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Wolverine World Wide Inc  (NYSE:WWW)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Wolverine World Wide Fourth Quarter and Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would like to turn the call over to your host, Mike Harris, Vice President, Corporate Finance for Wolverine World Wide. Thank you. You may begin.

Michael Harris -- Vice President, Corporate Finance

Good morning, and welcome to our fourth quarter 2018 conference call. On the call today are Blake Krueger, our Chairman, Chief Executive Officer and President; and Mike Stornant, our Senior Vice President and Chief Financial Officer.

Earlier this morning, we announced our financial results for the fourth quarter and full year 2018. The release is available on many news sites or it can be viewed from our corporate website at wolverineworldwide.com. If you would prefer to have a hard copy of the news release sent to you directly, please call Francesca Filandro at 646-677-1814.

This morning's press release included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the release. Comments during today's earnings call will include some additional non-GAAP disclosures. There is a document posted on our corporate website titled WWW Q4 2018 Conference Call Supplemental Tables, that will reconcile these non-GAAP disclosures to GAAP. The document is accessible under the Investor Relations tab at our corporate website, wolverineworldwide.com, by clicking on the webcast link at the top of the page.

Before I turn the call over to Blake to comment on our results, I wanted to provide some additional context and information. When speaking to revenue, Blake and Mike, will primarily refer to underlying revenue, which adjusts for the impact of retail store closures, the transition of Stride Rite to a license business model, and the sale of the Sebago brand and Department of Defense business.

We believe underlying growth best reflects how our global businesses are performing in the marketplace. Also, recall that beginning in Q1 2018, we separately disclosed the impact of changes in foreign currency on revenue to better isolate this variable.

In addition, we will be providing adjusted financial results, which adjust for restructuring and other related organizational transformation costs, divestitures and incremental inventory markdowns related to store closures and the impact of environmental, non-recurring foreign exchange, impairment of intangible assets, pension settlement, impact of tax reform and other costs.

I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine World Wide and its operations are forward-looking statements under US securities laws. As a result, we must caution you that as with any prediction or projection, there are a number of factors that could cause actual results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases.

With that being said, I'd like to turn the call over to Blake Krueger.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Thanks, Mike. Good morning, everyone and thanks for joining us. Earlier this morning, we reported fourth quarter revenue of $580 million, representing 4.6% constant currency underlying growth, in line with our expectations. This constant currency growth represented the highest quarterly growth rate of the year, as we successfully executed against our global growth agenda. Our revenue growth was broad-based and highlighted by strong performance from our two largest brands, Merrell and Sperry. With Merrell, growing at a double-digit pace and Sperry growing at a high-single digit rate.

We also reported adjusted diluted earnings per share of $0.52, a 27% increase over last year, which also exceeded our expectations. Record fourth quarter gross margin contributed to our earnings performance, despite significant incremental investments in brand building initiatives.

Let me quickly review the quarterly results for our brand groups in key brands, followed by insight on the recent progress made against our global growth agenda.

Starting with the Outdoor & Lifestyle Group. Underlying revenue grew 8.4% compared to the prior year and nearly 10% on a constant currency basis, with Merrell, growing at a double-digit rate, its eighth consecutive quarter of growth. Cat grew at a mid-single digit rate, Chaco expanded revenue at a high-teens pace and Hush Puppies revenues were flattish for the quarter.

Merrell's growth was broad-based, driven by increases across all of the brands consumer territory and also fueled by robust e-commerce growth of over 55%. Hike, the largest of Merrell's consumer territories, saw impressive underlying growth driven by the strength of the Thermo, Moab, and Chameleon collections. The Outdoor Life territory also grew at a strong rate, driven by the Encore and Tremblant collections and the Nature's Gym territory had solid growth driven by the trail glove and vapor glove collections.

For the full year 2018, Merrell grew revenue at a high single-digit pace and we expect the branded deliver a similar level of broad-based growth in 2019, with growth weighted to the back half of the year.

Cat, the fourth largest brand in our portfolio, experienced strong growth in the work category and expanded its US market share during the quarter. International growth was also strong for the brand. Cat grew its revenue mid-single digits for the full year. For 2019, we expect high single-digit growth to be driven by strength across all channels, regions and product categories.

Moving to the Boston Group. Underlying revenue for the Boston Group increased 2.4% for the quarter, up 2.8% in constant currency versus the prior year. Sperry delivered high single-digit growth with low-single digit growth from Cat, and double-digit growth for our kids business.

As expected Saucony declined mid single digits, which represents an improvement over the last two quarters. Sperry's growth accelerated to its highest rate of the year, driven by strength in the US wholesale business. The boot category grew at a strong rate and retail sell-through is very robust, with particular strength in the Saltwater and Siren and Striper II boot collections. In addition, casual, vulcanized and sandal collections all experienced gains in this quarter.

We're encouraged by Sperry's return to low single-digit growth for the full year and expect this to accelerate to mid-single digit revenue growth in 2019. Saucony was down mid-single digits in the quarter, but continue to drive attractive growth in the important in EMA region. The Saucony e-commerce business grew over 50% in the quarter. While we are encouraged by the improved revenue trend, we expect revenue declines to continue during the first half of 2019 with a return to growth during the second half.

