Q2 2019 Earnings Call
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host like Harris, Vice President Corporate finance. Thank you Sir you may begin.
Good morning, and welcome to our second quarter 2019 conference call.
On the call today are Blake Krueger, our chairman Chief Executive Officer and President.
And Mike Stornant, our senior Vice President and Chief Financial Officer.
Earlier this morning, we announced our financial results for the second quarter 2019.
The release is available on many news sites or it can be viewed from our corporate website at Wolverine worldwide Dot com.
If you would prefer to have a copy of the news release sent to you directly please call Francesco one drill at six worth 6677181 for.
This morning's press release included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the release.
Comments during today's earnings call will include some additional non-GAAP disclosures.
There is a document posted on our corporate website titled Www, Q2, 2019 conference call supplemental tables that will reconcile these non-GAAP disclosures together.
The document is accessible under the Investor Relations tab at our corporate website Wolverine worldwide Dot com by clicking on the webcast link at the top of the page.
During our call, we're providing adjusted financial results, which adjusts for the impacts of environmental and related costs business development related expenses and foreign exchange rate changes.
I'd also like to remind you that predictions and projections made during todays conference call regarding Wolverine worldwide and its operations are forward looking statements under U.S. Securities laws. As a result, we must caution you that as with any prediction or projection. There are a number of factors that could cause actual results to differ materially.
These important risk factors are identified in the company's FCC filings and in our press releases.
But that being said I'd like to turn the call over to Blake Krueger.
Thanks, Mike.
Good morning, everyone and thanks for joining us.
Earlier. This morning, we reported adjusted earnings per share of 52 cents.
Despite overall sluggish U.S. retail conditions second quarter revenue increased 1.1% on a constant currency basis.
Well four of our top five brands met or exceeded our revenue expectations going into the quarter.
As a company we remain focused on delivering annual mid single digit organic growth.
Well Q2 did not meet our longer term goals momentum is building in our brands are poised for much better second half topline performance.
The recent news on the tariff front is not expected to have a material impact on the business in the second half or on next year's result.
More on that in a few minutes.
Let me quickly review the quarterly result for a brand groups and key brands. I'll, then provide an update on the status of our key 2019 investment and our view and outlook given last weeks announcement of additional tariffs on footwear imports from China.
Starting with the Wolverine, Michigan group.
Revenue grew 1.3% compared to the prior year and 2.4% on a constant currency basis with several brands delivering attractive growth.
Merrells results exceeded expectations as the brand grew mid single digits in the quarter.
And is poised for a strong second half.
A cat had another strong quarter growing almost 25% and we also saw gains in high Tech.
The growth in these brands was partially offset by declines in Wolverine and some of our smaller brands.
Merrells growth was driven by strength across most performance categories and excellent consumer acceptance of new collections highlighted by the Nova and Torah fiery district and grid weight offering.
New product launches helped drive the brand DTC business.
Merrell ecommerce business grew 27% in the quarter.
Consumer digital and social media trends for Merrell were robust with media abuse impression search interest in site traffic all up at attractive rates.
This strength continue to position Merrell as the market leader in hike well expanding market share in the trail running category.
We expect merrell to grow high single digits in the second half driven by continued direct to consumer momentum a robust product pipeline and a favorable order backlog.
[noise] kept strong growth was primarily driven by its international business, specifically the Asia Pacific region.
The brands on the E. Commerce business also grew 36% benefiting from favorable trends in search interest in site traffic.
And the U.S. business grew at a low single digit pace.
The work category continued to perform well growing at a double digit rate with the brand again, expanding U.S. market share in this category during the quarter.
The decline in Q2 revenue for the Wolverine brand was driven primarily by the U.S. wholesale business.
Due to softer than expected reordered and a key retail customers reduction in stores.
Partially offset by strong growth in e-commerce up 25%.
The Michigan group include the five brands that make up the companies work category, which continues to experience meaningful momentum.
Our overall revenue in this category has increased at a high single digit rate during the first half of the year outpacing the overall U.S. work footwear market.
The work category represented approximately 15% of our global revenue during the first half and continues to be a significant growth opportunity for the company.
Moving to the Boston Group.
Revenue for the Boston Group was flat for the quarter versus the prior year.
After a soft Q1, Sperry rebounded and exceeded expectations with a slight Q2 decrease.
Sarkozy decline mid single digits, but also exceeded expectations for the second straight quarter at the turn around continued to gain momentum.
This decline was largely offset by mid teens growth from cat.
Well the kids business was flat to last year.
