Wolverine World Wide (WWW) Q2 2019 Earnings Call Transcript

Wolverine World Wide (WWW -1.77%)
Q2 2019 Earnings Call
Aug 07, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Wolverine Worldwide second-quarter fiscal 2019 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mike Harris, vice president, corporate finance. Thank you, sir. You may begin.

Mike Harris -- Vice President, Corporate Finance

Good morning and welcome to our second-quarter 2019 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 second-quarter 2019. 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 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 Q2 2019 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. During our call, we are providing adjusted financial results, which adjust for the impacts of environmental and related costs, business development-related expenses and foreign exchange rate changes. I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine Worldwide and its operations are forward-looking statements under U.S. 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 Krueger -- Chairman, Chief Executive Officer, and President

Thanks, Mike. Good morning everyone and thanks for joining us. Earlier this morning, we reported adjusted earnings per share of $0.52. Despite overall sluggish U.S.

retail conditions, second-quarter revenue increased 1.1% on a constant-currency basis. While four of our top five brands met or exceeded our revenue expectations, going into the quarter. As a company we remain focused on delivering annual mid single-digit organic growth. While Q2 did not meet our longer-term goal momentum is building and our brands are poised for much better second half top-line performance.

The recent news on tariff front is not expected to have a material impact on the business in the second half or on next year's results; more on that in a few minutes. Let me quickly review the quarterly results for our brand groups and key brands. I will then provide an update on the status of our key 2019 investments and our view and outlook given last week's announcement of additional tariffs on footwear imports from China. Starting with the Wolverine Michigan group.

Revenues grew 1.3% compared to the prior year and 2.4% on a constant-currency basis, with several brands delivering attractive growth. Merrell's results exceeded expectations as the brand grew mid single-digits in the quarter and is poised for a strong second half. Cat had another strong quarter growing almost 25%. And we also saw gains in Hy Test.

The growth in these brands were partially offset by declines in Wolverine and some of our smaller brands. Merrell's growth was driven by strength across most performance categories and excellent consumer acceptance of new collections, high lighted by the Nova, Antora Prairie District and Gridway offering. New product launches helped drive the brand's DTC business. Merrell's e-commerce business grew 27% in the quarter.

Consumer digital and social media trends for Merrell were robust with media views, impressions, search interest and site traffic all up at attractive rates. This strength continued to position Merrell as the market leader in hike, while expanding market share in the trail running category. We expect Merrell to grow high single-digits in the second half driven by continued direct to consumer momentum, a robust product pipeline and a favorable order backlog. Cat's strong growth was primarily driven by its international business, specifically the Asia Pacific region.

The brand's owned e-commerce business also grew 36% benefiting from favorable trends in search interest and site traffic. And the U.S. business grew at a low single-digit pace. The work category continued to perform well growing at a double-digit rate, with the brand again expanding U.S.

market share in this category during the quarter. The decline in Q2 revenues for the Wolverine brand was driven primarily by the U.S. wholesale business. Due to softer than expected reorders and acute retail customers reduction in stores.

Partially offset by strong growth in e-commerce of 25%. The Michigan group includes the five brands that make up the company's work category, which continues to experience meaningful momentum. Our overall revenue in this category has increased at a high-single digit rate during the first half of the year outpacing the overall U.S. work footwear market.

The work category represented approximately 15% of our global revenue during the first half and continues to be a significant growth opportunity for the company. Moving to the Boston group. Revenue for the Boston group was flat for quarter versus the prior year. After a soft Q1 Sperry rebounded and exceeded expectations with a slight Q2 decrease.

Saucony declined mid single-digits but also exceeded expectations for the second straight quarter as the turnaround continued to gain momentum. This decline was largely offset by mid-teens growth from Keds, while the kids business was flat to last year. For Sperry, the U.S. boat shoe category was down in the high single-digit range but in line with expectations and a significant improvement relative to Q1.

Other areas of the Sperry business performed well, including the casual and lifestyle boot category, which grew at a double-digit rate with strong sell-through at retail. Boots in particular have had a strong early start to the fall season. The Sperry e-commerce business was up 30% in Q2 driven by success in women's and the gold cup premium product category. We are pleased that Sperry's business regained momentum during the second quarter and we expect growth to accelerate in the second half at a double-digit rate, driven by less reliance on boat shoes and a very strong boot offering.

Saucony exceeded expectations in Q2 but was down mid single digits related to challenges in the technical run category in the U.S. and EMEA regions. The brand continues to benefit from the performance of e-commerce, which delivered growth of 27%. We continue to see Saucony returning to growth during the second half of the year driven by the addition of Saucony Italy, a strong pipeline of new product introductions and continued strong e-commerce performance.

