Wolverine World Wide, Inc. (WWW) Q4 2017 Earnings Report, Transcript and Summary

Good day, and welcome to Wolverine Worldwide’s Fourth Quarter and Full-Year 2017 Conference Call. All participants will be in listen-only mode until the question-and-answer-session of the conference call. This call is being recorded at the request of Wolverine Worldwide. [Operator Instructions] I would now like to introduce Mr. Chris Hufnagel, Senior Vice President of Strategy for Wolverine Worldwide. Mr. Hufnagel, you may proceed.

Thank you. Good morning and welcome to our fourth quarter and full-year 2017 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 fourth quarter and full-year 2017. The news release is available on many news sites or 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 616-258-5775 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 Q4 2017 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 information. As communicated during the Company’s last quarterly earnings call, the Company’s 2017 fiscal year is comprised of four 13-week quarters versus a 12-week quarter for the first three quarters and the 16-week quarter for the fiscal fourth quarter in the prior year. When speaking to revenue, Blake and Mike will primarily refer to underlying revenue, which adjust for the impact of foreign exchange, the impact of retail store closures, the transition of the Stride Rite to a license business model and for 2018 guidance, the sale of Sebago brand and the sale of the Department of Defense business. We believe underlying growth thus 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, non-recurring organizational transformation costs including divestitures and incremental inventory markdowns related store closures, the impact of foreign exchange, a non-cash impairment of indefinite lived intangible assets, environmental and other costs, and the impact of recent changes to U.S. tax law. 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 Worldwide and its operations are forward-looking statements under U.S. securities laws. As a result, we must caution you that as with any prediction or projection, there are a number of factors that could cause 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 fourth quarter revenue of nearly $580 million, representing underlying growth of 1.7% and adjusted earnings per share of $0.41, a 20% increase over the last year. We’re obviously pleased with these results as the momentum in the business continued into Q4. During the quarter, we made excellent progress in all four sprint lanes of the WOLVERINE WAY FORWARD, our holistic enterprise-wide transformation of the Company. This work has helped us harvest significant efficiencies that will allow us to achieve our 12% operating margin target well-ahead of our original schedule, all while providing the investment capacity to fuel our growth initiatives. We are pleased to say that the heavy lifting is behind us with the store closures, portfolio changes and organizational restructuring now complete. The Company’s pace of execution over the last two years has been incredible. The foundation is now set for a new and more profitable operating model that is focused on speed, innovation and growth, something we’re calling our GLOBAL GROWTH AGENDA. I am excited to share more details on our agenda with you this morning. But first, let me briefly review the fourth quarter performance of our brand groups, starting with the Wolverine Outdoor & Lifestyle Group. Underlying revenue grew 14.4% compared to the prior year with Merrell growing in the high teens, Cat up in the mid teens, Chaco posting nearly 30% growth, and Hush Puppies down mid single digits. The Merrell business continued to accelerate in Q4, benefiting from the successful launch of the Chameleon 7 and the excellent performance from the expanded Arctic Grip offering, which grew over 50%. The new Nature’s Gym collection continued to perform well and the Merrell Work and Tactical program was also a source of growth in the quarter. Merrell is now focused on five distinct consumer territories and each of these territories grew in Q4, which reflects the underlying brand work and recent implementation of our new brand growth model. This model for growth is focused on the consumer with an emphasis on greater speed and a continuous flow of new and innovative product. We are obviously pleased with the continued momentum in the Merrell business. Chaco again delivered strong growth in the fourth quarter as its e-commerce business grew nearly 40%. This performance was driven by Chaco’s expanded women’s product offerings along with continued robust growth from the Z/Sandal franchise. The U.S. market remains a growth opportunity for the brand as Chaco continues to expand its domestic footprint with national retailers and new independent accounts. Moving to the Wolverine Boston Group. Underlying revenue declined 6.5% versus the prior year, with Sperry, as expected, down high single digits, Saucony down mid single digits and Keds down low single digits. The Sperry women’s boot category exceeded expectations for the quarter with very strong e-commerce performance up over 30% and strong retail sell-through. Based on the continued success of this category, retailers are already making strong fall 2018 commitments for Sperry boots. And momentum in this category has continued into Q1 of this year. New sneaker collections also performed well for Sperry in the quarter. However, these gains were not sufficient to offset continued softness in the boat shoe category and lower closeout sales in the quarter. We expect a better first half for Sperry and a return to growth in the second half of the year. And closing with the Wolverine Heritage Group. Excluding our Bates Department of Defense contract business which we sold in Q4, underlying revenue for the group was down approximately 10% compared to the prior year with the Wolverine brand down low double digits and the Bates civilian, HYTEST and Harley-Davidson businesses collectively down mid-single digits. During Q4, we experienced some weakness in at-once orders in the work category as retailers consciously managed the inventory down and also shifted to a more need-now-buy-now order calendar. Last year, witnessed this trend across the number of consumer soft goods categories. Nevertheless, the Wolverine brand gained market share in the U.S. work boot category in Q4 and the brand’s e-commerce business grew nearly 45%. We expect Wolverine to return to growth in Q1 of 2018. Now, let me turn to an update on our progress related to the WOLVERINE WAY FORWARD, which has exceeded my highest expectations and introduced our new GLOBAL GROWTH AGENDA and related investment plan. While I’m pleased with our overall fiscal 2017 financial results and a total return to shareholders for the year of over 45%, I’m even more proud of the accomplishments achieved by the team over the last two years as we work to restructure and transform the Company. In 2017, we executed the WOLVERINE WAY FORWARD, the most ambitious effort in the Company’s nearly 140-year history, squarely focused on transforming the enterprise into a consumer-obsessed, design-led growth Company. The list of work streams and initiatives that were completed is lengthy. And I couldn’t be more proud of our team for the pace, urgency, and commitment that they put behind getting it all done. While some of the work will