Wolverine World Wide, Inc.

Greetings. Welcome to the Wolverine Worldwide Inc. Fourth Quarter and Fiscal Year 2023 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Alex Weisman. You may begin.

Good morning, and welcome to our Fourth Quarter 2023 conference call. On the call today are Chris Huffnagle, President and Chief Executive Officer, and Mike Stornett, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release and announced our financial results for the Fourth Quarter and full year 2023 and guidance for Fiscal 2024. The press release is available on many new sites and can be viewed on our corporate website at wolverineworldwide.com. This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures were reconciled to most comparable GAAP financial measures and attached tables within the body of the release. References made regarding financial results for 2023 and comparable results from 2022, in each case, for our ongoing business, exclude the impact of KEDS, wolverine leathers, and reflect an adjustment for the transition of our Hushpuppies North America business to a licensing model. The outlook for 2024 and comparable results from 2023, in each case, for our ongoing business, now also exclude the impact of Sperry, which was sold in January 2024. 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 2024, growth opportunities, and trends expected to affect the company's future performance made during today's conference call are forward-looking statements under US 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 Chris Huffmagle.

Thanks, Alex. Good morning, everyone, and thank you for joining us on today's call. To close 2023, we delivered revenue and earnings in line with our guidance, and our inventory and debt finished at levels better than we anticipated. More importantly, we continue to make great progress in driving Wolverine Worldwide's turnaround and transformation. With a clear vision, a common sense of purpose, and the collective effort of our global team, I'm proud and encouraged to say that Wolverine Worldwide is a much different company now than it was just six months ago. And I'm excited to share our progress with you today. As we begin 2024, our portfolio is more focused than it has been in over a decade. Composed of authentic, leading brands, playing in desirable consumer categories, and we're confident this will continue into the future. The organization is more efficient and more capable of building great global brands with new talent and key brand roles and new centers of excellence created to help enable our brands to build awesome products and tell amazing stories. Our business is poised to be much more profitable with an outlook to meaningfully expand operating margin this year as a result of significant gross margin improvements and our restructuring efforts late last year. We have the financial capacity to reinvest back into the business. With $30 million of incremental investment planned this year for key brand growth initiatives and the tools necessary to support long-term sustainable growth. Our product pipeline is stronger with new introductions already resonating with consumers and more great collections dropping in the coming months. Our balance sheet is much healthier with the company's lowest debt level in over two and a half years, approximately 40% less inventory than just a year ago, and a clear line of sight to drive further improvement on both metrics this year. And finally, we have a talented, aligned, and motivated team driving the business every day. I'm extremely thankful for their exceptional work over the past six months and couldn't be more excited about the work we'll do together moving forward. Our bold turnaround plan, coupled with the team's urgency and effectiveness in executing that plan, has allowed us to outpace our expectations in the first chapter of our transformation. We've largely stabilized the company in just a few short months. Last November, we shared our expectations for key financial metrics with you, and I'm pleased to report we've over-delivered. We reduced our year in inventory by $30 million, more than we anticipated. We said we'd further rationalize our portfolio and deliver $65 million of proceeds in Q4. We ultimately generated $91 million in the quarter and then completed the divestiture of Sperry in January, generating another $130 million in proceeds. We said we reduced the company's debt by around $170 million by year end, and ultimately we reduced our debt by $280 million, and that was before the Sperry transaction. As a result, our bank-defying debt leverage is better than expected. We've executed extraordinarily well on the key stabilization initiatives we laid out last fall, and we remain committed to continuous optimization efforts and further strengthening of our balance sheet. Today, we're in a much better position to accelerate the continued transformation of the company. The second chapter of our turnaround story is focused on transforming Wolverine Worldwide into a builder of great global brands. Let me take a moment to walk you through our progress and plans here. To be great brand builders, everything must start with the consumer. To shift our mindset and add capabilities within our brands, we've added more consumer-focused talent in many of our key brand roles over the last year, and we have several more searches underway today. To bolster resources and expertise, we established The Collective in November, a center of excellence created to elevate consumer insights, market intelligence, trend monitoring, and innovation. I've been pleased by our quick pivot to a more consumer-obsessed culture as our brands have already begun to incorporate more insights in consumer testing into their -to-market processes for product and marketing. Ultimately, the Wolverine Worldwide portfolio brands should make all our consumers' lives better. Thanks to recent portfolio management efforts, our brands are tightly aligned around enabling our consumers to have healthier and more productive lives. As a result, we have a great opportunity to increase collaboration across our brands and teams to recognize unmet consumer needs, spur innovation, identify trends, and better lever the collective talent of the organization. We believe the consolidation of our office footprint will continue that help. We've already relocated Swati Bhattai to our King's Cross office in London, and later this year, Marilyn Saakhani will be co-legated here in our global headquarters. We're also working to better equip the organization with modernized tools and processes to execute faster, more accurately, and with distinction. We've piloted new -in-class digital product line management tools with Mero, and are now rolling these tools out across the portfolio. We're implementing new integrated business planning processes this year to improve forecasting, inventory management, and margin efficiency. We've also just launched an initiative with our new digital and technology experience team to revolutionize our digital tools and improve the direct experiences our consumers have with our brand. In addition to redesigning the organization and reallocating resources to directly align with our vision, we're also taking bold steps to better manage our brands in the marketplace. In the fourth quarter, we created a new, centralized brand protection team to help us monitor and address nefarious activity in the marketplace. In a short time, across our portfolio, we've already identified and shut down nearly 20 customers and partners that have participated in gray market activity and approximately 400 accounts that do not align with our go-forward distribution strategies, with more to come. Our brands are also focused on achieving a healthier sales mix with a stronger emphasis on full-price business this year. We're already less promotional in the marketplace today and on our own -to-consumer channels. A more disciplined approach to brand management is critical to enhancing and protecting the equity of our brands. We must begin to establish more of a pull model and we must continue to strengthen relationships with valued wholesale and distributor partners. The next few months will be critical as we continue to aggressively advance our transformation, and I'm confident we are positioned to continue delivering on the plan we've laid out and we're committed to delivering better results for our shareholders. With firmer footing and a clearer vision, our brands are accelerating their efforts to reinvigorate growth, focus squarely on designing awesome products and telling amazing stories. While we expect our