Wolverine World Wide Inc (WWW) 2017 Q4 法說會逐字稿

Good day, and welcome to Wolverine World Wide's Fourth Quarter and Full Year 2017 Conference Call. (Operator Instructions) This call is being recorded at the request of Wolverine World Wide. If anyone has any objections, you may disconnect at this time. (Operator Instructions) I would now like to introduce Mr. Chris Hufnagel, Senior Vice President of Strategy for Wolverine World Wide. Mr. Hufnagel, you may proceed.

Thank you. Good morning, and welcome to our fourth quarter and full year 2017 conference call. On the call today are Blake Krueger, our Chairman, Chief Executive Officer and President; and Mike Stornant, our Senior Vice President and Chief Financial Officer.

Earlier this morning, we announced our financial results for the fourth quarter and full year 2017. The news release is available on many news sites or it can be viewed from our corporate website at wolverineworldwide.com. If you would prefer to have a copy of the news release sent to you directly, please call Tyler Deur at (616) 258-5775.

This morning's press release included non-GAAP disclosures, and these disclosures were reconciled with attached tables within the body of the release. Comments during today's earnings call will include some additional non-GAAP disclosures. There is a document posted on our corporate website entitled WWW Q4 2017 Conference Call Supplemental Tables that will reconcile these non-GAAP disclosures to GAAP. The document is accessible under the Investor Relations tab at our corporate website, wolverineworldwide.com, by clicking on the webcast link at the top of the page.

Before I turn the call over to Blake to comment on our results, I wanted to provide some additional context and information. As communicated during the company's last quarterly earnings call, the company's 2017 fiscal year is comprised of 4 13-week quarters versus a 12-week quarter for the first 3 quarters and a 16-week quarter for the fiscal fourth quarter in the prior year. When speaking to revenue, Blake and Mike will primarily refer to underlying revenue, which adjusts for the impact of foreign exchange, the impact of retail store closures, the transition of the Stride Rite to a licensed business model; and for 2018 guidance, the sale of the Sebago brand and the sale of the Department of Defense business.

We believe underlying growth best reflects how our global businesses are performing in the marketplace. In addition, we will be providing adjusted financial results, which exclude restructuring and impairment costs, nonrecurring organizational transformation costs, including divestitures and incremental inventory markdowns related to store closures, the impact of foreign exchange and noncash impairment of indefinite-lived intangible assets, environmental and other costs and the impact of recent changes to U.S. tax law. You can find tables reconciling these disclosures in our earnings release and on our corporate website. I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine 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 results to differ materially. These important risk factors are identified in the company's SEC filings and in our press releases.

With that being said, I would like to turn the call over to Blake Krueger. Blake?

Thanks, Chris. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported fourth quarter revenue of nearly $580 million, representing underlying growth of 1.7% and adjusted earnings per share of $0.41, a 20% increase over the last year. We're obviously pleased with these results as the momentum in the business continued into Q4. During the quarter, we made excellent progress in all 4 sprint lanes of the WOLVERINE WAY FORWARD, our holistic enterprise-wide transformation of the company. This work has helped us harvest significant efficiencies that will allow us to achieve our 12% operating margin target well ahead of our original schedule. All while providing investment capacity to fuel our growth initiatives. We are pleased to say that the heavy lifting is behind us with the store closures, portfolio changes and organizational restructuring now complete. The company's pace of execution over the last 2 years has been incredible. The foundation is now set for a new and more profitable operating model that is focused on speed, innovation and growth, something we're calling our GLOBAL GROWTH AGENDA. I'm excited to share more details on our agenda with you this morning. But first, let me briefly review the fourth quarter performance of our brand groups.

Starting with the Wolverine Outdoor & Lifestyle Group. Underlying revenue grew 14.4% compared to the prior year, with Merrell growing in the high teens; Cat up in the mid-teens; Chaco posting nearly 30% growth; and Hush Puppies down mid-single digits. The Merrell business continued to accelerate in Q4, benefiting from the successful launch of the Chameleon 7 and the excellent performance from the expanded Arctic Grip offering, which grew over 50%. The new Nature's Gym collection continued to perform well, and the Merrell work and tactical program was also a source of growth in the quarter.

Merrell is now focused on 5 distinct consumer territories, and each of these territories grew in Q4, which reflects the underlying brand work and recent implementation of our new brand growth model. This model for growth is focused on the consumer with an emphasis on greater speed and a continuous flow of new and innovative product. We are obviously pleased with the continued momentum in the Merrell business.

