Wolverine World Wide, Inc. (WWW) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to Wolverine World Wide’s Third Quarter 2016 Conference Call. [Operator Instructions] I would now like to introduce Mr. Chris Hufnagel, Senior Vice President of Strategy for Wolverine World Wide. Mr. Hufnagel, you may proceed.

Thank you, Andrew. Good morning and welcome to our third 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 third quarter of 2016. The release is available on many new sites or it can be viewed from our corporate website at wolverineworldwide.com. If you would 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 Q3 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 I turn the call over to Blake to comment on our results, I want 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 costs as well as debt extinguishment costs and constant currency results. You can find tables reconciling these disclosures in our earnings release and on our corporate website. I would 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 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?

Thanks, Chris. Good morning, everyone and thanks for joining us. Earlier this morning, we reported solid third quarter results with revenue of $603.7 million and adjusted earnings per share of $0.49, up 6% on a constant currency basis against 2015. Considering the continued tough trading conditions at retail and the tepid consumer environment, I am pleased with our availability to deliver bottom line results at the high end of our expectations entering the quarter. Let me briefly review the Q3 results for our brand groups along with some commentary on our larger brands and our international business. Mike Stornant will provide additional detail on our third quarter financial results, our operational excellence initiatives and our outlook for the remainder of 2016. Starting with the Wolverine Outdoor and Lifestyle Group, underlying revenue was down 10.4% compared to the prior year, with Chaco posting very strong double-digit growth, Hush Puppies down mid-single digits; Cat down high single-digits and Merrell down in the mid-teens. Chaco continued its torrid growth pace with revenue up over 30% and the Chaco.com e-commerce business, up over 45%. Chaco’s product and marketing initiatives continue to resonate with consumers and the brand is poised to be the next $100 million brand in our portfolio. Great progress from when we acquired the brand just several years ago. Moving to Merrell, Merrell’s performance in the quarter was impacted by ongoing challenges at retail, including several retail bankruptcies. Softness in the women’s active lifestyle category and the strategic realignment of apparel and accessories to exit the wholesale distribution and focus on our own consumer direct channels also impacted top line performance. Internationally, the continuing impact of the strong dollar given that nearly 50% of the brand’s revenue comes from outside the U.S. provided an additional hurdle. Despite some of these macro challenges, Merrell has seen success with new product introductions and its partnership with Tough Mudder, new product in several industry leading performance collections including Moab and Capra, each up over 30% in the quarter, continued to perform well demonstrating strong success where we have delivered new innovation. Arctic Grip will also be a winner this fall and our consumer activation is in full swing. Merrell.com also continued to perform exceptionally well, finishing the quarter up well over 30% compared to last year. The Tough Mudder partnership is exceeding our expectations with over 60 events taking place over the last several months, involving nearly 0.5 million participants worldwide. One of the key objectives for Merrell is to expand the brand’s reach with new and younger consumers. Market research suggests that being the lead presenter for Tough Mudder has certainly helped contribute to the significant increases in digital and social presence for the brand. Despite some recent wins, we acknowledged that Merrell has underachieved its potential over the last few seasons and we have taken actions to reenergize the product pipeline and return the brand to growth. Specifically, speed is a critical focus area across the entire company and applies to everything we do. Merrell is leading this charge. Merrell has overhauled its product development cycle, reducing concept to market time by nearly a third, with the ability to bring some new products to market in as little as 75 days. We have also reorganized a product development team and appointed new category and design leads for our women’s business to focus resources on reinvigorating this important component of the business. Merrell has also invested in deeper consumer insights and market research to get closer to its consumer and drive the product innovation pipeline while refocusing marketing investments towards digital and social vehicles to more effectively connect with today’s consumers. And finally, we have redesigned Merrell.com and elevated the execution of our direct catalogs to tell richer and more robust brand stories. Looking ahead, we have a steady stream of key product initiatives that will drive top line growth to the brand in 2017. In the first quarter, we plan to launch the new Moab, the Mother of All Boots and the number one light hike shoe in the industry and introduced several new athletic outdoor collections under what we are calling the nature’s gym category. For the active lifestyle category, we intend to expand the successful 168 collection, which is the modern take on the after sport category and will introduce new collections of casuals, sandals and boots for both men and women. In the back half of the year, the brand will re-launch the Chameleon franchise with new products. Chameleon remains one of the brand’s largest collections and a core program within the performance outdoor category. Finally, the brand will enter the tactical and work markets in the first half of 2017. Merrell boots, with their superior versatility and performance capabilities, have been a favorite of our military and special ops forces around the world for years and we will offer Merrell products specifically designed for this demand in use. A new work line will also be introduced in the first half to satisfy the persistent demands of retailers and consumers for work-specific product for Merrell. Many of whom already wear Merrell product on the job site. Product initiatives take some time to