For Sperry the U.S. boat shoe category was down in the high single digit range, but in line with expectations and a significant improvement relative to Q1.
Other areas of the Sperry business performed well, including the casual and lifestyle boot category, which grew at a double digit rate with strong sell through at retail.
Boots in particular have had a strong early start to the fall season.
The Sperry E Commerce business was up 30% in Q2, driven by success in women's and the Gold Cup premium product category.
We're pleased that spares business regain momentum during the second quarter, and we expect growth to accelerate in the second half at a double digit rate.
Driven by less reliance on boat shoes, and a very strong boot offerings.
Sarkozy exceeded expectations in Q2, but was down mid single digits related challenges and the technical run category in the U.S. and EMA region.
The brand continues to benefit from the performance of E Commerce, which delivered growth of 27%.
We continue to see Saucony returning to growth during the second half of the year driven by the addition of Saucony, Italy, a strong pipeline of new product introductions and continued strong E Commerce performance.
Get to mid teens performance in Q2 reflects healthy growth in the U.S. and several international regions.
With the Oneq commerce expanding 28%.
The core champion product category and product collaboration.
Continued to drive strong performer.
Let me provide a quick update on our global growth agenda, where we continue to make important investments to create a faster and more innovative product creation engine drive our digital direct off fan.
And expand our international business.
These investments in the aggregate totaled approximately $10 million in the quarter.
With continued expectations to invest approximately $38 million for the full year.
In addition, we still expect to spend approximately $40 million on capital investments to open stores and accelerate growth in global markets.
Including the acquisition of Saucony is Italian distributor, which closed in the second quarter.
And the previously announced China joint venture.
We continue to focus on our long term objective and executing against this agenda.
Including the implementation of the brand growth model across our brands.
We are dedicating resources to help our brands accelerate the strength of their product pipeline and bring a continuous flow on trend and craveable products to our global consumers.
Our targeted investments in our own e-commerce business have delivered robust topline growth thus far in 2019.
We've also made important progress in executing on our global expansion strategy with the international business growing 7% during the quarter on a constant currency basis.
Given last weeks announcement of an incremental 10% tariff on class four items from China, which includes footwear.
I'd like to provide an update on the relatively minimal impact this will have on our business in the short and longer term.
Over five years ago, the company implemented a strategic action plan to migrate product out of China as part of a broader plan to improve sourcing diversification for our global business.
We accelerated our strategic migration initiative over the last couple of years, given the tariff negotiations.
In 2019, the percentage of our footwear sold in the U.S. from trying to factories is substantially smaller than the footwear industry as a whole.
As a result, we plan to only import approximately 3.5 million pairs into the U.S. from China. During the last four months of 2019.
Our healthy inventory position will also help minimize the impact of any new tariffs should they be imposed.
For 2020, we expect China imports to decline dramatically to approximately seven and a half million pairs for the entire year.
Less than 10% of the global pairs sold by our brands.
We expect a further dramatic decline to approximately 3.5 million pairs in 2021.
We are working on efforts to reduce these amount even further.
We've been able to move very quickly because approximately 75% of pairs transitioning out of China are moving to factories owned by existing sourcing partners.
Our multi year strategy and continuing aggressive transition plan now puts the company in an excellent position to manage the potential cost impact of higher tariffs on footwear over both the short and longer timeframe.
Well, our mitigation actions might provide us with a mid term competitive advantage as a matter of policy, we remain opposed to higher import tariffs on footwear, which already has one of the highest tariff duty rates compared to a wide spectrum of other industries and product category.
Our updated outlook for the second half of the year reflects total revenue growth accelerating to mid single digits.
This includes very strong projected growth for our three largest brands Merrell, Sperry and saucony, which on a combined basis are expected to be up close to 10%.
The second half momentum in our largest brands is supported not only by the current order book, but also continued strong e-commerce performance relating to our digital direct often.
The impact of new stores and accelerated international growth at Merrell and Saucony.
With that I'll now turn the call over to Mike Stornant, Our senior Vice President and Chief Financial Officer, who will provide additional commentary on our second quarter financial performance, along with an updated outlook for Q3 and the full year.
Mike.
Thanks Blake.
And thank you all for joining us today.
Our diversified portfolio served the company well during the second quarter as several brands delivered solid revenue growth.
And spirits performance improved significantly versus Q1.
The success helped to offset the headwinds faced by some of our smaller brands.
And enabled the company to achieve low single digit constant currency growth.
Despite revenue result that were slightly below our expectations.
The company delivered earnings and cash flow ahead of our plan for Q2.
