Wolverine World Wide Inc /De/ Q2 FY2021 Earnings Call

Greetings, and welcome to the Wolverine World Wide, Inc. Second Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Parent, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Good morning, and welcome to our second quarter 2021 conference call. On the call today are Blake Krueger, our Chairman and Chief Executive Officer; Brendan Hoffman, our President; and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the second quarter 2021. The release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. If you’d prefer to have a copy of the news release sent to you directly, please call Allison Malkin at 203-682-8225. This morning’s press release and comments made during today’s earnings call include non-GAAP disclosures, which adjust, for example, for the impact of environmental and other related costs, net of cost recoveries, costs related to the COVID-19 pandemic, including air freight costs, credit loss expenses, severance expenses, and other related costs and foreign exchange rate changes. These disclosures were reconciled in attached tables within the body of the release. I’d also like to remind you that statements describing the company’s expectations, plans, predictions, and projections, such as those regarding the company’s outlook for fiscal year 2021 and 2022, growth opportunities, and trends expected to affect the company’s future performance made during today’s conference call are forward-looking statements under U.S. securities laws. As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company’s SEC filings and in our press releases. With that being said, I’d now like to turn the call over to Blake Krueger.

Thanks, Brett. Good morning everyone and thanks for joining us. I hope everyone on the call is safe and well. Our long-term strategic focus on our consumers, digital and DTC capabilities, and product and design innovation, especially in performance categories, is fueling robust demand for our market-leading brands. Earlier this morning, we reported strong financial results for the second quarter that significantly exceeded 2020 and our expectations, and also easily beat 2019. Revenue was approximately $632 million, a record high for Q2, representing growth of 81% versus 2020 and a double-digit increase compared to 2019. The Wolverine Michigan Group's revenue was up 63% year-over-year, and the Wolverine Boston Group's revenue was up 111%. Both groups were up double digits compared to 2019. Adjusted earnings per share for the company was $0.67. Our order backlog remains at historically high levels and momentum in the business continues to accelerate, despite the macro COVID-related supply chain headwinds facing our industry and many others. Certainly, our proactive approach to combat these headwinds has been very effective and is also reflected in our strong Q2 results. Given the company's excellent performance and the trends in the business, we have again raised our outlook for fiscal 2021 and now expect revenue in a range that is $150 million higher than we anticipated in our original February guidance, delivering meaningful growth over 2019 at both the high and low ends of the range. Our brand portfolio strategy and international distribution base are also fueling accelerated momentum as the company is not dependent on any single geographic region, consumer group, or distribution channel. We have positioned our consumers at the heart of our strategy, and that has changed the nature of our company with approximately two-thirds of our brand revenue now positioned in performance product categories like hiking, running, and work, categories that are tightly aligned with today's consumer trends. At the same time, the company has developed a strong DTC-focused global distribution model. Year-to-date, our DTC e-commerce business has more than doubled in revenue relative to 2019, and our DTC stores are up nearly 20% versus 2019. Together with the DTC channels operated by our distributor partners around the world, about one-third of our global revenue is now generated through direct consumer dialogue and interactions, enabling enhanced brand shopping experiences, a wealth of direct consumer insights and data, and a more efficient business model. We see this accelerated momentum continuing for the foreseeable future. While consumer lifestyle changes related to the COVID pandemic have significantly bolstered demand for performance product categories, the underlying trends are long-term in nature, existing prior to the impact of the pandemic and are expected by industry and consumer trend experts to persist. Consumers have become increasingly focused on health and wellness over the last several years and running, hiking, and the outdoors have served as primary activations of this mindset. Participation in running in the U.S. has increased every year over the last five years, up by a mid-single-digit CAGR over this time, and a significant majority of new runners say they plan to continue running in the future. Participation in the outdoors and hiking, in particular, has also increased every year during the same timeframe, up by a high-single-digit CAGR even before last year's 16% spike, adding nearly 21 million new hikers in the U.S. alone. This spring and summer, national parks are shattering attendance records. More people are continuing to get outside, and this renewed interest in the outdoors is expected to continue into the future, especially as consumers begin to travel again. The more need-based work category has also shown strong growth over the last several years, supported by healthy macro industry conditions and workwear fashion tailwinds. According to the Bureau of Labor Statistics, warehousing jobs have more than doubled since 2005, and construction companies are expected to hire hundreds of thousands of additional workers this year. Looking ahead, the passage of the major infrastructure plan in the U.S. would further boost momentum in this category. Our brands are capitalizing on these fundamental trends, and we expect continued strong consumer demand over the long term, especially for Saucony, Merrell, Wolverine, and our work brands and Sperry, which will launch product in the active sport category next spring. These trends and our visibility into future demand give us confidence to increase our outlook for this year and plan for double-digit growth in 2022. For our call today, Brendan Hoffman will provide some additional insight on the drivers of robust Q2 revenue growth. Mike Stornant will review our Q2 financial performance and improved outlook in more detail. And I'll conclude with some final remarks. With this, I'll now hand it over to Brendan.