be ongoing, I’m pleased to say that the heavy lifting is behind us and the extra costs required to execute the transformation are complete. We are now ready to take full advantage of our new tools, processes and capabilities, become a more nimble and agile company, and pivot our focus and energy to growth. The fast pace of change in the new normal retail and consumer environment continues. And our brands are operating to make the consumer experience frictionless and more convenient across all touch points. As we look to drive future growth, we will focus on consumers and develop a much closer relationship that is very different from that which existed only a handful of years ago. Internally, we’ve developed a new GLOBAL GROWTH AGENDA to clarify and prioritize our future initiatives to drive the business. This will be supported by a robust investments framework funded by the realized benefits of our transformation work. In 2018, we expect to invest $40 million to $45 million behind this new growth agenda, which is comprised of three key elements, first, a power product innovation and design engine. As part of the way forward transformation, our teams have now developed and tested new processes, tools and speed initiatives to drive future growth. This includes investing in new creative and design capabilities, while expanding our consumer insights and market intelligence skills to bring more credible product to market on a more continuous basis. Our operating model is now positioned to execute with more speed and flexibility including substantially shorter concept to market lead times, as shorter 60 days, and a greater ability to quickly backfill product collections that perform well at retail. In 2017, Merrell was our first brand to implement this new model and tool set, focusing on clear product segmentation, extensions into new consumer territories, and a faster cadence of new product introductions. The Merrell product team was reorganized around its newly defined consumer territories and now incorporates deeper consumer insight and market intelligence to influence design. In addition, our recent supply chain restructuring allowed Merrell to bring fresh, innovative product to market in half of the normal time, increasing flexibility for a quicker response to successful product tests around the world. As a result, Merrell brought several innovative product collections to market earlier than originally planned, including the launch of the new Merrell Work and Tactical product line in Q2 and the Chameleon 7 series in Q4. This new approach and mindset was successful as Merrell delivered high single-digit growth in 2017. All brands in the portfolio have now adopted this model and are developing go-to-market strategies which utilize these new processes and tools. We expect to commit about 45% of our 2018 incremental investment to this first element with a focus to enhance design, product flow, demand planning, supply chain capabilities and distribution centers while continuing to invest behind our consumer insights and global sales force teams. The second element of our GLOBAL GROWTH AGENDA is focused on an enhanced Digital-Direct Offense. The consumer shift to digital commerce continues. Today, approximately 28% of all footwear sales in the U.S. are made online and we expect this trend to continue. Technological disruption and innovation have forever changed the brand-consumer relationship. We will continue to over-index our investments toward our Digital-Direct Offense to stay in lockstep with our consumers by creating digital content that can be used across all distribution channels and by most customers. Today, consumers expect to experience a seamless digital and physical store experience. As brand owners, we will operate more like vertical retailers to drive speed, product flow and consumer centricity, all of which will also benefit our wholesale customers. Our owned e-commerce business has been our fastest growing channel over the last two years with nearly 20% growth in 2017. We expect this growth to accelerate in 2018 as we continue to prioritize this channel in our own markets. This growth will be fueled by key strategic investments around 30% of the total incremental investment which includes greater social prospecting, new advertising up and down the consumer funnel, and the implementation of our new unified consumer database, which will increase retention and enhance the lifetime value of our consumers. We have also expanded other tactics and disciplines to drive our e-commerce business including more exclusive product introductions, less promotional activity and increased spend on digital demand creation. We have several brands in our portfolio that excel in this area and by no coincidence delivered excellent e-commerce growth for 2017 including Merrell with nearly 25% growth, Chaco with nearly 35% growth and Keds with over 32% growth. We are implementing the new concepts, tools and capabilities that were tested and validated in these businesses over the past year in our remaining brand. The third element of our growth agenda is focused on significant international expansion. Our historical international model has been a profitable and strategic asset for the Company over many decades, and currently minimizes the risk and provides meaningful geographic diversification in a global marketplace undergoing significant change. During 2017, over 30% of our revenue and approximately 50% of our global pairs were sold outside of the U.S. Our well-established international business benefits from a broad network of global partners, most of whom are vertical retailers with direct insight into consumer trends and preferences in their respective markets. In fact, our brands enjoy over 15,000 control points of distribution around the world today. To fuel the global expansion of our brands, we planned to allocate nearly 25% of our incremental investment spend to support international growth, specifically to strengthen our regional teams, especially in China and the Asia-Pacific region, collaborate with new partners on new global product introductions, and improve systems to better service our global business. We are fortunate to have the strong foundation and global network and expect our international business to be a source of high single digit revenue growth in 2018. Despite our strong global presence, we remain underpenetrated in the fast-growing Asia-Pacific region, especially in the China market. During 2017, less than 10% of our global revenue was generated from this important region. And we view this as a very meaningful opportunity for future growth and one of our top strategic priorities. Our specific plans for growth in China are in motion with more to share in the coming months. We have established a near-term goal to double the revenue contribution from the Asia-Pacific region by 2020. This is an incredibly exciting time for the Company after the two years of restructuring and hard work. We will transition our focus to growth. We now have the tools and capabilities to accelerate top-line performance and certainly have the financial capacity to invest for the future, drive organic growth and add new brands to the portfolio. With that, I’ll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who’ll provide additional commentary on our 2017 financial performance and further insight into our expectations for 2018. Mike?