Gross margin for the quarter was 40.5%.
In line with expectations, but down 80 basis points from the prior year.
This was mostly related to unfavorable mix and higher close out costs.
These factors were partially offset by the favorable impact of strong growth.
And our higher gross margin direct to consumer businesses.
Adjusted selling general and administrative expenses of $167.3 million.
Were up only $4 million compared to last year.
And benefited from disciplined discretionary spending and lower incentive compensation costs.
The second quarter effective tax rate was 19.4% versus 18.1% in the prior year.
The increase is due primarily to the favorable impact from discretionary pension contributions made last year.
Second quarter adjusted diluted earnings per share of 52 cents exceeded our expectations.
Reported earnings per share were 45 cents.
And included the impact of environmental related costs and certain business development expenses.
We generated $136 million in cash from operations during the quarter.
Our earnings performance and strong cash flow.
Reflect our disciplined operating model and our ability to deliver solid bottom line performance, even in a softer macro environment.
On a year to date basis.
We continue to leverage our strong capital structure.
We have been active with share repurchases and made strategic capital investments to drive overall long term shareholder return.
In Q2.
We repurchased $104 million of our stock.
At an average price of approximately $29 per share.
Bringing our year to date total to $207 million.
We have approximately $220 million still available under the $400 million share repurchase program.
That was approved earlier this year.
We have also executed strategic capital investments of approximately $30 million.
Including the acquisition of our Saucony, Italy distributor.
Early funding of our China joint venture.
And other growth related initiatives.
We ended the quarter with net debt of $695 million, which increase versus last year, due mostly to our meaningful share repurchases and accelerated capital spending.
We ended the quarter with approximately $1.25 billion in total liquidity.
Given the company significant flexibility and capacity to invest for growth.
As we discussed during our last call.
We are taking a stronger inventory position on core items.
This year after operating with very lean levels during much of 2018.
Our like for like inventory was up about 35% at the end of Q2 compared to last year.
In line with our projections and including a significant pull forward of China sourced production in anticipation of potential tariff exposure.
In addition, we've added $10 million of inventory for new stores.
And the addition of our Saucony, Italy distributor.
Importantly.
The quality of inventory remains very high.
Including an improvement in aging and backlog coverage relative to last year.
We expect inventories to be up approximately 30% at the end of Q3 as we continue to pull forward core inventory in August .
Ahead of potential tariff implementation.
Our year end inventory levels will moderate.
And we expect an increase of 5% to 10%.
Including about $10 million related to new stores and the addition of Saucony, Italy.
Based on timing of future production, we have a strong line of sight to achieving this inventory position by year end.
Now, let me cover our updated outlook for the remainder of 2019.
During the first half of the year, the macro environment with soft, especially in the U.S.
At once order trends were inconsistent.
And we experienced some volatility in a few of our international markets.
As we transition to the back half of 2019.
We expect revenue and earnings performance to improve meaningfully.
Our current visibility into the second half is very good.
And includes a good start to the third quarter.
A stronger order book.
Excellent response to new product initiatives.
And positive momentum for Merrell, Sperry Saucony and cat.
We expect our ecommerce business to continue to perform on plan in the back.
Half with growth of nearly 20%.
The newly acquired Saucony, Italy business and additional stores will also benefit the second half.
Offsetting these tailwinds.
We are cautiously assuming ongoing volatility and our U.S. wholesale business.
And projecting at once demand in the back half of the year.
To be down slightly more than our first half experience.
We now expect very strong reported revenue growth in the second half of approximately 5%.
In constant currency growth of 5.5%.
This outlook includes approximately 10% constant currency growth in the second half for Merrell, Sperry and saucony on a combined basis.
And encouraging trend for our three largest brands.
More specifically by quarter.
We expect Q3 revenue of approximately $575 million.
Constant currency growth of 4%.
And Q4 revenue of approximately $615 million.
Constant currency growth of 7%.
Growth accelerates in Q4.
As our e-commerce and store businesses become more prominent in the quarter.
Our international business strengthens, especially for EMEA and Latin America.
And Sperry Merrell and cat.
Deliver our new product initiatives, including strong boot offerings.
Our full year revenue estimate is approximately $2.28 billion.
And within our original guidance range.
Gross margin in Q3 is expected to be approximately 42%.
And adjusted operating margin is expected to be approximately 13.5%.
Up nearly 100 basis points over last year.
This improvement is expected to be offset by higher year over year net interest expense.
And a much higher effective tax rate of approximately 21%.
Due to significant discretionary pension contributions made last year.