And closing with the Heritage Group. Underlying revenue for the Group was up 7.9%, up 8% in constant currency compared to the prior year, as all brands in the Group experienced year-over-year growth. The Wolverine and Bates brands were both up mid single digits, HYTEST grew in the mid-teens, and Harley-Davidson grew at a very strong double-digit pace.

The Wolverine brand saw continued success from new styles and key product collections, including the I-90, Floorhand and apparel offerings. The brand also experienced significant growth in e-commerce of nearly 50%. The Wolverine brand grew at a high-single digit rate during 2018.

Now let me shift focus to provide an update on the progress against our Global Growth Agenda, where we continue to make important investments across all three strategic focus areas. These incremental investments totaled approximately $11 million in the quarter, bringing the full year total to approximately $41 million. We expect to invest at the same general level for 2019.

Let me take a few moments to give some additional detail on a variety of 2018 investment initiatives that will drive future growth. The first element of our Global Growth Agenda is focused on a more innovative and faster product creation engine, and approximately 45% of our 2018 incremental investment related to this area.

Investments were made across a wide variety of initiatives, including new creative talent to support implementation of our brand growth model and systems to streamline the product development process and accelerate speed to market.

The second element of our Global Growth Agenda is focused on our digital direct offense, and approximately 35% of the spend for 2018 was centered on this area. Investments were primarily focused on improving social prospecting capabilities, customer retention and developing a more constant flow of compelling new content. We also completed our transition to a new West Coast distribution center to support our growing e-commerce business. These investments directly impacted our owned e-commerce business, which has been our fastest growing channel over the last two years with growth accelerating to nearly 30% during 2018.

The third element of our Global Growth Agenda is focused on our international business, and represented approximately 20% of the investment spend during 2018. We added strategic, operational and infrastructure resources to our regional teams, especially in China and several other key markets.

The early success associated with our brand growth model and our focused Global Growth Agenda is very encouraging. We are now positioned to complete the final stage of our transformation and expand on the initiatives and concepts that were validated in 2018.

During 2019, our focus is to ensure that all brands fully incorporate these new skill sets, tools and processes. Building on our transformation efforts, we are moving to a more disruptive growth phase for the Company that requires a heightened level of urgency and the integration of speed in everything we do.

Our more efficient operating model and improved profitability base provides greater flexibility to invest in growth going forward. To that end, we expect to invest nearly $70 million in growth initiatives this year, including approximately $40 million behind the Global Growth Agenda, an amount similar to 2018, and $30 million of capital to accelerate growth in our global markets.

Our overall results for 2018, which include record adjusted earnings per share, record gross margin and 12% operating margin for the full year reflect the effort by our team over the last couple of years to transform the business to succeed in the fast-changing global retail environment. I want to thank our global team for all of their hard work over the last several years to reshape the Company and act with urgency to drive growth and ultimately value for our shareholders. We are now in an enviable position to invest for growth, return capital to shareholders and pursue strategic acquisitions.

With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our Q4 and our full year 2018 financial performance along with our full year expectations for 2019. Mike?

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Blake, and thank you all for joining us today. 2018 was a successful year for the Company. Our brand building investments and the early implementation of our brand growth model proved to be very effective as several of our brands delivered solid underlying revenue growth and our owned e-commerce business grew nearly 30%.

We achieved our 12% adjusted operating margin target for the full year, which exceeded our original expectations. Our earnings leverage was exceptional, and our cash flow generation was very strong, despite $41 million of incremental brand investments made during the year. Our return to growth and important operating improvements allowed us to execute certain actions to strengthen the Company's capital structure and deliver value to our shareholders.

Let me review the Company's fourth quarter and full-year 2018 results, and then share details on our outlook for 2019. During the fourth quarter, the Company delivered revenue of $579.6 million, resulting in underlying growth of 3.8%, 4.6% on a constant currency basis.

Our lower margin Wolverine Leathers business declined as expected in the quarter and excluding this factor, our footwear brands grew nearly 5.7% on a constant currency basis.

Reported revenue increased 0.2% versus the prior year considering the impact from store closures and the portfolio changes made in 2017. Gross margin of 39.2% was a fourth quarter record, and nearly every brand in the portfolio saw gross margin expansion in the quarter. The 70 basis point improvement compared to last year was due to a number of factors, including portfolio changes made in 2017, better mix from the strong growth in our high margin e-commerce business, transformation initiatives resulting in lower product costs and significantly lower close-out sales, which were down $8 million in the quarter.

Adjusted selling, general and administrative expenses of $165 million or $5.7 million higher than 2017 as we fully activated planned incremental marketing, digital and other investments related to our growth initiatives. The higher investment level contributed to a slight 30 basis point decline in our quarterly adjusted operating margin compared to last year.

The fourth quarter adjusted effective tax rate was 11.8%, which benefited from the impact of US tax reform and included a true-up of certain estimates made during the quarter. Fourth quarter adjusted diluted earnings per share of $0.52 exceeded our expectations with growth of 26.8%, representing excellent leverage. Reported earnings per share of $0.40 included the impact of environmental, pension settlement and debt refinancing costs.

Moving to full year results, revenue of $2.24 billion, fell within the original guidance range provided at the beginning of the year. Underlying revenue grew 2.5%, 2.3% on a constant currency basis. Excluding declines in our lower margin Wolverine Leathers business, our footwear brands grew 3.1% on an underlying basis.

