Wolverine World Wide, Inc. (WWW) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to Wolverine World Wide's Second Quarter 2016 Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine World Wide. If anyone has any objections, you may disconnect at this time. I would now like to introduce Mr. Chris Hufnagel, Senior Vice President of Strategy for Wolverine World Wide. Mr. Hufnagel, you may proceed. Christopher E. Hufnagel - VP-Strategy, Communications & Investor Relations: Thank you, Andrew. Good morning and welcome to our second quarter 2016 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 of 2016. The release is available on many news sites or it can be viewed from our corporate website, at wolverineworldwide.com. If you'd prefer to have a copy of the news release sent to you directly, please call Tyler Deur at 616-233-0500. 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, entitled "WWW Q2 2016 Conference Call Supplemental Tables" that will reconcile these non-GAAP disclosures to GAAP. The document is accessible under the Investor Relations tab at our corporate website, wolverineworldwide.com, by clicking on the webcast link at the top of the page. Before turning the call over to Blake to comment on our results, I wanted to provide some additional context and information. When speaking to revenue, Blake and Mike will primarily refer to underlying revenue, which adjusts for the impact of foreign exchange and excludes revenue from store closures and the exited Cushe business. We believe underlying growth best reflects how our global businesses are performing in the marketplace. In addition, we will be providing adjusted financial results, which exclude restructuring and impairment and constant currency results. Where appropriate, we'll also provide reported results, and, as always, you can find tables reconciling these disclosures in our earnings release and on our corporate website. I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine World Wide 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 results to differ materially. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, I would like to turn the call over to Blake Krueger. Blake? Blake W. Krueger - Chairman, President & Chief Executive Officer: Thanks, Chris. Good morning, everyone and thanks for joining us. Earlier this morning, we reported better than expected second quarter results, highlighted by revenue and adjusted earnings per share of $583.7 million and $0.25 respectively. Inventory levels were down 2.9% year-over-year, the lowest Q2 ending inventory level since the acquisition of the PLG brands. E-commerce, a strategic priority for the company, which delivers operating margin significantly higher than the company average, continued its strong momentum, posting revenue growth of nearly 20%. Our diversified business model built around an industry-leading portfolio brand, selling in nearly every market around the world, coupled with strong operational discipline, continued to serve us well during the quarter. I am pleased with our performance in the quarter given the global economic political and retail environment but even more excited about the progress we continue to make against our key strategic initiatives. Specifically, we are focused on two key areas: One, accelerating growth through a fanatical focus on the consumer product innovation, and compelling storytelling. And two, expanding earnings through a relentless focus on operational excellence. I'll provide more detail on both of these important initiatives in a few minutes, but first I'm going to briefly review the Q2 results for our brand groups along with some commentary on our larger brands. Mike Stornant will provide additional detail on our Q2 financial result, our operational excellence initiative and our outlook for the remainder of 2016. Starting with the Wolverine Outdoor and Lifestyle Group, underlying revenue was down 0.8% compared to the prior year, with Chaco posting strong high-teens growth, Merrell and cat down low single digit, and Hush Puppies down high single digit. Turning to Merrell. The global footwear business was flat in the quarter, reflecting a soft US market, which was offset by strong revenue gains in each of our regions and a 30% plus increase in the global Merrell e-commerce business. The brand's performance outdoor category grew mid-single digits globally and actually, picked up market share in the US outdoor market, while the active lifestyle category was, as expected, down double-digits. Merrell's domestic wholesale business reflected sluggish conditions at retail including several recent bankruptcies that impacted sales in the quarter. We're encouraged by the progress that's been made with Merrell's product and marketing pipeline. A more robust go-to-market strategy for product launches has been impactful, and we plan to build on this momentum going forward. Our approach to strategic partnerships with key domestic and international retailers has generated positive results over the first half of the year, with the brand's largest retail partners collectively up high-teens year-to-date. This approach, combined with innovative new product introductions, like the Moab FST, the Moab Edge as well as the Capra Bolt and the Capra Rapid has driven significant growth in several key performance collections. Merrell's role as the first-ever presenting sponsor of Tough Mudder, the world's leading outdoor obstacle challenge, has also had a positive impact, resulting in a substantial increase in the brand's digital and social engagement metrics. Tough Mudder events are now in full swing for the summer. In the next few weeks, Merrell will launch what is poised to be one of the most talked about product innovations of the year, the Merrell Arctic Grip collection. Arctic Grip is a game changer. This exclusive outsole technology provides up to three times the traction on wet icy surfaces and has won Best in Show and Innovation Award at the industry's outdoor retailer and ISPOs trade shows. Arctic Grip technology will also be launched in five of our other brands this fall. I'm pleased about the recent headway we've made for our biggest brand and excited about the new products we have in the pipeline for 2017. Moving to the Wolverine Boston Group, underlying revenue declined 8.9% versus the prior year, with Saucony up mid-single digits, Sperry down high teens, and Keds down mid-single-digits. As we shared during our February call, we expected the first half of 2016 to present headwinds for Sperry. Softness in the boat shoe category persisted in the quarter, as consumers continue to focus on more athletic-inspired styles. Encouraging – declines in the category were slightly better than anticipated and we saw a nice growth in the brand's three largest regions outside the US, Asia-Pacific, Canada and Latin America, evidence of our continued focus on expanding the brand's global footprint. While softness persists with the classic boat shoe silhouette, we believe, as the industry leader by a wide margin, that one of the important opportunities for Sperry is to reinvigorate the category. And that's exactly what the brand anticipates doing with the new Seven Seas collection. Seven Seas is a modern interpretation of the classic boat shoe, an athletic-inspired offering that provides superior fit, comfort and performance. The collection is planned to launch in early 2017 and will be front and center with the Oracle Team USA at next year's America's Cup. We expect Sperry to return to growth in the back half of this year. Sperry's expanded boot offerings are planned to build on the tremendous success we've had in this important segment for the past few years. And retailer reception continues to be strong for the line, including the expanded Saltwater boot series. Saucony – Saucony contributed its solid growth in the quarter, despite the challenges associated with several domestic retail bankruptcies, and drove double-digit growth in its three largest regions outside the U.S. In the important run specialty channel, the brand achieved high teens growth fueled by continued product innovation with its latest award-winning technology, EVERRUN. In a few weeks American distance runners, Jared Ward and Molly Huddle, will represent the brand at the Olympics in Brazil. The future continues to be very bright for Saucony. And closing with Wolverine Heritage Group, underlying revenue was down 6.2% year-over-year, with Bates up strong double digits and Wolverine down high teens. Wolverine's performance in the quarter was negatively impacted by softness in its domestic work business, driven primarily by continued weakness in the oil industry and pressure on some key retailers. Encouragingly, we saw at-once orders improve as the quarter progressed, and the Wolverine e-commerce business performed very well with revenue growth of over 40%. Mike will provide more detail on the Q2 financial results in a few minutes, but first I'd like to take the opportunity to update you on our most important strategic initiatives. First and foremost, we're focused on driving the global growth of our brands through a consumer-centric approach to product innovation and demand creation. We've doubled down on investments for consumer research, trend and advanced concepts and have quickly added new talent to our consumer insights team, along with our brand, product and marketing teams. At the same time, construction has already begun on our first consumer and innovation hub, here at our global headquarters. The innovation hub, which is planned to open later this year, will serve as a catalyst for innovation and as a resource for our brands. This fresh approach to consumer centricity and product innovation is the top priority of the company. I'm excited about the progress we've made here in a relatively short period of time. Second, as we move forward with the growth initiatives just mentioned, we are also laser-focused on controlling what we can control to drive profit improvements across the organization. We've established a goal of achieving a 12% operating margin by the end of 2018 in what we continue to see as a low growth global environment. We've been working towards this goal for some time now and have made considerable progress across a number of fronts including, rightsizing historically, restructuring our operations in Canada and EMEA, and consolidating and reorganizing our apparel and accessories initiatives. Fundamentally, we are focused on gross margin expansion, portfolio management, optimizing our DTC operations, and controlling