As a result earnings per share in the third quarter are estimated to be 63 cents.
Gross margin in Q4 is expected to be approximately 40 cents.
And adjusted operating margin is expected to be approximately 13%.
An improvement of over 200 basis points compared to last year.
This improvement is expected to be offset by a higher effective tax rate of approximately 21%.
As a result adjusted earnings per share in the fourth quarter are estimated to be 67 cents.
For the full year, we now expect gross margin of approximately 41%.
Adjusted operating margin of approximately 12%.
And effective tax rate of approximately 19%.
And adjusted earnings per share of approximately $2.28.
Reported diluted earnings per share are expected to be approximately $2.06.
Diluted weighted average shares outstanding are now projected to be approximately 88 million shares.
Based on timely repurchases already executed in the first half of the year.
In closing.
I want to emphasize that our leadership team remains incredibly focused and executing the initiatives and activities that will accelerate growth.
We continue to see meaningful progress and more success within many of our largest brands.
And with our DTC platform.
We will continue to operate in a diligent and disciplined manner.
Both in the execution of our business model and the management of our working capital.
To deliver consistent profit and cash flow for our shareholders.
Thanks for your time this morning.
And we will now turn the call back over to the operator.
Thank you we will now be conducting a question and answer session.
Due to time constraints, we ask that all callers limit themselves to one question and one follow up.
If you have additional questions you may we queue and those questions will be addressed time permitting.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Thank you. Good morning Hope you guys are doing Jeff.
Couple of questions from me.
During the second quarter, obviously business softer and then expectations could be more specific about what was.
Light of expectations within the brand portfolio and then to what extent does this have impact on inventories on on your books.
And then what did channel inventories look like as you go into the back half of the year given Oh, what you suggested were sluggish sell through trends.
Yeah, I'll start with the last part of your question. Jim Obviously, we had a slow start to spring here in the U.S. weather impacted I would say there was a build up of seasonal product at the retail level.
Something we've seen and retailers are now at work clearing some of that sand on other seasonal product.
And so things have certainly improved in a June and then ended July as we've as we've.
You know gotten into a more normalized weather pattern with consumer demand.
The first part of your question, Yeah, I would say I'd just to clarify on the on the performance by kind of by brand. We mentioned in the prepared remarks that Merrell and Sperry boat.
Delivered honored on plan for the quarter no major surprises.
With saucony and that cat actually delivered over 25% almost 25% growth in the quarter.
The seasonal inventory issues that Blake talked about certainly impacted Chaco.
Even though it's one of our smaller brands it had a bigger impact on the quarter.
After they got off to a decent start in the in Q2 things reverse sort of midway through the quarter and we saw that fall off.
The Wolverine brand was the other brand that came short of expectations in the quarter, a little bit having to do with just some at once demand trends and.
They continue to work through a transition out of their Sears business. As you know so that had a little bit more of an impact in the <unk> in the quarter and well in the back half of the year more than we had originally expected so.
Some other small changes in our smaller brands frankly in the quarter, Jim but those are the big issues I would say just add onto the the channel inventory point, you will see that in the first half of the year, our gross margins were.
Under a little bit of pressure.
I think that our brands did a nice job of monitoring inventories, both ours and retail inventories to make sure that that that pipeline was being cleaned out we certainly didnt force product again.
Ended up into the retail pipeline and some of our promotional dollars and mark down spend in the second quarter. In particular, we are really intended to make sure that that seasonal product kind of cleared through to give us a clean runway for the back half of the year. So I think.
We're we feel good about that approach in about the quality of the inventory that we have going forward.
Okay, and then if I may just a question on the tariffs you guys spoken in Paris terms I recognize that that's an improvement in the amount of volume coming from China sourcing I was still doesn't seem insignificant in terms of number of millions of pairs can you speak in terms in dollar terms.
And how should we think about the timing of that product coming in and Uh huh.
The actual terrorists hitting the piano.
Yeah, I would say with respect to the and these are current estimate the 3.5 million pair that we expect to get the U.S. from China in the last four months of the year.
If we multiplied used our fob and multiply that times, 10% without any additional remedial actions concessions from the factories price increases or any number of actions we could take we see something and they are in the gross area maybe $5 million.
And obviously a lot of that merchandise Jim is spring merchandise, it's coming in in the fourth quarter and just we spoke pretty specifically about our.
