Q3 2021 Wolverine World Wide Inc Earnings Call

Strategic benefit in the current environment.

Yes. The company is not dependent on any single product category Geographic region consumer group our distribution channel.

While consumer lifestyle choices of increased demand for performance product the underlying trends in this category are long term in nature and are expected to persist.

Consumers are increasingly focused on health and wellness with running hiking, the outdoors and exercising general serving as the primary activations. This mindset.

Participation in running in the U S has increased every year over the last five years and a significant majority of new runners day. They plan to continue running in the future.

Participation in all outdoor activities, including hiking walking and boating has also increased with over 20 million new hikers in the U S alone since 2015.

This past spring and summer National Park shattered attendance records, and new bulk purchases and water activities and general reached a 13 year high.

Consumers renewed affinity for the outdoors is expected to continue into the future, especially as consumers begin to travel again.

The work category has also showed strong growth supported by healthy macro industry conditions in workwear fashion tailwind.

Warehousing jobs have more than doubled since 2005 and construction companies are expected to hire hundreds of thousands of additional workers over the coming months.

Looking ahead, the passage of a major infrastructure plan in the U S will further boost momentum in this category.

Across all brands and product categories, we have placed our consumers at the heart of our global strategy and that has changed how we bring product to market and operate the business.

This strategic focus led to our recent acquisition of Sweaty Betty.

Trend right Womens Activewear brand that adds a very meaningful DTC business to our portfolio.

With over 80% of revenue generated through DTC channels.

Including Sweaty Betty DTC e-commerce revenue more than doubled in Q3 relative to 2019, and our DTC stores are up over 35% versus that year.

Our own online business and the online business of our wholesale customers now account for over 30% of global revenue.

Together with the DTC businesses operated by our distributor partners around the world nearly 40% of our global revenue and a larger percentage of our pairs is now generated through consumer direct channel and.

Enabling enhanced brand shopping experiences a wealth of consumer insights and data in a more efficient business model.

We continue to capitalize on the fundamental consumer trends that are playing out in the market.

In addition to our strong DTC business. These trends are reflected by continued strength in retail sell through and a historically high order backlog that now extends into Q3 of 2022.

We remain bullish on our outlook in light of these trends and the composition of our brand portfolio, which over indexes and trending performance and lifestyle categories.

We expect strong long term consumer demand, especially for Saucony, Merrell sweaty, Betty our work brands and Sperry, which will launch a line of products in the active sport category next spring.

For our call today, Brendan Hoffman will provide some additional insight on key brand performance during the quarter, Mike startup will review, our Q3 financial performance and updated outlook in more detail and I'll conclude with some final remarks with this I'll now hand, it over to Brendan Brendan.

Thanks, Blake and.

In the third quarter, we acquired Sweaty Betty powerhouse brand that operates in a global addressable activewear market of over 200 billion.

The brand delivers on our key strategic priorities by delivering a powerful line of industry, leading products expanding our direct to consumer presence and growing our business internationally.

We plan to leverage these strengths by deploying sweaty, Betty best practices and apparel expertise across our portfolio.

The business grew over 50% in the third quarter ahead of our expectations.

And three months after welcoming sweaty Betty to the Wolverine family, we are even more excited about the growth potential product collaborations and operational synergies in front of us.

Saucony delivered a very strong performance in Q3 with more than 40% growth over 2020, and 60% versus 2019, despite some supply chain challenges.

Saucony Dot com was up more than 50% and nearly triple 2019.

The brand is seeing global success with all regions contributing significant growth.

Outside of the U S market technical running and lifestyle performance in Europe was especially strong up 30% versus 2020.

Our saucony originals lifestyle business continues to perform well, especially internationally.

Our performance in Europe continues to accelerate while the Asia Pacific region is a big opportunity for us moving forward with the brand delivering over 60% growth in Q3.

So how can these stores and the online business are performing well in China as the brand's joint venture there continues to gain momentum.

<unk> continues to deliver a consistent flow of powerhouse performance product and trend right lifestyle product.

This has translated to consistent robust growth for the brand over the last several quarters and we expect this to continue into 2022.

The road running category leads the way, including the recent launches of the new ride 14, the brand's biggest franchise shoe and triumph 19.

The innovative endorphin collection continues to generate heat in the marketplace and deliver substantial revenue for the brand. Thanks to recent franchise updates, including the pro two speed too and shift too.

Saucony is trail running business also grew by more than 40% in the quarter.

Let me shift to Merrell the brand continues to experience record demand and great momentum in all global channels.

During Q3, Merrell was impacted by factory closures in Vietnam, which resulted in missed revenue opportunities of at least $25 million.

Despite these challenges Merrell still delivered mid single digit growth in the quarter versus 2020.

Merrell DTC business grew mid single digits in the quarter with Merrill Dot Com building on its nearly doubling of the business last year.

Merrell stores also continued to outperform our expectations a promising indicator of the strength of the brand and our consumers return to shopping in stores.

Merrell holds the number one U S market share position in the high category and as the category leader in many key markets across the globe.

While Merrell continues to successfully optimize its well established and market leading core product franchises fresh innovative product offers offerings are driving brand heat and new consumer interest.

The Moab speed in Moab slight collections are energizing the performance category.

These styles represent the brand vision for fast lightweight footwear for the trail and light hiking and also build on our heritage and success of the world's number one hiker the moab.

