Wolverine World Wide, Inc.

Good morning, everyone, and welcome to the Wolverine Worldwide First Quarter Fiscal 2022 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Alice Wiseman, Vice President of Finance and Investor Relations. Sir, please go ahead.

Good morning and welcome to our first quarter 2022 conference call. On the call today are Brendan Hoffman, our President and Chief Executive Officer, and Mike Starnett, our Executive Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the first quarter 2022. 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 adjust, for example, for the impacts of environmental and other related costs, net of cost recoveries, and foreign exchange rate changes. Additionally, prior year non-GAAP disclosures include adjustments for air freight charges related to production and shipping delays caused by the COVID-19 pandemic. 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 FCC filings and in our press releases. With that being said, I'd now like to turn the call over to Brendan Hoffman.

Thank you, Alex. Good morning, everyone, and thank you for joining today's call. We are pleased to report strong first quarter performance despite ongoing supply chain challenges and a difficult macro and geopolitical backdrop. Our better than expected results are a testament to our team's focus and solid execution. Although these continued headwinds present complex challenges to our business in the near term, they are counterbalanced by sustainable changes in consumer trends in wellness, outdoor performance, and work that provide tailwinds for future growth. We remain focused on executing strategies to position our brands to capitalize on the industry backdrop and to drive market share gains in 2022 and beyond, while enhancing the profitability of our business. Now we'll provide a quick overview of our first quarter results, focusing on our biggest brands, where we continue to see strong demand as well as our key accomplishments. First quarter revenue increased 20% to $615 million, above the high end of our guidance. Excluding Sweaty Betty, revenue growth was 10%. Merrill performed in line with our expectations, with revenue of $148 million, down 2%. Availability of new product in the quarter was impacted by factory shutdowns in the back half of 2021, as previously noted. Merrill's demand remains very strong across all geographic regions, and we are seeing an improvement in the inbound flow of goods. As a result, we expect to deliver low teens growth in Q2 with anticipated sequential improvements in Q3 and Q4 as new product launches hit the market. For the full year, Merrill should deliver high teens growth. Merrill continues to elevate engagement with consumers supporting product successes. We launched our More Less campaign during International Women's Month, which resonated with consumers and fueled a 25% increase in demand for Antora, a trail running style uniquely tailored for women. Similarly, Merrill's Hype by Haters campaign with the viral hashtag BDE, Big Daddy Energy, brought nearly 4 million impressions via influencer outreach driving Hydromach to be the top unit seller on Merrill.com. We plan to launch a sustainability campaign, This is Home, along with Retread, Merrill's first footwear recycle program. The brand will be increasing investment in paid media through the remainder of the year as we rebalance our spend to emphasize brand building, top of funnel marketing. Saucony slightly exceeded our expectations with revenue of approximately $106 million and growth of 4%. While Saucony entered the quarter with a good inventory position and carryover styles, new product launches were delayed, as expected, due to supply chain challenges. Saucony's lifestyle business continues to perform very well in Italy, a critical market of fashion relevance, and we see ongoing momentum in the other international markets. The order book for Saucony gives us good visibility to growth over the remainder of the year as new product flow improves. As such, we expect double-digit revenue growth in Q2 for Saucony with a full-year outlook of high teens growth. During the quarter, we made a strategic media shift to broaden consumer reach. At the beginning of March, we launched a brand awareness campaign, Call Us Runners, in connected TV across all Roku apps with a supporting social campaign on Facebook and Instagram. We saw strong PR placements featuring the Saucony brand campaign, Call Us Runners, across multiple publications. Examples include an International Women's Day article in Ebony, highlighting our diversity efforts with the feature of JL from Black Girls Run. An Endorphin Pro 2, Triumph 19, and Guide 14 featured in Runner's World and Men's Health, which was syndicated to MSN and Yahoo!. We also saw Endorphin Pro 2 feature in Esquire in the UK. In sports marketing, three athletes ran the Boston Marathon in Endorphin Pro 3, further amplifying our brand presence in sport. Looking ahead, we will focus on core franchises for everyday active with Ride, Guide, Convara campaigns set to run on social media channels starting in May. Sweaty Betty revenues of $54 million were down 2% on a pro forma basis, but up 3% in constant currency. The brand was significantly impacted by geopolitical instability, given the brand's high exposure to the U.K. and Europe, where overall high street retail struggled. The broader challenges and new logistic delays had an unplanned impact on e-commerce traffic