Wolverine World Wide, Inc. (WWW) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Wolverine World Wide First Quarter Fiscal 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now just turn the conference over to your host, Mike Harris, Vice President of Corporate Finance. Thank you. You may begin.

Good morning and welcome to our first quarter 2019 conference call. On the call today are Blake Krueger, our Chairman, Chief Executive Officer and President and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the first quarter 2019. The release is available on many news 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 Francesca Filandro at 646-677-1814. This morning's press release, included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the release. Comments during today's earnings call will include some additional non-GAAP disclosures. There is a document posted on our corporate website titled WWW Q1 2019 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. As mentioned in this morning's press release, during the first quarter, the brands that were formally part of the Wolverine Outdoor & Lifestyle Group and Wolverine Heritage Group were realigned into the newly formed Wolverine Michigan Group. All prior period figures and current year growth rates have been restated within the reconciliation table included in the press release to reflect the new group structure. During our call, we are providing adjusted financial results, which adjust for the impacts of environmental and related costs, business development-related expenses and federal income tax reform. I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine World Wide and its operations are forward-looking statements under U.S. securities laws. As a result, we must caution you that as with any prediction or projection, there are a number of factors that could cause actual 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'd like to turn the call over to Blake Krueger.

Thanks Mike. Good morning, everyone and thanks for joining us. Earlier this morning, we reported first quarter revenue of $523 million with better than expected results for Merrell, Saucony, Cat and Wolverine, among other brands. Our diversified brand portfolio helped to deliver a solid revenue quarter, despite some global headwinds in a tepid quarter for the U.S. footwear market, where pairs declined 4% after seven consecutive quarters of growth. Revenue growth for our owned e-commerce business, which now represents nearly 10% of global revenue, was robust, up 28% over the prior year. This strength help to offset some unforeseen headwinds at Sperry related to the weak quarter in U.S. footwear and a soft boat shoe market. We reported adjusted diluted earnings per share of $0.49, which was above the high-end of our guidance for the quarter. During the quarter, we took steps to further develop our organization and brands to implement speed and innovation initiatives as well as the new skill sets and tools developed through our transformation work. The brands that were formally aligned with the Wolverine Outdoor & Lifestyle Group and Wolverine Heritage Group, all of which are headquartered in Michigan, were realigned into the newly-formed Wolverine Michigan Group. This new group is being led by Todd Spaletto, who previously led the Outdoor & Lifestyle Group. Todd has been an integral part of the development and implementation of the brand growth model, which is transforming our approach to growth. The Wolverine Boston Group will maintain the same brand alignment; Sperry, Saucony, Keds and our kids group, and will continue to be led by Richie Woolworth. Let me quickly review the quarterly results for our brand groups and key brands. I'll then provide an update on our global growth agenda, including key 2019 investments and the continued implementation of our brand growth model. Starting with the Wolverine Michigan Group. Revenue grew 2.3% compared to the prior year and nearly 3.7% on a constant currency basis, with several brands delivering attractive growth. Merrell's results were better than expected as the brand grew in the low-single digits after adjusting for the negative impact from foreign currency. Cat had an exceptionally strong quarter, growing over 30%, and we also saw gains in the Wolverine, Harley-Davidson and HYTEST businesses. The growth in these brands was partially offset by declines in Hush Puppies, Chaco and Bates. Merrell's better-than-expected quarterly results were driven by strength across all performance categories and excellent consumer reaction to new collections, highlighted by the Trail Glove 5, Choprock, Gridway and Range. The success of new launches is often first reflected in our B2C business, where we reached the consumer with the full power of our product and story. And we're pleased that Merrell's e-commerce grew over 30% in the quarter and stores grew at a mid-single digit same-store pace. Digital and social media momentum for Merrell was also strong, with media views, impressions and search interest all up significantly. This translated into improved sell-through at U.S. retailers during the first quarter. This broad-based strength was partially offset by the bankruptcy of an international partner and self-imposed brand protection decisions made to restrict some U.S. wholesale business. Merrell's direct-to-consumer momentum, new product pipeline and favorable backlog support our planned return to mid-single digit revenue growth in the second quarter and high-single digit growth in the second half of the year. For the full year 2019, we still expect Merrell to deliver broad-based high-single digit growth. Cat had an exceptional quarter and experienced strong growth across most regions, channels and categories. Much of this success is directly related to the accelerated and rigorous implementation of our brand growth model over the last six months. The U.S. and EMA regions were very healthy for Cat. And the brand's owned e-commerce