flow through to the marketplace, but the Merrell innovation and product pipeline is as robust as I have ever seen it and we are excited about the new introductions for next year. Moving to the Wolverine Boston Group, underlying revenue declined 8.6% versus the prior year with Sperry and Keds down in the mid single-digits and Saucony down in the mid-teens. As we anticipated, Sperry’s revenue trend improved significantly in the third quarter and we remain optimistic about the brand’s trajectory as we entered the fourth quarter and move into 2017. Boots had a great start to the season, up over 40% to last year as the brand continues to expand beyond the boat shoe category. As expected, boat was down in the quarter, but the category performed better than forecasted. Looking ahead, we anticipate Sperry to deliver flattish revenue in the final quarter of the year and we are excited about what’s in the product pipeline for 2017. Specifically, the introduction of the ‘70s collection, which is the modern athletic interpretation of the classic boat shoes silhouette. Retailer and consumer reaction to this collection has been great and we are especially pleased with the response in the international markets. ‘70s is scheduled to debut in February, supported by global marketing campaign. Turning to Saucony, in the quarter Saucony experienced some headwinds associated with key retail bankruptcies and tougher trading conditions in the run specialty channel. Encouragingly, the brand performed well in its largest international region, EMEA up double digits. Product innovation has always been central to Saucony’s success and we are excited about the introductions planned for the next several quarters, including what we believe will be the next game changer in the running category, the freedom with ISO technology. Retailing at $160, the freedom is pinnacle product in the premium performance run category and it’s the first shoe to feature our full length energy return EVERUN midsole. It’s lightweight, extremely comfortable and looks great. We expect Saucony’s performance to be significantly better in the fourth quarter and to return to growth in 2017. And closing with the Wolverine Heritage Group, underlying revenue was down 1.4% year-over-year with Bates up strong double digits and Wolverine down mid-teens. For Wolverine we have realigned the brand’s domestic distribution strategy to increase our focus on premium channels and accounts. This shift is already resulting in a more profitable business model and the reaction to the spring product line has been very positive. I will now share updates on a couple of critical initiatives starting with our international business. Despite the global macroeconomic and retail challenges, our international business is holding served in 2016. Our brand, channel and geographic diversification is one of the bedrocks of the company and a core competitor advantage for the organization. We continue to devote time and resources to the global expansion of our brands as this business has always operated to counterbalance any challenges in the U.S. market. We have made excellent progress in expanding our Boston based brands around the world and grew international pairs for these brands by over 20% in the quarter. Today, nearly a quarter of the total pairage of our Boston based brands is sold outside of North America. Finally, I would like to provide an update on our comprehensive strategic review of the business. Several years ago, we started the work of transforming our business to align with the rapidly evolving consumer, focusing on digital and social, aggressively investing in e-commerce, rightsizing our store fleet and realigning our domestic wholesale distribution. Our investments in e-commerce, which delivers operating margins significantly higher than the company average, continue to produce excellent returns, fueling growth of over 20% on an underlying basis in Q3. Earlier this summer, we announced the top to bottom review of our stores given continuing traffic challenges and the ongoing shift in consumer shopping behavior. As a result of this ongoing review, we expect to expand and significantly accelerate our store closing program. We have retained an external advisor to assist in negotiations with the development community. We expect this more aggressive approach will leave us with a much smaller retail brick-and-mortar footprint, but more importantly, a solid and profitable store base to build upon in the future. From a brand position perspective, over consumer direct business, including stores, e-commerce and catalogs provides the best representation of our brand and expanding the company’s DTC business remains a strategic priority moving forward. Mike will provide some more detail on this program in a few minutes. We have also made considerable progress in reviewing our brand portfolio and have identified several brands that do not meet our future growth and profit goals. As we move into the next phase of this work, which will include strategic alternatives for some of these businesses, we have engaged an external partner to assist in the process. While it’s too early to announce specific actions to-date, we do expect to be in a position to share more information in the coming months. As a team, we are focused on controlling what we can control and what remains a volatile and dynamic retail consumer and macroeconomic environment. This means not only responsibly managing the business by investing behind our brands and controlling inventory and promotional activity, but most importantly, being fanatical stewards and protectors of our brand. This stewardship sometimes involves taking actions and standing firm with some of our retail partners. We appreciate that this discipline may have negatively impacted revenue this year, but believe this stewardship is necessary to ensure the long-term health of our brands and provide appropriate returns to our shareholders. In closing, the strength, diversity and global reach of our brands, coupled with our continued operational excellence is serving us well in the current environment. We remain focused on introducing a steady stream of innovative products for our brands around the world while taking important steps to drive improved operational excellence across the enterprise. With that, I will now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our performance in the third quarter as well as provide more details regarding our expectations for the balance of the year. Mike?