inflection to growth will follow the meaningful margin improvement we've outlined, our brands are moving with great pace to drive improved top-line performance. Saucony has a proven formula for driving industry-leading innovation. The brand's Adorphin Elite collection, designed at Human Performance Lab in partnership with Elite Runners, is among the most innovative shoes on the market today and was recognized by Runners World Gear of the Year awards as the best racing shoe of 2023. Saucony is consistently one of the most trusted brands by Elite Runners in the world's most important marathons. And we now have the opportunity to capitalize on this tip of spear success by democratizing the brand's innovations for the larger casual running market and elevating its style to encourage adoption for the significantly larger lifestyle and wearing occasions. The brand intends to do so through a focus on its core four franchises, the Ride, Guide, Triumph, and Hurricane. As the first step, Saucony launched the new Ride 17 several weeks ago, engineered with a Power Run Plus foam to deliver a more comfortable fit and better ride in the brand's neutral runner. It's been well received and sell through and is up strong double digits in the important Run specialty channel. The brand followed this launch with a new introduction of its maximum comfort franchise, the Guide 17, with even more cushioning and support. The Guide 17 has only been in the market a couple of weeks and sell through is already off to a very strong start. Saucony expects to launch the Triumph 22 next quarter, followed by the Hurricane 24 in Q3. And the brand plans into some of the best lifestyle distribution in the marketplace starting this spring with authentic, trend right, retro tech designs from its archives, like the ProGrid Omni and Azura. As a result of these important launches and the brand's improved storytelling, which is just getting started, the brand has started to see an inflection in brand heat with consumers. Moving to Merrill, the outdoor footwear industry leader with a long history of product innovation, the product pipeline is improving here as well. It's MTL Skyfire 2 Matrix, developed within the Merrill Test Lab, an elite product innovation incubator with rigorous testing by trail running athletes, is a super lightweight plated trail runner that was named Outside Magazine's best trail running shoe of 2023 and received recognition in runner's world in this world, among others. Merrill intends to continue to modernize the trail through faster, more trend right design that consumers demand, as well as the durability and traction the trail requires. The brand's Agility Peak 5 is outperforming the leading trail running shoes in the marketplace in consumer and expert gear reviews on comfort, quality, and fit, and is up triple digits to start the year. The product is exceptional, and Merrill plans to scale up storytelling to drive greater momentum. The brand's new Moab Speed 2, a 2023 ISPO Award winner, and a key story this year, is also seeing strong early sell through. Merrill's collaboration with Jeep in the fourth quarter drove 70 million earned impressions, and the hero blue colorway sold out to the piece. The brand again grew US market share both hike and trail in Q4, capping a year of market share gains for our largest brand. As a stocking, the broader life opportunity is significant for Merrill, and when we develop on brand and on trend styles like the new wrapped collection, a disruptive look on our barefoot platform, our consumers respond. This new collection almost sold out entirely on Merrill.com in a matter of weeks, and today we're chasing replenishment for this franchise and plan to introduce new silhouettes later this year. In closing with Sweaty Betty, having built its brand of business through direct channels, the brand has always been consumer obsessed, driving product innovation response to the feedback it receives from consumers. A mindset and approach that can influence our other brands as we endeavor to become a more consumer focused organization. Sweaty Betty's power franchise is beloved by consumers for its best in class fit, premium materials, and on trend designs. Through its rapid consumer feedback and response model, the brand is building on its leading franchise through category extensions and new textures and patterns. The newness is trending well, and with recent improvements to our supply chain, the brand can now replenish fast moving styles in a matter of weeks. The brand is seeing excellent traction with extensions in new categories as well, like outerwear, mid layers, and accessories, with very strong double digit growth in Q4, driven by styles like the Nimbus Down Parka and Navigate Quilted Coat. I'm pleased and encouraged to say that today our brands have a heightened understanding of their consumers and a clear vision for their product direction, and our business always starts with product. We're seeing green shoots across the business, and the brand's product pipelines will build momentum throughout the year. It's important to pause here and set some near expectations for the business. Encouragingly, this year we expect the business to be much more profitable, and again generate strong cash flow, as our model has done so effectively in the past. Driven by significant gross margin expansion, and our aggressive and proactive profit improvement initiatives we've executed over the past few months. At the same time, our actions have created the financial wherewithal to reinvest in our brand, with an incremental $30 million plan in 2024. Although this investment will moderate our operating margin expansion this year, we believe it is essential to better position our brands for long term sustainable growth, while still taking an important step in our transformation to meaningfully improve profitability. For a variety of reasons, we expect the company to return to growth to lag our profit improvement. As we've candidly shared with you on recent earnings calls, we've identified and owned various past missteps, and we're taking swift action to address them. Strengthening the product pipeline with design supported by heightened consumer and trend insights, re-energizing our brands with elevated marketing, and better managing the marketplace with greater distribution and pricing discipline. However, the business is starting the year from a challenging position, which will weigh on full year revenue results, most meaningfully for Saucony, followed by Maryland Wolverine. But we anticipate a sequential improvement in top line performance as the year progresses. We expect the positive impact of our corrective actions will accelerate and be bolstered further in the second half by reduced rogue selling, cleaner inventories, better alignment of global partners, and lapping easier year over year comparisons. All contributing to an inflection in growth in the second half of the year, and acceleration into 2025. Finally, before handing the call to Mike, I want to summarize where we are today and where we're headed. Our fast and bold actions to better manage our portfolio has simplified the business and strengthened the alignment of the organization. Going forward, we will continue to critically evaluate our organization as part of our commitment to create greater shareholder value. Today, we have a focused portfolio of great, authentic brands that have a rich history of developing innovative products, all designed to help their consumers live better lives. Our improved structure enables our brands to focus on their consumers, product and marketing by providing platforms that efficiently drive operations and back office activities. The Wolverine model also aggregates an extensive global distribution network composed of wholesale distributed relationships for the brands to leverage. And we are further amplifying our model's value by creating competitive advantages for the brands on capabilities we deem strategically important, like consumer insights, trends, innovation, marketing and licensing. Given the powerful combination of our brands and our platforms, all enabled by a talented, aligned and dedicated team moving with pace, I'm optimistic about what we can achieve collectively as one Wolverine. We're confident we are taking the right steps to unlock value and deliver on Wolverine worldwide full potential for the benefit of our shareholders. With that, I'll turn the call over to Mike Stornet, Executive Vice President and our Chief Financial Officer, who will provide more details on our fourth quarter results and our guidance for the year ahead. Mike.