business grew over 40%. The work category grew at a double-digit rate, with the brand expanding U.S. market share in this category during the quarter. For 2019, we continue to expect high-single digit growth for Cat, driven by strength across all channels, regions and product categories. During the quarter, the Wolverine brand increased its Number 1 U.S. market share position in the work category, with strong demand for core offerings and new product introductions. The brand also experienced significant growth in e-commerce of over 40%. For 2019, we expect the Wolverine brand to achieve mid-single digit growth, driven by elevated marketing stories and strength in its core U.S. work category and its e-commerce business. The new Michigan Group now includes five brands that continue to experience meaningful success and momentum in the work category. Our overall revenue in this category increased at a mid-teens rate in the quarter, significantly outpacing the overall U.S. work footwear market. The work category is approaching 20% of our global revenue and continues to be a significant growth opportunity for the Company. Moving to the Wolverine Boston Group. Revenue for the Boston Group decreased 6.5% for the quarter versus the prior year, down 5.7% in constant currency. Sperry declined over 10%, partially offset by over 20% growth from Keds and low-single digit growth for our kids business. Saucony exceeded plan, but declined at a mid-teens rate during the quarter, as our turnaround initiatives began to take hold. Sperry's decline was primarily driven by weakness in the U.S. boat shoe category, despite the brand gaining significant market share in this category in Q1. Other areas of the Sperry business performed well, including casual footwear and the lifestyle boot category, which grew at a double-digit rate with strong sell-through at retail. In Q1, the industry experienced weak performance across traditional seasonal footwear categories, including sandals and boat shoes. We're pleased that April has brought a clear improvement in seasonal products and sell-throughs for Sperry at a variety of U.S. retailers. On a full year basis, we still expect Sperry to achieve mid-single digit growth, driven by a very strong second half for boots and continued strength of the Sperry brand with consumers. Saucony was down mid-teens in the quarter, but this performance was better than expected. Q1 softness was related to the core technical running category, primarily in the U.S. with some weakness in the region. A major bright spot for the quarter was e-commerce, which delivered growth of over 80% and benefited from the implementation of elements of the brand growth model and our digital-direct offense. We expect revenue trends to significantly improve in the second quarter as new initiatives hit the market and we still see Saucony returning to growth during the second half of the year, supported by further implementation of the growth model, a strong pipeline of new product introductions, continued strong e-commerce performance and the integration of its former Italian distributor. Keds was up over 20% in Q1, reflecting market share expansion in the U.S., healthy growth in several international regions and e-commerce growth of almost 40%. The core Champion product category and product collaborations helped drive this strong performance. For 2019, we expect Keds to achieve at least high-single digit growth, driven by its e-commerce business and strength in the U.S. and Asia Pacific regions. Now let me provide an enterprise perspective and update on our global growth agenda, where we continue to make important investments across all three elements; one, a faster and more innovative product creation engine; two, our digital-direct offense; and three, our focused expansion of our international business. These investments in the aggregate total approximately $9 million in the quarter, with continued expectations to spend approximately $40 million for the full year. In addition, we will invest $40 million of capital to open stores and accelerate growth in our global markets, especially in our recently announced China joint venture and our acquisition of Saucony's Italian distributor just last week. Our new China joint venture with Xtep International, a leading Chinese sportswear and running footwear company, will accelerate the growth for Merrell and Saucony in the critical markets of Mainland China, Hong Kong and Macau. This is a great marriage, combining the power and product expertise of these global brands with Xtep's significant regional expertise, fast supply chain and retail presence over 6,200 stores. The focus in China will be on the booming running and outdoor sectors. In addition, we are expanding direct control of our European operations by acquiring Saucony's Italian distributor to further strengthen the Company's own market presence and maximize growth opportunities for the brand. We intend to use the Italian operation as a global design hub for the brand's lifestyle product. Let me conclude by giving a brief update on the adoption of our brands' growth model across the portfolio. This model provides a framework to focus and drive the creative design and strategic product process for our brands. A key focus during 2019 is to ensure that all of our brands begin to execute against the strategic playbook, which has already proven to unlock growth opportunities for several of our brands. Merrell and Cat's significant progress and enhanced momentum over the last nine months are good examples of the impact that we expected when we rolled the model out and accelerate the pace of execution. Aligning our brand group structure and leadership under the Michigan and Boston brand groups will help expedite the implementation of the model across our brand portfolio. With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our first quarter financial performance, along with an updated outlook for Q2 and the full year. Mike?

