Wolverine World Wide Inc /De/ Q4 FY2021 Earnings Call

Greetings and welcome to the Wolverine World Wide Fourth Quarter Fiscal 2021 Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Alex Wiseman, Vice President of Finance and Investor Relations. Thank you Alex, you may begin.

Good morning and welcome to our fourth quarter 2021 conference call. On the call today are Brendan Hoffman, our President and Chief Executive Officer, and Mike Stornant, our Executive Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the fourth quarter and full year 2021. The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. If you would prefer to have a copy of the release sent to you directly, please call Jean Fontana at 646-277-1214. This morning’s press release and comments made during today’s earnings call include non-GAAP disclosures, which adjusts, for example, for the impacts of environmental and other related costs net of cost recoveries, costs related to the COVID-19 pandemic including airfreight costs, severance expenses, and other related costs, and foreign exchange rate changes. References to organic performance reflect the exclusion of the Sweaty Betty brand which was acquired in August 2021. These disclosures were reconciled in the attached tables within the body of the release or in supplemental tables found on our website under the Investor Relations tab at the Webcast and Presentations link. 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 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 Brendan Hoffman.

Thanks Alex. Thank you for joining us today for a discussion on our fourth quarter and full year results, as well as our go-forward priorities and outlook. I am very pleased to be speaking with you for the first time as CEO of Wolverine World Wide. I joined the company as President in the fall of 2020, and I'm more confident than ever in the untapped growth potential of our powerful and diversified portfolio of world-class brands which operate in attractive categories, deliver industry-leading product innovation, and are supported by centers of excellence. To drive our business forward, we have an incredible team in place which we further strengthened with new talent over the past year. We firmly believe that the consumer and marketplace trends that accelerated during the pandemic will continue to provide tailwinds, as evidenced by the strong demand we see across our brands. As we emerge from the pandemic, we believe that consumers will maintain healthy lifestyles that will fuel continued growth in the outdoor and active categories for some time, and we are competitively well positioned to capitalize on this opportunity. Today I will begin my discussion with some highlights from the fourth quarter and an update on our progress in advancing our growth strategies. I will conclude by sharing a few aspects of my approach to the Wolverine business that I believe will further improve execution against our goals in the year ahead and set us up for long-term sustainable growth. For the fourth quarter, strong consumer demand across key brands yielded 25% revenue growth. We were very pleased with the performance of our most recently acquired brand Sweaty Betty, which delivered revenue ahead of our expectations. Excluding the incremental sales from Sweaty Betty, revenue grew nearly 10%, while Saucony and Wolverine were the biggest contributors to organic growth. Inventory constraints created by Vietnam factory closures and the ongoing supply chain challenges impacted our top-line growth with demand for Merrell, Saucony, and other brands left unmet, which Mike will speak to in more detail. For the full year, we delivered revenue of $2.4 billion representing nearly 35% growth compared to the prior year, including over $115 million of revenue from the Sweaty Betty acquisition. Excluding Sweaty Betty, revenue grew 28%. We remain excited about Sweaty Betty as it further diversifies our portfolio as one of the few female-founded, female-led active wear brands in the markets creating products just for women. This team continues to execute on its key strategic priorities by delivering a powerful line of industry-leading products while growing internationally and expanding Wolverine’s direct-to-consumer presence and capabilities which can be leveraged across the portfolio. Merrell and Saucony each delivered record revenue in the year with growth of 22% and 57% respectively. On a full-year pro forma basis, Sweaty Betty grew over 40%. Sperry faced significant category headwinds early on during the pandemic but delivered marked improvement in 2021, delivering over 24% growth. While navigating macro challenges throughout the year, we made significant progress in delivering on our three primary growth drivers. Beginning with our DTC and digital focus, we continued to deliver growth in our direct-to-consumer business and further advanced our DTC penetration and international mix with the acquisition of Sweaty Betty. Including Sweaty Betty, fourth quarter direct-to-consumer revenue grew 60% compared to 2020 