Chaco again delivered strong growth in the fourth quarter as it's the e-commerce business grew nearly 40%. This performance was driven by Chaco's expanded women's product offering along with continued robust growth from the Z Sandal franchise. The U.S. market remains a growth opportunity for the brand as Chaco continues to expand its domestic footprint with national retailers and new independent accounts.

Moving to the Wolverine Boston Group. Underlying revenue declined 6.5% versus the prior year with Sperry, as expected, down high single digits; Saucony down mid-single digits; and Keds down low single digits. The Sperry women's boot category exceeded expectations for the quarter with very strong e-commerce performance up over 30% and strong retail sell-through. Based on the continued success of this category, retailers are already making strong fall 2018 commitments for Sperry boots, and momentum in this category has continued into Q1 of this year. New sneaker collections also performed well for Sperry in the quarter. However, these gains were not sufficient to offset continued softness in the boat shoe category and lower closeout sales in the quarter. We expect a better first half for Sperry and a return to growth in the second half of the year.

And closing with the Wolverine Heritage Group. Excluding our Bates Department of Defense contract business, which we sold in Q4, underlying revenue for the group was down approximately 10% compared to the prior year. With the Wolverine brand down low double digits and the Bates civilian, HYTEST and Harley-Davidson businesses, collectively down mid-single digits.

During Q4, we experienced some weakness in at-once orders in the work category as retailers consciously managed inventory down and also shifted to a more need-now-buy-now order calendar. Last year, we witnessed this trend across a number of consumer soft good categories. Nevertheless, the Wolverine brand gained market share in the U.S. work boot category in Q4 and the brand's e-commerce business grew nearly 45%. We expect Wolverine to return to growth in Q1 of 2018.

Now let me turn to an update on our progress related to the WOLVERINE WAY FORWARD, which has exceeded my highest expectations and introduce our new GLOBAL GROWTH AGENDA and related investment plan. While I'm pleased with our overall fiscal 2017 financial results and a total return to shareholders for the year of over 45%, I'm even more proud of the accomplishments achieved by the team over the last 2 years as we work to restructure and transform the company. In 2017, we executed the WOLVERINE WAY FORWARD, the most ambitious effort in the company's nearly 140-year history, squarely focused on transforming the enterprise into a consumer-obsessed design-led growth company. The list of workstreams and initiatives that were completed is lengthy, and I couldn't be more proud of our team for the pace, urgency and commitment that they put behind getting it all done.

While some of the work will be ongoing, I'm pleased to say that the heavy lifting is behind us and the extra cost required to execute the transformation are complete. We are now ready to take full advantage of our new tools, processes and capabilities, become a more nimble and agile company and pivot our focus and energy to grow. A fast pace of change in the new normal retail in consumer environment continues. And our brands are operating to make the consumer experience frictionless and more convenient across all touch points. As we look to drive future growth, we will focus on consumers and develop a much closer relationship that is very different from that which existed only a handful of years ago. Internally, we've developed a new GLOBAL GROWTH AGENDA to clarify and prioritize our future initiatives to drive the business. This will be supported by a robust investment framework funded by the realized benefits of our transformation work.

In 2018, we expect to invest $40 million to $45 million behind this new growth agenda, which is comprised of 3 key elements: First, a powerful product innovation and design engine. As part of the WAY FORWARD transformation, our teams have now developed and tested new processes, tools and speed initiatives to drive future growth. This includes investing in new creative and design capabilities while expanding our consumer insights and market intelligence skills to bring more craveable product to market on a more continuous basis. Our operating model is now positioned to execute with more speed and flexibility, including substantially shorter concept to market lead times as short as 60 days and a greater ability to quickly backfill product collections that perform well at retail.

In 2017, Merrell was our first brand to implement this new model and toolset, focusing on clear product segmentation, extensions into new consumer territories and a faster cadence of new product introductions. The Merrell product team was reorganized around its newly defined consumer territories and now incorporates deeper consumer insight and market intelligence to influence design. In addition, our recent supply chain restructuring allowed Merrell to bring fresh innovative product to market in half of the normal time, increasing flexibility for a quicker response to successful product tests around the world. As a result, Merrell brought several innovative product collections to market earlier than originally planned, including the launch of the new Merrell Work and Tactical product line in Q2 and the Chameleon 7 series in Q4. This new approach and mindset was successful as Merrell delivered high single-digit growth in 2017. All brands in the portfolio have now adopted this model and are developing go-to-market strategies, which utilize these new processes and tools. We expect to commit about 45% of our 2018 incremental investment to this first element, with a focus to enhance design, product flow, demand planning, supply chain capabilities and distribution centers while continuing to invest behind our consumer insight and global sales force teams.