Thanks, Blake and thank you all for joining us today. I am pleased with several areas of progress made so far this year related to our global growth agenda and total shareholder return objectives. The Company is deploying capital very effectively as evidenced by the recent announcement of our new China joint venture for Merrell and Saucony, the acquisition of our Saucony distributor in Italy and over $100 million of share buybacks executed in the first quarter. Each of these strategic actions supports our ongoing goal of consistent growth and enhanced value creation for our shareholders. As Blake mentioned, first quarter revenue of $523.4 million was a bit short of our original expectations due to the late start of spring and the slow start for seasonal footwear, including boat shoes. All other areas of the business were either near or better than planned. And I would like to highlight some early improvements in our global business that bode well for our performance over the balance of the year. Merrell and Saucony exceeded their revenue plan in Q1 and are poised to deliver further improvement starting in the second quarter. Our owned e-commerce business was a very strong growth driver in Q1, up over 28%, but the profit contribution from this channel was even stronger and improved over 70% in the quarter. We expect this earnings leverage to continue. While certain Latin America markets remain challenged and the distributor bankruptcy created some headwinds, our international business exceeded plan for the quarter, thanks to the strong brand and geographic diversification of our portfolio. Finally, in April, we saw an acceleration in seasonal footwear, with improvement in Sperry boat and Chaco sandal categories. Gross margin for the quarter was 42.1%, which was down 60 basis points from the prior year. This was mostly due to product and business model mix and lower high-margin revenue due to certain bankruptcies. Adjusted selling, general and administrative expenses of $163 million included $9 million of investment related to growth initiatives, but were down slightly compared to the prior year as a result of efficient expense management. Adjusted operating margin during the quarter was approximately 11% as compared to 12% in the prior year. The first quarter reported effective tax rate was 13.2% and the adjusted effective tax rate was 11.7%, due to the positive net impact from certain discrete items. First quarter adjusted earnings per share of $0.49 exceeded our expectations and reported earnings per share of $0.43 included the impact of environmental-related costs, business development expenses and certain other costs. We were active with share repurchases, buying back $103.1 million of our stock in Q1, at an average price of $35.65. We have approximately $325 million still available under the recently-approved $400 million share repurchase program. Transitioning to the balance sheet. After several quarters of significant inventory reductions, we have begun to make strategic investments in core inventory to position our wholesale and DTC businesses for accelerated growth. During much of 2018, we operated with a very lean inventory position that resulted in higher stock-out cancellations, some late customer deliveries and expensive air freight costs required to chase demand. By taking a stronger inventory position on core items this year, we are already seeing meaningful improvement in customer order fill rates and we are in a better position to work with key suppliers to smooth production and minimize factory delays. Our inventory was up 28.7% at the end of Q1, about 7% above our plan, with the overall increase attributable to the needed investments noted above. We saw an unplanned inventory spike from Sperry, including the impact of lower Q1 revenue. Overall, we expect inventory levels to be up in Q2 and Q3, as we adjust our quarterly positions, but we still project our year-end inventory to be up only low-single digits. The stronger core inventory position during the year would essentially mitigate any potential tariff exposure for 2019. We ended the first quarter with gross debt of $771.3 million and cash of $80.6 million. Total gross debt increased approximately $200 million from the end of 2018, reflecting the use to funds for share repurchases and seasonal working capital needs. The Company has significant flexibility to invest in organic growth, return capital to shareholders and execute strategic acquisitions. We had total liquidity of approximately $1.25 billion at quarter-end and we expect to add meaningful additional capacity into the future. Now let me cover our updated outlook for the remainder of 2019. We still expect 2019 full year revenue to be in the range of $2.28 billion to $2.33 billion, representing growth of 3% at the midpoint of the range. The acquisition of our Saucony distributor and the addition of new Sperry and Merrell outlet stores are expected to deliver approximately $25 million to $30 million of incremental revenue in the second half of the year. These assumptions were included in our previous full-year revenue guidance. Our owned e-commerce business remains our fastest growing channel and is a significant source of full-year growth. Our international business will return to growth in Q2 and accelerate in the back half of the year as we experience easier year-over-year comparisons and softer currency headwinds. We are projecting modest and achievable low-single digit growth for our U.S. wholesale business for the remainder of the year, including a very strong second half increase for the Sperry lifestyle boot business. Full-year gross margin is expected to expand by 45 basis points at the midpoint of our guidance range of 41.3% to 41.8%, unchanged from our original outlook. We expect significant gross margin expansion in the back half of the year due to a stronger direct-to-consumer mix, including e-commerce growth and new stores, favorable product costs and the acquisition of our Saucony Italy distributor, which operates with high gross margin. Adjusted operating margin is still expected to be in the range of 12.2% to 12.6%, including investing up to $40 million in growth initiatives to support the Company's global growth agenda. Reported operating margin is expected to be approximately 11.3% to 11.6%. We now expect 2019 net interest and other expenses in the range of approximately $24 million to $25 million, driven by higher average debt balances to fund planned growth initiatives, higher share repurchases, capital investments in international operations and ongoing working capital needs. The effective tax rate is now expected to be in the range of 18.5% to 19% and the diluted weighted average shares outstanding are projected to be approximately 91 million shares. Full year 2019 adjusted diluted earnings per share are still expected to be in the range of $2.20 to $2.35. Reported diluted earnings per share are now expected in the range of $2.00 to $2.15. Now let me provide some information on our outlook for the second quarter. We expect low-single digit revenue growth, which includes an unfavorable foreign currency impact of approximately $5 million or 1%. The second quarter will include approximately $5 million of incremental start-up costs related to the acquired Saucony operations in Italy, opening of new stores and the addition of a new member of our executive team to drive global merchandising and enhance our product innovation pipeline. Net interest expense for the quarter will be approximately $2 million higher than last year due to the use of funds for share repurchases and the phasing of inventory investments. As a result, Q2 adjusted earnings per share are expected to be approximately $0.50. In closing, I want to reiterate that we continue to relentlessly focused on growing our brands through implementation of the brand growth model, investing in key initiatives and supporting our employees with the tools and resources necessary to drive growth. The investment in new channels of distribution in Europe and our store fleet provides accelerated growth in the back half of the year with further opportunity in 2020 from the full-year benefit of these initiatives and growth from our China joint venture. The Company's strong liquidity provides ample capacity to invest in these growth drivers and we remain focused on leveraging our global operating model to deliver strong earnings from these new operations. Thanks for your time this morning, and we will now turn the call back to the operator.