and represented 35% of our total revenue. DTC e-commerce revenue grew 58% versus the prior year and 109% versus 2019. DTC store revenue was up 68% versus the prior year and 45% versus 2019. Excluding Sweaty Betty, fourth quarter direct-to-consumer revenue grew 12%, reflecting e-commerce growth of 13% and store revenue growth of 11%. The DTC mix in our organic business grew to 28% of revenue, up from 19% in Q4 2019. Our focus on driving authentic engagement and meeting consumers where they shop, creating a constant flow of content and storytelling and employing enhancement store e-commerce platforms globally are paying dividends across our brands. The progress we're making along with our acquisition of Sweaty Betty has enabled us to grow active customers by 24% versus the prior year and 50% compared to 2019, drive double-digit increases in conversion rate, and achieve higher retention rates compared to 2019. We will continue to focus on investments to drive DTC growth through continued e-commerce upgrades and digital strategies. As an example of this, we're making improvements to our recently launched Merrell mobile app in 2022 to further elevate the customer experience and drive customer acquisition engagement. Future enhancements to the mobile app will be focused on experiential elements related to Merrell’s purpose and additional customer-facing functionality. We are very excited by the consumer engagements we're seeing, and we will use our learnings to further evolve and introduce mobile applications to our other brands. Moving on to product innovation. Product innovation is embedded in our DNA and is the cornerstone of our brand success. Our big four brands have maintained a leadership position in their respective categories through consistent delivery of new product innovation in both proven franchise businesses as well as new product introductions that add excitement to the offerings and provide a halo for the brands. Our four largest brands all launched new products within their key product franchise collections in 2021. We cannot underscore enough the importance of our brands franchise businesses including the Merrell Moab collection, Saucony Endorphin running shoes, the Sperry Authentic Originals collection which is leading the boat shoe resurgence, as well as continued innovation from Sweaty Betty's core collections such as its power leggings. Supported by continued updates and innovation, these franchise businesses not only provide steady revenue streams but also provide substantial growth opportunities. Our product innovation also provides the brand equity necessary to enter new categories. Our third growth strategy is to accelerate international growth. For the full year, international revenue grew over 50% as compared to 2020. Excluding Sweaty Betty, international revenue grew 34% as compared to 2020, and we were particularly pleased with our performance in EMEA which delivered revenue in excess of 2019 levels. Asia Pacific and Latin America delivered revenue growth of 30% and 50% respectively versus 2020 and are accelerating to pre-pandemic levels, which we expect to occur in the first half of 2022. For the fourth quarter, international sales grew approximately 51%. Excluding Sweaty Betty, international revenue grew 10% led by the Asia Pacific and Latin America regions. Revenue in the APAC region grew 27% in the fourth quarter. While still in the early innings, we saw over 60% revenue growth in China predominantly driven by Merrell and Saucony through our joint venture. Turning to EMEA, revenue was roughly flat due to the impact of late product deliveries and factory delays. Nonetheless, we are encouraged by the strong order book demand in EMEA and expect improved results as inventory levels sequentially improve and normalize. Looking ahead to 2022, we remain optimistic about the momentum in our brand for several reasons. First, we have an incredibly strong order book reflecting continued momentum in our largest brands. We continue to refine our wholesale strategy with a focus on both brick-and-mortar and e-commerce partners that are right for our brands as well as take advantage of distribution decisions made by other brands. Second, we continue to drive outsized growth in our DTC business and are pleased with the increase in new customers as we advance our initiatives in e-commerce and engagement. Third, we have the tailwinds of favorable industry dynamics in active outdoor and work categories that we believe are sustainable. As consumers return to experiential activities, the elasticity in use and portability of our products help us to adapt to these changing lifestyle trends. Finally, we have a number of exciting and innovative new product launches across our biggest brands supported by powerful marketing stories, collaborations, and the resulting earned media. I will now turn the call over to Mike to discuss our fourth quarter financial results and 2022 outlook before I discuss how we will approach our growth strategies to drive improved execution in 2022 and beyond.

