Wolverine World Wide, Inc. (WWW) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Wolverine World Wide, Inc. Fourth Quarter Fiscal 2019 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I would now turn the conference over to your host, Paul Feyen.

Good morning and welcome to our fourth 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 fourth 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 Q4 2019 Conference Call Supplemental Tables that will reconcile these non-GAAP disclosures to GAAP. The document is also accessible under the Investor Relations tab at our corporate website wolverineworldwide.com by clicking on the webcast link at the top of the page. During our call, we are providing adjusted financial results, which adjust for the impacts of environmental and related costs and its settlement, business development-related expenses, re-organization costs, foreign exchange rate changes, and the estimated impact of the coronavirus. 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 Paul. Good morning everyone and thanks for joining us. Earlier this morning, we reported strong fourth quarter revenue growth of over 5% on a constant currency basis, which marks our highest quarterly growth rate of the year. Our two largest brands, Merrell, and Sperry each delivered mid-teens growth. Our teams' excellent performance against each pillar of our global growth agenda drove this success: compelling new product stories for our key brands, nearly 21% growth from our owned e-commerce platform, and over 10% growth in our international markets with growth across all regions. Q4 revenue growth drove record adjusted earnings per share of $0.59, a 13.5% increase over last year. We're extremely pleased with these results which reflect the strength of our brand portfolio, excellent effort in execution by our team, and solid progress against our global growth agenda. For today's call, I will provide some additional details on our Q4 results and will also provide more insight on how we're driving our growth agenda to deliver accelerated growth over the next two years. Mike Stornant will then provide additional details on the fourth quarter and full-year financial results. He will also cover our initial financial outlook for 2020, and touch on the impact of the China tariff and the coronavirus. Starting with the Wolverine Michigan Group. Q4 revenue increased a strong 7.7% compared to the prior year and 8.1% on a constant currency basis. Merrell and Cat were both up mid-teens in the quarters. These gains were partially offset by decline from the Wolverine brand and some of our smaller brands. Merrell's strong quarterly results were led by growth in all regions, including the U.S. Overall the wholesale, e-commerce, and retail store channels all saw year-over-year gains. For Merrell, growth came from both the performance and lifestyle product category led by exceptionally strong performance in hike, where the brand holds the number one U.S. market share position and work, the brands fastest growing category, which grew nearly 50% in the quarter. Nature's Gym the brand's most athletic expression category, which includes the Nova and Antora collections of progressive trail running styles also posted nice gains in the quarter, and the important lifestyle category grew as well driven by success in new collections, like the Alpine Sneaker, Juno Clog, and Hut Moc. The brand continues to aggressively pivot to digital direct channels as evidenced by the growth of the online consumer direct business of its wholesale customers and accelerated growth for merrell.com which was up nearly 25% in Q4. Merrell stores also performed well in the quarter with comp store sales up mid-single digits. We expect Merrell's momentum to continue into 2020. Cat's increase in the quarter was driven by strong international growth in EMEA and Latin America regions and robust growth in the e-commerce, which grew almost 55%. The CODE collection launched in the third quarter is the brand's largest product launch ever and has been received very well by consumers. New color offerings for CODE help fuel continued momentum and the new Arctic Grip boot program also help drive Q4 growth for Cat. The Wolverine brands results were down mid-single digits in Q4, but would have been up slightly except for lower sales to a financially challenged U.S. retail customer. This was partially offset by high single-digit growth in e-commerce and robust growth in the Wolverine apparel category. Moving to the Wolverine Boston Group. Revenue for the Boston Group was up 1.3% compared to the prior-year, and up 1.5% on a constant currency basis. Sperry had a very strong boot season and delivered mid-teens growth and kids delivered low single-digit growth. As expected, this growth was partially offset by Saucony, which declined at a low double-digit rate due to significantly lower close-out sales. Sperry delivered its highest quarterly growth of the year, driven by increases across all channels and with 50% growth in the boot category. The brands growth in boots outpaced the market, resulting in Sperry becoming the U.S. market share leader in the rain boot category. Sperry's e-commerce business was up nearly 20% in Q4, primarily driven by increased traffic and improved conversion as the brand continue to elevate its storytelling product exclusives, and other investments within this important channel. Sperry store revenue was up over 60% spurred by new stores improved conversion, and a high single-digit increase in comp store sales. We're pleased with the momentum in the Sperry business and expect continued growth in 2020 driven by the John Legend partnership and new product offerings. Saucony's recovery has turned the corner with Q4 growth in the brand's core technical category, up nearly 10% due to excellent consumer reaction to new performance products. This healthy growth was muted by significantly lower close-out sales related to the brand's accelerated full price performance at retail. Saucony's healthier mix and focus on more profitable distribution resulted in nearly a 700 basis point improvement in gross margin in Q4. The brand also continues to benefit from very good e-commerce performance with growth of over 25% in the quarter and over 37% growth for the year. The e-commerce channel benefited from the brand's digital direct investments and increased traffic. During the quarter, Saucony also launched two new technical running shoes, the Triumph 17 and the Guide 13. Both utilize the brand's new power run mid-sole cushioning technology, which provides enhanced flexibility, fit, durability, and energy return, while weighing one-third less than comparable models. During the quarter, Saucony received several industry awards across the road and trail running product categories related to the