Wolverine World Wide Inc (WWW) 2013 Q2 法說會逐字稿

Good morning, and welcome to Wolverine Worldwide's 2013 second-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.

(Operator Instructions)

I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine Worldwide. Ms. Cowdin, you may proceed.

Thank you, Laura. Good morning, everyone, and welcome to our second-quarter 2013 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 second quarter of 2013. And if you did not yet receive a copy of the press release, please call Brad Van Houte at 616-233-0500 to have one sent to you. The release is also available on many news sites, or it can be viewed from our corporate website at www.wolverineworldwide.com.

This morning's press release included non-GAAP disclosures, and these disclosures were reconciled with attached tables within the body of the release. Today's comments during the earnings call will also include some additional non-GAAP disclosures. There was a posting at our corporate website that will reconcile these non-GAAP disclosures to GAAP. To view this document, please go to our corporate website, www.wolverineworldwide.com, click on Investor Relations in the navigation bar, and then click on Webcasts at the top of the Investor Relations page. And then, finally, click on the link to the file called WWW Q2 2013 Conference Call Supplemental Tables, which is 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.

And 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 today. I'm pleased to report that the momentum in our global business continues, as the team delivered another quarter of exceptional financial results. Consumer demand for our brands around the world has never been stronger, which is very encouraging given the fact that we are living through a challenging economic period. Domestically, the consumer market has remained relatively strong, even though the strength of the economic recovery remains uncertain. Outside the US, Europe remains challenging, and our expectation for a choppy recovery in this important region is becoming a reality.

Our ongoing efforts to grow our brands within key markets in Asia Pacific and Latin America continue to be rewarded. And we are putting substantial resources in place in these regions to accelerate growth for our newly acquired brands. In this global environment, the strength in geographic spread of our diverse portfolio of lifestyle brands serves us well, and our performance in Q2 reflects this competitive advantage.

Before Don addresses the specifics related to our financial performance, I'd like to share some brief highlights from the quarter, comment specifically on our Merrell and Sperry Top-Sider brands, and conclude with an update regarding the integration of our newly acquired brands into the Business. For the quarter, Wolverine delivered revenue representing growth of 5.5% over the prior year's pro forma results, and about 88% over last year's reported revenue. Revenue performance in the quarter was driven primarily by growth in the Lifestyle Group, and in particular, outstanding results from our Sperry Top-Sider brand.

Our solid revenue growth, combined with gross margin expansion and a disciplined SG&A management, drove exceptional earnings results. Earnings per share, excluding acquisition- and integration-related expenses, totaled $0.46 per share in the quarter, 12.2% growth versus prior-year earnings, adjusted for last year's non-recurring tax benefit, well ahead of our expectations entering the quarter. Our strong first-half results provide tangible evidence of the earnings power of our newly expanded portfolio.

The Lifestyle Group, consisting of Sperry Top-Sider, Hush Puppies, Keds and the Stride Rite Children's Group, had another outstanding quarter, delivering very strong double-digit revenue growth compared to 2012 pro forma results. Sperry continued to build on its momentum and positioning as a lifestyle brand, posting extremely strong double-digit revenue growth in the quarter. Keds also delivered strong double-digit revenue growth as the business continues to benefit from the brand's strategic repositioning and partnership with Taylor Swift.

The Performance Group, consisting of Merrell, Saucony, Chaco, Cushe and Patagonia footwear, posted a mid-single-digit revenue decline in the quarter compared with 2012 pro forma results. As double-digit revenue growth from Saucony and almost-double-digit growth from Chaco were offset by declines from Merrell, Cushe and Patagonia footwear. More on Merrell in a moment.

The Heritage Group, consisting of the Wolverine brand, Cat Footwear, Bates, Sebago, Harley-Davidson footwear and HyTest, posted flat revenue versus the prior year. Double-digit growth from Harley-Davidson on the strength of its lifestyle collection, mid-single-digit growth from Cat Footwear, and low-single-digit growth for the Wolverine brand were offset by revenue declines in Bates, HyTest and Sebago.

Moving on, I'd like to take a moment to speak to you about two of our largest brands, Sperry Top-Sider and Merrell. First, Sperry Top-Sider, which continued its outstanding performance in market share gains since the execution of the brand's strategic growth plan that is focused on elevating the business into a global, dual-gender, multi-category performance and lifestyle brand. Sperry delivered very strong double-digit growth in women's footwear, driven by both boat and casual product, while the men's business also accelerated its strong momentum from Q1 across all categories. Our key retail partners around the world, especially in the US, remain very bullish on the brand.

Sperry strengthened its leading position in boat shoes by expanding core programs, but also focused on maintaining freshness through material and color innovation. The beyond-boat category continues to gain traction with consumers, led by broader offerings in sandals, casuals, and our men's Gold Cup line. The performance of Sperry direct-to-consumer was also excellent in the quarter, with mid-teen comp-store performance driven by increased conversion, higher average selling prices, and new product offerings from our license partners in the sunglass, watch, shoe care, swim wear, and hosiery categories, confirming that the lifestyle positioning and merchandising strategy is hitting the sweet spot with consumers.

eCommerce also performed at a very high level, as our digital marketing programs are yielding significant year-over-year traffic increases to sperrytopsider.com. While performance to date for Sperry has been outstanding, there's still a great deal of runway ahead for the brand, especially in countries outside of North America. The team is aggressively pursuing new geographic opportunities and innovative line extensions.

Now moving to Merrell. When we bought the brand, it was a small business, but today is the undisputed leader in outdoor footwear, achieving over $0.5 billion in revenue last year. Within the outdoor space, the brand continues to gain market share against the competition, according to NPD. Merrell remains the category leader in outdoor footwear, with market share eclipsing 18% over the last 12 months. And the story is even better when looking at the second quarter, where Merrell achieved nearly a 22% market share.

Following the high-single-digit revenue increase in the first quarter, driven primarily by the successful launch of the new M-Connect collection, the second quarter, as expected, was more challenging. The brand experienced a low-double-digit revenue decline, which can be primarily attributed to several factors. First, in [EMA], there was a shift of shipments, some to Q1 and some to Q3, as our international distribution partners partially altered their receipt timing. Second, the well-documented contraction in the outdoor footwear segment of the industry, coupled with a virtually non-existent spring in all of our owned markets, put additional pressure on this segment of the business. Finally, US sales declined in large part due to decreased sales in the discount channel from lower available inventory and custom programs that were not anniversaried. These factors were partially offset by solid reorders for the M-Connect product and continued great performance from core outdoor programs such as the Moab Series.

In the outside athletic category, M-Connect continues to be a bright spot for the brand, and is certainly exceeding our expectations, achieving high-double-digit growth in the second quarter. The evolution of M-Connect aligns with a shift in consumer demand away from pure barefoot to lightweight, minimal and natural motion, all with greater cushioning. Merrell has successfully broadened its athletic product offerings, opening a significant opportunity for the brand going forward. Merrell is now a leading player in the minimalist lightweight category, maintaining its top-three position in the critical specialty retail channel over the last 12 months, according to SportScanInfo, representing market share gains over that period.