Thanks Brendan, and thank you all for joining the call. Let me start by providing additional detail on the company's fourth quarter performance, then briefly touch on the full year results, and finish with insights on our outlook for 2022. Fourth quarter revenue of nearly $636 million was up 25% compared to the prior year and exceeded our expectations coming into the quarter despite well-known Vietnam factory closures in Q3 and persistent logistics delays. Sweaty Betty, the newest addition to the Wolverine family, contributed over $75 million of revenue in the quarter and exceeded our expectations. As we mentioned during our Q3 earnings call, Merrell was hit hardest by the Vietnam factory closures. Unmet demand for Merrell in Q4 was at least $50 million, and as a result, revenue declined by low single digits. The fundamentals of Merrell's global business remain very healthy, including an incredibly strong order book entering 2022. During Q4, the brand’s lifestyle category grew mid-single-digits and the work category grew by nearly 30%. Merrell’s Q4 DTC business grew nearly 10% compared to 2020 and over 50% versus 2019. As Brendan mentioned, fiscal 2021 was an exceptional year for Merrell with 22% growth and record revenue. Moving to Saucony, fourth quarter revenue reached an all-time high increasing nearly 25% and over 30% growth compared to 2019. All geographic regions delivered growth led by North America and Asia Pacific which benefited from our China joint venture. The brand achieved market share gains in road running and trail running categories in the U.S. and improved its strong market share in Europe. Saucony also gained market share in the lifestyle category in the important Italy market. Saucony continues to increase its DTC mix as Q4 e-commerce revenue grew nearly 38% compared to 2020 and nearly 130% versus 2019. While Saucony was impacted by Vietnam factory closures, a relatively strong inventory position entering the quarter helped to mitigate the downside. Turning to profitability, adjusted Q4 gross margin of 43% expanded 160 basis points versus 2020 despite an 80 basis point headwind from higher ocean freight costs. Total air freight costs in the quarter were $4.7 million of which $2.3 million was considered extraordinary and excluded from adjusted results. Adjusted selling, general, and administrative expenses of approximately $224 million for Q4 were up $47 million or 26% compared to the prior year. This was due partly to an increase in variable costs and higher revenue, the addition of Sweaty Betty, and higher labor rates in our distribution centers. More importantly, we continued to invest in our teams in strategic marketing aimed at consumer acquisition and brand heat during the quarter. Adjusted operating margin for Q4 was 7.7%, up 110 basis points versus the prior year. Net interest expense was down $4 million year-over-year due to the debt financing executed earlier in the year. Adjusted diluted earnings per share for the quarter were $0.41 compared to $0.21 in the prior year, growth of 94% or nearly four times our revenue growth in the quarter. The reported loss per share of $0.18 includes certain exceptional costs incurred in the quarter. The most significant contributor is approximately $44 million of costs related to our legacy environmental matter. During the quarter we were pleased to make very meaningful progress towards resolving a large portion of the outstanding litigation and accrued approximately $40 million in incremental settlement costs. Turning to the balance sheet, ending inventory of $365 million grew approximately $120 million or 50%, 30% excluding Sweaty Betty. Our available inventory position continued to improve, and we expect sequential improvement each quarter in 2022. Before moving to our outlook for 2022, I'd like to share a few highlights of our strong full-year earnings performance in 2021. Full-year adjusted earnings per share were $2.09, increasing 125%. This strong earnings leverage was driven by a healthy gross margin expansion, disciplined management of the business, and our flexible operating model that was adjusted to respond to global market changes from quarter-to-quarter during the year. These benefits help to mitigate unforeseen inflationary cost pressures from ocean freight, hourly labor, small parcel freight, and performance marketing. I will now turn to our outlook for 2022. Looking forward, our global order demand for 2022 remains very high and is expected to continue to exceed availability of inventory in the very near term. This strong demand is true for all brands in the portfolio as we continue to benefit from relevant consumer and category trends in footwear and apparel. Thankfully, we believe the actions taken last year to improve our supply capacity and inventory position should allow us to service the increased demand at a higher level in 2022. We have developed our outlook with a keen awareness of supply chain logistics risks that we believe will persist, appreciating that our number one operational priority is the improvement in getting inventory on time. The company currently expects to deliver record revenue in the range of $2.775 billion to $2.85 billion in fiscal 2022, growth of 15% to 18%. This includes double-digit growth from our organic brands excluding Sweaty Betty. Our four largest brands, Merrell, Saucony, Sperry, and Sweaty Betty are expected to contribute approximately two-thirds of our revenue in 2022. The addition of Sweaty Betty will also benefit the penetration of our DTC and international businesses in 2022. We expect our direct-to-consumer businesses to be approximately 30% of global revenue and our international markets to be over 35% of global revenues for the full year. We expect adjusted gross margin in the range of 43.5% to 44%. We are planning for the benefit of a higher mix of DTC, including a full year of Sweaty Betty and mid-single-digit price increases that will be phased in monthly throughout the year. We believe these benefits will be offset by higher supply chain costs. Adjusted selling, general and administrative expenses are expected to be approximately 33% of revenue and will reflect significant growth in DTC, including the full-year impact of Sweaty Betty. In 2022, we plan to prioritize our marketing spend to elevate brand awareness and attract new consumers. Marketing expense as a percent of revenue should approach 8.5%, as we continue to fuel the momentum in our biggest brands. The phasing of top-of-funnel marketing spend is weighted earlier in the year in an effort to accelerate the related benefits on brand heat. We expect adjusted operating margin of approximately 11%, an effective tax rate of approximately 20%, and an average share count of approximately 82.5 million. Adjusted diluted earnings per share are expected to be in the range of $2.50 to $2.65. Reported diluted earnings per share are expected to be in the range of $2.30 to $2.45 and reflect estimated future costs primarily related to legacy environmental litigation. Brendan hit on several actions we are taking to reinforce the supply chain, but I would like to reiterate that we've built and continue to pursue more flexibility in our supply network. We were very proactive in this regard and have secured 40% more production capacity and have committed to early production on core inventory. Production orders placed and confirmed for 2022 are up over 75% compared to the same point in time last year. We expect our forward coverage position on core inventory to increase sequentially each quarter, giving us added protection against unforeseen future volatility in the supply chain. To this end, we expect to invest approximately $220 million in working capital during 2022 to support the demand we continue to see across all of our brands. For the first quarter, production in our Vietnam factories has improved to about 70% of pre-closure levels, but the recovery is happening more slowly than planned. We expect Q1 revenue of approximately $595 million to $610 million or growth of approximately 16.5% to 19.5%, with Merrell and Saucony expected to be approximately flat for the quarter. Adjusted earnings per share in Q1 are expected to be in the range of $0.37 to $0.40, including operating margin of approximately 8%. Looking beyond the first quarter, we expect high teens growth in Q2 and Q3, with low to mid-teens growth in Q4. This quarterly phasing is based on the alignment of our strong future order book, with the improved inventory pipeline mentioned earlier.