Thanks, Blake. In the second quarter, our two largest brands both drove significant growth and achieved all-time record quarterly revenue. Merrell revenue grew 88% year-over-year or nearly 30% compared to 2019, with DTC up nearly 40%. Merrell.com grew mid-single digits against last year's better than doubling of the business, translating to growth of more than 150% versus 2019. Merrell stores were up significantly compared to last year's Q2 revenue due to lockdowns, and up high teens versus 2019, led by the robust growth of almost 180% in the U.S. Four of five regions contributed very strong double-digit growth year-over-year for the brand. Merrell continues to focus on cultivating its well-established product franchises while delivering innovation through key new products. The brand's performance category more than doubled in Q2, driven in large part by the launch of the all-new Moab Speed and Moab Flight, which build on the success of the world's number one hiker, the Moab and the brand's vision of faster, lighter footwear for the trail. Both collections quickly exceeded sell-through expectations, sold out on Merrell.com, and became top sellers for the brand during the quarter. The Antora 2 and Nova 2 trail runners also continued to perform very well, more than tripling year-over-year. Merrell's lifestyle business also grew very strong double digits during Q2. The iconic Jungle Moc nearly doubled year-over-year and the newer Hydro Moc more than tripled. Merrell also introduced its 1TRL capsule collection on Merrell.com, which reinterpreted existing styles with fresh, trend-driven colorways and fashion-forward storytelling with great success. This collection is focused on younger, fashion-forward consumers demanding authentic outdoor-influenced style. Merrell is generating significant brand heat and consumer interest, and the brand slate of product and marketing stories for the back half of the year are poised to fuel continued strong growth over both last year and 2019. Looking ahead, Merrell possesses a substantial growth opportunity globally, particularly in EMEA, where revenue nearly doubled in Q2 and in Asia Pacific. Outdoor is trending around the world in both performance and fashion, and Merrell is capitalizing on its heritage and brand positioning. Moving to Saucony. Q2 revenue grew 129% over 2020 or 65% versus 2019, an impressive performance. Saucony.com was up over 20% despite comping against a nearly tripling of the business last year, resulting in more than 250% growth versus 2019. All regions contributed triple-digit growth year-over-year. Saucony's incredible momentum continues to be fueled by product design and innovation. The road running category more than doubled in Q2, propelled by the launch of the new Ride 14, Endorphin Pro 2, and Endorphin Speed 2, three of the brand's top four franchises, all of which grew triple digits in the quarter. The innovative Endorphin collection continues to generate heat in the marketplace and deliver substantial growth for the brand. Saucony's trail running business more than tripled in the quarter and Saucony Originals, the brand's heritage lifestyle sneaker business, was up very strong double digits. Kicking off Q3 earlier this month, Saucony launched the Triumph 19, a follow-up to its award-winning predecessor. The brand also introduced the Endorphin Shift 2, which has received rave reviews within the industry and extended the Endorphin franchise into trail running with the all-new Endorphin Trail, bringing Saucony's revolutionary speed roll geometry for maximum speed and power run technology for lightweight cushioning to the trail. Saucony continues to deliver a consistent flow of powerhouse performance product and trend-right lifestyle products, and we are now seeing this translate into continued robust growth for the brand. Moving forward, Asia Pacific is a big opportunity for Saucony with the region almost tripling in Q2. Saucony stores and core technical products are performing well in China, as the brand's joint venture there begins to ramp up. EMEA more than doubled in Q2 and presents a meaningful growth opportunity in both performance and lifestyle, fueled by the Saucony Originals Italian product design and marketing hub. Saucony's runway for growth remains significant. In Q2, our work business accounted for nearly 20% of total revenue and continued to deliver strong growth with Wolverine, the leader in the U.S. work boot category, up over 70%, Cat Footwear up nearly 50%, and with strong contributions from our smaller brands. As Blake indicated, we expect consistent strong growth in the work category. With the continued growth of Merrell, Saucony, Wolverine, and our other work brands, our performance business almost doubled versus 2020, an increase of nearly 40% over 2019. The Sperry brand rebounded year-over-year in Q2 with triple-digit growth. The brand's DTC business was up nearly 50% in the quarter, driven by the excellent performance of Sperry stores. The brand's full price business continues to perform well with gross margin expanding well over 400 basis points in the quarter. Sperry's new float collection of fun and affordable injected version of the boat shoe vaulted into the brand's top-selling styles, expanding price tiers for the brand and reaching a younger consumer. The boat category has shown positive growth, particularly in men's, and Sperry gained market share in this key category. From a fashion standpoint, there are clear indications that we are at the forefront of a boat shoe trend. Sneakers was the brand's largest category and biggest growth driver in Q2, up more than 2.5x over last year, driven by new collections like Soletide and existing franchises refreshed with trend-right materials and colors. Moving forward, Sperry anticipates accelerated growth in its performance, active, and athleisure business. In spring '22, the brand will launch its new Sperry Sport collection, which responds to macro consumer trends with more trend-right, performance-based products. In the coming months, Sperry plans to build on the energy created by recent collaborations with Rowing Blazers, Netflix's Outer Banks, and Good Humor and Popsicle ice cream and product capsules with John Legend and Rebecca Minkoff. The brand also intends to leverage the Easy On & Off trend with the launch of the new Moc-Sider and the Cozy Float collections, extending the success of the Float franchise into the fall/winter season. We expect continued strong year-over-year growth from Sperry in the back half of the year. Finally, during the second quarter, our consolidated DTC business grew in the high teens compared to 2020, up nearly 70% versus 2019. Stores grew almost 20% compared to 2019, up significantly versus last year's lockdown-hampered business. E-commerce grew almost 100% over 2019 and was essentially flat to last year's record quarter. Looking at the back half of the year, the product lines are very strong across the brand portfolio, which will also drive growth in the digital channel. We believe the strong product, coupled with improved merchandising practices and healthier inventory positions, will drive growth in the second half as well as next year. We will continue to invest in digital and AI to improve site experience and drive conversion gains. In the next couple of months, we will launch our first mobile app with Merrell as well. We have pivoted to a more dynamic e-commerce development model to enable faster implementation of enhancements and new capabilities, which will also help us extend improved functionalities to our international sites more quickly. E-commerce has more than doubled 2019 revenue year-to-date. Although consumers have started to shift some of their purchasing back to stores as markets reopen, our DTC e-commerce business and the online business of our wholesale customers still represent almost half of our revenue in the U.S. I'm now going to hand it off to Mike to review the second quarter financial results and our increased 2021 outlook in more detail. Mike?