As we've discussed, Merrell's active lifestyle category has been weaker over the past several quarters. Merrell has restructured the brand's product development team to align with brand goals and growth opportunities. And the team has already been driving noticeable improvements with innovative new collections for men and women, as well as fresh updates to core styles. As part of this restructuring initiative, Merrell has recently appointed a new Head of Product Creation responsible for footwear innovation, design and development, with a focus on creating breakthrough product, and stories that inspire the Merrell consumer and leverage the Merrell brand around the world.

Looking ahead, Merrell has previewed its spring/summer 2014 product line with many of our key partners. Initial reaction has been very positive, and strategic partnerships with top retailers and international distributors have never been stronger. We remain very bullish on Merrell, and still plan to deliver a low-single-digit revenue increase for the full year, as well as more robust growth in 2014. Merrell is a double-digit growth brand, and the steps we're taking now will help the brand achieve this growth level within the next couple of seasons. Our expectations for future growth are supported by the current order backlog position, which is up high-single digits.

Focusing on our integration efforts for a moment, we are approximately nine months into the work of fully assimilating the former PLG brands into the Wolverine family. And the Boston and Michigan teams have made great progress. Frankly, the integration has gone extremely well, above and beyond my highest expectations. And excluding a couple of systems projects, is substantially complete. The cooperation, effort, and collaboration of our teams to seamlessly integrate these two businesses into a single cohesive global powerhouse has been exciting to witness and be a part of.

During our October 2012 acquisition closing announcement, I discussed with you several key strategic initiatives that were the basis for our confidence in the acquisition, and the positive impact it would have on shareholder value. This morning I'd like to update just a few of these initiatives with you. One of our main post-closing goals was to leverage our established global partnerships to accelerate the international growth for our new brands, in particular, Sperry Top-Sider, Saucony and Keds. At the time of the acquisition, less than 10% of the sales for the acquired brands were outside of North America. By contrast, Wolverine Worldwide has been pursuing global opportunities since 1959. And about two-thirds of all pairs for our legacy brands were marketed outside of North America.

Since the close of the transaction in October 2012, we've engaged our international partners to capitalize on the global opportunities for our new brands. And these efforts are beginning to bear fruit. We have signed and executed almost 20 distribution agreements in key growth markets, and anticipate another 15 to 20 programs will come online in the back half of 2013. Our focus and efforts to expand global distribution for these brands will obviously continue for the next several years.

A second key focus area to drive future growth for our new brands was to accelerate and expand our consumer direct business, both stores and eCommerce. A good example of this potential is the direct-to-consumer growth in Sperry Top-Sider. Sperry now operates 41 retail stores, 26 of those being concept specialty stores, with the expectation for 50 total stores by year end. Top-line performance and overall profitability have been excellent, and are exceeding plan. And the team remains dedicated to expanding the direct-to-consumer platform to a minimum of 100 stores within the next couple of years, with even faster expansion for eCommerce. These efforts will be fueled by a new Sperry store design, which will be introduced in the coming months. Although we're very excited about the direct-to-consumer opportunities, the team maintains a disciplined focus on profitable growth and selective store expansion, entering the right markets with the best location.

Last, I'm excited to share with you an update regarding the transformation of our Keds brand. Over the years, Keds has suffered from a high rate of leadership change and an inconsistent strategic direction. This has changed, as the new Keds team has made significant and rapid progress in reviving the brand by expanding the product assortment, and increasing the number of doors and shop-in-shops, with a focused strategy on teen girls and young women. While we're still in the early implementation stages of this strategic plan, the early reads are simply terrific. The brand has generated approximately 1.5 billion media impressions year to date, traffic to keds.com is up almost two-fold compared to the prior year, and attitude and usage metrics have all increased significantly. The business has certainly capitalized on the buzz generated by the brand's partnership with Taylor Swift, a great ambassador for the brand. We're very bullish regarding the future of the Keds business, as we capitalize on the momentum generated in the US, and expand distribution opportunities worldwide.

In closing, I believe our second-quarter performance is a testament to the strength and breadth of our 16 brands, the consumer appeal and earnings power of our expanded portfolio, and the talent and dedication of our global team. While our first-half results have certainly exceeded expectations, I remain even more excited about our future growth opportunities. Strategically, we continue our fanatical focus on delivering innovative, cutting-edge product across our portfolio, capitalizing on our global growth opportunities, especially with our newest four brands, expanding on the lifestyle opportunities for our largest brands, including Merrell, Sperry Top-Sider and Keds, and expanding our global direct-to-consumer footprint through best-in-class consumer touchpoints.

I'll now turn the call over to Don Grimes, our Senior Vice President and CFO, who will provide some additional detail on our Company's financial performance during the quarter, and the outlook for the balance of the year. Don?

Thank you, Blake. And thanks to all of you for joining us on the call today. As Blake shared, it's an exciting time for Wolverine Worldwide. We're thrilled about our many growth opportunities, both domestic and international, and the profit and cash flow potential of this phenomenal collection of brands. Earlier this morning we announced financial results for Wolverine's fiscal second quarter ended June 15 that reflect record revenue, record gross margin, record operating free cash flow, and a stronger-than-expected earnings performance. This is the second full fiscal quarter for the Company that includes results from the Sperry Top-Sider, Saucony, Stride Rite and Keds brands, all of which were acquired last October.

Before we dive into the details, let me remind you that our brand groups were realigned at the beginning of this year. And that we are now also including mono-brand consumer direct business, specialty and outlet stores, and eCommerce within the reported results by operating group and brand. We have again posted tables on our corporate website that reflect the new operating group structure for both prior-year reported revenue and prior-year pro forma revenue by fiscal quarter. One more reminder -- unless otherwise noted, all financial results discussed today are adjusted to exclude acquisition-related transaction and integration expenses.

Turning now to the details of the quarters' results. Revenue of $587.8 million was within the range of our expectations going into the quarter. And represent a growth of 88% versus prior-year reported revenue, and growth of 5.5% versus prior-year pro forma revenue. Foreign exchange had minimal impact on revenue growth in the quarter, decreasing reported revenue by just under $1 million.

The Lifestyle Group -- Sperry Top-Sider, Hush Puppies, Stride Rite and Keds -- delivered revenue of $255.2 million in the quarter, excellent growth of 20% over the prior-year's pro forma revenue. The Group's growth was once again led by Sperry Top-Sider, which delivered very strong double-digit growth. As Blake indicated in his remarks, Sperry's gains were across the board. Perhaps the most powerful testament to how the Sperry brand continues to resonate with consumers is the fact that Sperry standalone retail stores posted outstanding mid-teens comp-store sales gains. And the brand's eCommerce business delivered impressive double-digit growth.

Hush Puppies revenue growth for Q1 was about flat with the prior year on a global basis. Challenges in EMEA for Hush Puppies, the UK specifically, are still lingering. But these challenges were mostly offset in the quarter by several bright spots, including solid growth in the US, and nice revenue gains in both Latin America and Asia Pacific.

The Stride Rite business delivered outstanding results in the quarter, with upper-single-digit revenue growth. Of note, Stride Rite delivered its 10th consecutive quarter of double-digit growth in its wholesale business, underscoring the transformation of the business, and improved consumer acceptance of the brand over the last few years. Stride Rite retail recovered from a tough weather-driven Q1 to deliver mid-single-digit comp-store sales gains and double-digit eCommerce growth in the quarter.

