Q2 2020 Wolverine World Wide Inc Earnings Call
The us during the quarter.
Growth in this channel delivered strong profit leverage, including nearly 600 basis points of operating margin expansion and our owned ecommerce business.
I will share additional details on our digital strategy and are focused ecommerce efforts in a few minutes.
At the very started the crisis, our balance sheet and financial condition were strong, but we prioritized liquidity and cash EMEA uncertainties surrounding the pandemic and its impact on the global marketplace in the quarter the business generated over $115 million of operating cash flow.
Well.
Well above our highest expectations.
The company has a proven track record of consistently generating healthy cash flows in our broad range of business environment.
A powerful testament to our team the strength of our brands and our agile and diversified business model.
Mike Stornant, we'll share more details on our strong cash and liquidity position in a minute.
A number of our brands are clearly benefiting from the underlying changes in consumer behavior.
During the pandemic theres been a significant uptick in new runners and Saucony is capturing many of these new consumers and building momentum with award winning product innovation.
More people are getting outside and participating in outdoor activities, especially younger consumers and merrell as the market leader in the hiking category and provides a broad range of products to help consumers enjoy the outdoors.
Finally people are tackling more do it yourself home projects. In addition to continuing to work in essential jobs spring demand in work product category, where we are well positioned with market leaders like Wolverine and cat footwear.
Well, we continue to expect the pandemics impact to persist in some countries and regions. We have confidence the company is uniquely positioned for the current macro headwinds the gradual reopening and recovery of the global economy, and the new marketplace that is emerging.
I'll offer additional insight into the company's strategic outlook shortly but first let me briefly review the performance of our brand groups in Q2.
Reviewing our brand group's performance, starting with the Wolverine, Michigan group.
Reported revenue was down 31.7% to the prior year and down 31.2% on a constant currency basis, reflecting the widespread impacted the pandemic and related shutdown of retail stores.
Merrell and cat footwear were both down more than 30% and Wolverine, which benefited from several of the central retail customers remaining open was down less than 30%.
Chaco was only down mid teens due to a tie digital penetration and the success of its new chills product.
And our smaller brands in the group were down double digits.
Ecommerce was the primary revenue and earnings driver across the portfolio in Q2.
Merrell Dotcom grew approximately 140% during the quarter will nearly tripling new customer acquisition year over year.
The brand effectively engage consumers digitally with significant increases in video views and social engagement driven by highly relevant stories and product celebrating the power and benefits would be outdoors.
The combination of compelling moved product in the hiking trail running outdoor and at home casual category and strong customer engagement help generate robust online demand.
The consumers responding to new product and fresh sport and the Merrell pipeline is full with the brand also benefiting from the outdoor trend tailwind.
The brand is building equity behind new performance product, including the and Torah, Nova and ultra light offerings as well as its industry, leading franchises such as the Moab hiking collection.
On the lifestyle side, the Juno Sandal collection, along with trend right slip on the hot mock hydro mock and the jungle mock generated strong sell through.
Wolverine and cat footwear grew their ecommerce businesses, even faster than merrell during the quarter.
With new innovative product playing a central role.
Wolverine Dot Coms top seller was the ship plus work boot offering with a new Dura Sprem technology, delivering an athletic feel and our work boot with long lasting cushioning.
The brand built on this new technology with the July launch of the innovative health can't work boot powered by Ultra spring, we've sold in with our wholesale customers extremely well and immediately became the top selling style on Wolverine Dot com.
Cat footwear Dot Com was led by the excavator Super Light collection in work and the trend right in trigger collection in the lifestyle category.
Moving to the Wolverine Boston Group.
Reported revenue was down 46.9% to the prior year and down 46.7% on a constant currency basis.
Saucony had a relatively solid second quarter with revenue down a little over 25% with a strong improvement in the back half of the quarter.
Sperry and Keds two of our more fashion oriented brands were impacted by the stay at home realities of the pandemic and soft trends in casual footwear, finishing down approximately 60% and 50% respectively in the quarter.
Saucony Dot com nearly tripled revenue in Q2.
Driven primarily by new product innovation and significant new customer acquisition.
Product innovation also helped increase the brands to average selling prices overall and expand gross margin by 500 basis points.
Saucony has captured the running worlds attention and Gardner numerous awards with its speed roll design geometry, and power run Midsole Cushing technology.
Which delivers enhance flexibility fit durability and energy return, while Wayne one third less than comparable styles.
The brand continues to roll out the power run technology across its entire product line.
The new Endorphin collection launched in Q2 with the pro model featuring power, Ron and an innovative performance enhancing carbon fiber plate.
The shoe propelled Molly seidl to a second place finish at the US Olympic Marathon trials earlier, this year and with the top selling carbon plate running shoe in the run specialty channel in June.
Generated substantial bugs in the industry.
The new ride 13, one of the brands largest franchises is already delivering high double digit growth versus the previous model.