Thanks Blake and thanks to all of you for joining us on the call today. In the third quarter, the company delivered strong earnings per share growth of 6% on an adjusted currency basis and 11% on a reported basis despite a tepid retail environment. During Q3, we continue to reduce inventory levels ahead of plan, finishing the quarter down 7.6% compared to last year. And we delivered a significant increase in cash from operations year-over-year. We also strengthened the company’s capital structure, refinancing our debt to reduce anticipated interest expense by an estimated $30 million through 2020 and increasing flexibility for use of cash going forward. We continue to take strong action focused on the fundamentals of the business and on maximizing return for shareholders in both the short-term and the long-term. On today’s call, I will review the company’s third quarter financial performance in more detail, provide an update on our initiatives to expand operating margins and conclude with our outlook for the rest of the year. Beginning with our results for the third quarter, the company delivered revenue of $603.7 million, in line with the low end of our expectations heading into the quarter. Underlying revenue declined 8.6% while reported revenue was down 11.1% versus prior year. Latin America was the strongest region with underlying growth in the mid-teens. This was offset by the larger U.S. and EMEA markets where the retail environment proves soft. E-commerce, an area of strategic focus, continued its momentum, growing nearly 21% on an underlying basis versus last year. The actions that we have taken to right size our brick-and-mortar business to improve profitability contributed to a lower – a low-teen decline in reported store revenue for the quarter. Both reported and adjusted diluted earnings per share were $0.49 and at the high end of our expectations. On a constant currency basis, adjusted diluted earnings per share were $0.51 compared to $0.48 in the prior year. Adjusted gross margin was 40% on a constant currency basis, flat to the prior year and slightly better than expected. Supply chain initiatives contributed to lower product costs in Q3. Currency negatively impacted adjusted gross margin by approximately 60 basis points in the quarter, which as anticipated was less than Q2. We expect the negative impact from currency to decline further in the fourth quarter. Reported gross margin was 39.3%. Adjusted operating margin on a constant currency basis was 12.2%, a year-over-year improvement of 30 basis points and better than expected entering the quarter. Total SG&A expense was down approximately $23.6 million versus last year, including the benefits from store closures, lower variable costs related to the wholesale business, lower pension expense and the timing of certain marketing expenses. Reported operating margin was 11.4% compared to 11.2% last year. The adjusted effective tax rate was 22% for the quarter lower than last year due to changes in income within various tax jurisdictions and certain favorable discrete items in the current period. Our reported effective tax rate was 19.5%. Inventory was down 7.6% at the end of Q3 versus last year and better than projected entering the quarter. We established a plan last fall to responsibly manage down inventory levels without taking unnecessary markdowns on core product and the team has executed very well against this goal. We are pleased with the progress-to-date and expect to end 2016 with inventory down in the low-teens versus last year. Accounts receivable were also down at quarter end with DSOs improving by more than 2 days. Operating activities generated a very strong $70.4 million in cash during Q3 compared to $14.9 million in the prior year. Overall, we are pleased with our ability to effectively manage working capital and now expect to generate approximately $250 million in cash from operating activities for the full year. The company finished the third quarter with net debt of $521.5 million down nearly $100 million year-over-year. We recently shared details on our new debt structure, which is expected to drive material benefits in the form of an estimated $30 million in interest savings due 2020 and increased flexibility for use of cash. The debt refinancing included the following activities. The issuance of $250 million of 5% senior notes in Q3 due in 2026; the amendment of our senior credit facility in early Q4, which provides $150 million of incremental term loans and $100 million of incremental capacity under the revolving credit facility; and the redemption in Q4 of $375 million of 6.125% senior notes due in 2020. We also announced a new 4-year $300 million share repurchase program replacing our previous authorization. The new program together with more flexible debt covenants allows for greater capacity for share repurchases. During Q3, we repurchased nearly 418,000 shares at an average price of $23.55 per share. Our priorities for cash remained the same, drive organic growth, primarily through investments and product innovation, consumer engagement and insights, e-commerce and omni-channel growth and demand creation; return value to shareholders through share repurchases and consistent dividends; pay down our debt; and pursue potential value enhancing acquisitions. I will now spend a few minutes providing an update on our important operational excellence initiatives. Since our last call, we have continued to make important progress by developing our plans, taking actions and improving our line of sight to our goal of 12% adjusted operating margin by the end of 2018. Supply chain efficiencies are materializing as anticipated, including the benefits from factory rationalization, logistic savings, lower material costs and other related initiatives. We continue to execute against our omni-channel transformation plan. We expect to continue to drive strong growth in our highly profitable e-commerce business and to move more aggressively to close underperforming brick-and-mortar stores. We are actively involved in negotiations with our landlords and this remains a fluid situation, but we will take every action necessary to exit bad stores in 2017. We will provide more color here, doors closed, timing, revenue and operating revenue applications, once these details have been confirmed. Most importantly, we do believe that once fully executed, this accelerated store closing program, along with our ongoing initiatives to further improve the performance in our go-forward stores will result in material operating profit improvements for the company. We have also concluded a review of our brand portfolio and are pursuing strategic alternatives at this point for several of our businesses. This process will allow us to improve the health of the company and focus on our fastest growing and most profitable brands and businesses going forward. Our operational excellence initiatives are a top priority for the company. They will continue to take significant time and effort from across the entire organization given the complexity of our business and the exhaustive and far reaching nature of the projects. We are closing in on finalizing a plan to achieve our goal of 12% adjusted operating margin by the end of 2018 and would be disappointed if we did not achieve at least 150 basis points of operating profit improvement – operating margin improvement in 2017. I will now conclude with an update on our outlook for the rest of this year. Year-to-date, revenue and earnings results have tracked in line with our expectations. But outside of the athletic category, the footwear sector has continued to soften. Retail bankruptcies and store closures have continued to broaden back-to-school results were mixed, and the fall season got off to a slow start due to unseasonably warm weather. In addition, Brexit has created uncertainty in Europe and significantly devalued the British pound. Despite these challenges, we still expect to see an improvement in Q4 year-over-year revenue growth compared to recent quarters. As a result of new product initiatives such as Sperry’s boot collection, Saucony’s launch of Guide 10, Freedom ISO and the launch of Arctic Grip. Easier comparisons from last year and a waning currency impact also support the improvement. Given these factors, we expect reported revenue at the lower end of our original full year outlook range of $2.475 billion to $2.575 billion. Adjusted diluted earnings per share are still expected to be near the midpoint of our original full year outlook of $1.30 to $1.40 and on a constant currency basis, $1.48 to $1.58 growth of approximately 2% to 9%. Reported diluted earnings per share are expected in the range of $1.02 to $1.12 now reflecting the debt extinguishment costs related to our recent debt refinancing. Looking ahead, we remain committed to maximizing value for our shareholders. We believe our focus on the controllable fundamentals of the business and operating margin expansion will fuel earnings per share growth despite the continuation of a challenging macro environment. We expect that our consumer centric approach to product innovation and demand creation will drive global growth and further amplify our work to improve profitability in the near-term. We believe our business model, combined with our disciplined approach mitigates risk and our diversified portfolio of industry leading global brands provide the key competitive advantage in the marketplace of tomorrow as consumers and the retail landscape continue to evolve. Thanks for your time this morning. We will now turn the call back over to the operator to take some questions. Operator?