Reported revenue declined 4.7% due to the store closures and portfolio changes executed in 2017. Gross margin was 41.1%, a record for the Company and an increase of 150 basis points compared to last year's adjusted gross margin. The Company executed the WAY FORWARD transformation very effectively, leading up to 2018, enabling us to deliver full year adjusted operating margin of 12% ahead of our scheduled timeline. This was 80 basis points higher than last year, and includes approximately $41 million of incremental investments to drive growth.

Adjusted net interest and other expenses for the year were $22.6 million and the adjusted effective tax rate was 13.3%. Full year adjusted diluted earnings per share were $2.17, an increase of 32.3% over the prior year and well above the original guidance we offered last February.

The foreign currency impact on adjusted earnings per share was minimal for the full year. Our full year reported earnings per share of $2.05, represents a record high for the Company.

Our consistently strong cash flow generation over the last three years has put us in an enviable position to make strong growth investments and be opportunistic in returning capital to our shareholders. In addition to our investments in organic growth in 2018, we bought back approximately $175 million of our stock at an average price of $32.65, including $105 million in the fourth quarter alone. And we paid $29 million in dividends to shareholders, including a 33% increase implemented during the year.

We refinanced our bank debt and reduced debt by $212 million during the year, including $175 million of voluntary payments. Our strong track record and low leverage ratio allowed us to negotiate better pricing and terms related to our capital structure going forward. These actions provide us with greater flexibility and will reduce interest expense in 2019 by approximately $2.5 million. We were also able to reduce our accounts receivable financing program by $77 million, due to better pricing under our new debt structure.

Finally, we made $60 million of discretionary pension contributions to bring our defined benefit plans to near fully funded status. In addition, we further derisked our pension plan by executing an annuity buyout at attractive pricing, which removed $67 million or 20% of the Company's defined benefit liability. During 2018, the Company generated $235 million in operating cash flow, excluding the accounts receivable wind down and pension contributions noted above.

At the end of 2018, our bank defined leverage ratio was only 1.26 times and total liquidity was approximately $1.5 billion. As a result, the Company has significant flexibility to execute future actions to drive total shareholder return.

I would like to transition to our 2019 outlook, including an update on our ongoing investment strategy related to our Global Growth Agenda. As we further implement our brand growth model across the portfolio, we expect revenue growth to accelerate in 2019 with further operating margin expansion and very good earnings leverage.

We expect 2019 reported revenue to be in the range of $2.28 billion to $2.33 billion. This represents growth of approximately 3% at the midpoint of the range and 3.5% on a constant currency basis.

We expect approximately $10 million in foreign currency headwinds, mostly weighted to the first half of the year. Gross margin is expected to be in the range of 41.3% to 41.8%, up 45 basis points at the midpoint of the range. This ongoing improvement in gross margin is expected to be achieved by aggressively managing our supply chain and implementing certain pricing actions.

Total adjusted selling, general and administrative expenses as a percentage of revenue are expected to be roughly flat as compared to the prior year, reflecting planned brand investments.

Building on success from 2018, we plan to invest approximately $40 million to accelerate organic growth. Much of this catalysts spending will carryover from 2018, and we plan to invest in new initiatives to optimize performance across the three key elements of our Global Growth Agenda.

We also plan to spend approximately $30 million on revenue enhancing capital investments, including additional infrastructure and further investment in key global markets to improve our in region capabilities.

Adjusted operating margin is expected to be in the range of 12.2% to 12.6%, representing a 40 basis point expansion over last year at the midpoint of the range.

Reported operating margin is expected to be in the range of 11.4% to 11.8% and includes approximately $20 million of legal and consulting costs to manage the Company's legacy environmental matter.

We expect 2019 net interest and other expenses in the range of $18 million to $19 million, including the $2.5 million reduction in interest expense previously discussed. Pretax income is expected to increase approximately 10% at the midpoint of the range, representing strong earnings leverage of over 3 times relative to our revenue guidance.

The effective tax rate is expected to increase to approximately 19% and diluted weighted average shares outstanding are projected to be approximately $93 million.

Full year 2019 adjusted diluted earnings per share are expected in the range of $2.20 to $2.35, including a significant increase in the projected tax rate of approximately 6% or $0.14 per share.

Reported diluted earnings per share are expected in the range of $2.03 to $2.18. Cash flow from operations is projected to be in the range of $200 million to $220 million. Capital expenditures are expected to range between $35 million and $40 million, with depreciation and amortization forecasted to be approximately $35 million.

Now, let me provide some information on our general outlook for the first half of the year and current expectations for the first quarter. We expect first half revenue growth to be 2% to 3%, including a $10 million foreign currency headwind.

In the first quarter, we will continue to manage through certain challenges that materialized in the second half of 2018, including lower demand from some of our international partners centered primarily in Latin America, ongoing challenges in the Saucony business, lower demand in our Wolverine Leathers business, and the impact of some industry bankruptcies.

As a result, revenue in the first quarter will be roughly flat with last year, with mid single-digit growth projected for the second quarter. Our first quarter projection includes growth in the US, offset by declines in the certain international markets and a $5 million unfavorable foreign currency headwind.

Our first half outlook is informed by the timing of new product introductions and very good visibility to customer demand, which includes better trends in the second quarter for our international and Saucony businesses.