The brand ended the quarter with a double digit order backlog increase.
Okay.
Saucony its product in business fundamentals are very strong and the brand is clearly benefiting from the consumer running in health and wellness trends.
Internationally, the brand performed well in Europe and in China, The brand and its joint venture partner opened 12, new stores during Q2, which are performing above planned levels and expects to open around 40 stores by year end.
Barry Dot com grew over 30% in the quarter, driven primarily by new customer acquisition.
Its new plush wave product collection continued to gain traction and the brand executed its top performing digital campaign in Q2.
In addition, the John Legend partnership continues to resonate with consumers. The brand is planning a strong push behind the campaign. This fall.
Thanks, Barry also plans to expand its iconic salt water boot offering into mens and diversify the women's assortment. This fall with new trend right silhouettes.
The brand is the leader in the rain boot category in the US and is seeing encouraging category trends with retailers for the back half.
Ill take a few moments to share our perspective on the macro environment and additional details on how the company will leverage at strengths to succeed moving forward.
Throughout the pandemic, we've been actively engaged with business government in healthcare leaders to stay abreast of the latest global development and adjust our own tech.
From the very beginning we focused on supporting our communities and frontline responders with personal protective equipment as well as financial and product donations.
As one example, our custom chacko facility was converted to manufacturing protective face mask.
Which were provided to local hospitals and healthcare workers.
While the timing for a vaccine is still unknown in much uncertainty remains we are increasingly optimistic about the global prospects for our brand many of which are benefiting from the strong consumer trends tailwinds.
Our company and business model are built to over achievement and most challenging global conditions, which we certainly witnessed in the second quarter.
We anticipate that each country will continue down a path of gradual recovery and countering challenges and incorporating additional health measures along the way.
However, global consumers, including new consumers to our brands are responding to relevant storytelling and fresh innovative product.
During this time, we have increased our efforts and investments behind design cutting edge technology digital executions and new product introduction.
New collections in performance categories, like hiking, and running and need based categories like work, including work around the home.
We will continue to win in the marketplace underpinned by broader consumer trends related to health and wellness as well as a more secure and comfortable home environment.
Our brands continued to accelerate new product introductions across a number of trends right category.
Our long term investment behind our digital capabilities and ecommerce business has positioned us well for the accelerating changing consumer behavior and online growth.
We will continue to add to the meaningful investments made in our digital marketing platform Big data in AI tools digital content personalization and mobile experiences.
During the pandemic, we have increased digital marketing spend by more than 100%.
Fueling growth and new customer acquisition, and we expect to increase this investment by more than 60% for the full year.
Digital innovation is beginning to drive our entire go to market process as well, enabling us to get the right product more innovative product in the right place at the right time.
In June we wrapped up our first ever fully virtual and digital Global brand conference completed with less than two months prep time.
This conference was rated best in class by our global partners, who represent our brands in around 170 countries in markets.
We have increased the use of digital tools to design sample and style test products and we're now piloting AI powered trend analysis and advanced visualization to enable our product development process to be more effective efficient and responsive.
These new tools will also delivered benefits related to demand planning inventory management and selling efforts.
Well this dynamic environment will continue to present challenges and opportunities are leaner organization structure and enhanced digital capabilities.
Our providing for faster decision, making and a more agile and responsive company.
Our diversified business model helps us mitigate the pandemic related risks as we are not dependent on any single brand targets consumer product category geographic region or distribution channel to drive the business and when.
We are encouraged by the company's strong performance in Q2 and believe our long term strategy and operational rigor have prepared the company well for this unique time and the new global marketplace.
Our brands are well positioned relative to the consumers evolving mindsets and shopping behaviors, our balance sheet and financial position, our very strong and capable of supporting accelerated investment and our diversified and nimble business model enables us to pivot quickly as needed.
We believe the company is built to deliver strong cash flow and create value for our shareholders in any market environment.
Before I hand, it over to Mike I want to stress, how incredibly proud I am of our team.
They are actions in the hard work in response to the Pandemics impact have enabled the company to not only support our communities and remain on strong flooding, but to exceed our expectations and emerge even stronger position to invest and win in the new global marketplace.
With that I'll turn the call over to Mike Stornant, Our senior Vice President and Chief Financial Officer, who will provide additional commentary on our performance in the second quarter Mike.
Thanks, Blake and thanks to all of you for joining us on the call today.
I would like to start by briefly echoing Blake's comments regarding our global team.
Their focus and hard work have driven the performance of our brands in the toughest of times.
And have helped us to reinforce the financial health of the business.
This has put the company on solid ground and I'm very grateful for their contributions.
On today's call I will start by providing details on the company's second quarter results.
And then share an update on current business trends.
Revenue for the second quarter was $349.1 million down 38.6% compared to the prior year for down 38.3% on a constant currency basis.
On this revenue performance the company generated $115.6 million of operating cash flow.
Significantly exceeding our highest expectations entering the quarter.
