our primary focus and our leadership team remains incredibly focused on executing the initiatives and activities that will allow us to accelerate that growth.
The progress we are seeing within our largest brands.
And our DTC and international platforms.
Is evidence that the model is working.
We will continue to be disciplined in managing the operating costs of the business and working capital.
Which will position the company well as we further execute our global growth agenda, leading to earnings leverage and any increased cash flow generation.
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.
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Our first questions come from the line of Jim Duffy with Stifel. Please proceed with your question.
Thank you good morning, guys.
Good morning couple of questions from me Mike to start.
Looking forward to comparisons in the fourth quarter of 20 can you speak in more detail around the specifics of gross margin pressure during the fourth quarter.
We had strengthened direct consumer and international which I would think would be a benefit how much tariff impacted you see in the quarter.
Can you size the impact of the clearance in promotional support.
Yes, most of the most of the downside in margin in Q4, Jim was really driven from.
The close out pressures that we saw in the business.
As as you know we entered the quarter with inventories kind of at an elevated level for a lot of reasons cited earlier.
We felt like it we needed to take advantage of of the quarter to move through that inventory, especially on any seasonal items that we would have had to clean clean the pipeline for 2020.
I would say that we had strong at once performance early in the quarter and that sort of deteriorated as we got closer to the holiday season, and as we saw that demand start to to decline. We we emphasize the close out channel and move to the inventory so.
Positions us really well for first quarter margin improvement and in terms of markdown exposure at retail we think we've limited that by.
Adjusting and reserving for that and fourth quarter. So most of the impact in the quarter was related to that there was some tariff and FX impact in Q. In Q4 was a couple of million dollars on both of those items that we experienced in the quarter.
And as it relates to 2020, we would we would expect.
Less pressure on the close outside and certainly on the promotional side as we think about Q4 margins for 2020.
Thank you and then as it relates to the US unit guidance, you spoke to incremental expenses 20 million incentive comp 20 million incremental flow for stores.
Where are the areas, where you're finding savings to hold DSG in a flat as a percent of revenue in the guide.
Yes, some of the some of the the organizational changes and just.
Areas of focus for us in the back half of 2019 were really on continuing to look for efficiency within the.
SGN a category of spend for the company I think we've been successful at being able to do that I'm really pleased though that we havent really suffered in terms of the advertising or demand creation investments that we've made we talked about $40 million invested in growth initiatives.
In our original plan for 2019, and we were able to spend about $38 million of that in the full year.
So we really were able to find savings or improvements and other discretionary areas without impacting the investments that we were committed to for demand creation in growth, especially on the ecommerce side, Jim and.
As we got more more momentum within the international platform as well so.
But we are we know as you know continue to look at our cost structure globally, we have a complicated.
Organization, and we I think we've done a good job continuing to look for efficiencies there over the course of the last six to nine months.
Thank you.
Thanks, Jim.
Our next questions come from the line of Jonathan Komp of Baird and company. Please proceed with your question.
Yes, hi, Thank you maybe.
First Mike just a clarification I think.
In the prior response on gross margin you talked about being well positioned for the first quarter I just wanted to make sure I heard that correctly you sense.
It looks like you're guiding down gross margin. So maybe there is some mix or other impacts going on.
Yes, no I think for in terms of the improvement on from Q4 to Q1, though I.
I think we're going to getting more into a normalized level of of gross margin for Q1 John.
The big Big impact for us in the first quarter is sort of the carryover.
The higher tariff costs in Q1 that will be related to the inventory that we bought in the latter part of 2019. Some of that was purchased at the higher tariff rate of 15% as you know that that Didnt get adjusted down until December. So we've got a little bit of a timing issue there for Q1, but if you if you suffer.
Great out the tariff impact for the first quarter our mix is healthy.
We're going to see continue to see strong margins from our DTC business.
And then saucony, which is going to be our biggest brand in terms of growth in Q1 will continue to improve their gross margin in Q1 as well so really I think for Q1, it's a little bit of FX and tariffs that are there.