and new product launches in Q1, while store performance was relatively strong. Sweaty Betty continues to bring category-leading innovative fashion elements to technical activewear. This is reflected in the powerful lineup of new product introductions throughout the balance of the year. The brand has complemented performance product launches with lifestyle product offerings to serve the broader needs of the consumer in a post-pandemic world. Over the course of the year, Sweaty Betty will build on the recent success of its newly launched SuperSoft, already the brand's second-biggest franchise, as well as its cold weather products, such as ski, outerwear, and thermo. We expect Q2 revenues to be down mid-single digits for Sweaty Betty, with a return to double-digit growth in the second half of the year, resulting in low teens' full-year growth. Sweaty Betty is a predominantly DTC brand, and we are leveraging important learnings from the team that we can apply to our other brands. This cross-sharing is reciprocal. As an example, Sweaty Betty will be launching a new SMS trial in the U.S. market leveraging the work already done around this and our other brands. This functionality will support diversification and channel mix and offset privacy challenges in our current email-based CRM programs. In addition, to build on the success of the Insiders Loyalty Program, we are launching a new perk of the month to support trade and returning customer frequency. On the brick and mortar front, Sweaty Betty continues to attract new customers with profitable new store openings in the U.K. In the quarter, we opened four new stores. We have begun to investigate reentering brick and mortar here in the U.S. as the next stage of their expansion. Sperry had a very strong quarter with revenue of $67 million and growth of 19%. The brand continues to benefit from healthier boat shoe trends and had strong performance in U.S. wholesale with bright signals from certain international markets. We expect Sperry to grow mid-single digits in Q2 which is partially impacted by a shift of revenue into Q3 to timing of inventory receipts. For the full year, Sperry should deliver low teens growth. Wolverine brand delivered 12% growth in the quarter, in line with our expectations. Our portfolio of work brands performed very well with revenue of $130 million and growth of 21%. The company has a strong market share leadership position in the U.S. work boot category with over 30% of share and Wolverine brand leads the way. Wolverine continues to win with industry-leading product and creative collaborations. We expect Wolverine to grow in the high teens in Q2 with full-year growth in the mid-teens. Now an update on the supply chain. In the first quarter, we continue to experience logistic delays with lead time still almost twice as long as pre-COVID levels. Although factory production levels have meaningfully improved, Freight movement in the first quarter was affected by China's zero tolerance restrictions, the Russia-Ukraine war, and ongoing U.S. port congestion and trucking capacity limitations. We expect supply chain to be a lessening but still meaningful headwind throughout the year, with evolving COVID issues in China presenting a new potential challenge. At the end of the quarter, our inventory was up 36%, excluding Sweaty Betty, against abnormally low levels last year, and consists of healthy levels of core and carryover inventory. We expect inventory flow and newness to improve throughout the year. Moving on to the progress we made in the first quarter against our refined approach in support of sustainable future growth. On our last call, we spoke about an important shift in our approach to deliver our growth strategies, which fundamentally means a renewed focus on our biggest opportunities. This will mean prioritizing investments on our largest brands in global markets. The fundamentals remain in place, leading with an acceleration of our digital and e-commerce capabilities, elevating product innovation, and optimizing our international market opportunities. The product introductions, collaborations, and marketing campaigns we are delivering in 2022 are just the beginning. I'm incredibly proud of what the teams have accomplished and excited for the journey ahead. I see tremendous opportunities to unlock growth and shareholder value through a more comprehensive corporate strategy. Our leadership team is currently focused on this work, and we are excited to have Boston Consulting Group on board to support our efforts. I look forward to sharing more about this initiative as we get later in the year. Let me provide a brief insight in some of the key growth areas, beginning with our DTC and digital focus. We continue to focus on advancing our DTC capabilities and driving authentic engagements with consumers. That said, the DTC businesses for most of our brands are through the e-commerce direct channel, which had benefited significantly from consumer shopping behavior during COVID, but is now seeing some reversal as consumers shift back to stores. As a result of this change, combined with the impact of delayed product launches due to supply chain challenges, and shifts in consumer sentiment towards experiential spending, e-commerce sales did not meet our expectations during the quarter. Including our newly acquired Sweaty Betty business, first quarter direct-to-consumer revenue increased 24%. DTC e-commerce revenue increased 16% compared to last