A mitigation activities pulling forward production not only production, but obviously pulling in inventory as fast as we could not knowing exactly when or if these terrorists or be imposed by taking taking that Q and moving pretty aggressively and so for this year the impact even though we didn't put anything particularly specific in our guidance because nothing's been imposed yet and we don't necessarily want to reflect something that could change you know in the next couple of weeks the impact this year and be very minimal I'm just based on the inventory position, we have in the timing and the product that's coming in late in the year, which is mostly for next year.
Next year sales.
And then as it relates to next year I think the numbers that Blake quoted again.
It's a significant decrease from where we've been over the last even 18 24 months.
I think the improvement there and now the fact that we have visibility to this specific product that might be exposed to test cost in the future. We will have a much more specific mitigation strategy around pricing and other things that we can do to mitigate the impact so really difficult monotonous, it's probably premature to even suggest what the impact would be next year, but I think based on Blake's comments and kind of how we feel about it we feel like we have it well in hand and have plenty of time to act accordingly to mitigate any caustic impact for next year.
Yes, Jim as another point of reference our our pair age expected Paris next year will be.
About 25% or less than what it was just a as we look back to just 2014. So that gives you some idea some of our mitigation efforts.
Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.
Hi, good morning, everyone. Thanks for taking my questions.
I guess the first one I just want to step back for one moment and as you think about.
Sort of how the first half was played out sort of a little short on revenues and the guidance youve given for the back half, implying 5% or so currency neutral growth just what level of confidence maybe walk through that a little bit more specifically in terms of hitting that I guess more specifically could you give or talk to you know a backlog number or backlog numbers of relative to your revenue growth expectations for sperry or for merrell or for Saucony ex Italy, just so we have greater confidence that.
The revenue guidance that you're giving is achievable just based on what happened in the first half of the year any color around that to start at least would be helpful. You're correct shared Graz. I mean are we don't usually give backlog numbers than that at that level of detail, but I I can say that our we've looked at that in quite detailed brand by brand. Our second half backlog is probably the strongest it's been in five or more years.
At the present time, so fundamentally where are you.
We have a lot of confidence in our backlog and what it's going to deliver on the second half.
Sperry in particular has a very strong backlog a lot of it's tied to its a pretty diverse food offering but merrells backlog is is also strong and.
We're seeing some good order trends across the portfolio at the time.
Again, we've taken a little bit of a conservative view when it comes to at once trends. So we looked at at once trends in the first half were frankly volatile and you can see it from the overall U.S. industry trend up one month down a month back to flat another month and.
At once trends were volatile in the first half sometimes for no apparent reason given the strong sell throughs, we experienced but we've taken a conservative approach to the second half and are actually in our numbers modeling at wants to be slightly worse than it was in the first half.
Yeah, I think that's where that's where most of the first half shortfall came from crest right at the end of the day I think our visibility into the business.
For each quarter. It was good to backlog was solid in our at once well that while our at once expectations weren't necessarily aggressive the the outcome was was obviously worse than we projected so.
I think that approach is sound I think the other things.
In addition to the backlog numbers that Blake talked about we have we'll have.
In total in the back half of the year 20, new stores will have additional saucony, Italy, which is about 14 or $15 million lift in the back half of the year.
Our E Commerce growth continues and so as as we've talked about all along obviously that reflected in the backlog, but 25% growth in the first half that will taper down a little bit in the back half because were going up against much stronger comps in the prior year, but.
Ups still at least 20% in the back half. So I think those other areas of growth and opportunity are really important and I would also emphasize the fact that especially for EAME and Latin America. In Q4, we had some really rough result into 2018. So the comparisons for international business in Q4 are quite a bit easier and we'll see we'll see high teens growth in the international business in Q4 so.
Just at a high level that should round out some of the way, we're thinking about back half accelerated growth in the level of competence we have there.
And just a follow up on that just from a backlog perspective, if we look at something like already for example.
I guess, how much backlog is in excess of the revenue guidance that you've given number one correct me if I'm wrong and then I guess, how are you thinking about I mean, you talked about reorders and you're taking a more conservative view, but how are you thinking about cancellations.
Relative to that backlog and the revenue outlook.
Yeah, when we when we talk about at once we when we include cancellation assumptions in there too.
Maybe a broader way to think about it as kind of watch what do we think our replenishment.
Level will be.
Combining a cancellation experience now wants experience and so those those are both being kind of reflected here in a more conservative way in the back half more conservative even than what we saw in the first half when the weather was Friday and all that other.
All that other stuff that impacted impacted some of our seasonal businesses. So I think that's the way to think about it again, we don't give backlog by brand, but I think the if I was to kind of prioritize the level of confidence we have the the level of demand we have on boots lifestyle boots in the various categories, including a growing men's boot business for Sperry. This year is very high.