operating expenses. While not as exciting as new product marketing growth initiatives, we are pulling these levers to deliver meaningful near-term results and increases in cash flow and earnings per share. We've assembled a core team against this important work. Mike will provide additional detail in a minute, but our ultimate goal is in sight and I'm very encouraged about our progress. Finally, I want to provide a little more detail on our portfolio management efforts. We believe one of the core strengths of the company is our diverse brand portfolio and we consider ourselves active portfolio managers. We have a long and successful history of both adding and divesting brands. And we expect that trend to continue. Over the past few months, we've turned a very sharp eye towards our existing portfolio, in the context of what we believe to be the new normal global retail environment. Our goal is to maximize growth opportunities and shareholder return, while focusing our resources on our largest opportunities. As such, we have made significant progress in reviewing strategic alternatives for our portfolio, which could include the sale of several brands in the portfolio that may not meet our go-forward performance criteria and profit goals. We are also strategically reviewing our entire store fleet against the rising tide of challenges impacting domestic retail stores. In closing, we continue to believe that strength, diversity, and global reach of our brands, coupled with our continued operational excellence provide a great foundation and a distinct competitive advantage. As a company, we remain committed to driving growth for our brands around the world and simultaneously taking the important steps to drive improved operational excellence across the enterprise to maximize our returns to our shareholders. With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who'll provide some additional commentary on our performance in the second quarter as well as provide more details regarding our expectations for the balance of the year. Mike? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Thanks, Blake, and thanks to all of you for joining us on the call today. As Blake shared, we are pleased with the company's results for the second quarter, while the retail environment remained challenging through the first half of this year, the business performed well relative to our internal expectations. On the call today, I'll review the company's second quarter performance in more detail, provided an update on our key initiative to expand operating margin, and conclude with an update on our outlook for the rest of the year. Beginning with our results for the second quarter the company reported revenue of $583.7 million in line with our expectations. Underlying revenue declined 5.2%, while reported revenue was down 7.4% versus the prior year. Adjusted diluted earnings per share of $0.25 exceeded our expectations. On a constant currency basis, adjusted diluted earnings per share were $0.30 compared to $0.27 in the prior year. On a reported basis, earnings per share were $0.24. Gross margin on a constant currency basis for the second quarter was 39.8%, an increase of 70 basis points compared to the prior year, as a result of continued benefits from last year's strategic price increases and a better sales mix from less closeout sales, partially offset by increased liquidation within our direct-to-consumer businesses. Currency negatively impacted gross margin by approximately 100 basis points in the quarter, which, as anticipated, was slightly less than Q1. We expect the negative impact from currency to improve each quarter for the remainder of the year even at the current exchange rates. Reported gross margin was 38.8% for the quarter. Adjusted operating margin on a constant currency basis was 8.4%, an increase of 30 basis points over last year. Total SG&A expenses were down approximately $12 million. Selling expenses were down as a result of store closures and a reduction in related overhead, and lower pension expense provided a benefit. Reported operating margin was 7.2% compared to 7.6% last year. Net interest expense for the second quarter was approximately $1.2 million lower than the prior year. The adjusted effective tax rate was 28.2% for the quarter, lower than last year due to a shift in income between tax jurisdictions with differing tax rates. Our reported effective tax rate was 26.7%. Moving on to the balance sheet. Net working capital was $689.5 million, down 3.8% versus the prior year. Accounts receivable increased by $42.7 million, primarily due to the lower year-over-year sales volume in the quarter. Inventory was down 2.9% year-over-year at the end of Q2. Last fall, we implemented a plan to responsibly and rationally manage down our inventory over the first three quarters of this year. Our team's disciplined execution has enabled us to reduce inventory levels ahead of schedule, without accelerated liquidation of product or excessive erosion of gross margin. We plan to improve inventory levels further over the balance of the year and expect to finish 2016 with inventory down high-single digits from the prior year. At quarter-close, cash and cash equivalents were $221.7 million, up slightly from last year and, net debt was $586.3 million, down $14.5 million year-over-year. We repurchased nearly 137,000 shares at $17.94 per share early in the quarter, leaving approximately $25 million of repurchase capacity for this year under the terms of our current credit agreements. Our priorities for cash remain the same – drive organic growth primarily through investments in product innovation, consumer engagement and insights, e-commerce, omni-channel growth and demand creation; return value to shareholders through share repurchases and consistent dividend; pay down our debt and pursue potential value-enhancing acquisitions. I would now like to provide an update on one of our most important and comprehensive strategic initiatives. We are taking a very deliberate approach to improving operating margin for the company, in what we believe, will be a continuing low growth global macro environment. As Blake just mentioned, we have already taken numerous actions in recent quarters to improve our operations and focus the organization in this direction. We are finalizing a comprehensive game plan that examines and leverages all aspects of the business to accomplish our goal of delivering 12% operating margin by the end of 2018. We expect supply chain improvements to contribute approximately one-half of this operating margin expansion, as we begin to fully leverage factory rationalization, more efficient logistics and distribution strategies, and lower product costs. All critical objectives that our global operation group have been working on for some time. We continue to review our portfolio and evaluate strategic alternatives for underperforming brands and businesses. This effort should enable us to improve profitability and put more resources and energy behind higher-margin brand opportunities. We also expect to realize operating margin expansion as we optimize our direct-to-consumer business, growing our high operating margin e-commerce business through sustained investment, while addressing underperforming stores. Finally, we believe there is additional opportunity as we continue to deploy strong discipline over operating expenses and better leverage our global infrastructure. This will include future benefits from actions already taken such as restructuring and consolidating our DTC team, our apparel and accessories business and our operations in Canada and EMEA, and from driving similar future initiatives. Our focus on operational excellence will be relentless. And we believe our overall 12% operating margin goal for 2018 is already in sight. In fact, we would be disappointed if we didn't see meaningful progress in 2017. We expect to share more details on this important initiative as we finalize our plans during the back half of the year. I'll now conclude with a few comments regarding our outlook for the rest of this year. We entered 2016 braced for a very challenging year. The macro environment has post some additional headwinds over the last several months. Retail conditions have deteriorated, retail bankruptcies have increased, and political turbulence has persisted, most recently, with the Brexit vote. Despite some of these unanticipated headwinds and ongoing uncertainty in the global marketplace, we are reaffirming our original outlook for 2016. Reported revenue is expected in the range of $2.475 billion to $2.575 billion. Adjusted diluted earnings per share are expected in the range of $1.30 to $1.40, and on a constant currency basis in the range of $1.48 to $1.58, growth of 2% to 8.9%. Reported diluted earnings per share are expected in the range of $1.16 to $1.26. To dial in the quarterly flow of revenue over the back half of the year, our current expectations would suggest a rebalancing of the street's revenue estimates between Q3 and Q4. We see some of the revenue trends from the first half of the year continuing into Q3. We then expect easier fourth quarter comparisons due to the unusually high cancellations and soft at-once ordering experienced last year. The easier comparisons coupled with new product initiatives like Sperry's boot program and Merrell's Arctic Grip launch, I anticipated the result in Q4 reported revenue to be flat to up slightly compared to last year. A relatively stronger Q4 revenue performance is expected to help leverage expenses and drive year-over-year EPS growth in Q4. In addition, gross margin is expected to expand in Q4. As FX headwinds improve, product cost reductions flow-through and the closeout comp becomes more favorable. Offsetting some of these improvements, the tax rate in Q4 will be meaningfully higher as discrete benefits shift to Q3. Looking forward, we remain committed to delivering value to our shareholders. We believe that we have a clear and focused plan to generate increased cash flow to our operational and portfolio management initiatives and to redeploy resources to drive our high-margin opportunities and return value directly to shareholders. We believe our business model, built on a diversified portfolio of industry-leading brands selling to consumers in almost every market around the world, mitigates risk and promotes consistent performance, an important advantage in today's turbulent environments. Thanks for your time this morning. We will now turn the call back to the operator to take some questions. Operator?

