Wolverine World Wide Inc (WWW) 2014 Q1 法說會逐字稿

Good morning and welcome to Wolverine Worldwide 2014 first-quarter earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine Worldwide. If anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine Worldwide. Ms. Cowdin, you may proceed.

Thank, Maureen. Good morning, everyone, and welcome to our first-quarter conference call. On the call today are Blake Krueger, our Chairman, CEO, and President; and Don Grimes, our Senior Vice President and CFO.

Earlier this morning, we announced our financial results for the first quarter of 2014. If you did not yet receive a copy of the press release, please call Jessica VanSolkema at 616-233-0500 to have one sent to you. The release is also available on many news sites or if can be viewed from our corporate website at WolverineWorldwide.com.

This morning's press release included non-GAAP disclosures, and these disclosures were reconciled with attached tables within the body of the press release. Today's comments during the earnings call will include an additional non-GAAP disclosure. There was a posting at our corporate website that will reconcile this non-GAAP disclosure to GAAP; to view that document, please go to our corporate website WolverineWorldwide.com, click on Investor Relations in the navigation bar, click on Webcast at the top of the Investor Relations page, and then, please click on the link to the file called, WWW Q1 2014 Conference Call Supplemental Tables, located below the webcast link.

Before I turn the call over to Blake to comment on our results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine Worldwide and its operations may be considered forward-looking statements by Securities laws. As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and also in our press releases.

With all of that being said, I would now like to turn the call over to Blake.

Thanks, Christi. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported our first-quarter results, highlighted by better-than-expected earnings per share. I'm obviously pleased with our team's ability to outperform our bottom-line expectations, given some of the challenges facing the US retail market in Q1.

Our global business model mitigates risk, as we are not dependent on any single country, region, fashion trend, brand, or distribution channel, a solid start to the year. As we anticipated and as we've guided to in our last earnings call, revenue of $627.6 million was down modestly versus the prior year. The softer top-line results were limited to a few brands in the portfolio, and we'll provide further color in a moment, along with some of the highlights from the quarter.

The diversity of our brand portfolio and our global reach is reflected in our solid performance this quarter, with the Asia-Pacific and EMEA regions posting double-digit growth. However, we have not been immune to the general US retail malaise, which has also impacted the US footwear market. In 2013 the US market reached its lowest level since 2008, and this trend has continued through Q1, with the exceptionally long and severe winter. Encouragingly, we have seen a significant uptick in business over the last several weeks, as spring has finally arrived and consumers are beginning to shop and react positively to our new spring and summer product offerings.

Now, moving to some specifics by operating group. First, the performance group, consisting of Merrell, Saucony, Chaco, Cushe, and Patagonia footwear, posted solid mid-single-digit revenue growth in the quarter. Merrell continues to benefit from the actions of investments made in 2013, which included the appointment of a new brand president, the addition of a new creative director for the brand, and the realignment of the product development team. We are making great progress with compelling new product, and retailers and consumers are responding.

I'm happy to report that Merrell is back on a growth track, and we believe its momentum will accelerate throughout the balance of 2014 and into 2015. The lifestyle group, consisting of Sperry Top-Sider, Hush Puppy, Keds, and the Stride Rite children's group, experienced a double-digit revenue decline in the quarter compared to the prior year.

A soft quarter for our Sperry Top-Sider, Hush Puppies, and Stride Rite brands more than offset very strong growth from Keds. The Keds brand's renaissance and momentum continued in the first quarter, driven by the brand's Brave Girl initiative, highlighted by its continued partnership with Taylor Swift.

Some of the retail headwinds in the US market impacted the Stride Rite and Hush Puppy brands in Q1. For Stride Rite specifically, a brand with over 50% of its revenue generated through our own consumer-direct operations, the brutal and prolonged winter season took a large toll. We lost well over 600 retail business days due to weather-related closures, by far an all-time high, over 10 times the number of closures in a normal year.

Stride Rite's year-over-year results were also impacted by the shift of Easter and lower mall traffic. Easter is a significant holiday for the brand, and I'm pleased to report that business was much improved in the first weeks of Q2, as we moved through the Easter-selling season, and the weather has finally begun to turn.

Turning to Sperry Top-Sider, I want to provide some additional detail regarding Q1 revenue performance and where I see the brand headed over the course of the year. Sperry posted an upper mid-teens revenue decline in the quarter, compared to a 28% increase in last year's Q1. The Sperry brand was negatively affected by weather in the US, which is by far its largest market, the decision to exit certain distribution in the US, and a somewhat softer fashion trend for boat shoe silhouette, primarily in women. Some product delays also had an impact on the quarter for Sperry. Almost 50% of the Q1 revenue decline relates to the family channel and our decision to exit some distribution that was not consistent with our future growth strategies.

Looking ahead for Sperry, we expect Q2 revenues to be down in the mid-single-digit range, compared to a 34% increase last year, and expect overall 2014 revenues to be down in the mid-single to upper single-digit range. The Sperry business has picked up significantly with the long-awaited arrival of spring, both in our wholesale accounts and in our own direct-to-consumer business. The improvement started in the last couple of weeks of Q1 and has continued into Q2; in particular, at-once reorders have been very strong in the current quarter.