Okay, I would say also Chris with respect to Sperry. The early indications we have from the marketplace, the Nordstrom sale et cetera.
The fuel we have although very early.
Are all strong in the boot category for Sperry all very positive.
Okay final thing for me just on the capital.
Just I have hawkish any view that you bought back a lot of stock just curious I know you've given a share count for the year, just what do you how you're thinking about.
Right.
And if I back additional stock relative to the guidance here.
No additional buybacks factor.
We've we've proven to be pretty active there in the first half and and obviously have capacity and flexibility to do more of that in the back year back after the year, our share count guidance doesn't reflect that but.
We certainly don't intend to change our approach.
Our next question comes from the line of Jonathan Komp with Baird. Please proceed with your question.
Yeah, Hi, Thank you I wanted to.
Follow up first just on the second half revenue projection.
I guess when you when you look at the big three brands guiding up 10%.
Curious, how you're thinking about the sustainability of that like when you look at the projection.
How much is kind of unique factor is whether its cyclean low inventory level.
Last year some of the international comments you just had.
And how much of it is sustainable as you look beyond the second half and I guess related Lee with your big three up so strong does that.
Change your view at all in terms of kind of the optimization of the current portfolio of brands.
Yeah, I would say Jonathan but.
As we.
As we take a view on.
Organic growth into the future, we're still firmly fixed on mid single digit growth certainly we would expect that and would try and achieve at that level at a minimum for our largest brands.
And these were the brands that were the early adopters the brand growth model in some of the other skills tools and processes that we developed through our transformation initiative. We're in the process of taking some of those tools and skill sets to our our smaller brands, but they are clearly a half left behind.
Merrell Sperry.
Sarcone in and cat in that regard.
And what was the second part of your question.
Yes, it would help doors.
Yes, just when we look forward to the future we would look to for these brands to deliver mid single digit growth next year or better.
Okay, and then the second half so maybe.
Like do you think you're kind of at the underlying mid single digit growth rate in the second half and then some of the unique factors.
Our out I did yes.
Yeah, we feel very confident about the second half we we feel like were there we understand there's a there's things outside of our control like Brexit currency and a few other challenges, but we've been pretty nimble at risk responding to those challenges those global challenges.
As they as they arise so oh, we think we're going in the back half the year. We think all regions in the world are are going to be a positive for the year in terms of growth. We know that Asia Pacific is is going to be challenged a little bit in Q4, because there's some bankruptcies in Korea.
But we feel very confident right now as we look ahead in the future is pretty bright for most of our larger brands I think this the I think the portfolio mix that different challenges that we have there we're going to have them every year. It's just the way it is and especially with the 12 brand portfolio you have some brands and some regions that win and some that don't every quarter. So.
I think the fact that we've kind of transitioned out of a first half where we had some negative surprises around some seasonal merchandise a strengthening sperry business.
I'm going into next year, not just in the boot categories, but in other categories.
And obviously merrell really frankly accelerating as we move into next year as well. So I think you know getting the results from the first half behind US I think the second half is more reflective of kind of how we see the business going forward.
I would say lastly.
We're very happy with our brand the configuration for our brand portfolio right now and we wouldn't have any.
Near term plans to trim our portfolio right.
Our next question comes from the line of Ed.
Keybanc. Please proceed with your question.
Hey, guys. Thanks for taking the question I guess first just on the order book again, how much of the the up tick in boots is driven by the saltwater boot and kind of how big of the portfolio is that I know that's been a great product story, but just trying to understand where that is in its lifecycle and then second obviously nice job diversifying away from China.
We've heard complaints from others that you know as you move away you see other impacts Patrick on the cost of goods side have you started to see higher cost and does that change how you think about kind of the medium term gross margin opportunity. Thank you.
Yeah first of all with respect to the Sperry saltwater boot the Sperry boot offering this fall, it's going to be substantially larger than just the expanded saltwater collection.
I've, given having said that it's probably speaking obviously been a roaring success here. The last three Oh. Its fall seasons. We think that success is going to continue if I was going to put a rough figure on it for the overall Sperry boot business I'd say, the the salt they expanded salt water cat categories is two thirds approximately <unk> of the overall business for Sperry continues to expand its it's a lifestyle and performance boot business as does Marilyn several of our other brands.
With respect to the migration out of China, We frankly have not seen any significant uptick in prices in fact, some of the fob prices. We've been quoted as we migrated to a way from China have actually been a little lower than what we were getting from China.