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Jim Duffy of Stifel. Please go ahead. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Thanks. Good morning, guys. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Hey, Jim. Blake W. Krueger - Chairman, President & Chief Executive Officer: Good morning, Jim. Jim Duffy - Stifel, Nicolaus & Co., Inc.: So I think we're all intrigued by the objective for the 12% operating margin. Blake, I think, you suggested that wasn't as exciting as product. You need to remember your audience here. Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah. I know. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Looking back down... Blake W. Krueger - Chairman, President & Chief Executive Officer: I lean a little heavily towards product and marketing, but I certainly understand. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Okay. So going down the list of things you guys identified as opportunities, a number of these seem within your control. Revenues, one variable you can't control directly. How do you think about the top line in the context of that exiting 2018 objective? And when we're thinking about top line in that context, is addition to margin through subtraction of lower margin businesses a component of the strategy? Blake W. Krueger - Chairman, President & Chief Executive Officer: I think your latter point is certainly a part of the equation. But we entered this initiative – we've been working on it, as you know, for some time now with an ultimate goal of delivering this with a very little top line growth. So we thought that was the prudent approach to take in this environment. We do think the current environment is kind of the new normal. Whether that's good, bad or indifferent is not for us to determine. So our 12% operating margin goal by 2018 really doesn't include any significant amount of top line increase in revenue. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Okay. That's helpful. And then on the topic of new normal, can you speak to the channel landscape and what you're seeing from an inventory standpoint in the channel? Is it a cleaner position in an environment such that if weather and the consumer cooperates, you feel you have better visibility to your ability to stabilize revenue and, perhaps, even see an inflection in 2017? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah. I mean, we've seen – the team has done an excellent job managing the inventory this year. This was the plan that kind of Mike and I and the brand teams have put together in Q4 of last year. So they've done a very good job. I would say our own inventory levels, we're very pleased with, and we think we are narrow and deep in the right stuff. As far as the industry is concerned, it varies a little bit on country and region. I would say the US right now in consumer soft goods, primarily apparel and footwear, remains over inventoried at retail. You know that's reflected in the pretty high promotional environment that you see in any mall that you walk into. And we think that's going to continue for a little bit. We'll be watching back-to-school closely. As a company, it's really not that important a season to us anymore. Maybe a little bit for our Stride Rite brand. But we'll be watching that very closely. But certainly, the promotional levels are high now. We know, as you know, that the closeout channels are also fully stocked with opportunities. So it's a little bit of an unusual environment. We've been here before. We've seen this before and I think we are reacting to it fairly well. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: I think, Jim, just to add to that the one thing that we are seeing because it was really part of our very deliberate inventory management game plan was to work closely with key retailers to help them get their inventories in line, at least for our brands, and I think we've seen some evidence that that's been successful and feel better about our inventory positions at retail today than we would have maybe at this time last year. So that's improved a little, but I think the overall environment, maybe not so much, but at least with our stance based on that effort I think we've seen some improvement. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Thank you, guys. I will leave it at that. Blake W. Krueger - Chairman, President & Chief Executive Officer: Thanks, Jim.