Keds mid teens performance in Q2 reflects healthy growth in the U.S. and several international regions. With owned e-commerce expanding 28%. The Core Champion product category and product collaboration continued to drive strong performance.

Let me provide a quick update on our global growth agenda, where we continue to make important investments to create a faster and more innovative product creation engine, drive our digital direct offense and expand our international business. These investments in the aggregate totaled approximately $10 million in the quarter; with continued expectations to invest approximately $38 million for the full year. In addition, we still expect to spend approximately $40 million on capital investments to open stores and accelerate growth in global market. Including the acquisition of Saucony's Italian distributor, which closed in the second quarter, and the previously announced China joint venture.

We continue to focus on our long-term objectives in executing against this agenda including the implementation of the brand growth model across our brands. We are dedicating resources to help our brands accelerate the strength of their product pipeline and bring a continuous flow of our on trend and cravable products to our global consumers. Our targeted investments in our own e-commerce business have delivered robust top-line growth thus far in 2019. We've also made important progress in executing on our global expansion strategy, with the international business growing 7% during the quarter on a constant-currency basis.

Given last week, the announcement of an incremental 10% tariff on Class 4 items from China, which includes footwear. I'd like to provide an update on the relatively minimal impact this will have on our business in the short- and longer-term. Over five years ago, the company implemented a strategic action plan to migrate product out of China as part of a broader plan to improve sourcing diversification for our global business. We accelerated our strategic migration initiative over the last couple of years, given the tariff negotiations.

In 2019, the percentage of our footwear sold in the U.S. from China factories is substantially smaller than the footwear industry as a whole. As a result, we plan to only import approximately 3.5 million pairs into the U.S. from China during the last four months of 2019.

Our healthy inventory position will also help minimize the impact of any new tariffs should they be imposed. For 2020, we expect China imports to decline dramatically to approximately 7.5 million pairs for the entire year, less than 10% of the global pairs sold by our brand. We expect a further dramatic decline to approximately 3.5 million pairs in 2021. We are working on efforts to reduce these amount even further.

We've been able to move very quickly because approximately 75% of pairs transitioning out of China are moving to factories owned by existing sourcing partners. A multi-year strategy and continuing aggressive transition plan now puts the company in an excellent position to manage the potential cost impact of higher tariffs on footwear over both the short and longer timeframe. While our mitigation actions might provide us with the midterm competitive advantage, as a matter of policy, we remain opposed to higher import tariffs on footwear, which already has one of the highest tariff duty rates compared to a wide spectrum of other industries and product category. Our updated outlook for the second half of the year reflects total revenue growth accelerating to mid single-digits.

This includes very strong projected growth for our three largest brands, Merrell, Sperry and Saucony, which on a combined basis are expected to be up close to 10%. The second half momentum in our largest brands is supported not only by the current order book, but also continued strong e-commerce performance relating to our digital direct offense, the impact of new stores and accelerated international growth at Merrell and Saucony. 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 second-quarter financial performance, along with an updated outlook for Q3 and the full year. Mike.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Thanks, Blake. And thank you all for joining us today. Our diversified portfolio served the company well during the second quarter as several brands delivered solid revenue growth and Sperry's performance improved significantly versus Q1. The success helped to offset the headwinds faced by some of our smaller brands, and enabled the company to achieve low single-digit constant currency growth.

Despite the revenue results that were slightly below our expectations, the company delivered earnings and cash flow ahead of our plan for Q2. Gross margin for the quarter was 40.5%, in line with expectations but down 80 basis points from the prior year. This was mostly related to unfavorable mix and higher close out costs. These factors were partially offset by the favorable impact of strong growth in our higher gross margin direct-to-consumer businesses.

Adjusted selling, general and administrative expenses of $167.3 million were up only $4 million compared to last year and benefited from disciplined discretionary spending and lower incentive compensation costs. The second-quarter effective tax rate was 19.4% versus 18.1% in the prior year. The increase is due primarily to the favorable impact from discretionary pension contributions made last year. Second-quarter adjusted diluted earnings per share of $0.52 exceeded our expectations.

Reported earnings per share were $0.45, and included the impact of environmental related costs and certain business development expenses. We generated $136 million in cash from operations during the quarter. Our earnings performance and strong cash flow reflect our disciplined operating model and our ability to deliver solid bottom-line performance even in a softer macro environment. On a year-to-date basis, we continue to leverage our strong capital structure, we have been active with share repurchases, and made strategic capital investments to drive overall long-term shareholder return.