Modestly impacting the margin expansion, but otherwise we.
We feel like we'll get back to normal.
As we think about the back half of the year and gross margins in sort of stronger gross margin performance and maybe Q3 and four it will really be off the benefit of on those tariff costs moderating a bit from a comparative standpoint, and we won't start really seeing the true benefit from price increases until June ourselves.
So the combination of of that in.
The also the this stronger mix as our DTC business continues to accelerate throughout the year.
Those will be the factors that will allow us to see gross margin expansion strengthen in the back half of the year.
Okay, Great. That's helpful. And then maybe bigger picture just kind of a state of the business in terms of where you expected to be from the global growth agenda and.
Yeah, when you look at 2020.
As a whole all just curious kind of where you stand across the brands in terms of driving growth I know your 4.5% kind of at the top top end adjusted for some of the factors.
It was getting back to mid single digit growth, but just curious how you're viewing the state of the business relative to where you expected to be growing.
Yeah, I think were John I think we're not a pretty good place.
Setting aside corona virus for the moment.
We had we had well balanced growth in 2019 across regions. We actually grew in every region in Q4 and every region for the year.
We expect a little a little more volatility in that this year are dependent on where the kernel Corona virus, Texas I would say that with respect to consumer sentiment that remains.
Fairly positive.
We're seeing a little bit of a decrease in GDP growth across the.
The world.
In the US I think the consumer volatility remains there continues to be a shift to online a shift to mobile.
People seem to me, making a fewer a few last trips to the malls to stores, but.
We see a pretty balanced approach to 2020 with respect to our brands that we expect saucony simply to have a blockbuster year and 2020 weeks Sep expect merrell to be up.
Mid single digits to high single digits, and we expect mid single digit growth from Sperry. So.
Good all around performance by our biggest brands for sure.
I would also say we expect.
Pretty good performance from our DTC business.
We had our store comps growth. That's really started in Q4 in Q3 has continued into this year as long as as well as our E com growth.
I think.
E Commerce growth year to date in 2020.
And store comps are up over twice that of the industry as a whole so we feel pretty positive there.
Okay. Great then maybe just lastly quickly on Corona virus.
Just curious if you're willing to share any detail on kind of the current delays or a number of days.
Getting quoted by some of your factories and just how to think about the.
The key windows over the next weeks or months going forward and also if.
Any of this specific brands are concentrated more or less in China that would be helpful.
Yes, I mean, we don't really on the supply chain side, we really don't see an impact in Q1.
People took off for Chinese new year.
It's only 20% of our imports in any event from China into the us or or globally. So.
People seem to be returning from Chinese new year.
China government has been very aggressive here and that seems to be.
Paying dividends.
Most of our factories are.
And most of our key product lines, our dual sourced few remain in China, but most of them are outside of China as we looked at Q2 and beyond we're trying to anticipate the impact.
Right now and we're working on some raw material substitution in the event the Corona virus situation.
Continues to accelerate but.
On the supply chain side not much of an impact in the first half.
I would say the last part of your question John too as far as the brands that are most exposed to the China, China production. That's in specialized categories like Balkanize shoes, and some of our more technical work boot product, that's moving a little bit later.
So that would impact keds, our kids business.
Certain degree Sperry on their vulcanized products and.
Some of the Wolverine and.
Mostly wolverine technical product, but.
I think frankly, a little bit ahead of schedule on moving production out of China.
And I think from that standpoint, it's good but as Blake said this the other the other key part of this is making sure that we also have raw material suppliers outside of China, too and our our sourcing team has been working on that for several months just in line with the manufacturing migration that we're making there so.
We feel relatively good about that but.
Certainly on.
A challenging situation for the industry.
Understood and that's all helpful. Thank you.
Our next questions come from the line of Chris Svezia of Wedbush. Please proceed with your question.
Good morning, everyone. Thanks for taking my questions I guess first just to go to the.
Commentary about mid single digit growth in Q2.
I guess just.