The second element of our GLOBAL GROWTH AGENDA is focused on an enhanced digital-direct offense. The consumer shift to digital commerce continues. Today, approximately 28% of all footwear sales in the U.S. are made online, and we expect this trend to continue. Technological disruption and innovation have forever changed the brand-consumer relationship. We will continue to over index our investments toward our digital-direct offense to stay in lockstep with our consumers by creating digital content that can be used across all distribution channels and by most customers. Today, consumers expect to experience a seamless digital and physical store experience. As brand owners, we will operate more like vertical retailers to drive speed, product flow and consumer centricity, all of which will also benefit our wholesale customers.

Our own e-commerce business has been our fastest growing channel over the last 2 years with nearly 20% growth in 2017. We expect this growth to accelerate in 2018 as we continue to prioritize this channel in our own market. This growth will be fueled by key strategic investments around 30% of the total incremental investment, which includes greater social prospecting, new advertising up and down the consumer funnel and the implementation of our new unified consumer database, which will increase retention and enhance the lifetime value of our consumers.

We have also expanded other tactics and disciplines to drive our e-commerce business, including more exclusive product introductions, less promotional activity and increased spend on digital demand creation. We have several brands in our portfolio that excel in this area. And by no coincidence, delivered excellence e-commerce growth for 2017, including Merrell with nearly 25% growth, Chaco with nearly 35% growth and Keds with over 32% growth. We are implementing the new concepts tools and capabilities that were tested and validated in these businesses over the past year in our remaining brands. The third element of our growth agenda is focused on significant international expansion. Our historical international model has been a profitable and strategic asset for the company over many decades, and currently minimizes risk and provides meaningful geographic diversification in a global marketplace undergoing significant change. During 2017, over 30% of our revenue and approximately 50% of our global pairs were sold outside of the U.S. Our well-established international business benefits from a broad network of global partners, most of whom are vertical retailers with direct insight into consumer trends and preferences in their respective market. In fact, our brands enjoy over 15,000 control points of distribution around the world today.

To fuel the global expansion of our brands, we plan to allocate nearly 25% of our incremental investment spend to support international growth specifically: To strengthen our regional teams, especially in China and the Asia Pacific region; collaborate with new partners on new global product introductions; and improve systems to better service our global business. We are fortunate to have the strong foundation and global network and expect our international business to be a source of high single-digit revenue growth in 2018.

Despite our strong global presence, we remain under-penetrated in the fast-growing Asia Pacific region, especially in the China market. During 2017, less than 10% of our global revenue was generated from this important region, and we view this as a very meaningful opportunity for future growth and one of our top strategic priorities. Our specific plans for growth in China are in motion with more to share in the coming months. We have established a near-term goal to double the revenue contribution from the Asia Pacific region by 2020. This is an incredibly exciting time for the company after 2 years of restructuring and hard work. We will transition our focus to growth. We now have the tools and capabilities to accelerate top line performance and certainly have the financial capacity to invest for the future, drive organic growth and add new brands to the portfolio.

With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our 2017 financial performance and further insight into our expectations for 2018. Mike?

Thanks, Blake, and good morning, everyone. 2017 was a successful year for the company, and I'm proud to say that we are clearly seeing positive results from our teams' efforts over the last 2 years. In the fourth quarter of 2015, we set in motion several initiatives focused on improving the operational performance of the company in the phase of a quickly changing global retail environment. In a very short time period, we have successfully addressed the most critical needs, including closing subpar stores, restructuring our supply chain to drive lower costs, resetting our portfolio to focus on brands with the most profitable growth potential and reorganizing our teams around the world.

The fundamental profit improvements from this work will allow us to achieve our stated 12% adjusted operating margin target well ahead of schedule. At the same time, we've added talent, tools and capabilities that will change the way we do business and allow us to act with speed and urgency as we implement our new GLOBAL GROWTH AGENDA.