introduction of new franchise models. Just this week, the Triumph 17 won the Prestigious Editor's Choice Award from the Runners World. We are very encouraged by the momentum in the Saucony business and the incredibly strong pipeline of new performance in lifestyle products planned for 2020 where we expect to see strong double-digit growth. Turning to our growth agenda. The strong Q4 results underscore the growing effectiveness of our global growth agenda which is focused on a faster and more innovative product creation engine, a modern consumer driven digital direct DTC offense, and steady growth in key international markets. The 2019 second half performance of Merrell, Sperry, and Saucony up nearly 10% on a combined basis reflects our team's excellent execution against this agenda. The investments in our owned e-commerce business help deliver growth of over 20% across the brand portfolio for the year. With a meaningful improvement in operating margin, capital investments made in 2019 for new stores, the acquisition of a distributor in Italy and in our China joint venture totaled approximately $35 million and better position the company for future growth. Our global growth agenda is focused on three primary elements. First, market leading product and compelling product marketing stories. In 2019, we recruited Chief Merchant Officer to supplement the efforts of individual brands, help lead the innovation and elevate our product creation process. This new role also oversees our centers of excellence for consumer and market research in advanced innovation concepts, with an emphasis on driving deeper consumer insights, increasing our learnings from Big Data, and enhancing our trend analysis. We're excited by the 2020 pipeline of on-trend and innovative product offerings across our brand portfolio, which includes the Saucony Endorphin, Sperry Plushwave, Merrell, Antora and Nova, Wolverine Hellcat, and Chaco chillos collections. These new products are supported by powerful marketing stories that are more prominent within our digital channel. The second pillar of our growth agenda is focused on our digital-direct DTC offense. For us this means leveraging our commercial platforms and optimizing demand creation investments across all channels of distribution especially own DTC channels. In today's marketplace, digital and social engagement with the consumer drives brand heat, search interest, and growth. Our owned e-commerce channel, which has averaged approximately 20% growth over the last three years, is expected to continue to be the highest growth channel for the company over the near-term and is expected to generate at least $100 million in incremental revenue over the next two years. Our efforts related to digital content creation will also help drive online growth with pure play e-tailers and our traditional customers, who have also experienced accelerated growth in their digital direct channel. Finally, the third pillar of our global growth agenda is focused on international expansion. We have a long track record of driving brand success and growth on a global basis through a variety of business model. Today, about 34% of our global revenue is generated outside the U.S. and over 50% of our pairs are sold outside the U.S. We will continue to partner with our current international distributors to drive growth. But we'll also focus on exercising more direct control over select global markets to enhance the global reach and pull of our brand. We believe that our international business will add $150 million of incremental revenue over the next two years. The foundation we built over the last several years to drive the business has never been better. We own one of the strongest brand portfolios in the footwear industry and have an efficient operating platform and sufficient scale to drive innovation and speed. We have a strong balance sheet and a profitable operating model that provides us with the flexibility to invest in growth while creating value for our shareholders. Let me spend a few minutes providing our current view of the dynamic coronavirus situation. Our first priority is the safety and wellbeing of our employees and partners in China, and we are making every effort to support them. From a business standpoint, we separate the emerging impacts of the coronavirus into two buckets: revenue and supply chain. As it relates to revenue, while the China market is a significant unlock in our international growth strategy, we are still in the early stages of development to generate in-country revenue. And our estimated revenue exposure from China is relatively insignificant, less than 2% of our total 2020 revenue is planned to come from China. The broader Asia-Pacific region represents less than 10% of our global revenue and we know that very low retail traffic in China and other markets, coupled with reduced tourism activity in the region, will likely have a meaningful impact on certain countries in the short-term. We have also assessed the global supply chain implications for products produced in China and nearby countries. We are fortunate to have greatly reduced our reliance on China sourcing over the last five years. However, we expect some production delays from China factories, and a potential slowdown in the supply of some raw materials sold by China vendors to manufacturers outside of China. This is being closely monitored, but will be difficult to quantify until our factory partners have more clarity on the return of workers from Chinese New Year. So far, the return rate of workers to factories has been better than expected and is not expected to have a material impact on production in Q1. None of our factories are in the Wuhan region. Mike Stornant will provide more details on how this situation could impact our financial results and the flow of revenue growth in the first half of the year. We currently estimate that the first half revenue impact could be up to $30 million and the first half profit impact could be up to $10 million. While this impact is relatively insignificant compared to the overall size of our business, this remains a very fluid situation. We will continue to work closely with our international teams and sourcing partners to mitigate the impact of the coronavirus, but recognize the situation is fairly dynamic and subject to change. In summary, we're very pleased with the momentum and performance of our brands in the fourth quarter and our strong finish to the year. We're confident in the strength and diversification of our brand portfolio, and most importantly, we're seeing positive results related to the implementation of our global growth agenda. 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 fourth quarter and full-year financial performance, along with the initial outlook for 2020. Mike?