We are encouraged by the response to our newest products and are seeing strong early sell-through of our latest women's offerings, including our Vulcanized, espadrille, and summer sandal collection. In men's, the momentum in Gold Cup, the brand's most premium offering, with price points running from $120 to over $200, continues, and we're excited to launch the brand's first Gold Cup collection for women this coming fall.

Over the past month, we've also made several key leadership changes within the Sperry brand and have brought in senior talent to head the marketing and sales teams. We expect these changes will have a significant positive impact on the brand, as we position Sperry to be a global lifestyle brand.

Sperry continues to be a significant front and center brand for most of our largest US accounts and retailers. Market data shows the brand maintaining its number-one ranking in the competitive casual footwear market over the last 12 months, and it continues to enjoy a material market-share advantage over its next corporate competitor.

The loyal Sperry consumer has also responded very positively to the brand's expansion into a number of new footwear categories and the brand's evolution to a true lifestyle brand, with offerings in bags, hosiery, eye wear, watches and several other categories. While we expect 2014 to be a normalizing year for Sperry, the brand remains one of the strongest in the industry and has tremendous equity with both retailers and consumers. We remain excited about the global growth potential that exists and look forward to making Sperry one of our first billion-dollar brands.

And finally, the heritage group, which consists of Wolverine, Cat Footwear, Bates, Sebago, Harley-Davidson Footwear, and HYTEST. This group posted a low single-digit revenue gain compared to the prior year, led by strong double-digit growth from Harley-Davidson, double-digit growth from Cat Footwear, and high single-digit growth for the Wolverine brand. This growth was partially offset by declines in Sebago and our lower margin base US military business.

Before I turn the call over to Don, I wanted to take a moment to dive a little deeper into our global business. During our last call, I provided some color on the depth and breadth of our portfolio by highlighting several of our key brands, brands that are significant contributors to both our consolidated solid top- and bottom-line results. We believe the diversity of our brands and the reach of our global business model provides us with the unique and competitive advantage in the marketplace.

Today, I want to focus briefly on the global nature of our business, a business approach that started in 1959 when we took the one-year-old Hush Puppy brand international. A few years ago, our global initiatives took a significant step forward when we established a stand-alone international group with a dedicated team of in-market experts tasked with developing regional strategies and accelerating our brand's growth around the world.

Through our network of global partners, we have nearly 11,500 controlled points of distribution for our brands. While we work closely with our global partners to supply store designs, product and marketing concepts, and assist with merchandise flow, our partners bore the underline retail financial risk.

With over 750 Hush Puppies, 210 Merrell, and over 100 Cat mono-branded stores, our brands are represented in many of the world's best malls and high streets. In the past quarter alone, almost 150 new model-branded stores or shop-in-shops opened around the world, the majority in key growth markets, such as China and certain emerging markets in Latin America. We anticipate another 800 stores and shop-in-shops will be open by year end.

Since the closing of the PLG acquisition, one of our key priorities has been to plug our new brands, Sperry Top-Sider, Saucony, Keds, and Stride Rite, into our vast and experienced global network. We are already beginning to see some early traction for this critical initiative. During the quarter, we signed agreements covering over 25 key growth markets, bringing the total number of new agreements since closing to nearly 55, covering nearly 85 countries. Our efforts to expand global distribution for our newest brands will obviously continue, and we expect they will have a meaningful impact on our results over the next several years.

Our diversity international portfolio helps drive our consistent financial results and enables us to reach a broad range of consumers around the world. Strategically, we remain focused on leveraging our diversified brand portfolio by maintaining a fanatical focus on innovation, especially product innovation; expanding our already extensive global footprint; focusing on creating stronger connections with our targeted consumer groups; and extending the lifestyle and direct-to-consumer opportunities for our largest brands.

Thanks for your time this morning. I'll now turn the call over to Don Grimes, our Senior Vice President and CFO, who will provide some additional commentary on our performance in the quarter. Following his prepared remarks, we'll open the call up for questions. Don.

Thank you, Blake, and good morning to everyone listening in today. Earlier this morning, we announced financial results for Wolverine's first fiscal quarter ended March 22nd, highlighted by double-digit operating margin, growth in adjusted pre-tax income, better-than-expected adjusted earnings per share, lower inventories, and significant improvement in year-over-year free cash flow.

Our consolidated revenue, consistent with the guidance we offered in February, declined modestly versus the prior year. However, as I mentioned, adjusted earnings per share substantially exceeded our internal forecast, driven by better-than-expected gross margins and solid operating expense discipline.

I'll now provide some additional insight into our financial results and give an update on our expectations for the balance of the year. All current and prior-year financial results discussed today have been adjusted to exclude any integration expenses related to the October 2012 acquisition of the performance in lifestyle group, restructuring charges related to the closure of our Dominican Republic manufacturing facilities, and expenses related to our October 2013 debt refinancing.

We reported first-quarter revenue of $627.6 million, a decrease of 2.8%. We were pleased with solid revenue performances from many brands in our portfolio in the quarter, particularly Merrell, Saucony, Keds, and Cat Footwear, where we have many product and marketing initiatives working well. In addition to significantly lower retail traffic in the US, a number of factors impacted consolidated revenue in the quarter, including the strategic realignment of Sperry Top-Sider's US distribution, which Blake mentioned earlier; unusually harsh and prolonged winter weather, causing a much higher-than-normal number of temporary retail store closures, both our own retail stores and those of our retail customers; the shift in timing of the Easter holiday business to the second quarter; and a continuing soft US casual footwear category, which according to NPD, was down almost 6% in the first calendar quarter versus the prior year.