This momentum is further fueled by the uptick in organic media placements that bridge, both performance and lifestyle. For example, Annie Leibovitz use the Moab speed in the September issue of Vogue for a major photo shoot and style with a Louis Vuitton jacket and skirt.

Additionally, Merrell was featured on the today show during Q3, showcasing the moab speed, which aligns well to the brand step further campaign encouraging increased commitment to the outdoors.

Both collections have exceeded our expectations and we are excited about the potential for new performance collections in 2022.

Merrell is lifestyle business performed better than the brands overall growth in Q3.

We are seeing positive results from our strategic focus on further elevating merrell is a lifestyle brand.

Recent brand health research indicates that consumers are incorporating merrell into their own identity and an increasingly higher degree.

These trends are manifesting in the strong strong performance, we're seeing in lifestyle products, including the hydro Mark.

And the newly launched cloud all day casual sneaker collection made with eco friendly materials.

As we mentioned on our Q2 call Merrell introduced its <unk> TRL capsule collection on Merrell Dot com, which focuses on younger fashion forward consumers demanding authentic outdoor influence style.

Looking ahead, merrell possesses a substantial growth opportunity globally, particularly in EMEA, which has seen increasing momentum for several quarters and in Asia Pacific where the China JV is just beginning to gain momentum.

Outdoor and performance trends are strong around the world and Merrell is capitalizing on its heritage and brand positioning.

In Q3, our work business accounted for nearly 20% of total revenue in the category continued to deliver strong growth with Wolverine the leader in the U S work boot category up over 16% cat footwear up nearly 40% and with strong contributions from our smaller brands.

As Blake indicated we expect continued strong growth in the work category as we pivot towards 2022.

Based on the performance of Merrell, Saucony, Sweaty, Betty Wolverine and our other work brands our performance business developed growth of nearly 30% over 2019 during the third quarter.

The Sperry brand continued its steady recovery in Q3 with over 40% growth the.

The brand's DTC business was up 25% driven by ongoing e-commerce growth and very good Sperry stores performance.

All product categories delivered strong double digit increases in the quarter. The overall boat market showed strong growth, particularly in men's and Sperry gained significant market share growth in this key category.

From a fashion standpoint, there are clear indications that we are at the forefront of a boat shoe trend with very encouraging demand from key retailers for the first half of 2022.

I Hope you all saw double O seven James bond wearing a pair of our iconic boat shoes and no time to die.

In the coming months Sperry plans to build on the energy created by recent collaborations with rowing Blazers, and Netflix outer banks and product capsules with John legend, and Rebecca Minkoff.

The brand is also well positioned for the current seasonal women's boot business with strong demand and healthy inventory levels.

Sperry will also leverage the easy on off trend during Q4, with a new Mark cider and the cozy float collections.

In spring 'twenty, two the brand will launch its new Sperry sport collection to tap into macro consumer trends with more trend right performance based product for the water.

Looking forward our product lines are robust across the brand portfolio and order demand continues to strengthen we have been flexible and responded quickly to navigate the ongoing ongoing macro supply chain challenges to service. The increased demand we are seeing in nearly every brand we.

We believe strong product coupled with more precise merchandising and consumer focused as well as healthier inventory positions will drive growth over the next year.

Our DTC channels remain a top priority and a source of opportunity for the business.

We have pivoted to a more dynamic e-commerce operating model to enable faster <unk> implementation of technical enhancements and new commercial capabilities, which will also help us extend improved online functionality to our global online wholesale customers.

In addition to our global DTC E Commerce business, we are seeing meaningful meaningful wholesale growth with our online retail customers.

As global economies have reopened we've seen consumers shift a portion of their spending back to brick and mortar stores about 50% of our footwear is now sold online in the important U S market.

This bodes well for the current brand operating model that we are executing including a more continuous product flow and best in class digital marketing and content to benefit all channels.

We continue to look closely at our store fleet and suspect there may be favorable and profitable opportunities for us to explore as we expand our footprint in key market starting in 2022.

I am now going to hand, it off to Mike to review the third quarter financial results and our increased 2021 outlook in more detail Mike.

Thanks Brendan.

Let me start by reviewing the Companys strong third quarter financial performance.

And then I will cover our revised outlook for 2021.

Third quarter revenue of approximately $637 million represents growth of over 29% compared to the prior year and includes $39 million from the recently acquired Sweaty Betty business.

On a pro forma basis sweaty Betty grew over 50% versus 2020.

Based on increased consumer demand experienced across the portfolio during the quarter.

The company was on track to deliver just under $700 million in third quarter revenue.

But as Blake mentioned, the unprecedented factory closures and other well documented supply chain disruption impeded our ability to service this strong demand.

Despite these headwinds saucony and Sperry each delivered over 40% growth.

Merrell was impacted most heavily by the factory closures in southern Vietnam, yet still delivered mid single digit growth.

Our work business also continued to drive meaningful growth at over 20%.

Adjusted gross margin improved 330 basis points versus the prior year to 44, 6%.

Due to the highest higher average selling prices.

Favorable product mix and the addition of sweaty Betty for nearly two months of the quarter.

Merrell Saucony, and Sperry, all well exceeded gross margin expectations in the quarter.

A testament to their strong position in the marketplace and robust pipeline of relevant trend right product.

Sweaty bodies premium positioning distinctive product offering and strong consumer trends are yielding robust gross margins, which are accretive to our underlying business in Q3.

Total airfreight costs were approximately $10 million in the quarter of which $7 million was excluded from our adjusted results.