[Operator Instructions] Our first question is from Jim Duffy from Stifel. Please go ahead.

I'm going to start with Merrell. Can you guys talk about the shape of Merrell guidance for the remainder of the year? I know it was up low-single digits in the first quarter, that was above plan. I believe we had some challenges there with Latin American distributors and you're seeing good sell-through, but it sounds like that plus low-single digits is the expectation for the second quarter and then acceleration in the back half. Are there some product release-related drivers that give you confidence there?

Yes, I mean, first of all, the pace of Merrell growth this year, we see Merrell accelerating to probably mid-single digits in Q2 and then high-single digits for the complete year. It's supported by their backlog and I would say especially strong performance in the performance categories; high Nature's Gym and work. Nature's Gym was up over 30% in Q1, work was up almost 40% in Q1. Their e-commerce business continues to be very strong; over 30% growth. Their digital-direct offense is working. In Q1, they did have some headwinds. There were some international distributor bankruptcy that had an impact. Foreign currency especially hit the Merrell business and I would say some of the brand protection initiatives they've taken in the U.S., which is the right thing to do when it comes to map and third - unauthorized third-party sellers had an impact in Q1 on topline sales. But we remain very confident about Merrell and the outlook for the rest of the year, supported by the - fundamentally by the product pipeline and compelling stories.

Yes. And the other - only other thing I'd add Jim is that for Latin America and Europe, Q1 and a portion of Q2 are sort of the major areas of challenge there or headwinds coming from those two regions. And just between the comps in the back half for Latin America and just an improved situation in Europe, we think those will significantly improve as the year progresses.

Good to hear. And then in the release, you talked about unforeseen challenges. It's very - it sounds like that was just demand-related relative to boat shoes or was there some sort of operational or product dynamic?

No. It was really focused in Q1 entirely on boat shoes. We had a - it was a pretty weak quarter here in the U.S., Sperry biggest market, whether it was weather, the late spring, we had snow fall in here just 12 days ago in Michigan if you can believe it. Maybe some of that was due to the Easter shift as well but retailers, we saw as the quarter progressed, took a very conservative stance when it came to reordering out once. So, Sperry in the quarter almost gained 400 basis points in market share in the boat category and their sell-throughs were pretty good, at least equal to last year, but the reorders just did not materialize from U.S. retailers. They just took a conservative view. So, the real issue on Sperry is just the boat issue in this quarter.

The inventories though today through April at retail are much cleaner, the sell-through pace is picked up since the first quarter by quite a bit. So, I think after having some time to assess Q1, it's certainly been a function of retailers working through inventory. They came into the year with, as Blake said, playing it closer to the vest, but already starting to see that kind of come back to a normal level. We are still for the year even giving - embedded in the guidance we're giving for Sperry, we're not expecting boat to be a growth driver for the brand. In fact, we expect it to be down double-digits still for the rest of the year, but Sperry has such a strong offerings, vulcanized and obviously their lifestyle book business for the back half of the year where we're seeing an incredible amount of demand for that already in the order book, gives us real confidence that they'll be able to withstand this difficult Q1 and still deliver their full-year performance.

And then last one from me. Mike, can you just talk about how you expect the inventory to progress across the quarters of the year. I know you're budgeting to carry more inventory, but to a full more direction on that?

Yes, this is again Q1 was a little ahead of our plan, but directionally, we expect it to be up over 20% in the first quarter and I'd expect us to be in sort of the mid-20 range, 25% to 30% higher in Q2 and Q3. Those were two quarters where we had the most challenged a year ago with respect to just order fill and some delays and other costs. I mean in the back half of last year, we spent quite a bit on air freight and other costs that when you're trying to chase that demand that are problematic to the margin. So we would sort of see that continuing kind of through Q3 and then like I said in my prepared remarks down to a more reasonable level in terms of growth up just low-single digits by the end of the year. We've seen a significant improvement in our fill rates and our ability to achieve the demand that we see in the order book compared to last year and we're also seeing with our U.S. business in particular, three or four of our largest retail customers, who are really shifting their order cadence from future orders to at-once orders this year. And that's obviously putting a little more responsibility on us as a brand to hold inventory for those retailers. So that shift is not a new shift, but for us this year, to have two or three large accounts, doing that obviously puts a little more pressure on us to hold the core inventory, but we're very - Jim, we're very comfortable with the quality of the inventory, the age of the inventory, our skew productivity staying really high. So I think overall we're really comfortable with where we are right now as we work through the year.