The next question comes from Erinn Murphy of Piper Jaffray. Please go ahead. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Great, thanks. Good morning. Blake W. Krueger - Chairman, President & Chief Executive Officer: Good morning Erinn E. Murphy - Piper Jaffray & Co. (Broker): I guess just following up on thinking about the operating margin bridge to 2018. Can you just speak about how to think about gross margin in that context? I was curious just given that you've had a tremendous amount of stability despite all of the volatility in the macro for about several years that rates typically been in the high 30%s, so just curious how to think about that, anything on the input costs? And then I am assuming the balance of the improvement is really coming from SG&A. So any kind of puts and takes on those two components would be great. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Sure. Well, let me start with your point about sort of that consistency that we've seen with respect to our gross margin and, in light of the impact that FX has certainly had on us over the last couple of years, I think it's a tribute to the work and the proactiveness around pricing. And then, certainly the work that our global operations team has done, to incrementally improve our product cost, or our total supply chain, kind of, costs over that same period of time to help us neutralize some of those FX impacts. But overall, as we look forward, a lot of those efforts are really going to start to kind of materialize for us as we head into 2017. We talked a little bit about the tailwinds related to product costs as we head into spring for sure, and we expect a nice benefit from that next year. But beyond that, global operations team is really focused on factory rationalization, component vendor rationalization, reviewing our distribution model and our warehouse strategy, logistics. So it's really a very holistic supply chain analysis and we mentioned in prepared remarks that we expect about half of the total benefit or expansion in operating margin to really come from the supply chain. So, again, in the areas of things that we kind of control and where we don't have to rely on growth as a driver for leverage there. And then, as you mentioned, the other benefit certainly would fall below the gross margin line and it will come in a variety of areas but – I think we outlined those major components in the remarks. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Okay. Thank you. And then, how much of your cost of goods sold is leather? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Well, it depends by brand. Some of our brands like our big boot brands would be a significant percentage and then we have other brands that are not as reliant on the leather component. But leather is a meaningful component of overall cost for us. And total material cost on average for a – as a percent of landed cost is about two-thirds of the total cost. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Okay. That's helpful. And then just... Blake W. Krueger - Chairman, President & Chief Executive Officer: ...that's not just leather, but that's all material costs. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Got it. Okay. That's helpful. And then you guys are one of the first kind of global brands to report post-Brexit. You do have exposure in the UK. I mean, could you just speak about any differences you're seeing on the ground there, whether it's incoming tourism from the US, given the strength of the dollar in context of the pound, or anything on the local demand or any other kind of things we should be mindful of in that region, given some of the – just headline news we've been hearing and reading about. Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah, I think after the initial mini-panic died down a week or two after the vote, I think things have settled down fairly quickly. For us, the entire EMEA region is about 13% of our sales to put it in context. The UK would be obviously substantially smaller than that. Currency will be a headwind, as we look forward into 2017 and beyond. The pound has depreciated about 12% since the vote. We're certainly covered for this year. Maybe, it will be a $5-million or so headwind for us yet this year. But the pound is only our number three currency when it comes to foreign exchange. So we have seen some volatility in the reaction of consumers. They froze in place a little bit for a few days, a week or so after the vote. But it's hard to really separate the vote from some of the other terrorism events that have been going on in Europe. I think all of that is having an impact on the mindset of the European consumer. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Got it. Thank you for that context. I'll let someone else jump in. Blake W. Krueger - Chairman, President & Chief Executive Officer: Okay. Thanks, Erinn. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Thanks, Erinn.