Including the full air freight impact our adjusted gross margin would've been 43, 5% still 220 basis points higher than last year.

We continue to use air freight where appropriate to mitigate exceptional supply chain delays cost specifically by Covid.

Adjusted selling general and administrative expenses of approximately $208 million or <unk> $56 million more than last year.

<unk> due to increased revenue. The addition of sweaty Betty and increased marketing investments.

Adjusted operating margin was 12% for Q3, an improvement of 140 basis points over last year.

And ahead of our expectations.

This very strong leverage on the Companys revenue growth resulted from gross margin expansion and a balanced operating expense management.

Adjusted diluted earnings per share were <unk> 62.

Compared to 35 in the prior year.

Growth of 77%.

Our three five times, our revenue growth in the quarter.

Reported diluted earnings per share were breakeven and include a number of nonrecurring or exceptional items comprised of approximately $34 million of costs related to bond retirements executed in the quarter to significantly improve the company's capital structure and future liquidity.

Including future savings of nearly $10 million in annual interest expense.

Approximately $10 million of cost directly related to the acquisition of sweaty Betty.

Approximately $17 million of costs related to our legacy environmental matters.

Including ongoing defense cost and estimate of potential future settlement costs for a portion of the outstanding litigation.

And finally, approximately $7 million of airfreight considered to be well above normalized levels based on historical experience.

During the quarter the company and three M.

Entered into a non binding term sheet outlying proposed settlement terms on certain individual lawsuits filed against the company related to our legacy environmental issue.

While the proposed settlement remains subject to finalizing terms and conditions.

That allow any of the parties to opt out of the proposed settlement we.

We believe this is another important step towards potential resolution of these matters.

Yeah.

Let me now shift to the balance sheet.

Total inventory grew approximately 26% versus 2020.

Including 16 percentage points of growth from Sweaty Betty.

Underlying inventory was up approximately 10% compared to last year and still down compared to 2019.

Our inventory position has improved over the last two quarters, especially for Saucony, Sperry and our work brands, but it's still not in line with the higher demand.

Merrell continues to manage through the recovery from close Vietnam factories, which has put more pressure on inventory levels.

Based on current visibility inventory.

Inventory levels that will continue to improve as we benefit from supply chain diversification.

The addition of several new factories and incremental capacity for 2022.

Higher production orders placed in mid 2021, and other actions, we have taken to counterbalanced macro supply chain headwinds.

Since August one we.

We acquired sweaty Betty for approximately $410 million.

The purchase was financed through a combination of existing cash.

And borrowing under the company's revolver.

We also executed some important refinancing activities to support future growth and optimize our capital structure.

Notably our bond refinancing and the new credit facility that gives us added liquidity and flexibility to invest in growth.

As a result of these recent actions we've added a powerhouse growth brand in the portfolio and our balance sheet remains extremely healthy with total liquidity of approximately $800 million.

I will now provide an update on our outlook for the rest of 2021.

First let me focus on the strength of demand signals across the portfolio.

A very optimistic outlook for growth over the next several quarters.

Our order book remains at historically high levels and provides very clear demand visibility for our global wholesale and distributor businesses well into 2022.

Retail sell through continues to be very strong.

Despite shipment delays and supply chain disruption or order cancellations have been limited as retailers remain committed to our industry, leading brands and product offerings.

The positive momentum of our performance and work footwear brands continues and now Sperry is beginning to show signs of a healthy recovery.

Sweaty Betty is now the fourth largest brand in our portfolio and is driving outpaced growth.

Trends in our <unk> business remained strong with year to date underlying e-commerce revenue up nearly double 2019 and year to date underlying store revenue up mid teens.

Finally.

Demand in our APAC and Latin America regions is recovering nicely.

As we transitioned to spring 2022.

And we see near term strength across many international markets.

All of these indicators give us great confidence for the future.

The strength of new product offerings and improved go to market tactics across the portfolio will allow us to continue to fuel growth.

Spite, the macro supply chain headwinds that we believe will persist well into 2022.

In the short term.

The impact of factory closures in a volatile logistics environment is having an unplanned negative impact on revenue for the last four months of 2021.

As a result.

We are adjusting our fiscal 2021 outlook.

We now expect fiscal 2021 revenue of approximately $2 4 billion.

Growth of nearly 35% compared to the prior year and approximately 28% growth on an underlying basis.

Despite the shorter term supply chain impact, we still expect to deliver up to 25% growth in the fourth quarter.

We expect strong gross margin performance to continue in Q4, thanks to low levels of the excess inventory lower promotional activity in the market and continuing expansion of our <unk> businesses.

There will be ongoing cost pressure related to higher freight and logistics costs throughout the fourth quarter, and we will continue to invest behind our future growth opportunities, including brand enhancing marketing in key talent.

We now expect full year adjusted diluted earnings per share in the range of $2 <unk> to $2 10.

In Q4, adjusted diluting diluted earnings per share of <unk> 38 to <unk> 43.

Representing 100% growth over 2020 at the high end of that range.

Full year reported diluted earnings per share are now expected in the range of $1 16 to $1 21.

We have good line of sight to the start of 2022 and.

And have great enthusiasm for continued brand momentum as we pivot into the new year.

While certain known supply chain headwinds will continue to be in play we still expect to deliver mid teens underlying growth and mid twenty's overall growth in the first quarter of 2022.

Our confidence in delivering double digit underlying growth next year remains very high.

And we believe sweaty Betty add certainly to the growth profile of the company.

With that I will hand, it back over to Blake for some closing remarks.