I'm excited to share more details on our 2018 outlook, including our reinvestment strategy to drive growth. But first, I will review the company's 2017 results. Beginning with the fourth quarter, the company delivered revenue of $578.6 million, resulting in underlying growth of 1.7%. Reported revenue declined 20.7% versus the prior year due to the change in the quarterly calendar, the impact from store closures and the portfolio changes made earlier in the year. As Blake noted, Merrell delivered high teens growth in the quarter, in part from the early launch of the Chameleon 7 product and a strong Arctic Grip performance, while the Sperry women's boot business exceeded our expectations.

The work boot category for Wolverine brand was softer-than-expected on lower at-once order activity. In addition, revenue from 2 divested businesses, Sebago and Bates Department of Defense, were lower than projected as they both transitioned earlier than expected in the quarter. Q4 adjusted diluted earnings per share of $0.41 resulted in 20% growth over the prior year. Adjusted gross margin on a constant currency basis improved 140 basis points despite a 50 basis point negative mix impact from store closures. Adjusted operating margin on a constant currency basis of 10.7% improved 260 basis points compared to the prior year.

During the fourth quarter, the company expensed all remaining discrete costs related to the transformation and restructuring activities needed to address underperforming areas of the business. In addition, special charges were incurred related to implementation of new U.S. tax laws, noncash impairment of the Sperry tradename and certain environmental remediation costs. Including these charges, Q4 reported diluted loss per share was $0.65.

Moving to full year results. Reported revenue of $2.35 billion was at the top of our outlook entering the year. Underlying revenue grew 0.6%, and reported revenue declined 5.8% due to store closures and portfolio changes. Full year adjusted diluted earnings per share of $1.64 exceeded our outlook entering the year. On a constant currency basis, adjusted diluted earnings per share were $1.71 compared to $1.36 in the prior year, growth of nearly 26%. Full year reported diluted earnings per share were 0, including the full year cost related to our restructuring and transformation activities, implementation of new U.S. tax laws; noncash impairment of Sperry tradename and certain environmental remediation expenses.

For the year, adjusted gross margin on a constant currency basis was 40%, a year-over-year increase of 120 basis points despite 50 basis points negative mix impact from store closures. Currency negatively impacted gross margin by 40 basis points. Reported gross margin was 38.9%. Adjusted operating margin on a constant currency basis was 11.2%, an improvement of 270 basis points compared to the prior year and meaningfully better than our expectations entering the year. This very strong improvement in operating margin is a direct result of the transformation work executed over the last 2 years. Net interest expense for the year was approximately $32 million and the adjusted effective tax rate was 27.7%.

Transitioning to the balance sheet. As part of our operational excellence and transformation work, we established aggressive goals related to working capital management. As a result, we have seen meaningful improvement and very strong cash generation over the last 2 years. At the end of 2017, inventory was down 20.6% on top of a 25.3% reduction achieved in 2016. In addition, global SKUs on hand were down over 30% at year-end. During 2017, we generated over $200 million in cash from operations despite nearly $90 million in cash costs related to restructuring and transformation activities. We ended the year with cash of $480 million, up over 30%, and net debt of approximately $302 million, which was down 33% compared to last year.

In 2017, we repurchased over 1.6 million shares at an average price of $25.79. The adjusted earnings results and positive cash flow for 2017 were better than planned, and I'm proud of our team's ability to over deliver against the bold goals that were set at a time of great change for the company. I would like to transition to our 2018 outlook, including further insight on the reinvestment strategy related to our GLOBAL GROWTH AGENDA. We entered 2018 positioned to drive organic growth. The recent store closures and portfolio changes have resulted in a healthier foundation for the business, and our brands have also worked to improve distribution in all markets. We have generated consistent momentum in our own e-commerce business and our international business is accelerating.

More importantly, we are now ready to invest in the growth tools and capabilities that were developed as part of the WOLVERINE WAY FORWARD. We expect 2018 reported revenue in the range of $2.24 billion and $2.32 billion. This represents underlying growth of nearly 6% at the high end of the range. Reported revenue is expected to decline 1.3% at the high end of the range, including $159 million of revenue from store closures and portfolio changes in 2017 that will not occur in 2018.