year. DT store revenue was up 60% versus the prior year. Excluding Sweaty Betty, first quarter direct-to-consumer revenue decreased 14%, reflecting e-commerce decline of 16% and store revenue decline of 8%. During the quarter, we focused on attracting new customers to the brands. We better balanced some of our marketing investments to top of funnel, which we believe is important to the long-term growth and durability of our brands. We are testing and learning a number of strategies and also balancing higher performance marketing costs with anticipated returns. We will continue to expand our reach through a better flow of newness and purposeful storytelling throughout the rest of the year. With a commitment to growing DTC, capital investment in e-commerce store infrastructure is expected to more than double this year, and we feel this will support growth into 2023. We expect our DTC business to grow over 20% for the full year, 5% excluding Sweaty Betty, and approach nearly 30% of total revenue in 2022. This reflects our expectation for an acceleration of DTC growth as we move past tougher compares in H1 of 2021, particularly in e-commerce, improved flow of new product offerings, and benefit from our top-of-funnel brand-building marketing initiatives. Beyond DTC, we continue to support our presence in the wholesale channel through key partnerships. As many of you are aware, DSW is testing a new format called Warehouse Reimagined, featuring shop and shops that showcase national brands. We believe this is an opportunity to amplify visibility of brands such as our iconic Hush Puppies brand. Moving on to product innovation, product is at the center of everything we do and a key strength across our brands. While supply chain challenges led to product delivery delays, this was another quarter of successful product newness enhancements and collaborations across our brands. To name a few, Sweaty Betty, in conjunction with its apparel expansion in the hiking category, teamed up with Merrill to introduce a limited edition Moab Speed, reflective of the Sweaty Betty ethos. We are thrilled by the strong response. As we discussed last quarter, 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. At Sperry, we launched Sperry Sport, the brand's most technically advanced performance launch yet, as we return to our performance-based roots. The assortment provides the versatility to cross over from lifestyle activities to sport. We are excited to be launching this new collection that is just hitting the stores this month. Sperry Sport Dive in product campaign drove new customer growth, 75% of Sperry.com buyers are new, and significant interest from media, including travel and leisure, where we were top pick. Our Make Waves brand campaign will continue to pulse and run through October. We also launched C-Cycle storytelling during Earth Month to begin activating our brand purpose, all for water, water for all. At Wolverine, we had a hugely successful collaboration with Halo, bringing the video game-inspired boot to life. The boot featured the Master Chief emblem while offering the same comfort and support inherent in Wolverine boots with a midsole that contains UltraSpin technology for a lightweight, energized ride. The product sold out in under one minute with 250,000 visits to the Halo landing page, leading to a 22% growth in its email database in a two-week span. These launches and collaborations clearly showcase the potential of these brands to excel in innovation and creativity. The next key growth area is the acceleration of our international business. In the first quarter, international revenue grew 35% as compared to last year. Excluding Sweaty Betty, international revenue grew 10%, driven by growth in our third-party distributor business, with recovery seen in our top markets as well as strong performance in our China joint venture. Our third-party businesses in Asia, EMA, and Latin America delivered revenue growth, excluding Sweaty Betty, of 40%, 60%, and 90% respectively versus 2021 and are accelerating to pre-pandemic levels. Our own business in EMA and Canada declined 21% and 28% respectively as they were impacted by supply chain constraints similar to our domestic business. We are particularly encouraged by momentum in LATAM, with Cat and Merrill brand growth of 66% and 137% respectively. Our brands are well-positioned to take share in this region as key markets, including Chile and Peru, recover. Notably, in the first quarter, two branded sites for Saucony in Chile and Merrill in Peru were launched, and the Merrill Cusco's Peru store will open in Q2. As we look out, I also want to touch on the impact of the Russia-Ukraine conflict. Our Russia business is very small, historically less than 1% of revenue. And during this quarter, we were able to divert the inventory allocated for our Russian distributor to other regions. That said, the war impacted consumer confidence in Europe, which is impacting business. We are monitoring the situation closely and making any adjustments as necessary. In efforts to support displaced Ukrainians and those affected by the war, we have made meaningful donations, including nearly 100,000 pairs of shoes to those in need. In conclusion, while the global macro environment and supply chain challenges are likely to create headwinds in the short term, we are more confident than ever in the future of our brands. With that, I will turn it over to Mike to discuss our financial results.

