Wolverine World Wide Inc

NYSE:WWW

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and welcome to today's Wolverine Worldwide Third Quarter Fiscal 2024 Earnings Call. [Operator Instructions] Please note this call is being recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Alex Wiseman, Senior Vice President of Finance.

[Alex Wiseman, executive]

Good morning, and welcome to our third quarter fiscal 2024 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer; and Taryn Miller, Chief Financial Officer.

Earlier this morning, we issued our earnings press release and announced our financial results for the third quarter of 2024. The press release is available on many news sites and can be viewed on our corporate website at wolverineworldwide.com. This morning's earnings press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures were reconciled to the most comparable GAAP financial measures in attached tables within the body of the release or on our Investor Relations page on our website.

References made regarding financial results and outlook for 2024 and comparable results from 2023 in each case for our ongoing business exclude the impact of Keds, Wolverine Leathers and Sperry. I'd also like to remind you that statements describing the company's expectations, plans, predictions and projections such as those regarding the company's outlook for fiscal year 2024, growth opportunities and trends expected to affect the company's future performance made during today's conference call are forward-looking statements under U.S. securities laws.

As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company's SEC filings and in our press releases. With that, I'll now turn the call over to Chris Hufnagel.

[Christopher Hufnagel, executive]

Thanks, Alex. Good morning, and thanks to everyone for joining us on this morning's call. Starting with the headlines. In the third quarter, we delivered better-than-expected revenue and earnings. Notably, Merrell returned to growth and Saucony and Sweaty Betty were approximately flat when adjusted for business model changes and currency fluctuation, respectively. We drove record gross margin for the third quarter, the second quarterly record we've set this year. Finally, at the bottom line, we more than doubled our earnings from a year ago. It was a good quarter for the company, further confirming our strategic direction and the great work our teams are doing.

Based on these results and our outlook for the fourth quarter, we're raising both our top and bottom line guidance for the year. Taryn Miller, our Chief Financial Officer, will provide more color here in a few minutes. A year ago, we outlined an ambitious plan to turn around Wolverine World Wide and in the process, build a new company for the future. We started by taking fast and bold actions to stabilize the company and strengthen the balance sheet by significantly paying down our debt and reducing inventory, both of which are now well under half of where they stood 24 months ago.

At the same time, we moved quickly to transform Wolverine World Wide for the future. rationalizing our brand portfolio, restructuring the global organization and working to improve our profitability. Today, we continue to execute with great pace against this agenda, focus squarely on delivering the progress needed quarter after quarter to build a better business and ultimately deliver better returns for our shareholders.

While we have more work to do to fully realize the potential, I believe our company, brands and teams possess, we're getting better in building new muscle each and every day. Replacing our consumers and brands at the center of our approach and developing the talent, tools, capabilities, and processes needed to execute our enterprise and brand strategies with distinction moving forward. As we secure the turnaround and advance the transformation of our organization, we're thoughtfully navigating the reinvigoration of our brands and our inflection to growth as a company.

We've worked hard to establish a healthier foundation for growth, cleaning up the marketplace, expanding margins, and working to better position and manage our brands at wholesale and in our own channels of distribution. As we guided at the start of the year, we've now driven sequential improvement in top line revenue for the past 2 quarters. We have a plan to inflect the growth as the company in the final quarter of the year and more importantly, carry this momentum into 2025.

While the macro environment remains choppy and the consumer outlook is still a bit murky, our teams continue to manage the variables they can control. Focusing on our global brand building model and prioritizing, designing awesome products that are innovative, trend-right, place strike and price strike, telling amazing stories that not only convey the functional benefits of our brand's products, but also resonate with consumers on an emotional level and driving the business each and every day.

The third quarter was another positive chapter in our turnaround and transformation story. Before handing over to Taryn to detail our financial results in the quarter and updated outlook for the remainder of the year, I'd like to provide some additional insight on our brand's performance, starting with Merrell. As a leader in the hike footwear category, the brand remains intently focused on modernizing the trail through faster, lighter and more versatile product. Over the course of this year, the Moab Speed 2 has meaningfully advanced this effort and established itself as an important franchise for the brand. It continues to sell through well at key outdoor accounts and encouragingly, is also performing well at certain lifestyle retailers.

Next week, the brand anticipates launching its second collaboration with Jeep, this iteration on the Moab Speed 2 platform an opportunity to increase the brand's awareness and [indiscernible] to build on the product franchises success. Merrell's premier, Trail Runner, the Agility Peak 5, is also selling through well in both performance and lifestyle channels. The brand has plans to continue to leverage collaborations on both of these franchises for the trail moving forward, further broadening their reach. Merrell's modernized product offering has enabled the brand to partner with several of its key accounts to reset assortments with the goal of evolving consumers' perceptions of the brand and driving sell-through.

As a result of our proactive approach, the brand again accelerated share gains in the high category in the U.S. last quarter. Merrell's created traction on the lifestyle side as well, successfully testing new products with several influential retailers. Outside the U.S., the brand was up mid-teens in EMA and drove mid-single-digit growth in Asia Pacific in the quarter in part due to the execution of our key city strategy in Tokyo with brand activations in our Shibuya Square scramble and Harajuku stores.