Gross margin is expected to expand by 40 to 80 basis points despite 20 basis points of negative mix impact from 2017 store closures. This ongoing improvement in gross margin is a direct result of aggressive supply chain management, cost reductions and other pricing initiatives implemented as part of the transformation. We are planning $40 million to $45 million of incremental investments to accelerate growth. And as Blake mentioned, our reinvestment strategy is closely tied to the 3 elements of our GLOBAL GROWTH AGENDA. We expect to spend approximately 45% to drive our product, innovation and design engine, a category that benefits all aspects of our growth model. We also expect to spend approximately 30% on initiatives specifically tied to our digital-direct offense. And approximately 25% on resources for international expansion. The effectiveness of these new investments will be monitored frequently and adjusted to maximize the best possible outcome for our shareholders.

Adjusted operating margin is expected to improve 110 basis points to 12% in 2018. Total selling general and administrative expenses, including our incremental investments, are expected to be lower, due mostly to the benefits from store closures and portfolio changes and slightly lower employee benefit costs. Reported operating margin is expected to be approximately 11.6% and includes $8 million to $12 million of cost to manage the company's legacy environmental matter. We expect 2018 net interest expense and other expenses of approximately $28 million to $30 million, an effective tax rate in the range of 18% to 21% and approximately 95 million diluted weighted average shares outstanding. As a result, full year fiscal 2018 adjusted diluted earnings per share are expected in the range of $1.95 to $2.05, an increase of 25% at the high end of the range. Reported diluted earnings per share are expected in the range of $1.87 to $1.97. Foreign currency is expected to have a neutral impact on earnings. We are forecasting full year depreciation and amortization of approximately $31 million to $33 million. Capital expenditures are expected in the range of $35 million to $40 million, primarily for investments in supply chain, digital and e-commerce initiatives, information technology and other facility enhancements.

As mentioned previously, we ended 2017 with cash and cash equivalents of $481 million, of which approximately $320 million was held outside of the U.S. Due to recent changes in the U.S. tax law, we now expect to repatriate approximately $250 million of cash by the end of the first quarter. In addition, we expect to generate $230 million to $250 million of cash from operations in 2018. The company is in a strong liquidity position, and we expect to deploy our cash as followed over the coming months: Evaluate a $100 million early payment of debt; execute more buybacks under the 2016 share repurchase plan; implement a 33% increase in our annual dividend to shareholders; and actively pursue future acquisition targets.

Before closing, I want to provide some information about the first quarter and our general outlook for the first half of the year. Regarding 2018 revenue flow by quarter, we expect that the timing of new product introductions, especially for Merrell and Sperry, along with the ongoing change in retail order patterns, will mean a shift in current consensus revenue estimates of $10 million to $15 million from Q1 into Q2. As a result, we expect underlying growth in the first half of 3% to 4%.

With respect to earnings flow, we expect that the timing of incremental investments and recognition of incremental WAY FORWARD benefits will shift approximately $0.10 to $0.15 of current consensus earnings per share out of the first half of 2018 and into the second half of the year. As a result, we expect Q1 revenue in the range of $525 million to $535 million and adjusted earnings per share in the range of $0.35 to $0.38. Finally, I want to briefly acknowledge our team members around the world who have done incredible work and accomplished so much over the last several months. They have stepped up to the challenge and delivered. And as a result, our company and our shareholders are reaping the benefits.

Thank you for your time this morning. We will now turn the call back to the operator. Operator?

(Operator Instructions) The first question comes from Jim Duffy of Stifel.

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

Yes, I mean, Jim, it's as simple as looking at our product pipeline and our new ideas pipeline. When you focus on Merrell just as one example and you look back at '17, Arctic Grip, the Moab 2, the Chameleon 7 that was kind of brought forward into Q4, when you look at Merrell's product pipeline, new idea pipeline today, it's at least 4x what it was in 2017. So we have each of our brands gauge their timing, put our plan -- internal plan together over each of the first half, second half of the coming year. And so we've got pretty good view of where our growth is going to be coming from and when. I'm sure there'll be some surprises over 12 brands and 200 countries and territories up and down a little bit as there always is. But we have pretty good insight.

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

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

I would also add, Jim, to that, that our ability to test a lot of this and validate a lot of this during the year, obviously, with Merrell, it showed really strong results for the year and accelerated growth in the back half of the year also gives us that confidence and the effectiveness of this as we roll it out to the rest of the portfolio. And we, obviously, had some brands adapt a lot of this work during the year, during 2017. But kind of putting ourselves in a position to really get the new playbook in everyone's hands and be able to execute coming out of the gate into '18 is probably, as Blake said, probably a little ahead of schedule.