Confidence level and getting to that gross typically it's more of on an app once quarter versus Q1 Q3 is more futures base. So just curious if visibility there I just number next year. The last year. There are some color about accelerating growth in Q2 with getting necessarily develops I'm just curious about your confidence what you see in order book et cetera.
Got to that level of growth in Q2, and what that might mean as he got to the back half.
Yeah, I would say, it's based on a couple of things one.
Our current view of the order book.
Which reflects and supports that.
That expectation for Q2, and also continued performance of our DTC channels stores and E Commerce.
Our exceeding our at the moment year to date, they're exceeding our plans. So that also gives us some confidence as we enter in.
To the second quarter.
Okay.
Okay, and I guess, you anticipate the international business to improve as well as we go into Q1 your reference in the National being flat I guess, you anticipate international to improve in Q2 as well.
Correct right.
Actually the biggest headwind in the first quarter, Chris is us wholesale we've got we've got some specific categories for us in the weather hasn't been even necessarily helpful.
To our our boot business, whether its lifestyle or work boots on in that those are those are usually importantly in the first quarter in terms of us wholesale performance.
I will be less of a headwind for us in Q2 as well so thats important to know and we see some improvements in our Chaco business in Q2. The first half of the year is important for Chaco Q1 is more challenging for that brand lower closeouts for one but overall there there's still positioning there they are there new product line into them.
Market. So the demand for that we see improving in the second second quarter. So that's another contributor but.
Overall, the focus here continues to be moderation within the U.S. wholesale.
Channel.
Okay got it second question just on me.
Laid out 100 million for E commerce over the next two years 150 million in revenues over the next two years on international side.
Now based on the guidance you've given for this year and what that implies for 2021 and I could guidance, there's pretty big improvement for 2021, I guess what are the offsets how should we think about what those are and how that kind of plays into that thought process.
For 2021 over then that two year period.
Well I guess.
The $100 million for E. Commerce is really just a continuation over the next two years of around 20% growth.
On the international side again, setting aside the Corona virus.
This was going to be a foundational year in China for our ex step joint venture, obviously, we're not going to.
Proceed with the original plan pace of store openings, but that's going to probably the delayed a little bit hard to have a lot of visibility to that at the current moment. So we've got a number of initiatives on the international upfront that are going to.
Delivered the growth over the next two years.
I would say that the main offset is our current view of.
Us wholesale.
So we're taking a cautious current view of the U.S. wholesale business.
We see retailers pushing back a little bit on.
Orders and risk taking given some of the volatility that existed in Q4 and has continued into.
Q1, so that would probably be a bit of an offset to what we see is pretty robust growth in DTC and.
Even strong growth in the emerging region.
Even though we have Brexit looming and.
Some dire predictions there the EMA region for US remains very strong driven primarily by Merrell and Saucony and we expect that to continue.
Okay last one for me just real quick just on the buyback Mike just curious you ended the year.
On the share count of roughly call. It 80, 80 81 now again the guidance assumes 82.5. So 2020, just kind of how we think about the buyback Watson, what's employed and why why such an increase in that fully diluted share count asset options et cetera.
A share count on the on the loss calculation is slightly different Kristen the count would be on the adjusted results. So you would use about 82.6 million shares in the fourth quarter calculation for adjusted EPS, which is in line with the guidance for next year.
So we typically we typically guide to in our stock buybacks that will kind of offset any dilutive impact from share grants and things that happen naturally in the course of the first part of the year. So.
No no significant buybacks incorporated into our outlook.
Got it okay. Thanks, very much all of us.
Thanks, Chris.
Our next question comes from the line of Matthew to Goalless of Keybanc capital markets. Please proceed with your question.
Hi, Thanks for taking your questions. So with Saucony, obviously, a great job in the quick turnaround I'm curious how long the lag is between introducing a I had shoe like the triumphant and taking shelf space at specialty running, especially given how fragmented that industry is and.
How much shelf space do you think you've taken back thus far and do you think you're back to the pre 2018 levels.
Yeah, what I'd look at the specialty run channel at least in the United States. It took us a year and a half maybe two years to get a new team in place developed a product and start to fill those shelf spaces. So certainly in the second half of 19, we believe saucony took market share.