[Operator Instructions] The first question comes from Jessica Schmidt of KeyBanc Capital Markets. Please go ahead.

Hi, thanks for taking my questions. Can you talk about the continued weakness that we are seeing at retail and I guess what’s sort of driving this? And can you elaborate a bit on what’s giving you the comfort in sort of that sales recovery in fourth quarter, especially as you have been getting more aggressive with some of the store closures?

Yes. I mean, focusing on domestic, the domestic consumer soft goods market, we have been operating with the mindset that what we are experiencing today is frankly the new normal. There is nothing surprising in what we are seeing. We continued to see shifts in consumer behavior, especially a big shift to mobile. I think mobile, for us, in Q3 alone was up nearly 40%. Consumers and retailers are buying closer to need. There is still heightened promotional activity. And there is some retail consolidation and bankruptcies that are – and we are probably not over with that impact yet. So there is a number of things impacting and probably a list of 15 others that I could list here impacting the USA market, but I guess overall, focusing just on footwear, it’s been a bit of a lackluster year for footwear with the possible exception of athletic and athleisure. The good news for us is the consumer is still responding to fresh new innovative product. So we see that with the Moab FST and Edge in Capra and Arctic Grip and Merrell. We see that with the Sperry boot collection. We see that with Saucony, EVERUN and ISOFIT of the technologies. So the consumer is out there willing to respond, but willing to respond to fresh new innovative product. That’s something we have been doubling down on and focusing on for the last 1 year or so. I drove home last night in Michigan, it was 77 degrees. It might hit 80 today. So I had promised myself I wasn’t going to mention weather during this call. But it is what it is. And I assume we are going to get some cool fall weather at some point here. But I think that’s also having an impact on the overall consumer soft goods market. When we get a little weather and a little coolness, retail jumps up, consumer traffic jumps up and things are pretty good. But when it’s unseasonably warm, things slowdown again, at least that’s what we are seeing.

Yes. Jessica I think for Q4, the things that were mentioned in prepared remarks around – first of all, a much easier comparison against any of the other quarters up till now, we have had good response, obviously to the Sperry boot program. Early indications there are very good. We had a nice initial selling improvement in Q3, which is small part of that program but still indicative of the kind of progress we are making there. Arctic Grip from Merrell and some other incremental programs for Q4 are really driving that. So we have recognized, to Blake’s point about the weather that there are some variables out there that we don’t control that still may put some pressure on Q4 results and we become a little more cautious than a quarter ago about the balance of the year. But so far, we have been able to achieve the expectations on the top line based on the information we have. And that’s it’s translated into our guidance for Q4.

Great. And can you talk about the overall inventory levels at retail and do you think that there are still some pockets that need to be worked through?

I think there are some pockets that need to be worked through. I think it’s certainly much better than it was in Q1, Q2 of this year. I think some retailers and some brands are working through some excess inventory, but probably nothing that the retailers and the industry cannot manage. I think you see this evidenced by still probably a little bit of a heightened promotional activity at retail, which is probably reflective of just some concern about maybe the holiday season and the level of inventories growing into the – this fall.

Great, I will pass it on.

Thanks.

Thanks Jessica.

The next question comes from Jim Duffy of Stifel. Please go ahead.

Thank you. Good morning guys.

Good morning Jim.

Good morning Jim.

Mike, you had mentioned that you would be disappointed if you didn’t achieve 150 basis points operating margin improvement in 2017, pardon the skepticism here, but that seems heroic in the current demand trends, at a high-level, can you speak to some of what you see that leads you to believe that’s achievable?

Sure. Yes. I think we talked quite a bit even though we haven’t really quantified the exact amounts related to initiatives around our store closings and further work we have around the store fleet itself and improving profitability there. We have been pretty open that that’s been a drag on earnings for the last several quarters. And we are making a lot of progress there, but we are not quite to the finish line there, Jim. But given the visibility that we have, we believe that that will be meaningful. Once we are through the process as it relates to store performance and that’s – we are not suggesting that will all occur next year. But the improvement we see – the current trend for those stores is operating profit loss of $28 million or so. And so that that’s an opportunity for us that we have clear visibility to. It’s a matter of timing when and how we will see that come to fruition next year. The other important contributor for next year is really on the gross margin side. We have talked about supply chain initiatives, factory rationalization, taking advantage certainly of the raw material cost environment for the next two seasons, spring and fall of ‘17, which we have very good visibility to right now. So that’s not really on the comp. That’s something we have kind of crystallized here as we enter the New Year. We are not done with our planning process, so we are not ready to give guidance or clarity specifically on the operating margins for next year. But as we stated, we would be disappointed, even in this tepid growth environment, if we didn’t achieve at least 150 basis points improvement.

Okay, that’s helpful. Thanks. And then the 12% operating margin objective exiting 2018, it seems a component of that is even beyond the store closures addition through subtraction, when do you guys expect to be in a position to share more details around that, you alluded to perhaps that coming in the relatively short-term?

Yes. We agree with that. And we are obviously working really hard on that right now, Jim. And the timing is difficult to exactly predict. But we would expect certainly in the near future, so in the next several months that we will have a lot more clarity on that. We put a lot of focus in the organization on focusing on things that we are great at, that we would want to do more of and deemphasizing things that aren’t going as well. And the store example is one of those things, obviously looking at the portfolio, another area where we are trying to exit businesses that just aren’t meeting our profit goals and targets for the company. And we are moving very fast on all of that. And as soon as we do have clarity, you can rest assured, we will be sharing it with the team here.

Okay, thanks for that. I will jump back in the queue.

The next question comes from Christian Buss of Credit Suisse. Please go ahead.

Yes. I was wondering if you could talk a little bit about the Merrell brand and where you think the positioning needs to shift to start regaining revenues with consumers going forward?

Yes. I mean as I discussed maybe in a little more specifics during the prepared remarks. The Merrell brand remains very strong, obviously industry leader in the outdoor category. Looking back over the last couple of seasons, with hindsight, we probably didn’t put enough emphasis on freshening some of our legacy products and our legacy collections and put a little more of our emphasis on introducing upon new product offerings. So for Merrell, it’s just creating the new and refreshing some of the legacy collections. Next year, you are going to see freshness in the after sport category. For example, you are going to see freshness in Chameleon. You are going to see new product offerings on Encore and across some of our biggest legacy collections. So the consumer is still focused on Merrell. They are still enthusiastic about Merrell. We probably have had a bumpier than anticipated transition from some of the legacy products to some of the new product offerings for this year, especially in the third quarter. Frankly, the new product offerings have met our expectations when it comes to sales and pairs. So we feel energized by where Merrell is today. Importantly, Jim Zwiers and the team over last year, so have been putting a tremendous amount of emphasis on market research, getting some intelligence on their consumer and then increasing the product pipeline and focusing on a more continuous flow of fresh product to the marketplace. We are already seeing the benefit of that. And then I think under the Nature’s Gym category, there is no secret that there has been a consumer shift over a period of several years to athletic and athleisure. And Merrell is going to double down on that particular category under the Nature’s Gym umbrella as we move forward into next year. So we think we are in a good position. Certainly, Q3 was a bit of a disappointment for us, but nothing we didn’t anticipate.