Thanks, Brendan, and thanks to all of you for joining us. Let me start by reviewing the company's second quarter financial performance and some of the key drivers of our over-delivery, and then I will cover our improved outlook for 2021. Second quarter revenue of approximately $632 million represents growth of 81% compared to the prior year. While Merrell, Saucony, and Sperry were the strongest performers, nearly all brands in the portfolio delivered substantial growth. All regions grew nicely in the quarter, with the U.S. and EMEA meaningfully beating expectations. Adjusted gross margin of 44.5% improved 230 basis points versus the prior year due to a favorable product mix and higher average selling prices. Merrell and Saucony both easily exceeded gross margin expectations in the quarter, another indication of their strength in the marketplace. Adjusted selling, general, and administrative expenses of $201.8 million, or $72 million more than last year and $35 million more than 2019, primarily due to increased revenue volume, increased marketing investment, and more normalized incentive compensation costs. Most major expenses levered better than expected as a percent of revenue, including our increase in marketing investment. Adjusted operating margin was 12.6% for Q2, an improvement of 750 basis points over last year and 150 basis points versus 2019. Very strong leverage on the company's revenue growth resulted from gross margin expansion and healthy operating expense management. Adjusted diluted earnings per share were $0.67 compared to $0.08 in the prior year. Reported diluted earnings per share were $0.53 versus a loss per share of $0.02 last year and reflect specific COVID-related costs and certain litigation defense costs in both periods. Let me now shift to the balance sheet. At the end of the quarter, inventory was down approximately 14% compared to last year, a nice improvement compared to the 21% decline at the end of Q1. Our inventory position continues to strengthen as we make some progress against the supply chain headwinds impacting the broader industry. In Q2, we generated $25.4 million of cash flow from operating activities. The company finished the quarter with $306 million less debt compared to the prior year and total liquidity of approximately $1.1 billion, including $346 million of cash on hand and nearly $800 million of revolver capacity. Our bank-defined leverage ratio continued to improve, ending the quarter at a low 1.2x. The company's balance sheet is extremely healthy. I will now provide an update on our outlook for 2021. The company outperformed in Q2 and the trends in our business are very strong. Our order book remains at historically high levels and continues to provide good visibility to our global wholesale and distributor businesses into 2022. Our direct-to-consumer businesses are performing well, including steady improvement from our store fleet. This momentum, coupled with the consistent strength of global consumer trends that align well with our brand portfolio, give us confidence to raise our outlook for fiscal 2021. The company now expects fiscal 2021 revenue in the range of $2.34 billion to $2.4 billion, growth of 31% to 34% compared to the prior year. This represents an increase of $150 million from our original outlook in February and results in growth of 5.6% versus 2019 at the high end of the range. We now expect adjusted diluted earnings per share in the range of $2.20 to $2.30. Reported diluted earnings per share are now expected in the range of $1.85 to $1.95, and include net litigation defense costs and incremental air freight costs caused by the COVID-specific disruption in the supply chain. The global economic environment continues to improve, but pandemic-related volatility remains. We have factored into our outlook the current headwinds that we have visibility to today, including logistics costs and supply chain delays. In this dynamic marketplace, our team has done a remarkable job to improve our ability to service the accelerated demand we continue to see for our brands. Our balance sheet is very strong, and the company is poised to lean forward as we deliver higher growth in 2021 with very strong prospects for 2022 and beyond. With that, I will hand it back over to Blake for some closing remarks. Blake?