Thanks, Blake, and good morning, everyone. 2017 was a successful year for the Company. And I’m proud to say that we were clearly seeing positive results from our team’s efforts over the last two years. In the fourth quarter of 2015, we set in motion several initiatives, focused on improving the operational performance of the Company in the face of a quickly changing global retail environment. In a very short time period, we have successfully addressed the most critical needs, including closing subpar stores, restructuring our supply chain to drive lower costs, resetting our portfolio to focus on brands with the most profitable growth potential and reorganizing our teams around the world. The fundamental profit improvements from this work will allow us to achieve our stated 12% adjusted operating margin target well ahead of schedule. At the same time, we’ve added talent, tools and capabilities that will change the way we do business and allow us to act with speed and urgency as we implement our new GLOBAL GROWTH AGENDA. I am excited to share more details on our 2018 outlook including our reinvestment strategy to drive growth. But first, I will review the Company’s 2017 results. Beginning with the fourth quarter, the Company delivered revenue of $578.6 million, resulting in underlying growth of 1.7%. Reported revenue declined 20.7% versus the prior year due to the change in the quarterly calendar, the impact from store closures, and the portfolio changes made earlier in the year. As Blake noted, Merrell delivered high teens growth in the quarter in part from the early launch of the Chameleon 7 product and a strong Arctic Grip performance, while the Sperry women’s boot business exceeded our expectations. The water boot category for Wolverine brand was softer than expected on lower at-once order activity. In addition, revenue from two divested businesses Sebago and Bates Department of Defense were lower than projected as they both transitioned earlier than expected in the quarter. Q4 adjusted diluted earnings per share of $0.41 resulted in 20% growth over the prior year. Adjusted gross margin on a constant currency basis improved 140 basis points, despite a 50 basis-point negative mix impact from store closures. Adjusted operating margin on a constant currency basis of 10.7% improved 260 basis points compared to the prior year. During the fourth quarter, the Company expensed all remaining discrete costs related to the transformation and restructuring activities needed to address underperforming areas of the business. In addition, special charges were incurred related to implementation of new U.S. tax laws, non-cash impairment of the Sperry trade name, and certain environmental remediation costs. Including these charges, Q4 reported diluted loss per share was $0.65. Moving to full-year results. Reported revenue of $2.35 billion was at the top of our outlook entering the year. Underlying revenue grew 0.6% and reported revenue declined 5.8% due to store closures and portfolio changes. Full-year adjusted diluted earnings per share of $1.64 exceeded our outlook entering the year. On a constant currency basis, adjusted diluted earnings per share were $1.71 compared to $1.36 in the prior year, growth of nearly 26%. Full-year reported diluted earnings per share were zero including the full-year costs related to our restructuring and transformation activities, implementation of new U.S. tax laws, non-cash impairment of Sperry trade name, and certain environmental remediation expenses. For the year, adjusted gross margin on a constant currency basis was 40%, a year-over-year increase of 120 basis points, despite 50 basis points negative mix impact from store closures. Currency negatively impacted gross margin by 40 basis points. Reported gross margin was 38.9%. Adjusted operating margin on a constant currency basis was 11.2%, an improvement of 270 basis points compared to the prior year and meaningfully better than our expectations entering the year. This very strong improvement in operating margin is a direct result of the transformation work executed over the last two years. Net interest expense for the year was approximately $32 million, and the adjusted effective tax rate was 27.7%. Transitioning to the balance sheet. As part of our operational excellence and transformation work, we established aggressive goals related to working capital management. As a result, we have seen meaningful improvement and very strong cash generation over the last two years. At the end of 2017, inventory was down 20.6% on top of a 25.3% reduction achieved in 2016. In addition, global SKUs on hand were down over 30% at year-end. During 2017 we generated over $200 million in cash from operations, despite nearly $90 million in cash costs related to restructuring and transformation activities. We ended the year with cash of $480 million, up over 30% and net debt of approximately $302 million, which was down 33% compared to last year. In 2017, we repurchased over 1.6 million shares at an average price of $25.79. The adjusted earnings results and positive cash flow for 2017 were better than planned, and I’m proud of our team’s ability to over deliver against the bold goals that were set at a time of great change for the Company. I would like to transition to our 2018 outlook including further insight on the reinvestment strategy related to our GLOBAL GROWTH AGENDA. We entered 2018 positioned to drive organic growth. The recent store closures and portfolio changes have resulted in a healthier foundation for the business and our brands have also worked to improve distribution in all markets. We have generated consistent momentum in our owned e-commerce business and our international business is accelerating. More importantly, we are now ready to invest in the growth tools and capabilities that were developed as part of the WOLVERINE WAY FORWARD. We expect 2018 reported revenue in the range of $2.24 billion and $2.32 billion. This represents underlying growth of nearly 6% at the high-end of the range. Reported revenue is expected to decline 1.3% at the high-end of the range including $159 million of revenue from store closures and portfolio changes in 2017 that will not occur in 2018. Gross margin is expected to expand by 40 to 80 basis points despite 20 basis points of negative mix impact from 2017store closures. This ongoing improvement in gross margin is a direct result of aggressive supply chain management, cost reductions and other pricing initiatives implemented as part of the transformation. We are planning $40 million to $45 million of incremental investments to accelerate growth. And as Blake mentioned, our reinvestment strategy is closely tied to the three elements of our GLOBAL GROWTH AGENDA. We expect to spend approximately 45% to drive our product, innovation and design engine, a category that benefits all aspects of our growth model. We also expect to spend approximately 30% on initiatives specifically tied to our Digital-Direct Offense and approximately 25% on resources for international expansion. The effectiveness these investments will be monitored frequently and adjusted to maximize the best possible outcome for our shareholders. Adjusted operating margin is expected to improve 110 basis points to 12% in 2018. Total selling, general and administrative expenses including our incremental investments are expected to be lower due mostly to the benefits from store closures and portfolio changes and slightly lower employee benefit costs. Reported operating margin is expected to be approximately 11.6% and includes $8 million to $12 million of costs to manage the Company’s legacy environmental matter. We expect 2018 net interest expense and other expenses of approximately $28 million to $30 million, and effective tax rate in the range of 18% to 21%, and approximately 95 million diluted weighted average shares outstanding. As a result, full-year fiscal 2018 adjusted diluted earnings per share are expected in a range $1.95 to $2.05, an increase of 25% at the high end of the range. Reported diluted earnings per share are expected in the range of $1.87 to $1.97. Foreign currency is expected to have a neutral impact on earnings. We are forecasting full-year depreciation and amortization of approximately $31 million to $33 million. Capital expenditures are expected in the range of $35 million to $40 million, primarily for investments in supply chain, digital and e-commerce initiatives, information technology, and other facility enhancements. As mentioned previously, we ended 2017 with cash and cash equivalents of $481 million, of which approximately $320 million was held outside of the U.S. Due to recent changes in the U.S. tax law, we now expect to repatriate approximately $250 million of cash by the end of the first quarter. In addition, we expect to generate $230 million to $250 million of cash from operations in 2018. The Company is in a strong liquidity position. And we expect to deploy our cash as follows over the coming months: Evaluate a $100 million early payment of debt; execute more buybacks under the 2016 share repurchase plan; implement a 33% increase in our annual dividend to shareholders; and actively pursue future acquisition targets. Before closing, I want to provide some information about the first quarter and our general outlook for the first half of the year. Regarding 2018 revenue flow by quarter, we expect that the timing of new product introductions, especially for Merrell and Sperry along with the ongoing change in retail order patterns will mean a shift in current consensus revenue estimates of $10 million to $15 million from Q1 into Q2. As a result, we expect underlying growth in the first half of 3% to 4%. With respect to earnings flow, we expect that the timing of incremental investments and recognition of incremental way forward benefits will shift approximately $0.10 to $0.15 of current consensus earnings per share out of the first half of 2018 and into the second half of the year. As a result, we expect Q1 revenue in the range of $525 million to $535 million, and adjusted earnings per share in the range of $0.35 to $0.38. Finally, I want to briefly acknowledge our team members around the world who have done incredible work and accomplished so much over the last several months. They have stepped up to the challenge and delivered. And as a result, our Company and our shareholders are reaping the benefits. Thank you for your time this morning. We will now turn the call back to the operator. Operator?