Thanks, Brendan, and thank you all for joining the call. As Brendan mentioned, we delivered strong top and bottom line performance in the first quarter and continue to see healthy demand across most brands. First quarter revenue of $615 million was up 20% compared to the prior year and exceeded our expectations and the high end of our guidance. The revenue performance was driven by an 11% increase from the Michigan group, a 6% increase from the Boston group, and an 11 percent contribution from Sweaty Betty's revenue of $54 million. Adjusted Q1 gross margin of 42.5 percent was in line with our internal plan and decreased 180 basis points versus 2021. During the quarter, we experienced higher supply chain and product costs as expected, while certain price increases, which are phased later into the year, had a small offsetting benefit. The benefit from price increases will be more meaningful in the back half of the year, with sequential improvement each quarter. Gross margin was also impacted by channel mix. Our international distributor business was especially strong in Q1, and this more than offset the near-term softness seen in our e-commerce channels. The gross margin from our distributor revenue is much lower than our e-commerce gross margin. Adjusted selling general and administrative expenses of approximately $211 million for Q1 were up $37 million, or 21%, compared to the prior year. This was due to an increase in variable costs on higher revenue, the addition of sweaty Betty, and higher labor costs in our distribution centers. More importantly, we continued to invest in our teams and strategic marketing. aimed at consumer acquisition and brand heat during the quarter. Our reported SG&A expenses include $30 million of net costs related to a legacy environmental matter. We expect that this charge will substantially cover the current pending lawsuits, and we are pleased to be making such meaningful progress towards resolving this matter. Adjusted operating margin was 8.1 percent and in line with our expectation and guidance for the quarter. Excluding Sweaty Betty, adjusted operating margin was 9.1%, compared to 10.2% in the prior year. Adjusted diluted earnings per share for the quarter were 41 cents, compared to 40 cents in the prior year, growth of 2.5%. Reported diluted earnings per share of 12 cents includes the impact of net litigation costs already mentioned. Turning to the balance sheet, ending Q1 inventory of $483.3 million grew about 50 percent and 36 percent, excluding Sweaty Betty. This increase reflects abnormally low inventory levels last year due to excessive supply chain challenges. Our available inventory on core and carryover styles is currently very healthy. Importantly, the flow of new product for our key brands is now improving, and we expect this will support the important product launches planned for Q2 and into Q3. I will now turn to our outlook for 2022. The first quarter provided a solid start to the year, And we continue to experience strong global order demand that gives us good visibility to projected revenue for the rest of the year. As mentioned, our inventory levels have improved. And while supply chain challenges persist, we are in a more stable position moving into the back half of the year. As a result, we are reiterating the fiscal 2022 guidance on revenue and EPS provided on our last call. We continue to expect to deliver record revenue in the range of $2.775 billion to $2.85 billion in fiscal 2022, growth of 15% to 18%, including double-digit growth for our organic brands. We continue to expect our four largest brands, Merrill, Saucony, Sperry, and Sweaty Betty, to contribute approximately two-thirds of our revenue in 2022. Despite the e-commerce decline in the first quarter, we expect our direct-to-consumer businesses to approach 30 percent of global revenue, and our international markets to be over 35 percent of global revenue for the full year. We now expect adjusted gross margin to be approximately 43 percent, and selling, general, and administrative expenses to be approximately 32% of revenue. This outlook now reflects a shift in revenue from our D2C channels to our accelerating international distributor business. We still expect adjusted operating margin of approximately 11%. Our revised outlook now reflects an effective tax rate of approximately 21%, net interest and other expenses of approximately $44 million, and an average share count of approximately 81.4 million shares. This revised share count reflects 2.1 million shares repurchased since the beginning of the year. Adjusted diluted earnings per share are still expected to be in the range of $2.50 to $2.65, and reported diluted earnings per share are still expected to be in the range of $2.30 to $2.45. We expect Q2 revenue of approximately $735 million to $745 million, or growth of approximately 16% to 18%. Gross margin is expected to be approximately 42.5%. Operating margin is expected to be approximately 10.5%. And adjusted earnings per share are expected to be in the range of 63 cents to 66 cents. Looking at the second half of the year, we expect high teens growth. The quarterly phasing is based on the alignment of our strong future order book, the improved new product pipeline mentioned earlier, and the phased benefit of price increases. Before I pass the call back to Brendan for closing comments, I wanted to share information about some very important work underway at the company. Since the beginning of this fiscal year, the leadership team has been working on a number of initiatives specifically focused on accelerating total shareholder return for fiscal 2022 and beyond. The first priority is the execution of this year's financial plan in line with the outlook just provided. Beyond the financial performance, here are some of the initiatives worth noting. First, as Brendan mentioned earlier, We are working to reset the corporate strategy of the company with the support of Boston Consulting Group. This includes developing new enterprise level and brand level strategic goals and initiatives geared towards the optimization of our portfolio and capital structure to maximize value. To complement this work, we are also in the early stages of a comprehensive cost and efficiency review and may partner with some outside experts to help us accelerate these opportunities. Next, to provide greater clarity into the performance of our business, we will continue to provide more detail on the performance of our biggest brands and plan to further enhance our reporting structure in the second quarter. Last, as a culmination of the work noted above, we plan to host an investor day to share insights on our company's biggest growth and value creation opportunities. We will provide a more specific timeframe for this event in the coming months. In closing, I'd like to thank our global team for their outstanding execution during an incredibly volatile time. I'll now turn the call back over to Brendan.