As anticipated, Keds' market-right product offerings, and the many benefits of its partnership with Taylor Swift, helped drive double-digit revenue growth for the quarter. The Taylor Swift relationship, which includes the sponsorship of her current concert tour, continues to create momentum for the brand. And we expect even stronger growth for the brand in the back half from both organic growth in existing points of distribution, and incremental penetration into some of the most influential US retailers. The results of Keds' partnership with Kate Spade are also exceeding expectations, while giving the brand even more fashion credibility.

Our Performance Group, which consists of Merrell, Saucony, Chaco, Cushe and Patagonia footwear, posted revenue of $199.7 million, a decline of 4.8% versus prior-year pro forma revenue. Saucony and Chaco delivered excellent double-digit and upper-single-digit revenue growth, respectively, with particular strength for Saucony in the US market, driven by new product introductions, including the very successful introduction of Kinvara 4. The most recent market stats show that Saucony is the fastest growing footwear brand in the all-important run specialty channel.

As expected, and as highlighted in our commentary on Merrell from last quarter's call, Merrell gave back some of its Q1 revenue gains in the second quarter for all the reasons Blake noted earlier. Based on Merrell's current solid order position and a more conservative outlook for Q4 at-once orders, we remain comfortable with the expectation that the brand will deliver full-year revenue growth in the low-single-digit range.

The Heritage Group, consisting of Wolverine, Cat Footwear, Bates, Sebago, Harley-Davidson Footwear, and HyTest, had revenue of $110.6 million, down slightly compared to prior-year pro forma revenue. Harley-Davidson footwear had a tremendous quarter. The brand has now anniversaried the realignment of its distribution channels, and its new lifestyle products are seeing great success, both here in the US and with international customers. Low-single-digit growth for the Wolverine brand was driven by strength of its lifestyle product offerings, partly offset by declines in the US work segment. Cat Footwear grew in the mid-single digits, with solid growth in the US and in subsidiary markets in Europe.

Gross margin in the quarter for the Company was 41.0%, a record for our second fiscal quarter. And a very strong 320-basis-point increase from prior year's reported gross margin. The excellent gross margin performance was driven by a greater percentage of business from higher-margin consumer direct operations, Sperry specialty stores in particular, favorable brand mix, improved results from our owned manufacturing operations, and better inventory management, only minimally offset by year-over-year losses on foreign exchange forward contracts. Year-to-date gross margin is now up 140 basis points versus the prior year. This meaningful improvement in gross margin is a great indication of the enormous profit potential of our collection of 16 outstanding brands.

The Company's reported operating expenses in the second quarter were $204.1 million, and included $7.9 million of acquisition-related transaction and integration expenses, primarily retention bonus and professional service expenses. Adjusted SG&A was $196.2 million, or 33.4% of sales, better than planned, but higher than the 28.9% of sales in the prior-year second quarter. The increase was driven by $4.6 million of purchase price accounting amortization, $7 million of incremental pension and incentive-comp expense, increases in marketing investments such as Keds' partnership with Taylor Swift, and a higher portion of business coming from high-SG&A consumer direct channels than in the prior year.

Interest expense in the quarter was $13.1 million, consisting of both interest expense on the outstanding debt, and amortization of debt fees that were capitalized at closing and are being amortized over the life of the respective loans. The reported effective tax rate for the quarter was 24.2%, and reflects a benefit from the deductibility of the acquisition-related transaction and integration expenses, primarily in high statutory tax rate jurisdictions. Excluding acquisition-related expenses, the effective tax rate in the quarter was 26.6%. The quarter's adjusted effective tax rate, which is higher than the first quarter's 23.3%, reflects a catch-up impact in the quarter of a revised full-year outlook that skews taxable income slightly more to higher tax jurisdictions, including the United States.

Fully diluted weighted average shares outstanding for the second quarter were 49.3 million. Adjusted for the $0.10 per share impact from acquisition-related expenses, fully diluted earnings for the quarter were $0.46 per share, a 4.2% decrease versus the prior year's adjusted $0.48 per share, but significantly better than our expectations of $0.31 to $0.35 per share going into the quarter. Adjusting further for the $0.07 per share one-time tax benefit in last year's results, earnings per share were up 12.2%, an excellent result.

The PLG acquisition delivered a better-than-expected $0.24 per share of earnings accretion in the quarter. Recall that we are defining earnings accretion as the sum of the operating income of the four acquired brands, incremental interest expense, amortization expense related to long-lived purchase price accounting intangible assets, and net synergies, all on an after-tax basis. The stronger-than-expected accretion was driven by exceptional revenue growth, particularly for Sperry Top-Sider, some of which is timing related; better-than-expected gross margin, driven by favorable brand and channel mix; lower incremental ongoing operating cost; slightly lower interest expense; and delays in certain marketing initiatives and headcount adds -- expenses that will now hit the back half of the year. We are obviously pleased with the acquisition's powerful contribution to earnings in the first two fiscal quarters.

The earnings from the pre-acquisition legacy portfolio were $0.22 per share in the quarter. In addition to the expectation that the second quarter will be the toughest quarter of the fiscal year from a revenue growth standpoint, year-over-year earnings growth for the pre-acquisition portfolio was impacted by the absence of last year's non-recurring tax benefit, which is $0.07 per share; higher pension and incentive-comp expense, which combined is $0.06 per share; the catch-up tax expense that I previously mentioned, which is $0.03 per share; and the shift of certain Merrell shipments to a significant international distributer from Q2 into Q3, which is about $0.02 per share.

Turning to the balance sheet, total inventories at quarter end were just over $484 million. As would be expected, significantly higher than the prior year when we didn't own the newly acquired brands. We're comfortable with the level of inventory investment. Our days sales in inventory by brand and consolidated inventory position are both in line with revenue growth expectations over the balance of the year. Accounts receivable also increased versus the prior year due to the acquisition, but our days sales outstanding decreased by more than 11%.

We finished the quarter with cash and cash equivalents of $171 million, and net debt of $1.014 billion, a full $159 million lower than net debt on the acquisition closing date last October. We generated a record $165.1 million of operating free cash flow in the quarter. We used the strong cash flow in the quarter to fully pay off our revolving line of credit, make required principal payments of $7.6 million, and also make a voluntary $25 million payment on our term loan B, bringing total voluntary principal payments to $75 million in the last eight months. Our pro forma net leverage ratio on a trailing 12-month basis was 3.1 at quarter end, which will result in a further 25-basis-point reduction in the interest rate on the term loan A. This all represents significant progress since the acquisition closed.

Ultimately, shareholder value is driven not by GAAP earnings or profit margin metrics, but by good old-fashioned cash flow. And we believe that this portfolio of brands, working to deliver individual growth while leveraging a common backroom infrastructure and support system, is a cash-generating machine. We still project that our net debt will be at or below 2 times adjusted EBITDA by the end of fiscal 2015.