Maybe that'll change a little bit here into the future, but right now it's been steady on I think you do have to remember, though that much of the migration has gone to a factory groups that were already using in China that also have factories outside of China, So and in that respect for us at least it's been maybe an easier transition than some other folks in the industry.
Great. Thanks, so much guys.
Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.
Hi, Good morning. This is will on for Sam.
So you guys mentioned Saucony had you did the.
Italy.
Acquisition, that's going to be a $14 million to $15 million topline lift that's in.
Why 19 correct.
Yes, that's in the back half.
It was actually a little bit of a drag in Q2 this quarter, we did our acquisition.
Okay and is that is that business is that margin accretive.
Yeah, I'm not from our operating margin perspective.
It is both from a gross gross margin gross profit standpoint in operating margin remember this is a distributor that we operated on a.
Fairly lean margin topline basis.
In the past.
And obviously now is operating as a subsidiary business with full margin in a very healthy operating margin.
Great. Thank you and then can you guys just discuss a little bit I know you're opening some new stores can you just discuss the performance of those open this newly opened stores and just comps in general for for your ship for stores.
As far as the as far as the performance is concerned many of the stores that we are referencing in the back half guidance or not open yet. So we did opened nine stores in the second quarter, mostly Sperry outlet stores and very.
Strategic outlet locations that we felt were were.
Right for the brand, but I I would say early reads on those stores have been very good.
And it's a little bit too early to call either way, but we like we like to start.
And I would say.
Taking a similar approach for both Sperry and Merrell outlet stores in the back half of the year our expectations there are pretty.
Modest as as it relates to store openings.
You know, but we are excited about the early reads on the nine stores we've already open.
Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.
Hi, guys its Eric Kelly for Heritage. This morning, Thanks for taking the questions first.
I was just curious.
In an average year.
So what's your second half business is at once and is there a way to quantify what you're planning it.
Yes to be this year, if you can.
Yeah, we don't give that level of detail. It's so dynamic right every brand quite a bit different and as.
The different parts of our international business grow ebb and flow. If you will you know that changes, but but obviously Q3 is much more of a.
Kind of a futures oriented selling quarter for us and so the demand there is more.
Around future orders and when we've talked about being more conservative. If you will are cautious around our at once demand it really more impacts the fourth quarter, which is more.
More reliant on on Reorders. So.
Not not a significant increase necessarily in Q4, but but certainly more.
No more impacted by sell through trends seasonal implications around weather or anything else. So that's where we put a little bit more of our conservatism in the outlook for the back half of the year.
Okay. That's helpful and then I'd Chaco.
Hi, there was little softer get in Q2 were seeing some digital promotions.
You seem fairly aggressive here of late.
We just curious if you can provide any more context on what's going on there and then how you're planning that business for the full year, maybe compared to how you were.
Say 90 days ago.
Yes, Chuck called primarily a sandal brand in a premium price stand brand certainly had a bit of a challenging first half to the year.
Given the weather and the slow start to trading this year. It is seeing some off price pressure at the moment as excess stock is is cleared.
They've taken some corrective actions for next year recall that a Q1 and Q2 are really the big the big quarters for the Chaco business. So they've got several new collections coming to market.
Next year that are going to be priced under $100 and they're gonna certainly have more of a good better best product offering then Dave than they've ever had we think that'll that'll a smooth out some of the volatility we've seen in the business this year.
I would say two they did have some of that product. This year I would say not enough obviously to offset the challenges with the sandal, but where they did have product in those price points or new offerings. The the sell in sell through and the success online was very strong. So I think thats a good indication of the opportunity for that category or that expansion.
Different categories into next year.
Our next question comes from the line of Ross Glycerol with Telsey Advisory. Please proceed with your question.
Hi, Thanks for taking my question just wanted to get a little bit more color on the gross margin guidance or for the back half of the year, what's what's driving the lower outlook.
Well I think I think for us, though gross margins are going to expand nicely in the back half of the year. The overall I think pressure in the first half was a little bit.
More more.
More difficult and that's where I think the overall guide for the year brings our our margin rate kind of in line with last year kind of flattish to last year, but were still seeing nice expansion in gross margin in both Q3 and Q4.
You know, we've got much of the promotional and sort of inventory risk reserve for or already experienced in the first half of the year and we're going to see that improve in the back half.
Sperry.
With all the momentum we have there and the strong growth that we're going to see in the back half of the year. Their boot business is very profitable high margins and that's good to see our gross margin for stores and E. Commerce, obviously are higher than our wholesale margins and that will become a bigger part of our overall business in the back half of the year.