Additionally foreign exchange translation, in particular a strengthening of the US dollar versus the Canadian dollar, reduced reported revenue by $1.5 million in the quarter. Our ability to deliver solid earnings within the context of a challenging retail environment underscores the power of our diversified business model.

I'll now move into more specific commentary about each of our operating groups, first the performance group. The performance group delivered revenue of $248.8 million in the quarter, growth of 3.4% versus the prior year, with Merrell, Saucony, and Chaco leading the way. Merrell had mid-single-digit revenue growth in Q1, very solid performance, and above our expectations going into the quarter.

As you may recall, Merrell was up against strong growth in the prior year, driven by the launch of the full M-Connect collection in last year's Q1. Driving the brand's revenue gain in the current quarter were double-digit growth from its performance outdoor product, a nice lift in men's active lifestyle product, and across-the-board strength from international regions. Merrell's US specialty stores posted strong comps for the quarter, continuing a nice trend for this important brand initiative.

Saucony had another solid quarter, delivering growth in the mid-single-digit range as brand momentum continues in both performance running product and its more lifestyle-oriented Originals product, which is doing exceptionally well in Europe and is building momentum in other markets. Saucony is focused on being the leader in product innovation for performance runners

In the first quarter, the brand continued to expand in the all-important US specialty run channel, with the launch of both the Guide 7 and Ride 6. The lifestyle group, our operating group that was most significantly affected by the negative trend in US casual footwear and the harsh winter weather, delivered revenue of $238 million in the quarter, a decrease of 11.9% versus the prior year.

Continued excellent double-digit-growth from Keds was more than offset by double-digit declines in Sperry Top-Sider and Stride Rite, and a single-digit decline from Hush Puppies. Many of the factors that challenged Sperry in Q1 were anticipated; the brand was up against a very tough comparison to the prior-year's Q1, when revenue grew by nearly 30%, and we made the strategic decision last year to exit specific family channel distribution points, which significantly reduced revenue in the quarter. Other factors were less easy to predict, such as the record winter in the US, which drove consumers away from the malls and reduced demand for spring and summer product.

On the bright side, as Blake noted, certain of Sperry's product classifications did well during Q1, and as expected, business has improved in the first few weeks of Q2. Additionally, the brand expanded nicely in EMEA, an important part of our growth strategy for Sperry.

The product excitement and momentum in the Keds brand continued in the first quarter, with further expansion of the Champion product and continued success of the Brave Girl initiative, with Taylor Swift firmly entrenched as Brave Girl number one. Expanded assortments with implemental retailers are helping fuel brand excitement in the US, while the international business for the brand also saw a very healthy uptick during Q1.

Turning to Hush Puppies, the US business was negatively impact by tough retail conditions for casual product, particularly with department stores, as we face poor weather across the US. On a positive note, the brand returned to growth in EMEA, a region that has been challenging for the last several quarters due to macroeconomic conditions and key retailer consolidations and bankruptcies. Lastly, the Stride Rite children's group experienced a difficult quarter that was impacted by an unusually high number of weather-related retail store closures, a shift in the timing of the brand's very important Easter holiday selling season, and the continued pressure on US retail in general.

Turning now to the Heritage group, first-quarter revenue was $120.7 million, a 1.8% increase over the prior year. Double-digit growth from Cat Footwear and Harley-Davidson Footwear, and high single-digit revenue growth in the Wolverine brand, drove the group's performance.

Cat Footwear's growth in the quarter was geographically balanced, with nearly all regions contributing to the brand's double-digit revenue increase. The brand is succeeding with a variety of offerings, including core Colorado product, Cat Women's, Cat Work, and a new casual program called Cat [Ease].

The Wolverine brand solidified its leading position in the US [sport] category, were its market share expanded by approximately 110 basis points in the last year. Wolverine also achieved double-digit growth in its heritage product, specifically its 1000 Mile collection in top-tier accounts and better men's stores.

Blake spoke earlier about the power of the Wolverine global business model and the strategic advantage related to the geographic balance of our portfolio. In the first quarter, EMEA and Asia-Pacific delivered the strongest revenue growth, both generating double-digit increases. The growth in EMEA, after several successive quarters of contraction, is very encouraging. Growth in these two regions is partially offset by single-digit contraction in North America. For the full fiscal year, we expect the strongest regional growth from Asia-Pacific and Latin America.

Gross margin in the quarter was 40.8%, a 20-basis-point increase compared to the prior year. Select price increases and favorable product mix were the single biggest drivers of the increase, only partially offset by higher product costs and unfavorable variances on foreign exchange future contracts for product purchases.

Reported operating expenses in the quarter of $192.1 million included $1.6 million of acquisition-related integration expenses. Adjusted SG&A of $190.5 million represents a 2.8% decrease compared to the prior year's adjusted SG&A, reflecting both disciplined management of operating expenses and year-over-year integration synergies. As a percentage of revenue, SG&A was essentially flat with the prior year.

Interest expense in the quarter was $10.9 million; $2 million lower than the prior year, reflecting the impact of year-over-year principal reductions and a lower interest rate on our term loan, driven by both our lower leverage ratio and last year's debt refinancing. The Company's reported effective tax rate for the quarter was 28.5%, significantly higher than the prior year, due primarily to a higher mix of earnings coming from the United States and the absence this year of the US Federal research and development tax credit.