Thanks, Blake, and thank you all for joining us. We're very pleased with fourth quarter growth of 5% especially in light of relatively weak U.S. retail conditions, the impact of one key workbook customer, and some delivery delays for our international business late in the quarter. Our diverse portfolio, broad geographic reach in multiple distribution channels allowed us to deliver a strong quarter. As Blake noted in his comments, our two largest brands delivered mid-teens growth, our own DTC businesses grew nearly 25%, and our international businesses grew over 10%. Gross margin for the fourth quarter of 37.8% was lower than expected entering the quarter. This was due mostly to higher than expected close-out sales and retail promotional activity during the holiday season, which helped us to reduce our inventory and improve inventory positions at most retail channels. A shift in mix across brands and regions coupled with FX trends also negatively impacted the quarter's gross margin. We did see nice gross margin expansion for Saucony, e-commerce and stores. Adjusted selling, general and administrative expenses of $168.1 million were significantly lower than expected, despite a higher year-over-year increase in advertising to support DTC growth and our new business in Italy. The lower quarterly expense structure was a result of disciplined expense management and lower year-over-year incentive compensation costs. As a result of these factors, adjusted operating margin was 10.1% in the quarter. The adjusted effective tax rate was 8.7% versus 11.8% from the prior-year and benefited mostly from lower state income tax expense and other discrete items. Fourth quarter adjusted diluted earnings per share were $0.59, a record for the fourth quarter. During Q4, the company resolved two meaningful litigation matters related to its legacy tannery operations. Net costs of $58 million were recorded in Q4 related to settlements with the State of Michigan, two local townships, and the 3M Company. The reported loss per share was $0.01 and includes these settlement costs and other non-recurring items. For the full-year, revenue of $2.27 billion represented constant currency growth of 2.3%. Full-year adjusted operating margin was 11.5%. Net interest and other expenses for the year were $25.1 million and the adjusted effective tax rate was 15.7%. Full-year adjusted diluted earnings per share were $2.25 a record result for the company. Our full-year reported earnings per share were $1.44 reflecting the litigation settlements noted above and other one-time charges. Our operating model has consistently generated healthy cash flows. And in 2019, we generated over $220 million of operating cash flow which includes $35 million of cash spend on legacy environmental matters. Given our strong balance sheet, and further cash generation, we continue to invest in organic growth throughout the year which directly benefited our accelerating DTC businesses and momentum of our biggest brands. Now, let's turn to the balance sheet. As discussed in prior quarters, we built up our inventory position throughout the year to mitigate the impact of potential new tariffs, support our new sock in Italy business, and stock our new stores for the holiday season. Strong growth in the fourth quarter coupled with proactive close-out liquidations allowed us to reduce inventories down to normalized levels. As expected, inventory was up less than 10% over the prior-year, but up only 5% when adjusting for the impact of new stores, the new Italy business, and the incremental cost of higher tariffs. This improved inventory position help contribute to strong cash generation in the quarter and also reduces our markdown exposure in 2020. We ended the year with net debt just under $618 million, which was up versus last year as we strategically deployed capital to enhance shareholder value including $320 million of opportunistic share repurchases, $34 million in dividends paid to shareholders, and $35 million of strategic capital investments to drive growth. At the end of 2019, our bank defined leverage ratio was 2.05 times down nicely from the previous quarter. Total liquidity was approximately $1.3 billion. The company has significant flexibility to execute future actions to drive total shareholder return and we expect that our leverage ratio will improve throughout 2020. We're encouraged by the strong finish to 2019 with resulting accelerated revenue growth, very good earnings leverage, strong cash flow, and a healthy balance sheet. Now let me shift to our 2020 outlook including the estimated impact from two important topics, China tariffs, and the current coronavirus health crisis. Despite some positive U.S. China trade negotiations in Q4, the footwear industry will still incur significant new tariff costs on U.S. imports from China during 2020, less than 20% of our U.S. imports will be sourced from China in 2020 and our transition of production to other source countries remains on schedule. Despite our proactive efforts, we still expect to incur about $15 million in incremental costs associated with this trade dispute including $12 million of incremental tariffs expense, and $3 million of discrete China migration costs. This 2020 cost includes about $5 million related to incremental tariffs that were incurred on product at the initially higher 15% rate in 2019 nut won't be expensed until this inventory is sold in Q1 of 2020. Our sourcing teams continue to work on initiative to minimize these costs, while our brands have selectively implemented price increases throughout the year. As Blake noted, the coronavirus health crisis is a developing situation, reduced reliance on China sourcing and relatively small commercial exposure to the China market will help limit our direct risk related to this issue. Our healthy inventory position on core product should also help to mitigate the near-term exposure, especially for our wholesale in own DTC channels. However, this is a dynamic situation and the future implications are difficult to fully measure, especially beyond the first half of the year. The present estimated impact on first half revenue of $30 million and pre-tax profit of $10 million is incorporated into our full-year outlook, which I will cover now. The strategic investments made in 2019 bode well for our global business moving forward. These drove progress in key areas including accelerated momentum for our largest brands in the back half of the year and strong full-year performance in DTC businesses. The key regional investments made in Europe and China will support ongoing international growth. We're well-positioned for the future. And