Thanks, Mike.

Our healthy growth and strong financial performance in Q3 are a testament to the company's strategic focus and accelerated brand investments.

Over the last several years, we've consistently invested behind digital and DTC capabilities technology talent and e-commerce as well as product innovation and design.

In Q3, we made an important acquisition of sweaty, Betty which will be an important catalyst for growth across our performance brands.

Our product pipeline is robust consumer demand is surging and brand heat and ongoing trends favor our brand.

We are confident as we plan for double digit growth in 2022.

The advantageous position, we find ourselves in today is a credit to our teams expertise and relentless work, especially over the last couple of years.

The global marketplace continues to be dynamic and fast changing and our people and company are selling in this environment.

I'd like to close by thanking our team members around the world for their tremendous efforts and making this a pivotal year for the company.

With that I'll now turn the call back over to the operator.

Operator.

We will now begin the question and answer session.

To join the question queue you May Press Star then one on your telephone keypad.

Youll hear atone acknowledging a request.

Yes.

Please pickup your handset before pressing any cheese.

So as Tony a question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question is from Erinn Murphy with Piper Sandler. Please go ahead.

Great. Thank you good morning, I had a couple of questions I wanted to start first with the order book for 2022. It sounds like you have good visibility through the third quarter now of next year could you talk a little bit more about that and then with the facilities in Vietnam now ramping up after.

A long period of downtime is added and impacting your ability that protein spring 2022.

Yes.

I'll take the first question with respect to the order book, Our order book really has been very strong for a year now and.

Most recently over the last couple of months, it's been accelerating.

We have good visibility across the brand portfolio the increases.

And frankly, Eric.

Historically high numbers that I've never seen in my career all of which is very helpful. As we try to mitigate some of the supply chain headwinds, where we're all facing so.

The order book is building certainly Q1 Q2, well in we're still getting some more orders in Q3, and we'll be getting some Q4 future orders in the in the near future.

With respect to Vietnam, a number of the factories in the south were closed over the last.

253 months.

They're reopening reopening, it's probably going to be a bit of a ramp up here as we look ahead.

I would say play stay on supply chain in general we've been very proactive for a year. We've been focused on additional capacity cost taking cost out of the supply chain, but also speed.

So.

We're going to continue the macro supply chain issues are going to continue to impact us in the whole industry and many industries.

Well into 2022, we feel very good about what we can control and the proactive actions.

We've taken certainly.

In the short term and mid term we've added substantial new capacity.

With our existing factory basins, hyster factories as well as.

A couple of dozen of new factories that have been added to our mix.

Supply chain is going to continue to be a bit of a slow poll care compared to historical timelines, but <unk>.

Again in that regard we've taken a number of actions air freight.

We use a fast boat.

Shipping directly bypassing the distribution centers so.

We feel very good about where we stand today and the actions we've taken to control what we can control.

Okay.

Great. Thank you I just had a follow up for Mike if possible on that third quarter credits margin you talked about it being better if you excluded the airfreight.

But I guess, even if I do that and then back out the benefit that <unk> had and the $39 million of sales in 2000 and $6 million to gross profit gross margin would have been in the mid 30% range of 35, 36% versus last year. So I'm just trying to understand a little bit more about what is going on under the hood.

With the gross margin is that input costs or it's something else, we're not thinking that I'm not thinking too. Thanks, so much yes.

Yes, sure I think the sweaty Betty benefit in the quarter was about 140 basis points on margin just the mix benefit there because of their strength in DTC Erinn. So think even after that we still are above last year's.

Last year's gross margin performance so.

Overall, our ability to kind of maintain a healthy gross margin go in on the wholesale side.

Has been very good very strong obviously scarce inventory helps helps in that regard our e-commerce and store performance overall, the gross margins have held up to our expectations very well.

We're not over promotional right now in the marketplace. As a result, we're getting good good flow through and then on the input cost side, we've been able to manage that really well.

So as it relates to product costs et cetera. So I think overall the health of the gross margin line is quite strong we're certainly getting the benefit of the mix as we as we grow our D to C business and add sweaty, Betty and into that overall, but I still see.

Our continuing expansion in gross margin as we move forward as that as that mix continues to get richer.

Thank you all.

Please limit your questions to one question and a follow up.

The next question is from Jim Duffy with Stifel. Please go ahead.

Thanks, Good morning, I Hope you guys are all do Arnie.

Thanks, Tim.

Can I ask you to speak more about the supply chain mechanics, and how they play forward from here into 2022 can you get more detailed on brand specific impacts I know you've flagged merrell or there are other brands that are impacted I am curious how that impacts your international distributor business and then looking out to 2022 is going to <unk>.

Revenue timing between Q1 and Q2.

You can help us think through that some more of that would be great. Thank you.

Yes, I would say.

Yes, obviously for the factory closures that happened in southern Vietnam.

Of all of our brands Merrell was the most impacted.

There'll be still some continuing impact on merrell growth. They are an extremely strong order book obviously.

Into Q1, and maybe potentially Q2.

Next year.

We have several other brands that had some capacity there.

Not to the extent of Merrell.

Softening.

Would be one of those brands, but saucony was all toll.

<unk> to increase their inventory levels going into some of the.

Most severe.

Vietnam shutdowns so.

Obviously, we haven't provided complete guidance for next year, but despite all of these supply chain headwinds.

Logistics headwinds, we still expect very very strong growth in the first half of the year mid teens on an organic basis, and probably over well over 20% when it comes to <unk>.