In Q2, we repurchased $104 million of our stock at an average price of approximately $29 per share, bringing our year-to-date total to $207 million. We have approximately $220 million still available under the $400 million share repurchase program that was approved earlier this year. We have also executed strategic capital investments of approximately $30 million, including the acquisition of our Saucony Italy distributor, early funding of our China joint venture and other growth related initiatives. We ended the quarter with net debt of $695 million, which increased versus last year due mostly to our meaningful share repurchases and accelerated capital spending.

We ended the quarter with approximately $1.25 billion in total liquidity, giving the company significant flexibility and capacity to invest for growth. As we discussed during our last call, we are taking a stronger inventory position on core items, this year after operating with very lean levels during March of 2018. Our like-for-like inventory was up about 35% at the end of Q2 compared to last year in line with our projections and including a significant pull forward of China sourced production in anticipation of potential tariff exposure. In addition, we've added $10 million of inventory for new stores and the addition of our Saucony Italy distributor.

Importantly, the quality of inventory remains very high, including an improvement in aging and backlog coverage relative to last year. We expect inventories to be up approximately 30% at the end of Q3 as we continue to pull forward core inventory in August ahead of potential tariff implementation. Our year-end inventory levels were moderate and we expect an increase of 5% to 10% including about $10 million related to new stores and the addition of Saucony Italy. Based on timing of future production, we have a strong line of sight to achieving this inventory position by year end.

Now, let me cover our updated outlook for the remainder of 2019. During the first half of the year, the macro environment was soft, especially in the U.S. At-once order trends were inconsistent. And we experienced some volatility in a few of our international markets.

As we transition to the back half of 2019 we expect revenue and earnings performance to improve meaningfully. Our current visibility into the second half is very good and includes a good start to the third quarter, a stronger order book, excellent response to new product initiatives and positive momentum for Merrell, Sperry, Saucony and Cat. We expect our e-commerce business to continue to perform on plan in the back half with growth of nearly 20%. The newly acquired Saucony Italy business and additional stores will also benefit the second half.

Offsetting these tailwinds, we are cautiously assuming ongoing volatility in our U.S. wholesale business, and projecting at-once demand in the back half of the year to be down slightly more than our first half experience. We now expect very strong reported revenue growth in the second half of approximately 5%, in constant currency growth of 5.5%. This outlook includes approximately 10% constant currency growth in the second half from Merrell, Sperry, and Saucony on a combined basis, an encouraging trend for our three largest brands.

More specifically by quarter, we expect Q3 revenue of approximately $575 million, constant currency growth of 4%. And Q4 revenue of approximately $615 million, constant currency growth of 7%. Growth accelerates in Q4 as our e-commerce and store businesses become more prominent in the quarter. Our international business strengthened, especially for EMEA and Latin America.

And Sperry, Merrell and Cat deliver our new product and initiatives including strong boot offerings. Our full-year revenue estimate is approximately $2.28 billion, and within our original guidance range. Gross margin in Q3 is expected to be approximately 42%. And adjusted operating margin is expected to be approximately 13.5%, up nearly 100 basis points over last year.

This improvement is expected to be offset by higher year-over-year net interest expense, and a much higher effective tax rate of approximately 21%, due to significant discretionary pension contributions made last year. As a result, earnings per share in the third quarter are estimated to be $0.63. Gross margin in Q4 is expected to be approximately $0.40. And adjusted operating margin is expected to be approximately 13%, an improvement of over 200 basis points compared to last year.

This improvement is expected to be offset by a higher effective tax rate of approximately 21%. As a result, adjusted earnings per share in the fourth quarter are estimated to be $0.67. For the full year, we now expect gross margin of approximately 41%, adjusted operating margin of approximately 12%, and effective tax rate of approximately 19%, and adjusted earnings per share approximately $2.28. Reported diluted earnings per share are expected to be approximately $2.06.

Diluted weighted average shares outstanding are now projected to be approximately 88 million shares, based on timely repurchases already executed in the first half of the year. In closing, I want to emphasize that our leadership team remains incredibly focused on executing the initiatives and activities that will accelerate growth. We continue to see meaningful progress and more success within many of our largest brands, and with our DTC platform. We will continue to operate in a diligent and disciplined manner, both in the execution of our business model and the management of our working capital to deliver consistent profit and cash flow for our shareholders.

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

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. I hope you guys are doing OK.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Good morning, Jim.