We will now begin the question-and-answer-session. [Operator Instructions] The first question comes from Jim Duffy of Stifel. Please go ahead.

Thank you. Good morning.

Good morning, Jim.

My question is around the assumptions for acceleration and underlying revenue growth. Can you guys speak to the visibility you have to that at this juncture? And it seems, expectations are for that to be more second half weighted than first half weighted. If you could explain that as well, that would be helpful. Thank you.

Yes. I mean, Jim, it’s as simple as looking at our product pipeline and our new ideas pipeline. When you focus on Merrell, just as one example, and you look back at 2017, Arctic Grip, the Moab 2, the Chameleon 7 that was kind of brought forward into Q4, when you look at Merrell’s product pipeline, new idea pipeline, today, it’s at least four times what it was in 2017. So, we have each of our brands gauge their timing, put our plan, internal plan together over each of the first half, second half of coming year. So, we’ve got pretty good view of where our growth is going to be coming from and when. I’m sure there will be some surprises over 12 brands and 200 countries and territories up and down a little bit as there always is. But, we have pretty good insight.

Okay. How far along Blake are you in some of these key agendas, like consumer insights, product innovation, and international acceleration? Is that a situation where all that’s well in place coming out of 2016- 2017, or are you still kind of building the plane while flying it here?

I would say, we’re pretty close to the goal line. We did a tremendous amount of work, as you know, in 2016, and that continues the way forward in 2017. We’ve implemented most of the new skill sets, tools, capabilities into our brands. I wouldn’t say that it’s all 100% completed for every brand as we sit here today. But, we are substantially further along than I ever anticipated we would at this point in time. So, we feel pretty good right now. We feel like -- we kind of feel like we’re ahead of the path. We know the retail consumer environment remains pretty dynamic, especially here in the U.S., but we’ve got a lot of a heavy lifting, a lot of the work is -- most of the work is behind us.

I would also add Jim to that that our ability to test a lot of this and validate a lot of this during the year, obviously with Merrell which showed really strong results for the year and accelerated growth in the back half of the year, also gives us that confidence in the effectiveness of this as we roll it out to the rest of the portfolio. And we obviously had some brands adopt a lot of this work during 2017. But, kind of putting ourselves in the position early, get the new playbook in everyone’s hands and be able to execute coming out of the gate into 2018 is probably, as Blake said, probably a little ahead of schedule.

Okay. Last one for me and I’ll let someone else jump in. You are calling for return to growth from the Sperry brand in the second half of the year. What are some of the factors that give you confidence that you can stabilize and have revenue from that brand, actually in fact positive for a change?

Well, first of all, we’ve got a great merchant leader who is leading that brand now and he’s been on board for about a year, a little less than a year. And again, it goes right back to product flow and ideas. The Sperry consumer has a great affinity for the brand. And we were frankly with some hindsight anchored in only boat or primarily boat for too long a period of time. So, when I look ahead, you probably have seen the new Gold Cup ads in the Wall Street Journal. I look at an expanded casual collection, Seaport Penny loafers which are selling through. The pick up on sneakers and vulcanized product category has been excellent. And we are still with our plan for Sperry, planning boat down for 2018. We understand though as the category leader with a 60% or 70% market share in boat, it’s up to Sperry to make boats cool again. I know, I am dading myself by using the word cool. But that’s Sperry’s job to do in that particular category. So, it really comes down to the team and the product flow and the early responses to some of these new product initiatives.

I don’t want to overlook the boot category either, Jim, because that was a real strong performer, better than we expected frankly in Q4 for Sperry. I think that consistent performance over the last several fall seasons has been a good momentum build in that category for the brand. And we’re already seeing some strong commitments on boots, as Blake mentioned in his prepared remarks on boots for Sperry for next fall. So, I think that’s another important category that continues to grow on top of these, not necessarily all new categories that Blake itemized, but categories are getting them a proper amount of attention and have a little bit more momentum today than they did a year ago.

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

Yes. Hi, thank you. I wanted to ask you guys your current assessment of the environment as you look at the U.S. wholesale channel. And I know with the update a few weeks ago, you highlighted expectations for low single digit wholesale growth in the U.S. for 2018. So, I just wanted to maybe get a little bit more detail behind your thinking there along with kind of the current environment.