Including Sweaty Betty.

And I think just to add.

Add onto what Blake said I think the tools, we now have in our toolbox going forward, whether it be as Blake said, just shipping directly to retailers diversifying our.

Sourcing base are going to serve us very well as we get to the other side of this.

<unk> continued to grow as a company.

Jim the only other point that you asked about on the international side too. It's a good question, because obviously can impact the timing of deliveries to our distributors a little bit.

Certainly hampering us in Q4.

But obviously, we have a little more flexibility there as it relates to getting goods into the market on time, even if we don't.

Hit the quarter end deadline. So some of the Merrell headwinds that Blake referred to are certainly impacting our international business, but we don't see that creating any specific risk. There. It's just more of a timing shift.

Got it thanks, and then follow up just wanted to talk about the order backlog a little bit you guys are not alone in expressing strength.

Confidence and visibility.

Into next year I'm curious how solid these orders are because it feels like retailers are ordering from everybody and then we'll see who can deliver just given the backdrop can you just speak about.

How you feel about orders in your call Center.

House all of those are in.

Presumptions for cancellation rates so forth.

I think very solid I mean, we're talking to the retailers all the time, we will get the same in a few weeks to have Fannie, but there are hungering for goods and they're hungry for the right goods in as we've talked about.

Our brands are playing in the right space and also some of the competitors have made some decisions to exit some of the retailers, which has also provided shelf space for us. So I think we feel extremely confident that the orders we have are.

We will be followed through on.

I would say Jim so far.

This year, we've seen very minimal order cancellations, so that that certainly gives us some additional confidence.

Okay. Thank you guys.

Thanks, Jim.

The next question comes from Jay sole with UBS. Please go ahead.

Great. Thank you so much.

Mike I just want to ask you about the airfreight I think this year and for the year to date, it's like $22 million and sort of.

Unusual airfreight expenses as you think about next year, presumably company will need to use air freight the same way, but do you see other cost inflation, whether it's in ocean shipping rates or container rates or whatever that would impact margins. So if we think about that.

That $22 million, how much really goes away next year.

So like what's the offset from rising costs in other areas to get the product to where you need to call yes.

Yes, I think again as we as we finalize our outlook for next year, we'll have more specific insights on where.

Where we see higher input costs are higher higher inflationary pressure on the business.

So I won't be incredibly specific about it but I will say that we expect to continue to use air freight as.

As a way to mitigate some of the other delays, we're seeing and we're lucky enough to have ocean contracts that take us into may of next year at very low rates relative to the spot rate market today and.

But we're going to plan for increases there.

The team on the sourcing side on the global operation side of the business has done a tremendous job with our factories to manage.

Product cost increases for next year.

So we have some visibility to that but overall, obviously, we're expecting and already communicated price increases across our own businesses here.

Here in the in North American and our European owned businesses as well.

So we would expect to.

Manage our margin and enhance our margin outlook for next year based on.

The pricing power that our brands have right now we have.

We feel a very reasonable price increases that we need to pass along but really not a lot of resistance on those.

Okay.

Okay got it maybe if I can ask one more about sweaty Betty.

I think it.

It was mentioned that so anybody who is going to help.

Give expertise are you going to private sweaty Betty expertise across the entire portfolio, presumably helped grow the apparel business for Merrell and maybe some of the other brands can you just talk about how just about anybody acquisition maybe.

New opportunity to do apparel and the other brands and what kind of revenue opportunity you see there and then just on the sweaty Betty guidance for this year I think it was 100 million for revenue impact to this year has that changed at all just based on the commentary in the press was it wasn't sure. If it seems like it had been shifted a little bit. Thank you.

Yeah, well I'll start with the first I mean, we are having spent more time now with a sweaty Betty team and Blake and I were off site with them with some of our board members last week, we are even more enthusiastic about the capabilities theyre going to be able to bring to us in many areas in apparel was certainly a top priority.

Julia and her team have spent time with our <unk>.

Brands to start to think about how we can utilize their expertise.

Which goes.

Across the gamut of supply chain design production.

To really bring product to market and Merrell and saucony and some of our other brands in a way we haven't been able to do before we certainly have.

On our website apparel and these brands, but I think they.

They think of it more of a collection that will enhance the footwear that obviously.

As our strength so very excited about what that can be now it won't really come to fruition until 2023 at this point, but the the planning and the work and the effort going into it as is.

<unk> already started.

Yeah on the outlook side Jay.

We're really encouraged by <unk> performance. This year, we're expecting slightly better results. This year than we originally anticipated so no no.

No declines there at all and if anything we expect it to be slightly better.

Terrific. Thank you so much.

Thanks.

The next question comes from Laura vascular <unk> from Exane BNP parallel. Please go ahead.

Good morning, and thank you very much for taking my questions.

I wanted to ask about the $60 million of Mike.

Is that is that lost revenues or is that really a shift into one Q I think you talked about on the prior calls you know there was a $40 million shift between the first.

First quarters.

And I would love to get some some additional color on that.

Well I guess the way, we really measure that Lauren is that we know from Vietnam in particular, obviously on the logistics side it tends to be timing related right. So we as Blake mentioned, we haven't seen a lot of cancellations in the business and our retail customers and also our distributors around the world have been fairly.

Patient with some of these logistics delays.

To the extent Vietnam production can.

It can be replaced.