Looking ahead to 2025, Merrell plans to launch its most innovative franchise to date in January. The all-new Speed Arc Collection, led by the award-winning Speed Arc Surge BOA , last week named one of Time's Best New inventions of the Year. It employs advanced materials and the brand's new Speed Arc platform, including its FloatProPlus Supercritical Foam and a stabilizing FlexPlate. [indiscernible] is a remarkably unique and comfortable ride with exceptional energy return that outperforms the industry in extensive lab testing packaged in a visually disruptive, modern silhouette.

Merrell is pushing the innovation boundaries of the trail as the category leader and generating momentum around the world. Moving on to Saucony. As the original running brand, Saucony has been an innovator in the category for decades, earning the trust of serious runners around the world with lead products like the award-winning endorphin collection. A little over a year ago, we overhauled the brand strategy to sharpen its focus on everyday runners and the broader run life opportunity by bringing better innovation into its core 4 franchises, the Ride, Guide, Triumph and Hurricane and by enhancing its design to provide more versatile, wearable styling. Saucony has made this important pivot while simultaneously advancing innovation in its most elite offerings. And the consumer is responding positively to the brand's evolution.

Saucony is pardoned closely this year with a host of key accounts to prove the power of the brand and its key product franchises and has delivered strong results in several distribution channels, including run specialty sporting goods, outdoor specialty and beyond. And the critical U.S. run specialty channel, in particular, the brand drove strong growth and took market share in the third quarter. Internationally, the brand grew in EMEA and was up significantly in Asia Pacific after adjusting for last year's business model change in China.

Saucony executed a similar approach on the lifestyle side as well. The brand's deep authentic product archive with key styles like the Pro Grid Omni and Ride Millennium coupled with relevant and compelling collaborations with the likes of J. Tips, Minted New York, Sarkal Paris, 316 and Undefeated and others right up through last week has helped fuel strong brand heat. As of today, the brand expects to thoughtfully increase its store count in relevant U.S. lifestyle and athletic specialty channels from nascent distribution this past spring to over 900 doors in spring '25. Saucony anticipates building on a strong momentum in 2025 by kicking off the year with a fresh offering of the rapidly growing Pro Grid Omni and lifestyle, along with the introduction of new guide and ride models on the performance side.

The latest iterations of 2 of the brand's biggest franchises. To continue to advance tip-up sphere innovation, the brand also plans to launch the Endorphin Elite 2 this coming spring, featuring In Credit Run Foam, most innovative and responsive film ever, delivering unmatched energy return and cushioning. Saucony expects to build on its key cities strategy to help activate the brand in a strong pipeline in an impactful way as well. with continued sponsorship of the London 10-K and the opening of our first pioneer store in London's Covent Garden in Spring '25. 2024 has been a pivotal, transitional and transformational year for Saucony. I believe we've positioned the brand for the opportunity to deliver strong growth in 2025 and beyond.

Sweaty Betty also delivered a solid quarter with year-over-year increases in both its e-commerce and wholesale businesses, while our stores finished flat. The brand launched its new fem tech collection, aimed at empowering its female consumer at every life stage, which was met with an overwhelming consumer response. In addition, the brand drove strong growth in its biggest category, leggings, powered by its cornerstone franchise power. Importantly, the brand's lifestyle offerings, led by the Explorer Collection also contributed to growth in the quarter, helping the brand diversify beyond its core performance silhouettes.

Finally, the Wolverine brand saw encouraging proof points in its business trends as well. While we experienced some delayed product deliveries that impacted the brand shipments for the quarter, retail sell-through in the U.S. was up compared to the prior year, and the brand's market share trend sequentially improved. However, we have more work to do in our work group, and it's art of bolstering the innovation in our product pipeline.

To that end, we recently appointed a new product Chief for the group. As for 2025, I'm excited for several new launches for Wolverine beginning with the Vantage and the Rancho Pro collections, both featuring the brand's new hyperrest technology for improved cushioning and energy return. And to help accelerate brand heat, the brand will launch a partnership next February with Country Music Superstar, Jordan Davis. While we know the path forward won't be perfectly straight or smooth, I believe our company is headed in the right direction with great pace, executing our strategies, driving the business and beginning to deliver better results.

With that, I'd now like to hand the call over to Taryn to take you through our results and updated outlook in more detail. Taryn?

[Taryn Miller, executive]

Thank you, Chris, and welcome, everyone. We are pleased to report that our results for the third quarter exceeded expectations across key financial metrics. The sequential improvement in both top and bottom line performance demonstrates the success of our strategic initiatives and the dedicated execution by our team in driving the turnaround. Third quarter revenue for our ongoing business of $440 million was $20 million above our outlook of approximately $420 million.

Approximately half of the over-delivery was primarily driven by increased demand in the active group with favorable foreign currency also contributing. The remaining amount resulted from a net timing shift between the third and fourth quarters as certain wholesale orders shipped earlier than originally expected. Revenue for our ongoing business declined 7% versus the prior year compared to a decline of 24.5% in the first quarter, a decline of 18.4% in the second quarter. The third quarter of 2023 included approximately $30 million of revenue that did not repeat in the third quarter of this year, including revenue from excess end-of-life inventory liquidation and business model changes. Excluding these discrete items, third quarter revenue this year was approximately flat to 2023.