Thanks, Chris. And good morning to everyone on the call. This morning, I will start with a review of fourth quarter results, followed by our expectations for fiscal 2024. Fourth quarter revenue for our ongoing business of $521.2 million was in line with our outlook. Adjusted gross margin of .9% was better than our outlook of approximately 36%, with better gross margin in our e-commerce channel helping to drive this result. Adjusted SG&A expense of $211 million, or .4% of revenue, includes $5 million of incremental performance marketing investment, tested during key moments of the holiday season, which helped us deliver more full price sales in the e-commerce channel and acquire nearly 200,000 new consumers. We also implemented a $4 million supplemental incentive program in the quarter for non-executive team members tied to important inventory and net debt metrics. This program helped us deliver better than expected results for inventory, cashflow, and net debt in the quarter. Our team is motivated, aligned, and focused on improving the company's financial performance. Adjusted diluted earnings per share for the quarter was a loss of 30 cents

and

in line with our outlook. Shifting to the balance sheet. We made meaningful progress to further improve inventory, net debt, and liquidity during the fourth quarter. Inventory for Sperry and our China Joint Venture, which were both sold in January of 2024, is treated as help for sale inventory as of year end. Excluding these businesses, inventory was $374 million, down nearly 40% compared to last year, and approximately $30 million better than we expected. We delivered this improvement by leveraging a rigorous inventory management process while operating in a more normal and predictable supply chain environment. While pleased with the meaningful improvements in 2023, we believe we can further optimize inventory levels over the coming quarters. Shorter supply chain lead times, implementation of our integrated planning processes, and heightened focus on SKU productivity should allow us to drive inventory levels down by at least $70 million during 2024. Active portfolio management has also been a key focus, helping to unlock value and narrow our focus on businesses with the highest return opportunities. Strong working capital management and the sale of certain non-core assets generated approximately $200 million of cash in the quarter, exceeding our expectations. As a result, we ended the quarter with net debt of $740 million and a bank defined leverage ratio of 2.9 times. Let me now provide details on our outlook for 2024. The critical stabilization work executed over the last three quarters puts the company on solid footing. As a result, our teams can more fully focus on efforts towards transforming the company while driving an inflation to grow in the back half of 2024. Our guidance reflects the expected performance of our ongoing business, which now excludes SPARI. Fiscal 2024 revenue is expected in the range of $1.7 billion to $1.75 billion. This compares to 2023 revenue from our ongoing business of $1.99 billion and represents a decline of .4% at the midpoint of the range. Discreet items in 2023 totaling $165 million in revenue will not recur in 2024. These include approximately $70 million of extraordinary -of-life inventory liquidation, heavily weighted to the first half of 2023, approximately $55 million in business model changes, including the transition of our China JV to a distributor model for both Merrill and Saucony, and approximately $40 million in a timing shift of international distributor shipments that benefited Q1 2023. Excluding these discrete items, the midpoint decline would be approximately .5% for 2024. We expect active group revenue to decline mid-teens. Merrill is expected to decline in the low double-digit range with inflection to growth expected in the second half of the year. Saucony is expected to decline in the low 20% range with sequential improvement each quarter. Wettibetty is expected to be flat. We expect the worker of revenue to decline high single digits with Wolverine brand expected to be down mid-single digits. Adjusted gross margin is expected to be approximately .5% at the midpoint of the outlook range, a record for the company, and up approximately 460 basis points compared to 2023. Key contributors to the gross margin expansion include approximately $50 million of supply chain transitory costs, expense in 2023 that will not recur in 2024, and approximately $45 million from profit improvement initiatives related to product and logistics costs. In addition, we expect that healthier inventory levels and increased brand protection actions will lead to a lower promotional cadence during 2024, especially in the back half of the year. This gross margin benefit is expected to be offset by foreign currency headwinds that impact inventory costs. Adjusted selling, general, and administrative expenses are expected to be approximately $650 million at the midpoint of the outlook range, or .5% of sales, compared to $716 million in 2023, or 36% of sales. The lower operating cost structure includes $95 million of savings from the 2023 restructuring and other profit improvement initiatives. Partially offset by $30 million of incremental investments for demand creation, modernization of systems, and building important organizational capabilities. 25 million of normalized incentive compensation expense, and $15 million for normal inflationary increases. Adjusted operating margin is expected to be approximately 7% at the midpoint of the outlook range, compared to .9% in 2023. Interest in other expenses are projected to be approximately $40 million, down from $63 million in 2023, and benefiting from the significant debt reduction achieved last year. The effective tax rate is projected to be approximately 18%. As a result of these assumptions, adjusted diluted earnings per share is expected to be in the range of 65 cents to 85 cents, including a 10 cent negative impact from foreign currency exchange fluctuations. This compares to 15 cents in 2023 for our ongoing business. Working capital and cashflow optimization remains a priority in 2024. We expect inventory to decline by at least $70 million during the year, as we continue to work through specific areas of excess inventory. Operating free cashflow is expected in the range of 110 million to 130 million, with approximately $40 million of capital expenditures. We expect net debt to improve by nearly $165 million to $575 million at year end. Shifting to our outlook for the first quarter, we expect first quarter revenue of approximately $360 million, a decline of approximately 30%. Many of the discrete items occurring in 2023, and noted in our annual revenue outlook, are especially impactful to the first quarter. This includes $23 million of extraordinary end of life inventory liquidation in Q1 2023, a $40 million shift in international distributor shipments that benefited Q1 2023, and $13 million in business model changes. Excluding these discrete items, the projected first quarter revenue decline would be approximately 18.5%. Similar to the fourth quarter of 2023. First quarter gross margin is expected to be approximately 46%, up 480 basis points from last year. Significantly lower supply chain costs, lower sale of end of life inventory, and a better distribution channel mix are all contributing to the dramatic gross margin improvement. We expect first quarter operating margin to be approximately .5% and adjusted diluted earnings per share to be approximately breakeven.

