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Wolverine World Wide (NYSE:WWW)
Q4 2019 Earnings Call
Feb 25, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings and welcome to the Wolverine World Wide, Inc., fourth-quarter fiscal 2019 results call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Paul Feyen.

Paul Feyen -- Vice President

Good morning and welcome to our fourth-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 fourth-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 Q4 2019 Conference Call Supplemental Tables that will reconcile these non-GAAP disclosures to GAAP.

The document is also 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 and a settlement, business development related expenses, reorganization costs, foreign exchange rate changes, and the estimated impact of the coronavirus. 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 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, Paul. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported strong fourth-quarter revenue growth of over 5% on a constant-currency basis, which marks our highest quarterly growth rate of the year. Our two largest brands, Merrell and Sperry, each delivered mid-teens growth.

Our team's excellent performance against each pillar of our global growth agenda drove this success: the compelling new product stories for our key brands, nearly 21% growth from our owned e-commerce platform, and over 10% growth in our international markets with growth across all regions. Q4 revenue growth drove record adjusted earnings per share of $0.59, a 13.5% increase over last year. We're extremely pleased with these results, which reflect the strength of our brand portfolio, excellent effort and execution by our teams and these solid progress against our global growth agenda. For today's call, I'll provide some additional details on our Q4 results, and we'll also provide more insight on how we are driving our growth agenda to deliver accelerated growth over the next two years.

Mike Stornant will then provide additional details on the fourth-quarter and full-year financial results. He will also cover our initial financial outlook for 2020 and touch on the impact of the tariffs and the coronavirus. Starting with the Wolverine Michigan Group. Q4 revenue increased a strong 7.7% compared to the prior year and 8.1% on a constant currency basis.

Merrell and Cat were both up mid-teens in the quarter. These gains were partially offset by a decline from the Wolverine brand and some of our smaller brands. Merrell's strong quarterly results were led by growth in all regions, including the U.S. Overall, the wholesale, e-commerce and retail store channels we all saw year-over-year gains.

For Merrell, growth came from both the performance and lifestyle product category, led by exceptionally strong performance in Hike, where the brand holds the No. 1 U.S. market share position. And Work, the brand's fastest growing category, which grew nearly 50% in the quarter.

Nature's Gym, the brand's most athletic expression category which includes the Nova and the Antora collection for progressive trail running style, also posted nice gains in the quarter. And the important Lifestyle category grew as well driven by success in new collections like the Alpine Sneaker, Juno Clog and Hut Moc. The brand continues to aggressively pivot to our digital direct channels as evidenced by the growth of the online consumer direct business of its wholesale customers and accelerated growth for merrell.com, which was up nearly 25% in Q4. Merrell stores also performed well in the quarter with comp store sales up mid-single digits.

We expect Merrell's momentum to continue into 2020. Cat's increase in the quarter was driven by strong international growth in EMA and in Latin America regions and robust growth in e-commerce, which grew almost 55%. The CODE collection launched in the third quarter is the brand's largest product launch ever and has been received very well by consumers. New color offerings for CODE helped fuel continued momentum and the new Arctic Grip boot program also helped drive Q4 growth for Cat.

The Wolverine brand's results were down mid-single digits in Q4, but would have been slightly up except for lower sales to a financially challenged U.S. retail customer. This was partially offset by high single digit growth in e-commerce and robust growth in the Wolverine apparel category. Moving to the Wolverine Boston Group.

Revenue for the Boston Group was up 1.3% compared to the prior year and up 1.5% on a constant currency basis. Sperry had a very strong boot season and delivered mid-teens growth, and Keds delivered low single-digit growth. And as expected, this growth was partially offset by Saucony, which declined at a low double-digit rate due to significantly lower closeout sales. Sperry delivered its highest quarterly growth of the year driven by increases across all channels and with 50% growth in the boot category.

The brand's growth in boots outpaced the market resulting in Sperry becoming the U.S. market share leader in the reboot category. Sperry's e-commerce business was up nearly 20% in Q4, primarily driven by increased traffic and improved conversion, as the brand continued to elevate its storytelling, product exclusives and other investments within this important channel. Sperry store revenue was up over 60%, spurred by our stores, improved conversion and a high single-digit increase in comp store sales.

We're pleased with the momentum in Sperry business and expect continued growth in 2020, driven by the John Legend partnership and new product offerings. Saucony's recovery has turned the corner with growth in the brand's core technical category, up nearly 10% due to excellent consumer reaction to new performance products. This healthy growth was muted by significantly lower closeout sales related to the brand's accelerated full price performance at retail. Saucony's healthier mix and focus on more profitable distribution resulted in nearly a 700 basis point improvement in gross margin in Q4.

The brand also continues to benefit from very good e-commerce performance with growth of 25% in the quarter and over 37% growth for the year. The e-commerce channel benefited from the brand's digital direct investments and increased traffic. During the quarter, Saucony also launched two new technical running shoes, the Triumph 17 and the Guide 13. Both utilize the brand's new power run midsole cushioning technology, which provides enhanced flexibility, fit, durability and energy return, while weighing a third less than comparable models.

During the quarter, Saucony received several industry awards across the road and trail running product categories which related to the introduction of new franchise models. Just this week, the Triumph 17 won this prestigious Editor's Choice Award from Runner's World. We are very encouraged by the momentum in the Saucony business and the incredibly strong pipeline of new performance and lifestyle products planned for 2020, where we expect to see strong double-digit growth. Turning to our growth agenda, the strong Q4 results underscore the growing effectiveness of our global growth agenda, which is focused on a faster and more innovative product creation engine, a modern consumer-driven digital-direct DTC offense and steady growth in some key international markets.