Fully diluted weighted average shares outstanding for the first quarter were the 99.9 million. Adjusted fully diluted earnings for the quarter were $0.38 per share, a decrease of 7.3% versus the prior-year's adjusted $0.41 per share, but well above our expectations going into the quarter, and as I noted earlier, adjusted pretax earnings were up versus the prior year, with EPS decline being driven solely by the higher tax rate. On a reported basis, earnings increased 20% to $0.36 per share compared to $0.30 per share in the prior year.

Total inventories were down 4.4% at the end of the first quarter compared to the prior year, reflecting our continued discipline in managing working capital. Accounts receivable increased moderately compared to the prior year, due primarily to stronger revenue growth in the latter half of the quarter. On the strength of a $30-million improvement in year-over-year free cash flow, we finished the first quarter with cash and cash equivalents of approximately $167 million and net debt of slightly over $1 billion.

Our priorities for cash remain the same: invest in our brands to drive future growth; maintain a stable cash dividend for our shareholders; aggressively pay down debt; and when the timing and opportunity are right, considered adding brands that strategically compliment our best-in-class portfolio. There are certainly many things to be excited about in our business, and we're exceeding performance targets for many product and marketing initiatives throughout the portfolio.

Today, we're reaffirming our estimate for full-year revenue in the range of $2.775 billion to $2.85 billion, representing growth in the range of 3% to 6% versus 2013 revenue of $2.69 billion. We're also reaffirming our expectations for full-year adjusted earnings per share in the range of $1.57 to $1.63, which represents growth in the range of 10% to 14% versus the prior-year's adjusted earnings per share of $1.43.

We expect to deliver record full-year financial results, performance that would represent our fifth consecutive year of record revenue and our third consecutive year of record earnings.

Thanks for joining us on our Q1 conference call, and we'll now turn it back to the operator for some Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is Jim Duffy from Stifel. Please go ahead.

Thanks, good morning, everyone.

Good morning, Jim.

Good morning, Jim.

A couple questions on the outlook for the balance of the year. With the fourth-quarter call, you gave some context around the shape of your expectations for growth between the first half of the year, second half of the year. Don, could you update us on that, please?

And then, if I have to choose a second question, it would be around the areas where you're finding room to tighten the belt for the cost savings. You did a nice job on the SG&A. I'm wondering how much more there is there, and at what point we might see that flatten out, or perhaps see incremental dollars as you invest behind the brands.

As related to your first question, we certainly expect stronger growth in the second half of the year, particularly weighted to the 17-week fourth quarter. We're up against tougher comps in Q3, when last year our consolidated revenue grew about 9%. I would say our expectations are still for stronger second-half growth compared to the -- what we expect to deliver in the first half of the fiscal year.

As it relates to your second question, we did over-deliver on our expectations for earnings in the quarter, with a substantial part of that over-delivery coming from lower SG&A than expectations. Most of that SG&A we expect to be invested in -- over the balance of the year Q2 through Q4. We do expect to see contribution in each quarter from incremental synergies. Recall that last year we talked about a $10- million full-year benefit from synergies, as we completed the integration. And we expect that to be a -- the run rate that we saw or the expectation -- the performance we saw in Q1 we would expect to see in each of the three remaining quarters of the year.

Great. Thanks.

Our next question is Kate McShane, Citi Research. Please go ahead.

Thanks, good morning.

Good morning.

My question is centered around the supply chain, and I wondered if you could walk us through how you're progressing and expanding the capacity of supply chain to serve the increased distribution internationally. And can you address the disruption at Yue Yuen and how it could impact your business for the rest of the year?

Yes, I would say we -- for a number of years now, we've been focused on expanding our supply base out of southern China and out of China. We've made considerable progress. The overall percentage of our footwear source from that country continues to decline, and certainly, we started out far below the US average, for example.

And it's a question of blocking and tackling, Kate, really; new factories forming some relationships, testing products -- new products in a prudent way, and then expanding our capacity with them.

With respect to the Yue Yuen situation, it was -- didn't really have an impact on most -- on any of our brands except maybe for Saucony a little bit. We follow that situation closely. We think it's been resolved. Yue Yuen is a material supplier for us, primarily the Merrell brand, but the factory is making for Merrell and several of our other brands were, frankly, unaffected.

Thank you.

Our next question is Taposh Bari, Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Good morning.

A question on the EMEA region, obviously, very encouraging trend there. How are you planning that business for this year? And in the event that you actually beat on that revenue plan, walk us through, if you can, the EPS implication, because I believe it's a lower tax region and also higher margin.

Yes, the double-digit growth out of EMEA in Q1, we're not expecting, we'd like to see, but we're not expecting double-digit full-year growth. After two consecutive years of decline, with last year being close to flat but still technically a decline for EMEA, we're forecasting mid single-digit growth for EMEA, which is a nice turnaround from where it's been the last two years.

You're right about a lower tax rate out of that region, but the benefit from EMEA growing mid-single digits is already captured in our earnings guidance. I wouldn't categorize that as upside to the earnings guidance necessarily.

Taposh, as you know, the UK is our biggest market in that region and the UK seems to have a little bit more of a bounce back right now than the region as a whole. But the greater European region is still only estimated due GDP growth of 1.7% to 1.9% this year. So they're recovering, but albeit, on a pretty slow pace.