The Chaco business frankly, the headwinds are that we just talked about with respect to chalk, though all of that really isolated in the first half of the year. So we saw some gross margin pressures in each one.
Inventory promotional some of the things that we talked about to make sure the channel was clean.
We did take some aggressive approaches to move through and try to drive some at once demand, but also to move through some inventory, we see that being behind us now and with stronger results expected in projected for the back half of the year based on those factors.
Got it okay. So from a gross margin perspective really no change to the back half in terms of the rational environment.
Yeah, we're still being cautious there just like we were our without wants and replenishment demand, we're being somewhat cautious on on that side of the business. So a little bit of a of a.
Reduction if you will in our mix expectations on fill ins.
Ill fill in orders are always the highest margin.
Wholesale orders, we get because it's it's a merchandise coming out of our inventory and we tend to get the highest margin there.
So as we drive that down as a percentage of our mix that has a slight impact on gross margins, but those are already reflected in the outlook.
Which is still very strong.
Our next question comes from the line of Michael Komodo with D.A. Davidson. Please proceed with your question.
Hey, guys. Thanks for taking my questions first is inline Merrill.
I think on the last call you talked about an online retailer maybe overstepping you need to take some brand protection actions have no that she's been work through.
Yes in a word yes, they have and so we're we're back on.
Expected.
Business relationships and practices with that particular retailer.
Got it and then just coming out of outdoor retailer or a little over a month ago. You know what were your takeaways from your retail partners.
Through the back half just around your product or their expectations from you.
Yeah, I would say the reaction was very positive across the ranch, both performance and life lifestyle, so the new product offerings.
In the height category light height category Trail running category, where Merrell continues to gain share where frankly, all positive and then on the lifestyle side the range that sustainable product grid way continues to.
Get shelf space, So really it was quite positive across the whole range.
Our next question comes from the line of law, that's less skew with Macquarie. Please proceed with your question Oh. Good morning. Thanks for taking my question. Thank you Mike for all the color on the third quarter and fourth quarter guidance based on the on the gross margin operating margin much of this Kevin it looks like we should see some nice leverage around yesterday, what's driving that and then for the remaining investments around the global growth agenda, which I think.
It's about $19 million for the second half.
Should we think about that $19 million equally spread between Threeq and fourq.
Yes, and actually on that last part of your question Laura Yeah, It's pretty well straight line through the back half of the year I think it's important right away I mean, we obviously are looking at the business every month adjusting our discretionary spending where we can and you know as a.
As a corporate.
A team here, we're obviously keeping a very close eye on that.
And because we do that you know I think it gives us a lot of opportunity to be proactive and weve made some adjustments to our spending in the back half of the year.
But obviously the stronger growth SGN, a as a percent of revenue improves the leverage there really comes off our ability to leverage what is essentially going to be organic 5% growth in the back half of the year.
On.
A large portion of our overall spend being on a fixed basis. So.
Part of it as an adjustment to our planning in the back half of the year trying to be sensitive and proactive around any revenue risk that we see in the business and I think fundamentally it's our operating model and our ability to leverage SGN anyone we have growth like this.
Thank you Mike and then I. My question is on Merrell, you know, we've seen pretty different growth rates by quarter I forgive me if I missed this but when we expect high single digit growth in two inch 19, especially with the compares.
I think to get tougher in the fourth quarter, how should we think about the growth between the third and fourth quarter. I know you, maybe just a little bit high level on that would be great.
Yeah, I mean for Merrell right now when we look at the order book and.
A few other factors were looking at high single digit growth in Q3, and we're also looking at balance high single digit growth in Q4.
Sorry for Merrell third there isn't a big swing between the quarters high single digit both ports.
Okay. Thank you very much for that my last question I think in the first quarter 10-Q, the Boston group showed a 10% decline in wholesale but an 18% increase in DTC.
How did those numbers shake out for the second quarter and how should we think about those numbers for the third quarter and the full year.
Yeah, I think for the whole business, Laura we're obviously seeing accelerated growth in our DTC businesses.
That's been doing well that's going to continue.
Into the back half of the year not just for the Boston Group are for all brands right. We had 25% DTC growth, we're adding stores that we will continue to be a bigger contributor to our overall growth.
As at those growth levels as we go forward and I and the guidance kind of reflects.
20% growth in our e-commerce business in the back half of the year for our our portfolio not just Boston and.
And some incremental revenue coming from the addition of new stores.
Thank you we have reached the end of the question and answer session Mr. Harris I would now like to turn the floor back over to you 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 Dot com. The replay will be available until September seven 2019, Thank you and good day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.