The 2019 second half performance of Merrell, Sperry and Saucony, up nearly 10% on a combined basis, reflects our team's excellent execution against this agenda. The investments in our owned e-commerce business helped deliver growth of over 20% across the brand portfolio for the year with a meaningful improvement in operating margin. Capital investments made in 2019 for new stores in the acquisition of a distributor in Italy, and in our China joint venture totaled approximately $35 million and to better position the company for future growth. Our global growth agenda is focused on three primary elements.

First, market-leading product and compelling product marketing stories. In 2019, we've recruited a chief merchant officer that supplement the efforts of individual brands, help lead innovation and elevate our product creation process. This new role also oversees our centers of excellence for consumer and market research and advanced innovation concepts, with an emphasis on driving deeper and deeper consumer insights, increasing our learnings from big data and enhancing our trend analysis. We are excited by the 2020 pipeline of on-trend and innovative product offerings across our brand portfolio, which includes the Saucony Endorphin, Sperry PLUSHWAVE, Merrell Antora and Nova, Wolverine Hellcat and Chaco Chillos collections.

These new products are supported by powerful marketing stories that are more prominent in our digital channels. The second pillar of our growth agenda is focused on our digital-direct DTC offense. For us, this means leveraging our commercial platforms and optimizing demand creation investments across all channels distribution, especially own DTC channel. In today's marketplace, digital and social engagement with the consumer drives brand heat, search interest and growth.

Our owned e-commerce channel, which has averaged approximately 20% growth over the last three years, is expected to continue to be the highest growth channel for our company over the near term and is expected to generate at least $100 million of incremental revenue over the next two years. Our efforts related to digital content creation will also help drive online growth with pure play e-tailers and our traditional customers who have also experienced accelerated growth in the digital direct channel. Finally, the third pillar of our global growth agenda is focused on international expansion. We have a long track record of driving success and growth on a global basis through a variety of business models.

Today, about 34% of our global revenue is generated outside the U.S. and over 50% of our pairs are sold outside the U.S. We will continue to partner with our current international distributors to drive growth, but we'll also focus on exercising more direct control over select global markets to enhance the global reach and pull of our brands. We believe our international business will add $150 million of incremental revenue over the next two years.

The foundation we built over the last several years to drive the business has never been better. We own one of the strongest brand portfolios in the footwear industry and have an efficient operating platform and sufficient scale to drive innovation and speed. We have a strong balance sheet and a profitable operating model that provides us with this flexibility to invest in growth while creating value for our shareholders. Let me spend a few minutes providing our current view of the dynamic coronavirus situation.

Our first priority is the safety and well-being of our employees and partners in China. And we are making every effort to support them. From a business standpoint, we separate our emerging impacts of the coronavirus into two buckets: revenue and supply chain. As it relates to revenue, while the China market is a significant unlock in our international growth strategy, we are still in the early stages of development to generate in-country revenue.

And our estimated revenue exposure from China is relatively insignificant, less than 2% of our total 2020 revenue is planned to come from China. The broader Asia Pacific region represents less than 10% of our global revenue, and we know that very low retail traffic in China and other markets, coupled with also reduced tourism activity in the region will likely have a meaningful impact on certain countries in the short term. We have also assessed the global supply chain implications for products produced in China and nearby countries. We are very fortunate to have greatly reduced our reliance on China's sourcing over the last five years.

However, we expect some production delays from China factories and a potential slowdown in the supply of some raw materials sold by China vendors to manufacturers outside of China. This is being closely monitored, but will be difficult to quantify until our factory partners have more clarity on the return of workers from Chinese New Year. And so far, the return rate of workers to factories has been better-than-expected and is not expected to have a material impact on production in Q1. None of our factories are in the Wuhan region.

Mike Stornant will provide more details on how this situation could impact our financial results and the flow of revenue growth in the first half of the year. We currently estimate that the first half revenue impact could be up to $30 million, the first half profit impact could be up to $10 million. While this impact is relatively insignificant compared to the overall size of our business, this remains a very fluid situation. We will continue to work closely with our international teams and sourcing partners to mitigate the impact of the coronavirus, but recognize the situation is really dynamic and subject to change.

In summary, we are very pleased with the momentum and performance of our brands in the fourth-quarter and our strong finish to the year. We are confident in the strength and diversification of our brand portfolio, and most importantly, we're seeing positive results related to the implementation of our global growth agenda. With that, I'll now turn the call over to Mike Stornant, our senior vice president and chief financial officer, who will provide some additional commentary on our fourth-quarter and full-year financial performance along with the initial outlook for 2020. Mike?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Thanks, Blake, and thank you all for joining us. We're very pleased with fourth-quarter growth of 5%, especially in light of relatively weak U.S. retail conditions, the impact of one key work boot customer and some delivery delays for our international business late in the quarter. Our diverse portfolio, this broad geographic reach and multiple distribution channels allowed us to deliver a strong quarter.

As Blake noted in his comments, our two largest brands delivered mid-teens growth. Our own DTC businesses grew nearly 25% and our international businesses grew over 10%. Gross margin for the fourth quarter of 37.8% was lower-than-expected entering the quarter. This was due mostly to higher-than-expected closeout sales and our retail promotional activity during the holiday season, which helped us to reduce our inventory and improve inventory positions at most retail channels.

A shift in mix across brands and regions coupled with FX trends also negatively impacted the quarter's gross margin. We did see nice gross margin expansion for Saucony, e-commerce and stores. Adjusted selling, general and administrative expenses of $168.1 million were significantly lower-than-expected despite a higher year-over-year increase in advertising to support DTC growth and our new business in Italy. The lower quarterly expense structure was a result of disciplined expense management and lower year-over-year incentive compensation costs.