While the majority of physical stores were closed for much of the quarter, our ecommerce business excelled growing 96% year over year and accretive margins.
Our digital and ecommerce platforms delivered a crucial payback on our multiyear investment and prove their potential to drive the business at a larger scale.
In total these platforms represented about two thirds of total us sales in the quarter.
The company benefited from approximately $10 million of international orders that shift at the end of the quarter. Instead of in Q3 is presented previously anticipated.
On a regional basis, North America, and EMEA performed the best.
Driven by ecommerce growth and the performance of consumer relevant product categories like hiking running and work.
Asia Pacific in Latin America were down more significantly due to a greater dependence on casual lifestyle categories, and a more severe and prolonged impact.
From the pandemic in Latin America.
Our diversified and nimble business model again played a critical role in mitigating risk compared to the prior year.
Inventory of $386.5 million was down 5% at quarter end and down 7%, when excluding new stores and the impact of incremental tariff costs.
This compares very favourably to the projections entering the quarter of a mid teens increase in inventory.
Promotional activity was limited to certain brands with seasonal product.
And we were successful and working through this inventory.
The full price wholesale business and the increased mix of our higher margin ecommerce business helped drive gross margin for the second quarter, 242.2% or.
170 basis points better than last year.
Most brands delivered nice gross margin expansion for the quarter.
Adjusted selling general and administrative expenses of $129.6 million.
We are down nearly $38 million compared to last year.
Due to lower sales and quick action taken to adjust to the unplanned downturn in the global economy.
Collect furloughs organizational changes in compensation changes for the company's management team accounted for nearly half of these savings.
Reductions in traditional marketing.
And travel costs were also key contributors.
We continued to invest heavily in our growing ecommerce platform and increase Q2 marketing spend in this area by more than 100% compared to last year.
We also focused more investment dollars behind Merrell, Saucony, and Chaco to take advantage of evolving consumer trends that started during the quarter.
An important note here on the quarterly phasing of SGN expense for this year.
Some cost savings were more beneficial in Q2 due to the timing of certain events, including furloughs and other compensation changes to closure of our retail stores and the significant reduction in warehouse in customer service support at the beginning of the quarter.
We remain discipline in managing all of our costs, but project that SGN expense in Q3, and Q4 will progressively increase from Q2.
As the demands of the business increase and as we invest to support growth entering 2021.
We expect approximately $22 million of such costs to come back into the third quarter.
Adjusted operating margin was 5.1% lower than last year due to lower revenue, but well ahead of our projections entering the quarter.
Net interest expense rose $3.8 million as the company took proactive liquidity measures and raised $471 million of new debt in the quarter.
We project that net interest expense will be approximately $45 million for the full year.
Adjusted diluted earnings per share of eight cents nine cents on a constant currency basis significantly exceeded our expectations entering the quarter.
Let me now shifted balance sheet.
We're very pleased with the accelerated progress made on inventory management.
Our brands has sufficient core inventory.
And our poised to support improved customer.
Meritized future production to bring new and innovative styles to the consumer.
Especially through digital channels.
Overall, the inventory is healthy and.
And we expect progressive improvement in our inventory position as we move through Q3 and Q4.
Helping us to deliver solid operating cash flow during the second half.
We expect normalized closeout sales in the second half of the year due to the reopening of discount retailers that were closed for much of Q2.
The $115.6 million of operating cash flow generated in the quarter.
With an outstanding result.
Our team Overdelivered on nearly all metrics that drive this.
We were especially pleased to see stronger than anticipated cash collections from our global customers.
Our overall days sales outstanding was 54 days well below our expectation and a testament to the strong customer partnerships and the global relevance of our brands in this environment.
We now expect operating cash flow to be between 200 million and $250 million for the full year.
During Q2, we amended the company senior credit facility to provide enhanced flexibility within our capital structure and borrowed $171 million of incremental term loan debt.
We also sold $300 million, a senior notes that mature in 2025.
Together the proceeds from these actions were used to repay prior borrowings under our revolving credit facility.
Resulting in longer term financing and additional borrowing capacity overall.
More recently in Q2, we pay down $665 million in revolver debt, reducing the outstanding balance to $125 million at the ended the quarter.
Total liquidity at the end of Q2 was approximately $1.1 billion.
Including cash of $423 million and $669 million of revolver capacity.
Our bank defined leverage ratio was 2.16 times at the ended the quarter.
Lower than at the end of Q1, and well below the 4.5 times ratio required by our financing agreement.
Based on our current projections, we are confident accompany will remain well within its leverage ratio requirements and in full compliance on debt covenants for the foreseeable future.
We have great confidence in our brands and in our ability to adjust to the dynamics of a volatile global marketplace.
The environment remains uncertain with somewhat limited visibility.
As a result, we're not providing detailed guidance at this time.
But we'll revisit this issue as conditions stabilize.
As we continue to manage the business to maximize growth and cash flow.