Quarterly revenue growth during the second half of the year is expected to be in the mid single-digit range for both quarters. Adjusted earnings per share in the first quarter are expected to be in the range of $0.45 to $0.48 including a higher level of SG&A expense compared to the prior year related to increased incentive compensation costs, higher marketing and digital investments, one-time cost to consolidate warehouse operations in Europe, and incremental bad debt exposure for an international bankruptcy.

Before closing, I want to comment on our plans to build on our effective capital deployment strategy. With approximately $1.5 billion of dry powder exiting 2018, and our expectation to generate strong cash flow in 2019 and future years, we have significant capacity to invest in a variety of initiatives to enhance shareholder value. This includes a new $400 million four-year share repurchase plan, and a 25% increase in our quarterly dividend.

We remain committed to investing in organic growth, and we'll continue to pursue strategic acquisition that enhance our portfolio and add broad capabilities that we need to win in the new normal market environment.

Thanks for your time this morning. And we will now turn the call back over to the operator.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session.(Operator Instructions) Our first question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy -- Stifel -- Analyst

Thanks. Good morning, everyone.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Good morning, Jim.

Jim Duffy -- Stifel -- Analyst

More than one question, I have to choose here. The -- let's see. Can you guys speak to some of the factors that are causing Merrell growth to be second half weighted this year, expectations for e-commerce growth at '19 and then some of the puts and takes of the gross margin outlook in '19?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah. Let me tackle maybe the first two. With Merrell, when we look at the first half of the year -- but in particular that really it's a Q1 issue for Merrell. It's a number of different factors, the timing of new product introductions -- some of our brands, including Merrell have seen some of their orders slanted into early Q2 maybe that is late Easter, maybe it's -- these unusual continuing weather patterns, it's probably a combination of factors like that.

And I think in Q1, Merrell is also going to expect some continuing softness from Latin America. We expect Latin America to firm up over the year, but we're going to enter the year on a pretty soft note for that region.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Q2 for Merrell, Jim, is going to be up double digits, but of all the factors, that (technical difficulty) just Blake just mentioned, Q1 is going to be tough and Latin America would be the biggest owner of that.

Jim Duffy -- Stifel -- Analyst

Got it.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. The e-com growth for the year, we're expecting strong double digits, we were up nearly 30% for the year in 2018. We'd expect that to temper a little bit in 2019, but we're still seeing great momentum in really in all of our brands, especially opportunities with some of our smaller work brands, where we're starting to see really strong momentum in particular. But that will continue to be the fastest growing channel in our business for 2019 for sure.

And then your question about gross margin was just sort of the puts and takes for '19. I think the biggest component for us is going to be the spillover benefits that we're still kind of harvesting out of the transformation work, a lot of the work that was recognized in 2018 from factory consolidation and just better product management and product negotiation, those were meaningful in '18. We still have some of that carrying over into 2019, especially for our fall product lines. So we'll see stronger gross margin expansion as that product starts to hit in Q3 and Q4. But it's good old-fashioned supply chain management, a little bit of pricing, and of course our e-commerce business, which is our highest gross margin business in the portfolio is growing faster than anything else. So it will be a positive mix benefit as well.

Jim Duffy -- Stifel -- Analyst

Very good. Thank you.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Jim.

Operator

Thank you. Our next question comes from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question.

Steve Marotta -- C.L. King & Associates -- Analyst

Good morning, Blake And Mike. I do have two very quick questions. I hope, the first is Mike, from an inventory standpoint,. I guess it was up roughly 15% at year-end. Can you talk a little bit about aged inventory within the competition? And also the $30 million in capital for emerging markets, can you talk a little bit about how -- well it's all incremental, I understand, what is that going to exactly and can that be something that's expected more or less in perpetuity from here off? Thank you.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Sure. On the inventory, we were very, very lean last year, or at the end of '17, I should say in our inventory position. We talked about it at the end of the third quarter too. We missed deliveries at the end of Q3, because of our inventory position. So we may have over-correcting a bit during the course of '18. I'd say our year-end inventory is a little bit higher than we had expected, but pretty much in line with our expectations and certainly supporting kind of the key growth initiatives in our wholesale and our e-commerce business growth for the first part of 2019.

The aged inventory is actually healthier, as a percent of our overall inventory, that's improved, even as the inventory dollars have increased a little bit. So we're really comfortable with the inventory position. We'll see double-digit growth again at the end of the first quarter as we transition into the Q2 with mid -- at least mid single digit growth expected in the second quarter.

So again, I think we're just at normalized levels on the inventory. As it relates to the investment, we've got -- some of that is related to some new stores we're investing in for Sperry in the US market, that $30 million, so a portion of that will go toward that. We're also going to be investing in some of our key markets internationally, that's more weighted to the back half of the year, but we have some key initiatives in some of our emerging markets, where we feel like having a more direct control over those particular markets will benefit us in those opportunities.

So whether that will be an ongoing thing or not, Steve, frankly, we're just focused on this year right now, but I think that's an important catalyst for our international business and our growth moving into '19 and beyond.

Steve Marotta -- C.L. King & Associates -- Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jonathan Komp with Robert W. Baird. Please proceed with your question.