Then it will be a timing issue to the extent. It can't then maybe there is some revenue in there that we're not going to be able to kind of push forward into future quarters, but the guidance that we gave for the first quarter, which was very strong and very Blake.

Blake just reiterated a high level of confidence in that number really doesn't rely any major shift of revenue coming out of Q4 into Q1, it's based on the order book, we have today, the knowledge of <unk> supply chain capabilities and timing that we see today. So.

Again that shift concept really is that's something that we're focused on we're looking at the reality of each month.

Production capabilities and the demand that we're seeing month by month and as a result, we're still seeing really strong growth in the first half of next year. Despite those those issues.

Oh, that's great to hear that for next year, it's really strong double digits, not driven by any shifts into into into.

Into <unk>.

Wanted to follow up on Vietnam in the press release.

You say.

We're encouraged to see factors reopened but there are some recent closures.

I'd love to get some context, what are you seeing.

I see.

You can see that <unk> is picking back up in Vietnam, but I'd, just like to hear what youre seeing.

What percentage are in the south as well as the north any further color on that would be very helpful for the audience.

Yes, I mean, what we're seeing right now still seems to be concentrated in the southern and the south in southern factories.

While not on touched was and we've got several factories up in the north are largely gotten through the latest there.

And <unk>.

Very well.

Obviously, it's hard to predict how governments and countries certain can react to the COVID-19.

Situation, we've seen a wide variety of.

Responses.

I think there was some original fear that when the factories reopened that it was going to be very difficult to get workers back in place and ramp up and certainly theres going to be some ramp up.

Challenges, but I think from our perspective, right now things are going better than anyone really anticipated west.

With respect to getting workers back and getting the factories back up to production levels and.

It's a little bit better right now than anticipated.

Right now we're not anticipating.

Slide back into closures for the southern Vietnam factories, but again, it's hard to predict but we're not anticipating that right now.

That's great to hear thank you and then lastly, just.

As a follow up Mike maybe you can give us some more color.

And if we assume on Jays question, the other $60 million.

Sweaty body in the fourth quarter, it looks like youre, implying the underlying business to be down high single digits.

Is that the right way to think about doing the right math if that's the case, how do we think about the puts and takes across the key brands.

No I think what we're seeing and I guess, the math that I'm looking at here still sell nice double almost double digit growth in our underlying business in Q4.

Some of our larger brands and Blake mentioned the impact Merrell is taking on the Vietnam closures and the ramp up there, but fundamentally we're still seeing great growth and Saucony Sperry.

And our work brands sweaty, Betty should be incremental to that so.

About about 10% growth on an underlying basis.

For the fourth quarter.

Wonderful. Thank you very much Mike product color.

Thanks.

Okay. Next question comes from Jonathan Komp on Bank. Please go ahead.

Yes, hi, Thank you can I guess.

Just a follow up on the fourth quarter I might follow up and understand I know.

The underlying business. The last couple of years, you saw revenue hit a high point in the fourth quarter and this year you're implying.

Sequentially lower dollars, especially when you take out sweaty body. So could I, just maybe understand the fourth quarter assumption a little better and then I know previously you thought 12% operating margin was towards potentially achievable on a non-GAAP basis and can you maybe just clarify the delta versus what you expect now.

Yes, I think as we've been cycling through the year, John I'll take the last question first.

We've been investing a lot in our brands the potential growth that we've seen is it.

Kind of crystallize every quarter and accelerated now we've invested in our brands and in our E comm capabilities in other parts of the business. So the investment thesis stays pretty constant and we have one quarter here in Q4, where we're taking a more meaningful.

Meaning full head on.

On some of these delayed shipments so.

Youre going to see a little bit of deleverage against what we've normally delivered in the first three quarters on the earning side, but I think fundamentally its really a slowdown.

For Merrell in Q4.

As it relates to the supply chain. So the lower revenue flow through for sure has an impact on Q4 EPS earnings.

And then some of the incremental investments that we've made that we're going to continue to move forward with are still embedded in our Q4 outlook as well so.

The business the mix of the business is a little bit.

Different now with Sweaty Betty included as a D to C business right higher gross margins, but also a higher SG&A profile for that business are underlying or organic.

<unk> business is also grew.

Growing and continuing to take a bigger share of the mix and so the P&L kind of shifts around a little bit there, but I think overall.

We're continuing to feel very confident especially with price increases that were planning for going into next year. We remain really confident in the margin profile of the business the operating margin delivery and unfortunately in Q4, we're going to have a little bit of a little bit of a bump in the road, but fundamentally with all.

The actions that we're taking and the outlook that we have for next year, we remain really confident not just on the growth side.

<unk>, but on the leverage side as well.

Okay. So it sounds like we shouldn't be sort of permanently lower from that 12% operating margin or maybe if not only to tell but just wanted to clarify.

No I don't think that Q4 is an indicator of that at all I think youre right to think that.

Next year with the growth that we've kind of foreshadowed here and the health of the business overall, we will.

We will be comfortable at that level.

Okay, and then just one broader question if I could on saucony, given the two year strength, you're seeing there and just the broader.

Really enhancements to that brand in the last couple of years is there any more detail you can share sort of the size of that brand the opportunity just how to frame up sort of the multiyear.

Profile.

Of the growth that you see as well is just even more details.

Sort of the mix and size of the brand today would be helpful.

Yes, I mean, we.

We're not sure which of our brands is going to be our first billion dollar brand merrell or saucony. So.

For us, it's obviously a good race to be involved in.