Merrell revenue grew 1.4% in the quarter, with growth in both DTC and wholesale. Saucony declined 10% in the quarter, a meaningfully lower rate of decline than expected due to continued demand momentum, particularly in e-commerce and U.S. wholesale. Sweaty Betty grew 3% in the quarter, in line with expectations. The work group declined 11% in the quarter, which fell short of our original expectations of a high single-digit decline. Compounding supply chain disruptions that started with the challenges in Bangladesh had a bigger impact on the work group than originally estimated. Shipping delays limited our ability to meet the full demand for work boots in the quarter. We expect to recover most of the shortfall in the fourth quarter.

Turning to profitability. We are encouraged by the growth achieved this quarter, which underscores our effective cost management and improved operational efficiency. We are seeing the rewards of our efforts over the past year to restructure the company and reduce costs, including both cost of goods sold and selling, general and administrative expenses. Adjusted gross margin of 45.3% increased 380 basis points versus last year and represents record gross margin for the quarter.

Gross margins were in line with our expectations and reflect a healthier sales mix and the benefit of supply chain cost saving initiatives. Adjusted operating margin of 7.7% exceeded our outlook for the quarter driven by operating cost leverage on the stronger revenue performance. As a result of the improvement in revenue and operating margin, adjusted diluted earnings per share improved from $0.20 in the first half of 2024 to $0.29 in the third quarter.

When we laid out our turnaround plan, we said profit margin expansion would lead revenue growth. With the third quarter results, year-to-date adjusted earnings per share performance is up by nearly 20% versus the prior year. We also continue to make solid progress on strengthening the balance sheet. Inventory at quarter end was $286 million, down approximately 40% from last year for the ongoing business as we further optimize inventory levels and reap the benefits of improved planning and execution.

During the August earnings call, I mentioned that while we were chasing demand and had lower inventories in Saucony, we still had work to do in Merrell and the work group. We plan to address specific areas of excess inventory, mainly through our DTC channel. Although there is still work to be done to fully optimize inventory, current levels are nearing our target ensuring we have adequate coverage for the business' future needs. Net debt was $563 million, down approximately $100 million versus second quarter and down $370 million versus last year.

Now turning to our updated outlook for 2024. We are raising our revenue and earnings guidance for the full year. Solid year-to-date results, combined with the development of our order book for our global wholesale business has strengthened our confidence in our outlook. Fiscal 2024 revenue from our ongoing business is now expected to be in the range of $1.73 billion to $1.745 billion, an increase of $18 million at the midpoint versus our August outlook. Increase in the active group demand drives $11 million of the raise and favorable foreign currency drive the remaining increase.

This compares to 2023 revenue from our ongoing business of $1.99 billion and represents a decline of 12.8% at the midpoint of the range. As we shared in previous calls, there were discrete items in 2023 that are not recurring in 2024 related to end-of-life inventory liquidation, business model changes and a timing shift of international distributor shipments. Total revenue generated by these items was $185 million, with 90% occurring in the first 3 quarters of the year. Excluding the discrete items, full year 2024 revenue at the midpoint is expected to decline approximately 3.8%.

We continue to expect full year 2024 active group revenue to decline by mid-teens percentage year-over-year and work group revenue to decline by a percentage in the high single digits year-over-year. Brand performance expectations can be found in our investor presentation on our website.

Turning to gross margin. As a result of the actions we've taken over the last year, we continue to expect strong margin expansion compared to 2023. These actions include supply chain and product cost savings, the benefit of healthier inventory level, better mix of full price sales and brand protection actions. Adjusted gross margin is expected to be approximately 44.5% at the midpoint of the outlook range, a record for Wolverine Worldwide and up approximately 460 basis points compared to 2023. Adjusted selling, general and administrative expenses are expected to be approximately $650 million at the midpoint of the outlook range compared to $716 million in 2023.

The lower operating cost structure includes restructuring savings partially offset by incremental investments in our business, normalized incentive compensation and inflation. We're investing in our brand building model to drive sustainable growth building awesome products, telling amazing stories and driving the business. Key initiatives include modernizing product line management tools to drive innovation sponsoring the Saucony London 10-K to elevate brand awareness, establishing our first innovation hub in Boston and building talent and capabilities. Adjusted operating margin is expected to be approximately 7.2% at the midpoint of the outlook range compared to 3.9% in 2023.

Net interest and other expenses are projected to be approximately $36 million, down from $63 million in 2023, which reflects the benefit from the significant debt reduction over the last year. The effective tax rate is projected to be approximately 16.5%. Adjusted diluted earnings per share is now expected to be in the range of $0.80 to $0.90, an increase of $0.05 at the midpoint versus our August outlook. This compares to adjusted diluted earnings per share of $0.15 in 2023. Working capital and cash flow optimization continues to be a priority in 2024. We expect inventory to decline by approximately $85 million by year-end compared to the prior year-end as we continue to work through specific areas of excess inventory.

Operating free cash flow is expected to be in the range of $120 million to $130 million with approximately $30 million of capital expenditures. We expect net debt to be $545 million at year-end, an improvement of nearly $195 million versus year-end 2023. Given this outlook for the full year, we expect the fourth quarter revenue to be in the range of $475 million to $490 million. This reflects continued improvement in revenue performance and at the midpoint, an inflection to growth. We are executing our plan and seeing momentum in our brands from increased new product introductions improvements in product design and cleaner and lower inventory levels at retail.