Jonathan Komp -- Robert W. Baird -- Analyst

Yeah. Hi, thank you. I wanted to start first just looking back at the fourth quarter, and I know a number of other companies that have reported thus far have showed some upside, especially on the top line in North America. And I know you in total hit your guidance for the quarter, so I just wanted to ask if you had any more color, anywhere you saw areas of upside, and if there are any sources of downside during the quarter itself that offset each other?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Really not that much new to report, our October, November were very strong. December for us, like for virtually everybody was little bit weaker than anticipated. For us, it was a great boot season. I wish we had more boots right now. But it was a great boot season, and it was a strong quarter for us on our stores, our store comps and e-commerce business. So those were kind of the highlights during the quarter, some of that was offset as we've mentioned by Latin America, our low margin leather business and lower Saucony sales. But no big surprises across the business.

For Q4, all regions were up double digits, except for Latin America. So pretty -- pretty balanced across the board.

Jonathan Komp -- Robert W. Baird -- Analyst

Okay. And then maybe a follow-up on Merrell. I know it was up high-single digits for the quarter. I think you had guided maybe just slightly higher than that low double-digit growth. So I wanted to ask about what you're seeing there and then maybe a bigger picture for the brand. Just given the ebbs and flows across quarters recently, I wanted to dig in a little bit more if you could share any insights about the reception and any measures around sell-through of some of the newer products that we see in market. And any more color, that would help kind of get comfort that, that what's out there is resonating?

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Jon, before we answer the question, just to clarify, the Q4 performance from Merrell was double digits, double-digit growth in Q4, and for the full year, it was high-single digits.

Jonathan Komp -- Robert W. Baird -- Analyst

Got it. Thank you.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, as far as the Merrell product is concerned, it's really resonating across the board, they had growth in Q4 across all five consumer territories. The broader performance category was really positive in the quarter, the Lifestyle category was also positive in the quarter. So they're really seeing success across a number of different -- a number of different collections broad based growth.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

And their e-commerce business we said in the prepared remarks was up over 55%. So it was a quarter where we invested a lot in Merrell, some of the marketing and digital investments that we tend to talked(ph)about for Q4 in the aggregate, much of that was dedicated to the Merrell business and the timing of some of the new products they brought to market. But those have resonated nicely and we saw good results.

Jonathan Komp -- Robert W. Baird -- Analyst

And do you have any kind of early sell-through reads on the newer product as you think about the first quarter and some of the unique factors you called out, I'm just trying to get a sense of what you're seeing in market?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Sure. The sell -through reads for Merrell continue to be very good across the board, strong performance, as you would expect in high teens, and -- but the Lifestyle products as well.

Operator

Thank you. Our next question comes from the line of Ed Yruma with KeyBanc Capital Markets. Please proceed with your question.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Good morning, guys. Thanks for taking the question. I guess, just two quick number questions and a broader question. First, this incremental $30 million of expense or $30 million of investment for '19. What is -- what's actually capital dollars, sequential(ph)CapEx versus what's expensed. On the tax rate for the fourth quarter, it was obviously very low, I want to confirm that you excluded maybe some of the benefit when you did the adjusted EPS. And then, I guess is a broader picture question, maybe any update on PFAS and kind of reserves and where you are on your reserves? Thanks so much.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Sure. Yes, so on the -- on the tax rate, there really weren't any extraordinary adjustments there relative to the full year, we were a bit conservative earlier in the year in some of our interpretation of the new tax reform, obviously, that was evolving from quarter to quarter. So we took a little bit of a conservative posture earlier in the year, and we treat some of that up in Q4, which is why the rate came as it did. As far as the -- I'm sorry Ed, what was -- tax rate Q4, that was the question, I just answered

Ed Yruma -- KeyBanc Capital Markets -- Analyst

The $30 million on the incremental investments for '19 capital versus expense.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Right, that's all capital. So we talked about$70 million in total, $40 million would be on sort of the typical operating expense investments, similar to the stuff that we invested in, 2018. Some new initiatives bundled in there as well. But the $30 million is CapEx or capital investment in some of those key markets that we talked about before.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

And then maybe just quickly with respect to PFAS, that situation continues to unfold, the number that Mike Stornant quoted earlier, do not include any recovery from other responsible parties or insurance companies(ph). In fact, we've sued the manufacturer of Scotchgard and also filed lawsuit against our insurance companies to recover some considerable sum. So the numbers quote by Mike Stornant did not include any recovery in that area. We -- as you know we took a better in science approach from day one on this. All of the houses in our study area have got great water, we provided Whole House Filters, is needed across the entire area. So PFAS itself is an emerging contaminants. It's long lived in the environment, the science remains a bit on certain regarding this particular family of chemicals, but these were our friends, families and neighbors and we've kind of took a proactive approach.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much guys.

Operator

Thank you. Our next question comes from the line of Chris Svezia with Wedbush Securities. Please proceed with your question.

Chris Svezia -- Wedbush Securities -- Analyst

Good morning, everyone. And thanks for taking my questions.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Hi, Chris.

Chris Svezia -- Wedbush Securities -- Analyst

So I guess first just on the -- just a point of clarification. Just the $40 million in incremental investment spend, is that just on top of last year. So combined two year stack, you have just a touch(ph)over $80 million in investment. I just want to make sure I understand that, that thought process.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, I think over a two year period, you -- we will consider that to be incremental to our base. But just to be clear, we're not adding on top of the $40 million that we spent in '18, and incremental $40 million in '19. So we're going to continue to spend at that higher rate. Same type of catalyst investments that we had in '18. We'll be focused on those things and '19 as well as the CapEx that we talked about. So the CapEx is incremental, but the -- when you look at our SG&A guide for the year, Chris, we're seeing as a percent of revenue, we're going to be essentially flat. We're continuing to invest, we've got obviously ,growth and so a portion of our SG&A increase in 2019 about half of it frankly would be just related to variable cost to support the growth that we have in the plan and some additional investment in people and marketing that wouldn't be considered part of that, that investment spending.