we have refined and prioritized investments focused on the key pillars of our global growth agenda. We have a mid-term goal to grow our own DTC businesses to 30% of global revenue as we continue to leverage the investments made in our e-commerce platform and model brand stores. We're also committed to annual double-digit growth from our international businesses over the mid-term as we leverage investments in Europe and Asia-Pacific and look to other markets for further expansion. We will prioritize our biggest brands and expect to see consistent growth from Merrell and Sperry and a much stronger growth path for Saucony as the brand accelerates its recovery. While the prospects for growth in 2020 are very promising, our outlook is tempered by first half headwinds from the coronavirus situation and some continued softness in the U.S. wholesale channel. We expect 2020 reported revenue to be in the range of $2.29 billion to $2.34 billion including $30 million of negative first half impact from the coronavirus and $10 million in negative impact from foreign currency. This represents constant currency growth of nearly 3.5% at the top end of the range. The most prominent growth drivers for 2020 include 20% growth from our global DTC business, 5% to 10% growth from our international markets despite the negative coronavirus implications, and 4% to 8% combined growth from our three largest brands, Merrell, Sperry and Saucony, supported by a very strong global recovery from Saucony. Gross margin is expected to be approximately 41% up 40 basis points versus last year. Strong improvement despite approximately $30 million of cost headwinds from three key areas, including $15 million of incremental costs related to higher tariffs, the China migration costs, $10 million related to foreign currency, and $5 million related to a significant increase in ocean freight surcharges. We plan to offset these headwinds with lower negotiated product costs and strategic price increases that will be most prominent starting in June of this year. Total adjusted selling, general and administrative expenses as a percentage of revenue are expected to be roughly flat to up slightly compared to the prior-year. This includes over $20 million of increased costs related to incentive comp and employee benefit costs and nearly $20 million in additional costs related to new stores, the full operation of our Saucony Italy business, and ongoing investment in our China joint venture. We will also increase investment in our global e-commerce platform. Adjusted operating margin is expected to be approximately 12%, representing a 50 basis point improvement over last year. Reported operating margin is expected to be approximately 11% including an estimated $15 million for legal and consulting costs to manage the company's legacy environmental matter. We expect 2020 net interest and other expenses of approximately $31 million. The effective tax rate is expected to increase to approximately 19% and diluted weighted average shares outstanding are projected to be approximately 82.5 million shares. The ratio of net earnings available for EPS is expected to be 98%. Full-year 2020 adjusted diluted earnings per share are expected in the range of $2.25 to $2.40, 6.5% growth at the top end of the range which represents strong leverage on planned revenue growth. Excluding approximately $0.10 from FX, and $0.10 from the coronavirus impact, full-year adjusted diluted EPS would be projected in the range of $2.45 to $2.60, or growth of 15.5% at the top end of the range. Reported diluted earnings per share are expected in the range of $2.05 to $2.20. Our balance sheet position is very good entering the New Year and we expect another strong year of cash generation in 2020. Operating cash flow is projected to be approximately $240 million, up from $220 million in 2019. Based on the recent litigation settlements noted above, we've included an information table on our website covering related multi-year cash flow projections. In 2020, we expect a positive cash impact of approximately $13.5 million related to these settlements. We expect our bank defined leverage ratio to be under two times at the end of the year. Capital expenditures are expected to range between $30 million and $35 million with depreciation and amortization forecasted to be approximately $34 million. Before we conclude, let me update you on our outlook for Q1. Solid mid-single-digit combined performance from Merrell, Sperry and Saucony will once again be the highlight of the quarter supported by 20% growth from our own DTC businesses. However, the impact from coronavirus will result in flat Q1 revenue for our international business. In addition, some of the Q4 softness in the U.S. retail market has continued into Q1. As a result, we expect revenue in the quarter to be approximately $500 million, including an estimated $15 million of direct impact from the coronavirus health crisis. We expect gross margin of approximately 41% and operating margin of approximately 8%. First quarter earnings per share expected to be $0.30 to $0.32. This reflects certain headwinds that will moderate in future quarters including $0.05 from the coronavirus health issue, $0.05 from higher tariffs, $0.03 from higher incentive compensation and employee benefit costs, and $0.03 from FX. Our revenue outlook for Q2 is much stronger and we are projecting mid-single-digit growth after factoring in the coronavirus impact of approximately $15 million. In closing, I want to emphasize that growth continues to be our primary focus and our leadership team remains incredibly focused on executing the initiatives and activities that will allow us to accelerate that growth. The progress we're seeing within our largest brands, and our DTC and international platforms is evidence that the model is working. We will continue to be disciplined in managing the operating costs of the business and working capital, which will position the company well as we further execute on our global growth agenda, leading to earnings leverage and an increased cash flow generation. Thanks for your time this morning, and we will now turn the call back over to the operator.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Couple of question from me. Mike, to start looking forward to comparisons in the fourth quarter of 2020, can you speak in more detail around the specifics of gross margin pressure during the fourth quarter, you had strengthened direct-to-consumer and international, which I would think would be a benefit. How much tariff impact did you see in the quarter? And can you size the impact of the clearance and promotional support?