Our next question is from Steve Marotta from CLK & Associates. Please go ahead.

I know the boat shoes comprise less than 50% of annual sales. Can you talk a little bit about what the makeup is for spring/summer versus fall/winter? And also what specific other categories in the spring/summer are performing well or hopefully outperforming within the brand?

Yes, I would say boat shoes are obviously heavier weighted in the first half of the year for Sperry than the second half. Boots in the second half are now approaching 45% to 50% of the overall revenue. Because of the weather, boots for Sperry obviously performed well in Q1. We basically sold out to the pair. We just frankly hadn't planned on the spring. We had and we could have used more boot product frankly for Sperry in Q1. And probably as we go forward, we're going to have some more transitional offering certainly for spring for Sperry, but also heavier boot offering, which we now see as really a 12-month composition. So, reliance on boat is still prevalent in the first half of the year for Sperry but it will be - we see that diminishing over the time. Its vulcanized business over the last two years has been extremely good and that business also has a much higher percentage of penetration in Q1.

I'd say in the first half of the year, we're going to - Sperry will return to kind of flat performance in Q2 as Blake said and that's going to come on the heels of better vulcanized performance in the quarter and then they've offered some new casual product. They started to really emphasize that last year and you'll see this year in Q2 even more non-bulk casual product, it's performing well too. So there is still some very good diversification happening there. And as we said before the bulk business is starting to improve a bit. So as we start to go into Q3, the boot shipments are actually going to start quite a bit earlier this year compared to last year. Just based on the order demand and the fact that some retailers, didn't get enough for that product last year as we sold through it so well. So we're starting to see that demand kind of accelerate into the middle of Q3 at this point.

Can you talk a little bit about the growth model, you mentioned that, Merrell and Cat both exemplify what is going on with that particular model in the earlier adoption and the speed at which now the other brands can begin to adopt the model. Can you talk about what other brands are targeted and when will we see the improved fundamentals based on those new processes?

Yes, I would say that the brand growth model, it's now a proven success for us even with Sperry and some of the expansion categories and success Sperry has proven certainly for Merrell and certainly now for Cat. One of the reasons for our reorganization, other than just to simplify the organization structure and all the brands being located in Michigan and combining all of our work brands under one umbrella was to accelerate our execution against the brand growth model. Todd has been the Senior Executives here who has been leading that charge now for 12 months, 18 months and we just need to execute faster. It frankly never goes fast enough for me, but we need to execute faster for our medium sized and smaller brands, and that's a pretty dynamic model. So our largest brands continue to hone it, examine it, look at their consumer territories, look at their strategic product creation processes every year, every season. So, as you know, the brand model is focused on brand strategy that's brand D&A, target markets, consumer territories, brand design. It's then also focused on seasonal activation that gets down to what are the actual products and opportunities under specific consumer territories and then it's focused on the resources needed. What do we need to do to enable the brand to achieve its growth opportunities talent, tools, skill sets, that sort of things. So Cat has certainly shown that our rigorous approach against the model can even lead to short-term results, and we would hope to start to see those type of results here over the next season or two for the majority of our brands.

Yes, I think you will see that. You're seeing it Saucony and Cat's had a really strong first quarter. And I would say those two brands are sort of the next up on the list.

Our next question here is from Jonathan Komp from Robert W. Baird. Please go ahead.

I want to start off by asking about the full year outlook, unchanged overall, especially for revenue unchanged despite it's not like a little bit of unexpected softness in the first quarter and then still kind of a gradual build in the second quarter. So as you look to the full year, can you highlight any specific changes in the outlook or any areas that you're more confident, looking into the second half and then maybe tie and I know it can be noisy, but the backlog disclose in the 10-K looks fairly strong. So, any more color there?

I mean, fundamentally our outlook one of the key factors goes back to our order book. So we've got another three, four months of insight into our order book in the second half of the year. The second half of the year for us is going to frankly have a lot of tailwinds. And we know Sperry is going to have a very strong boot season. We know our Saucony Italy operations are going to come on board, our international distribution is going to have a much easier compared to last year. We know that FX is going to be an easier compare and that's going to have less of an impact. We're going to have some new stores, 12 to 15 new stores in that range. Our e-commerce business, we plan on continuing to be very strong. We know that product Sperry’s product pipeline is going to deliver in the second half and Saucony is going to return to growth and Sperry is going to have solid growth. So when you total all that up, we have a high - confidence level, when it comes to our second half outlook. I'm sure we'll have whether it's tariffs few other things. We'll have a few unexpected headwinds or challenges in there, but overall, we've got a lot of tailwind for the second half.