That’s helpful. I am going to speak to market initiatives, can you talk a little bit about what the end game here is how much of your product you want to be on a rapid design, rapid replenish cycle?

Well, theoretically eventually you would like to get to 100%. You don’t ever start out that, but it really took a keen focus and mindset from the brand to change its processes and also use some of the tools that are currently in the stable. When you use existing outsoles and midsoles and lathe, you can make some – you can have some dramatic introductions of fresh products in a relatively short period of time. So within the company, I would say Merrell is leading the charge in this regard, but this is an initiative that we intend to spread across all of our brands.

Thank you very much and best of luck.

Thank you, Christian.

The next question comes from Jay Sole of Morgan Stanley. Please go ahead.

Great, thank you. Mike I have got a question. You talked about some cost savings that are going to possibly benefit gross margin. Can you just talk about strategically how you are thinking about taking those cost savings and letting that flow to the bottom line versus maybe investing in price or other ways to stimulate demand?

Yes, absolutely. I mean, I think the number one priority for us right now is to make sure that as we think about the supply chain opportunities that exist that we take full advantage of that. And so that’s been our number one priority. Obviously, as we look at demand creation, the things that Blake discussed related to some innovation there around consumer centric demand creation, social, digital work that we are continuing to develop. Those continued to be priorities, our product innovation, hub and the emphasis we are putting on that in the organization right now is primary. So, those are all being funded with some of the improvements that we are seeing on the supply chain side. And who would expect to continue to do that as we move forward. So, there is clearly a model here, which is not about saving to just flow through the bottom line. We are obviously looking at important investment initiatives that are going to require some further enhancements over the coming months and years. So, part of our 12% operating goal will certainly be to balance that and continue to focus on the drivers that we believe are going to stimulate growth.

Okay. And if I can ask one more, on SG&A, SG&A dollars down about 12.5% in the quarter. Can you just kind of give us a little bit more detail about where the savings came from, was it marketing, was it all store closures, headcount reductions perhaps? Any color there would be great.

Yes. And again, part of the – there is certainly a heavy mix there. So, our gross margins obviously, the mix on gross margin percentage in the quarter was negatively impacted by store closures, too, because they run at a higher margin rate than our wholesale business, but the benefit there obviously comes from two things, the closures themselves and then just the work that we have done to improve the profitability are those stores as we continue to operate them. The third quarter is probably the first quarter where we have seen the benefit of some of the structural changes that we made earlier in the year. So, those are two really – probably half of the savings really coming from those areas. Pension expense is important, that’s been trending as we guided all year long. That was an important contributor. Just the general reduction in volume year-over-year in our wholesale business, there are some variable costs that come down as a result of that. Currency is a small benefit in the quarter. Translation of SG&A expense from our foreign operations is a slight benefit. And then some timing on marketing and demand creation that either accelerated it earlier in the year is being pushed into Q4 a little bit, but those are the major drivers that really had an impact in the quarter. I think there was a slight improvement against what we expected on SG&A expense, but no real surprises there given all the factors I just rattled off.

Got it. Thank you so much.

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

Hi, thanks for taking my questions. I was just wondering if you could talk about in light of the bankruptcies that we have seen this year and you talked about some strategic alternatives that you are looking after some of your brands. How are you thinking about your U.S. wholesale distribution strategy over the next year or couple of years in terms of across your brands? And then also how are you taking your inventories ahead of the plan that you guys have previously outlined? Are you clearing more products through your own stores or are you using other channels?

Well, I will let Mike address the inventory question. When we look ahead for U.S. wholesale over the next several years, we frankly believe there is going to be some more consolidation. There is going to be some more store closings. As we all know, the U.S. compared to the rest of the world is really grossly over-stored when it comes to brick-and-mortar retail. And we think there will be some shrinkage there. We want to stay close and important to our most important wholesale customers and the good ones are growing and maintaining or gaining market share in this environment. The best way to do that is to focus on product, product, product and to be there with fresh innovative product that has its base consumer insights and market intelligence and ultimately a focus on the consumer for each of our individual brands. We have engaged over the last several years. The playing field has changed tremendously. So, if you are a brand owner like us, which is a huge advantage in this environment, you have to be out there protecting your brands. The changes in technology just over the last several years have made this a necessity as far as being an appropriate brand’s steward. So, this is something we have been focused on. We know it’s hurt our top line. We know it’s led to a few difficult conversations with some of our retail customers, but in our opinion anyway, this is something that we don’t have a choice of. This is something that must be done especially as we look forward in this wholesale environment. And you had a question on inventory?

Yes. On the inventory side, I think it’s just good old fashioned discipline and the approach that we have taken over the last several quarters to make sure that this was managed well and prioritized. Revenues have kind of met our expectations. So, no real changes to the overall inventory plan from that, but we have done a better job of reacting to some of the changes in the market, pulled back a little bit with some of our intake of goods. To your point about sort of how we are liquidating, it’s through a normal course of business. I mean, we have taken advantage of all of our DTC channels to make sure that we are maximizing the recovery we can get on any older inventory. There is no question that to closeout channels are still very heavy with inventory and it’s harder to use that channel as an outlet for excess inventory today than it may have been in past times. But even with that environment, we really like the improvement and the progress we have made with our inventories. We have been very cautious on the recovery value. We have got actually one of the negative impacts on gross margin this quarter was the fact that we have provided a little extra reserve against some of our older inventory just because of the closeout environment being so competitive right now. So, even with that, we would like the results for the quarter, our margin performance and our inventory position remains strong. And we see it continuing to improve as we mentioned to be down low-teens by the end of the year, which we think is in line as we head into 2017.