Jim Duffy -- Stifel Financial Corp. -- Analyst

A couple of questions from me. During the second quarter, obviously business softer than expectations. Can you be more specific about what was light of expectations within the brand portfolio? And then to what extent does this have impact on inventories on your books? And then, what did channel inventories look like as you go into the back half of the year, given what you suggest to a sluggish sell-through trend?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah, I'll start with the last part of your question, Jim. Obviously, we had a slow start to spring here in the U.S., weather impacted. I would say there was a buildup of seasonal product at the retail level, something we've seen. And retailers are now at work clearing some of that sandal and other seasonal product.

And so things have certainly improved in June and then into July, as we've gotten into more normalized weather pattern, with consumer demand. The first part of your question?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah. I would say, just to clarify on the performance by, kind of, by brand, we mentioned in the prepared remarks that Merrell and Sperry, both delivered on plan for the quarter, no major surprises with Saucony and that Cat actually delivered over 25% or almost 25% growth in the quarter. The seasonal inventory issues that Blake talked about certainly impacted Chaco, even though it's one of our smaller brands it had a bigger impact on the quarter. After they got off to a decent start in the Q2, things reversed sort of midway through the quarter, and we saw that fall off.

Wolverine brand was the other brand that came short of expectations in the quarter, a little bit having to do with just some at-once demand trends, and they continue to work through a transition out of their Sears business as you know, so that had a little bit more of an impact in the quarter and will in the back half of the year more than we had originally expected. So some other small changes in our smaller brands, frankly, in the quarter Jim, but those were the big issues, I would say. Just add on to the channel inventory point, and you'll see that in the first half of the year our gross margins were under a little bit of pressure. I think that our brands did a nice job of monitoring inventories both hours in retail inventories to make sure that that pipeline was being cleaned out.

We certainly didn't force product in, into the retail pipeline. And some of our promotional dollars and markdown spend in the second quarter in particular were really intended to make sure that that seasonal product kind of cleared through to give us a clean runway for the back half of the year. So I think we feel good about that approach in about the quality of the inventory that we have going forward.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. And then if I may, just a question on the tariffs. You guys spoke in pay range terms. I recognize that's an improvement in the amount of volume coming from China sourcing.

But it still doesn't seem insignificant in terms of number of millions of pairs. Can you speak in terms -- in dollar terms? And how should we think about the timing of that product coming in? And the actual tariffs hitting the P&L?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah. I would say, with respect to the -- and these are current estimates. The 3.5 million pair that we expect to get to U.S. from China in the last four months of the year, if we multiplied -- used our FOB and multiplied it times 10% without any additional remedial action, concessions from the factory, price increases or any number of actions we could take, we see something in the gross area of maybe $5 million.

Mike Stornant -- Senior Vice President and Chief Financial Officer

And obviously, a lot of that merchandise, Jim, is spring merchandise. It's coming in, in the fourth quarter. And just -- we spoke pretty specifically about our mitigation activities, pulling forward production, not only production, but obviously pulling in inventory as fast as we could, not knowing exactly when or if these tariffs will be imposed, but taking that cue and moving pretty aggressively. And so for this year, the impact -- even though we didn't put anything particularly specific in our guidance, because nothing's been imposed yet, and we don't necessarily want to reflect something that could change within the next couple of weeks.

The impact this year would be very minimal just based on the inventory position we have and the timing and the product that's coming in late in the year, which is mostly for next year sales. And as it relates to next year, I think the numbers that Blake quoted, again, it's a significant decrease from where we've been over the last, even 18, 24 months. I think the improvement there, and now the fact that we have visibility to the specific product that might be exposed to tariffs costs in the future. We will have a much more specific mitigation strategy around pricing and other things that we can do to mitigate the impact.

So, really difficult and not necessarily -- it's probably premature to even suggest what the impact would be next year. But I think, based on Blake's comments and kind of how we feel about it, we feel like we have it well in hand and have plenty of time to act accordingly to mitigate any cost impact for next year.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Just Jim, there's another point of reference our pay range -- expected pay range next year will be about 25% or less than what it was just as we look back to just 2014. So that gives you some idea, some of our mitigation efforts.

Operator

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

Chris Svezia -- Wedbush Securities -- Analyst

Good morning, everyone. Thanks for taking my question. I guess the first one, I just want to step back for one moment. And as you think about sort of how the first half has played out, sort of a little short on revenues and the guidance you've given for the back half implying 5% or so continual growth.