The next question comes from Jessica Schmidt of KeyBanc. Please go ahead.

Thanks for taking my question. Can you talk a little bit about what you're seeing at wholesale? So I know you mentioned inventory overall is still a little heavy. But does the channel seem to be less cautious around pre-orders, given that it seems like the consumer demand has gotten a little bit better over the past few months? Blake W. Krueger - Chairman, President & Chief Executive Officer: I think retailers are now talking primarily about the US market. Retailers continue to be pretty conservative against historical measurements when it comes to advance orders and making a commitment. I think it was a weak holiday season last year. We saw a pretty significant fall off in retail traffic starting about mid-March. That has been very volatile but generally down, as we've gone into the summer months here. Inventories have remained a little high. And so I think they're taking a cautious approach. We've seen it many times before during these cycles when it comes to back-to-school and the holiday season, still a very promotional environment. I don't know when we'll start to see holiday promotions – maybe it will be September this year. I don't know. But consumers and retailers are certainly buying closer to need. And so it just puts a little additional burden on us to have – to be ready and able to apply that when they unlock their pencil and place some orders.

And just a quick follow-up. Can you talk about some of the trend a bit more in Sperry, especially around the boat shoes? So, I guess, does the new Seven Seas collection give you comfort that you could stabilize the boat business? I know you had previously talked about sort of a natural level for boat shoes in men's, but, I guess, how should we be thinking about this now? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah, I think, I'm very excited about the Seven Seas offering. I probably wish it was here four or five months sooner than it will be at market. But I have seen it several times now and it's coming, obviously, more athletically inspired. Boat shoes continue to be a downward trend as far as a fashion silhouette. You know, our expectations for Sperry take all that into account. We expect Sperry this year to meet our expectations for the full year to deliver growth in the back half, especially some growth in Q4. You just have to remember our Q4 starts in mid-September and contains 16 weeks, not 12 weeks like our first three quarters. So we feel pretty good about where Sperry is. I think boat shoes overall for the brand are down to less than half of total sales. So that's certainly a trend we expect to continue. Certainly, retailers and consumers are willing and encouraging the Sperry brand to advance into other product categories and that's a big plus for the brand going forward.