Thanks, Mike. Now, I'll share how we'll be approaching our business to drive improved sustainable performance. First, we will increase focus and prioritization. We will make concentrated bets that will have a more meaningful impact on our business. In addition to prioritizing the biggest brands that can generate the largest financial payback, we will invest in international markets where we have a long runway for growth and then drive accelerated growth in our direct-to-consumer business. As we become more global, we will continue to invest in key international regions, including China, with JVs for Merrell and Saucony and expand e-commerce capabilities globally. For Sperry, we are adding 14 new distributors in EMEA, where we are seeing incredibly strong demand for boat shoes. The potential for Sweaty Betty in 2022 is also incredibly exciting. By the end of the year, over a third of the sales will come from outside the UK. Following the launch of its first stores in Singapore and Ireland, the brand will continue to grow globally, with confirmed retail expansion plans in several markets, including the U.S. Importantly, we will encourage our brands to chase opportunities with greater speed and agility to drive accelerated growth. Second, we will leverage our largest brand’s leadership position through more informed product innovation, greater emphasis on messaging brand values, and investments in driving brand awareness. We will deliver product innovation with a consumer-centric focus and utilize more testing and consumer research to better inform our direction. These will include investments in proven franchises as well as product introductions that expand our consumer reach. In 2021, we invested in developing agile testing capabilities to enable more informed product decisions. This comes with the need to fail quickly, learn, and course correct as a best practice. We will also emphasize messaging with purpose that aligns with our brand and customer values. We know that consumers choose authentic brands that make great products, but they also want brands that stand for something. We will also create a better balance of brand and performance marketing to drive new customer acquisition while maintaining engagement with our loyal customers. A top priority is to drive higher unweighted awareness in our leading brands with a focus on driving top-line growth. We will shift marketing investments to more top-of-funnel programs, including media placement as well as social and influencer strategies designed to accelerate growth in new customers. We will continue to evolve these strategies as we test and learn. Third, we will go after white space opportunities. We will leverage our brand equity and product development capabilities to expand into new categories that will broaden our customer reach and drive higher spend per customer. We will focus our efforts on categories that have attractive total addressable markets, no clear market leader, and are a logical extension of our own performance brands where we can achieve a leading market share position. For example, we plan to leverage Sweaty Betty's strengths and expertise in apparel through the sharing of best practices across our portfolio. We also remain excited about the growth potential, product collaborations, and operational synergies in front of us with Sweaty Betty. With the continued focus on the outdoors, Sweaty Betty will be offering an expanded ski and snow collection, and we'll be introducing a hiking footwear collection in collaboration with Merrell. This will be the first time Sweaty Betty is partnering with one of our brands, and we see additional collaborations within the portfolio to come. Note that this collaboration was in the works prior to our acquisition, further demonstrating the great fit Sweaty Betty is to Wolverine. In support of our updated approach to executing our strategies, we will continue to add talent to create best-in-class teams across the organization. In conclusion, our mission remains the same; to empower, engage, and inspire our customers every step of the way. We remain committed to advancing our primary growth strategies with a more focused approach to execution as we capitalize on the sustained, favorable industry backdrop in outdoor and performance categories. We are also in the process of developing a longer-term strategic plan to unlock the potential of our biggest businesses. With our portfolio of powerful brands, the right strategies in place, and a talented team to execute, we are extremely excited about our growth potential. I look forward to providing more details on our strategic plan in the future. With that, I will turn it back to the operator to open the call up for Q&A.