Just what level of confidence you may walk through that a little bit more specifically, in terms of hitting that. I guess, more specifically, could you give or talk to what backlog number or backlog numbers relative to your revenue growth expectations for Sperry or for Merrell or for Saucony ex-Italy, just so we have greater confidence that the revenue guidance that you're giving is achievable just based on what's happened in the first half of the year? Any color around that start at least would be helpful.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Sure, Chris. I mean, we don't usually give backlog numbers in that -- at that level of detail. But I can say that our, we've looked at that in quite detailed brand by brand. Our second half backlog is probably the strongest expense in five or more years at the present time, so fundamentally, we have a lot of confidence in our backlog and in what it's going to deliver on the second half.

Sperry, in particular has a very strong backlog, a lot of it tied to its pretty diverse boot offering. But Merrell's backlog is also strong and we're seeing some good order trends across the portfolio at the time. Again, we've taken a little bit of a conservative view when it comes to at-once trend. So we looked at-once trends in the first half were frankly volatile and you could see it from the overall U.S.

industry trends up one month down one month, back to flat another month. And, at-once trends were volatile in the first half. Sometimes for no apparent reason, given the strong sell-throughs we experienced. But we've taken a conservative approach to the second half and are actually, in our numbers, modeling at-once to be slightly worse than it was in the first half.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah, I think that's where -- that's where the most of the first half shortfall came from Chris, right. At the end of the day, I think our visibility into the business for each quarter was good. The backlog was solid and our at-once -- while that -- while our at-once expectations weren't necessarily aggressive, the outcome was obviously worse than we projected. So, I think that approach is sound.

I think the other things in addition to the backlog numbers that Blake talked about, we have -- we'll have in total in the back half of the year, 20 new stores. We'll have addition of stock in Italy, which is about a $14 million or $15 million lift in the back half of the year. Our e-commerce growth continues. And so, as we've talked about all along, obviously, that reflected in the backlog, but 25% growth in the first half, that will taper down a little bit in the back half, because we're going up against much stronger comps in the prior year, but up still at least 20% in the back half.

So, I think those other areas of growth and opportunity are really important. And I would also emphasize the fact that especially for EMEA and Latin America in Q4, we had some really rough results in 2018. So the comparisons for our international business in Q4 are quite a bit easier. And we'll see high-teens growth in the international business in Q4.

So, just at a high level, that should round out some of the way we're thinking about back half accelerated growth and the level of confidence we have there.

Chris Svezia -- Wedbush Securities -- Analyst

And just a follow-up on that, just from the backlog perspective, if we look at something like Sperry, for example, I guess I would -- the backlog is an access to the revenue guidance that you've given, number one, correct me if I'm wrong. And then I guess, how are you thinking about, I mean you've talked about reorders and you're taking a more conservative view, but how you're thinking about cancellation relative to that backlog and the revenue outlook?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah, when we talk about at-once, we include cancellation assumptions in there too. Maybe a broader way to think about it is kind of what do we think our replenishment level will be combining a cancellation experience and at-once experience. And so, those are both being kind of reflected here in a more conservative way in the back half. More conservative, even than what we saw in the first half when the weather was cloudy and all that other stuff that impacted some of our seasonal businesses.

So, I think that's the way to think about it. Again, we don't give backlog by brand. But I think the, if I was to kind of prioritize the level of confidence we have, the level of demand we have on boots, lifestyle boots in the various categories including a growing men's boot business for Sperry this year is very high.

Chris Svezia -- Wedbush Securities -- Analyst

OK.

Blake Krueger -- Chairman, Chief Executive Officer, and President

I would say also Chris, with respect to Sperry, the early indications we have from the marketplace, the Nordstrom sale etc., the few we have although very early are all strong in the boot category for Sperry, all very positive.

Chris Svezia -- Wedbush Securities -- Analyst

OK. Final thing for me just on that capital -- just kind of capital allocation you do that, you've bought pack a lot of stock, just curious I know you have given a share account for the year, just what do you -- how are you thinking about stock price really to buy back additional stock relative to the guidance here with no additional buyback in factor [Inaudible]

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah, we've proven to be pretty active there in the first half and obviously have capacity and flexibility to do more than the back year -- back half of the year. Our share count guidance doesn't reflect that. But we certainly don't intend to change our approach.

Operator

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

Jonathan Komp -- Robert W. Baird -- Analyst

Yeah, hi. Thank you. Wanted to follow-up first just on the second half revenue projection. I guess when you look at the big three brands guiding up 10%.