As a result of these factors, adjusted operating margin was 10.1% in the quarter. The adjusted effective tax rate was 8.7% versus 11.8% in the prior year and benefited mostly from lower state income tax expense and other discrete items. Fourth-quarter adjusted diluted earnings per share were $0.59, a record for the fourth quarter. During Q4, the company resolved two meaningful litigation matters that are related to its legacy tannery operations.

Net cost of $58 million were recorded in Q4 related to settlements with the state of Michigan, two local townships and the 3M company. The reported loss per share was $0.01 and includes these settlement costs and other nonrecurring items. For the full year, revenue of $2.27 billion represent the constant-currency growth of 2.3%. Full-year adjusted operating margin was 11.5%.

Net interest and other expenses for the year were $25.1 million and the adjusted effective tax rate was 15.7%. Full-year adjusted diluted earnings per share were $2.25, a record result for the company. Our full-year reported earnings per share were $1.44 reflecting the litigation settlements noted above and other one-time charges. Our operating model has consistently generated healthy cash flows and in 2019, we generated over $220 million of operating cash flow, which now includes $35 million of cash spent on legacy environmental matters.

Given our strong balance sheet and further cash generation, we continued to invest in organic growth throughout the year, which directly benefited the accelerating DTC businesses and momentum of our biggest brands. Now let's turn to our balance sheet. As discussed in prior quarters, we built up our inventory position throughout the year to mitigate the impact of potential new tariffs, support our new Saucony Italy business and stock our new stores for the holiday season. Strong growth in the fourth quarter, coupled with proactive closeout liquidations, allowed us to reduce inventories down to normalized levels.

As expected, inventory was up less than 10% over the prior year, but up only 5% when adjusting for the impact of our new stores, the new Italy business and the incremental cost of higher tariffs. This improved inventory position helped contribute to strong cash generation in the quarter and also reduces our markdown exposure in 2020. We ended the year with net debt just under $618 million, which was up versus the last year as we strategically deployed capital to enhance shareholder value, including $320 million of opportunistic share repurchases, $34 million in dividends paid to shareholders and $35 million of strategic capital investments to drive growth. At the end of 2019, our bank-defined leverage ratio was 2.05 times, down nicely from the previous quarter.

Total liquidity was approximately $1.3 billion. The company has significant flexibility to execute future actions to drive total shareholder return and we expect that our leverage ratio will improve throughout 2020. We are encouraged by this strong finish to 2019, with resulting accelerated revenue growth, very good earnings leverage, strong cash flow and a healthy balance sheet. Now let me shift to our 2020 outlook, including the estimated impact from two important topics, China tariffs and the current coronavirus health crisis.

Despite some positive U.S.-China trade negotiations in Q4, the footwear industry will still incur significant new tariff costs on U.S. imports from China during the 2020. Less than 20% of our U.S. imports will be sourced from China in 2020.

And our transition of production to other source countries remains on schedule. Despite our proactive efforts, we still expect to incur about $15 million in incremental costs associated with this trade dispute, including $12 million of incremental tariff expense and $3 million of discrete China migration costs. This 2020 cost includes about $5 million due to incremental tariffs that were incurred on product at the initially higher 15% rate in 2019, but won't be expensed until this inventory is sold in Q1 of 2020. Our sourcing teams continue to work on initiatives to minimize these costs, while our brands have selectively implemented price increases throughout the year.

As Blake noted, the coronavirus crisis is a developing situation, reduced reliance on China sourcing and relatively small commercial exposure to the China market will help limit our direct risk related to this issue. Our healthy inventory position on core products should also help to mitigate the near-term exposure, especially for our wholesale and own DTC channels. However, this is a dynamic situation and the future implications are difficult to fully measure, especially beyond the first half of this year. The present estimated impact on first half revenue of $30 million and pre-tax profit of $10 million is incorporated into our full-year outlook, which I will cover now.

The strategic investments made in 2019 bode well for our global business moving forward. These drove progress in key areas, including accelerated momentum for our largest brands in the back half of the year and strong full-year performance in DTC businesses. The key regional investments made in Europe and China will support ongoing international growth. We're well positioned for our future and we have refined and prioritized investments focused on the key pillars of our global growth agenda.

We have a midterm goal to grow our own DTC businesses to 30% of global revenue as we also continue to leverage the investments made in our e-commerce platform and mono-brand stores. We are also committed to annual double-digit growth from our international businesses over the midterm, as we leverage investments in Europe and Asia Pacific and look to other markets for further expansion. And we will prioritize our biggest brands and expect to see consistent growth from Merrell and Sperry and a much stronger growth path for Saucony as the brand accelerates its recovery. While the prospects for growth in 2020 are very promising, our outlook is tempered by the first half headwinds from the coronavirus situation and some continued softness in the U.S.

wholesale channel. We expect 2020 reported revenue to be in the range of $2.29 billion to $2.34 billion, including $30 million of negative first half impact from the coronavirus and $10 million in negative impact from foreign currency. This represents constant currency growth of almost nearly 3.5% at the top end of the range. The most prominent growth drivers for 2020 include, 20% growth from our global DTC business, 5% to 10% growth from our international markets despite the negative coronavirus implications and 4% to 8% combined growth from our three largest brands, Merrell, Sperry and Saucony, supported by a strong global recovery from Saucony.

Gross margin is expected to be approximately 41%, up 40 basis points versus last year. Strong improvement despite approximately $30 million of cost headwinds from three key areas and including $15 million of incremental costs related to higher tariffs and China migration costs, $10 million related to foreign currency and $5 million related to a significant increase in ocean freight surcharges. We plan to offset these headwinds with lower negotiated product costs and strategic increases that will be most prominent starting in June of this year. Total adjusted selling, general and administrative expenses as a percentage of revenue are expected to be roughly flat to up slightly compared to the prior year.