Thanks, Mike. Our accelerated growth and strong financial performance in Q2 are a testament to the company's strategic focus and increasing brand investments. Over the last several years, we've invested behind digital marketing, technology, talent, and e-commerce as well as product innovation and design. These investments are paying off. Our brands have numerous growth opportunities in front of them. The company's balance sheet is strong, and we are confident as we plan for double-digit growth in 2022. The advantageous position we find ourselves in today is a credit to our team's expertise and relentless work. The global marketplace continues to be dynamic and fast-changing, and our people and company are excelling in this environment. I'd like to close by thanking our team members around the world for their tremendous efforts in making this a pivotal year for the company. With that, I'll now turn the call back over to the operator.

Thank you. At this time, we’ll be conducting a question-and-answer session. Your first question comes from the line of Steve Marotta with CL King & Associates. Please proceed with your question.

Good morning, everybody. Thanks for taking my question. I appreciate it. Mike, can you talk a little bit about the current supply chain disruptions, the length of time, the difficulty in getting product here and how that affects your outlook for the second half sales and earnings cadence again from a quarterly basis? Thanks.

Sure. Yes, the industry is definitely dealing with this challenge across the board. Here at the company, I think we've done a great job of managing and being proactive where we can be to offset some of those risks as you're seeing in the outlook, which has improved here. In the back half of the year, we have a well-known disruption in some of the Vietnamese factories that we're in. But even with some of that downside exposure, which is reflected in our outlook, as we mentioned, we feel confident that we can continue to deliver growth in the back half of the year. And I think as we look at the position we have with our inventory today, it continues to improve. By the end of the year, we would expect our inventory positions to be up nicely over last year and over 2019 levels. And so I think, again, the aggressive position we're taking in terms of buying inventory and some of the tactics we've deployed have helped us kind of navigate what's been a really choppy supply chain situation.

That's helpful. Thank you. Brendan, you mentioned that you have indications that we're currently on the bubble of a new boat shoe trend. Can you talk a little bit about in detail what those indications are and how quickly you think that could touch fire? Thanks.

Yes. It's really exciting for us to see that with Sperry. We're really just seeing it on our own website. We're hearing it from our retail partners that they're seeing the uptick, seeing it really strong in men's right now and all the data points we get and the information we get from our CIMI group show that as well. So really feeling confident that we're at the precipice here of that trend, which obviously only enhances everything we're doing with Sperry.

Yes, Steve, I'd also say that I think this was the second quarter in a row we saw that category increase in the market here in the U.S. where we get information.

I’ll jump back in queue. Thank you.

Your next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Thank you. Good morning, everyone. Hope you guys are doing well?

Yes.

Mike, I wanted to focus for a moment on the SG&A just as it relates to potential for leverage with any revenue upside in the back half of the year versus 2019, your second quarter SG&A growth accelerated. You mentioned some incentive compensation and incremental marketing expense for modeling versus 2019. Should we expect leverage in the back half of this year? Is the incentive compensation all trued up to appropriate levels, or is there more of that to come in the back half of the year?

Yes, there's more of that to come, Jim, in the back half. We allocate and expense that over the full year and expect now, based on the performance of the business, which is obviously exceeding our expectations on the top line and the bottom line, that our incentive comp results will be very positive and more normalized. We're also investing pretty heavily in our e-commerce business and our direct-to-consumer businesses across the channels. So you're seeing a shift from 2019 to 2021 in the way that we're investing in the business, but also just the nature of the direct-to-consumer business model, right, which is at a much higher level, we've more than doubled it in the first half of the year. We're still on track to do that for the full year. So the shift in SG&A expense has a lot to do with our focus on direct-to-consumer and that business model requires a higher level of variable SG&A.

Understood. Thanks. Moving up to P&L as it relates to the gross margin outlook, some clear inflationary pressures. I joined the call late. Maybe you mentioned this in the prepared remarks, but did you speak at all to pricing power just given the demand strength that you're seeing across the industry?

Yes. Right now, frankly, we believe the consumer has been paying higher prices throughout most of this year. There's been significant less promotions across the industry. That has really seemed to have no impact on demand, at least the demand as we see it for our family of brands. So we think there's pricing power yet available. We think there will be price increases in the industry. Input costs going up. Obviously, logistics costs going up. We'll start to see some of those price increases yet this year. You're seeing it in some industries, like toys and some other consumer categories. And then you'll see some more selective price increases, judicious price increases in 2022.

Mike, do you have a view for product cost inflation from your channel partners as we look out to 2022?