Yes. When I look at the U.S. market right now, several things are striking. First of all, the growth in digital mobile continues. I would say, 10 years ago, none of us anticipated in 2017 that 28% of all footwear would be sold online in our market, but that’s -- it was at 28% last year and it’s headed north. I also think from a macro standpoint, the consumer has shifted especially the millennial consumers and younger consumers, much more of a focus on experience, creating memories, I think, that’s a trend that’s going to continue and probably accelerate. And then, I think some of the dynamics of the environment have retailers and consumers -- especially with the consumer they can get everything delivered in two days at the most primarily, buying closer to need. So, the cadence of buying from retailers is changing, has changed over the last several years, and that’s the same for consumers. So, in the U.S., the brick and mortar store environment, we think that’s going to continue to be pretty tough. I think, there has been several estimates of bankruptcies, and store closures are going to continue into this year. It could be as high or higher than 2008. So, I think the macro brick and mortar environment is going to be challenging. I do think inventories are clean right now. So, I think the retailers and certainly brands, when you look at our performance, our inventories over two-year period down 40% to 50%. But, I think retail inventory is also very clean. We do think internally that the new tax act is going to increase consumer spending, that’s over two thirds of our economy. And we think that middle America gets $1,600 to $2,000 extra that that’s going to be spent. And so, we kind of look ahead and see that as a bit of a positive development. And then, maybe lastly, I would say another trend that we see continuing is this homing trend or nesting trend. You see it in some of the homeware markets, but we think that’s a trend that’s going to continue for the U.S. consumer over the next year or two. That’s just kind of a macro overview of what we’re seeing.

Okay. And just as a follow-up on the inventory. Is there any color you can give on Merrell, either state of channel inventories or the sell-through in the market after such strong selling growth in the fourth quarter?

I would say, Jon, the channel inventories are in very good shape for Merrell. Last year, remember, in the first quarter, we were liquidating Moab, the old Moab style and replacing it with the new updated version. And so, that obviously is well-behind us now. But, I would say every indication for Merrell right now in terms of the channel is very clean, the sell-throughs, not just for Merrell but frankly for most of our portfolio continued to improve. And I would say that as we see that and we see the order patterns that Blake referred to being a little bit different than may be historically, it will be kind of an important sort of trend to monitory for us. We are going to put a little more emphasis in our business in tracking and understanding the sell-through trends in each of the channels and spend more time with our retail customers on helping them manage that. That’s one of the many work streams or initiatives that we have as part of the transformational work and feel like as that brick and mortar channel becomes more challenging, we need to spend more time helping our retail partners manage. But, the indicators in terms of inventory and sell-throughs have been pretty good.

Yes. I would say, Jon, just with respect to Merrell, we are anticipating high single-digit growth next year for Merrell, maybe even approaching double-digit growth. We think Q1 is going to be a little more flattish for some of the reasons that Mike indicated, the introduction of the Moab 2 last year, Chameleon 7 being pulled into Q4 of this year, and frankly on the good side, just lower closeouts and less promotions at retail. So, we are very excited about the product pipeline for Merrell for sure.

The next question comes from Ed Yruma of Keybanc Capital Markets. Please go ahead.

Good morning. Thanks for taking our questions. This is Matt on for Ed. So, could you give us your thoughts on the Saucony brand? It seems like a decelerated a bit in the fourth quarter. What specifically drove weakness? And I think we’ve seen some promotional activity on originals on the site. Are you guys taking a step back from originals or do you think they will continue to be a growth driver?

We are not -- we continue to see originals as a growth driver. Q4 was a little more challenging for Saucony for a couple of reason. I think, the run specialty channel here in the U.S. had a tougher quarter in Q4 than some prior quarters and of course that affects the Saucony business. And I think Saucony also had some late product deliveries and a couple of quality issues that were frankly not anticipated and a bit unusual, given the factories that we do business with. But Saucony certainly had some late product and a couple of quality issues that had an impact on Q4, which was a little worse than the performance for the rest of the year. But, Saucony as a brand obviously performance run, originals which continued to grow especially in some key international markets and what we call Life on the Run, you may call athleisure category. Saucony is going to be introducing a pretty unique premium approach in that particular area. So, as we look ahead, clearly, Saucony right now is playing in the ten-ring of the consumer. So, athleisure, athletic, running silhouettes have been really the one category that has grown double-digit, significantly over the last couple of years.

And Saucony’s international business is very strong in terms of not only penetration, overall mix, but just growth in the category, so, another strong sort of indicator for the Saucony business.

Okay, thanks. And can you expand a bit about your where your digital engagement strategy sits today and how that will change your Digital-Direct Offense plan? And that’s it for me. Thanks.

Yes. Well, it’s changing today and obviously it’s going to continue to change. But frankly, we’re focused on a few big things. First of all, mobile, when you look at just our own collective sites today, about 50% of all traffic comes through mobile. So, as a company, as a brand, you’ve got to be focused on mobile. That’s where the consumer wants to be; that’s where the consumer is. You must have a great experience on mobile. And that’s just part of the overall consumer convenience trend. And then, I guess, maybe secondly, we’re focused on newness and freshness. So, you’ve got to have fresh content, digital content on a much more continuous basis compared to traditional marketing or traditional consumer interaction. So, the frequency of updates, a content flow, the flow of product, the amount of exclusive product you’re offering to your wholesale customers for their online business or our own e-commerce site, has got to increase substantially. And then, I would say, third, one of our key focus areas right now is on retention. So, how do we increase the purchase frequency? Where do we have to invest? We just -- in 2017, one of our projects was a collective unified database where we can cross sell the consumers across all of our 12 brands when appropriate. So, the actual use of that tool and capability is going to be rolled out this year. And then, of course, lastly, we’re spending behind social prospecting and digital demand creation. In a summary, that’s where we are in kind of our Digital-Direct Offense.

The next question comes from Steve Marotta of CLK & Associates. Please go ahead.

Good morning, everybody. Can you please talk about the mix? Just one quick question on Sperry and then a follow-up. The mix of boat shoes, as a percent of the total category in 2017 and what you expect for 2018?

I think, for Sperry, it was still over 40% for 2017. As we look short or maybe more mid-term, we’d like that to be a third, a third, a third; a third in casual area, which includes boot as well a third in sneakers, and a third in boat. So, the team is focused on expanding the product categories for Sperry, and there has been absolutely no pushback from the Sperry consumer.