Thanks, Mike. Operator, we'll now open it up to questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then 1 to join the queue. We'll pause momentarily to assemble the roster. Our first question today comes from Jim Duffy from Stifel. Please go ahead with your question.

Thank you. Good morning, Mike. Good morning, Brendan. Guys, I'm going to start by asking about the Comprehensive Corporate Strategy Review and the Engagement of Boston Consulting Group. Is everything on the table here, including active brand and portfolio management, or do you foresee this to be more operationally focused? And then, Mike, I'm curious, is the consulting fees within the budget, or is this something we should be looking for as incremental in the P&L?

No, those costs are embedded in the outlook here, and I can give some comments, and then Brendan can kind of top it up. But I would say the work here is really focused on sort of corporate-level strategy and evaluating where the opportunities are for the business as we kind of pivot out of out of this COVID timeframe and look for opportunities that are relevant to white space within our brands and other portfolio options that are certainly on the table as we move forward.

And I think, you know, I mentioned last time in my remarks, just focusing the organization on prioritization. And so I think that they'll help us expand on that and really where we want to focus our resources.

Fair enough. Helpful. Look forward to hearing more about that in the future. On to more near-term dynamics, I was hoping you could speak to just demand indicators that you're seeing in the outdoor and running categories. These very strong categories during the pandemics, there's been some supply disruption, not only for your brands, but for others in the space. What do channel inventories look like at this point? What type of demand indicators are you seeing within your own direct-to-consumer business, and how do you see this unfolding across the year in these categories?

Yeah, well, I mean, we're still bullish on the categories. We still see tremendous strength in our order book. You know, it really comes down to supply chain, you know, the closure in Vietnam. The H2 last year just, you know, that really came back to haunt us, as we expected in the first half of this year, just with the lack of newness. So when you speak to our own direct-to-consumer demands, you know, it fell off, as is evidenced by our results, because we had no newness. So we were just showing the same core product over and over. We also missed out specifically in Merrill on cold-weather boots. So we were out of stock there. So I think that's what you're seeing in our own direct-to-consumer, and that's why we expect that to pick up as we get further along in the year. But, you know, really excited and enthusiastic about what we're seeing in our wholesale partners, you know, whether it be the family channel like Boot Barn reporting yesterday or the Sporting Goods channel where we continue to see strong demand both in stores and online and a healthy order book that has the good flow, you know, make us very optimistic.

I think on the inventory side too, Jim, there's been some certainly bottlenecks in certain retail stores or channels. But overall, for the categories that we're strongest in, the channels have been good and healthy. An opportunity for us to accelerate here with our wholesale business into Q2 and certainly for Q3. As new product arrives, to Brendan's point, not just – Filling in on core, I think it's the added catalyst for additional growth as we move forward. But I feel good about our inventory position as it stands today and obviously still see strong demand in terms of bringing in newness and new product from our retailers too.

Great. And then lastly for me, and I'll let someone else jump in, you mentioned some softness in European consumer trends. presumably some softness in Asia Pacific as well. Are you seeing any cancellations related to this from wholesale partners or distributors, or is the order book intact?

I'd say on the distributor side, it's been especially strong and no cancellations, really. They're continuing, as we have been, to chase supply against the demand that they're seeing in those markets. From a cancellation standpoint, it's been pretty stable, Jim, and Been lucky to see that for several quarters in a row here during this timeframe where supply chain's been a little more challenging. And so, so far, we've been able to hold in there. And the outlook, as we mentioned before, for the future orders is still very strong with a strong commitment from not just our domestic retail partners, but our international partners, distributors, and wholesalers alike. Thank you. Thanks, Jim.

And our next question comes from Jonathan Komp from Baird. Please go ahead with your question.

Yeah, hi. Good morning, everyone. Maybe a follow-up on the corporate strategy review you're initiating. Brendan, I'm curious as you look across the brand portfolio, do you expect any brand or set of brands in particular to benefit from the review? And then maybe it's too early for this, but do you have any thoughts when you look at the brand portfolio today? directionally, what sort of organic growth potential has a portfolio is really possible on an ongoing basis?

Yeah, I think, you know, as I said, it's making sure we put our resources behind our growth priorities. And whether it be the biggest brands or whether it be the workbook group that we, you know, under Tom Kennedy, I think we are starting to think more like that as an organization, and I think that's going to hopefully unlock future growth and make sure that our brand strategies and our corporate strategies are all aligned. The nice thing about our brands that we have today, they're all profitable, so it's really just a matter of balancing the resources and the time rather than having any that are not thrown off profit, and I think you know, we'll have better clarity into that as we go through this process.

Exactly. I mean, John, we shared it today, but literally the process is just kicking off. And, you know, we're excited about, you know, what we'll be able to focus on and share, you know, share with you in the near future here. But in terms of any outward-looking projections or outlooks, it's a little early to put that on the table quite yet.

And maybe as a follow-up on the sweaty Betty brand, could you just expand a little bit more on some of the shifts you might be making to the marketing tactics? And does any of that change your outlook for the growth potential beyond the next quarter or a few quarters here?

Well, again, I think they've had some product delays, not quite as severe as we have in the shoe side of the business, but things that they were planning on for Easter that got here post-Easter. But they're, you know, very sophisticated when it comes to working directly with the consumer. So Julie and her team are actively shifting where they're investing their marketing dollars and how they're going after new customers combined with the existing customers, the different tools they're using. So they did some things over the last few weeks that generated some nice push in business, and so they'll continue to work through that. So, you know, it likely will be a little bit choppy over the next quarter or so. You've seen that in other DTC brands, but doesn't dull our enthusiasm for their long-term expectations.