Yes, most of the downside in margin in Q4, Jim, was really driven from the close-out pressures that we saw on the business. As you know, we entered the quarter with inventories kind of in an elevated level for a lot of reasons cited earlier. We felt like we needed to take advantage of the quarter to move through that inventory especially on any seasonal items that we would have had to clean the pipeline for 2020. I would say that we had strong at once performance early in the quarter, and that sort of deteriorated as we got closer to the holiday season. And as we saw that demand started to decline, we emphasized the close-out channel and move to the inventory. So positions us really well for first quarter margin improvement. And in terms of markdown exposure at retail, we think we've limited that by adjusting and reserving for that in the fourth quarter. So most of the impact in the quarter was related to that. There was some tariff and FX impact in Q4 was a couple million dollars on both of those items that we experienced in the quarter. And as it relates to 2020, we would expect less pressure on the close-out side and certainly on the promotional side as we think about Q4 margins for 2020.

Thank you. And then as it relates to the SG&A guidance, you spoke to incremental expenses $20 million in incentive comp, $20 million in incremental for stores, where are the areas where you're finding savings to hold the SG&A flat as a percent of revenue in the guide?

Yes. Some of the organizational changes and just areas of focus for us in the back half of 2019 were really on continuing to look for efficiency within the SG&A category of span for the company. I think we've been successful at being able to do that. I'm really pleased though that we haven't really suffered in terms of the advertising or demand creation investments that we've made. We talked about $40 million invested in growth initiatives in our original plan for 2019 and we were able to spend about $38 million of that in the full-year. So we really were able to find savings or improvements in other discretionary areas without impacting the investments that we were committed to for demand creation and growth, especially on the e-commerce side, Jim, and as we got more momentum within the international platform as well. So but we are -- as you know, we continue to look at our cost structure globally, we have a complicated organization. And we -- I think we've done a good job of continuing to look for efficiencies there over the course of the last six to nine months.

The next question comes from the line of Jonathan Komp of Baird and Company. Please proceed with your question.

Yes, hi. Thank you. Maybe first, Mike, just a clarification, I think in the prior response on gross margin, you talked about being well-positioned for the first quarter, I just wanted to make sure I heard that correctly since it looks like you're guiding down gross margins or maybe there's some mix or other impacts going on?

Yes, no, I think for in terms of the improvement on from Q4 to Q1 though, I think we're going to get more into a normalized level of gross margin for Q1, Jon. The big impact for us in the first quarter is sort of the carryover of the higher tariff costs in Q1 that'll be related to the inventory that we bought in the latter part of 2019. Some of that was purchased at the higher tariff rate of 15% as you know that, that didn't get adjusted down until December. So we've got a little bit of a timing issue there for Q1. But if you separate out the tariff impact from the first quarter, our mix is healthy. We're going to see -- continue to see strong margins from our DTC business and then Saucony which is going to be our biggest brand in terms of growth in Q1 will continue to improve their gross margin in Q1 as well. So really, I think for Q1, it's a little bit of FX and tariffs that are modestly impacting the margin expansion. But otherwise, we feel like we'll get back to normal. As we think about the back half of the year in gross margins and sort of stronger gross margin performance and maybe Q3 and Q4, it'll really be off the benefit of those tariff costs moderating a bit from a competitive standpoint and we won't start really seeing the true benefit from price increases until June or so. So the combination of that and also the stronger mix as our DTC business continues to accelerate throughout the year. Those will be the factors that will allow us to see gross margin expansion strengthen in the back half of the year.

Okay, great, that's helpful. And then maybe bigger picture just kind of the state of the business in terms of where you expect it to be from the global growth agenda. And when you look at 2020, as a whole, just curious kind of where you stand across the brands in terms of driving growth. I know 4.5% kind of at the top end adjusted for some of the factors is getting back to mid-single-digit growth, but just curious how you're viewing the state of the business relative to where you expect it to be growing?

Yes, I think we're, Jon, I think we're in a pretty good place setting aside coronavirus for the moment. We had balanced growth in 2019 across regions; we actually grew in every region in Q4 and every region for the year. We expect a little -- a little more volatility in that this year dependent on where the coronavirus takes us. I would say that with respect to consumer sentiment, that remains fairly positive. We're seeing a little bit of a decrease in GDP growth across the world, in the U.S., I think the consumer volatility remains there continues to be a shift to online a shift to mobile. People seem to me making a fewer -- a few less trips to the malls, to stores. But we see a pretty balanced approach to 2020. With respect to our brands, we expect Saucony simply to have a blockbuster year in 2020. We expect Merrell to be up mid-single-digits to high single-digits and we expect mid-single-digit growth from Sperry. So good all round performance by our biggest brands for sure. I would also say we expect pretty good performance from our DTC business. We had our store comp growth. It's really started in Q4 and Q3 has continued into this year as long as -- as well as our e-com growth. I think e-com growth year-to-date in 2020 and store comps are up over twice that of the industry as a whole. So we feel pretty positive there.

Okay, great. And maybe just lastly quickly on coronavirus. Just curious if you're willing to share any detail on kind of the current delays or number of days, you're getting quoted by some of your factories and just how to think about the key windows over the next weeks or months going forward. And also, if any of the specific brands are concentrated more or less in China that would be helpful.

Yes, I mean we don't really -- on the supply chain side, we really don't see an impact in Q1. People took off for Chinese New Year. It's only 20% of our imports in any events from China into the U.S. or globally. So people seem to be returning from Chinese New Year. China government has been very aggressive here and that seems to be paying dividend. Most of our factories are -- and most of our key product lines are dual-sourced. Few remain in China, but most of them are outside of China. As we look to Q2 and beyond, we're trying to anticipate the impact right now and we're working on some raw material substitution in the event that coronavirus situation continues to accelerate but on the supply chain side, not much of an impact in the first half.