We are experiencing the following trends so far in the third quarter.
Our performance in need based brands, including Merrell, Saucony, Wolverine cat footwear, and our other smaller work brands are performing better than our lifestyle brands.
We expect us to continue.
Especially for Saucony as it accelerates its momentum in age too.
We order trends from our wholesale customers have been positive for the last several weeks.
Many retail stores are now open.
But traffic is still recovering as consumers become comfortable with returning to physical shopping environments.
So our traffic in the US has slowed recently as consumers react to the apparent second wave of the pandemic being experienced in several states.
Our ecommerce growth remains robust, but as moderated to about 50% in the last few weeks as physical stores of reopened.
We expect current growth rates continue to continue the balance of the quarter.
Gross margin remains healthy, but should moderate to more normal levels as stores reopened and we returned to a balanced wholesale revenue mix.
Around the World Our third party partners are managing inventory in coping with a variety of market dynamics.
We expect M&A to perform better than the other regions, partially due to the relative strength of our on businesses there.
Followed by Asia Pacific.
Latin America will continue to lag recovering more slowly.
Overall, we do expect to sequential improvement in revenue from Q2 to Q3.
Based on current trends.
Coupled with the current backlog and reorder trends.
We expect third quarter revenue to be down less than 25%.
The global economy continues to reopening process.
But as we have seen here in parts of the us not without some volatility.
Such we remain focused on Adeptly, adjusting course as needed and managing the fundamentals of the business.
The company has proven and ability to consistently generate earnings and cash flow for shareholders.
Even in severely compromised global market conditions.
With Q2, providing the most recent example.
Our diversified global portfolio effectively mitigates risk.
While our nimble operating model and relatively low fixed cost structure enable us to pivot quickly when faced with challenges.
The company has the liquidity and the balance sheet to weather near term headwinds, while we fuel future investments.
Our team is focused experienced and determined.
And I am confident in our ability to emerge and even stronger company.
Thanks for your time this morning.
We will now turn the call back to the operator.
Thank you as you would like to ask your question. Please press star one and your telephone keypad.
And conservation Tele indicate your line is the question can you may have tested Tim if he would like to remove your question friendly Q.
Participants using speaker equipment may be necessary to pick up your handset before passing this tax he's.
Our first question is from Jim definitely Keith. Please proceed.
Good morning, guys terrific execution.
Thanks, Jim.
Im sure you guys are gratified by the return you're seeing on the investments you've made in digital capabilities one to start by talking about the increased use of digital in your business fall season go to market strategies, and we're seeing on changes across a number of industries with the pandemic does it does look forward can you kind of shape, maybe some of the PML insulin.
Most of increased use of digital capabilities in your operational strategies.
How does this influence the kind of structural margin opportunity for the business.
Well I think it's done.
We obviously think it's going to be a benefit Jim.
On the marketing side, obviously there'll be a bit of a shift here from traditional marketing to digital marketing.
But.
The ultimate goal here is to shorten the overall supply chain not just for the making shoes, but development to hitting the consumers' hands.
You just simply have to be closer to the.
Consumer in especially in challenging times like this.
You need to do that in order to take risk on of the equation. So we see digital as being a broad enhancer when it comes to that kind of operational.
Discipline in shortening the supply chain.
It's hard to predict exactly the pockets and how much of the savings.
DNA savings will be come out of the equation in that regard, but we believe it's going to be fairly substantial, especially when you consider.
Traditional sourcing and product development.
Back and forth to China Asia, and other other manufacturing centers.
We believe that's going to eventually fall by the wayside and be replaced by digital capabilities in Blake mentioned in his comments the fact that.
We think we can take a lot of those cost product related costs out with the digital solution virtual solutions that were already using but had to test in an accelerated timeframe.
But also just helps us manage manage the inventory we can be closer to the consumer the decisions, we're making about the inventory and when we make those.
Really helps us drive down or exposure there. So we're seeing some really immediate benefits from that approach.
Great.
And what number that really jumped out of you guys mentioned 600 basis points operating margin leverage in New Zealand ecommerce business.
Our gross margins for the colors business in the quarter was promotional.
And can you speak to some of those leverageable expenses Im curious how much of that leverage related to AD rates, which I think were depressed during the quarter.
Which may have helped customer acquisition costs.
I think are there a couple of big drivers for us gross margins were up actually year over year.
Nicely. It wasn't I mean, we were promotional with a couple of brands that needed to move some seasonal goods, but.
Overall, the promotional cadence was was better than better than the normal.
And I would say from that standpoint, you know helped us on the gross margin line along with the fact that we're introducing some new products in the in the quarter, which were at higher margins. So that was positive.
The.
The drivers on leverage really a couple of things the way we run our E com business right. We have a platform that supports our entire portfolio.
And that cost structure definitely is variable to a certain degree but.
We are very much able to support the E com demand both in terms of the infrastructure with E Com Center of excellence and our warehouse customer service and other support services.