Before

turning the call back to Chris, let me summarize the key points I hope you will take away this morning. We are in the late innings of the stabilization phase of the company's turnaround, and are ahead of schedule in many key areas, including portfolio optimization, gross margin expansion, operating cost improvement, healthier inventory, and much lower net debt. Importantly, we expect to deliver at least $140 million of incremental profit improvement in 2024 as promised in November of 2023. 2024 is the year of transition for the company. A significant gross margin expansion precedes an inflection to growth in the back half of the year, and we set our brands up to accelerate into 2025. We recognize that improved and sustainable gross margin is necessary to create capacity for consistent brand investment into the future. We are balancing the need for meaningful earnings and cash flow improvement with critical reinvestment required to modernize our systems, accelerate demand creation, and build our important capabilities. And finally, we've instituted a new Cadenson grid room of business to improve accountability and ensure future execution of our strategy. I would like to thank our global team for their tremendous effort over the last year. Thanks to their work, the company is now ready to pivot to growth. Now I'll turn the call back to Chris.

Thanks, Mike. To close our prepared remarks, in a few short months, we've largely stabilized the company due to our fast, bold, and decisive actions. On firmer footing now, our team is focused on transforming Wolverine Worldwide into a consumer-obsessed builder of global brands, delivering improved profitability and driving long-term sustainable growth the right way. 2024 will be a pivotal year, and our teams are energized by our new vision and the many opportunities ahead. They are proving their ability to move quickly and drive change, and importantly, we're passionate about winning. I personally want to thank our global teams for their work over the past few months. You've been simply great, and I couldn't be more excited to start writing our next chapter together. We're committed to building great brands, do awesome products, amazing storytelling, and driving the business each and every day, and we're equally committed to delivering greater value

for

our shareholders.

Thank you for taking the time to be with us this morning. Thank you. At this time, we will be

conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys. We also ask that each person in the queue to limit themselves to only one question and one follow-up question so everyone can

have ample enough time to ask their question. Our first question

comes from the line of Jonathan. Conf with Bear. Please proceed with your question.

Yeah, hi, thank you. Good morning. Mike, I want to just first ask, you did a good job of highlighting year over year in the first quarter the factors impacting comparability. Could I ask just a little more detail that the underlying -19-19 and a half percent decline for the first quarter, how do the factors you outlined impact the next several quarters and can you talk about the rate of change in the year over year sort of underlying improvement that you're baking in?

Sure, thanks, John. Those are important discrete items that we called out in the remarks. 23 was a year where we certainly dealt with a number of headwinds that are behind us now. I'll just reiterate a few of those things. So the -of-life inventory that we cited, about $70 million of headwinds mostly in the first half of the year, about $23 million of that in the first quarter, really related to the elevated inventories that we entered the year with. The company did a good job of working through those in a rational way, but that certainly was an excessive amount of inventory to put into the market. Had a negative impact during the year on our candle inventories and promotional cadence, but thankfully we feel like we've worked through most of that and those headwinds will abate in 2024, but a difficult comparison in that respect. We would expect most of that, or we incurred most of that in the first half of the year, so we'd expect the back half of the year to be a much simpler or easier comparison as it relates to -of-life. The business model changes that we made in the year, that's $55 million for the full year, about $13 million in the first quarter. Those relate to the hushpuppee licensing change that we made in 2023, and the shift in distributor to a distributor model for our joint venture that we started at the beginning of 2024. So those are important revenue headwinds, so to speak, but cleaner, better, simpler business models for us that we think are gonna also generate more profitability in the future. And then the last one relates to the third party shift in shipments that we noted for Q1 last year. Supply chain delays for some other reasons in terms of how we prioritize new product. We shipped a lot more product into our distributor network in the first quarter of 2023 versus what we normally would do. So that comparison or that reality kind of creates a tough comp for us in the first quarter. And again, I think as we go into 2024, we're in a more normalized state for all of these components, but the comparison really was important to call out to clarify some of the noise there. So when we think about the impact of these discrete items in the first half of the year, about 125 million of the 165 will impact the first half of the year, so putting more pressure on growth rates in H1, we already talked about the impact for Q1, but yeah, I think hopefully that answers your question, but important to clarify what those impacts are.

Yeah, that's really helpful, Mike. Maybe just one follow-up, Mike or Chris. Is I think about the shape to the year for the revenue guidance, it looks like you're implying about $100 million revenue pickup per quarter going forward, that looks pretty unusual compared to the historical quarterly cadence. So could you just talk a little bit more about the visibility that you may have internally and I think more importantly, maybe just reassurances that you're not gonna be stretching to reach a revenue goal given the stage you're at really investing in the brands to drive longer term profitable growth. Thank you. I think

that's super important. I'll start and I'll let Chris kind of finish off. First quarter is typically a lower revenue quarter for the business, so that's not necessarily unusual, but we're continuing to work through and improve on some of the macro factors and self-imposed factors that have impacted the business in the last half of 2023. The first and second quarter, we're still dealing with some of the excess inventory, although it's improved dramatically. We're still working through that and some of the headwinds around brand health and brand protection in the marketplace are gonna be more acute in the first half of the year, John. So the actions and improvements and corrections that have been made in the business over the last six months are starting to take hold, but we're seeing those continue to linger a little bit in the first half of the year. And then with the product pipelines really kicking in with new product introductions starting in Q2 and beyond, the health of that and the magnitude of that new product in the marketplace is a reason to kind of believe in the improvement or the increase in revenue by quarter. But those are some of the highlights I think Chris probably could add to that.