Thank you. Our first question comes from Jim Duffy with Stifel. Please proceed with your question.

Thank you. Good morning. I wanted to start by asking about the composition of the inventory. Can you give us some perspective on how much of the inventory balances on the books at year-end are in transit? And then, if you could speak to the inventory positions for the four major brands that will help set our expectations for growth for each of the brands across the quarters? Thanks.

Yes. Thanks, Jim. Yes. Well, I mean, directionally, obviously, it's our number one challenge and focus every day is delivering shoes, especially for our big brands. So, still not in the inventory position we would like given all the challenges, and we can go into that a little bit more, but I'll have Mike give you the specifics on the question, yes.

Yes, when you look at the in-transit question, Jim, it's about $50 million coming into the year. I'd say today, it's probably in a similar position. And so those added days on the logistics side of things are obviously backing up the goods. So the production has been stronger and availability of the goods coming out of the factory, but obviously, the logistics and the hold time at the port has kind of slowed things down.

Understood. And then any color on inventory that presents different challenges than others for the four major brand franchises?

I think Vietnam was the call out in the prepared remarks for Merrell and Saucony, and that's going to have a bit of an impact, timing-wise, on Q1. And so I’d say, coming into the year, Saucony is in a little bit better position than Merrell as it relates to the production they would normally get out of Vietnam. But we're already seeing that improve quite a bit, and the goods flowing more towards the end of the quarter. So on the other brands, I think inventories are improving; the position is stronger. Obviously, overall, we've got a nice position in inventory even just coming into the year. And some of that seasonal product that will carry over into later deliveries in the later part of spring and summer. But yes, I think the challenges for us are mostly in the first quarter, and they mostly relate to the Vietnam recovery.

Great. And Brendan, I wanted to ask about your comments on product strategy and the test-and-learn approach. You have some very productive key franchises. Certainly, those remain important. As you think about the composition of growth, how does that mix between key franchises and new product?

Yes, I believe we will continue to rely significantly on our key franchises. Part of our strategy for innovation and learning involves those franchises. For instance, Sperry is set to launch the PLUSHWAVE 2 in the boat shoe category, which will have a noticeably different appearance compared to traditional boat shoes, featuring more modern elements. We are also introducing the Moab 3 later this year. Additionally, in Saucony, the Endorphin line is evolving, not just with next year's version but with product extensions as well. Across our franchises, there is significant innovation as we utilize customer insights through a test-and-learn approach, experimenting with different offerings and monitoring their performance to determine what we should develop further.

Great, thank you guys. I will turn it over to somebody else.

Thanks, Jim.

Thank you. Our next question comes from Dana Telsey with the Telsey Advisory Group. Please proceed with your question.

Good morning, everyone. A couple of things. So as you think about the first quarter and the first quarter guidance, did Omicron play a factor in January, and you're seeing a pickup since then, as we've heard from others, or how would you shape the first quarter that way? And then just a quick follow-up.

Yes, it definitely did impact us. Even in December in the UK, that became a significant part of our business, not just with our own EMEA operations but also with Sweaty Betty, which faced challenges early on, especially around Christmas as they struggled to keep stores open. In January, the impact on our legacy retail business was less pronounced since we primarily operate outlet stores, which we managed to keep staffed. However, we did notice a general shift in shopper sentiment and some disruptions caused by Omicron that affected our warehouses and logistics. Thankfully, by the end of February, we felt much more optimistic as the situation improved.

I think the port congestion was also affected by the cases of Omicron. That situation has started to improve and return to a more normal state, so I believe it had a greater impact in January.

Got it. Three other follow-ups. Sweaty Betty, what type of contribution are you thinking about for 2022? I think you had previously given guidance that it could be $0.15 to $0.20 accretive in 2022; is that still the case, or any changes? Mike, any update on the approach to air freight and how you're thinking about it for 2022? And Brendan, on the marketing, 8.5% of sales in 2022. What are you planning, what should we be looking for, and does it differ by quarter in terms of the nuances? Thank you.

Yes. Let me cover the first two questions there, Dana. With Sweaty Betty, they're definitely on track against what we would expect. That range that you gave, we're probably closer to the high end of that range for 2022. So good performance there. And again, the growth in the stub period in 2021 was really in line, actually slightly better than we expected. So good progress with Sweaty Betty. On the air freight side, last year all in, we spent almost $35 million in air freight and obviously, adjusted out a portion of that. And as we think about 2022, we think the total air freight dollars will come down a bit, but obviously, you had the opportunity to price that in with the progressive price increases that we mentioned in the remarks. And so it will come down. We think airfreight itself will come down, but obviously, the full-year impact of the ocean freight rates and some of the other costs are going to more than offset that overall. But we've got that factored into the outlook, and we've priced accordingly for the cost in there that we think are going to be permanent in nature.