This includes over $20 million of increased costs related to incentive comp and employee benefit costs of nearly $20 million in additional costs related to new stores, the full operation of our Saucony Italy business and ongoing investment in our China joint venture. We will also increase investment in our global e-commerce platform. Adjusted operating margin is expected to be approximately 12%, representing a 50 basis point improvement over last year. Reported operating margin is expected to be approximately 11%, including and an estimated 15 million for legal and consulting cost to manage the company's legacy environmental matter.

We also expect 2020 net interest and other expenses of approximately $31 million. The effective tax rate is expected to increase to approximately 19%, and diluted weighted average shares outstanding are projected to be approximately 82.5 million shares. The ratio of net earnings available for EPS is expected to be 98%. Full-year 2020 adjusted diluted earnings per share are expected in the range of $2.25 to $2.40, 6.5% growth at the top end of the range, which represents strong leverage on planned revenue growth.

Excluding approximately $0.10 from FX and $0.10 from the coronavirus impact, full-year adjusted diluted EPS would be projected in the range of $2.45 to $2.60 or growth of 15.5% at the top end of this range. Reported diluted earnings per share are expected in the range of $2.05 to $2.20. Our balance sheet position is very good entering the new year, and we expect another strong year of cash generation in 2020. Operating cash flow is projected to be approximately $240 million, up from $220 million in 2019.

Based on the recent litigation settlements noted above, we've included an information table on our website covering related multiyear cash flow projections. In 2020, we expect a positive cash impact of approximately $13.5 million related to these settlements. Also, we expect that our bank-defined leverage ratio to be under 2x at the end of the year. Capital expenditures are expected to range between $30 million and $35 million, with depreciation and amortization forecasted to be approximately $34 million.

Before we conclude, let me update you on our outlook for Q1. Solid mid-single digit combined performance from Merrell, Sperry and Saucony will once again be the highlight of the quarter, supported by 20% growth from our DTC businesses. However, the impact from coronavirus will result in flat Q1 revenue for our international business. In addition, some of the Q4 softness in the U.S.

retail market has continued into Q1. As a result, we expect revenue in the quarter to be approximately $500 million, including an estimated $15 million of direct impact from the coronavirus health crisis. We expect gross margin of approximately 41% and operating margin of the approximately 8%. First quarter earnings per share are expected to be $0.30 to $0.32.

This now reflects certain headwinds that will moderate in future quarters, including $0.05 from the coronavirus health issue, $0.05 from higher tariffs, $0.03 from higher incentive compensation and employee benefit costs and $0.03 from FX. Our revenue outlook for Q2 is much stronger, and we are projecting mid-single digit growth after factoring in the coronavirus impact of approximately $15 million. In closing, I want to emphasize that growth continues to be the primary focus and our leadership team remains incredibly focused on executing the initiatives and activities that will allow us to accelerate that growth. The progress we are seeing within our largest brands and our DTC and international platforms is evidence that the model is working.

And we will continue to be disciplined in managing the operating cost of the business and working capital which will position the company well as we further execute on our global growth agenda, leading to earnings that leverage and increased cash flow generation. Thanks for your time this morning. And we will now turn the call back over to the operator.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first questions come from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Good morning, guys.

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

Good morning.

Jim Duffy -- Stifel Financial Corp. -- Analyst

A couple of questions for me. Mike, to start, looking forward to comparisons in the fourth quarter of '20. Can you speak in more detail around the specific of growth margin pressure during the fourth quarter. You had strength in direct to consumer and international, which I would think would be a benefit.

How much tariff impact did you see in the quarter and can you size the impact of the clearance in promotional support?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yes, most of the downside in margin in Q4, Jim, was really driven from the closeout pressures that we saw in the business. As you know, we entered the quarter with our inventories kind of at an elevated level for a lot of reasons cited earlier. We felt like we needed to take advantage of the quarter to move through that inventory, especially on any seasonal items that we would have had to clean the pipeline for 2020. I would say that we had strong at-once performance early in that quarter, and that sort of deteriorated as we got closer to the holiday season.

And as we saw that demand start to decline, we emphasized the closeout channel and moved through the inventory. So positions us really well for first quarter margin improvement. And in terms of markdown exposure at retail, we also think we've limited that by adjusting and reserving for that in the fourth quarter. So most of the impact in the quarter was related to that.

There was some tariff and FX impact in Q4. And it was a couple of million dollars on both of those items that we experienced in the quarter. And as it relates to 2020, we would expect less pressure on the closeout side and certainly on the promotional side, as we think about Q4 margins for 2020.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. And then as it relates to the SG&A guidance, you spoke to incremental expenses, $20 million incentive comp, $20 million incremental for stores. Where are the areas where you're finding savings to hold the SG&A flat as a percent of revenue in the guide?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yes, some of the organizational changes and just areas of focus for us in the back half of 2019 were really on continuing to look for efficiency within the SG&A category of spend for the company. I think we've been successful at being able to do that. I'm really pleased though that we haven't also really suffered in terms of the advertising or demand creation investments that we've made. We talked about $40 million invested in growth initiatives in our original plan for 2019, and we were able to spend about $38 million of that in the full year.

So we really were able to find savings or improvements in some other discretionary areas without impacting the investments that we were committed to for demand creation and growth. Especially on the e-commerce side, Jim, and as we got more momentum within the international platform as well. So -- but we are -- as you know, we continue to look at our cost structure globally. We have a really complicated organization.

And so we -- and I think we've done a good job of continuing to look for efficiencies there over the course of the last six to nine months.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Thanks, Jim.