Yeah, thanks, John. I think it's a great question talking about the shape of the business and how we're thinking about it and importantly how we're trying to manage the portfolio going forward. And we had talked a couple of weeks ago about sort of temperate expectations in the first half and we sort of provided some clarity on both the internal and external factors that are sort of suppressing growth in the first half. But I do think that there are a number of reasons to believe in the second half. I think certainly the corrective actions we've taken internally as it relates to product, I think we're encouraged by the product pipeline. And we talked about what Saucony has delivering, the Ride and Guide 17, the Triumph 22, the Hurricane 24, all of those things are really good product introductions and I think the Saucony pipeline is much stronger this year than it was last year. I think Merrill is similar. The Moab Speed 2 just dropped. We're seeing really good pickup on that, really good reception, the Agility Peak 5. And then some of the lifestyle collections are around wrapped. When Merrill can develop on trend, on brand product that looks different, consumers respond. So at the same time, we also need to invest back in our brands. We talked about constraining some of the operating margin expansion this year in the spirit of investing back into our brands and back into our tools. And I think we will begin to see the fruits of those investments in the back half of this year. And then just in the marketplace, I think certainly continuing to have cleaner inventories, which is encouraging. We're seeing inventories come down. We're seeing our ASPs go up. We are attacking rogue selling. I think from a brand protection standpoint, we got lax and we didn't do a good enough job protecting our brands. And we're beginning to see the benefit of that. And then just frankly, we're gonna lap some user comparisons in the back half of the year for some of the reasons that Mike called out. So I'm optimistic looking to the back half of the year. I understand the question around the shape of the business. At the same time, I think there are a number of reasons to believe our ability to go execute against that.

That's a really helpful caller. Thanks again. Thanks, John. And our next question comes from the line of Jim Duffy with

Stiefel. Please proceed with your question.

Well, thank you. Good morning, guys. A lot of evidence of hard work. Yeah, I was gonna say a lot of evidence of hard work in this report. With that, I'm gonna start on a positive. The guided gross margin for .5% in fiscal 24, that's an all time high. Is that, Mike, do you see that as a new normal? Or do you think that's still subdued relative to potential given some of the impediments to margin in the first half of the year as you continue to work through inventory?

Yeah, I think, thanks for recognizing that, Jim. It has been a lot of work, a lot of focus of the team across the organization and functions. We think there's upside in the future given the fact that we are still dealing with some lingering inventory issues, certainly smaller than we had to deal with coming in 23. But we're gonna continue to drive those inventory levels down, we set another $70 million in 2024. So we feel there is upside potential yet in the gross margin. It's a healthier mix of business. We have a bigger direct to consumer mix in that profile for the gross margin, including the inclusion of our sweaty betty business. And so that's one reason for the higher margin. But I just think in every area, stronger full price selling, supply chain costs being addressed, obviously lingering and hangover transitory costs that we had to contend with in 2023, those are all behind us. And so I feel like this is a really good baseline for the future and feel like we can build on that as we move into 2025.

And then Jim, let me just add onto there, Jim, you followed our story for a long period of time and sort of know where we've been as a company and the work we had to do coming out of this fall. I think importantly, we really put our heads down and I appreciate you recognizing the hard work to really stabilize the organization, attack the inventory, pay down the debt, restructure the business, the biggest restructuring in the history of the company we did last fall. And then we've said that margin improvement will lead inflection to growth because we wanna grow the business the right way. And we did the hard work around the margin. We certainly are encouraged by what we have line of sight to when we can deliver this year. And then everyone is pivoting towards the inflection to growth. So that's where the story that we've laid out for the last six months and we're gonna keep working against that plan.

Thanks guys, just follow up on the top line. And Jonathan dug in on this sum, but a little bit more difficult view on the top line. What are the sight lines that you have to inflection for the growth brands in the portfolio? Merrill and Sockney specifically, do you have also orders in hand to support the second half inflection assumptions?

You know, we don't disclose backlog and we have not done that. I do think we're getting continuously encouraging signs on the new products. And obviously a lot of the growth that we have planned for the back half of the year, and the inflection to growth and the improvement in the business is really driven by the new product introductions. So if we're coming out of the pandemic and the supply chain issue, we were heavy in core. And I think we all know that newness and innovation is winning with the consumer. And I do think our product pipelines weren't as innovative as they need to be in 2023. So that focus and Sockney on the core force or early indications in the ride and guide 17 are positive. And we'll launch the Triumph 22 and the Hurricane 24 in quarters two and three sequentially. And then we'll come back in Merrill. Moab Speed 2 is already out. We're really encouraged by initial sell throughs and the feedback. And then Agility Peak 5 and a handful of other collections. And the Moab 3, we don't talk a lot about the Moab 3, but that continues to check and we're encouraged by that. So I think from a wholesale landscape perspective, we're staying very close. We all know that wholesalers are continuing to act differently. I think we all sort of know that for some brands with the challenge macro landscape and wholesale, but I think it's part of our turnaround effort too is just re-engaging those wholesale partners in a more meaningful way. The number of -to-tops we've done over the past six months I think has been critically important. I've done, I've listened a lot to what the wholesalers and their partners are looking for Wolverine from, what they're getting from other brands and how we can ultimately better. I think that has been very well-timed spent. So I think in general, I think about the back half of the year, needs to be largely driven on the innovation that we're bringing. And that is also why I'm encouraged about what we have line of sight to in 2025.

Excellent. Thank you guys.

Thanks, Jim.

Thank you. Our next question comes from the line of Abby V. Hicks with Piper Sands. Please proceed with your question.