Great, thank you. I will pass it along.

The next question comes from Corinna Van der Ghinst of Citigroup. Please go ahead.

Thank you. Hi. Good morning, Blake. Hi, Mike. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Good morning. Blake W. Krueger - Chairman, President & Chief Executive Officer: Good morning.

Hi. I was hoping to talk a little bit more about your SG&A in the quarter and for the rest of the year. You talked about just general expense discipline, store closures, lower pension expense and I think last quarter you mentioned that the timing of some of the Merrell advertising was shifted into Q2 from Q1. Can you just kind of walk us through how that played out during the quarter, did you shift any of your planned SG&A dollars from Q2 to the back of the year, or how to kind of expect it to play out? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah, no. I think for the quarter, a little bit of better performance really came from the gross margin, overall gross margin performance. We don't really have any major timing shifts into the back half for any of our marketing initiatives or any other SG&A items. We did have some movement from Q1 to Q2 for Merrell. But there are always puts and takes and changes, but nothing meaningful that would require any kind of new modeling.

Okay. That's helpful. And then, I was wondering if you guys could just maybe talk about your broader outlook on the outdoor market. I know you have new product initiatives coming out and some new kind of marketing initiatives in partnership with some of your bigger sporting goods retailers. But just in light of the recent liquidations that we've seen, in the industry and, general kind of consumer related, can you talk about your views on outdoor, specifically? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah, outdoor, I think, continues to be pretty much a steady-on market here in the U.S.A. Certainly, we had several of our brands that were impacted by the recent retail bankruptcies. Saucony would be a brand that would fall in that category, certainly Merrell, Sperry as well. So those bankruptcies have had an impact. But the consumer is still out there looking for some fresh innovative product. So, our brands are focused on bringing some cutting-edge product to the market as soon as – frankly, as soon as possible. When you're there with fresh, exciting new product that has a good story behind it, the consumer will respond. So, we see, at least in the United States, the outdoor market to be pretty much steady on, a solid market. I think if you look at the market share data, you would have seen, certainly, athletic, athletic-inspired, athletic casual footwear spike up in the quarter. The outdoor market would have been pretty much flat to up slightly in the footwear sector. And then, you would see some other categories like casual and dress that would have tapered off. Q2 for the industry was a bit of a tough quarter. Overall, footwear pairs in the United States were down probably low single digits, probably down in the 2% to 4% range for the entire quarter.

Great. Thank you.

The next question comes from Steve Marotta of C.L. King and Associates. Please go ahead. Steven L. Marotta - C.L. King & Associates, Inc.: Good morning, Blake and Mike. Blake W. Krueger - Chairman, President & Chief Executive Officer: Good morning. Steven L. Marotta - C.L. King & Associates, Inc.: There was – you mentioned – Mike, there was an abnormally low tax rate in the fourth quarter of last year, and you indicated, of course, that wouldn't repeat. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Yeah. Steven L. Marotta - C.L. King & Associates, Inc.: Can you give a little bit of guidance on your expected tax rate in the third and fourth quarter. Is it just at mid to upper 20%s area for both? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Well, in the fourth quarter, it will be quite a bit higher than that, in the third quarter it will be kind of approaching 20%. So, there's a shift there. It's really not – I mean, some of those adjustments in discrete items that we tend to have, but not necessarily unusual, I think the change this year is just the timing. So we'll have those benefits in Q3 as opposed to Q4. Steven L. Marotta - C.L. King & Associates, Inc.: You often give – I'm sorry, go ahead. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: No. That's all. Steven L. Marotta - C.L. King & Associates, Inc.: You often provide EPS expectations for the coming quarter. Could you talk a little bit about the range that you're looking at for the third quarter? Blake W. Krueger - Chairman, President & Chief Executive Officer: We haven't done that in the last couple of quarters. I'm trying to be a little bit more focused on the full year performance. But we did see some things within the timing or within the balancing between Q3 and Q4 that we wanted to clarify with our comments today. Steven L. Marotta - C.L. King & Associates, Inc.: Lastly, the inventory expectations for year-end – has that changed in the last three to six months? You mention now it's expected to be meaningfully below last year. Is that a change from three months ago? Blake W. Krueger - Chairman, President & Chief Executive Officer: Well, actually, in my comments earlier, I had mentioned that we expected it to be down high-single digits, which is a little more clearer. I would say, pretty much in line, maybe a little better than what we – when we started the year, we're ahead of schedule as we mentioned on our initiative to get inventories right-sized. And so, as that becomes a little more clear obviously with only two quarters to go, we feel even more confident in that. So we're certainly on track from where we started the year, maybe a little ahead of schedule, and maybe would be able to end the year a little bit better than we had initially expected. Steven L. Marotta - C.L. King & Associates, Inc.: Last question. E-commerce was up significantly in the second quarter. What is the current percent of total sales roughly? Blake W. Krueger - Chairman, President & Chief Executive Officer: It would be in the 6% or thereabouts range. We have a near-term goal to get that to about 10% of overall sales and obviously to keep advancing it from there. Steven L. Marotta - C.L. King & Associates, Inc.: Sure. Excellent. Thank you very much. Blake W. Krueger - Chairman, President & Chief Executive Officer: You're welcome.