Great. That’s really helpful. And if I could just tack on a quick follow-up to that, I know you guys mentioned that this kind of U.S. retail environment is the new normal in your view, but how does this double-digit decline at the end of the year position you for top line growth going into next year with all the new product and initiatives you have?

I think there are two things there. Number one, I think that decline obviously last year at the end of the year we were up double-digits and so are near double-digits. So, we certainly feel like this is getting us back to a more normalized level. But the other thing that’s important and Blake touched on it as it related to the Merrell discussion, our ability to be faster, speed to market and really manage the supply chain in that way, is also giving us more leeway, more leverage on the existing inventory that we have. We are – it’s still a very strong and stocked portfolio of brands. That’s sort of the business model that we have. We are going to be remaining important to our key retail partners, but our ability to manage that to be deep and in the right styles and to be fast to market with our new introductions. Those are the mechanisms I think that help us continue to chase that additional business while not over-investing any inventory.

Great. Thank you.

The next question comes from Erinn Murphy of Piper Jaffray. Please go ahead.

Great. Thanks. Good morning. I was looking to talk a little bit more about Merrell and the third quarter being down mid-teens versus, I think it was flat in the second quarter, can you just isolate how much of that lost sales was from the sporting goods channel and some of the bankruptcies we have seen in the space and then how do we think about that impact as we go into the fourth quarter and into the first part of next year?

Yes. We have built that into our outlook going into Q4 and for next years as well when Merrell is currently planned to return to growth behind the multitude of new product introductions. Focusing on Q3, certainly some of the bankruptcies did have an impact on the brand. But there were a number of other factors. We had in the apparel and accessories shift to our own DTC and we got out of the wholesale business there which just wasn’t making financial sense for us. I would say our men’s business in the quarter was stronger than women and we still have plenty of opportunity in the active lifestyle casual space, especially women’s for the Merrell brand. So it was a number of factors. It wasn’t just one factor in the quarter that the sporting goods bankruptcies that contributed the majority of the Q3 decline. It was really a number of factors for Merrell.

Okay. And then just maybe secondly, on Merrell on the weakness you called out in the women’s lifestyle, how are your kind of core retail partners ordering that segment as we go into the fourth quarter?

I think they are ordering products that they like. And frankly, we haven’t been feeding them enough great product in that particular category for several seasons. We have implemented and recruited and changed our structure and recruited some new talent to key positions, especially in the women’s area. And we think that’s going to have a fairly big impact on 2017.

Okay. And then just last on Sperry, for the fourth quarter I think you said it was guided to flat, can you just help us think about the complexion between kind of the strength they are seeing in the boots business for Sperry right now, how much of the mix is our boots right now. And then kind of what you are seeing in the boat shoe, would that continue to decelerate in the fourth quarter just being offset by boot? Thanks.

Yes. I mean frankly, boat was down for us in Q3. We think the overall it was down for us. It was down for the industry. We actually took market share in boat according to NPD in Q3. But we think boat is going to continue to decline in Q4. That’s being offset at least in Q3 with substantial increase in the boot business for Sperry and increase in the vulcanized business and the sandal business, which is pretty small in Q3, but double-digit increase in the sandal business as well. So as a brand, Sperry is a wonderful brand. Virtually, every teenager or millennial has at least one pair of Sperry in their closet and it’s just a question of category expansion on the product side for Sperry to offset some of the decline that we have seen over the last 2 years in that boot category. So we expect flattish sales for Sperry in Q4, but some of that could be dependent on the weather and frankly, the holiday season.

Got it. Thank you, guys and best of luck.

Thanks Erinn.

The next question comes from Steve Marotta of C.L. King & Associates. Please go ahead.

Good morning. Thank you for taking my question. Mike, could you please go over what the current store structure is by brand, how many stores are represented in each brand and what the total number of stores are currently?

We can give you some broad – sort of some broad updates on the store fleet. I mean by the end of the year, we will have about 320 stores in the fleet. Most of those would be Stride Rite stores. We continue to have concepts under the Sperry and Merrell banners for both mall based specialty outlets. We also have some multi-brand concepts in the fleet. Mall based as well as outlets as well. So again, by the end of the year, just over 300 stores in the fleet and most of those are Stride Rite stores.

How many of those are Stride Rite, please?

About two-thirds of them.

Okay. And I assume that all will be looked at and assessed accordingly?

Yes. This process is across the entire fleet and the actions we are taking right now, the activity that’s underway, applies to every store at anytime said.

Okay. And 150 basis points improvement expected for next year, I assume obviously that would include the store closures that are currently under review right now, although the timing I understand would be up for interpretation?

Yes.

Does that also include the potential to divest brands?

Yes, it does.

Okay. So the expectation would be again, making the assumption, it wouldn’t be a stretch that sales would actually decline on a year-over-year basis on an absolute basis if there is store closures and brand divestitures?

Sure. We have seen that in our underlying results up until now, right. As we have continued to close stores. So that would be fair.

Okay. And I am sorry that I missed this, just very quickly housekeeping, what is Merrell expected to do in the fourth quarter?

Well, I think Merrell is going to have substantially better fourth quarter than a Q3. We normally don’t give out that level of detail and we have most of the fourth quarter in front of us. So we met our expectations, frankly in Q3 and expect to meet them in Q4.

I think you said earlier and that just reminded me better but not positive and that would be next year?

That’s correct.

Alright, excellent. Thank you very much for the clarity.