Very well and that helped leverage the results there and then you're right. We did get some benefits from some some depressed.
Advertising cost, but overall the organic interest in our sites really allowed our our marketing money to work a lot more effectively in the quarter. So our role as on Netspend was with higher because we saw some very healthy organic.
Interest and organic search drive traffic to the site.
Great I'll leave it at that I look forward to following up after the call.
Thanks, Jim.
Okay.
Our next question is travel Chris.
Cynthia with Wedbush. Please proceed.
Hi, good morning, everyone. Thanks for taking my questions.
Youre welcome.
Just first I want to good saucony for a moment.
Just to go there just would you expect that to return to growth in the back half of the year just given the double strong backlog increase what you're seeing on E. Com a response the product to further color around that based on what's that about backlog.
Yes that would be our goal obviously affected somewhat by the timing of new product introduction. You can there are number of new product introductions that could fall at this point into Q4 or Q1, so it's a little bit up in the air but saucony has tremendous momentum right now driven fundamentals.
By innovating products and.
A lot of bonds in the marketplace. So.
We would expect certainly a return in Q3 two growth for Saucony.
Okay. Thank you and just I guess, Mike for you.
Just the exit rate for Q2 on on revenues seems to be somewhere in that somewhat less than 25% sort of that preliminary thought process gave for Q3, which doesnt really implied too much of an improvement sequentially in terms of what you're seeing is that just because of a just your concerns about cobot spikes in certain.
Market, how quickly that in America, and some international markets come back.
Sure just based on some of the other comments you made wholesale.
Sales seem to be slowly moving into right direction as such as more caution about how to fall unfolds or just any additional color for sure and we continue to be cautious here Chris.
The wise thing to do I think it served us really well, how we manage the business in Q2.
June saw some improvement we we came out at the beginning of June was sort of our outlook at the point at that point in time for the rest of the month in things proved proved out a little stronger.
Realized July was an improvement over June but at the end of today, we still have some uncertainty that we were not able to control. So now I would I would say overall, though the the trends in the business in the shift.
It was probably most prominent is obviously moved from E com growth to our traditional wholesale channels.
But the demand there has been good in our at once.
Order trends in the last several weeks has been positive there. So theres been a 10 absurd recovery there and obviously, we'd expect that to maybe settle down a little bit in the back part of the quarter.
Christa final thing just from the real quickly just on gross margin I'm just curious.
What you would characterize is normal or maybe you can break apart how much of the color 170 basis point improvement in Q2, it just driven by strength in mix I'm. Just curious does it turned negative or is it just normalize in terms of less of a game because you're selling in still full priced products are not don't have to be promotions out there.
Yes, Thats good question, because I mean, I think normal normal for us. It was really to just kind of talk about a normal mix.
There was there was.
Suppressed close out demand in the second quarter and some of that's going to shift into Q3.
So that will have an that'll have a negative impact on gross margins just for the quarter. It's just a little bit of the timing shift there but.
But when you when you look at.
Sort of the gains that we that we had in Q2 hundred 70 basis points.
Two thirds of that more than two theres that was really from E com mix and just first quality versus close out mix. So.
I think we're going to see a big portion of that kind of come back in Q2 and get back down into the 40% to 41% range for the second or for the third quarter now Q2 Q3.
Understood. Okay. Thank you very much all of us.
Thanks.
Our next question is from talents income with Baird. Please proceed.
Yes, Hi, I appreciate the color on recent trends I, just wanted to dig in a little bit more OPEC casual brand, what you're seeing there just given that yes.
Couple of them that lag didnt.
In the second quarter, maybe maybe just to start therapy to give more color what you're seeing.
I think it's several things.
Jonathan I think one.
Everybody is aware of the consumer trends right now so theres some distinct consumer trends for us right now that our tailwinds.
For many of our brands and there's a few that are.
Headwinds so I would.
A couple of our Boston brands.
More than the rest of the portfolio have a bigger us department store base.
In their business for example.
That obviously was not very robust in Q2. So that's that's happening in impact add theres been just on the consumer side just general.
A focus on.
Outdoor Ron work at home comfort, probably at the expense of dress casual fashion and traditional casual shoes, and we're certainly seeing that in a couple of our our brands, we think thats probably going to continue here until.
The pandemic runs its course here over the next six or nine months.
And just maybe clarify I assume those brands, we expect down more than 25%.
Well, if given that some of the positive call out the out in the other performance driven brands just yes, Thats correct, Yes, that's correct I would expect.
Those brands to be down in that range.
Certainly down more than.
Our some of our other brands that are benefiting from the Tailwinds.
Okay, Great and maybe bigger picture when you look out with your Crystal ball, maybe that's a good.
Broader industry discussion, but just trying to think about how youre planning to capture a go off the elds here, maybe any thoughts on kind of good picture timeline and related to that.
Just with some of the cost gets up and you think it needs to get back to the prior sales level bigger picture of the same level of profitability or do you think your some of the cuts that you are making are going to be permanent here.