So overall, really good SG&A discipline and leverage going into next year, but we're continuing to invest behind the brand growth model and the growth agenda -- and the we've talked pretty openly about the importance of implementing this model across the rest of the portfolio. We've had our two biggest brands Merrell and Sperry have great success in 2018 with those new tool sets. Caterpillar came on later in the year and implemented, and we're seeing great momentum in that business right now. So the fact that we've been able to sort of test and tweak those -- that process and that growth model gives us a lot of confidence that we continue to invest in it in 2019, we'll get even greater results.

Chris Svezia -- Wedbush Securities -- Analyst

Okay. And then just on the -- thank you. And just on the revenue outlook overall, it looks like roughly, call it 2% to 4% ballpark is the range, you did 3.8% in the fourth quarter a little bit higher on currency neutral basis. Q1, it seems like orders are stacked a little more toward the second quarter and back half, but given all the investments that you're making, given growth prospects for Merrell, Sperry accelerating, Cat accelerating, I guess, Chaco and Cat continue to grow nicely, just how are you thinking about the ability for these investments to accelerate growth and your confidence around that as you move through the balance of the year? I'm just a little curious about what you put up in Q4 relative to the outlook in 2019.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, I mean, we've got some living -- great living examples right now, where we've proved the value. We would expect for this year and ensuing years, the growth rate to pick up, frankly. So we right now, for the rest of this year, we anticipate mid single-digit growth for quarters, two, three and four right now. That could improve a little bit in a particular quarter, but we expect our investments behind the brand growth model and the Global Growth Agenda to continue to pay off, especially as we bring those skill sets, tools and processes to the other brands in our portfolio.

Chris Svezia -- Wedbush Securities -- Analyst

Okay.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

The turnaround we have for Saucony is important, right, that's our third largest brand. And Saucony will be down in the first half of the year. They're going to be a major reason why in Q1, we're guiding to flat revenue for the quarter. But that turnaround is well under way. We're seeing some great success in early reads with new product on our owned e-commerce channel. So the Saucony component of this and the timing of that turnaround is really critical. And we've already talked about Latin America and international in general, which will start to rebound early in the second quarter.

But -- and we are really confident that the investments are working and we are taking a pretty prudent approach to our back half guidance at this point. We have strong guidance or a strong -- strong confidence in the performance for the brands that are already seeing good momentum.

Chris Svezia -- Wedbush Securities -- Analyst

Okay. Thank you very much. And all the best. Appreciate it.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

Eric Johnson -- Piper Jaffray -- Analyst

Hi, this is Eric on for Erinn today. Thanks for taking our question, guys. First on Sperry, regarding the mid-single digit guidance for 2019, curious what's contemplated for boat shoes versus boots and your other categories?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

I think when you look at Sperry right now, they've developed a very large vulcanized business. We expect their boot business to continue to grow in 2019. I think we essentially sold out to the pair in '18 and in January of this year. We are not counting on boat growing in 2019 yet, so maybe that will happen, but right now, we're not -- our guidance does not contemplate any growth in boat.

Eric Johnson -- Piper Jaffray -- Analyst

Okay, that's helpful. And then on Saucony, curious for your confidence level in the second half recovery, is that better or worse than you would have thought say 90 or 180 days ago. And are any share gain contemplated by the second half or is that going to be further into 2020 or beyond?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yes. I don't know about share gains for the complete year, certainly, that brand ought to be taking some market share in Q3 and Q4. But we have a pretty high confidence level, much higher than we had a 100 days ago. And that's just really tied to the basics, the flow of new product introductions and how we think they're going to perform, and two, the impact of the new team -- management team have been on Saucony. So our confidence level is high.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Remember the EMA business and the overall international business for Saucony is a large percentage of the total global revenue. And we're still expecting that to continue to have a positive momentum even in the first half of the year. So the confidence level is certainly weighted to our intentions for international growth for the brand.

Eric Johnson -- Piper Jaffray -- Analyst

Great. Thanks guys.

Operator

Thank you. Our next question today comes from the line of Michael Kawamoto with D.A. Davidson. Please proceed with your question.

Michael Kawamoto -- D.A. Davidson -- Analyst

Yeah. Hey guys. Thanks for taking my questions. Just first, the strength in Lifestyle for Merrell , you introduced a number of offerings there this past summer. Is that what's really driving that growth there, is there anything else to call out in Lifestyle category?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, I think fundamentally, the new styles in some existing collections and new collections introduced by Merrell have all done very well, but Merrell still continues to have a great business in styles and collections that have been around for a while. So Merrell really has seen kind of growth and strength across all of its performance and Lifestyle category.

Michael Kawamoto -- D.A. Davidson -- Analyst

Got it, thanks. And then you talked about the $1.5 billion in dry powder exiting '18. What is the M&A environment look like for you guys right now? Or how you think about deploying capital for the foreseeable future?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, I think we're in the position to use our capital and cash in a number of areas. It's hard to say that one has any priority over the other, obviously, we're going to spend and we've indicated, we're going to spend about another $40 million this year to drive incremental growth. We're going to return capital to our shareholders. But we remain very active at looking at brands that would be a strategic fit for the Company. These could be domestic brands or these could be international brands that we could expand across our global distribution base. So we remained very active tire kickers.