Turning to the full-year outlook, we are today reaffirming our estimate for full-year revenue in a range of $2.7 billion to $2.775 billion, representing growth in the range of 6% to 8.9% versus 2012 pro forma revenue of $2.548 billion. We still expect modest full-year gross margin expansion and full-year SG&A deleverage, the latter being driven in part by approximately $20 million of full-year non-cash amortization expense related to purchase price accounting. Operating margin, therefore, will be slightly lower than the prior year. The full-year tax rate, excluding the impact of acquisition-related expenses, is now expected to be in the range of 24% to 25%.

Excluding acquisition-related expenses, and even with the higher expected full-year tax rate, we are increasing our expectations for full-year earnings to a range of $2.60 to $2.75 per share, which represents growth in the range of 13.5% to 20.1%, versus the prior year's adjusted earnings per share of $2.29. Further adjusting for the prior year's non-recurring tax benefit, our increased earnings guidance represents growth in the range of 23.8% to 31%. Within the full-year consolidated earnings guidance is the expectation that the PLG acquisition will now be accretive to full-year earnings in the range of $0.55 to $0.65 per share, up from the previous expectation of $0.40 to $0.50 per share, underscoring the strength and momentum of our new brands.

Back-half accretion is being impacted by certain key retailers' accelerating receipt of Fall Sperry product into the latter part of Q2, planned investments in both marketing initiatives and staff additions back loaded into Q3 and Q4, and the impact of our interest rate swap arrangement, which, beginning in early October, will result in an increase in the interest expense on a portion of our floating rate debt of approximately $2.5 million per year. Net-net, we expect modest accretion in Q3, and modest dilution in Q4. Full-year capital expenditures will be in the range of $40 million to $50 million. And full-year adjusted EBITDA, as defined by our credit agreement, in the range of $345 million to $355 million.

Blake touched briefly on the progress we've made with integrating the new brands and businesses into Wolverine. We're operating as one Company with one vision, and one set of goals and values. Overall, the integration is on track, and we've had no major surprises. Transition service agreements with the former parent company have nearly all been retired, and back room integration, for all intents and purposes, is finished, as the vast majority of human resources, finance and reporting, and supply chain and sourcing activities are complete.

One important integration project, and one that I've discussed with many of you over the last few months, is the conversion of the new brands' North American wholesale and retail businesses onto SAP. The SAP wholesale migration will occur in the coming quarter, with the SAP retail rollout to be completed by year end. We are all mindful of the importance of completing this project as seamlessly as possible with no negative impacts to our Business. We have an experienced team that has successfully managed SAP migrations in the recent past. And we have high confidence that this project will be very successful.

Thanks for listening this morning. Blake and I will now be glad to take your questions. Operator?

(Operator Instructions)

Christian Buss of Credit Suisse.

Yes, congratulations on the nice quarter. I was wondering if you could provide a little bit of color on the restructuring initiatives at Merrell and what the composition of the order book likes like, what type of products are working well there, as the bookings number seem to be improving nicely there.

Yes, I would say about six months ago now, Merrell reorganized its PD structure around its three primary lines, categories of footwear product -- outdoor performance, outside athletic, and active lifestyle which is casual footwear. And we're already beginning to see the benefits of that restructuring. Leaders for each of those three categories have responsibility for men's and women's products so it's a more focused structure for the brand. We're seeing some of the early success in the backlog for Merrell. Although we don't go into a lot of detail, the backlog is up high single digits. It's really across all regions, genders and product categories, probably some of the biggest interest for the placement of future orders coming in the outside athletic category. But we're seeing gains in all three categories, including, most importantly, active lifestyle.

And, Christian, a little more color on that. What's encouraging to me about the current order position for Merrell is that we're seeing the order position up in the high teens for the performance outdoor and the outside athletics. The outside athletic continuing the momentum that we've had the first two quarters of the year. And performance outdoor is that order position reflecting a nice turnaround for that particular sub category. And the active lifestyle, where we've had even more struggles, as Blake talked about in his remarks, the current backlog is up in the very low single digits so that's a nice turnaround for that part of the business, as well.

That's helpful. I was wondering if you could also provide some perspective on and apples-to-apples basis how gross margins performed relative to your expectations and on a year over year basis.

Yes. Gross margin performed better than our expectations going into the quarter, or what we planned at the beginning of the year. On an apples-to-apples basis, we don't really have solid prior-year pro forma numbers below revenue that we're talking to. But I will say that the inclusion of the newly-acquired brands in the business in the second quarter contributed about two-thirds of the overall gross margin expansion, given the greater percentage of consumer direct and the PLG business that we acquired. So it was a contributor so gross margin expansion in the quarter but it wasn't the entire story. As I mentioned in my remarks, we had some favorability of our owned manufacturing, we had favorable brands and channel mix even within the legacy Wolverine business, and then we had discipline around selling price increases. So, overall it was a very powerful gross margin story in the quarter. And year-to-date gross margin being up 140 basis points and our full-year guidance of moderate gross margin expansion, it's a pretty powerful profit story now for the portfolio.

That's great to hear. Congratulations and best of luck.

Kate McShane of Citigroup.

Hi, thanks, good morning. I just wanted to ask one question around Sebago. It sounds like revenues were down during the quarter for the brand and I just wondered if you had any more detail on that?

No. You'll have to remember that, taking a step back, the US is a relatively small market for Sebago. And its largest market, from an international viewpoint, is Europe. And, as we all know, Europe continues to struggle through a double-dip recession. Economic conditions, especially in the UK and some other southern countries, continue to be challenged. So Sebago's performance in the quarter -- Sebago was down -- is really reflective of that geographic baseboards business.

Okay, great, thank you. And just another small detail question. I think you had mentioned -- and correct me if I'm wrong -- that you have a new Head of Product at Merrell. Have you named who that is?

Yes, we have. It's Martin Dean, somebody that's been in-house. I've known personally for 12 years since my days when I was back running the Cat brand. One of the most creative powerhouse individuals, frankly, in our industry. And so we're very pleased to have announced that we've appointed him as the Head of Product Creation for Merrell.

Okay, thank you.

Jim Duffy of Stifel Nicolaus.

Thanks, good morning, everyone. A couple questions around the accretion. Don, your initial guidance in the first couple quarters of the year, at first glance your third quarter looks like it should be the most accretive, yet you're talking about modest accretion. Help us understand some of the dynamics there. It sounds like maybe some incremental SG&A coming into the model?

Yes, I wouldn't call it incremental over full-year expectations. I would call it a shift of SG&A from the first half of the year into the second half of the year. I tried to touch on this in my prepared remarks. But that's a big part of the view that Q3 accretion will be less than either Q1, or Q2 for that matter. But certainly less than we expected going into the fiscal year.

A shift of expenses into the back half of the year, not insignificant. And then further to that, there also was an acceleration of shipments, for one customer in particular, into Q2 from Q3 versus what was originally planned. So that was a benefit to the second quarter to the detriment of Q3. We also had extremely strong at-once orders for Sperry Top-Sider in Q2, higher than expectations, which contributed to the over-delivery -- a big contributor to the over-delivery for accretion in the second quarter versus expectations. And we don't have views that we're going to have that same level of strength in at-once orders in the back half of the year, although we do expect a good at-once order environment for Sperry Top-Sider.

Okay. Can you speak in more detail about the nature of those expenses? If I remember correctly, there was some expenses that were supposed to ship from Q1 into Q2, as well. Did that happen or did those get pushed into the second half of the year?