Helpful. The and the second question I had was on Sperry. I believe last quarter you were calling for '14 to be a flat year in terms of revenues for Sperry, and now you're calling for it to be down mid to high-single digits. Just curious to see what the difference is there.

Yes, we try to be very transparent with you and give you our current estimate, and that estimate was, frankly, based on how the brand performed in Q1. We expected Q1 to be a down quarter for Sperry, but the prolonged winter, the fact that most of the Sperry product at this point is anchored in spring and summer collections, frankly, everything really had an impact on the brand. So when you factor in their revenue decrease in Q1, and as we look ahead at the order book and how the business is shaping up for the entire year, that's our best -- that's our best estimate for the full year.

I would say while we met our consolidated expectations for revenue in Q1, Taposh, some of the brand's over-delivery, as you would expect across a 16-brand portfolio, some are going to do better than bet expectations. And certainly, we didn't expect Sperry to be as down as much as it was, but other brands pulled up the slack to a certain extent and we delivered on the consolidated expectation for the quarter.

Yes, the good news right now is we're seeing very strong [at one three] orders for Sperry as spring has finally broke around the country. And the pick up on the non-boat shoe category for fall, boots, rubber boots, casual boots, and several other flats and in other categories, has been very good.

On the pickup, are you able to discern how much of that is actual improvement in the fundamental trend, versus say, a favorable Easter shift? Because we're hearing a lot of companies say the same thing, but I think investors are trying to figure out what's real and what's not.

I would think that -- well Easter is important to the footwear market, but it's really not important for a number of our brands and Sperry would fall into that category. The Easter and the three-week Easter shift would be far more important for the Stride Rite children's group, for example. So really our outlook for Sperry for the year and its current performance is really not overly based on the shift in Easter.

Okay. Thank you. I will pass it on.

Our next question is Christian Buss, Credit Suisse. Please go ahead.

Yes, thank you very much. You've shown pretty tremendous inventory discipline over the last several quarters. Could you provide some perspective on how you're planning your inventories for the back half of the year?

Yes, I think in terms of year-end inventory, we would expect year-end inventory to be up modestly versus the prior year. I would say our inventory was very low and very clean at the end of 2013. So when we're looking at our planned cash-flow generation for fiscal 2014, we're certainly expecting to make some investments in networking capital, both inventory and accounts receivable at year end versus the prior year.

I think our inventory will still be very much in balance and very clean at the end of fiscal year, but I think trying to replicate where we were at the end of 2013 might be a challenge. If you're modeling out free cash flow generation for the year, I would expect inventories to be up modestly in the mid single-digit range versus the prior year.

That's very helpful, and the pendulum's been swinging over the last couple of years between pre-orders and at-once orders. Where are we on that pendulum right now?

Well, I would say not much has changed, frankly. I think retailers are playing as close to the vest as they possibly can. They try and push back on brand owners like us as much as the inventory risk is possible. We've responded over the years by having a narrow and deep philosophy. We want to carry a little of everything, but we want to be narrow and deep in the core product and the core colors, so sometimes, it gets, frankly, a little frustrating to us when we don't think a particular retailer has placed as many future orders as they should, and especially when they come back with large at-once reorders. But that's the nature of the business, and we've learned how to be pretty good at it.

Thank you so much and best of luck going forward.

Thanks.

Our next question is Mitch Kummetz from Robert Baird. Please go ahead.

Yes, thanks for taking my questions. A little bit more color on Sperry. Could you quantify the impact from the distribution alignment -- realignment on the quarter? And then, when does that normalize? And any help, men's versus women's performance on the quarter. It sounds like the women's boat shoe piece was the most difficult, and then I have a follow-up.

Yes. Let me address the boat shoe piece. Yes, I would think the impact in the quarter was fairly even on a percentage basis between men's and women's. I have seen the boat shoe silhouette remain, I believe, stronger on the men's side. It's become a -- over the last seven or eight years, a real staple in the men's closet, especially here in the United States, with 25% to 30% of all men's shoes being tied to that boat shoe silhouette.

Less on the women's side, and we detected a more significant -- it was hard to measure, but a more significant fall off in the fashion component on women's boat shoes in the quarter, and we think that's stabilized right now. We really don't think period 1 and 2 and most of 3 was a good indication. The boat shoe look itself is front and center at all of our major retailers and customers, so as you know, Sperry is the dominant player in that category.

And what was your --

The first question about the one decision to exit the family channel account. That hurt the brand's year-over-year growth in the quarter by about 5 percentage points. And I think as Blake mentioned in his prepared remarks, about 50% of the brand's decline in US wholesale in the quarter was from the family channel accounts, which would include that one specific decision to exit the one account.

Got it, and that normalizes by Q4?

I'm sorry. It would be a negative impact each quarter of the year.

Okay. Got it. Then could you guys speak a little bit to performance in the quarter, wholesale versus direct, and how you expect that to play out over the course of the year?

Yes, I would say certainly period 1 -- as I said in our last call and as I said in January at ICR, we didn't expect the turning of the calendar page to change the retail environment, and that's exactly what happened. So the tough trading conditions at retail continued certainly into period 1 and 2 and most of 3, exacerbated by the weather. So it's been a challenging Q1 for retail in general.

And overall, across our 16 brands, the wholesale business was stronger than consumer direct in Q1. We would expect that, we've already seen it, expect that to reverse here in Q2 a little bit and get back to a more normal shopping environment. Spring has finally gotten here, and people are actually starting to look at new spring and summer styles.