This momentum is showing up in our wholesale and international distributor order books as expected, and e-commerce initiatives are in place for the holiday season. Fourth quarter gross margin is expected to be approximately 44%, an increase of 700 basis points from 2023. Last year's fourth quarter gross margin was adversely affected by a decline in full-price business, resulting from excess inventory in the wholesale channel. This issue has significantly improved over the course of 2024. We expect improvements in operating margin and earnings with fourth quarter adjusted operating margins of approximately 9% and adjusted diluted earnings per share in the range of $0.31 to $0.41.

While it's too early to discuss the 2025 outlook in detail, there are a few key points I'd like to highlight. We anticipate cleaner year-over-year comparisons in '25 as the discrete headwinds we faced this year will be largely behind us. While we recognize there is more work to be done, we feel good about the momentum of the business. In this dynamic operating environment, we remain focused on what we can control, investing in our brands, our team and the technology to build new capabilities drive growth and deliver value to our shareholders.

And with that, let me hand the call back to Chris before we open it up for questions.

[Christopher Hufnagel, executive]

Thanks, Taryn. Looking ahead, I believe we possess tremendous competitive advantages. We have a portfolio of authentic global brands positioned in attractive categories that are focused on making people's lives better, healthier, happier and more productive. Our brands are considered leaders in their categories, and are long respected for making great innovative products.

In addition, we've developed an extensive global distribution network over decades with best-in-class partners to reach our consumers in every corner of the world. While these are certainly invaluable advantages, as we've said before, brands have to do more to win in today's dynamic and competitive marketplace. To enable our brands to compete and win. We've been hard at work strengthening key capabilities for the new Wolverine Worldwide.

Beginning with the consumer, we create a collective last fall to better identify consumer trends and innovation insights to guide product innovation, design and storytelling. As a part of this initiative, we also established the den, an in-house creative studio designed to equip our brands with the tools they need to quickly and efficiently develop creative assets to tell amazing stories in today's always-on digital world.

We've tested a key city strategy through focused initiatives in Tokyo and London with our biggest brands, Maryland Saucony, and we're encouraged by the early results. To help us run about our business, we're enhancing our integrated business planning approach by redesigning related processes, bolstering our tool get and adding new talent. We anticipate this new competency will be fully online early next year. On the product front, just 3 weeks ago today, we cut the ribbon to open our first ever innovation hub located in the heart of the West End of Boston to tap into the region's deep product talent and augment the teams here in Michigan.

Finally, we've hired new critical product and marketing talent for our brands over the past year. And just last week, we announced the appointment of [ Susie Kuhn ] as our President of the active group, an industry veteran. She's a tremendous addition to the team and I look forward to partnering with her and her leadership of our company's biggest brands. We've been busy, but we're unequivocally not slowing down. All of the work we've done to this point in our turnaround we believe has prepared the organization to better compete and win, the opportunity to drive for better and the privilege to write the next chapter in our company's 141-year story.

Before concluding our prepared remarks, I'd like to thank our teams for being all in and dedicating themselves to the work we've done together over the last 455 days. You've been simply great. And I'm incredibly grateful for and motivated by your work passion, grit and drive. And while we've written a good story together to date, the most important chapter is the next one. With that, thank you to all of you on the call this morning for taking the time to be with us, and we're happy to answer your questions. Operator?

[Operator]

[Operator Instructions] And we'll take our first question from Laurent Vasilescu with BNP Paribas.

[Laurent Vasilescu, analyst]

Congrats on the continued progress here. Chris, I think in your prepared remarks, you talked about the momentum for both key brands, Merrell and Saucony heading into 2025. I would love to drill in a little bit more on that comment. I know you've recently parted with a number of key retail accounts for those 2 brands. Can you maybe just give us some color for the audience here on what's the reception so far with these key accounts? .

[Christopher Hufnagel, executive]

Sure. Thanks, Laurent. Appreciate the question. Yes, I think certainly, as we've sort of thought about the reset at Wolverine and the work we needed to go do, we took a healthy look at our biggest brands and first starting with products. and what products did we have, what was in the pipeline, what innovation did we need to bring? And where could we improve and where could we streamline and focus on doing fewer things, bigger and better and certainly paying attention to where the consumer was moving and how we could tap into that.

And with Merrell and Saucony specifically, we've got new leadership in those brands. We've got new sales leadership in those brands. And we looked at the distribution and is really focused on the U.S. and said, where are our brands showing up, what channels were growing, what partners would we want to be with? And then how could we go in and take advantage of that. And credit to those brands and certainly credit to the partners and thanks to the partners for opening up and being open to thinking about our brands in different ways.

So you certainly will see both Merrell and Saucony showing up in new accounts as we brought great relevant products that's resonating with consumers. And I think a thoughtful distribution expansion and a really heavy eye towards a proper segmentation is going to be critically important. So the new door count growth both opening new accounts, expanding to new accounts and then showing a broader breadth of the assortment in existing accounts is certainly part of the growth thesis and certainly some of the momentum we've built. And as we think about where the brands can go in 2025.