Curious how you're thinking about the sustainability of that, like when you look at the projection, how much is kind of unique factors, whether it's cycling, low inventories of last year, some of the international comments you just had? And how much of it is sustainable as you look beyond the second half? And I guess relatedly with your big three up so strong, does that change your view at all in terms of, kind of the optimization of the current portfolio of brands?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah, I would say, Jonathan that, as we take a view on organic growth into the future, we're still firmly fixed on mid single-digit growth. Certainly, we would expect that and would try and achieve at that level at a minimum for our largest brands. And these were the brands that were the early adopters with the brand growth model and some of the other skills, tools and processes that we developed through our transformation initiative. We're in the process of taking some of those tools and skill sets to our smaller brands, but they're clearly a half a lap behind Merrell, Sperry, Saucony and Keds in that regard.

And what was the second part of your question?

Jonathan Komp -- Robert W. Baird -- Analyst

Just to [Inaudible]

Blake Krueger -- Chairman, Chief Executive Officer, and President

Just -- when we look forward to the future, we would look to -- for these brands to deliver mid single-digit growth next year or better.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. And the second half, so maybe, like, do you think you're kind of at the underlying mid single-digit growth rate in the second half, and then some of the unique factors are additive to that?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah. We feel very confident about the second half. We feel like we're there. We understand there's things outside of our control like Brexit, currency and a few other challenges, but we've been pretty nimble at responding to those challenges, those global challenges as they arise.

So we think, we're going -- in the back half of the year, we think all regions in the world are going to be positive for the year in terms of growth. We know that Asia-Pacific is going to be challenged a little bit in Q4 because of some bankruptcies in Korea, but we feel very confident right now as we look ahead and the future is pretty bright for most of our larger brands.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah, I think the portfolio mix, the different challenges that we have there, we are going to have them every year. It's just the way it is. And especially with a 12 brand portfolio, you have some brands in some regions that win and some that don't, every quarter. So I think the fact that we've kind of transitioned out of a first half where we had some negative surprises around some seasonal merchandise, a strengthening Sperry business going into next year, not just in the boot categories but in other categories.

And obviously, Merrell really frankly, accelerating as we move into next year as well. So I think getting the results from the first half behind us, Jon, I think the second half is more reflective of kind of how we see the business going forward.

Blake Krueger -- Chairman, Chief Executive Officer, and President

I would say lastly, we're very happy with our brand -- configuration of our brand portfolio right now. And we wouldn't have any near-term plans to trim our portfolio.

Operator

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

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Hey, guys. Thanks for taking the question. I guess, first, just on the order book again, how much did the uptake in boots is driven by the saltwater boot? Kind of how big of the portfolio is that? I know that's been a great product story. But just trying to understand where that is in its lifecycle.

And then second, obviously a nice job diversifying away from China. We've heard complaints from others that as you move away you see other impacts particularly on the cost of goods side. Have you started to see higher costs and does that change how you think about kind of the medium-term gross margin opportunity? Thank you.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah, first of all, with respect to the Sperry saltwater boot. The Sperry boot offering in this fall is going to be substantially larger than just the expanded saltwater collection, having said that, it's obviously been a roaring success here in the last three fall seasons. We think that success is going to continue. If I was going to put a rough figure on it for the overall Sperry boot business, I'd say the expanded saltwater category is two-thirds approximately, of the overall business.

The Sperry continues to expand its lifestyle and performance boot business as does Merrell and several of our other brands. With respect to the migration out of China, we frankly have not seen any significant uptick in prices. In fact some of the FOB prices we've been quoted as we migrated away from China have actually been a little lower than what we were getting from China. Maybe that will change a little bit here into the future but right now it's been steady on.

I think you do have to remember though that much of the migration has gone to our factory groups that we're already using in China, that also have factories outside of China. So in that respect for us at least it's been maybe an easier transition than some other folks in the industry.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much guys.

Operator

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

Unknown speaker

Hi, good morning. This is Will on for Sam. So you guys mentioned Saucony, the Italy acquisition that's going to be $14 million to $15 million top-line lift, that's in FY'19 correct?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah, that's in the back half guidance.

Unknown speaker

OK.

Blake Krueger -- Chairman, Chief Executive Officer, and President

It was actually a little bit of a drag in Q2, the quarter we did our acquisition.

Unknown speaker

OK. And is that business, is that margin accretive?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yes.

Unknown speaker

from an operating margin perspective?

Mike Stornant -- Senior Vice President and Chief Financial Officer

It is both from a gross margin, gross profit standpoint and in operating margins.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Remember this is a distributor that we operated on a fairly lean margin top-line basis in the past. And obviously, now is operating as a subsidiary business with full margin and a very healthy operating margin.