And maybe a similar or same question around the gross margin I know, first quarter had been expected kind of flattish. And you have the inventory which you explained a good portion of it, but anything else in the first quarter that stands out other than the mix components, you highlighted. And then just anymore color on how gross margin should progress throughout the year?

Yes, I think for the first two quarters of the year these bankruptcies are not helping us. And as Blake said we've got most of those bankruptcies, by the way, are some of those business challenges our four businesses are distributors that pay us royalties. So the margin impact of that is quite high. The dollar flow through of that is nearly 100% of the revenue so it's one of the reasons why the mix looks a little worse. A little bit of FX impact in the first two quarters also Jon, that we didn't actually talk about, but it kind of flattens out and actually for the full year it's a non-issue. We don't think FX is going to have really any impact overall for the year on earnings are gross margin, but in the first half of the year it's 10 or 15 basis point headwind for us on gross margins. The most important improvements in the back half are going to come from the stronger DTC mix that we talked about as we add stores and we continue to accelerate our e-com business in the mix. Those businesses carry a really high gross margin rate, so they helped the overall mix. Sperry's margins on boots are very, very good and obviously missing that revenue in the first half of the year on Bow which is also a high margin business for Sperry has shifted the kind of the dynamic of the Sperry margin store from H1 to H2 a little bit. And we have lower product costs already kind of locked in for the back half of the year, both for some of our fall merchandise that will be shipping in Q3 and Q4. And also some spring product that will ship a little bit earlier in that sort of November/December timeframe. Our sourcing team has done a great job of negotiating pricing for all of our brands. Frankly, one of the benefits of being able to take position on inventory right now is to help the factories flatten their production and get us better pricing, and be able to negotiate better pricing with our suppliers. So those are tailwinds in the back half as well. So we think again good visibility to that some of the issues that we've experienced in the first two quarters will abate in the back half, so we won't have those headwinds to.

And just last one from me, Blake I think you made a comment about the work category across all the brands I think you said approaching 20% of the global revenue and just sounded like you were calling it out a little more explicitly as a potential focus in growth driver. So I wanted to maybe follow up on that, just confirm kind of a size today and how you see the growth opportunities for that category specifically?

Yes, I would say today it's probably in around 17% of our overall revenue for the company. We did a little bit of a deep dive into that, that's a growing category as you know for the footwear industry, especially the U.S. market over the last couple of years. We looked at a little bit deeper dive. It was one of the reasons underlying our changing group structure here to put all of our group brands that would be Wolverine, Cat, Bates, HYTEST, Merrell has a very fast growing tactical and work business. And really you could throw a little of Harley-Davidson in there as well, but put them all under our one umbrella. We think it's trending from a bit of a fashion standpoint, we think it's trending from a use standpoint and it's one of the strengths of the company. And so we like having a lot of arrows in our quiver, when it comes to attacking that particular opportunity and I think this new structure is going to help accelerate exactly, I mean Wolverine alone owns the number one spot in the market in the U.S. marketplace for work. And when you add these other brands in the portfolio to that I mean, the market share that we can control in the U.S. is pretty staggering. So it's an area of strength for us, it always has been and I think it's going to continue to be a growth driver for us.

Our next question is from Sam Poser from Susquehanna. Please go ahead.

This is Will on for Sam. Can you guys discuss the difference EBIT margin profiles between the wholesale business and the e-commerce business? Because e-comm carry a higher or lower EBIT margin in the wholesale business?

Slightly higher. It's, we've been making some significant investments in the e-comm platforms and structure to drive growth there. But even with those investments included, the operating margins for that channel are very strong and pretty consistent with our wholesale margins.

And then secondly, can you discuss in a little further detail the additional non-recurring items that you're baking into your non-GAAP operating margin and EPS?

Fundamentally, we continue to incur costs related to our legacy environmental issue and as we guided in February there about $20 million of legal fees and other non-remediation costs that we're incurring here over the course of the year that we're treating as non-recurring or non-GAAP charges. We also have some cost related to business development and we talked today a little bit about the China joint venture and we had some other business development activities in the first quarter that we incurred that are small part of that overall charge. But those are also included as well.

And then last one for me. What is the inventory turn on the four weeks of supply that you're targeting is something, somewhere in the neighborhood of thirteen to fourteen, four weeks of supply kind of your sweet spot?

It's really depends on the brand. Well, we have so many different business models, and obviously our brands in terms of how they service their international markets differ. But in the aggregate, we kind of think about three and half times to four times inventory turn is a good target for the company.

Our next question here is from Edward Yruma from KeyBanc. Please go ahead.

I guess first, I think you guys said. Mike you were about 7 points higher on inventory growth and you would have expected, I guess if you could kind of deconstruct that and maybe more specifically kind of isolate how much of that is Boat inventory. I know that you said that you've seen Boat trends improve, or the sell-throughs improve. Is it your expectation that you're going to have to hold inventory for next year, packed away is off price, how exactly you're going to clear the Boat piece of it? And then finally, any update on PFAS. Thanks.