Some of those occurred in Q2 and some got pushed further into Q3 and Q4. They are really marketing expenses, Jim, and they're headcount adds in sales and marketing and product development.

Okay. Is there any change to the marketing budget for the year related to the PLG Group?

No.

It's just timing from first half of the year, second half?

Correct. When I say there's no change in marketing budget, if there's a change it's very small. There's not an increase in the marketing budget, I can tell you that. So if it's less it's only a little bit less.

Got you. Okay, thanks. And then the DTC sounds as if it was very strong. Can you maybe give us a look at what DTC was as a percent of sales during the quarter and what you expect that to be for the year?

Yes. In the quarter it was 18.1% of consolidated revenue. And I don't have the forecast for the full-year DTC versus the consolidated but my recollection is in Q1 it was 14% and change, and then 18.1% in Q2. So I have to get back to you on the forecast for the full year in terms of the range. But somewhere in that range, in that mid to high teens level. But it was incredibly -- I'm sorry go ahead.

I was going to ask you, is there any reason to believe that it would be lower than it was in the second quarter for the balance of the year, just given the seasonality of DTC?

Don't forget, the Stride Rite stores, their big selling season is Easter and back-to-school. So less holiday for Stride Rite stores. And Q3 is a very strong quarter for the Company wholesale as we ship in fall/winter products. So I wouldn't necessarily think, as I'm thinking through the numbers in my head, that the full year would be something above 20%. And I'll look and get back to you but I do think mid to high teens is the right number.

Okay, that's helpful. And part of the reason I'm asking this is I'm wondering if there's any reason to believe the Q2 rate of gross margin isn't sustainable over the balance of the year.

320 basis points is pretty strong performance. I would look at the year-to-date gross margin performance, maybe, as a better barometer of what the future might look like over the balance of this fiscal year. There were a number of puts and takes in the quarter. Obviously net-net it was very positive, but when I talk about moderate full-year gross margin expansion, 320 basis points might be above moderate.

Okay, thanks guys.

Taposh Bari of Goldman Sachs.

Hi, good morning. Nice job. I wanted to follow-up on Sperry. We were impressed by that mid teens comp in the quarter. But can you give us some context as to what that number has been either last quarter or perhaps over the last 12 months. Just wanted to get some more granularity around how 2Q compared to the run rate.

Yes, I think Q2 was a very good quarter for Sperry stores and Sperry eCommerce, probably the best we've had in some time. You'll have to remember, we're building our base of stores. So, as we build a base, we don't have some comp store numbers from stores that have been opened in the last 12 months so it's hard to give you an apples-to-apples comparison here. I will say that the Sperry stores had been performing clearly above our expectations, are very profitable. And, frankly, have benefited from a boost, a shot in the arm from sunglasses and hosiery and some of the other ancillary product categories we've been able to put in those stores from our new license programs over the last six months or so. So those programs, which help round out the appearance of that brand at the store level, to being a true lifestyle brand, have been very beneficial, one of the key contributors to the comp store increase. Other than that, the comp store increase has been driven across men's, women's, boat, and non-boat categories across the range of the product.

Taposh, when you decompose the comp store sales gains, about one-third of it is coming from the introduction of the license product categories in the stores. But still about 10% or more is really based on footwear.

Okay, that's helpful. And then you mentioned that you're planning on redesigning the store format of the Sperry stores. Just curious to see why you'd be doing that if the current model is exceeding both your sales and profitability plan.

I don't know, maybe it's the German in us. We just want to reengineer everything, including everything that's going extremely well.

Continuous improvement.

Yes. The current store design, I would call it good. It's performing well. But I would call the new store design spectacular. So, when we start to roll out the new store design on our new stores, and refurbish/remodel some of our existing stores, you'll see what I'm talking about. But it's a noticeable improvement.

Okay. And then the other question we had was just on spring and how that materialized. Last quarter you had taken down your full-year revenue guidance slightly. You spoke to a tough start to the spring. It seems like the quarter, what you said in your prepared remarks, I hear some mixed comments. So, Merrell was hurt by the absence of a spring, yet Stride Rite retail comps improved pretty meaningfully. Sperry, it seems like, is on fire. So if you could just help reconcile those comments.

Yes. Just to take a couple steps back, retailers are nervous. They could never have a warm fall, right? So they had one. It can't happen twice in a row. Frankly, it happened twice in a row. So, you can imagine retailers are appropriately nervous a little bit about this coming fall. They're being a bit stingy with future orders. At the same time they know they need excitement in their stores and they need to deliver growth.

The burden that's put on us is really to be there with the right product, a fill-in product, core styles, core colors, when they need it. Certainly that was our experience with Sperry in Q2. In hindsight I think a number of retailers would tell you that they went into the quarter a little light on Sperry inventory, especially maybe a little light in the women's area. And we were there. One of the reasons why Sperry was able to drive such high at-once business in the quarter was, frankly, we were there with the right product when we need it. So we see some of those same dynamics, frankly, rolling forward. Each brand is a little different. We have brands that are USA-centric, we have brands that are international-centric. And all of that has its own complexities as far as the overall equation.

I'll say, Taposh, just to add to that, that of our 16 brands, we would have maybe 50% of those what I would call needle movers in terms of their performance, good or bad, can more meaningfully impact the top line or the bottom line. And your question suggests that we're being somewhat contradictory in our comments. But the reality is that, to Blake's point, this story's not going to be the same. The macro influences are not going to impact all of our brands, or all of our needle-moving brands in the same direction necessarily in the same quarter. At-once orders for Merrell were lower than expectations going into the quarter.

Some of the challenges in the outdoor footwear segment drove that, we think. And we've taken our expectations for at-once business for Merrell in the back half of the year down to reflect that trend that we saw in Q2. But on the other hand, at-once business for Sperry Top-Sider was up stronger than expected going into the quarter. In fact, the last two-thirds of the quarter, at-once orders for Sperry were up about 70%. So an incredibly strong finish to the quarter for that brand. And Stride Rite retail delivered a little better than expectations for the quarter. So there are a million stories beneath the surface and we try to package it into a holistic story that makes sense to you guys.

Okay, thanks a lot and good luck.

(Operator Instructions)

Edward Yruma of KeyBanc Capital Markets.

Hi, thanks for taking my question. Do you think there's something that's structurally changing within the outdoor business that causes you to have better backlogs but weaker at-once business?

Again, I think, when you look at the outdoor specialty channel, really, in owned markets now, primarily the USA, they have struggled through two very warm falls. They were blessed in one respect with the cold spring this year, which helped clear out some insulated goods in some product categories. But I don't think anything has changed dramatically in the outdoor channel. I would say over the last 18 months or so there has been a shift in consumer preferences and trends to sleeker, lighter, more athletic styles. And that's probably had some impact on outdoor footwear, at least as outdoor footwear is measured by some of these reporting agencies. But fundamentally nothing's changed. But there has been a little bit of a shift in consumer preferences.

Got it. I think you said that roughly two-thirds of the gross margin improvement was driven from the acquired businesses. Can you remind us the favorability of lapping some of the inventory clearances that you had to do due to weaker results last year? And what quarter should we expect the best favorability as it relates to the legacy businesses?