[Laurent Vasilescu, analyst]

Okay. Wonderful. That's great to hear. And then, Taryn, I think last call, we were talking about during the Q&A about the longer-term opportunity for gross margins to go to 45% to 47%. I know you're not prepared to guide for 2025. But high level, as we think about not just the gross margin, is there an opportunity to get back to 10% operating margins? Or is there an environment that leads us to where, yes, the operating margin of 10% plus is no longer in the realm of possibilities?

And then a quick follow-up. I think last call, it was mentioned that China is less than 19% or it was really explicitly called out that Bangladesh was 19% of your sourcing. And then China is less, not to get from you guys. What is your China sourcing into the U.S.?

[Christopher Hufnagel, executive]

I'll take the first one on the China situation and then turn it over to Taryn to talk about gross margin, operating margin. We worked really hard, really hard over the last handful of years from a sourcing standpoint to diversify our sourcing footprint. We have a new leader in our global supply chain, who I'm really pleased with and our exposure, 2018, 2019 would have been north of 40% from China. And today, we're well down sort of in the mid-teens and mid-teens is much a significant reduction from where we were.

I'd also add the vast majority of that production we still do in China, we have the ability to dual source. So as things develop, as things change, we worked really hard on that sourcing footprint to be more diversified to reduce our exposure in China. And certainly, as things sit today, I'm pleased that we've done that work and pleased that we sit where we are as we think about how things move forward from here.

[Taryn Miller, executive]

To answer your question -- sorry, I think there was one more question in terms of margins. In terms of gross and operating margin expansion, we're pleased with the improvements that we're seeing in both gross margins and operating margins in 2024, largely coming through as we had laid out in our initial guide. So -- and that really is a combination of seeing the top line improvement each and every quarter as we go through '24 and building on that momentum as our cost saving initiatives, both in terms of the supply chain improvements as well as in the spending optimization that we've been doing and really seeing that come through in the year-to-date results as well as implied in the guide that we've given for the fourth quarter.

I'm going -- if you look at 2024, the Q4 implied guidance, the operating margins would be in that 9% range. So approaching the 10% that you're speaking to there, Laurent, but I'm going to resist the temptation to talk about 2025 and leave it to encouraged with the momentum that we're seeing and the continued focus on that margin improvement.

[Operator]

We'll take our next question from Ashley Owens with KeyBanc Capital Markets.

[Ashley Owens, analyst]

Congrats. Just quickly looking at the investor deck, I see work group is now guided to grow low double digits in this all factors, the shipment delays? Or is there more impact there? Are we capturing all the demand that was missed in the third quarter. Just want to make sure I understand the dynamics there.

[Christopher Hufnagel, executive]

It's a good question, and thanks for bringing it up. As it relates to the work group in 4Q, I'd say there's 3 factors at play which support that revenue growth assumption, a, the delays that we experienced in 3Q from both production and sourcing. Work Group does about 40% of its -- north of 40% of its production in Bangladesh. And Bangladesh has just faced a handful of issues lately from civil and rest to floods to some logistics issues. So the [ Mishin ] 3Q, we believe, will be gained back in 4Q.

At the same time, the work Group's fourth quarter last year was challenged. So we just have an easier comparison, frankly, in the fourth quarter. And then also, as there is demand in the marketplace, we plan to pull ahead a little bit from the first quarter of next year, reacting to consumers who want product earlier. And those -- really, it's those 3 factors that give us confidence in the work group's guide for 4Q.

[Ashley Owens, analyst]

Okay. Got it. That's super helpful. And then just a bigger picture question. Saucony outperformed expectations pretty candidly. You've seen solid [indiscernible], et cetera, more newness, [indiscernible], et cetera. I know we're currently still in a period of work through and adding on that newness aspect, but would just be curious to hear your thoughts on brand growth from here, what we should be looking for to drive and raise awareness in 2025 and just your overall thoughts as to how big Saucony could get?

[Christopher Hufnagel, executive]

Yes. Thanks for calling that out. Obviously, we're not going to guide for Saucony today. But certainly, there are a lot of things we're working in that brand's favor right now. And I take you back to sort of a reset and overhaul of the brand strategy, sort of opening up that aperture to service a broader run as one of the best performing categories in the marketplace. And I think our change in strategy pivot as we think about that consumer, both from the performance run from the lifestyle run has helped that brand sort of resuscitate in very short order.

We're seeing good growth and momentum in the performance category, the core for The Ride, The Guide, The Triumph, The Hurricane, which we're encouraged by. At the same time, there's a lifestyle thing happening, and we're capitalizing in Saucony benefits from a very deep product archive and the [ petrotech ] fashion thing that's happening right now, Saucony has the ability to capitalize. It's important to note, though, that we're not walking away from Elite run. And I think one of Saucony's best innovations is going to be dropped early next year with the Endorphin Elite 2 and the new phone that we're going to introduce.

So I think from a product side, that brand is firing right now on all cylinders. At the same time, we've really taken a hard approach of how we build awareness and affinity in the marketplace. And I'd point to London our key city strategy, investing more -- being the sponsor for the London 10-K. They're working hard on the activation, doing run clubs. We're seeing all-time record search interest for [indiscernible] in the U.K. And this is really before we fully activated.

We'll open our first Saucony store next year as well in London, which we're encouraged by. And I certainly think from a brand heat buzz standpoint, Saucony is having a moment. So your call out about how big Saucony can be. I can tell you that's something we're spending a lot of time here as an organization thinking about too, because we think there's tremendous potential with that brand and with that team really up and down the product line. And certainly, from a global standpoint, that brand has tremendous exposure and great partners. So we remain encouraged and optimistic about the growth prospects for Saucony.