We have been able to manage input costs effectively, particularly for the spring season in the first half of the year, so we have good visibility on that. However, we are facing challenges with cost pressures mainly from the logistics and distribution side of the supply chain, where we've experienced significant increases in freight rates for both inbound and outbound shipments. This cost pressure has been considered as we plan our spring business and look ahead to 2022. Overall, we've managed the input and product costs very well.

Thank you very much, guys.

Thank you, Jim.

Your next question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Hi. Thank you. First, Mike, can I just clarify? I know the guidance for earnings is now adjusting for $0.35 of items. Can you just maybe highlight what's included in that currently?

Right. We have the litigation costs that we continue to have related to the legacy issue that we've spoken about in the past, and that continues to be included in our non-GAAP adjustment. And we've included mostly air freights, some other COVID-specific costs that we've adjusted out consistent with the last several quarters.

Okay. Is the air freight still around $15 million to $20 million as mentioned in the last call? Do you think this level will continue beyond this year, or what are your current thoughts on it?

It's hard to predict that right now, Jon. Obviously, we're seeing a demand for that this year and have provided a little bit more coverage for that, just given the uncertainty of the supply chain. But as far as how that plays out next year, it's hard to predict. I will say that I think our brands across the portfolio have taken a much harder position on inventory, a much stronger position, I should say, more aggressive to position us better for the spring demand and fall demand for next year. Supply chain teams are getting well ahead of that. I think that will be indicated in our strong year-end inventory position. So that will help take some pressure off of some of the air freight demand that we're seeing this year.

Okay, that's helpful color. Thank you. And then I want to ask a broader question on the revenue outlook for this year. Q2 was up double digits against 2019. It looks like the second half you're assuming more low to mid-single-digit growth versus 2019. So can you just maybe frame that up? Q2, did you have some benefits from shipments that were going to happen in Q1 or any other factors as we think about the second half that's driving your outlook there? And maybe as a follow-up, any more detail on how you're thinking about '22 given the comment about double-digit growth? Thank you.

Yes, I'll take the first part of your questions. I think right now, we're in a normalized position. Pretty much what we predicted in Q1 occurred. We had pour over from Q1 into Q2 in about the same amount from Q2 into Q3. So Q2 really represents a very strong performance on a normalized basis. At this time, given some of the logistics issues, it's a little hard to predict exactly the split between Q3 and Q4, but we expect strong growth in the back half of the year. When we look ahead, we've been receiving orders much earlier from our wholesale partners and international distributors for 2022 product. So as a company, we're sitting today with a lot more insight and visibility into next year's business levels, demand by geographic regions and at the wholesale level. And so this is something that is a bit unusual. I think all retailers appreciate the fact that they need to place their orders a little bit earlier if they're going to be assured of product for the coming year, given some of this year's disruption. So that's really enabled us to with some confidence look at double-digit growth next year.

I think that's also helping address the previous question regarding the supply chain and air freight for next year. By placing these orders earlier, we are able to collaborate with retailers on new expedited methods to deliver goods to them, whether through what we call the fast boat or direct shipping. As we look at 2022, we should be much better prepared, both on our end and theirs, to manage the costs we incurred this year.

All right. Thank you very much.

Thanks, Jon.

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

Great. Thanks. Good morning. I guess my question is still on the global logistics outlook. Could you share what your Vietnam exposure is currently? And then are you needing to shift production for some of the temporal factory closures, or are you just riding out the disruption? And then I have a couple of follow-ups.

Yes, there have been some factory closures in Southern Vietnam, particularly around Ho Chi Minh City, which is an important region for our industry and us. Currently, less than half of our factories in Vietnam are closed. The factories are beginning to reopen after a two-week government shutdown. While we are uncertain about the future, we have taken all current information into account for our guidance for the remainder of the year. The shutdowns in Vietnam have generally lasted about two weeks, so with such a short disruption, we do not expect any major shifts in production to other countries or factories.

We have people on the ground there throughout Asia. So it's something we're managing every day right now.

And just to clarify. Is it similar footwear companies have somewhere between 25% and 40% exposure to Vietnam? Is that in the ZIP code for you guys as well?

Yes, probably at the high end. We'd be around 40% if you look back on a historical basis.

The good news, Erinn, is that we source a lot of our products. We're already established in other factory locations and countries for supply. If the situation worsens, we'll have dual sourcing capabilities to manage through it.

Got it. And then maybe, Brendan, for you. You've been prioritizing e-commerce across the portfolio. Can you share a little bit over the next kind of 12 to 18 months other areas of investment you're focused on? I know that Merrell app is coming up soon. Any other kind of brands that you're really focused on kind of supercharging their e-commerce capabilities?

From a brand perspective, all of them will benefit from the investments we're making in replatforming technology, data collection, and data mining. Currently, Saucony is a primary focus for us due to their growth and the need for some catch-up. They are excelling at their e-commerce growth, particularly with Saucony.com, emphasizing both performance and originals. Similarly, Sperry is seeing a significant rebound by sharing their story directly through Sperry.com, which also positively impacts their other partners. Additionally, we're experiencing substantial growth in the work group channel, making it a viable avenue as well. Overall, it's broad-based, which is promising, and we will keep investing to support this growth, both in customer-facing areas and behind-the-scenes technology.