Great. Thanks for sharing my question. I have one and then a follow-up. Just on Merrill specifically, I mean, just on the comments on taking share in hike and trail. I mean, I guess you wouldn't think that with the business down, low doubles this year and projects to be low doubles next year. Can you just talk about kind of what's happening in that hike and trail space and where you think that market will evolve and how can Merrill grow that market but also serve other adjacencies to that?

Yeah, great question, Abby. I'll hit it straight on. I think at the highest level, the outdoor category has been pressured. Probably one of the worst performing categories in the market for the past 12 months. I think as, and we're not gonna sit behind that and say it's just a category issue. As the category leader, which Merrill is, Merrill has to innovate and help lead that category, which is why I'm encouraged by some of the new product introductions. You know, the Moab Speed 2, which I've already referenced, a lighter, faster, more athletic version of the world's number one hiking boot, which is the Moab. I think agility peak five is the evolution of the trail. The trail is certainly evolving. Specifically, market share gains. You know, in the last quarter, Merrill gained 30 basis points and 60 basis points in hike and trail run respectively, and for the full year, up over 100 basis points and 70 basis points respectively in both of those categories. So that is share gains, albeit in a contracting category. I think the future of the outdoor category is lighter and faster and more athletic and more versatile. And I think certainly predicated on not just function but also style. And I think that's where, and Merrill, we can work harder is really hitting that style piece and designing great looking shoes that are versatile, that can only not only be worn on the trail, but also can be worn for everyday wear. So I think the onus is on the category leader to help reinvent. I think the reinvention is lighter and faster, and I think the work we've done on the pipeline is important. Another reason why the Merrill Test Lab is so important to us. You know, this elite trail running incubator for great product. You know, the design words we've won in Merrill for the past handful of years around the MTL product is critical and important. And honestly, some of the best products in the market. So tough category, leader has to lead, gaining share, and we have to be out in front of evolving trends.

Got it. That's helpful. And then, Mike, maybe on the... You know, you said that the profitability improvements will proceed in inflection and growth, but kind of how can we think about, you know, if there are more challenges, you know, consumer macro environment gets worse, you know, top line trends are lower than you projected, but your ability to still make those profit improvements?

I think that's indicated in the strong first quarter gross margin guide, which is 46%, you know, higher than the full year guidance for gross margin. I think that's an area where we feel we've got a really strong base, and we have a lot of those sort of relative headwinds behind us. High confidence that we can maintain that or even improve that as we move forward. So on the downside, you know, we feel like we've taken a really prudent approach to this guidance, and to the extent we always have levers to pull in terms of discretionary spend and contingencies in our operating plan to make sure that we protect that flow through and that profitability, and also the cash flow performance of the business this year. So we'll continue to manage that as we have in the past. The biggest pressure on the business over the last couple of years has been gross margin, and you know, driven by that high inventory level and the fact that we've got the inventory in a much healthier place today, we have much more predictable gross margin performance coming into 2024.

Makes

sense. Thank you.

Thanks, Abby. Thank you. Our next question comes from

the line of Ashley Owens with KeyBank Capital Markets. Please proceed with your question.

Great. Thanks so much. So I just wanted to focus on Sweaty Betty really quickly. You know, can you talk about any specific comps you're facing there in one queue, driving the high signal digit decline, what's factored in and out there for 2024, and then just how you're sizing the opportunity for that brand over the coming years, given increasing in competition and athletic wear in general?

Yeah, I'll hit it, and then Mike can add on. We have new leadership in Sweaty Betty, which we're very encouraged by. I think we've worked hard in the integration for the past year, and I think certainly feel much closer to that business. And I've spent a lot of time with Sweaty Betty over the past handful of months trying to understand that business. I think the decline in the first quarter is really driven by just becoming a less promotional business. And that business was very promotional last year. And I think that rings, too, for a lot of our brands. You know, and I'll come back to Sweaty Betty, but in the latter part of last year, we pulled back on promotions at our own dot-com businesses, and we saw meaningful improvements in gross margin, and running a healthier business. We're actually in the same strategy in the first half of this year to be less promotional as well. That's also why you're seeing some of the uptick, also a contributor to our overall gross margin improvement, but ultimately running better brands and enhancing and protecting brand equity. So the drag in the first quarter for Sweaty Betty really is being a less promotional business. I was encouraged by the way that team performed in the back half of last year over the holiday season. Really, some really strong product reception. That brand has a very fanatical, strong following of female consumers who love that brand. They stay very close to that. The Power franchise, you know, -in-class fit, premium materials, on-trend designs, and then their ability to extend beyond just that core bottoms business. Really encouraged by the Outwear business, the Nimbus and the Navigate, were really good styles for us, strong double digits year over year. And then the ability to grow in addition categories, mid-layers, accessories, and stocks are all very encouraging. So I'm excited by the potential of that brand. It is a very competitive market, no doubt. That is well noted, we understand that. At the same time, I think Sweaty Betty has a very unique positioning, a premium brand, largely direct to consumer, predicated on great design, great materials, great research and development, and then great fit, and then just cultivating a very loyal fan base. There's a lot of things we can learn across the Wolverine portfolio from Sweaty Betty, and I think the Wolverine worldwide organization is bringing a lot of benefit to Sweaty Betty as well. They've plugged into our supply chain. We've done some gross margin improvement initiatives with them that have really helped, and we're speeding up the supply chain. We now have the ability in Sweaty Betty to react to fast-moving styles in a matter of weeks to replenish those things, which I love coming from retail apparel backgrounds. Just that fast reaction time, I think, is a competitive advantage. So there's still work to go do for sure in that brand. Hopefully that explains a little bit of the first quarter drag, but certainly optimism moving from there.

Great. That's super helpful, Coller. Thank you.

Thanks, Ashley.

Thank you. Our next question comes from the line of... ...Reeding. Please proceed with your question.