And I would add, John, that the store performance for Sweaty Betty was fairly strong in the quarter. It was copping up against, you know, a really tough Q1 in 2021, but in line with what we would have expected and certainly the The benefit for this brand, even though it's strong D2C, it has the omni-channel opportunities that some of our other brands don't have. So there's a lot of learnings coming out of that as well as we look at how to kind of refocus on the brick-and-mortar opportunities as the consumer shifts their shopping habits a little bit.

And our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead with your question.

Good morning, everyone. A couple things to unpack. It seems like the delays in the arrival of goods in the first quarter impacted the newness. How do you see the flow of goods continuing and how are you thinking about air freight expense? And then also the shift to stores from e-commerce with reopening, how are you thinking about that as we go through the quarters? And the back half of the year where there's the cadence uptick, Is there new products or new things that we should be looking for to drive demand there? Thank you.

Yeah, thanks, Dana. I mean, I'll start, then Mike can follow up. I mean, I think, again, you know, the lack of new deliveries for a mono brand like our brands, basically one category, is just too difficult to overcome. We just have nothing to engage the consumer with. And so... In Merrill, the Moab 3 continued to get delayed. It was supposed to launch last year, and then in Q1, now we are firm to have it launch in June, so we're excited about that. In Saucony, their new franchise, the Tempest, was meant to launch in Q1, along with the campaign Call Us Runners. That's going to be now in Q2, and I can go on and on down the list as these goods are on the water or in the air, and so we have better line of sight into when they'll be here in Q2, Q3, Q4, which is also when last year we started to see inventories be challenged. So now that's really what is giving us the confidence in kind of the uptick in business in the back half of the year. In terms of stores, you know, you have to remember, and Mike mentioned in his comments, we're really not an omni-channel business in terms of our own DTC. Our stores are all outlets. So I don't think of those in the same way as I would full-price stores in terms of how they interact with our e-commerce business. And so as others have had the full-price store business to mitigate some of the e-commerce myths, we just don't have that opportunity. So even more pressure on us and an opportunity to get the flow of goods into the last three quarters and see, give ourselves the opportunity to market to our customer with something new and to engage them.

And I think the key to that, Dana, is visibility to this, which we had in February when we gave our outlook that we knew there were going to be some launch delays here. We have much more confidence in the timing based on the status of production and the flow of the logistics, et cetera. So from that standpoint, even though it's shifting a little bit, we're very, I think we have really good visibility there and it's stabilized. We're not leaning excessively on air freight, certainly not more than we had planned to, to get the goods here faster. So again, I think it's, all of this is fairly in line with what we had expected coming into the year. And so, you know, as we delivered on Q1, overall that was positive. But, you know, some of the pressure it's had directly on our e-commerce business has been a little more acute than we expected. But obviously the diversity of our business model helped us mitigate that in other places.

And then just on price increases, are you taking price increases across all brands? What's the magnitude that you're doing?

We are. We've got price increases that are impacting, you know, sort of in the market starting now more meaningfully and will have an even bigger impact in Q3 and Q4. What we're seeing, unfortunately, linked to the delay in some of the launches is with some of the new product where we took more meaningful increases, those Those were delayed a bit. So the benefit of that is also delayed. But overall, very meaningful price increases. I think very much in line with competitor brands that we've seen in the market. And from a D to C standpoint so far, no resistance on the higher pricing that we're passing through. So overall, very, I think, very comfortable with that approach.

Yeah. And we have, even though, as Mike said, a lot of it's phased in throughout the balance of the year, you know, Merrill, for example, has taken up two of their, you know, core franchises, the Moab by $10 and the Jungle Mock by $5. And again, we haven't seen any pushback from the consumer. That being said, you know, we're doing it selectively because we know, you know, we have to watch how it impacts demand.

And our next question comes from Laurent Valescu from BMP Paribas. Please go ahead with your question.

Good morning, and thank you very much for taking my question. Mike, I think you hinted that you might provide enhanced disclosures in 2Q just so we're prepared. Any guardrails on that matter?

Well, I think it's part of all the work that we're doing right now to sort of, you know, look at the business and how to organize the business a little bit more efficiently. And so no foreshadowing at this point, Laurent. I think just more in line with the focus and the prioritization that Brendan mentioned before, obviously continuing to emphasize and share the performance of our biggest brands, which continue to represent two-thirds of our global revenue, and focusing on a grouping or an organization of the business That's the most helpful to investors and helps us tell our growth story in a more efficient way.

Very helpful. Okay. And then I think you mentioned maybe 30% of your revenues for this year will come from DTC. If I look at the K, you had 143 stores, right? Which includes Sweaty Betty. Just curious to know, how do we think about the store count for the end of the year? and within that, how do we think about e-commerce performance? I think you gave a stated goal to get to $500 million. How do we think about that for 2022?