Regarding the marketing question, we will continue to see an increase in our marketing expenses as we shift toward a direct-to-consumer model, which includes our existing brand, Sweaty Betty. The marketing spend will be fairly evenly distributed throughout the year, with a slight increase in the fourth quarter due to the holiday season. As mentioned earlier, we are making a significant change by focusing on brand awareness rather than just performance marketing at the bottom of the funnel. We realize that, at both the brand level and within our e-commerce strategy, we need to adjust our marketing approach to enhance brand recognition for this year and for future growth. We're working on achieving a more balanced approach, rather than making drastic changes, and you will notice this shift in our messaging throughout the year. Additionally, the changes in our marketing strategy will also be influenced by product delivery schedules, as we aim to align our campaigns with product launches.

Thank you.

Thanks, Dana.

Thank you. Our next question comes from Laurent Vasilescu with BNP Paribas Exane. Please proceed with your question.

Hey, good morning. This is actually Aubrey Tianello on for Laurent. Can you hear me okay?

Yes. Hey, Aubrey.

Great. Thanks for taking our questions. I wanted to start with the revenue guidance. It's great to hear you're still going to be looking for double-digit organic growth this year despite all the supply chain disruption. Our quick math says that implies something like high single-digit growth for Sweaty Betty on a pro forma basis. Does that sound about right to you, and any color you can give on what's implied for Sweaty Betty growth in 2022?

No, yes, we're still expecting Sweaty Betty to outpace the average for the year in terms of growth rate. I would say, on a pro forma basis, closer to 20%, maybe slightly above 20% growth for Sweaty Betty. We can walk you through the puts and takes of that later if you want.

We are collaborating closely with Julie and her team. Our acquisition of them was driven by their growth potential, and our goal is to support that growth. We are committed to maintaining their previous trajectory since the acquisition, and we are very pleased with the outcomes so far.

Excellent. That's great to hear. And then just wanted to follow up on the question about inventory. I appreciate the color on in-transit inventory. Curious if there's any revenue that slipped out of Q4 into Q1 2022. I think you called out $50 million on just Merrell alone this quarter. Does any of that move into Q1 or not?

Well, a big portion of the lost revenue related to production that didn't happen in the Vietnam factories, so that won't shift. We kind of, unfortunately, talk about that production being gone forever. And some of it, a good portion of it was seasonal anyway, so we wouldn't have continued with producing that product and having it kind of spill over in Q1. But there certainly was a negative impact in Q4 from a number of factors including that, and there will be some benefit in Q1 for some of that timing shift, but not as much as you would normally expect based on the fact that a lot of it was related to factory production.

Got it, makes sense. Thank you.

Thank you. Our next question comes from Jay Sole with UBS. Please proceed with your question.

Sorry, I was on mute there. My question is just about the international business. If you could just talk a little bit about your outlook, if you go through the different international markets, and if you include Sweaty Betty, that would be great.

Yes. Well, I mean, obviously, international is a big part of our growth story, and we're pleased with the results we had in 2021. It does differ by region, just as Omicron is a virus in general is playing its way through there, and certain regions are impacted a little bit more by some of the product delays, but very bullish overall. Thrilled with the results Sweaty Betty is getting. They're continuing to open up stores. We've opened up one in Ireland, opened up one in Singapore and seeing great results. Also, excited that we can finally start to travel. I haven't been able to travel and visit our regions and our partners, and I'm going to make my first trip down to South America next month. So excited to see some of this firsthand.

Jay, the benefit that we're seeing in the international business right now is partially due to the - I mean, slightly slower recovery, I guess, in some of the markets outside of Europe for us. So in Latin America in particular, those key countries are now certainly normalizing in the growth rates that we're expecting for Latin America and Asia Pacific. The joint venture getting back on track are very, very strong. So we'd expect growth rates in those regions to outpace 2021 for sure and be at the higher end, if not, kind of in the mid-20s in terms of overall growth rate for international markets. Europe was a strong performer in 2021, one of our strongest markets with Merrell and Saucony being strong brands in those countries. So still expect really strong growth in line with our overall guidance in Europe and even better performance in those other international markets based on the timing of the recovery.

Got it, okay. Thank you so much.

Thank you. Our next question comes from Jonathan Komp with Baird. Please proceed with your question.

This is Alex Conway on for Jonathan Komp. Yes, just one question. Can you share a little more detail on the growth of the organic business you're assuming for Q1 and what's changed since your prior outlook of at least mid-20% revenue growth that you gave previously?