Thank you very much for taking my questions. I have a question about the Wolverine brand and the work business. That's been... Can you give us some idea of why that became so tough and how you intend to get it turned around? I think, as you know, the work customer is very, very loyal. And so, how hard will it be if they've gone to somebody else on the downtrend and then getting them to swing back over, if you're in the thesis?

Yeah. Great question, Sam. And I appreciate it. And I appreciate you talking about our work group. No doubt, our work group is struggling a bit right now. We've talked about that. The Wolverine brand specifically has been an industry leader. But we had a tough year there, for sure. And we have lost share. Working really closely with that team to understand where those share losses are happening, we're seeing more at the premium price points than at the $90 to $120 price point. There are new introductions coming this year to bolster that more premium positioning. DuraShok, the Surge, the Colorado Equip, we feel good about those and our ability to gain back at that $140 to $60 price point. We think inventories are much better now in the channel. And in some places, I think our sell-throughs are outpacing sort of the restocks and our ability to get close to that market and replenish that business. We do think the category is going to grow, but I think, Sam, to your point, that has been sort of a very sort of steady-on business force, very consistent. We've struggled there a little bit over the past year, and there is an intense focus to get that work group back to its more historical range. I think the team has diagnosed the issues, what we did, what was self-inflicted, and then our ability to both understand both channel and price point and category, and then capitalize on those trends. There's a strong Western trend right now, and the brand is pushing into that Western trend as well. But we certainly think that premium price point is where the brand has felt some pressure.

Thanks. And then, I mean, I'm just trying to wrap my arms around the expectation. It sounds like you're expecting parts of the business to turn positive in the back half of the year. Can you just... Can you give us a little more dissecting of that, and then just sort of delve into sort of how it gets there?

Well, again, in the guide we provided, Sam, this is Mike. Merrill's expected to inflect a growth in the back half of the year. We saw, as Chris mentioned on Sweaty Betty, a contraction in Q1, and so that, again, we'll see that sequentially improve and inflect a growth in the back half of the year as well. Our Saucony business will improve each quarter, but for the full year, we'll be down, so we're not expecting an inflection of growth there, but just sequential improvement. It's important to underscore, too, many of the... Certainly the business model change that we called out and some of the other changes that were mentioned in our previous discussion heavily impact Saucony, but that joint venture change is about a $30 million impact to the Saucony revenue specifically. But overall for the year, seeing sequential improvement in Saucony, but not an inflection of growth in the back half of the year. So for the growth brands, that's sort of the trajectory of the business, and I think Chris touched on some of those reasons to believe as it relates to the product pipeline and some of the easier comparisons, but also just the abatement of some of the headwinds that we've been contending with for the last couple of quarters.

And I think also, just to build on that, we've also made some tough decisions as it relates to how we're going to manage our brands. And I think how we want our ability to reset the business and just manage the portfolio differently. Another thing, working against Saucony, they had a very low margin sort of value channel product that we're moving away from, that wasn't helping build brand equity, that was not accretive to the brand's margin in total, and we're making the tough decisions to move past those businesses. So I think there's a lot of different reasons why the business is where it is, but in total, as we think about how to best manage the portfolio, how to best be great brand stewards, I think we're making a lot of those very tough decisions right now, and then working to really improve the product pipeline investments back into marketing to ultimately become really good brand builders. So that's just another reason why, and trying to explain some of the color behind the numbers.

Thank you. And then one last thing, on the gross margin, I understand the non-repeating pieces with freight and so on and so forth, but with promotional activity, and I understand inventories are much cleaner and so on, and I understand what's going on today, but you're anticipating it looks like for gross margin really to look up. Well, I mean, the guidance is gross margins could look a lot better throughout the whole year, and specifically in the back half when it did get very promotional. I doubt it will be as promotional as it was a year ago, but I mean, how confident are you, even with clean inventory, that the new product you put out there is going to be good enough not to get caught up, or should you be being even more conservative with sales to sort of guarantee that that doesn't happen?

I'll take it, and Mike could add on, I think certainly to your point, Sam, I think we are viewing the marketplace differently in how we manage the brands. I do think the product we have is really good, and I would say the product we introduced in 23, I think our innovation fell flat in 23, and I think the consumer responded to newness, and we were heavy in core styles that didn't check, which put a lot of pressure on 23, and certainly our continual pressure on us in the first quarter of this year. But when I look across the portfolio and the work that we've done around the product pipeline, I'm encouraged by what we have, both what we have hitting the marketplace today, the Ride and Guide 17, Sauconese are a good example, the Triumph will quickly follow it, the Moab Speed 2 out of the gate is very good, the new Wrap collection, which I keep referencing, really selling out with almost no marketing because it is just visually disruptive and just looks different and is very on brand. So I think the product pipeline is much, much stronger than where we have been historically, and I'm excited to sort of continue to work through those older core styles and get to the newness. That's where the consumer is responding, that's what the retailers are telling us is working what they want. And in fact, we have a new protocol every Tuesday, just a full deep dive into the business. And we had our session yesterday and we're having different conversations. We're talking about chasing new products. We're talking about perception that we have seen, feedback that we're getting, and we're actually talking about chasing prox in our supply chain today, where we haven't had those conversations for a while. I get on a plane next week with the presidents of Maryland, Saucony to go to Vietnam, to go to our biggest factories, both to accelerate products that are in development and talk about how we can continue to chase other items. So the fact that we're talking about chasing new good styles and chasing products that we want to accelerate into the pipeline, I think is a very encouraging place for us to be right now.

And the only thing I'd add to that, Sam, is really important part of the margin expansion is the hard work that the profit improvement team has done over the last year to get product costs and freight rates and things down, not just the transitory costs that go away, but just on the go-forward business and the new styles that Chris is talking about coming in at a much higher gross margin. So really secure that and see that in the gross margin bridge. And we're being cautious on the promotional cadence, to your point. We don't control or have complete visibility to the back half of the year. We expect it to improve because of healthier inventories, but we're still being cautious in this guide as it relates to promotions. So I think overall we're laying out a very achievable gross margin outlook for the business.