Got it. And then just last question for me is around M&A. I'm curious how you both are prioritizing M&A as you look forward? Are you looking at a lot of deals? Just curious given where that balance sheet is right now and how you're prioritizing that versus organic growth opportunities ahead? Thanks.

Well, yes, of course, we're putting available cash, all that's necessary into the organic growth and paying down debt and returning capital to our shareholders. But we continue to be very active in the M&A as we have been historically. We have a pretty well-established set of criteria we use. We are looking at not just potential footwear brands, but also businesses that might bring some new strategic competencies like apparel, vertical integrated brands, digital brands. So we, frankly, remain pretty active in kicking the tires and taking a look at properties. We have a long track record of success in bringing brands into the company and growing them.

Thank you.

Thanks, Erinn.

Your next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Thank you for taking my question. Good morning, everyone. I was curious about the second half of the year. In the second quarter, you experienced a significant flow through compared to 2019, with revenue increasing by 11% and EPS rising by about 28%. However, your guidance for the flow through in the second half of the year doesn't appear to be as strong as it was in the second quarter. Can you provide some insight on why that might be and what could potentially change this, especially since you indicated that you were seeing a very positive response to your digital marketing efforts?

Yes. I think the expectations for kind of the effectiveness of those investments still remains really strong, Sam. A lot of the flow through in the back half has to do with some of the supply chain costs that we've been talking about. And those are meaningful, and they're very much back half weighted too. So that's important. And there are some areas of conservatism built into that, because of the uncertainty. But overall, really when I think about the drivers here in the first half year performance versus the back half, it's really the back half weighting of the incremental supply chain costs.

How will you differentiate between regular operations and one-time COVID-related air freight costs?

Yes, we've done that based on the outlook that we provided and the separation of those topics. But we have ocean freight, logistics, other logistics costs, distribution costs, several other costs related to supply chain that are having a heavier weight on the back half of the year, unrelated to air freight.

Thanks. I was wondering if you could provide the channel information for the Michigan Group and the Boston Group before the quarterly report is released.

Yes, I don’t have that information at the moment. However, I can tell you that all of our channels, including wholesale, showed growth compared to 2019. I don't have the breakdown between the Michigan Group and the Boston Group right now, but we can probably provide you with that information. Overall, performance has been solid across all channels and geographic regions.

The profit flow was very strong for both groups because we experienced growth from all the brands and saw significant leverage across the board. Therefore, there is no distinction between the two groups regarding profit performance or flow.

And then lastly on the gross margin, so the air freight coming out of the margin. So how should we think about the gross for the back half or the full year given even what you're telling us? Is it going to be like 200 basis points less than what it was in the first quarter or first half of the year? How should we think about that?

Yes. Again, just to reiterate, like we said many times, we're only excluding what we're considering extraordinary air freight costs. We've got $10 million of air freight costs in the results that we're referring to. And I'd say for the full year, our gross margins will be down a little bit from the first half performance, which they typically are, based on just the gross margin performance in the fourth quarter, et cetera. But the margins for the full year we're expecting to be in that 43% to 43.5% range and operating margins approaching 12% for the full year.

We are not changing the level of promotions. We are selling things at full price, as Blake mentioned. This will continue for the second half of the year. However, some of the input costs are impacting our margins more.

And a more normalized mix in the back half, which just changes the margin profile a little bit.

And just to confirm, are you expecting things to normalize at all regarding promotional activity, or how are you assessing the seasonal promotional activity in the second half compared to what you experienced in the first half?

We're selling things at full price. It will be an interesting Christmas without all the deep discounts that it's going to be a great pallet cleanser for the industry. So we're excited at the AURs we're seeing, both in our own channels and through our retail partners.

Okay. Thank you guys very much.

Thanks.

Your next question comes from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question.

Yes. Thanks. I guess I've got a few. First off, I just wanted to follow up on Jon Komp's question earlier because he was asking about shifts. And previously, you were pretty specific about the slippage Q1 to Q2, Q2 to Q3. I think it was $40 million for each. Is that still kind of what you saw in the quarter and what's expected for the third quarter?

Yes. When I say it was basically a net wash, pretty much what we predicted in Q1 occurred. So we had a little bit of a pour over from Q1 to Q2 and a similar pour over from Q2 to Q3. Our overperformance in Q2 was fundamentally driven by accelerating demand and also a lot of the proactive steps we took in the supply chain area earlier in the year. So that really drove our performance.

You increased your sales guidance by $100 million. I understand it's $150 million from earlier in the year, but compared to last quarter, it has risen by $100 million. How much of this increase was due to performance in the current quarter versus a more optimistic outlook for the latter half of the year? Additionally, could you clarify what specific factors positively surprised you this quarter compared to your internal expectations?