The outlook we provided earlier included Sweaty Betty, but in Q1, we're mainly facing logistics delays. We have significant production on the water and many goods that will not arrive at the port until mid-March. We lack confidence or predictability regarding how quickly those goods will reach the warehouse and be delivered to customers. As a result, we adopted a cautious outlook for our legacy brands. However, Sweaty Betty is not facing those same issues, so their performance aligns with what we anticipated back in November.

Yes. As mentioned earlier, Omicron has certainly changed since our last discussion and has impacted everything we were observing before. The demand is definitely present; it’s just a matter of getting the product here to satisfy that demand.

Helpful. Thank you guys.

Thank you. Our next question comes from Susan Anderson with B. Riley. Please proceed with your question.

Hi, good morning. Thank you for taking my question. I was curious if you could provide some insights into the performance of Merrell and Saucony by brand during the quarter.

Yes. Well, Saucony continued to deliver high growth. They were up in the 24%, 25% range and about 55% for the year. As Mike said earlier, they had started the year with more inventory, and that helped fuel more of the demand. Merrell struggled a little bit more getting the inventory here, given the issues we talked about. So for the quarter, they were closer to flat, but still up over 20% for the full year, and with an order book that is just at historic levels.

The other brands performed well, Susan, in the quarter, in line with what we expected.

Great. And so Sperry was also up in the quarter?

Sperry for the quarter was flat, slightly up, for the year up 25%. So happy to see that turnaround there, and for those of you that were in New York during Fashion Week saw some of the great product that they're bringing to market. So really bullish on their 2022 and go forward.

And obviously, having a boat shoe trend that we're at the forefront of is terrific news as well.

Great. Yes, the product looks great. And then just a follow-up on the gross margin. It sounds like you're expecting the air freight to come down a bit this year. Should we expect any of the extraordinary air freight in the year to be adjusted for? And then also, what other drivers within gross margin are you seeing for this year? Are you planning on raising prices across all the brands? I think you mentioned Sweaty Betty? And then maybe, if you could talk about other inflationary pressures, too?

I'll begin, and then Mike can add more. We recognize the pricing power we have across our brands. As we approached the middle of last year and anticipated the inflationary and freight pressures, each brand strategically adjusted prices. This gives us a chance to better align the value of our products with retail pricing. For instance, in Merrell, the Moab increased from $125 to $135, while Saucony's Endorphin Shift went up $10 from $140 to $150. Sweaty Betty's gold boat shoes rose from $165 to $170. These are reasonable price adjustments that will help us manage current challenges, and as conditions stabilize, we believe we can maintain these prices. We will keep evaluating where further opportunities exist. We experienced no resistance from retailers regarding these price changes in the latter part of last year, and anecdotally there hasn’t been any pressure, so we feel confident about how our competitors have responded to our pricing strategy. Regarding extraordinary freight in 2022, we will not adjust those figures; we will report them as they are. We believe we have managed well against the long-term inflation costs and have taken sufficient steps regarding some transitional trade issues to protect ourselves in 2022, which is reflected in our guidance.

Great, thank you so much. Good luck this year.

Thank you.

Thank you. Our next question comes from Mitch Kummetz with Seaport. Please proceed with your question.

Yeah, thanks for taking my questions. Mike, can you quantify the supply chain impact on Q1 sales and operating margin, and do you think the issues there, will those sales get pushed out into Q2? Is that factored into your guide, or do they kind of go away like they did the Q4 kind of shortfall? And then I have a follow-up.

Yes. I mean, on the supply chain, it's pretty meaningful. It's probably about 80 or 90 bps in the quarter for the newer or the ocean freight and some of the other transitory costs that we've been talking about that didn't occur a year ago. So that put pressure on margins. Brendan just talked about the phasing in of the pricing that we're seeing impacting. So I think in Q1, we see a couple of factors there, putting pressure on operating margin, mostly the new supply chain costs. And then, just some mix issues are impacting the timing of our wholesale business in Q1 more so than permanently impacting it, as you're pointing out, Mitch. So yes, we would expect to shift from Q1 to Q2, but there'll probably be a similar shift from Q2 to Q3, right? So I think all of that is reflected in our outlook, though, and the phasing of growth that we mentioned in the prepared remarks.

Okay. And then secondly, regarding some of your larger brands. You provided pro forma growth for Sweaty Betty in 2022. What were the pro forma revenues in 2021 for context on that growth? Additionally, for Merrell, Saucony, and Sperry, you shared the full-year growth rates; could you provide those on a two-year basis to help us understand how those brands performed in 2021 compared to 2019?