Unknown speaker

Great. Thank you. And can you guys just discuss a little bit, I know you are opening some new stores. Can you just discuss the performance of those newly opened stores and just comps in general for your sandal stores?

Mike Stornant -- Senior Vice President and Chief Financial Officer

As far as the performance is concerned many of the stores that we are referencing in the back half guidance are not opened yet. So we did open nine stores in the second quarter mostly Sperry outlet stores in very strategic outlet locations that we felt were right for the brand. But I would say, early reads on those stores have been very good. And it's a little bit too early to call it either way but we like to start and we see a -- we've taken a similar approach for both Sperry and Merrell outlets stores in the back half of the year.

Our expectations there are pretty modest as it relates to store openings but we are excited about the early reads on the nine stores we've already opened.

Operator

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

Unknown speaker

Hi, guys. This is Erick calling for Erin this morning. Thanks for taking the question. First, I was just curious, in an average year how much of your second half business is at-once and is there a way to quantify what you are planning it to be this year if you can.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah, we don't give that level of detail. It's so dynamic, right, every brand is quite a bit different and there is -- the different parts of our international business grow ebb and flow, if you will, that changes. But obviously Q3 is much more of a kind of a futures-oriented selling quarter for us. And so the demand there is more around future orders.

And when we talked about being more conservative, if you will, or cautious around our at-once demand, it really more impacts the fourth quarter, which is more reliant on reorders. So not a significant increase necessarily in Q4 but certainly more impacted by sell-through trends, seasonal implications around weather or anything else. So that's where we put a little bit more of our conservatism in the outlook for the back half of the year.

Unknown speaker

OK. That's helpful. And then on Chaco, I know it's little softer again in Q2. We're seeing some digital promotions, extremely fairly aggressive year of late.

We are just curious if you can provide any more context on what's going on there? And then how you are planning that business for the full year or maybe compared to how you were say, 90 days ago?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah, Chaco primarily a sandal brand and a premium-priced sandal brand certainly had a bit of a challenging first half to the year given the weather and the slow start to trading this year. It is seeing some off-price pressure at the moment as excess stock is cleared. They've taken some corrective actions for next year. Recall that Q1 and Q2 are really the big quarters for the Chaco business.

So they've got several new collections coming to market next year that are going to be priced under $100. And they're going to certainly have more of a good, better, best product offering than they've ever had. We think that will smooth out some of the volatility we've seen in the business this year.

Mike Stornant -- Senior Vice President and Chief Financial Officer

I would say too, they did have some of that product this year. I would say not enough obviously to offset the challenges with these sandals but where they did have products in those price points for new offerings, the sell in and sell-through and the success online was very strong. So I think that's a good indication of the opportunity for that category or that expansion of different categories into next year.

Operator

Our next question comes from the line of Ross Licero with Telsey Advisory. Please proceed with your question.

Ross Licero -- Telsey Advisory -- Analyst

Hi, thanks for taking my question. Just wanted to get a little bit more color on the gross margin guidance for the back half of the year, what's driving the lower outlook?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Well I think, for us the gross margins are going to expand nicely in the back half of the year. The overall, I think, pressure in the first half was a little bit more difficult. And that's where I think the overall guide for the year brings our margin rate kind of in line with last year kind of flattish the last year. But we're still seeing nice expansion in gross margin in both Q3 and Q4.

We've got much of the promotional and sort of inventory risks reserved for or already experienced in the first half of the year. We are going to see that improve in the back half. Sperry, with all the momentum we have there and the strong growth that we are going to see in the back half of the year, their boot business is very profitable, high-margins. And that's good to see.

Our gross margin for stores and e-commerce obviously, are higher than our wholesale margins. And that will become a bigger part of our overall business in the back half of the year. The Chaco business, frankly, the headwinds are -- that we just talked about with respect to Chaco, all of that really isolated in the first half of the year. So, we saw some gross margin pressures in H1, inventory, promotional, some of the things that we talked about to make sure the channel was clean.

We did take some aggressive approaches to move through and try to drive some at-once demand, but also to move through some inventory. We see that being behind us now, and with stronger results expected and projected for the back half of the year based on those factors.

Ross Licero -- Telsey Advisory -- Analyst

Got it. So from a gross margin perspective, really no change to the back half in terms of the promotional environment?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Right.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah. We're still being cautious there, just like we were with that once in replenishment demand. We're being somewhat cautious on that side of the business. So a little bit of a reduction, if you will, in our mix expectations and fill ins.