I think some of the structural changes will be permanent I think there's been significant changes over a very short time and consumer behavior.
Maybe five years of consumer behavior, compress down to six or nine months, especially around.
The use of technology and the changes that thats enabled so.
We think thats going to be permanent that requires our business and all businesses frankly to be adjusted Viejo, Allenby fast and operate with some pace.
On a broader picture with respect to the pandemic.
It really varies by region by region and.
In the United States state by state or even labor shed within a particular state. So we believe there is going to continue to be some volatility until there is universal vaccine.
I don't have.
A crystal ball go I've been on a committee.
Advising our states governor on NIM.
With health experts and other Ceos honored on approaches to address the pandemic and and lower the curve, but I think it's going to be six or nine months, a little bit of fits and starts.
One of the things that that has been surprising to us has been the quick spike in consumer trends, whether it's to the outdoor or Ronnie and even in the running category Theres been a tremendous influx for example of new consumers to the sport and subsequent surveys of.
On that they're going to.
The vast majority of those new consumers are going to remain with the sport. So we see some of those trends.
Continuing on well past, probably the lifeline this particular pandemic.
Okay Thats helpful color. Thank you.
Thanks.
Our next question Incheon, Dana Telsey with Telsey Advisory Group. Please proceed.
Hi, good morning, and congratulations on the progress.
Thank you John.
As you've seen the commerce channeling digital accelerate what do you think the the opportunities our gross margin potential versus the other channels and how do you see it is being operating margin accretive.
Thank you.
Yes, I would think.
One is going to be gross for us anyway, I know, it's different for certain companies, but our ecommerce business has always been accretive to our overall bottom line results, we do not even though we're going to and have increased our investments in E com and digital.
We think that is going to be.
Continued to be the case, so we would see this shift to a more DTC E Commerce model benefiting gross margin over the long run.
More than we may have seen it.
I have an impact a year or two ago, and certainly a beneficial impact on our our bottom line as well.
Got it and management and then think and frankly, that's taking into account increased investments that we know are going to continue and data you. Just all you have to do is look at the second quarter results that we talked about earlier and really the ability at these levels at this at this scale.
To enhance the operating margin by 600 basis points was pretty tremendous.
And we had just where do we had adjacent things and changing things in the middle of the quarter to respond to that demand. So I think it bodes well for our ability to to two leverages year as your inquiring about.
And then if you think about inventory, which I'd also like licenses linked to how do you think about inventory by brand as you move through the holiday season, what are you seeing out there in terms of demand. Thank you.
Sure not worse, we're certainly seeing spikes in demand behind certain consumer trends in some brands.
We've got a few brands that are a couple of brands that are chasing some inventory right now.
We believe for Q4, obviously when.
You have something is white hot as endorphin his for Sperry Saucony right now you never have enough inventory. So we're chasing some inventory.
For Saucony for sure some of the more fashion boot product, probably the new boot product for Sperry as well overall, though the team did a pretty tremendous job of.
[music].
Keeping the company in business, keeping our supply chain operational.
And.
Hats off to the team obviously for all those efforts in Q2 I would think with this.
We're going to see at least domestically here probably continued shift.
Two out once from future orders.
For a quarter or to at least.
So it just puts a little more.
Burden on us to have the right core inventory for those retailers in really over communicate with those retailers like we have been so we can really manage our business with them.
Many of those retailers remain in.
A state of flux right now.
Thank you look focusing the continued progress.
Thanks, Thanks Dana.
Our next question is from Matthew decline with Keybanc. Please proceed.
Good morning homes will taking your questions.
So when he Tom up almost 100% and wholesale down.
Thats, a pretty big Delta some im wondering your thoughts on if this is more of a permanent shift and you will be a much bigger DTC company moving forward and what this does your business on a predictability and inventory or them. Despite.
I think it's going to be permanent shifted may not be is dramatic in the short term is Q2.
But we see that is a permanent.
Shift accelerating shift I've read some predictions that overall consumer online will be up.
50% or more this year in the US market. For example, so we don't see the the consumer retreating from the use of technology digital and in online.
Certainly the company is going to shift to have more of a DTC focus.
As as we look forward here.
And Thats frankly, one of the reasons why we're investing so much in digital capabilities, we need that digital analytics AI powered predictions.
To help us make the very best decisions when it comes to.
Inventory so they really both of those.
Go hand in hand at least for our best business.
Thanks, and then the wholesale channel I'm wondering do give us any color on how you're thinking about the back half of the year and if you could break that down by store type like family Sporting goods online only and the others.
We've we've seen stores for actually open up here as throughout Q2, but we know that some states now in the United States. For example, our restrict my comments right now to the domestic market.
Our experian experiencing a second wave or something approaching a second wave we have seen store traffic overall decrease in some of those markets in some of those states and we think that probably will continue until trends reverse with respect to the VA.