Operator

Our next questions come from the line of Jonathan Komp of Baird & Company. Please proceed with your question.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

Yes. Hi. Thank you. Maybe first, Mike, just a clarification. I think in the prior response on gross margin, you talked about being well positioned for the first quarter.

I just wanted to make sure I heard that correctly since it looks like you're guiding down gross margins, so maybe there's some mix or other impacts going on?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yes. No, I think for -- in terms of the improvement on from Q4 to Q1, though, I think we're going to get more into a normalized level of gross margin for Q1, Jon. The big impact for us in the first quarter is sort of the carryover of the higher tariff costs in Q1 that will be related to our inventory that we bought in the latter part of 2019. Some of that was purchased at the higher tariff rate of 15%.

As you know, that didn't get adjusted down until December. And also so we've got a little bit of a timing issue there for Q1. But if you separate out the tariff impact from the first quarter, our mix is healthy. We're going to see -- we continue to see strong margins from our DTC business, and then Saucony, which is going to be our biggest brand in terms of growth in Q1, we'll continue to improve their gross margin in Q1 as well.

So really and, I think, for Q1, it's a little bit of FX and tariffs that are modestly impacting the margin expansion. But otherwise, we feel like we'll get back to normal. As we think about the back half of the year in gross margins and sort of stronger gross margin performance in maybe Q3 and Q4, it will really be off the benefit of those tariff costs we're moderating a bit from a comparative standpoint, and we won't start really seeing the true benefit from price increases until June or so. So the combination of that and now -- this is also the stronger mix as our DTC business continues to accelerate throughout the year.

Those will be the factors that will allow us to see gross margin expansion strengthen in the back half of the year.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

OK. Great. That's helpful. And then maybe bigger picture, just kind of the state of the business in terms of where you expect it to be from the global growth agenda.

And when you look at 2020, as a whole, just curious kind of where you stand across the brands in terms of driving growth? And I know 4.5% kind of at the top end, adjusted for some of the factors is getting back to mid-single-digit growth, but just curious how you're viewing the state of the business relative to where you expect it to be growing.

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

Yes, I think we're -- Jon, I think we're in a pretty good place, setting aside coronavirus for the moment. We had a balanced growth in 2019 across the region. We actually grew in every region in Q4 and every region for the year. We expect a little more volatility in that this year depending on where this coronavirus takes us.

I would say that with respect to consumer sentiment that remains fairly positive, we're seeing a little bit of a decrease in GDP growth across the world. In the U.S., I think the consumer volatility remains. There continues to be a shift to online, a shift to mobile. People seem to be making a fewer -- and a few less trips to the malls, to stores.

But we see a pretty balanced approach to 2020. With respect to our brands, we expect Saucony simply to have a blockbuster year. In 2020, we expect Merrell to be up mid-single to -- digits to high single digits, and we expect mid-single-digit growth from Sperry. So good all-round performance by our biggest brands for sure.

I would also say we expect pretty good performance from the DTC business. We had our store comp growth that really started in Q4 and Q3, has continued into this year as long and as well as in our e-com growth. I think e-com growth year to date in 2020 and store comps are up over twice that of the industry as a whole. So we feel pretty positive there.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

OK. Great. Then maybe just lastly, quickly on coronavirus, just curious if you're willing to share any detail on kind of the current delays or number of days you're getting quoted by some of your factories, and just how to think about the key windows over the next weeks or months going forward? And also if any of the specific brands are concentrated more or less in China? That would be helpful.

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

Yes. I mean, we don't really -- on the supply chain side, we really don't see an impact in Q1. People took off for Chinese New Year. It's only 20% of our imports in any event from China into the U.S.

or globally. So people seem to be returning from Chinese New Year. China government has been very aggressive here and that seems to be paying dividends. Most of our factories are -- in most of our key product lines are dual sourced.

Few remain in China, but most of them are outside of China. As we look to Q2 and beyond, we're trying to anticipate the impact right now, and we're working on some raw material substitutions in the event the coronavirus situation continues to accelerate. But on the supply chain side, not much of an impact in this first half.

Mike Stornant -- Senior Vice President and Chief Financial Officer

I would say, on the last part of your question, Jon, too, as far as the brands that are most exposed to the China production, it's in specialized categories like vulcanized shoes and some of our more technical work boot product that's moving a little bit later. So that would impact Keds -- our Keds business to a certain degree, Sperry on their vulcanized products and some of the Wolverine and -- mostly Wolverine technical product. But I think, frankly, a little bit ahead of schedule on moving production out of China. And I think from that standpoint, it's good.

But as Blake said, the other key part of this is making sure that we also have raw material suppliers outside of China too, and our sourcing team has been working on that for several months, just in line with the manufacturing migration that we're making there. So we feel relatively good about that but certainly, a challenging situation for the industry.

Jonathan Komp -- Robert W. Baird and Company -- Analyst

Understood. That's all helpful. Thank you.

Operator

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

Chris Svezia -- Wedbush Securities -- Analyst

Good morning, everyone. Thanks for taking my questions. I guess, first, just to go to the commentary about mid-single-digit growth in Q2. I guess, just the confidence level in getting to that growth.

Typically it's more of an at once quarter versus Q1 and Q3 is more futures based. So just curious of the visibility there. I just remember, next year, there -- last year, there was some color about accelerating growth in Q2, it didn't necessarily develop. So I'm just curious about your confidence, what you're seeing in the order book, etc., to get to that level of growth in Q2, and what that might mean as you go into the back half?