Well, on Sweaty Betty, the pro forma for 2021 is in line with what we shared. I think, back in August when we acquired the business, around $250 million or so, right in that range. So that was the basis for the 40% pro forma growth there. On a two-year stack, we're probably not going to go through that in detail. I would just say, overall, for the legacy business, we were able to deliver low single-digit growth over 2019, obviously. And we had some brands that exceeded 2019 pretty favorably and some that didn't. But I think overall, good performance in the face of the supply chain challenges that we saw in the business.

Okay, alright. Thanks, guys. Good luck.

Thanks.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler. Please proceed with your question.

Good morning. Hey guys, this is Matt on for Erinn. I just had a quick question on gross margins. I think you mentioned on the last call and a few times so far about ocean freight, and I think they're locked in until May. Can you just give us kind of the puts and takes of gross margin for the year, and is it increasing more in the back half, and how is Sweaty Betty kind of impacting the puts and takes there? Appreciate it.

Sure. Well, Sweaty Betty is a positive contributor to gross margin because of the strength of their DTC business. It's over 80% of the mix of their business. So that will continue to be a benefit going into the year. Obviously, Q4 is our biggest direct-to-consumer quarter, and so we see the biggest lift in gross margin in Q4 from that mix. But overall, I think the biggest factor that will improve gross margin in Q2 and Q3 is related to the phasing of where pricing increases start to hit. So we will see a progressive improvement right around 44% margins in the second and third quarter based on the improvement there. And all of the puts and takes on freight, airfreight, and ocean freight, and all the other costs, you're right to point out that the contracts expire in May. We're negotiating those right now. We're comfortable to learn that we've got the capacity that we need to be able to contract that. We don't have the pricing settled yet, but we've got some pretty conservative estimates built into the outlook that will kick in once the May contracts are settled.

Thank you.

Thank you. Our next question comes from Steve Marotta with CL King. Please proceed with your question.

Good morning Brendan and Mike. Brendan, you mentioned earlier that based on consumer-centric product innovations, there could be additional new categories with the exception of what you had mentioned as well, Sweaty Betty and Merrell collaboration. What else can we expect maybe from some other of the brands, and maybe you could dovetail those comments into considering Sweaty Betty's apparel and the best practices that might be able to utilize in some of the legacy brands? When can we expect the impact of say better apparel design and delivery to affect some of the more legacy brands? And I have one follow-up, thank you.

Okay. Thanks, Steve. Yes, 100%. I mean, the teams, Julie at Sweaty Betty and her team are already working with Chris and the Merrell team and Ann and the Saucony team specifically on imprinting best practices from an apparel company onto what we're doing with specifically those two brands. So we're trying to figure out exactly how much we can integrate or just learn from each other or have some centers of excellence around apparel. It is very important to me and the brand leaders to be able to bring apparel to the market. Not only do we think it's a revenue opportunity, but I think from a DTC standpoint, whether or not it's e-commerce or we open up lifestyle stores in the U.S. or around the world, where we have them. I think you have to offer those adjacent categories to really reach and connect with the customer. So that is very much top of mind and happening. In terms of some of the other extensions within our footwear business that you talked about within the brands, Merrell is launching the Bravada 2, which takes them further into categories like light hike and they're going to do a big marketing campaign around that. Sperry Sport launches next month, which is really authentic footwear for the water, whether it be water surfing or boating that then will also have a lifestyle aspect to it. So I think there's a lot of different product extensions within our core business that the brands and their product leads are constantly working on. In addition to doing collaborations to drive some typical brand heat, our Wolverine work boot brand has been one of the best. The one I'm most excited about is they're doing another campaign with Rawlings, the baseball company, and doing a launch at Yankee Stadium in April, if baseball is being played. Merrell continues to do their collaborations, including with Sweaty Betty, as I mentioned, which will happen in the next few months. And Unlikely Hikers, which is a brand partner that's important to them. Sperry has a collaboration coming with Herschel and Rowing Blazers. So every brand is chock-full of making sure we have collaborations to generate news and brand heat. Then you said you had a follow-up?

Yes, that's terrifically helpful, thank you. Mike, what do you expect to end the year from a leverage ratio standpoint?

End 2022? Yes, I think in line with where we are, our credit facility definition of leverage we're under two and half times at the end of the year. I'd say we'd probably be at a similar place at the end of 2022 as well. Noted in my comments that we're pushing hard to invest in inventory, and a large portion of our free cash flow will be going to invest in core inventory to support the growth we're seeing in the business.

Excellent. Thank you both.

Thanks, Steve.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Brendan Hoffman for any closing comments.

Yes, thank you. Thanks, everyone. Really appreciate your time today and look forward to talking to you along the way. Take care.

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