Okay. Thank you. Good luck.

Thanks, Mitch.

Our next question is Edward Yruma, KeyBanc Capital Markets. Please go ahead.

Hi, good morning, and thanks for taking my question.

Good morning.

I know you discussed at length the transition with Sperry, particularly as you exit some of these family channel doors. Can you talk about Sperry's distribution overall? I know it was unique that you had some premium positioned retailers. Have you been losing retailers and how does the skew of the customer base, how has that changed this year versus last year?

Really, the customer base hasn't changed at all from what we can ascertain. And we're in as many mid-tier and premium retailers as the brand's ever been in, with a, probably, even an expanded assortment, as the brand has redoubled its effort to move beyond boat shoes. So you can take a quick tour at retail, and you can see, frankly, Sperry is front and center in the mall, whether it's at team retailers or at department stores or better-grade department stores and very, very strong with independents.

So the brand is strong. There is no brand drag with retailers or customers, and this will be a bit of a normalizing year for the brand, but after four or five years of growth at a CAGR of 30% plus, not totally unexpected.

Got it, and a follow-up, if I may. I know there was a confluence of unusual things that took place between weather, the Easter shift, that impacted the Stride Rite children's group, but you've had a number of weak quarters there. I know you have a new leader in place. Any early unlockings and things you can do to improve performance there, should mall traffic remain weak?

Yes, I think Ira is focused on the right things; he's taking a hard and very strategic look at the whole omni-channel experience and structure of that organization. As you know, we operate almost 300 Stride Rite children's stores here in the US, but he's also taking a hard look at millennial moms, how millennial moms are shopping. And he's got a number of initiatives focused on a short and midterm increase to store productivity.

So we feel great about Ira. He's doing a great job. Certainly a challenging environment in Q1 out of the box for him, but he's looking at all the right things.

Great. Thanks so much.

Our next question is Scott Krasik, Buckingham. Please go ahead.

Yes, hey everyone. Thanks for taking my questions. Can I ask a question on Q2, and then a second-half follow-up? On Q2, you alluded to DTC growing faster than wholesale, and I think you also said that you don't intend to reinvest as much either. So should we see a sequential increase in gross margin improvement and should we still continue to see SG&A down year over year?

Well, yes, Scott, first, maybe I misspoke, but I said consumer direct was going to bounce back to what we considered normalized levels, so we don't see any -- we don't anticipate and we're currently not seeing any falloff in our wholesale business, which really remains pretty strong around the world.

We're not giving specific quarterly guidance, Scott, but we [would] stand behind our comment from February that we expect modest full-year gross margin expansion. And I also mentioned, I think, in response to one of the first -- Jim Duffy's question that we would expect some of the SG&A that we did not invest in Q1 to be invested over the balance of the fiscal year, to be only maybe partly offset by the realization of the synergies on a quarter-by-quarter basis from the integration of PLG.

So not down year over year is what you're saying.

No, I would not expect full-year SG&A to be down, no.

Okay. And then in terms of giving us comfort around the sales acceleration in the back half, because that's really key here, do the backlogs support this acceleration? I know you alluded to retailers still playing it coy with commitments, but how do we get comfortable really with the acceleration?

Well, fundamentally, not much has changed. We obviously look at our order flow at once and future orders. We look at how our newest products are selling through in the market, especially here in the United States, and a number of other factors. We get pretty detailed sell-through reports from all of our largest retailers, and collectively, across our portfolio, we're probably the largest footwear brand-owner supplier to a number of our -- the biggest retailers here in the US. So our outlook certainly has not changed since our last call and its current sell-throughs and the current order position have only reconfirmed what we said during last call.

I would say Scott, it's not -- it's a backlog, that's obviously one data point, but also the quality of the backlog in terms of what we expect to actually ship out of that backlog this year versus last year also framed by what we expect our at-once business to be, framed by what we experienced last year in Q3 and Q4. And also what we expect to do on the consumer direct front, both in terms of e-commerce growth, new stores opening, as well as comp-store sales growth on the existing stores.

Okay. Thanks. Good luck.

Thanks.

Our next question is Steve Marotta, CL King & Associates. Please go ahead.

Good morning, everyone. Another question on Sperry, considering that the first quarter was down in that upper [teens]; the second quarter is expected to be down mid-single-digit; the full year down, I believe you said mid to high single digit. Can you talk a little bit about -- a little more granularity about second-half '14 expectations? I'm unsure of the particular sales mix of Sperry in first half versus second half. Maybe you can offer a little granularity there.

Yes, to give you maybe a little bit more insight, as we look into the second half of the year, we would be anticipating, for a number of reasons, growth for Sperry in Q4, still a tougher comparison in Q3. We would expect a revenue shortfall from last year in Q3, but we're pretty confident about getting Sperry back on the growth track in Q4.

The backlog order book supports, obviously, that fourth-quarter projection?

The answer is yes. It's still early. We've got a couple of open-order windows yet, obviously for Q4 and then we do, as you know, a good chunk of our business in the at-once category, but the answer is yes.

Okay. And the follow-up question I had as it pertains to operating expenses in the first quarter. Don, could you aggregate what was discretionary versus synergies for the decline on a year-over-year basis?