Chris.
A little bit surprising in Q2, we had.
The rural Channel the farm and fleets remained open fairly much as essential businesses throughout the country.
On a country I think that contributed to our are relatively strong work boot performance.
In Q2, we continue to see that case, we think the sporting goods channel is we'll continue to remain will open.
And.
Performed well.
Mall based retailers, it's a little bit more of a mixed bag there depending on the state and in some cases the city. So we know the consumer is still has a level of fear or concern about going into crowded.
Environments, you would know that from the news when you looked at the beaches.
And some of the younger.
Millennial parties, but.
We know that exists generally for consumers right now so.
We think those environments will continue to be a bit challenge tier.
For a while.
And likewise I think the family channel is a little bit mix is well some areas open and in doing fairly well in some areas in states not so well. So we think we're going to see gradual improvement here across all channels as we roll forward.
The big Spike I think is going to be tied to.
A vaccine and some real.
Headway on on that front, but we longer term in short term, we see the consumer continuing to focus on line and they using technology to them.
Make their life more safe and convenient.
And Matt one more thing our digital our digital pure play customers right.
They continue to do very well in this environment for strong contributors in Q2 and.
As part of our traditional wholesale business, that's become a bigger and bigger part of the overall mix.
Helped us deliver two thirds of our us revenue through the online channel in the second quarter.
Thanks all.
Our next question is from Erinn Murphy with Piper sat there. Please proceed.
Great. Thanks, Good morning, I guess two questions for me first just around the uncertainty at school apart from just a broader back to school fee then could you speak to how you see that impacting.
Sorry, and had been particularly in the portfolio and then I had a clarification on acne.
Yes, I mean the.
Unfortunately the.
Three.
Hamleys with younger children, and even kids going back to University. The patch work of approach to school openings. This fall it's causing.
A lot of concern in the lot of volatility, we do not anticipate any kind of universal approach there.
As you know Aaron back to school is not really material to our company overall.
As a selling.
Event.
Our kids business.
Our kids group.
Even that is more focused on younger children. So.
We don't think it's going to have much of an impact, but we think it's going to be.
From a consumer standpoint, a more volatile back to school season, we see parents investing in technology and.
And as many schools are are focused on or virtual only format at least for the first semester first couple of months we see.
Apparent spending on their home, whether it's a desk or to create a little bit of the school flash work environment. I think some of that is going to come at the cost of traditional consumer softgoods, especially in the apparel sector and a little bit in in foot.
Were so it's a challenging environment.
And it's different.
For every state are in Boston, our offices are open and but our onsite daycare is not open in Michigan. Our offices technically are not open now we have still some pretty restrictive guidelines there, but our onsite daycare here is open so.
There's going to be a number of challenges for parents and kids business certainly this fall.
Okay.
My follow up maybe Mike that the screen you just on Hockney, I believe you're lapping that taking that Eric volume distributor how does that impact. This second half growth rate that you were speaking about earlier on the brand. Thank you.
Yes, I mean, we we definitely.
Saw nice benefit last year from the addition of Italy is.
We acquired that distributor.
So yeah, we're anniversarying some really nice numbers there in Q3 as Blake mentioned, we still expect saucony to return to a growth.
Position in the third quarter based on the momentum there.
The order book to the trends that we're seeing in the category. So.
It's good that you called that out because they think that even strengthens strengthens the the saucony story that we're comping up against the addition of that business a year ago.
Great. Thank you Doug.
<unk>.
Our next question is from Susan Anderson with B. Riley FBR. Please proceed.
Hi, Good morning. This is alec leg on for Susan Thanks for taking our question on just a quick follow up on wholesale orders you mentioned they were trending positively. The last few weeks I remember last quarter, you mentioned, reducing inventory receipts by about 300 million this year.
As retailers substantive bidding up have you seen any categories or wholesale partners.
Part of chasing on categories, and do you anticipate that inventory risk reduction to the less than 300 million this year.
Well, we took cancellations back at that time based on the uncertainty that can really March April timeframe.
And since then obviously gain more confidence more certainty more clarity from our customers to be able to go back and replace some of those cancellations.
So overall I think as I mentioned, our outlook for inventory still very positive and we expect by the end of the year to still be down over $40 million year over year in inventory. So we have the ability to surge if our spring demand were to pick up over the next 60 days and we needed to bring in some more spring merchandise.
As for December January deliveries, and we still have some time to do that so I would say that we have inventory we have brands that many of our brands have seasonal inventory. It's very good core product that sales year round and and I think for some of our brands like.
Blake mentioned around Sperrys boat business or boot business dead to get pushed into Q4, a little bit but other than that our inventories are strong our physicians are solid and I think we're we're in a very good position certainly for Q3, so far in the quarter, we've been able to fulfill the unexpected demand.
Very high level, so we're confident in the inventory trends.
Terrific. Thank you.
Our next question is from Mitch Kummetz split Tim's research. Please proceed.