That’s very helpful. And also, could you peel the onion back a little bit on China? Is the Asia South Pacific region 10% of your total consolidated sales, or is it specifically China? And then, can you talk a little bit about your strategies there, specifically with either new partners or new products flow? I mean, how do you expect to get from point A to point B there?

I think, when you look at China, we have probably made some partner selection mistakes in the past. When we look back over the last five or eight years, we’ve got some great partners for some of our brands in China, but we’ve had a couple of stumbles along the way. Right now, with some of our key brands, really nothing we can talk too much about today, but we are focused on new partners. And fundamentally, probably moving down the food chain, from more of a pure distributor relationship with people, and we’ve got excellent distributors around the world, but moving down the food chain to more of a joint venture or a little more direct control when it comes to product and marketing.

And Steve, to answer your question, the 10% we referenced earlier was for the entire region, not just for China.

The next question comes from Andrew Burns of D.A. Davidson. Please go ahead.

Thanks and good morning. When you look at the momentum in the Merrell brand, I know you’ve really built up the product engine and the marketing there for the last year or more. Was that one of the earliest brands to adopt the GLOBAL GROWTH AGENDA initiative? Just curious if that success you are seeing is sort of a template company-wide with some of those products and digital investments?

Right. Merrell was the very first brand that adopted the model. And frankly, Merrell was a bit of our test case that for validation across a number of initiatives last year but certainly on our growth model, Merrell was the first and early adopter, and frankly to reflect it in the results for the year.

Just a follow-up. It sounds like most of the brands now have some or all of those tools outlined in the agenda. And you are investing another $40 million to $45 million in ‘18. How should we think about the financial benefits? Should we consider ‘18 to be sort of an investments year where they are partially evident and fully reflected in ‘19 or is sort of more of it realized in ‘18? Thanks.

Yes. I think, I would view -- we view 2018 really both ways. We know it’s an investment year, $40 million to $45 million to capitalize on a lot of the hard work the team did over the past couple of years. We also view it as a big step in the growth direction for the Company to deliver mid single-digit growth. And then, obviously, for 2019 and thereafter, we would anticipate having -- being able to drive organic growth above mid single digits. So, that’s our internal...

Sure. I mean, we absolutely expect to accelerate right into ‘19 in terms of the impact of these investments we’ll have typically. But, we expect to have certainly some meaningful benefit in the back half of ‘18 too.

The next question comes from Chris Svezia of Wedbush. Please go ahead.

Good morning, everyone. And thank you for taking my questions. I guess, first, I just want to go to Merrell. Last year, you talked about a lot of product initiatives that came to market, Moab, Chameleon, Arctic Grip et cetera, Nature’s Gym. Can you maybe elaborate a little bit just based on your confidence for Merrell in ‘18, what in terms of product initiatives, gives you that confidence to get to high single digit growth specifically? You’re just building on these existing platforms, or is there something new that you can call out to sort of give you that confidence about where Merrell is going in 2018?

Yes. I think, let me talk about it in a couple of ways. For Merrell, I think, the product focus is maybe in two or three big areas, fast and light hiking. Merrell wants to own grip with an emphasis on fast and light. And you know how the millennials now hiking suddenly become desirable, cool, again, if I could use that term. But Merrell wants to own the fast and light area and own grip. I think, Merrell is also looking at expanding two of its really newest categories, Nature’s Gym and Work. And so that’s going to be a focus. Those were -- they delivered some growth, they were kind of in start-up mode in 2017, and we look for accelerated growth in those areas. And then, in the lifestyle area, which is probably defined by two of the five product -- consumer territories right now that would probably be urban trail and outdoor life, we’ve got to get younger. So, we’re going to be bringing -- Merrell is going to be bringing Arctic Grip to the lifestyle side of the equation, not just the performance footwear, but also it’s going to be focusing on younger, a more color, faster style. Merrell is going to be introducing something they call Youngle Moc. The Jungle Moc is going to be, believe it or not, 20 years old this year in 2018, but they are also focused on a pretty significant update and modernization of that particular style. So, when you look at Arctic Grip, one of their hiking boots, hopping [ph] and hiking boots, Thermo Rogue just won a Gear of the Year of the Outdoor Retailer Show, won the gold Award at the ISPO show in Europe. So, when you look at all of the initiatives they have underway, I mean, we would guess it would be kind of 4X the initiatives that they instituted in 2017. We think Merrell is going to one of our fastest growing brands for this year.

Okay. Thank you for the color, Blake. With regard to the digital piece of business. How big is digital right now? And just from a margin perspective, where does that stand relative to the 12% corporate level EBIT margin?

Yes. When you look at the growth we expect in that channel this year in 2018, and the other changes to the business over the last year or so, our own e-com business will be about 8.5% of our total business in 2018. And even though we’re overindexing our investments there in some of the areas that Blake talked about, we would still expect operating margins in that channel in that segment of our business to be at the high end of the range of even our wholesale businesses. And so, when we look at where we have not only we have the most growth potential but where we have the ability to drive some mix improvement in our profit margin, e-com is that. And obviously, we have as a result, more capacity to invest in that and to make sure that we maximize the potential of it over the next 12 to 24 months.

I would say, Chris, we’re also seeing accelerated growth at e-com businesses at our great wholesale customers and really across the board there.

All right. Thank you. and final question I had is, Merrell, you talked about high single digit growth on a year. Is it safe to assume, Sperry is flat, down in the first half, up in the back half? And in Saucony, where does that fall in that growth that you think about for the year in total, is that a mid single digit growth brand, or how do you think about that?

All right. Let me see if I can remember all those. I think, as we talked about Q1, for a variety of reasons, maybe a bit flattish for Merrell, but we expect high single digit growth for the year. For Sperry, we would expect our first half performance to improve, maybe approach flat, but to improve certainly from being down mid or low high single digits in 2017. That’s how the pace of new product introductions flow. And for Saucony, we would expect mid single digit growth for the entire year, probably back half weighted but mid single digit growth.