I'd say that on the guidance, Mitch, it's about 50% what we over-delivered in the quarter and 50% in the back half of the year, better outlook, higher confidence in delivering on the supply chain. All the things that Blake mentioned about demand though, that continues to be the strongest metric. And order book has strengthened since the last call we had. So our outlook on demand is very strong. Where we have caution in the outlook is to do with the supply chain, as you would expect. But even with that, we have enough confidence to raise the outlook like we did.

Okay. Please continue.

No, that's all I had to say.

Okay. And then on Sperry, I know you gave kind of the two-year numbers on Merrell and Saucony. I'm not sure if you gave it on Sperry. I heard kind of a 40%, but I don't know if that was in reference to work boots or Sperry. What was the two-year growth on Sperry? And I'm curious how that compared to the first quarter?

Yes. In Q2, Sperry would have been down mid-teens compared to 2019. I'd have to look up Q1 and get back to you, Mitch.

That was a nice improvement in Q1, Mitch. And I think we're going to continue to see that gradually improve in the back half of the year as well.

Okay, that’s helpful. Thank you very much. Good luck.

Your next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Super. Thanks so much. Mike, I just want to follow up on the comment you made I think a couple of times in the prepared remarks about double digit growth for 2022. Can you just maybe elaborate that a little bit more? Is that a number versus 2019? Is that a number versus the new updated guidance for 2021 that you just gave? And sort of what are going to be the main drivers? And are we talking about double digit being 10%? Is it more like 15%, 20%? Maybe can you frame that up for us a little bit more, that would be helpful. Thank you.

I probably won't go beyond double-digit growth this morning. However, we have unprecedented visibility into our order book for next year, at a level we've never experienced historically. Demand remains very strong across the portfolio, similar to what we saw in Q2. With a high level of confidence, we are anticipating double-digit growth compared to 2020, not 2019, but it looks very strong right now across Merrell, Saucony, Sperry, and our work brand.

Go ahead.

Got it. And just maybe if we can talk about sell-through a little bit, because obviously there's a lot of fiscal stimulus in March and April. But did you see the sell-through for the brands collectively improve throughout the quarter? And sort of what's your read on back to school? And what does that mean for, say, your kids business, your Keds business, and obviously the portfolio overall?

Yes. I would say right now in general, I wouldn't bet against the consumer. Saving rates have tripled, stimulus money continues. The consumer has been locked up for 18 months. They want to travel. They want to, frankly, buy some stuff and experience some stuff that they haven't over the last 18 months. So right now, we see continuing strong demand. We see a strong back to school. It's hard to predict what the COVID situation is going to be like on back to school. But right now, it looks like in the United States, almost all K-12 children will be returning to in-classroom experience. And so we continue to see strong consumer demand.

Yes. And just on the kids, our e-commerce this month in our kids group is double last year. So that's a real strong sign of back to school is happening.

Got it. Great. Thank you so much.

Thanks, Jay.

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

Good morning, everyone, and nice to see the progress on the results. As you think about the order book that you talked about, it sounds like there's an acceleration globally. Any way to expand on that what you're seeing overseas, what you're seeing in the U.S., and how you're thinking about the upcoming holiday season? Thank you.

Yes. I would say as we look at Q2, first of all, our growth was really evenly split between the USA and the international markets. As you know, Dana, about half of our pairs are marketed in international markets. So we are seeing strong demand across virtually every country and international market at the same time, including the U.S. So we think it's going to be a good back to school season. We think it's going to be a good holiday season for consumer soft goods and our brands in particular. So we're energized right now. The backlog would reflect that too, Dana. So when you look at the nice distribution of demand across the business for our distributor businesses and third-party markets, our own businesses in Europe and Canada, so the backlog metrics or trends that we're seeing are very strong across the regions.

Got it. And then inventory levels, how do you think inventory levels and where do you see them being at the end of the third and the end of the fourth quarters?

Again, we're very excited about the fact that we're starting to turn that corner right now. We were down about 14% at the end of Q2, which frankly was a little bit lower than expected, but our revenue obviously outperformed, right. So we were able to really turn at the end of the quarter, turn around a lot of goods and get them out the door. So that was very positive. And our ability to service the business in Q2 was much stronger than Q1. We'd expect inventories to be up year-over-year at the end of Q3 and then by the end of the year, up strong double digits based on our current outlook. Supply chain can always impact those projections. But at this point, based on what we have on order, what's on the water, and what we're already securing in the warehouses, we feel good that inventory positions are going to continue to strengthen throughout the balance of the year.

Thank you.

You’re welcome.

Your next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.

Hi. Good morning. Nice job on the quarter. I'm curious on Sperry, just a follow-up on all the comments. Thanks for all the details there. I'm just curious, like the last time you saw a strong boat trend, maybe if you could talk about when that last time was? And then just kind of the performance you saw on Sperry. And then also, it sounds like it's performing better at retail than wholesale, or are you seeing wholesalers yet start to indicate they want I guess more orders for the brand?