That's more of a back half benefit, Ed, in terms of -- because the close-out sales, they accelerate close-out sales or incremental close-out sales, really were more in the second half of last year than they were in the first half. So that was a very modest, very slight contributor to gross margin improvement in Q2. It would be more of a back half contributor to gross margin.

Can you remind us how much the impact was the back half of last year?

I can in a phone call later because I don't have my file with me and I don't have the number in my head. So I'll have to get back to you.

Got it. And final question, are you expecting any material changes now that you've had some turnover at the head of the Stride Rite division? Thank you.

No. As you know, Sharon left us to take a CEO position at Build-A-Bear and lead that turnaround for that Company. We have a search pending right now. Frankly, the team continues to perform at a very high level. We've got at least a couple of internal candidates that are front and center in that search process. So, nothing to report yet on that front.

Got it. Thanks so much.

Mitch Kummetz of Robert Baird.

Yes, thanks for taking my questions. I've got a few of them. First on the PLG accretion, I know last quarter you actually raised your outlook for 2014. I think you bumped that up by $0.10. And obviously you guys over-delivered in this quarter. I'm just wondering if you have any updates to your outlook for next year on PLG accretion. I think it currently stands at $0.70 to $0.90?

Not at the current time, Mitch. We were purposely silent on it in the call because we don't have an update yet. But clearly, the $0.55 to $0.65 range for 2013. And we talked in the past about the incremental benefit in 2014 from getting the full year of synergies versus only a partial year in 2013. So right now, we're staying with the $0.70 to $0.90. And obviously we'll have more updates later in the fiscal year on what our outlook is for accretion in 2014.

Okay. And then you bumped up your accretion assumption this year by $0.15. Does that $0.15 -- there's a lot of things happening in the quarter, does that $0.15 really represent the sales and margin over-delivery that you experienced in the quarter, excluding some of the other shifts that you've already referred to?

Yes. It's really driven by organic brand performance and not by the other components of our accretion calculation. It's not driven by lower SG&A. It's driven by incremental gross profit.

Got it. So you've had two quarters now where you've over-delivered on accretion based on better-than-expected sales and gross margin.

And a shift in timing of expenses, too.

Right. But just X'ing that out for a second, how should we be thinking about what the expectation is in terms of accretion in the back half relative to your expectations for sales and margins? I guess there's room for over-delivery again, just like there's been for the last couple of quarters. I'm trying to figure out how conservative you're being with the sales and margin expectations in terms of what's baked into your accretion for the back half. I'm not sure how to ask that, but you're over-delivering in that regard, and I'm just wondering what's the likelihood that you're going to continue to over-deliver there?

That's a fair question, and we're not trying to be the boy that cried wolf. But I will say we're appropriately conservative. We are relying on a certain amount of at-once orders, in Q4 in particular, for these brands. But the over-delivery in Q2, which was more than by which we took up the full-year accretion guidance, but that's because some of that over-delivery was related to a shift in the timing of expenses, as I mentioned, to the back half of the year. So that's certainly going to be a bit of a suppressor of the calculated earnings accretion in Q3 and Q4. T

he comments were modest accretion in Q3, which is down from, as I think the first questioner indicated -- I forgot who it was now -- but said that going into the year we thought Q3 was going to be the strongest quarter for accretion. We no longer believe that to be the case. And that's driven partly by some of the shift in timing of shipments into Q2 from Q3. And also pushing expenses into the back half of the year. So we do believe that modest accretion in Q3 is in the cards, and modest dilution probably offsetting that in Q4, is what our outlook is.

Okay. And then your sales outlook for the year hasn't changed. Based on where you are due to the first half of the year, your sales outlook implies, I think, back-half growth of 5% to 11%. It seems like a pretty wide range. You know what your backlog is going into the back half.

I would imagine the delta on that range is mostly in terms of reorders. So is there any way you can talk to us about what reorder assumption is baked into that range? Is it anywhere from flattish reorders to up double digits? Or what's the assumption there to get to that range for the back half?

I think we've taken a more conservative at-once view with respect to Merrell, for example. So, although we didn't change our guidance for the complete year, there were, frankly, some puts and takes across the portfolio of 16 brands. We think retailer, inventories at retail, are in shape right now, and maybe even a little light. And that they're going into this fall hoping for a normal, some cold in weather and a normal fall. But we left our guidance where it was, but there were a number of puts and takes in it by brand and geography.

Yes. We don't have any global macro comment on at-once orders for the entire portfolio. It differs by brand. And it depends on each brand's individual momentum. So, the Merrell team was heavily influenced by the at-once order trends in Q2. And I had an analyst at a conference about a month ago -- I can't remember who it was -- who told me that he wished that we had a more conservative view on Merrell at-once orders in the back half of the year. That was you, Mitch. (laughter) And so we responded to your wishes. We did what we thought was right and so just had a more conservative view on Q4 at-once orders for that brand. But, in contrast to Sperry, which is coming along more strongly, for a number of reasons, we have a more aggressive or optimistic view regarding at-once orders for Q4.

Let me ask one last question. I know you don't give quarterly guidance. I think you provided some quarterly color on the last call for Q2 How should we be thinking about the sales growth into the back half? Is it going to be more Q4 weighted just relative to where your backlog is versus your at-once expectations? And, also, are you seeing that retailers are wanting fall holiday deliveries later in the season. So, maybe you could just address that.

To answer the first question, we're not seeing a dramatic difference between Q3 and Q4 revenue growth versus the prior-year pro forma. Obviously on a reported basis, last year's Q4 had some 10 weeks of PLG activity in it. But versus pro forma we're not seeing 4% in one quarter and 12% in another quarter.

All right, that's helpful. Thanks, guys, good luck.

Andrew Burns of D.A. Davidson.

Good morning. Congrats on a solid quarter. Don, you mentioned that the Q2 had some benefit from early fall shipments for the Sperry brand, I believe. Sorry if I missed it but could you quantify that, how material was that impact?

It was like mid single-digit millions of revenue.

Thanks. And then a longer-term question for you. Can you help us better understand what the international growth story for the PLG brands looks like in 2014 and '15, just in terms of the ramp? Should we be thinking about a decent amount of store openings with partners in '14 across multiple brands, or just Sperry first? Any color there would be very helpful, thanks.

Yes. As you know, we've been spending a lot of calories this year taking these four brands, expanding their international footprint. If you look, for example, just at Q2, about 98% of all Sperry revenue was in Canada and the US, just to quantify the longer-term opportunity that's out there. We know the programs we're putting into place, which will be about 35 to 40 programs for this year. We'll certainly replicate that again next year. Our experience with our international third-party distributor business is that it builds like an annuity in the aggregate over time. It grows every year. So we will have some impact next year. Hard to quantify at this point in time. And then we'll certainly have greater impact as we roll forward.

Certainly, from a brand perspective, Sperry -- there's a lot of interest in Sperry. And that is now quickly morphing into a lifestyle brand. So the product we have to export for Sperry is a retail product. It's a broad product. It's a retail store design, it's merchandise flow, it's footwear. But it's watches, sunglasses, packs, bags, hosiery, any number of other category. That's more interesting to our international partners overall that just a footwear-only assortment.