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

Well, first of all, we've got a great merchant leader who's leading that brand now. And he's been on board for about 1 year, a little less than 1 year. And again, it goes right back to product flow and ideas. The Sperry consumer has a great affinity for the brand. And we were, frankly, with some hindsight, anchored in only boat or primarily boat for too long a period of time. So when I look ahead, you probably have seen the new Gold Cup ads in the Wall Street Journal. I look at an expanded casual connection Seaport Penny Loafers, which are selling through. The pickup on sneakers and vulcanized product category has been excellent. And we're still with our plan for Sperry, planning boat down for 2018. We understand though as the category leader with a 60% or 70% market share in boat, it's up to Sperry to make boat cool again. I know I'm dating myself by using the word cool. But that's Sperry's job to do in that particular category. So it really comes down to the team and the product flow and the early responses to some of these new product initiatives.

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

Next question comes from Jonathan Komp of Baird.

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

Yes. When I look at the U.S. market right now, several things are striking. First of all, the growth in digital mobile continues. I would say 10 years ago, none of us anticipated in 2017 that 28% of all footwear would be sold online in our market. But that's -- it was at 28% last year. And it's headed north. I also think from a macro standpoint that consumer has shifted, especially the millennial consumers and some younger consumers, much more of a focus on experience, creating memories. I think that's a trend that's going to continue and probably accelerate. And then I think the -- some of the dynamics of the environment have retailers and consumers, especially with the consumer they can get everything delivered in 2 days at the most primarily, buying closer to need. So the cadence of buying from retailers is changing, has changed over the last several years. And that's the same for consumers. So in the U.S., the brick-and-mortar store environment, we think that's going to continue to be pretty tough. I think there's been several estimates of bankruptcies and store closures are going to continue into this year. It could be as high or higher than 2008. So I think the macro brick-and-mortar environment is going to be challenging. I do think inventories are clean right now. So I think retailers and certainly brands, when you look at our performance, our inventories over 2-year period down 40% to 50%. But I think retail inventory is also very clean. We do think internally that the new tax act is going to increase consumer spending. That's over 2/3 of our economy. And we think as middle America gets $1,600 to $2,000 extra that that's going to be spent. And so we kind of look ahead and see that as a bit of a positive development. And then maybe lastly, I would say another trend that we see continuing is this homing trend or nesting trend. You see it in some of the homeware markets. But we think that's a trend that's going to continue for the U.S. consumer over the next year or 2. That's just kind of a macro overview of what we're seeing.

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

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

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

Next question comes from Ed Yruma of KeyBanc Capital Markets.

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

Yes. We're not -- we continue to see originals as a growth driver. Q4 was a little more challenging for Saucony for a couple of reasons. I think the run specialty channel here in the U.S. had a tougher quarter in Q4 than some prior quarters, and of course, that affects the Saucony business. And I think Saucony also had some late product deliveries and a couple of quality issues that were, frankly, not anticipated and a bit unusual given the factories that we do business with. But Saucony certainly had some late product and a couple of quality issues that had an impact on Q4, which was a little worse than their performance for the rest of the year. But Saucony, as a brand, obviously, performance run, originals which continued to grow especially in some key international markets. And what we call life on the run you may call athleisure category. Saucony is going to be introducing a pretty unique premium approach in that particular area. So as we look ahead, clearly, Saucony, right now, is playing in the 10-ring of the consumer. So athleisure, athletic, running silhouettes have been really the one category that has grown double-digit significantly over the last couple of years.

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

Okay. And can you expand a bit about your -- like where your digital engagement strategy sits today? And how that will change on your digital-direct offense plan? And that's it for me.

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

The next question comes from Steve Marotta of CL King & Associates.

Can you please talk about the mix? Just one quick question on Sperry, and then a follow-up. The mix of the boat shoes as a percent of the total category in '17 and what you expect for '18?

Yes, I think, for Sperry, it was still over 40% for 2017. As we look short or maybe more midterm, we'd like to be -- that to be 1/3, 1/3, 1/3. 1/3 in casual area, which includes boot as well as 1/3 in sneakers and 1/3 in boat. So the team is focused on expanding the product category for Sperry, and there's been absolutely no pushback from the Sperry consumer.