Our fill in orders are always the highest margin wholesale orders we get, because it's merchandise coming out of our inventory, and we tend to get the highest margin there. So as we drive that down as a percentage of our mix, it has a slight impact on gross margins, but those are already reflected in the outlook, which is still very strong.

Operator

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

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

Yeah. Hi, guys. Thanks for taking my question.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Good morning.

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

First, just [Inaudible] Merrell, I think on the last call you talked about an online retailer, maybe overstepping, you needed to take some brand protection actions, have those issues been worked through?

Blake Krueger -- Chairman, Chief Executive Officer, and President

In a word, yes, they have. And so we're back on expected business relationships and practices with that particular retailer.

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

Got it. And then just coming out about the retailer a little over a month ago. What were your takeaways from your retail partners as we enter the back half, just around your product or their expectations from you?

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah. I would say, the reaction was very positive across the range, both performance and lifestyle. So the new product offerings in the hike category, light hike category, trail running category where Merrell continues to gain share were frankly all positive. And then on the lifestyle side, the Range, the sustainable product Gridway continues to get shelf space.

So really it was quite positive across the whole range.

Operator

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

Laurent Vasilescu -- Macquarie Research -- Analyst

Good morning. Thanks for taking my question. And thank you, Mike, for all the color on the third-quarter and fourth-quarter guidance. Based on the gross margin and operating margin metrics given, it looks like we should see some nice leverage around SG&A.

What's driving that? And then for the remaining investments around the global growth agenda, which I think is about $19 million for the second half. Should we think about that $19 million equally spread between 3Q and 4Q?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah. Essentially on that last part of your question, Laurent, yes, it's pretty well straight line through the back half of the year. I think it's important, right -- I mean, we obviously are looking at the business every month, adjusting our discretionary spending where we can. And as a corporate team here, we're obviously keeping a very close eye on that.

And because we do that, I think it gives us a lot of opportunity to be proactive, and we've made some adjustments to our spending in the back half of the year. But obviously the stronger growth SG&A as a percent of revenue improves the leverage there really comes off our ability to leverage what is essentially going to be organic 5% growth in the back half of the year. And a large portion of our overall spend being on a fixed basis. So part of it is an adjustment to our planning in the back half of the year, trying to be sensitive and proactive around any revenue risk that we see in the business.

And I think fundamentally, it's our operating model and our ability to leverage SG&A when we have growth like this.

Laurent Vasilescu -- Macquarie Research -- Analyst

Thank you, Mike. And then my question is on Merrell. We've seen pretty different growth rates by quarter. Forgive me if I missed this, but when we expect high single-digit growth in 2H '19, especially with the comparers, I think they get tougher in the fourth quarter.

How should we think about the growth between the third and the fourth quarter? And I know, you -- maybe just a little bit high level on that would be great.

Blake Krueger -- Chairman, Chief Executive Officer, and President

Yeah. I mean, for Merrell, right now, when we look at the order book and a few other factors, we're looking at high single digit growth in Q3, and we're also looking at balanced high single digit growth in Q4. So for Merrell, there isn't a big swing between the quarters, high single digits both quarters.

Laurent Vasilescu -- Macquarie Research -- Analyst

OK. Thank you very much for that. My last question. I think in the first-quarter 10-Q, the Boston group showed a 10% decline and also but an 18% increase in DTC.

How did those numbers shake out for the second quarter? And how should we think about those numbers for the third quarter and the full year?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yeah. I think for the whole business, Laurent, we're obviously seeing accelerated growth in our DTC businesses. That's going to continue into the back half of the year, not just for the Boston group, but for all brands, right. We had 25% DTC growth.

We're adding stores. That will continue to be a bigger contributor to our overall growth at those growth levels as we go forward. And the guidance kind of reflects 20% growth in our e-commerce business in the back half of the year for our portfolio, not just Boston, and some incremental revenue coming from that the addition of new stores.

Operator

Thank you. We have reached the end of the question-and-answer session. Mr. Harris, I would now like to turn the floor back over to you for closing comments.

Mike Harris -- Vice President, Corporate Finance

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 September 7, 2019. Thank you, and good day.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Mike Harris -- Vice President, Corporate Finance

Blake Krueger -- Chairman, Chief Executive Officer, and President

Mike Stornant -- Senior Vice President and Chief Financial Officer

Jim Duffy -- Stifel Financial Corp. -- Analyst

Chris Svezia -- Wedbush Securities -- Analyst

Jonathan Komp -- Robert W. Baird -- Analyst

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Unknown speaker

Ross Licero -- Telsey Advisory -- Analyst

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

Laurent Vasilescu -- Macquarie Research -- Analyst

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