Saucony has tremendous tailwind right now a lot of them due to the management team and their product offerings and some of them. The result of what we've all lived through for the last.

20 months, so we're very bullish on the saucony opportunity.

Our joint venture in China is going extremely well there is an apparel opportunity, especially with sweaty Betty.

Sitting there for Saucony and you have to remember that we also have a saucony originals business, which is more of a lifestyle business based on.

Our current and some older.

Files, but done in a lifestyle materials colors and.

And uppers that that is growing.

A tremendous success in Italy, one of the world's top three fashion markets and so there is a great opportunity for saucony there so.

It's the Endorphin collection, which is now approaching two years old is <unk>.

Significant success for the brand the brand continues to increase the number of participants on virtually every marathon or rates, that's run either in China or here in the United States. So.

We're very bullish on the brand today and obviously its growing at a highly accelerated pace.

I mean is it possible just to say this year with the growth again.

<unk> might be tracking towards to finish the year in revenue.

I think saucony I don't want to quote into exact number, but I mean stock and he is going to be up an extremely strong double digits. This year.

Okay understood. Thanks again.

Thanks.

Our next question comes from Sam Poser from Williams trading. Please go ahead.

Good morning, I have three questions. One just housekeeping are you guys putting out of Investor presentation. This morning.

Yes that will that will go on later this afternoon Sam.

Okay.

Alright. So here we go so I want to follow up.

On Lauren's question. It says I'm, just going to need it we encourage you to see factories reopened but recent closures will impact our ability to fully service incrementally strong demand, we're seeing in the fourth quarter.

And adjusted the outlook. Accordingly. The question is are you seeing more closings now or is it closing the recent closing.

That youre speaking of the closings that happened in the past.

The factories are now reopening.

Yes, those closing would be the.

What happened in the past Sam that basically started in July the end of July but continues through August and September and maybe a few into early October those factories are now reopened and they're ramping up.

Okay now.

Regarding the.

The airfreight costs and how you report it.

One what is your airfreight cost assumption in the adjusted margin in the.

The implied adjusted margin in the fourth quarter and then why do you continue to take this as a non-GAAP charge. When you are the only company out there doing that and if you were to take that as a non-GAAP charge why not take the $60 million in lost revenue as revenue against the non-GAAP gross.

I mean.

It didn't come.

All right.

I understand it's there I don't understand why you take it out of the gross margin.

We'd expect about the same level of airfreight in Q4, as we had in Q3, which is about $10 million give or take and sell a similar approach similar treatment. We started the year with this approach.

Sam based on the fact that we.

Obviously didn't anticipate the severity or the length of disruption that we're seeing from the supply chain issues in and felt like this was excluding these incremental an exceptional airfreight costs would be more relevant to our historical treatment as well as what the future would look like obviously things have changed and we're not going to change our treaty.

This year on how we handle that but it's been well documented I think its clear in terms of how we're treating it and what the impact is and so we will finish the year with the same treatment in Q4 and as.

As we cycle into next year, we're in a position to price for those increases.

Just for airfreight, but for some of the other costs that we talked about earlier and so we will reflect that and will will.

We will treat trade and other costs that are now elevated on an extended period of time is more normalized and we won't we won't have in a non-GAAP adjustment going forward.

So then we need to add back I mean, I assume theres going to be air freight in the first quarter just given how.

Our guidance our guidance when we provided when we provide the guidance next year, we'll reflect all of that stuff in <unk>.

You'll see how we've been able to manage that in Europe.

Excellent.

<unk>.

We are providing non-GAAP.

So that's going to prove to be.

Put back in.

Next year, I mean, especially in the first quarter.

Because youre going to probably have an incremental air freight over the $4 million you had in Q1.

I think our adjusted guidance is going to be apples to apples and we'll have again, we'll have the opportunity to price in.

These increases that we didn't have a chance to do this year. So.

You have another question.

No. Thank you very much.

Good luck with.

Holiday season.

The next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.

Good morning, everyone.

As we're going through this time period, we have price increases that companies are kids product.

<unk> taken price increases and how.

Or does it vary by Division and then I have a follow up on the $500 million I believe slide earlier in the year on E. Commerce is that still on track or how are you seeing that unfold for the year and then just one quick follow up after that thank you Yeah, Let me I'll start with E Commerce.

You include Sweaty, Betty we will exceed the $500 million, but obviously that wasn't in our initial outlook. So now we will fall short of that I mean, I think it's been pretty well documented out there how the shifts back into stores I think for US. The biggest headwind was just the inventory just not having the.

Quantity of inventory two to hit those numbers and of course the way it's shifted completely played abbott with the marketing calendar. So really proud of the work the team has done the.

The numbers, we have are still.

Almost double what they were two years ago. So we are.

Have clearly shifted to become an e-commerce DTC focused business, we've added great talent in that longer as our head of digital and he's brought in talent.

To support him we have become much better at managing the funnel as we find new customers and expose them to the brands.

And I think we're starting to understand what to do with the data we now collect as.

As DTC focused DTC focused company. So I think there are a lot of positives that even though we will fall short of that number most likely have set us up.

For the path, we want or beyond in the future I think as we look as we look at it by brand it is very.

Reflective of where the inventory levels are challenged so.

Further reinforces in our minds that I'd say largely the inventory.

<unk>.

Headwinds I think on the pricing.

We as Mike and Blake have said, we have had visibility now for quite a few months into what the supply chain challenges, we're going to be into 'twenty, two and the cost increases that are well documented across all industries and inflation and so.