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

Yes, I would say, it's based on a couple of things. One, our current view of the order book, which reflects and supports that expectation for Q2 and also the continued performance of our DTC channels, stores, and e-commerce are exceeding our -- at the moment, year to date, they're exceeding our plan. So that also gives us some confidence as we enter into the second quarter.

Chris Svezia -- Wedbush Securities -- Analyst

OK. OK. And I guess, you anticipate the international business to improve as well as you go into -- I think in Q1 you referenced international being flat. I guess, you anticipate international to improve in Q2 as well?

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

Correct. Right.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Obviously, the biggest headwind in the first quarter, Chris, is U.S. wholesale. We've got some specific categories for us. And the weather hasn't been necessarily helpful to our boot business, whether it's lifestyle or work boots.

And that -- those are usually important in the first quarter and in terms of U.S. wholesale performance. That will be less of a headwind for us in Q2 as well. So that's important to know.

And we see some improvements in our Chaco business in Q2. The first half of the year is important for Chaco. Q1 is more challenging for that brand, lower closeouts for one, but overall, they're still repositioning their new product line into the market. So the demand for that, we see improving in the second quarter.

So that's another contributor. And overall, the focus here continues to be moderation within the U.S. wholesale channel.

Chris Svezia -- Wedbush Securities -- Analyst

OK. Got it. Second question, just on the -- you laid out $100 million for e-commerce over the next two years, $150 million in revenues over the next two years on the international side. Based on the guidance you've given for this year and what it implies for 2021, and then I think the guidance there is pretty big improvement for 2021.

I guess, what are the offsets? How should we think about what those are, and how that kind of plays into that thought process for 2021 over in that two-year period?

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

Well, I guess, the $100 million for e-commerce is really just a continuation over the next two years of around 20% growth. On the international side, again, setting aside the coronavirus, this was going to be a foundational year in China for our XTep joint venture. Obviously, and we're not going to proceed with the original planned pace of store openings, but that's going to probably be delayed a little bit, hard to have a lot of visibility to that at the current moment. And so we've got a number of initiatives on the international front that are going to deliver the growth over the next two years.

I would say that the main offset is our current view of U.S. wholesale. So we're taking a cautious current view of the U.S. wholesale business.

We see retailers pushing back a little bit on orders and in the risk-taking given some of the volatility that existed in Q4, and it's continued into Q1. So that would probably be a bit of an offset to what we see is pretty robust growth in DTC. So, even strong growth in the EMA region. Even though we have Brexit looming and some dire predictions there, the EMA region for us remains very strong, driven primarily by Merrell and Saucony, and now we expect that to continue.

Chris Svezia -- Wedbush Securities -- Analyst

OK. And last one for me, just real quick. Just on the buyback, Mike. Just curious, you ended the year with a share count of roughly, call it, 80 million, 81 million.

The guidance assumes 82.5 million for 2020. Just kind of how we think about the buyback? What's employed and why -- why such an increase in the fully diluted share count, stock options, etc.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yes, the share count on the loss calculation is slightly different, Chris, than the count would be on the adjusted results. So you would use about 82.6 million shares in the fourth-quarter calculation for adjusted EPS, which is in line with the guidance for next year. So we typically guide to stock buybacks and that will kind of offset any dilutive impact from share grants and things that happen naturally in the course of the first part of the year. So no significant buybacks we incorporated into our outlook.

Chris Svezia -- Wedbush Securities -- Analyst

Got it. OK. Thanks very much. All the best.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Thanks, Chris.

Operator

Our next question comes from the line of Matthew Degulis of KeyBanc Capital Markets. Please proceed with your question.

Matthew Degulis -- KeyBanc Capital Markets -- Analyst

Hi. Thanks for taking my questions. So with Saucony -- obviously, a great job on the quick turnaround. I'm curious how long the lag is between introducing a hit show like the Triumph and taking shelf space at specialty running, especially given how fragmented that industry is? And how much shelf space do you think you've taken back thus far and do you think you're back to the pre 2018 levels?

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

Yes. When I look at the specialty run channel, at least in United States, it took us one and a half years, maybe two years to get a new team in place, develop the product and start to fill those shelf spaces. So certainly, in the second half of '19, we believe Saucony took market share. And so as we look ahead, we think that's going to accelerate.

We know we have several big introductions planned for May and after May in the year. So it will have some impact on quarter 2, but a bigger impact probably on Q3 and Q4. We think Saucony's continued to take market share. They won 20-some awards in 2019, and that space has not slowed down so far this year.

We know they're taking market share in trail run category and in the performance run category. I would say, using our new Italian business as a design hub for the original Lifestyle side of the business, we also have some really high expectations there. And we're very enthusiastic about that possibility. And so the Italian Saucony business is -- this original business is very strong, and we're going to use that as a springboard for the rest of the world.

So overall, Saucony is hitting on just about every cylinder right now, and we expect that to continue.

Matthew Degulis -- KeyBanc Capital Markets -- Analyst

Thank you. That's helpful. And at Wolverine, I'm wondering what your vision for that brand is given Tom Kennedy is coming back to Michigan to run it. And where do you think you are in your implementing the global growth agenda at that brand?

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

Yes. As you know, we brought one of our best and brightest back to Michigan. Tom worked with us closely in Michigan for several years before he went to Sperry and over the last three years, turned that brand around. Wolverine is a brand that we believe has tremendous untapped potential.

We needed seasoned, aggressive leadership there. So bringing Tom back was a pretty easy fit. He's also coming back to Michigan to run our licensed apparel and accessory programs and he's going to be with this apparel background, a member of our M&A team as well. The turnaround of the Wolverine brand return to growth is really in its very early stages.

Wolverine had a great Q4, maintained its No. 1 position in the work market, actually gained market share there in the U.S. market. But when you look at Wolverine brand and the possibilities on the Lifestyle side, and the possibilities on the apparel side, a lot of those upsides are untapped, and that's really why we asked Tom to return to Michigan.