Right. So I think by the end of the year, including our Sweaty Betty stores and the additional stores that we're seeing added across the portfolio, we should be approaching somewhere between 155 or 160 stores across the fleet. Brandon mentioned, a lot of our legacy brand stores are outlet stores. Most of them are. And from an e-commerce standpoint, we expect to see an inflection in the second half of the year in terms of growth, more stable performance in Q2 on a year-over-year basis, and then an inflection in the back half of the year aligned with the new product launches that we talked about. We do expect... good growth for the full year on e-commerce, but including, you know, when we talk about 30% direct-to-consumer, that includes Sweaty Betty's store and e-com business as well. So that acquisition really enhances our overall mix as it relates to direct-to-consumer versus wholesale.

Very helpful. And the last question, gross margins organically, they were down 280 bits, but Mike, I think you mentioned mix was a real way on that performance. Could you possibly parse that out? And then what was the driver for the gross margin guide down a 50 to 100 basis points? Was it mixed or was it just incremental freight, incremental costs? Any comment on that would be helpful.

Thank you. It really is mixed, Laurent. I mean, as we're looking at the business today and as we kind of modeled the first quarter, those margins came in line essentially with what we would have expected for Q1. just based on the tougher compares on D to C and then, you know, the overall mix. But it was, the mix was worse, slightly worse than we expected in the plan, as we mentioned in the prepared remarks. But I will say that the gross margin performance in our core business and our wholesale markets was quite a bit better than expected. And that also helped us sort of offset some of that mix issue overall. So the change in the guide there on gross margin and also on the SG&A expense line is really due to the mix shift between those different channels. And really, everything else around pricing, overall cost increases that we had contemplated in our plan, et cetera, are pretty well consistent from what we thought a few months ago.

And our next question comes from Jay Sol from UBS. Please go ahead with your question.

Great. Thank you so much. My question is on share buybacks. You did some buybacks in the quarter. Can you remind us how much authorization you have left, maybe what your plans are for buybacks for the rest of the year and if that's included in your updated EPS guidance for the full year?

We have over $400 million authorized on the current plan still remaining. The outlook that we gave reflects just over 2 million shares we bought back so far this year and some some buybacks at the end of last year that will benefit this year as well. But we haven't modeled in, Jay, any additional meaningful share buybacks. That doesn't mean we won't do them. But in this outlook right now, we are only factoring in the buybacks that we've completed. So obviously at today's valuation, we'll be seriously considering our position on that as we move into the rest of the year.

Okay, and then I'm going to ask one more just on China. You know, it sounds like the JV has been going really well. Everybody's talking about the impact of the lockdowns in China. Can you just remind us how large the China business is from a pairs and from a sales perspective as it stands today and how lockdowns might be impacting it so far?

Go ahead. Yeah. No, I mean, overall, our business there is still relatively small. I mean, we're continuing full steam ahead with the JV. Saucony is doing great. Merrill is a little bit slower there, as was planned. But amazingly, despite the lockdown, we're still seeing them find a way to do business. So, you know, we're certainly anticipating some slowness, you know, as – you know, COVID spreads through China if that's what happens. But right now it's really hasn't had a big impact, but that's largely due just to the small size of the business. We're certainly, you know, keeping an eye on it in terms of manufacturing. And while we don't have a lot of manufacturing left in China, we still have materials that come from there. A couple of our brands like Keds and Kids still have some exposure there. So that's more where our emphasis is.

Right. And the focus on channel mix in our joint venture has obviously shifted to be very heavy on the e-commerce side of that business, which is outperforming for both brands. Tempering our outlook for stores a little bit this year, just a little bit more wait and see on the potential impact that COVID might have on lockdowns. But overall, I think confident in the outlook for that joint venture and the progress that we're seeing in the two largest brands in the portfolio.

Okay, thank you so much.

Thanks, Jay.

And our next question comes from Susan Anderson from B. Riley. Please go ahead with your question.

Hi, good morning. Thanks for taking my question. I was wondering if maybe you could give a little bit more color on what's going to accelerate Sweaty Betty back to double digit in the back half. And then also I'm just curious if you saw any growth differences in Europe versus the U.S. I know the U.S. is small, but just curious how the brand is doing in the U.S.,

Yeah, so I think, again, with Sweaty Betty, you know, they start to see products slow down in the back half of last year as they see a better flow of goods and newness. You know, that's giving us the confidence that, you know, they'll start to get back to double digits. In terms of the U.S. versus the U.K., it is very different because in the U.S. they don't have any stores, so it's purely e-commerce. They do have a nice wholesale business with Nordstrom's and have expanded into Bloomingdale's as well as some specialty shops. And Julian and her team were here last week doing a site tour to, as we've mentioned before, look at opening back-up stores in the U.S. You know, they had, I think, about a dozen stores at one point, and they shut them down during COVID. But it gives us pretty good intel into the top-line number. opportunity. They were able to get out of the leases, but between that and where their e-commerce business is happening, we think there's an opportunity later this year or early next year to start to open back up stores and gain some more brand awareness for Sweaty Betty here in the States.