I would say the last part of your question, Jon, to as far as the brands that are most exposed to the China, China production now it's in specialized categories like vulcanized shoes and some of our more technical work boot product, it's moving a little bit later. So that would impact Cat. Our kids business to a certain degree on Sperry on their vulcanized products, and some of the Wolverine and mostly Wolverine technical products, but I think frankly, a little bit ahead of schedule on moving production out of China. And I think from that standpoint, it's good. But as Blake said, the other key part of this is making sure that we also have raw material suppliers outside of China too. And our sourcing team has been working on that for several months, just in line with the manufacturing migration that we're making there. So we feel relatively good about that, but certainly a challenging situation for the industry.

The next question comes from the line of Chris Svezia of Wedbush. Please proceed with your question.

Good morning, everyone. Thanks for taking my questions. I guess first just to go to the commentary about mid-single-digit growth in Q2; I guess just the confidence level in getting to that growth. Typically, it's more of at once quarter versus Q1 and Q3 is more futures day. So just curious of visibility there. I just remember next year -- last year there was some color about accelerating growth in Q2 didn't necessarily develop. So just curious about your confidence, what you see in the order book et cetera to get to that level of growth in Q2 and what that might mean as you go into the back half?

Yes, I would say it's based on a couple of things. One, our current view of the order book which reflects and supports that expectation for Q2 and also the continued performance of our DTC channels, stores and e-commerce are exceeding at the moment year-to-date, they're exceeding our plans. So that also gives us some confidence as we enter in to the second quarter.

Okay. Okay. And I guess you anticipate the international business to improve as well as you go into I think in Q1 you referenced international being flat. I guess you anticipate international is improving Q2 as well?

It's correct

Right, okay.

Obviously the biggest headwind in the first quarter Chris is U.S. wholesale. We've got some specific categories for us. The weather hasn't been necessarily helpful to our boot business, whether it's lifestyle or work boots and that those are usually important in the first quarter in terms of U.S. wholesale performance. That'll be less of a headwind for us in Q2 as well. So that's important to know. And we see some improvements in our Chaco business in Q2, the first half of the year is important for Chaco, Q1 is more challenging for that brand lower close-outs for one, but overall they're still positioning their new product line into the market. So the demand for that we see it improving in the second -- second quarter. So that's another contributor. But overall, the focus here continues to be moderation within the U.S. wholesale channel.

Okay, got it. Second question just on the, you laid out $100 million for e-commerce over the next two years, $150 million in revenues over the next two years on the international side. Based on the guidance you've given for this year and what that implies for 2021 I know you've not given guidance there, is pretty big improvement for 2021, I guess what are the offsets? How should we think about, what those are and how that kind of plays into that thought process for 2021 over the next two-year period?

I guess the $100 million for e-commerce is really just a continuation over the next two years of around 20% growth. On the international side again setting aside the coronavirus, this was going to be a foundational year in China for our Xtep joint venture. Obviously, we're not going to proceed with the original plan pace of store openings, but that's going to probably be delayed a little bit hard to have a lot of visibility to that at the current moment. So we've got a number of initiatives on the international front that are going to deliver the growth over the next two years. I would say that the main offset is our current view of U.S. wholesale. So we're taking a cautious current view of the U.S. wholesale business. We see retailers pushing back a little bit on orders and risk taking, given some of the volatility that existed in Q4, and it's continued into Q1. So that would probably be a bit of an offset to what we see is pretty robust growth in DTC and even strong growth in the EMA region. Even though we have Brexit looming and some dire predictions there, the EMA region for us remains very strong driven primarily by Merrell and Saucony and we expect that to continue.

Okay, last one from me just real quick just on the buyback, Mike, just curious, you ended the year, the share count of roughly call it 80 million, 81 million, the guidance assumes 82.5 million for 2020. Just kind of how we think about the buyback, what's employed and why such an increase in the fully diluted share count, that stock options et cetera.

The share count on the loss calculation is slightly different; Chris and the count would be on the adjusted results. So you would use about 82.6 million shares in the fourth quarter calculation for adjusted EPS, which is in line with the guidance for next year. So we typically guide to stock buybacks that will kind of offset any dilutive impact from share grants and things that happen naturally in the course of the first part of the year. So, no, no significant buybacks incorporated into our outlook.

The next question comes from the line of Matthew DeGulis of KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks for taking our questions. So with Saucony, obviously a great job in the quick turnaround. I'm curious how long the lag is between introducing a hit shoe like the Triumph and taking shelf space at specialty running, especially given how fragmented that industry is, and how much shelf space do you think you've taken back thus far? And do you think you're back to the pre-2018 levels?

Yes. When I look at the specialty run channel, at least in the United States, it took us a year-and-a-half, maybe two years to get a new team in place, develop the product and start to fill those shelf spaces. So certainly in the second half of 2019, we believe Saucony took market share. As we look ahead, we think that's going to accelerate. We know we have several big introductions planned for May and after May in the year. So it will have some impact on quarter two, but a bigger impact probably on Q3 and Q4. We think Saucony has continued to take market share; they won 20 some awards in 2019. And that pace has not slowed down so far this year. We know they're taking market share in trail run category and in the performance run category. I would say using our new Italian business as a design hub for the original lifestyle side of the business, we also have some really high expectations; they were very enthusiastic about that possibility. So the Italian Saucony business is, original business is very strong, and we're going to use that as a springboard for the rest of the world. So overall, Saucony is hitting on just about every cylinder right now and we expect that to continue.