$2 million of synergies really would be what the run rate would be per quarter. For the full fiscal year, year-over-year synergy benefit of about $8 million. And so the balance of the SG&A discipline would be more in the form of discretionary spending that -- some of it's timing related, some of it is was purposely delayed until the latter part of the year.

Okay. That's very -- was any completely eliminated? In other words, you mentioned the course of the reinvestments, but of that difference.

Obviously, there's a lot of the fiscal year left, but our expectation now is that the vast majority of the underspend in Q1 would be reinvested over the balance of the year. That's why the earnings overdelivery in Q1 did not result in an increase in our full-year EPS guidance, because we expect to invest that over the balance of the year.

I understand. Thank you very much.

(Operator Instructions)

Our next question will be Danielle McCoy, Brean Capital. Please go ahead.

Good morning. Thanks for taking my question.

Good morning.

Regarding some of the trends that you guys have been seeing come about in the second quarter, can you give us a little bit of color of where you're seeing the pockets of upside or strength and where still some weaknesses might exist?

Well, if you want to focus first on general consumer trends, and we've -- amongst our 16 brands, we have one or more brands that cover just about any targeted consumer group. We continue to see a strong interest in boots, especially in Europe, a resurgence of the mid-90's grunge boot trend. We also see that picking up on the coast here in the United States. That's good for, obviously, a number of our brands, and it's an early trend that continues to build.

Obviously, we're beginning to see specific sell-throughs on spring and summer product over the last three or four weeks, as the weather has broken in about two-thirds of the country. Color, as a general consumer trend, remains very high on a consumer's mind. And that's good usually; when that trend has been there for footwear, it means for a pretty strong footwear business. Do you have any other trends -- or any categories in mind?

No, I was just trying to get a little bit of a sense of how -- what some of the consumers are really focused on and what have been selling better than others.

Yes, I would say, frankly, boat shoes have been very strong here over the last several weeks. I think you're going to see, especially in the US market, strong espadrille season and a strong sandal seasons, as well, for spring and summer.

I would say, in the apparel category, generally, it's my belief from touring retail and talking to some folks around the industry that there isn't a single one or two white-hot fashion trends that is driving apparel at the moment. And so, I think that flows down to the footwear category as well, and we'll have to see what the future holds.

All right. Great. And then a little housekeeping. What should we expect for D&A and the tax rate for the year?

I would use the Q1 tax rate as the best estimate for the full-year tax rate, Danielle, and D&A in the $50-million range.

Okay. Great. Thank you, guys. Good luck.

Thanks.

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

Great, thank you for taking my question, and I apologize if this has been asked; I've been toggling on a couple of conference calls. On the Keds business, it sound like that's been a point of strength. Can you talk about how that brand has been translating internationally?

Yes, as I said at the beginning, when we acquired the PLG brand, I was surprised at the very beginning at the strong interest our international partners showed in Keds. I expected strong interest out of the box in Saucony; I expected strong interest of the box certainly in Sperry Top-Sider, the number-one casual brand in the US; but the Keds brand and business had a pretty strong pickup across our international partners.

The brand continues to perform quite well, obviously, very early on in its international expansion. Probably between EMEA and Canada and the rest of the countries around the world in Q1, it would be less than -- certainly less than 25% of top-line sales, so tremendous upside there. And we've got some big programs going in China and some other bigger countries around the world.

I would also say that in the US, Keds, given the nature of its product and the brand, the weather also had a negative impact on the Keds brand in Q1, despite its strong double-digit revenue increase. Certainly, if we'd had a normalized spring, it would have been even higher.

What's really encouraging about the Keds brand, Danielle, is in addition to the revenue growth both US and outside the US, we continue to see nice gross margin expansion, not the same rate of expansion that we had in 2013 when the brand grew its gross margin by almost 1,000 basis points but a significant increase in gross margin in Q1 versus last year's Q1. We continue to -- it's really driven by favorable product mix.

That was a follow up question, given the promotional environment --

Sorry, Erinn, not Danielle. Sorry.

That's okay. I knew what you meant. Given the promotional environment in general, it was impressive to see the gross margin gains in the quarter. Was that more mix shift, as you alluded to, or how are those conversations with your wholesale accounts going, as we think about what was a very, very soft weather patch during the first quarter?

Are you talking overall or for Keds?

Overall.

Overall, really it was driven by price increase. Our price increases was more than offset the impact of higher product costs by about 40 basis points. And then slightly offsetting that was a negative foreign exchange that I alluded to, that was about 20 basis points, which got us to the 20-basis-point increase in margin. It was a solid gross margin quarter we think in a tough environment, especially when we had the softness in our consumer-direct business, which obviously had a negative impact on gross margin. We were really pleased with the gross margin performance in the quarter.

Great, thank you, and best of luck.

Thanks, Erin, sorry I called you Danielle.

Our next question is Sam Poser, Sterne Agee. Please go ahead.

Good morning. Thanks for taking my questions. I've got a handful. I'll make it in one long question. One, can you give us EBIT, I know it's comes on the Q? Can you give us the EBIT by group? Number two, could you give us an update on the five-year plan given the slow revenue start? Number three, the pre-book -- Q1' is a pre-book quarter. Could you discuss how that might have moved around to at-once? Number four, you said you were going to aggressively pay down the debt, but there wasn't that much of it appears in the first quarter. And lastly, the GAAP EPS guidance went from 152 to 158 to 148 to 154, yet the non-GAAP numbers stayed the same. Can you talk about what changed there? Sorry for that one, long, multiple question. Thanks.