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

Yes. I think when you look at China, we have probably made some partner selection mistakes in the past when we look back over the last 5 or 8 years. We've got some great partners for some of our brands in China, but we've had a couple of stumbles along the way. Right now for some of our key brands, really nothing we can talk too much about today. But we're focused on new partners and fundamentally, probably moving down the food chain. From more of a pure distributor relationship with people. And we've got excellent distributors around the world. But moving down the food chain to more of a joint venture or a little more direct control when it comes to product and marketing.

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

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

When you look at the momentum in the Merrell brands, I know you've really built up the product engine and the marketing there for the last year or more. Was that one of the earliest brands to adopt the GLOBAL GROWTH agenda initiatives? Just curious if that success you're seeing in sort of the template to go company-wide with some of those products and digital investment?

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

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

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

For sure. I mean, we absolutely expect to accelerate right into '19 in terms of the impact that these investments will have specifically. But we expect to have certainly some meaningful benefit in the back half of '18, too.

The next question comes from Chris Svezia of Wedbush.

I guess, first, I just want to go to Merrell. Last year, you talked about a lot of the product initiatives that came to market: Moab; Chameleon; Arctic Grip, et cetera; Nature's Gym. Can you maybe elaborate a little bit, just based on your confidence for Merrell in '18, what in terms of product initiatives gives you that confidence to get to high single-digit growth specifically? You're just building on these existing platforms. Is there something new that you could call out to sort of give you that confidence about where Merrell is going in 2018?

Yes. I think -- let me talk about it in a couple of ways. For Merrell, I think the product focus is maybe in 2 or 3 big areas. Fast and light hiking. Merrell wants to own grip with an emphasis on fast and light. And you know how the millennials now, hiking has suddenly become desirable, cool again, if I can use that term. But Merrell wants to own the fast and light area and own grip. I think Merrell is also looking at expanding 2 of its really new categories, Nature's Gym and work. And so that's going to be a focus. Those were -- they delivered some growth. They were kind of in startup mode in 2017, and we look for accelerated growth in those areas. And then in the lifestyle area, which is probably defined by 2 of the 5 product consumer territories right now that would probably be urban trail and outdoor life, we've got to get younger. So we're going to be bringing -- Merrell is going to be bringing Arctic Grip to the lifestyle side of the equation, not just the performance footwear. But also, it's going to be focusing on younger, more color, faster style. Merrell is going to be introducing something they call the [Youngle] Moc. The Jungle Moc is going to be, believe it or not, 20 years old this year in 2018. But they're also focused on a pretty significant update and modernization of that particular style. So when you look at Arctic Grip, one of their hiking boots, hot band hiking boots, Thermo Rogue, just won "Gear of the Year" at the Outdoor Retailers Show. It won the Gold award, at the ISPO Show in Europe. So when you look at all of the initiatives they have underway, I mean, we would guess it would be kind of 4x the initiatives that they instituted in 2017. We think Merrell is going to be one of our fastest growing brands for this year.

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

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

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

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

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

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

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

Yes. To be honest with you, October was pretty warm, November was good and miserable and December turned a little bit warm again. So we did, I think, because of apparel outerwear, everybody anticipated generally a blockbuster Q4 for the footwear industry on cold weather product. And I would say, overall across companies and brands, it was average. So maybe Merrell benefited a little bit in Q4 from the weather and some of our other brands as well. But there were also some anomalies. No one really, after 3 great quarters of growth, expected the U.S. work boot business to be down in Q4 given the weather. But that is, in fact, what happened. So a lot of Merrell's business is driven by at-once orders. And retailers are buying closer to need. But some of the growth in Q4 certainly was driven by the Chameleon, the early lunch of Chameleon 7 which performed very well at retail.

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

Well, we probably can't implement them quickly enough. But the 60-day project, which we have successfully introduced in several of our brand isn't across every brand in the entire product line right now. But it's probably 1/3 of what the industry would consider the normal time line. And the normal time line traditionally from very early concept to delivery at retail could be as high as 350 to 400 days. In today's world, that's just not acceptable. So you've got to be able to get into your best-selling product much, much quicker. And then something we called Project Dash was an initiative to reduce the concept to at-market time to 60 days, which we tested in 2017 and plan to roll out on a much broader basis this year.