Thank you. Our next question comes from the line of Mitch Clymets with Seaport Global Securities. Please proceed with your question.

Yes, thanks for taking my questions. I guess a couple of things. On the Merrill inflection to growth, I just want to better understand that. I know you don't give backlog, but does the order book support that growth or is this more, your assumptions around DTC are at once based on the product pipeline and our retailers, are you starting to see kind of a bottoming around the outdoor space in terms of retail orders? And then I'll follow up.

Yeah, I think I'll hit it. I'll let Mike add some color. I think part of the turnaround and one of the things that I talked about on the last quarterly call was just how close we were to the wholesale market, how close we were to the partners. I do think the conversations are different today than they were just a handful of months ago, as we think about the outdoor category specifically, and frankly, how they view Merrill within their assortment. I think we all know that the pressures are well-documented in the outdoor category. Merrill continues to be the leader, continues to gain share, and we keep seeing retailers keeping protecting Merrill. I think the important thing for the Merrill brand is to evolve behind that sort of classic Moab 3 silhouette and become lighter and faster and more athletic, which is why we're so excited about how the Moab Speed 2 has been received. And then our entree into Trail Run and the fact that we're gaining share in Trail Run is very encouraging. I think we're paying very close attention to our own -to-consumer business too and what's happening in our 46 Merrill outlet stores. Where is traffic? What are they buying? What are they responding to? We're working to be less promotional at Merrill.com, and we're seeing sort of great, great increases in product margin to be less promotional and certainly to create less disruption in the marketplace. And I think Merrill has new introductions coming for the balance of the year. And then continued health. We've got continued health of the Moab franchise. We talked about the Jeep launch last year, 70 million impressions, the Hero Color Race sold out to the piece, and we saw a 12 percent lift across the rest of the Moab franchise just by bringing that new heat to that category. So I think, like I said, I think the pressure on outdoor is, it remains. Hopefully that will bottom out and it'll begin to resuscitate. At the same time, you know, we just can't sit back and say it is what it is. The leader has to innovate. And I think we're bringing product to market. That is, that is very good.

And then Chris, on Saucony, you seem particularly encouraged, not just from a product standpoint, but also in terms of the brand heat. I'm just trying to reconcile that with the guidance that the brand doesn't inflect a growth in the back half. What if you adjust for those business model changes? And if not, is really the issue that you need to get the like the order book is the order book. The hope is that with better product, stronger brand heat, the sell through will, you know, dramatically improve and that will eventually drive better selling.

Yeah, great question. Saucony is near and dear to my heart right now. I think Saucony has probably some of the greatest potential in the entire portfolio to have to break out. I think there's a lot of things working against Saucony from a top line standpoint. We talked about some of them, the end of life transactions, the low margin business. We talked about the model changes. I'm encouraged by Saucony because I think the product pipeline is very good. And I think the brand has a very, very long period of time been sort of myopically focused on sort of the both the elite, the elite runner, the elite and elite channels and elite products. And I think the democratization of innovation is where there is a tremendous opportunity. And so I think the new products we've launched are resonating well. There was the feedback we're getting and we're prelining new styles is very positive. And there's frankly just a broader lifestyle opportunity beyond, beyond, beyond that core runner. We've worked hard on colors and materials to make our shoes more approachable. And we're opening the apertures. We think about distribution as we think about some of our new product launches. They've placed in sort of top 10 list and run specially where Saucony hasn't been for years. And so we're encouraged by those. And then if you just go back to the elite runner, you know, the when you look at Saucony counts at the prominent marathons, you know, Saucony is one of the top brands, you know, day in and day out in those leading marathons. And then there's just a broader lifestyle opportunity as well. And I think that as we think about lifestyle, it's not just that originals or retro tech. It's also just everyday Saucony run, which I think has has tremendous opportunities. So I'm very bullish on Saucony. That category has the most momentum. There are there are some brands that have done phenomenally well there. We know that we have underperformed at the same time. I think we've attacked the product piece first, and that is encouraging. And we will be turning on the marketing. And I think as we think about 30 million dollars of incremental investment, you know, I think a significant portion of that will be directed to Saucony. So I'm bullish on Saucony. I'm bullish on that team. And I think the opportunity opportunities there.

Thank you. Our next question comes from the line

of Mauricio Serna with UBS. Please proceed with your question.

Great. Good morning and thanks for taking my questions. Just a clarification on the margin guidance for first quarter 24. I think I heard a three point five operating margin. How much would that imply in terms of like an expansion versus, you know, the ongoing business in 2023? And then if I think about, you know, the revenue that when you talk about an inflection in the second half, does that imply like, you know, sales growth already happening as a total total company level by third quarter? And then just lastly, on the adjustments that you provided in the presentation, just want to make sure like, you know, the 35 million in the active group, is that mainly because of the because of the X step JV sale that you announced last year? Thank you.

Let me take the last question first. That's correct. So 35 million referenced is is related predominantly for the X step change that district we've moved to a distributor model there with that partner effective January 1st. The operating margin, I think, was your first question. The operating margin relative to the ongoing business going going forward is down in the first quarter versus last year. Gross margins up dramatically. But as we cycle through the year, obviously, we expect the operating margin to go from that three and a half percent rate, which we're seeing in Q1 on the lower revenue base. Q1 will be our lowest revenue quarter of the year to seven percent for the full year. So we'll see, obviously, sequential improvement there. But importantly, Mauricio, you know, the focus for us has been to drive that gross margin expansion, have that be a sustainable improvement for the business that gives us the confidence and capacity to reinvest behind our brands. Forty six percent, obviously, for the first quarter is well above the full year guidance of forty four and a half percent. So really strong outcome for the first quarter, even on that lower, lower revenue base, but importantly, much cleaner base of revenue in the first half, which is helping to drive that margin expansion.

Thank you very much.

Thank you, Mauricio. Thank you. We have reached the end of our question and answer session, and this also concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.