Yes, on the inventory, it's - I'd say about half of that is Boat and the other half is kind of within Sperry and a couple of the other brands. But overall, nothing that we're concerned about relative to how we are going to move it through the, through the channels that we have. Again, we'd expect that all to get normalized by the end of the year. And as far as promotional kind of as a promotional activity has an option to move the inventory, we'll probably have some of that, but I don't expect that we don't expect it to be anything more than normal, again the issue there was timing We got ahead of ourselves a little bit trying to get some core product into the pipeline a little faster to deal with some capacity issues that we've had in a couple categories. That's all been rectified in as we go forward. I think we're going to be able to work through it just fine. And the PFAS issue.

Yes, you on the PFAS issue, not a lot to report there as you read in the news, this is emerging contaminants. It's hundreds and hundreds of sites and water systems they’ve been identified around the country We've set frankly a very high standard for everybody. We've treated this from the beginning as involving our friends, families and neighbors have taken a bit of a better than science approach. So our own individual matters continue to march through the courts always a pleasant process. The news, I would think over the last three or five months is that we brought 3M into these lawsuits. They are the company that manufacture marketed and sold this millions of consumers and businesses for decades and decades. So they're not involved in these actions and we've also ended up filing a lawsuit against our insurance companies. So in our particular spike really relates to pre-1970 actions and so we believe we have pretty good, pretty solid insurance coverage. Of the costs that were quoted earlier by Mike do not include any recoveries from 3M insurance companies or other third-parties. So that would be the only thing really to note.

Our next question here is from Chris Svezia from Wedbush. Please go ahead.

I want to start on Saucony just kind of walk through what you expect as the year unfolds down mid-teens I think Q1 better than you plan. I guess it improved somewhat still down in Q2 then you have confidence in return to growth in the back half. I guess how much of that is Italy coming into the picture, how much of that is just the core business, U.S. wholesale, direct consumer and EMEA. So just may be kind of walk through your confidence level in that, in that inflection for that brand?

Yes. We have a pretty high confidence level we think Q1 here is kind of the bottom of the ball if you want to view it that way. We think Saucony will continue to be down in Q2 that could be in the mid-single digit range, maybe a little bit more than that. We see growth in the second half but not just by Italy, but fundamentally by the core of their business with new product introductions, introduction of new technologies. So, we see the U.S. recovering, we see EMA coming back and then we see the addition of Italy to be a major plus factor. Especially since we plan to use our Italian distributor has a very strong original lifestyle business in Saucony. With some colors, materials, a few different designs and we intend to use Italy as a design hub to kind of leverage that around, that ability, that design expertise around the world. So we have a pretty high confidence level in Saucony’s return to growth certainly by the second half.

And then just on Chaco for a moment, just any color there. I guess, did you see and acceleration as you came into April for that brand and just any color there would be helpful?

Yes, I mean Saucony for a couple of quarters has been challenged in its Z-sandal business primarily in the Southeast here in the United States. Saucony has a pipeline expansion in the packs and bags, expansion into leather sandals which has been very successful and into some water shoes and clothes told a style. So we also see Chaco returning to growth in the second half, we would anticipate probably for the full year low single growth - digit growth for Chaco as it expands into other category. And then we put Chip Coe again in charge of the Chaco business and Chip is frankly already having an immediate impact there.

And just on, I want to push you a little bit on the revenue guidance, I know you called out a lot of things you're encouraged about visibility of your order book, Italy, e-commerce stores you know what's going on some of these brands. But Q1 I mean, I think you're halfway through Q1 when you gave the guidance, and you felt a little bit short. So I guess what I'm curious about how much you factoring in maybe some of the areas whether there could be shortfalls, whether it's international distributors or other areas into the guidance to sort of give us confidence that kind of hit that 3% that you've kind of factored in some of these risks, potentially that could plan in the business. Just any color about it.

I would say this, Chris I mean, I think there and it was also kind of true when we gave us the original guidance, obviously we had less visibility to the back half of the year at that time. And so we had, we have quite a risk factored into our guidance in the back half. Now we have the Saucony, Italy acquisition completed, which we didn't have completed when we gave our guidance, and so we have more certainty about that. The stores that we're going to add to the fleet are now, those leases are being signed now or will be signed shortly, and we have more clarity on that, so there's much more certainty around those things. The backlog for Sperry boots is we already mentioned it about five times already. But I mean that is a major source of confidence for us because the order book already reflects the demand that we expect to ship in the back half of the year. We have, if you take the individual impact of each of those specific things, it covers almost all of the back half revenue growth that would be implied in our guidance, which is about $95 million to $100 million of growth. It really is going to come from those four or five things. Our e-commerce business is predictable as any part of our business today and that's been able to deliver at or above plan for the last several quarters. So the kind of certainty we have on those things has kind of improved, if you will, or kind of strengthened and then our visibility to some of the risk areas that are always in the business, right and some we can't predict are also clear and we feel like the coverage that we have for those things has been updated in this review of the guidance. So overall, Chris, I would say we're even more comfortable today with the full-year guidance than we were when gave it back in February.