[Operator]

We'll take our next question from Mitch Kummetz with Seaport Research.

[Mitchel Kummetz, analyst]

Chris, just to start, how are you guys planning for potential new tariffs next year? Are you guys thinking about changing your pricing architecture at this point at all for maybe the back half of the year, fall '25 product or anything? What can you share there?

[Christopher Hufnagel, executive]

Yes. Thanks, a very relevant topic. And I think us, along with just about everyone is sort of digesting the news and the new reality and to contemplate what's going to be on the horizon. I will tell you this, Walgreens 141-year-old company. We've seen 15 Republican administrations, 10 Democratic administrations. We've been through a civil war, 2 world wars, a cold war and a couple of global pandemics. And I think our job really is to build a durable and resilient business model that can weather those changes.

As it relates to tariff question, I answered Laurent's question earlier, exposure to China is down dramatically from where we were just a couple of years sort of in that mid-teens range. other important regions are Vietnam, Bangladesh, Indonesia are an important piece as the new realities are there. And as we hear more, we'll obviously contemplate things that we need to go do to make sure we can protect and see to grow the business. I'm incredibly thankful though that a lot of our heavy work on stabilization is behind us.

The restructuring work, the consolidation out of our portfolio work and I'd obviously point to the fact that 2 of the last 3 quarters, we've delivered all-time record gross margins and the hard work we've done around our costs, cleaning up the inventory and building a more full-priced premium business is important to that. So we're obviously thinking about what the future holds and implications as it relates to that. But one of my goals is to build a durable and resilient company that can weather changes like this, and the company has a long history of doing that. And I certainly am thankful that a lot of the work that we've done over the past 1.5 years is behind us. And we can think about growth, at the same time, manage different factors that are -- that may come our way.

[Mitchel Kummetz, analyst]

And as a follow-up, I just want to dig in a little deeper on the Saucony distribution expansion. Are you guys still kind of cleaning up removing accounts. Can you say kind of maybe what the net account growth is for our net door growth is for spring '25? And any more color in terms of kind of where you're seeing more door growth? Is it U.S. versus international? Is it lifestyle versus performance anymore, you parse these things out a little bit more, if possible?

[Christopher Hufnagel, executive]

Yes. I'm not going to give a net count sort of year-over-year. In the prepared remarks, we did talk about an additional 900 doors in the U.S. around supporting that lifestyle distribution. And I will tell you, it was thoughtful distribution because honestly, it probably could be more than that. We're trying to build a great brand for the long term, make sure we can capitalize on growth opportunities in front of us. At the same time, be thoughtful about where we want to sell.

Certainly, I think I talked about new sales leadership and Merrell new sales leadership and Saucony new brand leadership and certainly the addition of [indiscernible]. President of our active group with our 2 biggest brands reporting to her, and she is an industry veteran and expert probably understands the commercial side of the business, the go-to-market side of the business, the wholesale side of the business extraordinarily well. So we certainly will both prune doors that we don't think are additive or accretive to what we're trying to accomplish. At the same time, I think our brands have the effort to show up to consumers in more pieces.

And it's both for both Merrell and Saucony. And there are places where it's just hard to find our product. And I think as we think about the growth of these brands and certainly, as we think about the broader sort of active outdoor sport lifestyle component, which there is so much momentum in from a footwear standpoint. And we have to show up where she shops and beyond just the normal players.

So -- and that applies globally. I'm really pleased by the work that Saucony has done in Europe as they thought about distribution. And then certainly, we're very thankful for a very strong partnership in China with [ Xtep ] for both Merrell and Saucony and the expansion that we're seeing for those brands there. So that distribution piece is critically important. I think we have done a good job. We've taken the last years, we sort of reset the business to walk away from doors that we don't think helped us at the same time, be thoughtful about where we want to expand, and I'm certainly a [indiscernible] for what our brands can go to do in the future.

[Operator]

We'll take our next question from Jim Duffy with Stifel.

[Jim Duffy, analyst]

And I'll go on to the question. I'll start following on the Saucony business. Lot of noise related to wholesale adjustments creating year-to-year comparisons that are difficult to interpret. Can you maybe talk to us about Saucony's e-commerce growth in the quarter and how that splits between performance and lifestyle?

[Christopher Hufnagel, executive]

Yes. Saucony had a good third quarter, up sort of mid-single digits. I think as we think about that, I think the good thing about Saucony is we're seeing growth in both performance and lifestyle. It's not an either or, it's actually both. And I'd actually say Saucony's Don growth was probably a little bit constrained by the fact that we couldn't bring product in fast enough. And even if you shop saucony.com today in certain key styles, we're going to disappoint you because we don't have full color -- full-size runs in all colors.

So I told -- I said in the last call that we made a decision a year ago that we would probably -- we prefer to miss some demand then find ourselves in a big inventory issue again and continue to perpetuate and exacerbate that situation. So I would say [indiscernible] growth was a little bit constrained probably because we just didn't have enough goods there to sell because we have been running tight. But in total saucony.com, up mid-single digits and again, seeing both growth both on the performance side as well as the lifestyle piece.