Michael Kawamoto -- D.A. Davidson -- Analyst

Okay.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

The key thing, Michael, the key thing for us is, we have put ourselves in a great position here to be able to do a lot of different things and at significant levels. So we will continue to be opportunistic with share buybacks, but we're also looking to invest in organic growth and strategic M&A opportunities as well.

Michael Kawamoto -- D.A. Davidson -- Analyst

Yeah. I appreciate the color. Thanks, and good luck for the rest of the year.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Thank you, Michael.

Operator

Thank you. Our next question comes from the line of Laurent Vasilescu with Macquarie Group. Please proceed with your question.

Laurent Vasilescu -- Macquarie Group -- Analyst

Good morning, thanks for taking my question. I wanted to follow up on Michael's prior question regarding M&A. I think you called out that your bank defined leverage ratio is 1.26 times, maybe can you talk about how much leverage you're willing to take on for the right acquisition?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Well, I mean if you look back on that PLG, that was a very strategic acquisition for us, a large acquisition compared to our base of revenue at the time. We basically went from a debt free Company, probably not the ideal capital structure and borrowed about $1.2 billion, $1.3 billion that we paid down early. So that took us to a leverage ratio of around 4 at the time. And but that was also a key strategic acquisition involved, not a single brand, it involved four different brands, all of whom kind of filled white space, strategic areas for the Company. So for the right strategic acquisition, we'd probably be willing to go to that level again. We've proven over the last four, five years that we have the ability to pretty quickly take that ratio down.

Laurent Vasilescu -- Macquarie Group -- Analyst

Very helpful. Thank you. And then in terms of some near-term modeling questions, how should we think about the first quarter gross margin and tax rate? And then for the $40 million of incremental operating expenses for 2019, should we think about that spend evenly flow through by quarter?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yes. I think on the Q1, where(ph)we gave some EPS guidance for the quarter, we'd expect gross margins to be kind of flat year-over-year in Q1 and the reason for that as it relates back to our revenue growth, some of that revenue softness in Q1 is from our international business, right, where we have high royalty and high gross margin revenue being delivered there.

So for Q1, about flat on gross margin and improving from there for the rest of the quarters in the year. On the investment front, we're more -- last year was a little more back weighted, where we were kind of testing out some new things and putting new people and systems in place during the year. This year, it will be more evenly distributed through the course of the year. And maybe even a little bit more front-weighted as we activate some of our new initiatives in Q2.

Laurent Vasilescu -- Macquarie Group -- Analyst

Okay. Any thoughts on the tax rate as well for the first quarter?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

For the first quarter, it will be -- the tax rate will be flat to slightly better in the first quarter compared to last year.

Laurent Vasilescu -- Macquarie Group -- Analyst

Okay, very helpful. And then one last question, I think last quarter it was called that Latin America was down $3 million to $4 million for the quarter. Can you parse out the dollar impact for 4Q and what are your expectations for the first quarter or maybe first half of the year?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, Q4 was similar and Q1 is going to be down around $3 million or so. And again, that's been a three quarter correction in that particular region, specifically, with two of our key distributors there. We see the order demand returning to kind of more normal levels even starting in Q2, and so while we feel like it was a meaningful adjustment for a few quarters, we feel like we're back on course here starting with Q2.

Operator

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

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. As you think about your customer base in the wholesale channels, both online and physical, brick and mortar, where do you see the growth coming from? And lastly on each of the brands, how do you see the level of pricing and price increases for 2019? Thank you.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, for our customer base, we've seen accelerated growth in our wholesale customers in their dot(ph)com business. So as we all know that physical store traffic continues to decline, it leveled off a little bit in Q4, but the long-term trend is down. And we're seeing accelerated growth from virtually every -- on the -- in online business from virtually every one of our wholesale customers.

And yeah, on the pricing, I think it's -- Dana, what we're seeing right now is for our business, an ability to continue to keep our product cost in line and not necessarily have to pass along significant price increases to either maintain or improve our gross margin overall, although, we do have some strategic areas, where with new product, we're entering into higher price points and with our international business, also driving up some opportunities there, but not necessarily in terms of kind of responding to any kind of inflationary pressures or product cost pressures or anything like that. So the other part of our margin story is just continue to get less promotional in all of our brands, and as a result, between that and lower closeouts, just the quality of our profit is better, and so our pricing is benefiting from that, our average selling price is benefiting from that as well.

Dana Telsey -- Telsey Advisory Group -- Analyst

And you mentioned last year how inventory levels are maybe a bit too lean. Is where inventories now, do you expect the markdown cadence to be similar to last year or how are you planning markdown?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, I think they're going to be about the same. I think we did a great job over the last 18 months, really kind of managing and cleaning up the inventory, don't forget, over a two-year period, we've probably driven our skew counts down by over 35%. So it's -- I think where we needed to be, the markdown cadence, the promotional cadence should be pretty normalized at this point. So we wouldn't expect a major tailwind from that in '19, but we would expect it to sort of sustain itself or stabilize.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Sam Poser with Susquehanna International Group. Please proceed with your question.