The next question comes from Jonathan Komp of Robert W. Baird. Please go ahead. Jonathan R. Komp - Robert W. Baird & Co., Inc. (Broker): Yeah. Hi. Thank you. Mike, if I could just first clarify for the third quarter and fourth quarter commentary, I know you talked about a rebalancing of consensus expectations. I'm just curious have you also kind of rebalanced your internal plan or was it just a mismodeling externally? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Yeah. We didn't give that detailed guidance by quarter. Our plan really hasn't changed a lot. Again, just I think, to reference Blake's comments on the new normal in the trends and I think some of the overall hesitancy at retail and in terms of future orders and buying heavy into back-to-school or whatever, so we've seen that for some time. Our international business is trending right on plan. And overall I don't think there is a big change internally. But it was maybe something we could have given a little more clarity on last quarter when we first thought but we didn't. And now, we just felt like it was, obviously, the right time to provide some more clarification. Jonathan R. Komp - Robert W. Baird & Co., Inc. (Broker): Okay. That's helpful. Thank you. And then on the 12% operating margin target, I just want to follow-up maybe on the operating cost assumptions at a higher level embedded in there. And I know if you look at today's revenue base and apply a 12% margin and assume half of the savings come from within the gross margin, I think you need to reduce the operating cost structure by about 5 percentage points on a dollar basis. And just wondering if you could maybe bridge a little better some of the factors you see impacting the operating costs? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Yeah, I think a big chunk of that as we continue to lean-up to store fleet. There is a significant amount of SG&A in that bucket and that will be part of this. Obviously addressing our overall fleet and store performance in general is, today it's a major drag on operating margin frankly. So – and one of the reasons for that, is the SG&A commitment that we have both at the store level and otherwise. So, that will be a big part of it, Jon. And we, obviously, are looking at and we already implemented a lot of other either consolidations or restructurings in the business that haven't really been fully realized in terms of benefit yet. But we have some of those things that we'll unveil more details on later in the year, certainly as we get into next year's outlook. But it's probably those two main areas and then, just continued discipline around a lot of the other parts of the business where we are not performing at the levels we need to. Jonathan R. Komp - Robert W. Baird & Co., Inc. (Broker): Great. And if I could, one last one for Blake. Just wanted to ask bigger picture about moving to become more consumer-insight driven on the brand and product side. Sound pretty optimistic about some of the changes and initiatives there. So, I'm wondering if you could maybe just give some examples early on of the buy-in you've gotten from the various brands, if there's any to call out. Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah, as you know, we've been working on this for some time, and really have accelerated our efforts. Just I think one prime example would be some of the brand focus groups that we've set up around the country and their usefulness. This gives us the ability real-time to look at products, to look at specific marketing messages, to look at marketing campaign, and get real-time consumer feedback from these groups, that generally range in size between 3,000, 5,000 people for a particular brand. The brands obviously are various excited. They have consumer insights people within most of our large brands now, and they've seen the benefit of this kind of investment and commitment and what it can mean for their business. So, our brands are 110% on board for this effort. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: They'd like to go faster, Jon, if they could. Jonathan R. Komp - Robert W. Baird & Co., Inc. (Broker): Got it. Sounds like some interesting changes there. I'll pass it on. Thank you. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Thanks, Jon.