Matthew Degulis -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next questions come from the line of Dana Telsey of Telsey Advisory Group. Please proceed with your question.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. Would love to get a little bit more color on triangulating the pattern of wholesale orders or what the wholesale environment is like lately. What are you seeing changing? Is it in different category of wholesale channels where changes are occurring? And is there wholesale channels, which are more impactful for the coronavirus than others for a particular brand? Thank you.

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

Yes, on the latter part of your question, I don't really see a particular channel that might be more challenged. We all know that the value channels, the discount channels have been doing very well over the last couple of years. We expect that to continue. There's probably been and this will continue to be more pressure on the mid-tier and then it's becoming a little bit of a barbell with the upper tier doing well, the value channels doing fairly well and the mid-tier struggling a bit.

So we really don't think that's going to change materially as we look ahead into 2020, at least with respect to the U.S. market. As far as the coronavirus is concerned, and we really don't see that having a significant impact right now on any channel versus the other. I would say for brands or businesses that are anchored more in China for luxury brands that have a significant percentage of the sales in Greater China, and it'll be certainly more material than it is to our business.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Dana, the only other piece I'd add too is that where we see strength is even within a traditional retail channel, the dotcom or digital part of their business is obviously the category that's driving any growth and for us, our wholesale business would include that and it would also include any pure play retail customers that we have in the portfolio. So while the brick-and-mortar customer base will be the most under pressure, in general, we would still expect the digital segment to continue to be relatively strong and are putting more of our efforts behind that as well. As part of our digital direct offense. And the assets and demand creation tactics that we're deploying for our own e-commerce business are going to leverage over to this category pretty seamlessly.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it. And when you think of the digital business, the cost of the digital business, delivery or shipping, how are you planning on that this year versus last year?

Mike Stornant -- Senior Vice President and Chief Financial Officer

It's fairly similar. I think we continue to get better in that space. I -- we have very sophisticated distribution centers, good technology that allows us to manage that part of our business as it's evolved in the fastest-growing category for us over the last few years, we have a strong contract in place with logistics carriers, etc. So we'll see some increases, I think, under normal conditions but nothing that isn't going to cause us a problem.

I would say that we continue to just see really good gross margin expansion for both our digital and store-based direct-to-consumer channels.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Our next questions come from the line of Erinn Murphy of Piper Sandler. Please proceed with your question.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks. Good morning. I guess, my question is around the price increases you referenced taking in June. Can you just share a little bit more about what percent of your overall portfolio you'll be taking prices in? And then, I guess, against that backdrop, you've mentioned several times kind of weakness in the North American wholesale channel.

What is the appetite for your retail partners to take price as we go deeper into the year?

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

Yes, I think it's hard to give you an overall percentage. I'll see if we can kind of work that up, Erinn. But I would tell you that our -- the most of our price increases were strategically taken. Certainly, you have the flexibility to do that on new product introductions to make sure you're hitting your margin targets but we also selectively took some price increases on carryover product, some of that tied to raw material, some of that tied to tariff when our research indicated we could do so without really having a material impact on demand.

So they were taken across all of our brands very, very selectively and strategically, and I would say, on the sourcing side, we're probably having our fifth or sixth season of price decreases from our factory partners, and so that's something I really haven't seen in my career ever that, that string of price decrease, that's also helping us some.

Erinn Murphy -- Piper Sandler -- Analyst

Got it. And then, I guess, the second question is just on uses of cash. Can you just talk kind of what you're thinking about as we go into 2020 and 2021? And then how are you prioritizing M&A within that?

Mike Stornant -- Senior Vice President and Chief Financial Officer

Sure. We're going to continue to make the growth investments that have proven to be successful over the last year or two. We talked about it a little bit already, but that's going to continue to be a focus on our digital offense, our direct-to-consumer businesses and then enhancing our international platform, where we have opportunities to do that. So No.

1 priority for cash and investment is on those growth opportunities. We did a good job in the fourth quarter of managing the balance sheet. We paid down debt in Q4. We recognize that we have plenty of the flexibility and capacity to borrow and to be in a position to deploy more capital in the future.

But our priorities in 2020 will be a little bit more focused on paying down debt, keeping the leverage ratio at the level that it is today as we consider M&A in the future as a more long-term strategy for the company in terms of capital deployment and we are very active in the market looking for assets as we have been for the last couple of years, that's not going to change. But we continue to be really selective about what assets we would pursue. And that's certainly a part of the overall longer term growth strategy. But in terms of priority, maybe third or fourth on the list of cash deployment priorities for us right now.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks, Mike.

Operator

Our next questions come from the line of Sam Poser of Susquehanna Financial Group. Please proceed with your question.

Unknown speaker

Hi, guys. Thanks for taking my questions. This is Will on for Sam. So just to go back to this weakness or softness that you're seeing in the U.S.

wholesale markets, what brands are being most impacted for you guys? And what are you guys doing to sort of overcome the softness that you're seeing?

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

Well, I think, Will, with respect to your -- the latter part of your question, we're pivoting strongly to DTC channels. We know the content, social capabilities, big data capabilities we're investing in and improving there, it's not only going to help our own DTC business, but it's going to help our DTC business of our wholesale customers. And that has been, by far, their fastest-growing segment. I would say with respect to traditional wholesale in the U.S., some of our brands that would have potentially the most exposure there would be Sperry, for example.