And that growth rate is heavily focused in the back half of the year, but also includes the expansion of new stores, both in their home markets in Europe as well as some new stores here in the US. So some of the growth that we'll see comes from that expansion as well as just the heavy weighting that's traditionally part of the Sweaty Betty business in the fourth quarter.

And as I said, we've already seen a small sample but a little bit of an uptick based on some of the marketing changes they were able to make on the fly post-Easter.

And our next question comes from Mitch. commits from Pivotal Research. Please go ahead with your question.

You guys have some old info at Seaport Research. So I've got a few questions. Just to follow up on Sweaty Betty, Mike, could you say what kind of dollar sales are embedded in your Q2 and full year outlook?

dollar sales for the full year.

For Sweaty Betty on Q2 in the full year. Yeah.

In Q2, I think we're right around $60 million. And for the full year, Outlook is like $270, $275. Okay.

And the EBIT was negative in Q1. Are you expecting an operating loss in Q2? And I assume you're not for the full year, correct?

Not for the full year. But, yeah, typically we would see those flow-throughs be a little more challenging in the first two or three quarters of the year, just given the volume that we do, especially through the e-commerce business. So very back-weighted in terms of the timing of profitability, but that's consistent with what the business has delivered the last few years.

And then you've referenced the strength of your order book as one reason to give you confidence in – in the acceleration of the back half. I mean, I assume at this point you've got a complete fall order book. I know you typically don't, you know, give the numbers on that, but I was wondering maybe you'd make an exception this time. Like, are you, are you looking at like, you know, 20, 30% increase in your fall orders year over year?

Well, I would, I would say consistent with what we've been saying really for the last several quarters, you know, the order book is historically high. We've seen it continue to grow. or in some cases for some brands, which have been especially high, maintain that level. The amount of coverage that we have from the order book versus our revenue outlook is incredibly high, and certainly at historic levels. So while we won't quote the percentage changes, and some of that has to do with the timing of the orders coming in and everything else, but fundamentally I think it's just the consistency we've seen in the order book and the ongoing kind of reliance that we feel we can have based on performance year-to-date, performance over the last couple of years that gives us real confidence in the outlook for the rest of the year. That includes our wholesale accounts and our third-party distributor businesses, which is, as we mentioned, accelerating right now and a very strong part of the story.

And our next question comes from Sam Plesser from Susquehanna. Please go ahead with your question.

You guys are right. I'm at Williams Trading, I guess. old list. A lot of my questions have been answered. To one on Sweaty Betty, you know, you talk about opening stores, but with the supply problems, I mean, is this something that's really going to be, you know, sort of a next year thing because of the supply, you know, catching up issue?

I wouldn't say it will be based on supply chain in the back half of the year, Sam. I think it's more dependent on the sort of real estate opportunities that are out there. I mean, you know, learn from the hard way of getting into bad real estate deals and think that Julie and her team have the right support system to make sure with an open playing field, not having stores anywhere right now, that we're very surgical about where we open stores and the leases we enter into. So I think that'll be more the driver of than supply chain issues by the back half of the year. But not gonna force a couple of stores to be opened in Q3 or Q4 if Q1 or Q2 of next year makes more sense. I think it's not gonna be meaningful to the overall business. It's more about setting us up for the future.

Thanks. I have sort of two more questions. One, Mike, what does the in-transit inventory look like right now?

Well, at the end of the quarter, it was about 20% of the total inventory. which is higher than normal, Sam, but not incredibly excessive. I think I would say over the last month that's probably improved a little bit, and it will continue to improve as some of the bottlenecks we're seeing in the ports and things like that improve, and the flow of goods is a little more consistent.

How does that compare to last year at the end of the first quarter?

You know, I don't know, honestly. I think it's probably, again, I think it's in a very similar place if not slightly better, frankly. It came down a little bit from the end-of-the-year level. I think at the end of last year, our in-transit was over 20%, and at the end of Q1, it came down to high teens or just under 20%. Great.

And then lastly, could you just give us what the DTC or wholesale revenue was by the Michigan group, Boston group, and other, including Sweaty Betty?

We don't, yeah, we don't have that.

It's going to come out in...

Yeah, it's going to come out in the queue. Yeah, we'll provide that then. I don't have it right in front of me.

All right. Well, I think all my questions have been answered. Continued success. Thank you. Thank you, Sam.

Thanks, Sam.

And, ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

Well, thanks, everyone, for joining us today, and we look forward to updating you on our next call in August.

And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.