There.
As we look ahead, we think thats going to accelerate we know we have.
Several big.
Introductions planned for.
May and after may in the year. So it will have some impact on.
Quarter to buy the bigger impact probably on Q3 and four.
We think saucony continued to take market share they won.
20, some awards in 2019 and that pace has not slowed down so far this year, we know, they're taking market share and trailed the trail running category and in the performance run category.
I would say using our new Italian business as a design hub for the originals lifestyle cited the business. We also have some.
Really high expectations, there were very enthusiastic about that possibilities. So.
The Italian Saucony businesses original business is very strong and we're going to use that as a springboard for the rest of world. So overall saucony is hitting on just about every cylinder right now and we expect that to continue.
Thank you that's helpful and I will vary and I'm wondering what your vision for that brand is given tomcat, Tom Kennedy is coming back to Michigan to run it and where do you think you are in your implementing the growth global growth agenda at that Brent.
As you know we brought one of our best and brightest back to Michigan, Tom worked with US closely in Michigan for several years before he went to Sperry and over the last three years turn that brand around.
Wolverine as a brand that we believe has tremendous untapped potential and we needed season.
Aggressive leadership, there so bringing Tom Bakke was up a pretty easy fit. These also coming back to Michigan to run our licensed apparel and accessory programs and he's going to be.
With this apparel background, a member of our M&A team as well.
The the turnaround of the Wolverine brand returned to growth is really units very early stages.
Wolverine had a great Q4.
Maintained its number one position in the work market.
I actually gained market share there.
In the us market, but when you look at the Wolverine brand in the possibilities on lifestyle side the possibilities on the apparel side a lot of those.
A lot of those upsides, our untapped and Thats frankly, why we we asked Tom to return to Michigan.
Thank you.
Our next questions come from the line of Dana Telsey of Telsey Advisory Group. Please proceed with your question.
Good morning, everyone would love to get a little bit more color on triangulating the pattern of wholesale orders or what's the wholesale environment is like lately. What are you seeing changing is it in different category of wholesale channels, where changes are occurring and is there wholesale channels, which are more impactful for the Corona virus then.
There is for a particular brand. Thank you.
Yeah on the latter part of your question I don't really see a particular, China channel that might be more.
Challenged.
We all know that the value channels, the discount channels have been doing very well over the last couple of years, we expect that to continue.
There's probably been and we'll continue to be more pressure on the mid tier.
And and then.
It's becoming a little bit of a barbell with the upper tier doing well the valued channels doing fairly well and the mid mid tier struggling a bit we really don't think thats.
Going to change materially as we look ahead into 2020 at least with respect to the U.S. market.
As far as a corona virus is concerned we really don't see that having a significant impact right now.
On any channel versus the other I would say for brands or businesses that are anchored more in China for luxury brands that have a significant percentage of their sales in greater China, it'll be certainly more material than it is to our business.
Sorry, Dan and the only at the end of the only other piece I'd add to is that where we see strength is even within a traditional retail channel the dotcom or digital part of their business is obviously.
The.
The category, that's that's driving any growth.
And I'll for us our wholesale business would include dad and it would also include any pure play etail customers that we have into portfolio, so while the brick and mortar.
No.
Customer base will be the most under pressure in general we would still expect the digital segment to continue to be.
To be relatively strong and are putting more of our efforts behind that as well as part of our digital direct offense or the assets in the demand creation.
Tactics that we are deploying for our own ecommerce business are going to leverage over to that category pretty pretty seamlessly.
Got it and when you think of the digital business the cost of the digital business deliver your shipping how you're planning and that this year versus last year.
It's it's fairly some similar.
I think we continue to get better in that space, we have very sophisticated distribution centers.
Good technology that allows us to manage that part of our business has evolved and then the fastest growing.
Category for us over the last few years.
We have a strong.
Contracts in place with logistics carriers et cetera. So we'll see some increases I think again under normal conditions, but.
Nothing that isn't.