Saucony, which at the time of closing probably had our largest international business even though it was only 20% to 25% of the overall reported revenue for Saucony, a lot of international interest in Saucony. Not only, I would say, it's from a fashion standpoint in its original lines, in cutting-edge fashion countries like Japan and Scandinavia, but also in its core true running product. So, a lot of interest in Saucony.

One of the pleasant surprises for me on the international side has been the level of interest in the Keds brand, which we tended to think more as a USA brand. And, again, Keds has about 90% of its current business is done in the US and Canada. But all of our international partners travel the United States. They can see what's happening. They all know about Taylor Swift. They can see how the strategic repositioning for the brand is, frankly, working. So, surprisingly strong interest from our partners for Keds, as well.

Andrew, I will say that we are expending considerable organizational energy in building the foundation for future international growth. And the way I've described it to investors and analysts is, when you sign a distributor up, the first season, for sure, maybe the first season or two, they are getting more familiar with the brand. They are selling into retail in their market. But it's a slower build. And once they get that familiarity, then, as we expect distributors to open up retail stores in markets under the brands' names, whether it's Merrell, Sperry, whatever the brand may be, that's when you'll start to see the accelerated growth in that particular market. So we'll get accelerated growth from markets in which we've signed up distributors to date, and will over the balance of the year. And then we'll continue to be signing up and expanding the brands' reach as we get into 2014, which will benefit 2015 and beyond.

Thanks and good luck.

Erinn Murphy of Piper Jaffrey.

Great, thank you for taking my question. Just a follow-up, actually, on the international growth programs and the opportunity. Just given the current instability, particularly in Europe, does that change near term, or call it over the next two-plus years, how you either deploy or prioritize some of the international growth opportunities from a regional perspective? And then as a follow-up to that, as we think about the global brand awareness of both Sperry and Keds, which regions do you feel really have the best current brand recognition for these brands outside of the US and Canada? And where would you feel like you would need to spend more time or resources really building some of the brand awareness?

That's a mouthful. Let me see if I can solve the world's -- or give you a view of the world's macroeconomic condition. Obviously, our view is that Europe is going to remain relatively choppy for a year or two. They've really done nothing to address the longer-term fiscal issues that that region is facing. On the other hand, from a 10,000-foot perspective, footwear does relatively well in challenged economic environments. So there's a quantity of need as well as want that's applicable to our industry.

Right now, as we step back, though, we have a very strong and growing base of business across all of our brands in Latin America. Our brands are very strong in Latin America so that's a key focus for us. Asia Pacific is obviously a key focus for us, especially with respect to the Keds and Sperry brands. Some of the longer-term economic studies I've read reflect the fact that, despite India slowing down a little, despite China slowing down a little, about 45% of the world's wealth, GDP, is going to be in Asia Pacific by the time we get to 2020. So, if you want to play on a global stage like we do, and have been for several decades, you need to be strong in Asia Pacific. So we're adding a lot of resources right now in Latin America market, in the Asia Pacific market. But were not ignoring EMEA and some of the opportunities in Europe. But clearly some of the near-term fastest-running water is in Latin America and Asia Pacific. And I would say the US market continues to be relatively strong.

Okay, that's helpful. And then in terms of Keds, very, very strong quarter. And you're speaking to some accelerating trends in the second half. I believe you last suggested that you were reinvesting in this business this year. But is the plan still to have that reinvestment into that business? Or, given the out performance, will you allow some of that out performance to really flow through to the bottom line?

I would say the very strong performance that we're seeing was planned growth. So, with the investment we're making behind Taylor Swift and the concert tour and all that, we expected the brand to grow at the rate. So the plan is to reinvest that incremental gross profit in 2013 such that the brand's profitability will be about flat year over year. And where we'll see meaningful improvements in profitability in the Keds brand is in 2014 based on the expectations of, again, very nice double-digit growth next year. And accompanying increase in marketing expense, but not as much of an increase in marketing spend in 2014 as we experienced in 2013. So a nice improvement in profitability for the Keds brand next year.

Great. Thank you, guys, and best of luck.

Chris Svezia of Susquehanna Financial.

Good morning, everyone. Congrats. Just a couple questions here. Just first on Merrell, high single-digit order backlog. Maybe some color between international versus domestic. And any color you can give between the back half of this year and what you see for spring, just in terms of how that backlog is unfolding, would be helpful.

I'm having somebody look up the timing of the backlog at the moment. I would say it's right now across all regions and all product categories, although stronger backlog, at least stronger in outdoor performance and outside athletic categories. But, importantly, from our viewpoint, having a positive backlog and active lifestyle is key to getting Merrell back on a double-digit growth track.

Geographically, Chris, it's strong double digits in Canada and our third-party distributor markets. And up in both Europe and US, but not as strong as in those in Canada and other third-party markets.

Okay. And cadence, Don, between how we think about the back half of this year and any early orders for spring of next year?

In terms of the aging? I don't have that for the Merrell brand.

I would say most of the backlog would be reflective of second half of this year. We would have maybe a little paper in hand at this point for Q1 delivery next year. But it would be a small percentage.

But I would say, our view on the Merrell order book -- or, not our view, the Merrell book supports our assertion that the Merrell brand will end up the full year with low single-digit revenue growth and stronger growth in 2014.

Okay. I just want to go to the accretion for a second. I know you're not going to talk about the $0.70 to $0.90 at this point. But is there any possibility that either some of the accretive benefit was either pulled forward because you had better growth than you expected, or you hit certain targets faster than you thought you did? Or is it more the thought process that you're looking at $0.70 to $0.90 and potentially there is some additional investment that could be embedded into the thought process next year to continue to see the type of growth whether it's direct to consumer or international, things of that nature? I'm just curious about how you're thinking about -- I know you're not talking about it specifically but maybe a little bit more thought process about why you're not talking about it, or just a little more color about how you're thinking about next year.

Are you asking if some of the $0.70 to $0.90 for next year got pulled into 2013?

Yes.

No, the answer to that is no. The over-delivery in Q2 on accretion was primarily driven by the improved operating performance of the brands. I did mention slightly lower incremental operating cost that was, I think, $1 million or so. So it was a contributor to accretion but not the biggest contributor to the over-delivery. But you're trying to ask questions, and I understand why, around 2014. But our view on 2014 hasn't changed. We're not giving an update, but it certainly hasn't gotten more negative regarding next year's accretion. But we'll probably comment on that in October.

Okay. And then just on when you calculate the earnings growth for the back half of the year, based on the guidance and what you've already achieved, it seems like 11% to 22% earnings growth is the range. Any color, Don, between Q3 and Q4, given the fact PLG is accretive in Q3 versus Q4. Is potentially more of the growth there? Or is it, it just depends on how the at-once business plays out?

Yes, I think that's probably a fair comment. Q3 was probably the toughest quarter last year from the legacy business, if you looked at it. Europe down 20% last year in Q3. I think Merrell itself was down mid to high single digits in Q3 last year. So we had some easier comps in Q3. That, plus the PLG deal being accretive in Q3, and we think modestly dilutive in Q4 would support that conclusion.