[Jim Duffy, analyst]

And then overall, really great execution across the year. The guide has you tracking to inflection to growth in the fourth quarter. Chris, could you just kind of give us an update on where you stand on the turnaround 10 months ago, you were speaking about the turnaround in the chapters are you confident the business is now successfully rebased? And is there any reason business couldn't inflect to that aspirational growth algorithm for 2025?

[Christopher Hufnagel, executive]

Great question. I appreciate it. Sort of acknowledging that you followed our story and appreciate sort of acknowledging the journey we've been on. And about a year ago, we talked about a turnaround in 3 chapters, stabilization, transformation and then ultimately inflection to growth. And we said the margin improvement would lead revenue growth. And all of those things have played out as we had planned, and I'm thankful for that.

I think the stabilization work is largely behind us. Stabilization work really was focused on attacking the debt situation, reducing and better managing inventories and then certainly adjust our cost structure from a restructuring standpoint to have a cost structure that better match the size and profit profile of the organization, at the same time, allowed us to invest in things that are critical capabilities going forward whether it's teams or marketing or demand creation or new tools that we need. So I would say that the stabilization is largely behind us, and I certainly am thankful for that.

As it relates to transformation, I think brands and companies they always have to be in some level of transformation. I think the world is moving extraordinarily fast and if we don't continue to evolve and pay attention to where the world is moving, I think you're going to get left behind. So I think the transformation continues, but key components of our transformation have been really putting the brands at the center, restructuring the organization building new capabilities like the collective integrated business planning, the new PLM tool and then certainly investing in things that get our brands out in front of the consumer through increased demand creation, whether it's marketing investment whether it's a key city strategy in Tokyo or London and soon to be more cities.

And then as it relates to the inflection to growth. We had talked about the inflection of growth happening in the fourth quarter as a company. We certainly are pleased by some of the early progress we've made in 2Q and then the additional growth and progress we made in 3Q and then obviously, we have a lot riding on the next 50 or so days as we deliver the full year and then carry the momentum into 2025. We'll obviously provide formal guidance in February for how 2025 looks, but the visibility that we have in these early days to the order book gives us some comfort that we're going to be able to continue the momentum that we've been able to build and then certainly build a flywheel and a healthy growth algorithm for our biggest brands right now led by Saucony.

[Operator]

We'll take our next question from Sam Poser with Williams Trading.

[Samuel Poser, analyst]

I've got a follow-up on the tariffs and then another question. On the tariffs, what percent of your units are international sales? And because the tariff sounds like it's going to affect a lot more than China. So what percent of your units are international these days?

[Christopher Hufnagel, executive]

Units, international, I would say, north of 50% approaching 60% from a unit standpoint.

[Samuel Poser, analyst]

So would that -- would you consider to offset on a volume perspective, converting distributors to subs, which would then theoretically take relief off the U. S.?

[Christopher Hufnagel, executive]

That's not something that we're currently contemplating. We like the model that's been built. We're thankful for some of the changes we made over the past handful of months. the changes we made in the China structure to a distributed model from the JV, we've licensed our kids business. We're obviously always evaluating our international model. That model, we're lucky that, that was established really in 1959 and we benefit from the decades of partners that we have. We have adjusted and sort of tweaked the international model over time. But right now, as we sort of think about the impending tariff issue, that's not something that we're currently contemplating.

[Samuel Poser, analyst]

And then secondly, can you talk about the expectations you have for [indiscernible] coming in? And what she's going to bring to the table for the brands with any the most specificity you could give, please?

[Christopher Hufnagel, executive]

Yes, sure. I'm excited about the tire. We did an extend sort of global search for a leader of our active group. Merrell, Saucony and Chaco will report into [ Susie's Suzi ] reports into me. [ Susie ] brings a really unique skill set. She's an industry veteran. She knows both the wholesale and the retail side of the business. She started her career as a merchant and she really understands the go-to-market process and really a commercial driver of the business.

At the same time, she has global experience. She's lived in China, she's lived in Europe and she's worked for leading brands. Foot Locker, Nike, Converse, to name just a few. Early days, I think today is maybe a ninth stay with the business. She's really learning the teams right now and learning sort of where the brands are. She's a product person. She loves product, so she's getting familiar with the product line and then really close to how we're segmented and distributed in the marketplace. So those are our early priorities. At the same time, learning the partners. She's got tremendous relationships across the industry, levering those relationships and really sort of getting her feet underneath across Wolverine Worldwide. So I'm very optimistic about Susie.

I think he's a great addition to the leadership team. I think she'll provide amazing day-to-day leadership for Merrell and Saucony, our 2 biggest brands to help our brand presidents. So I'm bullish on what she brings she builds a little bit of a white space in our team, too. We're looking to bring new talent. I would say, if I'm critical of us, we haven't always brought outside expertise and experiences to the business as well as we could have and that was something that I've worked hard on since I took this chair, and I think -- I think Susie checks a lot of boxes for us.

[Samuel Poser, analyst]

If I can just follow up, what are your expectations that she's bringing to those brands? I mean, I just like you hired it for a reason. I understand there's a learning curve and her bound and all that. But what is -- what are your expectations? What is she going to do, I guess, it's not going to be tomorrow.