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

Thank you. Hi, good morning. First, I just had a follow-up question on the Merrell growth of 18% in the quarter. You obviously mentioned some of the new products like the Chameleon 7 and the expansion of the Arctic Grip. But, how much of that growth was driven by reorders on better weather just relative to your initial plan for the quarter? And what does your high single digit guidance assume more broadly for the next winter season following what was pretty favorable for this past winter?

Yes. To be honest with you, October was pretty warm, November was good and miserable, and December turned a little bit warm again. So, we did -- I think, because of apparel outerwear, everybody anticipated a generally a blockbuster Q4 for the footwear industry and cold weather product. And I would say, overall, across companies and brands, it was average. So, maybe Merrell benefited a little bit in Q4 from the weather and some of our other brands as well. But, there were also some anomalies. No one really after three great quarters of growth expected the U.S. work boot business to be down in Q4, given the weather, but that is in fact what happened. So, a lot of Merrell’s business is driven by at-once orders, and retailers are buying closer to need. But, some of the growth in Q4 certainly was driven by the Chameleon, the early launch of Chameleon 7, which performed very well at retail.

Okay. That’s helpful. And then, I was wondering if you could contextualize your efforts a little to speed up the supply chain in terms of reducing lead times. You mentioned going to lead times as short as 60 days. But, how does that compare to your previous average lead times and how quickly can you implement those changes across the rest of the portfolio?

Well, we probably can’t implement them quickly enough. But, the 60-day project which we have successfully introduced in several of our brands, isn’t across every brand in the entire product line right now, but it’s probably a third of what the industry would consider the normal timeline. And the normal timeline traditionally from very early concept to delivery at retail could be as high as 350 to 400 days. In today’s world, that’s just not acceptable. So, you’ve got to be able to get in the year best selling product, much, much quicker, and then something we call Project Dash, was an initiative to reduce the concept to at market time to 60 days, which we have tested in 2017 and plan to rollout on a much broader basis this year.

Great. And if I could just sneak in one last follow-up. Based on what you guys are seeing in the market today, I know you guys have been actively talking about M&A for quite some time. But, where do you see is the potential for getting an acquisition done in 2018? And if you could just talk about what kinds of opportunities you’re seeing out there in the marketplace right now, and if you are making any changes and how you’re thinking about targets? Thanks a lot.

Yes. I would say, as you know, we have proven skill set. A lot of our growth has been driven by acquisitions over the last 20-25 years. We certainly have, as Mike indicated, plenty of capacity and liquidity right now. So, we’ve been very active in the market, looking over lots of different properties. We’re looking for companies that could fill a whitespace for us or are in the sweet spot on current consumer trends, high growth categories, companies that might have some new talent and skill sets we want. But fundamentally, we like heritage brands, we like brands that have global potential, because we know we have our brands in 200 countries and territories around the world. And we like picking up, looking at brands that may be strong in a particular market or a region but we can leverage around the world. And then, lastly, I would say given our size today, we’re interested in bigger brands. We’re interested in brands that we can grow that will really make a difference to our top-line. But, we’ve been very active and we’ll continue to be very active at looking at certain properties.

Thanks so much.

Yes. I can’t predict timing, obviously. Sometimes they come when they come, those opportunities, but you have to be active and we’re certainly active.

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

Hey, guys. Thanks for taking my questions. Just surprised, I guess a little bit that Asia less than $250 million last year. It doesn’t seem crazy to double that, but wondering on two fronts. Number one, how do you see that progressing? How much do you expect to add in 2018 for example, or is it more weighted to ‘19 and ‘20? And then, it can be very expensive to grow in Asia. So, just wondering, sort of if you feel like the level of investments that you outlined earlier, are going to be sufficient. Thanks.

Yes. I would say that -- remember, the $250 million, a lot of that is just royalty income, distributor fee income. So, we do not take -- on a lot of that we do not take a wholesale or top-line approach for many of the markets in Asia Pacific. The new initiatives that we are planning on kicking off this year, obviously probably won’t have that big of an impact in 2018, but it will start to be meaningful in 2019 and certainly 2020. That’s how we view it. We have plenty of dry powder to invest and we’ve kind of taken that into account in our plans for this year. If you want to look at Asia Pacific in terms of pairs for the Company, and if you take a full year, it’s a bigger market for us, probably 15% to 18%, depending on the year of total pairs would be in the region. But certainly, from a top-line standpoint, a lot of that is distributor fee income.

Okay. That’s great. And just in terms of the split by brand, is that a bigger Saucony region, Merrell, how does that break down?

I think Cat, Merrell, Saucony, Keds and of course Hush Puppies. And in terms of -- we don’t talk a lot about Hush Puppies. In terms of pairs, it remains one of our largest global brands. As you know, it’s a bit of an annuity for us in that respect. But, I think Hush Puppies today ended the year with over 850 standalone mono branded stores around the world.

The next question comes from Laurent Vasilescu of Macquarie. Please go ahead.

Good morning and thanks for taking my question. Regarding the incremental investments of $40 million to $45 million, I think you provided some percentage breakdowns between the three initiatives in your prepared remarks. Just to make sure I understand the breakdown, can you parse out how much will flow through COGS and SG&A, and how should we think of the flow through of these investments by quarter in fiscal ‘18?

Yes. The vast majority of the COGS are going to go through SG&A and we will see, as we mentioned, ongoing expansion in gross margin in 2018. We will also see an improvement in kind of our SG&A as a percent of revenue, despite these investments because of a lot of the hard work and improvements that we made in the business over the last couple of years. The shift or the impact of some of the way forward benefits are going to accelerate and will be more prominent in the back half of the year whereas these investments, obviously, we want to accelerate as much of this as we can to get some revenue benefit in the back half from the investments we are going to make. But obviously, to make sure we hit 2019 with everything fully in place. So, there will be a stronger portion of the investment in the first half of the year, maybe 60% or so compared to the back half of the year.

And then, for you full year gross margin guide of up 40 to 80 bps, can you parse out further what will drive that and then any color on how should we think about the first quarter gross margin shaping up?