Thank you.

Thank you.

The next question comes from Jonathan Komp of Robert W. Baird. Please go ahead.

Yes. Hi. Thanks guys. And maybe first question, just on the fourth quarter outlook, on the top line, Mike I think you previously had said kind of flat to up slightly and now if you hit the low end of the full year, you would be down kind of mid single-digits for the fourth quarter on a year-over-year basis and I am wondering if you could give a little bit more clarity across brands or even your assumptions for things like cancellations or at once business kind of what’s driving that difference?

Yes. As Blake just mentioned, we probably won’t get into the brand by brand detail of the ebbs and flows of the quarter. But in general, as we come into the quarter, I think retailers are continuing to be very stingy with their orders. We mentioned that inventory levels are in better condition today than they would have been 1 year ago or maybe in previous quarters. But I don’t think they are necessarily where retailers want them to be and they are really very, very focused on working capital management themselves. So that’s continuing to put pressure. We are not factoring in any major increases and at once or reorder activities, cancellations have settled down for sure compared to last year. They were very at high levels a year ago and that normally we would expect that to improve. And so far over the last several periods here, couple of periods we have seen that improve, so the assumptions that are growing into Q4 are we think are very valid and we are very comfortable with them. I think the reality is we are remaining cautious on the overall sort of condition of U.S. retail and also the weather a little bit factoring into our thinking around sort of pointing us at the lower end of the range for revenue. No particular softness with any brand. We still see Sperry boot program continuing to gain momentum. But as Blake said, lots of the quarter let to play out here. So we are remaining appropriately cautious for the quarter. We still feel very strongly about the earnings performance for the full year and for the quarter based on many of the actions that we have taken already this year.

Okay. And then maybe one question, again on 2017, a little different direction, but I know there is a lot of moving parts, the store closures and maybe some brand divestitures that are hard for us to have visibility to, but I am wondering kind of the dynamic of having the softer performance for the core brands, so Merrell and Sperry and a few others, but yet seen underlying margin improvement and I am wondering how long that dynamic would continue just given some of that supply chain savings or if you need those brands to start to produce flat to positive sales at some point next year to hit that mark that you set?

Yes. I think, frankly, for our biggest brands Sperry, Merrell, Saucony, we have got initiatives, products and big marketing stories in place that we think is going to drive growth in 2017. That’s our focus. We haven’t fully developed our 2017 operating plan yet, but that’s what – that’s the direction we are pointed at for sure.

When we talk about 12% operating margin at the end of 2018 though and we have said this before, it’s really not predicated on a growth story or leveraging growth per se, it’s certainly a small component of that. I mean, we don’t expect robust growth in that model though. And I think right now it’s important that we have got line of sight for the supply chain efficiencies we have talked about and the other initiatives that we feel comfortable with. And as we continue to develop that plan, we will be a little bit more clear about what our growth assumptions are beyond 2017, but the model is really predicated on kind of a flat growth environment or relatively low level of growth to drive that 12% improvement.

Okay. And maybe last one just on the supply chain savings and some of the lower product costs for next year, do you expect some of those savings to be significantly second half or first half weighted just on the timing of when you might realize some of those?

They are going to continue to improve into the second half, but a lot of the negotiations obviously spring is put to bed, so there will be meaningful savings and improvements in the first half and also those will be added to or improved on in the second half.

Okay, thank you guys.

The next question comes from Mitch Kummetz of B. Riley. Please go ahead.

Yes, thanks for taking my questions. So Blake, you talked about a return to growth in your biggest brands, Merrell, Sperry, Saucony for next year. I know you are excited about a variety of product initiatives, but can you talk a little bit about backlog? I mean, I would imagine, you have was wondering spring orders on those brands. I mean does the backlog points to return to growth in those brands or you are just looking at the easy comparisons and making an assumption around reorder activity? I mean, what gives you the confidence in that return to growth other than you have got a number of product initiatives?

Well, I think we do have a few – every brand is a little different. Let’s start with that. But we do have some easier compares for some of our brands. As you know this year, the reorder activity has been extremely choppy and it’s been hard to make sense of it when you measured against historical experiences. So, we think that choppiness is going to continue. All of our brands are focused on being narrow and deep in the right inventory, especially the new product offering. But I have certainly spent a lot of my time over the last year with our individual brands on the product side and the big product marketing stories. And so I would say across the board, our pipeline is more robust than I have ever seen it, not just for Merrell, but for Sperry and for Saucony and for several of our other brands. So, fundamentally, in this environment, we believe that fresh innovative product is going to drive consumer – really help drive consumer demand. They are looking for something fresh. It can be updates to existing collections or something that’s brand new. So, that’s been our focus. We have good insight as to those product pipelines when they hit. With respect to the Merrell brand, I tried to give you a little more detail as to what’s coming in Q1, Q2 the second half of the year whether it’s tactical and work on Merrell or the new Moab 2. So, I try to give you a little bit of a sense of timing for some of our biggest brands, but I would say it’s not all back end loaded. So, I think in today’s world having a kind of a continuous flow, steady flow of fresh new product translates into winning and growing.

And then just a quick follow-up on the introduction of work and tactical in Merrell, how big of a deal could that be? I think one of your competitors teen has been a really nice job on the work side. And I am guessing that’s been pretty incremental for them. I don’t know if you have got any stats on them or not but....

First of all, I don’t know who you are talking about, but setting that aside, listen we have had a lot of demand from Merrell consumers and retailers for years on a work offering. And a lot of people and not for steel-toe or composite toe, but soft toe environment, work environments are wearing Merrell today. Even though not specifically offered for the special ops forces in the military, we know that Merrell has been kind of the standout go-to-brand for those people that are operating in probably the most difficult environment that can be demand, it’s even imagined. So, we think that there is a lot of opportunity there. We have previewed this with just a very select few of our tried and true customers and really at the pinnacle level and I would say the response has been phenomenal so far.