Okay. And the last question I have is just, when you think more medium term about the business overall, obviously gross margin's coming in better than expected. Obviously the mix of business is helping you there. How do we think over the medium term about investments? Is this something whereby gross margin keeps coming in above plan, that the SG&A investment cadence could continue to accelerate to support continued growth, whether it's global, whether it's marketing investment, retail store growth, remodels, et cetera? Just maybe some color about how we think about those two levers.

Yes. They're related but only indirectly related. I think to the extent we continue to deliver on our gross margin expectations, it certainly gives you the ability to make incremental investments. But each incremental investment needs to stand on its own. I think one thing that we have learned as a Company, from studying the PLG brands, before we actually signed the deal and closed the deal, is some of the benefits that the brands are reaping from more significant investments in marketing. We had traditionally had a more conservative approach as a company as it relates to marketing spend. And you see what Sperry Top-Sider has done over the last five years now, what Keds is doing now, under our purview with Taylor Swift. There is something to this idea of investing for future growth. And you're investing today to generate growth next year and the year beyond. So, that's part of that.

It's gratifying to see great gross margin performance because that gives you the ability to make those decisions about incremental marketing investments. In the quarter, marketing as a percent of sales was about 5.5%. And that compares to last year's Q2 on a reported basis, which is 3%, 3.5%. So it's a full 200 basis point improvement, or increase -- hopefully it's an improvement -- that's going to drive growth down the road in terms of our marketing spend as a percent of sales. So that's a shift in the mind set of the Company, to a certain extent. Not that we're going to spend like drunken sailors but we're going to be thoughtful about what we're going to do.

Okay, all the best guys. Thanks very much.

Steve Marotta from C.L. King and Associates.

Good morning, everybody. I know we're running late so a very quick question. Trying to reconcile the commentary surrounding gross margin. Don, I believe you mentioned that gross margin is up year to date about 140 basis points. The guidance is for modest gross margin improvement for the entire year. And you also commented that gross margin is expected to be up at roughly the same rate in the second half as it was the first half. Which, at 140 basis points, I would define as a little bit more than moderate. I was hoping you could, again, offer some reconciling comments there.

I agree with you. (laughter)

I would say 100 basis points, plus or minus, might be in the modest to moderate range. But there are a lot of moving pieces, Steve, as I'm sure you can appreciate, over the balance of the year, with 16 brands, all the geographies. You have third-party business, which a lot of it's high gross margin. You have your consumer direct. So it's difficult to get more specific at this point with any degree of precision. But I think 100 basis points plus or minus would be the view right now.

Okay, that's helpful. Thank you very much.

Scott Krasik of BB&T Capital Markets.

Thanks, good morning. Blake, when we previewed Merrell spring '14, it looked like you were adding a lot of cushioning and stability back into the M-Connect line. I know you're a leader in minimalism, but how do you balance that, because it looks like you're getting less minimalist in the Merrell M-Connect line?

It all continues to fall on the minimalist. A lot of it depends on your definition. So if you define pure barefoot as basically no cushioning and zero millimeter drop, in our minds that's how we define pure barefoot. That business continues to be pretty sizeable and relevant for us. We're a big player there. The overall market there has come down considerably.

But the lightweight minimalist, where I'm talking now about either a zero drop with additional cushioning, 8 to 12 millimeters, or a 4-millimeter drop, or like a lot of the products in the Saucony line, an 8-millimeter drop now, these are all products that are still on the minimalist lightweight original barefoot track. But probably are a little more consumer friendly to the average runner and average weekend participator. So, what Merrell really did that was startling here is it jumped over two or three categories, entered with very technical barefoot product. And now, over the last two seasons, has backfilled with, whether it's the Mix Master series or Proterra, or some of the other more cushion product, backfilled product in that same category. Most people would define minimalist lightweight as including pure barefoot.

So we're all just trying to figure what's wrong with the outdoor category. Do you think there was just a disconnect between the buyers who thought there would be more broad appeal for the extreme minimalism, and by next year the consumer will catch up because it's much more traditional?

No, I think it was just really, some of it, just a shift in preferences. Outdoor multi-sport product. And Merrell has a number of categories and collections that continued to kick through and sell at retail. And has a dominant 20% or thereabouts market share. A lot of them were bulkier, luggier, a little bit heavier, made for trail use, light hiking use.

And for consumers that played on the fringe of the true outdoor performance segment, there was a shift to more athletic. So probably some of those consumers shifted over to Merrell. Maybe originally barefoot for the true runner, but now some of the other categories. So, I think it was just a shift, some of it in macro consumer preferences. Some of which Merrell is in the process of addressing now in the outdoor performance category. Proterra would be a good example -- lightweight, spectacular product, with a lot of technology, as it's performing very well.

Okay. And then, Don, you'd spoken previously about opening up some distribution for Merrell into more moderate channels in the back half of the year. Is that a contributing factor to the backlog of high single digits for Merrell?

Actually, I think it's not officially in the backlog as of yet. So that would not be in our comments regarding the backlog. But that is still the plan in the value channel, but it's in the very low single-digit million range. So that's not a big part of the Merrell recovery story. It's just an evolution of the brand's distribution strategy. I wouldn't call it a test necessarily but it's a very small part of the plan for the balance of the year.

Okay, thank you very much.

Sam Poser of Sterne, Agee.

Good morning. Thank you for taking my question. I just want to follow up on the gross margin. Were you affected -- you mentioned part of this, but in the quarter, with your international business, did you do less distributor business than you had anticipated, and that would have been beneficial to the gross margin in the quarter?

No. Our distributor business, the business models vary but on average, across the portfolio, our third-party distributer business has a higher gross margin than our subsidiary markets' gross margin. So that certainly wasn't a negative factor. As I look at growth geographically, I would say that there was no significant skew in international business as a contributor to gross margin year over year.

And then how are you viewing -- and, Blake, you commented that the double-dip recession in Europe and so on was tough. within your guidance, is there improvement in that going forward or is it status quo?

In our minds, pretty much status quo. Still a choppy environment over there, Sam. I think there will be some quarters where we and the industry will be up. There will be some quarters where it will be negative. And so it's going to continue to be a choppy environment, we believe, for the near term and maybe the mid-term.

Yes, status quo as it relates to the macro environment. As it relates to Wolverine World Wide, Q3 is our easiest comp quarter for EMEA revenue. Again, down 20% in last year's Q3. So we clearly expect to perform better than last year in Q3 and Q4 to get back closer to flattish on a full year.

Okay, thank you. And then, lastly, Don, on the last two calls you gave guidance for the subsequent quarter. Can you give us guidance for Q3?

We purposely didn't. For many years, up until some point last year, we didn't offer -- we were calling it commentary on the next quarter, not really guidance. And we did that because we saw some changes in the pattern of our business that weren't necessarily being reflected by you guys in your numbers. And we want to get away from offering specific quarterly commentary or guidance. And we chose not to do so for this call.

I thought I'd give it a try. Anyway, thanks. Good luck.

On the spur of the moment we're going to give quarterly. (laughter) Thanks, Sam.

Thank you. At this time, we have no further questions. I would now like to turn the call back over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Thank you. On behalf of Wolverine World Wide, I would like to thank everyone for joining us today. And, as a reminder, our conference call replay is available on our website at www.wolverineworldwide.com. And that replay will be available through September 30, 2013. Thank you for joining us today.

Thanks.

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