They have a very strong traditional wholesale business and this pure play business in the U.S.A. So, on the other hand, Sperry has one of the highest percentages of own DTC as well between the stores and e-commerce sites. So we're just seeing some general softness. It's really not applicable to a particular brand or category of footwear and just some reluctance on retailers to take risk in this environment, probably tied a little bit to a pretty volatile and somewhat soft Q4 for them.

Unknown speaker

Got you. So I guess, the other thing I wanted to just hit on is for Sperry. Are you seeing any light at the end of the tunnel here for both shoes. I know -- I mean, you're going to be lapping some very easy comparisons over -- these last couple of years, it's been such a weak category.

And then I think you mentioned on the 3Q '19 call that you had one major customer that's planning on making boat shoes their No. 1 story for the spring season, I think is what you said. Is that still the case?

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

That is still the case. I guess, with respect to boat shoes, we're -- we continue to see early signs, especially in the fashion of arena of a return of the boat shoe silhouette and -- trend. Boat shoes now account for maybe several years ago, they would have accounted for 70% of Sperry's business. Today, it's under 30%, and it's going to fall even more in 2020.

But as the -- by far, the dominant market leader at a 65% to 70% market share, it's Sperry's birthright and opportunity to inject some excitement into that silhouette and into that business. We think, for 2020, John Legend is going to be a big help there. The initial meetings with him and collaborations that we've had with him, he's been very focused on the -- on boat shoes.

Unknown speaker

Great. That's great. And just one last one, are you guys drop shipping? You talked about the growth in the digital business for your wholesale partners. Are you guys employing drop ship? [Inaudible]

Mike Stornant -- Senior Vice President and Chief Financial Officer

We do that. Yes, we do that on a kind of a strategic basis, depending on the different customers and the economics of that arrangement with the customer. But we certainly have the capabilities of doing it, as we mentioned before, with the sophistication of our distribution centers. But yes, overall, that's a tactic that we'll be looking at as another strategic avenue for us to grow that digital side of the business.

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

When we do, do that, we get paid for it.

Unknown speaker

Gotcha. Great. Thank you, guys.

Operator

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

Mitch Kummetz -- Pivotal Research -- Analyst

Yes. Thanks for taking my questions. On coronavirus, the $30 million sales hit, is there any way you can kind of break that out regionally? I mean, it sounds like China is a small business for you, but is it mostly China? Is it mostly other parts of Asia, like South Korea and Japan. Is there even a European or North American component to it? Obviously, Italy now has issues, maybe North America from a tourist standpoint.

I was just hoping a little bit more color there. And in also on coronavirus, you guys mentioned that less than 20% of your global production in 2020 is China. Is that referencing finished goods production or is that in reference to the total supply chain when you factor in all the raw materials and where they're coming from? So that's coronavirus, and then I have a follow-up.

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

Sure. I mean, the 20% figure is finished product. We do know that there are a number of China vendors of raw material supplies, leather, eyelet, shoelaces, and stuff. A large portion of raw material is available outside of China and our sourcing team has been working on that for some time but the 20% figure really refers to finished products.

Mike Stornant -- Senior Vice President and Chief Financial Officer

Yes. On the revenue side, Mitch, it's mostly international, certainly focused on the Asia Pac region, but it's not just China for us, obviously. Tourism is having an impact on other markets in and around that area and in other regions outside of Asia Pac as well. We also -- and as you know, we also have our own leathers business, which in terms of just short-term demand and some of the delays in factory openings, etc., there's been a negative impact on the demand for our Wolverine leather as well, which is a fairly large percentage of the 30 [Inaudible] you're talking about, probably a third of that.

So it's not one country, but it's certainly heavily weighted to Asia Pacific in our leathers business with some implications in other markets outside of that region.

Mitch Kummetz -- Pivotal Research -- Analyst

OK. That's helpful. And then my follow-up, just in terms of the weak U.S. wholesale that you've been talking about, can you maybe speak to the fall pre books that you're seeing? And within kind of the pre book, is the boot category more challenged than other categories, just given the weather issues? And is there any way you can say what kind of what percent of your fall business is boots versus other stuff?

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

With respect to the boot issue, I don't have the phrasing right in front of me, and we probably wouldn't normally provide that anyway. But with respect to the boot category, we had a very -- our brands had a pretty strong Q4. So Sperry boots were up 50%, Merrell work boots were up 50%, Wolverine brand gained market share, No. 1 position, the Cat brand gained market share, No.

3 position in the U.S. markets. So we're seeing pretty strong preorders for boots from our retail customers, simply because we performed in Q4 and the fall of 2019. So we're pretty bullish on boots in general.

Mike Stornant -- Senior Vice President and Chief Financial Officer

As you know [Inaudible] -- overall, I mean, our work boot business is about 15% of our total -- our global revenue. And if you add in Lifestyle boots, obviously, on top of that. So it's a new important -- for sure, an important category. And I think, Blake had mentioned, a good strong category for us.

And as far as the back half outlook on pre bookings in that category, we wouldn't comment on that but it continues to be an area of focus for us and a strategic asset to the portfolio.

Mitch Kummetz -- Pivotal Research -- Analyst

Got it. All right. Thanks, guys.

Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

Paul Feyen -- Vice President

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 25, 2020. Thank you, and good day.

Operator

[Operator signoff]

Duration: 75 minutes

Call participants:

Paul Feyen -- Vice President

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

Mike Stornant -- Senior Vice President and Chief Financial Officer

Jim Duffy -- Stifel Financial Corp. -- Analyst

Jonathan Komp -- Robert W. Baird and Company -- Analyst

Chris Svezia -- Wedbush Securities -- Analyst

Matthew Degulis -- KeyBanc Capital Markets -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Erinn Murphy -- Piper Sandler -- Analyst

Unknown speaker

Mitch Kummetz -- Pivotal Research -- Analyst

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