Isn't.
The isn't going to cause us a problem I would say that we continue to just see really good gross margin expansion for both our digital and store base.
Direct to consumer channels.
Thank you.
Our next question has come from the line of Erinn Murphy of Piper Sandler. Please proceed with your questions.
Great. Thanks, Good morning, I guess my question is around the price increase you referenced taking in Canada can you just share a little bit more about what percentage of your overall portfolio, you'll be taking pricing and then I guess.
Backdrop, you've mentioned several times a week North American wholesale channel what did the appetite for your retail partner to take price as we go deeper into the year.
Yeah, I think it's hard to give you an overall percentage I'll I'll see if we can kind of worked at up Aaron but I would tell you that are most of our price increases were strategically taken.
Certainly you have the flexibility to do that on new product new product introductions to make sure to make sure you're getting.
Hitting your margin targets, but we also selectively tuck.
Some price increases on carryover product.
Some of that tied to raw material some of that tied tariff.
When our research indicated we could do so without.
Really having a material impact on demand. So they were taken across all of our brands very selectively and strategically and I would say on the the sourcing side, we're probably having our fifth or sixth season of price decreases from.
Our factory partners and that's something I really haven't seen in my career ever that that string of.
Price decreases that's also helping us some.
Got it and then I guess the second question just on you said that cash on can you talk.
You're thinking about it declined to 2020 2021, and then how are you prioritizing M&A.
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Sure.
We're going to continue to make the.
The growth investments that have proven to be successful over the last year or two.
Talked about a little bit already but that's going to continue to be a focus on.
Our our digital offense, our direct to consumer businesses.
And then enhancing our international platform, where we have opportunities to do that so number one priority for for cash and investment is on those growth opportunities.
We did a good job into fourth quarter of managing the balance sheet, we paid down debt in Q4.
We recognize that we have plenty of flexibility in Pasadena to borrow and two on to be in a position to.
Deploying more capital in the future, but our priorities in 2020 will be a little bit more focused on paying down debt keep in the leverage ratio at the at the level that it is today as we consider M&A in the future as you know as a more long term strategy for the company in terms of capital deployment.
We're very active.
In the market looking for assets as we have been for the last couple of years, that's not going to change but.
We continued to be really selective about what assets we will pursue.
And that certainly part of our overall.
Longer term growth strategy, but in terms of priority.
Maybe maybe third or fourth on the list of cash deployment priorities for us right now.
Great. Thanks, Mike.
Our next question has come from the line of Sam Poser of Susquehanna Financial Group. Please proceed with your question.
Hi, guys. Thanks for taking my question this is well on for Sam.
So just to go back to this weakness or softness that you're seeing in the U.S. wholesale markets. What what brands are being most impacted for you guys and what do you guys doing to sort of overcome the softness that you're seeing.
Well.
I think.
Well with respect to the your latter part of your question. We're pivoting strongly to DTC channels, we know that content social capabilities big data capabilities. We're we're investing in and improving there is not only going to help our own DTC business, but it's going to help that.
PC business of our wholesale customers and that has been by far there fastest.
Growing segment.
I would say with respect to traditional wholesale in the U.S.
Some of our brands that would have potentially the most exposure there would be Sperry for example, they have very strong traditional wholesale business.
And.
Sure play business in the USA on the other hansberry as one of the highest percentages of owned DTC is well between that stores and E commerce sites. So.
We're just seeing some general softness it's really not applicable to a particular brand or category of footwear, just some reluctance on retailers to take risk in this environment, probably tied a little bit to.
Pretty volatile and somewhat soft Q4 for them.
Gotcha.
So I guess the the other thing I wanted just hit on is for Sperry.
Are you seeing any light in the tunnel here for boat shoes.
I know I mean, you're going to be lapping some very easy comparisons over this last couple of years, it's been such a we category.
Then I think you mentioned the Threeq 19 call that you had one major customer planning on making books user number one story for the spring season, that's because when you said is that still the case.