Sam, I was writing quickly. You've clearly violated the rule, but we'll try and answer as many of them as we can remember.

I would say that's par for the course for you Sam, but I'll handle the first one. You took that as a compliment, right? Operating profit that will be in the Q when it's filed, the performance group $58 million, 58.0 million; lifestyle group $25 million, and heritage group $17.7 million.

And the other?

I don't have it in my fingertips, a few million dollars. I don't have the exact number.

Yes, with respect to our five-year plan, we haven't changed our growth targets over the five-year plan. We would still expect at this point to hit $4.1 billion by 2018, despite the unusual Q1 this year and our outlook for 2014. We know our international business, especially with our newest brands, are going to build over time. It takes a couple of years, four or five seasons, to really get those brands going in international markets. So they'll start to kick in, in the future as well.

And then, Sam, I think your third question was on order. I think retailers, especially in periods 1 or 2, were very cautious with reorders and future orders; that has begun to open up. We've seen a resurgence in our at-once business, especially in the Sperry brand here just over the last few weeks. Just generically, when I look at our consolidated order book, it's certainly built week by week, since the end of Q1, which is a very good sign.

As it relates to your question on debt repayment, as I think you know from our past conversations, our ability to actually pay down the debt or prepay the debt, pay more than the mandatory principal payments, is a function of our US cash flow and is indicated by the fact we had a $34-million draw on our revolver at the end of Q1, which is a cash-usage quarter for us, given the seasonality of our working capital requirements. There really wasn't any excess cash flow in the US in Q1 with which to pay down our debt, so that still is an important part of our strategy to de-lever as quickly as we can. But it's a function of delivery -- or generating cash in the US that really determines our ability to do that.

As it relates to the reported EPS guidance, as we continue to move through with some of the lingering integration projects, the most significant of which is the integration of our customer service and consumer-relations department and the back-half integration of European distribution, we've continued to fine tune and refine the expenses that we would incur to accomplish those two things that are still to be accomplished in 2014. And so, that's why there's a bigger spread between the adjusted EPS guidance and the reported EPS guidance now than what we talked about in February.

Thank you for helping me break the rules.

You're welcome. Bye bye.

Our next question is a follow-up, Mitch Kummetz from Robert Baird. Please go ahead.

All right. Thanks. Yes, two quick follow-ups on the full-year revenue guidance. Don, I think you said on the last earnings call that lifestyle would likely -- I'm sorry, not lifestyle. Heritage would likely be your strongest growing group this year, but in the quarter, obviously performance was the strongest. And actually, performance was a little better than what I thought given the lapping of the M-Connect launch. Can you update us on how you're thinking about the growth by operating group?

We don't have our plan right in front of us Mitch, quarter by quarter.

By operating group.

But I will say Merrell had a very strong Q1, and this has been building since Q4 of last year. The outdoor performance category for Merrell in particular had a very strong double-digit increase in Q1, so Merrell and Saucony are clearly the largest drivers for the performance group. The unusual spring weather probably had a bit of a dampening impact on Saucony growth in Q1, but it's back on track towards an accelerated growth rate. So this year on the performance group side, I would see still continued very strong performance from Chaco and strong performance from both Merrell and Saucony contributing to a very good year.

Yes, I'll say Mitch, I'm sorry. I've been proven wrong before, but I don't have a specific recollection of saying in February that we expected the heritage group to be the strongest revenue performer for the full year. Maybe I did, but as I sit here today, even without the benefit of the full-year reforecast in front of me by brand and operating group, I think the performance group is going to be the strongest year-over-year grower of the three operating groups. But I'll confirm that, and I'm sure we're going to talk later today.

Okay. Great. And then, a last follow-up on the benefit from international expansion of acquired brands, I know your overall revenue growth plan is 3% to 6% growth. Is there any way you could give us a sense as to what incremental benefit you expect to get from the international expansion required brands. Is it 1 or 2 points of that growth or is it not even that much?

I would say Mitch, it's less important, frankly, in terms of revenue as it is in terms of bottom-line impact on the Company. Most of the -- contracts we're signing will be royalty. They'll be a blend, but it will be royalty income. Let us do a little more work, and we'll be happy to give you an update on that at our Q2 call when we have maybe a little more insight into the year.

I will say it's also a pretty small base of starting point, particularly for Keds and Sperry, Mitch. So by Saucony being one of the four brands that we acquired that has the most business outside the US, but I would say it's less than 1 percentage point of that 3% to 6% growth. It's still high teens to above that in terms of the year-over-year growth outside the US for Keds, Sperry, and Saucony.

Okay.

Just another point of reference for you, when we acquired these brands, the Saucony had the most international business, with about 18% of its top line outside of the United States. That has fallen by a double-digit percentage here, as even for Saucony, international operations have expanded and additional contracts have been signed, especially given its growth in EMEA. So today, for the quarter if you looked at the Saucony business, only about two-thirds of top-line revenue would be from the US. It gives you an indication of how it builds over time.

Great. Thanks again.

Thank you, bye.

Thank you.

Thank you. The question-and-answer session has now ended. I would now like to turn the call over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Thank you. On behalf of Wolverine Worldwide, I would like to thank everyone for joining us today. And as a reminder, our conference call replay is available on our website at WolverineWorldwide.com and that replay will be available until June 20, 2014. Thank you. Good day.