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

Yes. I would say, as you know, we have a proven skill set. A lot of our growth has been driven by acquisitions over the last 20, 25 years. We certainly have, as Mike indicated, plenty of capacity and liquidity right now. So we've been very active in the market looking over lots of different properties. We're looking for companies that could fill a whitespace for us or are in the sweet spot on current consumer trends. High-growth categories, companies that might have some new talent and skill sets we want. But fundamentally, we like heritage brands. We like brands that have global potential because we know we have our brands in 200 countries and territories around the world. And we like picking up, looking at brands that may be strong in a particular market or region that we can leverage around the world. And then lastly, I would say, given our size today, we're interested in bigger brands. We're interested in brands that we can grow, that will really make a difference to our top line. But we've been very active, and we'll continue to be very active at looking at certain properties. Yes, I can't predict timing, obviously, sometimes they come when they come, those opportunities. But you have to be active and we're certainly active.

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

Just surprised, I guess, a little bit that Asia, less than $250 million last year. Doesn't seem crazy to double that. But wondering on 2 fronts. Number one, how do you see that progressing? How much do you expect that in 2018 for example? Or is it more weighted to '19 and '20? And then it can be very expensive to grow in Asia. So just wondering sort of if you feel like the level of investments that you outlined earlier are going to be sufficient?

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

Okay, that's great. And just in terms of the split by brand, is that a – big as Saucony region, Merrell? How is that breaking out?

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

The next question comes from Laurent Vasilescu of Macquarie.

Regarding the incremental investments of $40 million to $45 million, I think you provided some percentage breakdowns between those 3 initiatives in your prepared remarks. Just to make sure I understand the breakdown, can you parse out how much will flow through COGS and SG&A? And how should we think of the flow through of these investments by quarter in fiscal '18.

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

Okay, very helpful. And then for your full year gross margin guided up 40 to 80 bps. Can you parse out further what will drive that? And then any color on how should we think about the first quarter gross margin shaping up?

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

Very helpful. And then finally, can you remind us the breakdown of stores by brand at the end of the fourth quarter? How much did the brick-and-mortar locations generate in FY '17 revenues? And what's your anticipation for FY '18?

Yes. We have about 80 go-forward stores. At year-end, we probably had 36 -- around 35, 36 Sperry concepts, the same number of Merrell concepts, 1 Saucony standalone store and we still have 8 kind of multi-brand stores that are more in the outlet arena. Comps were pretty good for our stores. The performance of those go-forward stores in Q4 certainly better than the FDRA Index that we always compare ourselves to. We'll be closing a few stores this year, and we'll probably be opening a few stores this year. So we're not anticipating a radically different year-end 2018 store count.

The next question comes from Dana Telsey of the Telsey Advisory Group.

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

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

The last question comes from Mitch Kummetz of Pivotal Research.

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

Yes. Just what I said for Merrell, we're really anticipating high single digits, maybe even double-digit growth for the full year. We expect Q1 to be flattish for Merrell for a number of reasons. We were -- in '17, we were selling out the Moab, the Moab 1s. We are pipeline-filling the Moab 2s. We had originally scheduled Chameleon 1 in Q1 of this year -- or Chameleon 7 but brought that forward into Q4. And then Merrell's inventory is just much cleaner. We're going to have substantially lower closeouts and less promotions going on. So for all of those reason, Merrell is going to have a great year. Their Q1 is probably going to be flattish.

And I think the other piece is, Mitch, Sperry approaching flat but not flat in the first quarter. I think the other brands are kind of puts and takes there. But I think obviously Merrell and Sperry have a big impact on the first quarter for us.

And then, Blake, is there any way you could provide some historical context around Sperry boat? It feels like that side of the business has been kind of in decline the last 3 or 4 years. It sounds like you commented, I think you said it's just over 40%. I'm guessing at sort of in the, I don't know, maybe, $200 million range or a little less than that. Is there any way you could say kind of what it was at the peak and even kind of what it was several years ago at a more normalized range -- rate before the whole sort of popularity boom when boat picked up whenever that was, I don't know, 6, 7, 8 years ago.

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

Got it. And then lastly, Mike, on the full year sales growth rate. You're saying 2% to 6%. That's a pretty big, pretty wide range. I'm just trying to understand kind of underlying assumptions that are embedded on either end of the range. Is there anything you can speak to there?

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

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

On behalf of Wolverine World Wide, I would like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. A replay will be available until March 21, 2018. Thank you, and good day.

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