That is still the case I guess with respect to boat shoes were we continued to see early signs, especially in the fashion of arena of a return of the boat shoes silhouette and trend.
Boat shoes now account for.
Maybe several years old years ago, they would have accounted for 70% of Sperrys business today, it's under 30% and it's going to fall even more in 2020.
But as the up by far the dominant market leader at 65% to 70% market share, it's sperrys birthright and opportunity to inject some excitement.
Into that silhouette and into that business, we think.
For 2020, John legend is going to be had a big help there the initial meetings with him and collaborations that we've had within he's been very focused on the.
On boat shoes.
Great that's great and just wanted just one last one or are you guys drop shipping you talked about the growth in the digital business for wholesale partners are you guys are you guys in point drop ship.
I do.
Yes, we do that on kind of a strategic basis, depending on the different customers and the economics of that arrangement with the customer, but we certainly have the capabilities of doing it as mentioned before with the sophistication of our distribution centers.
But yes overall.
That's a that's a tactic that we'll we'll be looking at as a another strategic Avenue for us to grow that digital side of the business.
When we do that we get paid for.
Gotcha, great. Thank you guys.
Our final question comes from the line of Mitch Kummetz of pivotal research. Please proceed with your question.
Yes, thanks for taking my questions.
Oh, Okay krona virus.
$30 million, Phil said is there any way you can kind of break that out regionally I mean, it sounds like China is a small business for you but is it mostly China is it mostly other parts of Asia, like South Korea, Japan, as or even a European or North American component to it obviously in Italy now has issues, maybe North America for about a tourist standpoint, I was hoping a little bit more color there.
And then also in krona virus.
You guys mentioned that wasn't 20% of your global production in 2020 is China does that referencing finished goods production is or is that there is that an refers to the total supply chain. When you when you factor in all the raw materials or where there are coming from.
So that's kind of virus that I have a follow up.
Sure I mean, the 20% figures finished product.
We do know that there are number of China vendors of raw materials supplies leather Iowa.
Shoelaces and stuff a large portion of raw material is available outside of China, and our source sourcing team has been working on that for.
Sometime.
But the 20% the figure really refers to finished product on the revenue side on the revenue side much. It's mostly international certainly focused on the Asia Pac region, but it's not just China for US obviously tourism is having an impact on other markets in around that area.
And in other regions outside of Asia Pac as well. We also as you know we also have our own leathers business.
Which in terms of just short term demand and some of the delays in factory openings et cetera, there's been a negative impact on on the demand for our Wolverine leathers, well, which is a fairly large percentage of the of the $30 million talking about.
Probably probably a third of that so it's it's not one country, but it certainly heavily weighted to Asia Pacific and our leathers business with some implications and other markets outside of that region. Okay. That's helpful. And then my follow up just in terms of the week U.S. wholesome wholesale that you've been talking about can you maybe speak.
To the fall pre books that you're seeing and within kind of the pre book is the boot category more challenge than other categories. Just given the weather issues and is there anyway, you could say what kind of what percent of your fall businesses boots versus other stuff.
With respect to the boot issue I don't have the pacing right in front of me and we probably wouldn't normally provide that anyway, but with respect to the boot category. We had a various our had a pretty strong Q4.
So Sperry boots were up 50% marrow work boots were up 50% Wolverine brand gained market share number one position that cap brand gained market share number three position in the us market. So we're seeing pretty strong preorders for boots from our retail customers.
Simply because we performed in Q4 in the fall of 2019 so.
We're pretty bullish on.
On boots in general.
As you know for that.
Overall and the boot our work boot business is about 15% of our total our global revenue and if you add in lifestyle boots, obviously on top of that so it's an important for sure and important category and I think for as Blake mentioned, a good strong category for us.
And as far as the back half outlook on pre bookings in that category, we wouldnt, we will comment on that but.
It continues to be an area of focus for us and and a strategic asset to the portfolio.
Alright, thanks, guys.
Yeah.
We have reached the end of the question answer session I will now 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 website at Wolverine worldwide Dotcom. The replay will be available until March 25, 2020, Thank you and good day.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.