And just one point of clarification. Mike, what, how big is e-commerce and what's the growth expectation for 2019.

Yes, I think for the full-year, we have a conslated at about 20% or a little above 20% for the full-year it was 28% in Q1. So, gives you a good indication of our confidence in that growth number. And overall, e-commerce - so, and our and now when you add in the total store fleet, it's going to be approaching 15%, 16% of our total revenue for the full-year, so that's direct to consumer revenue that we control and we have certain high level of visibility and confidence with.

Our next question here is from Mitch Kummetz from Pivotal Research. Please call ahead.

Yes, thanks for taking my questions. You guys talked a lot about the tailwinds in the back half and that's encouraging. And it sounds like you've got good visibility there. Just want to ask you question about maybe some of the things you don't have quite as good visibility on how are you factoring in or what's your assumption around at-once in the back half. And then also you know Mike, you mentioned the stores, is there a underlying comp assumption that's embedded in the guidance.

Yes. At-once, we’ve been able to, to evaluate at-once during a period where the market wasn’t performing very well, right. Q1, overall in the U.S market in particular, which is where we see most of are at-once, demand was pretty challenged. We are not assuming any kind of improvement in at-once trends year-over-year. Blake referred to the fact that our visibility into future demand is stronger for a couple of our key brands, including Merrill and Sperry. So while we're hopeful and we expect that as the weather shifts and so many other things that have been headwinds will kind of abate a little bit in the back half of the year. We're not expecting a significant improvement in at-once, in the back half of the year. I'm sorry, what was the second part of your question?

And then I said I on store comp. How are you thinking about the store comp in terms…

With respect to our stores we've assumed nothing. We've been very conservative there. Our physical stores have outperformed the FDRA index by a good amount. We're in the last several years we frankly haven't built that into our plan. I think FDRA in Q1 was down about 1.5%, our stores comp overall in Q1 was up almost 1%, to give you an idea as to the difference in performance. So we've taken a pretty conservative view of our store comps as we go forward here. But would you expect positive performance over the rest of the year?

I don't think that for the stores. I don't think it's about as much about the growth it is the improvement in the performance of the stores, right. The operational improvements, in the profit improvements there as we've been able to focus down and then essentially Merrill and Sperry outlet stores has really allowed us to drive the performance and the results much better and that's a reason why we're so confident in making the investments that we are and adding more still a small number of stores relative to the size of our brands. But adding more stores to the fleet this year now that our concepts have been proven and tested.

Our next question here is from Erinn Murphy from Piper Jaffray. Please go ahead.

It's Eric on for Erinn, this morning. I'll try and keep it short and brief here with time. I was just curious, if I could get your take on the U.S. macro if you strip out weather, Easter tax refund noise. How do you guys think about the consumer relative to kind of 2018 in terms of strength in spending power?

I think our - listen the U.S. consumer still drives our economy, so consumption here is still two-thirds of our overall economy. And when you look at the macro numbers over the last couple of years, it's been very, very good. The consumer is obviously changing and a number of different ways technology over the last five years has created a seat change in consumer soft goods, not just in the United States but starting around the world, we think that level of change is going to continue. So, we think the U.S. consumer right now is in a pretty good place. You can imagine a set of factors 25% tariffs, all consumer soft goods in coming into the country that would eventually probably starting next year, not this year, have an impact on the U.S. consumer, even with all the buzz this week, we currently - and the industry, currently doesn't see that is still view that as a low to maybe low medium likelihood, so again that can change on a given day. We do know that the U.S. consumer is responding to newness, freshness, design they are responding to stories and new product that kind of break through the clutter. Because everybody has too much information in today's world and it can be a Saucony Dunkin' Donuts collaboration, it can be a bigger product story and introduction for particular brand. But the consumer is responding to things that are newsworthy that break through the clutter. So overall, our view of the U.S. consumer is pretty positive, right now. Even with all the tariffs buzz that you read about that we all read about every day.

And just squeeze one quick while I've been there, regarding e-commerce and your guidance investments this year. How do you think about balancing driving growth versus profitability in terms of shipping speed to consumers?

Yes, it's a, it's an area we've spent a lot of time kind of evaluating over the last couple of years as we've had some significant growth in that channel. I mentioned earlier that the e-commerce business in the first quarter, the profitability there increased over 70%. For the first quarter, we would expect some similar improvements for the balance of the year and some of that comes from just being able to access and manage some of those, those levels that you're talking about and it's a constant process we test and react to the consumers' response as we, as we change the approach, but we've been able to get a little more scientific about it and I think it's resulted in some better gross margins and some better profitability for the e-comm business.

This concludes the question-and-answer session. I’d like to hand the floor back over to management for any closing comments.

On behalf of Wolverine World Wide, I'd 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 June 9, 2019. Thank you and good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.