We were had been able to price accordingly for 2022, beginning in spring.

Did it very strategically by brand by style, where we think from as merchants.

<unk> product allows us to have some elasticity there I will tell you in going to market with our retailers. There has been zero pushback I think theres actually enthusiasm for the opportunity to get some increased gross margin based on the the retails and of course, Dana as you and I have talked about the.

Reduction in promotions out there has further enhance the gross margin profile going forward. So we feel we're in a good position there I'll be curious to see how the competition also prices their goods I mean, we've gotten a little bit of visibility, but we think we'll be well positioned to still provide the value.

That our.

Footwear has always offered but yet doing it with some increased strategic retail pricing.

Got it and then Brendan you had mentioned that Gary is going to be launching next year.

So a little bit about the offering.

From Sweaty Betty Jiang from you for Sperry.

Do you see that going.

Activewear apparel active where around the footwear around the water.

We're really excited this is something Blake, we feel he pushed about a year ago with the new team coming in they just jumped on it and so we just have really authentic cool product.

Around the water activities on the water boating.

Surfing wind surfing that also translates into great lifestyle.

Footwear, so really excited not only with how it looks and how its priced but just how quickly the team was able to accomplish this as we try to shorten our lead times so.

Anxious for you guys to see that if you are able to come to market. Later this month for the shoe show.

Thank you.

The next question comes from Steve Marotta from CL King <unk> Associates. Please go ahead.

Good morning, Blake, Brendan Mike and Brett I wanted to just ask one question can you draw a distinction between the ability to deliver timely domestically versus internationally and you can of course exclude Vietnam.

The analysis is what I'm trying to get at is how.

How acute how much more acute are poor and trucking issues here domestically than they are internationally and how do you see that working out and say the first half of next year. Thanks.

Yes, I mean.

It's a very good question certainly here in the United States. When you look at long Beach, and even up to Vancouver Hoover and some of the other ports, we have unusually high congestion here in the U S. It's not just supports the rail yard.

It's some shortages in trucks.

More are accurately and truckers and we see that continuing throughout most of 2022 right now.

We think it's going to take a little bit of time to unclog that that has been built into our forecast and the estimates that we have talked about.

We're seeing less congestion in that regard internationally.

And so for our international business, it's more of a pure capacity issue and a timing issue when they can get stuff.

And there seems to be off.

Honestly every country is different but there seems to be less of.

Our supply chain.

<unk> issue in most of our key international markets.

And I'm assuming that.

Analysis is also baked into future guidance and over the so many of your pairs are sold internationally and the ease at which those payers are being delivered on a comparative basis to the U. S is also built into your forecast.

That's correct I mean, obviously, we're focused on serving all of our customers consumers and distributors.

As best we can in this unusual environment.

But.

That is correct.

Super helpful. Thank you.

The next question is from Susan Anderson from B Riley. Please go ahead.

Hi, good morning, Thanks for taking my question.

Wanted to ask about Asia. It sounds like China is going well for you maybe if you could talk about the performance. There and then also throughout Asia I think some others have mentioned that China was softening, but it doesn't sound like that's the case for you guys.

Yes, I would say when we looked at just greater China Saucony is having a lot of success. There right now we're very happy with the progress of that brand in greater China.

APAC for US is a major growth opportunity as we look forward.

Got some.

Some great businesses in.

Many countries around Asia, but when you step back and look at our company I would say, we're underpenetrated at the moment in APAC and so internally here, we viewed as one of our top growth opportunities.

Really across the portfolio, but especially for saucony Merrell and several of our other brands.

Great and then just wanted to follow up on the Sperry performance it sounds like.

We're confident that we're heading into the boat shoe trend, maybe if you could talk about what you're seeing that's driving that confidence and I'm curious, which products are selling well.

Alright, the casual theme Erinn the boat shoes or is it really just kind of all of that.

Brand.

Well I think specific to boat shoes.

Seeing none the reports.

Our classic <unk> and the market share we're taking it we're seeing it just as you shop shop, the market Youre seeing people.

Merchandise them front and forward when I was in London, a few months ago. I mean, there were windows are just boat shoes for other brands. So I think it's clear there is a boat to trend going and I think Sperry, we know Sperry is.

At the forefront of taking advantage of that I mentioned that.

Sitting in the James Bond movie also it doesn't hurt.

The other franchises, we have like the booths.

We're in better inventory position, there and as we've seen the cold weather start to hit we've seen a real pickup there there as well so.

Part of Blake and my enthusiasm on Sperry is not just that the trends are breaking our way, but the way the product has evolved which is just coming to market. Now. So we have the benefit of having showcase it to our retailers in advance of the end consumer in and you guys seeing it but that's starting to come to <unk>.

A market now and then as I said for those of you that are able to come to a shoe show at the end of the month yield. We can give you a preview of what's coming in 2022, and that's really exciting.

I would say just a little more color, we're seeing a positive reaction to the new product, but <unk>.

Very encouragingly, we're seeing a strong response to the core boat shoe product that we've carried for many years, obviously, some new materials and colors, but.

Strong reaction there.

<unk> category in total grew.

It was a growth driver in the United States in the most recent quarter.

I think Sperry took about 650 basis points of market share in Q3 in the category.

Great that sounds really positive. Thanks, so much good luck with holiday.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Alex Wiseman 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 Dot com. The replay will be available until December 10, 2021, Thank you and have a good day.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Okay.

Okay.

Yes.

Yes.

Yes.