I'll address the second part first and then have Blake speak on the historical trends. Our own channels will always be the primary indicator since we have control over them, including inventory and messaging. We're experiencing great enthusiasm. As I mentioned in the last call, this excitement began during the holiday season, particularly with the newly added members to the Sperry team and the strong response to our new product launches. We're starting to see that reflected in our online presence and retail stores. I anticipate this will also enhance our wholesale performance as we move into the latter half of the year and into 2022. Now, I'll let Blake share his insights.

Yes. If you look back, the U.S. has always had a boat shoe category resurgence from time to time. We're probably in the very early innings of that right now. Historically, that's lasted for several years when it starts. So we're trying to be there in the market with fresh boat shoe product like the Float and several other offerings from John Legend on down. And the early signs are good. We've had growth in the U.S. in the category the last couple of quarters. So that's also very encouraging.

Great. Thanks. And then also can you maybe talk a little bit about just the product offering for Sperry for this fall? Do you have anything new coming out, or maybe talk about the boots for fall?

We have a lot of new product. Blake just mentioned Float. We have the co-lab with John Legend that launches in September. We're doing some really cool events and concerts around that. John and I did something with Footwear News last month that was very well received. And we have Sperry Sport launching for holiday and spring of '22 as well as updates to the existing franchises. So I think the product line has never been stronger. I've gotten great responses from some of my industry friends about what they're seeing and some of the previews I've given them. As I mentioned, the wholesale accounts are really excited about what they're seeing for the back half of '21 and into '22, and I think it's a credit to the team and the product development pipeline.

That sounds good. I have one more question regarding the orders for fall. It seems like you are quite optimistic about them. I'm curious if they have picked up compared to the first half, especially since many wholesalers are currently facing product shortages. Could you discuss the volume of those orders? Additionally, do you have any early insights on spring '22 orders?

Yes. I would say in general, we don't give out specific backlog information. But as we've said, demand built throughout Q2 has continued to build really throughout the first half of this year. Our order backlog continues to build for 2022, which gives us confidence to focus and plan today for a double-digit increase next year. So it's extremely strong indications as reflected in our order backlog.

Yes. And I almost don't want to use the word accelerate because I think it's the new normal. We've reached new levels of demand for a lot of our brands. So some of it's an acceleration, but a lot of it is just the new baseline that we're building off of.

Great. That sounds good. Thanks so much. Good luck in the back half.

Thank you.

Thank you, Susan.

Your final question comes from the line of Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.

Good morning. Thank you for accommodating me. Mike, I wanted to inquire about the full year guidance. The high end suggests approximately $125 million in additional revenue compared to FY '19. If I recall correctly, your e-commerce segment is expected to reach around $500 million, effectively about $250 million. I'm trying to grasp the various factors you're considering regarding the wholesale business for FY '21 in comparison to FY '19. Any specific insights by brand would be appreciated.

Our focus on the digital business has been significant and that trend has remained steady over the past few months. The growth in e-commerce is crucial to the overall performance of our brands across the entire portfolio. This remains true as we see improvements in our wholesale trends, which were strong in Q2, up low-single digits compared to 2019 levels in our markets. Our top-performing categories continue to be outdoor performance, running, and work, which will drive growth for the rest of the year. Meanwhile, lifestyle brands are also making progress; we are seeing improvements from the first half of the year into the second half and are optimistic about that category in 2022.

That's very helpful. Thank you for that. Following up on Erinn's question regarding Vietnam, I believe you provide the percentage range in your latest ESG report. However, that's at the company level. Could you share which brands have greater exposure to Vietnam? I would assume it includes some of the performance brands, but any additional insights would be very helpful.

It's across the brands, Laurent. And again, we have a good amount of work boot business in Vietnam, along with those performance brands that you mentioned. So I would say that it doesn't necessarily impact any particular brand. But we're constantly monitoring that. And I would say, obviously, for our larger businesses, they're more exposed from a volume standpoint just because they're bigger, but not necessarily because we have more concentration of those constructions in Vietnam and other places. Again, I want to emphasize. We do have a nice diversification of sourcing supply outside of Vietnam right now. And we've moved some of our production back into China even in this year just to provide that dual sourcing capability and risk mitigation, and it's serving us pretty well right now. But we're keeping a very close eye on what's happening in Vietnam, and we'll continue to monitor that to the extent it impacts our outlook.

Very helpful. And then last question, great to hear about the double-digit growth for FY '22. Just to make sure, is that just fully organic? That's not anticipating any M&A? Is that correct?

That is correct.

That’s great. Okay. Thank you, Blake. Best of luck.

Thanks, Laurent.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to management for closing remarks.

On behalf of Wolverine World Wide, I’d like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until August 29, 2021. Thank you. And have a good day.

This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.