[Christopher Hufnagel, executive]

Yes. Accelerate growth. I think she has been there and done that for big brands. She understands both the wholesale and the retail side of the business. She really understands commercialization distribution segmentation, which I think are very close to your heart. She has merchandising experience. So we hired her not just to sort of maintain status quo for us. We hired her to accelerate and encase opportunity. We need to be a growth company again and then needs to be led by Merrell and Saucony. And while I think we've made really good progress there, I think opportunity for us to be better.

And I think her industry experience, the people that she knows her relationships, how she is so familiar with the go-to-market process I think we're already better today having or walking the rooms, working with the teams being out in the marketplace. So in short order, her job is to accelerate growth, Sam.

[Operator]

Our next question from Anna Andreeva with Piper Sandler.

[Anna Andreeva, analyst]

Congrats on all of the results. Great to hear about momentum and innovation. Chris, at Saucony, you have driven some really great brands meet with the collabs. Anything you can share about how we should think about the pace of those next year? And do you see these collabs mostly for the lifestyle piece or performance as well? And do you see a bigger opportunity for collabs at Merrell into '25? And I guess, at Taryn, can you just talk about what's driving that slight reduction in the margin outlook for the year? I think you had talked about marketing and IT being the 2 only areas of investment. So just any additional color on how we should think about that would be great.

[Christopher Hufnagel, executive]

Thanks for the question. Certainly, collaborations are a critical piece as they sort of drive brand awareness and drive brand heat and then us partnering with other like-minded brands or individuals as we think about our brands. That is a tried and true and tested playbook, and I think you've seen Saucony really accelerate that and really do some amazing collaborations this year. Last year, they had the collaboration of the year with J. Tips. They followed up with J. Tips again. There was lines around the block for the demented collaborations, and I think you'll continue to see that playbook. And if anything, a faster pace.

That is where the consumer is and I give the Saucony team credit for as many as they've come up with and the buzz they're building around those. And I think it's not just a U.S. phenomenon. It should be a global phenomenon as well. Merrell has had a handful of collaborations as well. The most -- the next one is [ Jeep ], which is going to drop next week, which is the year 2 of the Jeep collaboration and you'll continue to see those in a brand relevant way. So I think those are excellent ways for us to sort of build brand awareness and build brand heat and then partner with other cool individuals or cool brands or cool retailers, to get our consumers out there and really work to deepen emotional connections.

We've talked about this global brand building model, designing awesome products, telling amazing stories. And that amazing story piece is really -- can be helped to be driven by the collaborations that we've done. So expect more of that from us.

[Taryn Miller, executive]

Regarding your question about margin expectations for the fourth quarter, at the midpoint of the guidance that we gave our fourth quarter gross margin of 43.7% is consistent with the implied guidance that we gave in August for gross margins. And for operating margins of approximately 9%. This reflects -- it is modestly lower than what we had guided the implied guidance in August. This is primarily driven by incremental brand spending that we're putting into market for performance marketing to really help support that Q4 growth.

So it's -- I think we're taking the opportunity to put some discretionary spend in to make sure that we're supporting the growth that we have in there. For -- I would point out that for the fourth quarter operating margin it does reflect further sequential improvement. If you look at Q1, we were at 5%, now it's the fourth quarter at around 9%. It shows both a strong sequential improvement in our margins as well as a year-over-year expanding margins.

[Operator]

We'll take our last question from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

Great. I was hoping if you could elaborate a little bit more on the DTC growth trends you see across the brands, specifically the activewear brands maybe you don't give like specific numbers but just ranges to have an idea. And then curious if you could elaborate a little bit more on the share gains that you saw in Merrell because I recall, you've seen an acceleration in the last couple of quarters. So would be interesting in hearing that, considering that. Overall, it seems that it's been a relatively soft outdoor footwear category.

[Christopher Hufnagel, executive]

Yes. Mauricio, thanks for the question. For our 2 biggest brands, Merrell and Saucony in the quarter, it was essentially mid-single-digit growth in DTC. Both brands sort of comping fairly heavy promotional activity from last year. So at the same time, we saw growth. We're actually pleased with some of the progress we made on the gross margin side as well. As we work to become less promotional at our dot-com business, as we pivot into the final quarter of the year.

As it relates to share gains in Merrell, you are right, the outdoor category certainly has been under pressure for the last couple of years and is incumbent upon the category leader, which Merrell is to help reinvigorate and innovate and draw attention to that category and reverse that. We've actually accelerated market share gains in Merrell. I think 6 of the past 7 quarters, we have market share gains. And our biggest jump, I think, was just last quarter, approaching 300 basis points of share gain for Merrell.

So Merrell's mission really is to modernize the trail and to build lightweight athletic more versatile footwear. And we certainly are encouraged by some of the progress we've seen specifically with the MOF speed to a lighter, faster, mortholetic version of the Moab, which is the #1 hiking boot in the world. The consumers are responding to that. It looks great. It performs phenomenally well. It takes color material great. And I think that really is helping to lead.

So in total, e-commerce in total, it was up mid-single digits. Our stores were slightly worse than that. I'm pleased with the progress we made in the e-commerce piece. And now obviously, everyone is turning quickly towards. Now we're post-election, focusing on the critical holiday selling period for our dot-com channels.

[Operator]

And it appears that we have no further questions at this time. That concludes today's teleconference. Thank you for your participation. You may now disconnect.