William -- Susquehanna International Group -- Analyst

Hi, good morning, this is Will on for Sam. Thanks for taking our questions. I wanted to talk about Hush Puppies. Can you provide some more detail on when do you believe there's going to be a positive inflection in that brand?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, we think that positive inflection is going to come in the second half of this yea, as you know, we have new leadership in the Hush Puppies(ph)brand, the leadership has been in place, little less than a year. So our international business in Hush Puppies remained strong. We have well over 800 stand-alone Hush Puppies stores around the world, all in global markets, opened on our distributors and licensees, their(ph)checkbook, their capital. We supply those stores with product and store design and many other things, but we expect to see an inflection in Hush Puppies in the second half of this year, but it still remains a very profitable business model and profitable brand for us.

William -- Susquehanna International Group -- Analyst

Great, thank you. And then in international, I apologies, if I missed this, but how much did that grow in the quarter, international business?

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

In Q4?

William -- Susquehanna International Group -- Analyst

Yeah.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Mid-single-digit growth, right around 5% or 6% growth for the international business in Q4, and that was with the softness in Latin America included in there.

William -- Susquehanna International Group -- Analyst

Got you. Thank you. And then lastly, how -- so when do you expect -- I think you mention in -- on 3Q call that, your brands adopting your go-to-market strategy, your growth model that all brands will have that adopted by this quarter, is that on track or is that happened?

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Yeah, I think all brands are in process right now fully adopted, and you have to remember this involves not just some operational change, it also involves a little cultural change as well. And but all brands have that in process right now. We have obviously kick this off with our largest brands, Sperry and Merrell and Cat footwear. But I think it should be fully implemented certainly before Q3.

Operator

Thank you. Our final question this morning comes from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question.

Mitch Kummetz -- Pivotal Research -- Analyst

Yes. Thank you for taking my questions. First, Mike, just to kind of to help me reconcile the full-year sales guide up 2% to 4%. Because, you're saying Merrell up high single, Sperry mid singles, Cat, I think you said high singles, Saucony down in the first half, up in the second half. So I guess firstly, does Saucony flattish on the year or is it actually still down on the year? And then when I kind of think about the rest of the business in aggregate, Hush Puppies, Keds, Chaco you name it. Are those brands in aggregate down a little bit? How do I kind of get to that 2% to 4% when lot of things seem to be up more than 2% to 4%.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

I think everything else that you mentioned, Saucony and some of the -- kind of the netting of some of the smaller brands will be about(ph)flat. So we see again a direct correlation between the application of our growth agenda and our growth model in the larger brands taking hold, creating momentum, and we're going to expect growth there. Saucony won't see that until the back half of the year. So that's really all those positive trends for the -- first Merrell and Sperry and Cat and others, Wolverine will be about mid single digits, I guess, but rest of the brands are going to be implementing those tools later in the year and that's why we're expecting some recovery back half weighted, but Saucony is probably the biggest driver that in terms of trying to balance out the overall guidance.

And the other thing I would say Mitch is coming into the year, right, we are -- we're being prudent here with our guidance for revenue. I think that the first half obviously, we have pretty clear visibility to, the back half is fairly strong in terms of what we're seeing today, but as 2018 was evidenced, things happen that you can't predict. And so I think from the back half standpoint, we're trying to be a little more conservative.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. And then Blake, you made the comment that you wish you had more boots right now. So I know that the West Coast is finally gotten some winter weather after all, I think it's been a pretty mild winter, the Midwest, East Coast getting hit yet again. So I mean, is there still boot demand out there on the part of the consumer. I mean, can you meet any of this to any of that demand at this point, I mean, you're trying to rush in some boots or is it just too late and -- you're just --

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

It's probably -- Mitch, it's probably a little on the late side right now, it's almost March at some point, we won't be shoveling that our driveways here in the Midwest, I hope at some point. So we're probably going to get overall for the US. We'll put the industry, we're probably get kind of a late start to spring. But it was a -- frankly, it was a great season for boots, and we bought up on boots, especially in Sperry and several of our other brands, and we were pretty judicious about maintaining map pricing, not putting things on promotion too early. And I think that paid off for us again. So it was a great boot year and continues to be a good boot year. And the good news is, these are higher priced items for the industry as a whole and I think the inventories are pretty clean out there, as we head in the fall '19.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. Alright. Thanks, guys. Good luck.

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Thanks.

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Mitch.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Harris for any final comments.

Michael Harris -- Vice President, Corporate Finance

Thank you. On behalf of Wolverine World Wide, I'd like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until March 20th, 2019. Thank you, and good day.

Operator

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

Duration: 67 minutes

Call participants:

Michael Harris -- Vice President, Corporate Finance

Blake W. Krueger -- Chairman of the Board, Chief Executive Officer and President

Michael D. Stornant -- Senior Vice President, Chief Financial Officer and Treasurer

Jim Duffy -- Stifel -- Analyst

Steve Marotta -- C.L. King & Associates -- Analyst

Jonathan Komp -- Robert W. Baird -- Analyst

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Chris Svezia -- Wedbush Securities -- Analyst

Eric Johnson -- Piper Jaffray -- Analyst

Michael Kawamoto -- D.A. Davidson -- Analyst

Laurent Vasilescu -- Macquarie Group -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

William -- Susquehanna International Group -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

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