Okay. And then last question, Mike, I just want to make sure I had a better understanding of the trajectory of the 12% operating margin plan, because I think in response to John’s question, you mentioned that it’s sort of flat to maybe low growth to 2018. But then I think when Steve was asking you about 2017, you suggested that maybe the revenues are down a little bit in 2017 as some of these store closures and potential brand divestitures maybe more, yes, go ahead?

Right. I think what we are talking about is the organic growth. So, those components of the business that will move forward we are not planning robust growth to drive the operating margin leverage. And so yes, is it possible the company could look smaller because of store closures certainly and that’s going to have a negative impact on revenue. So, at the end of the day, it’s the focus on the go-forward components of the business that we are talking about there when we talk about kind of a low growth environment.

The actual revenue...

But to be clear, that is not our focus when we are developing our product pipelines, our marketing initiatives or we are talking about our internal operating plans for ‘17 and ‘18, but we do plan to deliver growth, but we also plan to do what we said we were going to do on the operating margin side in this continuing environment.

Got it. Alright. Thanks, guys.

Thanks.

The next question comes from Scott Krasik of Buckingham. Please go ahead.

Yes, hi, thanks. Just a couple of follow-ups on Sperry. So, I guess Mitch asked about bookings, but specifically the boat shoes since you have been through Fannie and Magic [ph], our platform, how did retailers book vouchers for spring and is that a category that you see is fine with stabilization yet?

Yes. As I look back over the last couple of years and look ahead, I think we first saw softness in the boat shoes silhouette the market did on the women’s side. And so that seems to be reaching a stabilized bottom and then we are continuing to see now a little softness on the men’s side. And so traditionally, there is not as much volatility in that category on the men’s side, but certainly, it’s following women’s and we think we will see continued softness in boat although the brand gained market share in Q3. But we think overall, that category will continue to decline in Q4 and probably decline at a lower rate, certainly, in Q1 and Q2 next year.

And then can you just remind us how big of a channel run specialty is for Saucony, please?

Saucony is a pretty significant channel for Saucony, probably constitutes roughly – and again, I don’t have the numbers in front of me, but a third to 45% of their domestic business, maybe a little bit more than that. So, it’s an important channel for Saucony, but it’s also very important from a brand positioning standpoint. So, when Saucony is the number two or number three brand in the run specialty channel that has the spillover impact on other channels of distribution, including sporting goods.

Thanks, Blake. And then you just gave us great details on sort of the operating loss pro forma of some of these stores you are closing. When you look at the brands that are looking at strategic alternatives, are these brands also losing or not profitable on an operating basis?

Yes, they – maybe one or two of them are it will be a positive impact on operating margin when we divest them. On some others, it would be a positive – they have currently a positive operating margin, but frankly, don’t meet our effort – our growth objectives going forward and the effort, time and resources we have to put behind those brands. We have some other bigger opportunities within the company.

Okay. And then just last, Mike, do you have a target for year end debt at this point given the guidance?

Year end debt?

Yes.

I think it would be very similar. We don’t have any mandatory payments in Q4. So, it would be similar to where we stand today.

And there is no effective pay-downs, I don’t know where the revolver was...

Not at this point. We just did the refinance less than a month ago or so. And I think we are in very good position there and obviously extended out the tenor of the senior notes quite a bit. So, I think at this point it’s possible we would make a payment, but there is no current plan to do so.

Okay, thanks. Good luck.

Thank you.

We have time for one more question. The last question comes from Laurent Vasilescu of Macquarie. Please go ahead.

Good morning and thank you for taking my question. I want to touch upon the 12% EBIT margin for 2018. During the October 2013 Investor Day, I think the 12% EBIT margin was predicated on a 42% gross margin. How should we think about the gross margin goal under the pre-tax of today’s 12% EBIT margin?

I think it’s a similar target maybe a little bit higher when we got more visibility today to the trends that we talked about. And the other thing that’s important for us as we think about this model, it deemphasizes our brick-and-mortar fleet. And so we are really more focused on the operating margin, because obviously any kind of decline in the brick-and-mortar fleet puts pressure on gross margins. So, it’s a little bit different relationship today than they would have been maybe when we modeled that out before, but overall, low 40s is about the right way to be thinking about it.

Okay, helpful. And then on the SG&A front, I think rent expense was $55 million last year, I think representing about 6% of SG&A. I understand you are rationalizing your store count and that will help the SG&A, but can you give us a little bit clearer breakdown of the other big buckets of SG&A? And where do you see the most opportunities to cutback on those buckets?

As we move forward, I mean, as it relates specifically to the stores obviously beyond rent, there is a significant investment there on store SG&A. But we are continuing to look at the organization in every aspect of the company. And look the initiatives that we have underway to be more efficient, to be more cost effective, they are certainly not just applying to our supply chain, it really applies to every area of the business. And so as we get more clear and firm on our 2017 guidance, we will be ought to give you more uncertainty or more quantify the benefits coming out of some of the other areas of operational excellence initiatives that are underway right now.

Okay, very helpful. And then last question, I think last quarter calls for SG&A dollar change year-over-year to be similar in 3Q and 4Q, how should we think about the SG&A change for 4Q today?

It will improve a bit. I don’t think you will see the same amount of leverage in Q4 as you saw in Q3, but similar improvement.

Similar improvement or better improvement, I am sorry, I am confused, is it a higher rate in the better terms?

I think the year-over-year improvement in SG&A spend in Q4 will be similar to what it was experienced in Q3, not quite as much leverage there. We saw some positive leverage in Q3. We probably won’t see in Q4 just given the size of the revenue in the quarter and some of the other trends that we saw in Q3 that were timing related.

Okay, thank you very much and best of luck.

Thank you.

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.

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 November 20, 2016. Thank you and good day.

The conference has ended. You may now disconnect your line. Thank you.