Yes. I think, similar improvement in terms of the first quarter, I’ll pull it up here while I am answering the other part of the question. But I think, overall, the organic improvement in gross margin is supply chain, product cost related, some improvements in sort of our pricing strategy. I would say, that’s a smaller impact on the overall margin expansion. It’s quite important to call out that our sales of close out or liquidation merchandize in 2018 will be about $15 million to $20 million lower than it was in 2017. That’s in our growth guidance already. But obviously that lower mix of closeouts and ability to maybe recover more of the cost is going to improve our margins as well. So, not much impact from currency in 2018 as we planned it today. So, overall, just really fundamental improvements there across the board, and a cleaner inventory, and a cleaner business overall. As far as the first quarter is concerned, I’d expect similar rate of improvement in that sort of 50 to 80 basis9point year-over-year improvement range.

Very helpful. And then, finally, can you remind us the breakdown of stores by brand at the end of the fourth quarter? How much did the brick and mortar locations generate in FY17 revenue, and what’s your anticipation for FY18?

Yes. We have about 80 go forward stores. At year-end, we probably had 36, around 35, 35 Sperry concepts, the same number of Merrell concepts, one Saucony standalone store, and we still have 8 kind of multi-brand stores that are more in the outlet arena. Comps were pretty good for our stores; the performance of those go-forward stores in Q4 certainly better than the FDRA index that we always compare ourselves to. And we’ll be closing a few stores this year and we’ll probably be opening a few stores this year. So, we’re not anticipating a radically different year-end 2018 store count.

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

Good morning everyone. As you think about CapEx spending and how capital is being allocated, what do you see as the return profile for this year on CapEx spend and how it will be allocated? And also as you think about the marketing budget, what’s different this year from last year? And how do you see SG&A being impacted? Thank you, bye.

Sure. Our CapEx is coming down year-over-year in 2018. Last year, we made a pretty significant investment in the new distribution center on the West Coast which has been up and running now for good several months and really operating at a high level. That’s going to help us continue to address the speed to market initiatives that we have in the business and get closer to the consumers and retailers out there. But, we won’t have that cost this year. So, we will be bringing our overall CapEx down nearly $10 million on a year-over-year basis. We continue to be very-focused there. In addition to the $40 million to $45 million of operating cost investments that we’re putting in to play this year, I would say 15% to 20% of the capital plan is also focused on our growth initiatives whether that be technology, IT infrastructure and other tool sets that are part of the supply chain improvements. So, when we think about those returns, it’s really to continue to operate a more flexible, nimble company. We’re relentless on our focus here around speed. And I think, the things that we’re investing in are supporting that overall. I think, as far as the discretionary component of the overall investment and thinking how much of that is related to not necessarily just marketing but sort of demand creation spend, it’s a good percentage of that incremental amount, especially on the digital side of the business. So, we would see that continuing to increase to drive brand awareness but also more importantly to disengage with our consumers on a digital platform more effectively. So, that part of the overall SG&A spend will increase along with the overall investment.

The last question comes from Mitch Kummetz of Pivotal Research. Please go ahead.

I guess I got a few. One, Mike, just in terms of the Q1 sales outlook, you are essentially guiding to kind of flat revenue on an underlying basis. I am trying to understand the thesis there, because Blake I think you talked about Wolverine returning to growth in the first quarter, I would imagine that you expect Merrell and Chaco to be up in Q1. I think, you guys made a comment that Sperry could be approaching flat, maybe that was more of a first half comment. But I am just trying to understanding why you aren’t expecting a little bit stronger revenue in the first quarter?

Yes. Just what I said for Merrell is we are really anticipating high single digits, maybe even double digit growth for the full-year. We expect Q1 to be flattish for Merrell for a number of reasons. We were -- in ‘17, we were selling out the Moab, Moab 1s. We were pipeline filling the Moab 2s. We had originally scheduled Chameleon 1 in Q1 of this year -- Chameleon 7, brought that forward into Q4. And then, Merrell’s inventory is just much cleaner. We are going to have substantially lower closeouts and less promotions going on. So for all those reasons, Merrell is going to have a great year. So, Q1 is probably going to be flattish. And I think the other piece is, Mitch, it’s, Sperry approaching flat but not flat in the first quarter. I think the other brand is kind of puts and takes there. But, I think obviously Merrell and Sperry have a big impact on the first quarter for us.

And then, Blake, is there any way you could provide some historical context around Sperry boat? It feels like that side of the business has been kind of in decline the last three to four years. It sounds like your comment -- I think, you said just over 40%, I am guessing it’s sort of in a $200 million range or a little less than that. Is there any way you could say kind of what it was at the peak and even kind of what it was several years ago in a more normalized range right before the whole sort of popularity boom and boat picked up whenever that was, I don’t six, seven, eight years ago?

Right. Just to put it in general terms I would say when the boat shoes silhouette was white-hot, men and women -- the Sperry boat business might have been $80 million to a $100 million higher than it is today, $100 million higher than it is today. And obviously that brands needs a more balanced approach to asset the needs of its consumer. And there’s been no push back into category expansion from the Sperry consumer as evidenced by the Saltwater Boot success. So that just kind of puts it in a historical context.

And then lastly, Mike, on the full year sales growth rate, you are saying 2% to 6%, that’s a pretty big -- pretty wide range. Just trying to understand kind of underlying assumptions that are embedded on either end of the ranges; is there anything you can speak to there?

Underlying assumptions meaning -- I mean, it’s pretty typical range for us, Mitch.

Okay.

I mean, I think, as we go into the year, especially with the experience over the last couple of years and things that are just -- there is no way to anticipate all the puts and takes in the business. We tend to provide guidance in that range. I would say, based on the comments we’ve made already and the fact that we really see growth materializing, expect to have growth materialized for all of our brands in the portfolio this year, I don’t know when we’ve seen that. And so, with very strong growth for Merrell, I think a good stabilization for Sperry, and the growth for rest of our brands, we think the year is stacking up pretty nicely.

Thank you. The question-and-answer-session has now ended. I would now like to turn the call back over to Mr. Christ Hufnagel. Mr. Hufnagel, you may proceed.

On behalf of Wolverine Worldwide, 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 March 21, 2018. Thank you and good day.

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