Thank you, that's helpful. And at Wolverine, I'm wondering what your vision for that brand is given Tom Kennedy is coming back to Michigan to run it. And where do you think you are in you're implementing the global growth agenda at that brand?

Yes. As you know we bought one of our best and brightest back to Michigan. Tom worked with us closely in Michigan for several years before he went to Sperry and over the last three years turned that brand around. Wolverine is a brand that we believe has tremendous untapped potential. And we needed seasoned aggressive leadership there. So bringing Tom back was a pretty easy fit. He's also coming back to Michigan to run our licensed apparel and accessory programs and he's going to be with his apparel background, a member of our M&A team as well. The turnaround of the Wolverine brand returned to growth is really in its very early stages. Wolverine had a great Q4, maintained its number one position in the Work market, I actually gained market share there in the U.S. market. But when you look at the Wolverine brand and the possibilities on lifestyle side, the possibilities on the apparel side, a lot of those upsides are untapped. And that's frankly why we asked Tom to return to Michigan.

The next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Good morning, everyone. Would love to get a little bit more color on triangulating the pattern of wholesale orders or what the wholesale environment is likely. What are you seeing changing is it in different category of wholesale channels where changes are occurring and is their wholesale channels which are more impactful for the coronavirus than others for a particular brand? Thank you.

Yes, on the latter part of your question, I don't really see a particular channel that might be more challenged. We all know that the value channels the discount channels have been doing very well over the last couple of years. We expect that to continue. There's probably been and will continue to be more pressure on the mid-tier and then it's becoming a little bit of a barbell with the upper tier doing well, the value channels doing fairly well and the mid-tier struggling a bit. We really don't think that's going to change materially as we look ahead into 2020 at least with respect to the U.S. market. As far as the coronavirus is concerned, we really don't see that having a significant impact right now on any channel versus the other. I would say for brands or businesses that are anchored more in China for luxury brands that have a significant percentage of their sales in Greater China, it'll be certainly more material than it is to our business.

Dana, the only other piece I would add to is that where we see strength is even within a traditional retail channel the dotcom or digital part of their business is obviously the category that's driving any growth. And for us, our wholesale business would include that and it would also include any pure play e-tail customers that we have in the portfolio. So while the brick-and-mortar customer base will be the most under pressure in general, we would still expect the digital segment to continue to be relatively strong and are putting more of our efforts behind that as well as part of our digital direct offense are the assets and the demand creation tactics that we're deploying for our own e-commerce business are going to leverage over to that category pretty seamlessly.

Got it. And when you think of the digital business, the cost of the digital business delivery or shipping, how are you planning in that this year versus last year?

It's fairly similar. I think we continue to get better in that space. I mean, we have very sophisticated distribution centers, good technology that allows us to manage that part of our business as it’s evolved in the fastest growing category for us over the last few years. We have strong contracts in place with logistics carriers, et cetera. So we'll see some increases, I think in -- under normal conditions but nothing that isn't going to cause us to problem. I would say that we continue to just see really good gross margin expansion for both our digital and store based direct-to-consumer channels.

The next question comes from the line of Erinn Murphy of Piper Sandler. Please proceed with your question.

Great, thanks. Good morning. I guess my question is around the price increases you referenced taking in June. Can you just share a little bit more about what percent of your overall portfolio you'll be taking prices then? And then, I guess, against the backdrop, you've mentioned several times kind of weakness in the North American wholesale channel. What is the appetite for your retail partners to take price as we go deeper into year?

Yes, I think it's hard to give you an overall percentage of I'll see if we can kind of work that up, Erinn, but I would tell you that our -- most of our price increases were strategically taken. Certainly, you have the flexibility to do that on new product, new product introductions to make sure you're getting, hitting your margin targets. But we also selectively took some price increases on carryover product. Some of that tied to raw material, some of that tied to tariff, when our research indicated we could do so without really having a material impact on demand. So they were taken across all of our brands very selectively and strategically. And I would say on the sourcing side, we'll probably having our fifth or sixth season of price decreases from our factory partners and that's something I really haven't seen in my career ever that that string of price decreases. That's also helping us some.

Got it. And then I guess the second question is just on uses of cash. Can you just talk kind of what you're thinking about as you go into 2020 and 2021? And then how are you prioritizing M&A within that?

Sure. We're going to continue to make the growth investments that have proven to be successful over the last year or two, talked about it a little bit already. But that's going to continue to be a focus on our digital offense, our direct-to-consumer businesses and then enhancing our international platform where we have opportunities to do that. So number one priority for cash and investment is on those growth opportunities. We did a good job in the fourth quarter of managing the balance sheet; we paid down debt in Q4. We recognize that we have plenty of flexibility and capacity to borrow and to be in a position to deploy more capital in the future. But our priority is in 2020 will be a little bit more focused on paying down debt, keeping the leverage ratio at the level that it is today as we consider M&A in the future as a more long-term strategy for the company in terms of capital deployment. We are very active in the market looking for assets as we have been for the last couple of years. That's not going to change. But we continue to be really selective about what assets we would pursue. And that's certainly part of our overall longer-term growth strategy. But in terms of priority, maybe third or fourth on the list of cash deployment priorities for us right now.

The next question comes from the line of Sam Poser of Susquehanna Financial Group. Please proceed with your question.