The next question comes from Mitch Kummetz of B. Riley. Please go ahead. Mitch Kummetz - B. Riley & Co. LLC: Yeah. Thanks for taking my questions. Mike, let me start with you, just in terms of the 12% operating margin guidance, I guess I just got two quick follow-ups there. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Sure Mitch Kummetz - B. Riley & Co. LLC: Jim asked about the sales expectation, and then you guys were saying kind of flattish. Does that assume growth in kind of continuing ops offset by some loss sales from discontinued ops? So it's the first question on that. And secondly, on the margins, 12% implies, I think, 300 basis points plus margin expansion from where you're trending today. I mean, should we think of that as kind of the improvement there is fairly linear across the two years, 150 basis points plus over the next couple of years? And I've got a follow-up for Blake. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Okay. Sort of, on your last point, I probably wouldn't think about it that way quite yet. And we're not giving guidance on operating margin for 2017 and when we have a more clear detailed game plan to share, you'll probably get more insight on how that's going to phase out over the next two years. We certainly expect improvement next year. We'd be disappointed if it wasn't meaningful improvements. But we still have – also still have some work to do. And there'll be some work in the first part of 2017 to get all of this accomplished. So, I think that's important. I think, fundamentally, the growth assumptions that we built in here, one area of the business that's growing and we've talked about it before, we're going to expect to continue to grow is our e-commerce business. It's a high profit business for us, it's going to help the mix of operating margin as we move forward, as we continue to grow that part of our business. We certainly have short-term plans to make that a bigger percentage of our total mix. So, that's a driver for sure. But when we look at our – the rest of our business, and there are some brands that we'll expect a little growth out of. But fundamentally, this exercise is around a fairly static growth environment outside of e-com and maybe one or two small exceptions within the brands, so that we can model out the improvements that we need in each area. And then, if we are able to achieve the organic growth that we think we can, that would be fantastic. That would be on top of the efforts that we're putting forward here. But our focus is to not lean on leveraging operating margin because of growth. It's certainly to operate in a more sort of conservative or cautious environment. Mitch Kummetz - B. Riley & Co. LLC: Got it. And then, Blake, you seem pretty bullish on Sperry for spring 2017, especially around, I think you said, the Seven Seas collection. Help me think about – when I think about spring orders, I think of it as sort of a function of how good is the product and then how good have been the sell-throughs kind of leading up to those retailers placing those orders. And when I look at kind of the numbers that you have been reporting for Sperry in the last couple of quarters, down double digits, help me kind of reconcile all that. I mean is that – has the sell through actually been better than kind of what's reflected and what you guys have been reporting and that kind of gives you optimism around how retailers might book 2017? Just any color around that would be helpful. Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah. I think our sell through outside of the boat shoe category has been pretty good. And I've spent a lot of time with – on product, and product and marketing storytelling with each of our brands but especially Sperry and Merrell. And when you look at what's coming down the product pipeline in vulcanized sandals, casual, athletics, boots, it's certainly a substantially more robust pipeline than it was a year ago at this time. So that's one of the reasons why I am encouraged. The other reason why I'm encouraged looking ahead for Sperry is that retailers, especially those with large Sperry businesses today, want and need a large and profitable Sperry business. Sperry is a cornerstone to the success in their footwear offerings, and they need the Sperry brand to expand into adjacent categories and drive their business forward. Certainly there has been no impediment and no pushback from retailers or consumers, as Sperry has moved away from primarily a boat shoe brand into other categories, including boots. Mitch Kummetz - B. Riley & Co. LLC: Got it. All right. Thanks, guys. Good luck. Blake W. Krueger - Chairman, President & Chief Executive Officer: Thanks. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Thanks, Mitch.

We have time for one more question. And the last question comes from Laurent Vasilescu of Macquarie. Please go ahead. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Good morning. Thank you very much for taking my questions. I think you're in the process of moving offices in Boston this summer. Can you tell us how that's progressing? Are there any savings we should think about going forward from this initiative? And then can you remind is what the CapEx guide is for the year? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yeah. I would say we've already moved into our new offices several weeks ago in Boston. We had an official building opening ceremony that involved the Governor of Massachusetts and several other visitors last week, which was frankly very special. And so I would say the reaction from the team in Boston has been excellent as it should be. Just to confirm with you our rent did not go down. So, I don't think the Boston market, which is pretty much on fire from a real estate standpoint. We – internally we view this as an investment for the future. But the ability to have your teams design space, design work rooms, design showrooms, design a work environment with on-site day care, in the very building, just off of 128, with restaurant and retail space, it's very nice. And it has been uplifting certainly for the team. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Very good. And then regarding the groundbreaking of the innovation center, can you tell us what brands will be focused on or will the innovation center focus on products that can utilize across different brands? And how should we think about the CapEx as a percentage of sales for 2017 as it relates to these initiatives? Blake W. Krueger - Chairman, President & Chief Executive Officer: Yes, the Innovation Center is really designed to service all of our brands. In the technology area, it would focus on technologies. It could be used certainly in more than one of our brands. We have a history of successfully transferring that technology and some ideas from brand to brand, and certainly, this will be an accelerator for that. Merrell product development team will have a very close presence. We will actually sit within the innovation hub and we are excited about that. But it's only 50 yards from the restaurant brands in the main buildings here in Rockford. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Okay. If I could squeeze one more in. I want to follow-up on the full-year guidance, can you help us think about the SG&A growth rates for the third quarter versus the fourth quarter? Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: The growth rates... Laurent Vasilescu - Macquarie Capital (USA), Inc.: The change year-over-year. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: They are pretty similar from quarter-to-quarter, and SG&A kind of as a percentage of revenue, pretty consistent. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Okay, thank you very much. Best of luck. Michael D. Stornant - Chief Financial Officer, Treasurer & Senior VP: Okay, thanks.

Thank you. The question-and-answer session has now ended. I would now like to turn the call over to Mr. Chris Hufnagel. Mr. Hufnagel, you may proceed. Christopher E. Hufnagel - VP-Strategy, Communications & Investor Relations: On behalf of Wolverine World Wide, I would like to thank you for joining us today. As a reminder our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until August 9, 2016. Thank you and good day.

The conference call has concluded. Thank you for attending today's presentation. You may now disconnect.