Yes, thanks for taking my questions I, just wanted to Mike I wanted to drill down on your outlook a little bit.
First on sales and then I got a follow up on margins. So.
You mentioned that Q3 sales are expected to be down less than 25%. I think you also made the comment that July.
Was better than June my sort of back at me on below calculation has a chance maybe down around.
20%, so I'm kind of curious as to what you. What you saw in July was that sort of down teams are.
No June June June was down much much higher than that.
But so July was and again I will quote the specific trends by month, but I would just stated we saw progressive improvement, especially in the wholesale side of the business in July as we just started to see more and more.
Reorder demand come as stores for opening or after the stores were opened so we saw that occur and saw some good.
Trends and consistent trends for the month of July.
Is that down less than the.
Same kind of in the same ballpark is what we're talking about for the full quarter slightly better in July than that but overall I think.
Good gives us good confidence because the out of the gate trends were in line, if not a little bit better than the overall outlook, we're providing for the quarter got it. So what what explains kind of the deterioration expert to deterioration over the balance of the quarter again is that just.
Being cautious or is there something you're seeing that suggests that.
I don't look at the significant deterioration I think Theres just again there is just we know what the timing and phasing of when we sell in new product in the quarter and that just happens in certain months and.
We're also theres a theres a dose of.
Washington, There Mitch for sure. We just don't know what the last few months to the quarter here. The last six weeks at this point will necessarily hold as it relates to all this uncertainty, but we feel good about the outlook based on where we are so far in accord got it just trying to better understand that and then on margins. Thank you made the comment.
On SJ that 22 million in cost come back in Q3. So are you basically saying that from a dollar standpoint like Q3 yesterday should be 22 million higher than Q2 are there other.
Factors to consider there.
Now that's about the right way to think about it I mean part of that part of that 22 million is I, obviously variable costs, though right as we urge up.
With wholesale revenue in our warehouse and customer service teams and all this infrastructure more commission sales in the quarter things like that marketing spend with our own whether wholesale.
Brand, so, but yes, that's essentially the way to think about its not fixed costs coming back in but not much of its variable costs related to the new demands of the business in Q3 versus Q2.
Got it thanks and continued success.
Thanks, Mitch Thanks.
And our final comment.
Fast Vera Vera skill with Exane BNP Paribas. Please proceed.
Good morning, and thanks for taking my question, Mike Mike I wanted to follow.
I'm not sure if I heard right, but are you protecting sequential improvement to the key to Fourq do.
I think you called out about 10 million of pull forward lease revenues to twoq from Threeq.
Are you anticipating any pull forwards.
For Q into Threeq, just maybe some color on that we'd be very helpful. Sure no not at this point, we don't necessarily view there to be any major opportunities in the ended the quarter.
And we tend to in this particular case in Q2 is nice to see that we had some some strong customer demand specifically in Europe.
The international business tends to be where we have some of that timing shift and for us in the in the second quarter. It was really the strength of our European business that.
Pulled some of that demand into Q2, but at this point the outlook that we have wouldn't contemplate any significant shifts from Q4 to Q3.
Okay very helpful and then.
As you pushed forward a little GTC strategy I noticed in your and your filing this morning.
You parsed out $4.5 million, a new store inventory just curious to know.
What your store count is currently it's the line sticks or and how many stores you plan to open for the full year.
Wow.
We're not planning to open any additional stores for the rest of the year.
I think to store counts in the low Ninetys right now we've had a couple stores come off their lease naturally so.
And we wouldn't planned to be opening any new stores in the environment. We're in today, but pretty good stable position at just over 90 stores and and actually seeing you know as Blake mentioned all that for all the reasons, whether its state by state or otherwise.
In the aggregate between our Merrell Sperry and.
Multi brand stores.
There are operating at a little above 70% of what the planned levels where for for the third quarter.
Coming into the year, so not a complete returned to normal but in many cases with conversions being much higher than than they were a year ago.
Performing at about that 70% plus level right now.
Very helpful and then as with last question following up on course his question on gross margins.
You mentioned briefly we should think about 40% to 41% range or.
Let's review.
I understand that mix might be an impact, but just curious to know if FX.
<unk>.
Cost anything we should think about as it as a as a downside to the gross margin not compared to Q2 really laraya, it's really.
It's really the mix for the common wholesale.
The gross margin and as well as I mentioned, just some shift on Closeouts from Q2 to Q3 more there were there some suppressed demand in Q in Q2. It. We just stores were and open the retailers were an open and we expect that to kind of come back in Q3.
Very helpful. The color. Thank you very much thanks.
We have we'd send any question and answer session I like to turn the conference back over Kipp apparent for closing comments.
On behalf of Wolverine worldwide I'd like to thank you for joining us today.
As a reminder, our conference call replay is available on our website at Wolverine worldwide Dotcom.
The replay will be available until September Fiveth 2020, Thank you and have a good day.
Okay.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Thanks.