Hi, guys. Thanks for taking my questions. This is Will on for Sam. So just to go back to this weakness or softness that you're seeing in the U.S. wholesale markets, what brands are being most impacted for you guys? And what are you guys doing to sort of overcome the softness that you're seeing?

Well, I think Will with respect to your -- the latter part of your question; we're pivoting strongly to DTC channels. We know that content, social capabilities, Big Data capabilities, we're investing and improving there is not only going to help our own DTC business, but it's going to help the DTC business of our wholesale customers and that has been by far their fastest growing segment. I would say with respect to traditional wholesale in the U.S., some of our brands that would have potentially the most exposure there would be Sperry for example; they have very strong traditional wholesale business and pure play business in the USA. On the other hand, Sperry is one of the highest percentages of own DTC as well between the stores and e-commerce sites. So we're just seeing some general softness, it's really not applicable to a particular brand or category of footwear, just some reluctance on retailers to take risk in this environment, probably tied a little bit to a pretty volatile and somewhat soft Q4 for them.

Got you. So I guess the other thing I want to just hit on is for Sperry. Are you seeing any light at the end of the tunnel here for boat shoes? I know you're going to be lapping some very easy comparisons over the last couple of years. It's been such a weak category. And then I think you mentioned on the 3Q 2019 call that you had one major customer that's planning on making boat shoes number one story for the Spring season, I think is what you said, is that still the case?

That is still the case. I guess with respect to boat shoes, we continue to see early signs especially in the fashion of arena of return of the boat shoes silhouette and trends. Boat shoes now account for maybe several years ago, they would have accounted for 70% of Sperry’s business. Today it's under 30% and it's going to fall even more in 2020. But as the -- by far the dominant market leader at a 65% to 70% market share it's Sperry’s boat shoe and opportunity to inject some excitement into that silhouette and into that business, we think for 2020 John Legend is going to be a big help there. The initial meetings with him and collaborations that we've had with them, he's been very focused on the -- on boat shoes.

Great. That's great. And just one last one, are you guys drop shipping, I know you talked about the growth in the digital business for your wholesale partners. Are you guys employing drop ship with the partners?

We do that on a kind of a strategic basis depending on the different customers and the economics of that arrangement with the customer. But we certainly have the capabilities of doing it, as I mentioned before with the sophistication of our distribution centers. But, yes, overall that's a tactic that we'll be looking at as another strategic avenue for us to grow that digital side of the business.

When we do that, we get paid for it.

Our final question comes from the line of Mitch Kummetz of Pivotal Research. Please proceed with your question.

Yes, thanks for taking my questions. On coronavirus, the $30 million sales hit, is there any way you can kind of break that out regionally? I mean certainly China is a small business for you. But is it mostly China; is it mostly other parts of Asia like South Korea, and Japan? Is there even a European or North American component to it? Obviously, Italy now has issues maybe North America from a tourist standpoint; I was just hoping a little bit more color there. And then also in coronavirus, you guys mentioned that less than 20% of your global production in 2020 is China. Is that referencing finished goods production or is that in reference to the total supply chain when you factor in all the raw materials and where they're coming from? So that's coronavirus and I have a follow-up?

Sure. I mean, the 20% figure is finished product. We do know that there are a number of China vendors of raw material supplies, leather, islet, shoe laces and stuff. A large portion of raw material is available outside of China. And our sourcing team has been working on that for some time. But the 20% figure really refers to finished product.

Yes. On the revenue side, Mitch, it's mostly international, certainly focused on the Asia-Pac region, but it's not just China for us, obviously, tourism is having an impact on other markets in and around that area, and in other regions outside of Asia-Pac as well. We also as you know, we also have our own leathers business, which in terms of just short-term demand and some of the delays in factory openings, et cetera. There has been a negative impact on the demand for our Wolverine Leather as well, which is a fairly large percentage of the 30 talking about probably a third of that, so it's not one country but it's certainly heavily weighted to Asia-Pacific in our leathers business with some implications in other markets outside of that region.

Okay, that's helpful. And then my follow-up just in terms of the weak U.S. wholesale that you've been talking about. Can you maybe speak to the fall of pre-books that you're seeing? And within kind of the pre-book, is the boot category more challenged than other categories just given the weather issues? And is there any way you could say what kind of -- what percent of your fall business is boots versus other stuff?

With respect to the boot issue, I don't have the pricing right in front of me and we probably wouldn't normally provide that anyway. But with respect to the boot category, we had a very -- our brands had a pretty strong Q4. So Sperry boots were up 50%, Merrell work boots were up 50%, Wolverine brand gained market share, number one position, the Cat brand gained market share, number three position in the U.S. market. So we're seeing pretty strong pre-orders for boots from our retail customers simply because we performed in Q4 in the fall of 2019. So we're pretty bullish on boots in general.

As you know, overall, I mean boot, our work boot business is about business is about 15% of our total, our global revenue and if you add in lifestyle boots, obviously on top of that, so it's been important, for sure an important category. And I think what Blake had mentioned a good strong category for us. And as far as the back half outlook on pre-bookings in that category, we wouldn't comment on that but it continues to be an area of focus for us and a strategic asset to the portfolio.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

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 March 25, 2020. Thank you and good day.

This concludes today's conference. You may disconnect your lines at this time. Thanks.