Greetings. Welcome to Wolverine World Wide, Inc.'s second quarter fiscal 2020 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Brent Parent, Vice President of Strategy and Investor Relations. Thank you. You may begin.
Good morning, and welcome to our second quarter 2020 conference call. On the call today are Blake Krueger, our Chairman, Chief Executive Officer, and President, and Mike Stornant, our Senior Vice President and Chief Financial Officer. Earlier this morning, we announced our financial results for the second quarter of 2020. The release is available on many news sites and can be viewed on 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 LaLanne at 646-677-1814. This morning's press release and comments made during today's earnings call include non-GAAP disclosures. These disclosures were reconciled in attached tables within the body of the release.
During our call, we are providing adjusted financial results, which adjust for the impacts of environmental and other related costs and environmental cost recoveries, costs related to the COVID-19 pandemic, including reorganization and credit loss expenses, and foreign exchange rate changes. I'd also like to remind you that predictions and projections made during today's conference call regarding Wolverine Worldwide and its operations are forward-looking statements under U.S. securities laws. As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could cause actual results to differ materially. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, I'd like to turn the call over to Blake Krueger.
Thanks, Brent. Good morning, everyone, and thanks for joining us. I hope everyone on this call is safe and well. Earlier this morning, we reported second quarter revenue of approximately $349 million and adjusted earnings per share of $0.08. The company's performance significantly exceeded our expectations entering the quarter on virtually every financial metric. Our team's response to the challenges resulting from the COVID-19 pandemic has been extraordinary, and the company is positioned to win moving forward. At the outset of the global shutdown, we immediately developed a six-point strategic game plan to tightly focus our efforts around protecting the health and safety of our team members and customers, supporting our communities, and delivering strong business results, as well as positioning the company for the future.
This plan and our team's execution behind it is working very well, and we are extremely encouraged by the company's results in the second quarter, which were led by the near triple-digit growth of our e-commerce business. We've strategically invested in digital and e-commerce capabilities for several years and quickly prioritized these channels as the best path to reach our consumers and drive profitable growth during the shutdown. These investments enabled our online business to sustain accelerated growth throughout the quarter, with a number of brands like Merrell, Saucony, Wolverine, and Cat Footwear delivering well over 100% online growth. The relevance of our brands, product offerings, and stories, combined with effective consumer acquisition efforts, drove an increase in organic traffic, while new consumers grew over 100%.
The total online channel for our brands, including our own e-commerce business and the online business of our wholesale partners, accounted for about two-thirds of our revenue in the U.S. during the quarter. Growth in this channel delivered strong profit leverage, including nearly 600 basis points of operating margin expansion in our own e-commerce business. I will share additional details on our digital strategy and our focused e-commerce efforts in a few minutes. At the very start of the crisis, our balance sheet and financial condition were strong, but we prioritized liquidity and cash given the uncertainty surrounding the pandemic and its impact on the global marketplace. In the quarter, the business generated over $115 million of operating cash flow, well above our highest expectations.
The company has a proven track record of consistently generating healthy cash flows in a broad range of business environments, a powerful testament to our team, the strength of our brands, and our agile and diversified business model. Mike Stornant will share more details on our strong cash and liquidity position in a minute. A number of our brands are clearly benefiting from the underlying changes in consumer behavior. During the pandemic, there has been a significant uptick in new runners, and Saucony is capturing many of these new consumers and building momentum with award-winning product innovation. More people are getting outside and participating in outdoor activities, especially younger consumers, and Merrell is the market leader in the hiking category and provides a broad range of products to help consumers enjoy the outdoors....
Finally, people are tackling more do-it-yourself home projects, in addition to continuing to work in essential jobs, spurring demand in work product, a category where we are well-positioned with market leaders like Wolverine and Cat Footwear. While we continue to expect the pandemic's impact to persist in some countries and regions, we have confidence that the company is uniquely positioned for the current macro headwinds, the gradual reopening and recovery of the global economy, and the new marketplace that is emerging. I'll offer additional insight into the company's strategic outlook shortly, but first, let me briefly review the performance of our brand groups in Q2. Reviewing our brand group's performance, starting with the Wolverine Michigan Group.
Reported revenue was down 31.7% to the prior year and down 31.2% on a constant currency basis, reflecting the widespread impact of the pandemic and related shutdown of retail stores. Merrell and Cat Footwear were both down more than 30%, and Wolverine, which benefited from several essential retail customers remaining open, was down less than 30%. Chaco was only down mid-teens due to its high digital penetration and the success of its new Chillos product, and our smaller brands in the group were down double digits. E-commerce was the primary revenue and earnings driver across the portfolio in Q2. Merrell.com grew approximately 140% during the quarter, while nearly tripling new customer acquisition year-over-year.
The brand effectively engaged consumers digitally, with significant increases in video views and social engagement, driven by highly relevant stories and products celebrating the power and benefits of the outdoors. The combination of compelling new product in the hiking, trail running, outdoor, and at-home casual categories and strong customer engagement helped generate robust online demand. The consumer is responding to new product and fresh stories, and the Merrell pipeline is full, with the brand also benefiting from the outdoor trend tailwind. The brand is building equity behind new performance product, including the Antora, Nova, and Altalight offerings, as well as its industry-leading franchises, such as the Moab Hiking Collection. On the lifestyle side, the Juno Sandal collection, along with trend right slip-on, the Hut Moc, Hydro Moc, and the Jungle Moc generated strong sell-through.
Wolverine and Cat Footwear grew their e-commerce businesses even faster than Merrell during the quarter, with new innovative product playing a central role. Wolverine.com's top seller was the ShiftPlus work boot offering, with the new DuraSpring technology, delivering an athletic feel and a work boot with long-lasting cushioning. The brand built on this new technology with the July launch of the innovative Hellcat work boot, powered by UltraSpring, which sold in with our wholesale customers extremely well and immediately became the top-selling style on wolverine.com. Catfootwear.com was led by the Excavator Superlite collection in work and the trend-right Intruder collection in the lifestyle category. Moving to the Wolverine Boston Group. Reported revenue was down 46.9% to the prior year and down 46.7% on a constant currency basis.
Saucony had a relatively solid second quarter, with revenue down a little over 25%, with a strong improvement in the back half of the quarter. Sperry and Keds, two of our more fashion-oriented brands, were impacted by the stay-at-home realities of the pandemic and soft trends in casual footwear, finishing down approximately 60% and 50%, respectively, in the quarter. Saucony.com nearly tripled revenue in Q2, driven primarily by new product innovation and significant new customer acquisition. Product innovation also helped increase the brand's average selling prices overall and expand gross margin by 500 basis points. Saucony has captured the running world's attention and garnered numerous awards with its SPEEDROLL design geometry and PWRRUN midsole cushioning technology, which delivers enhanced flexibility, fit, durability, and energy return while weighing one third less than comparable styles.
The brand continues to roll out the Power Run technology across its entire product line. The new Endorphin Collection launched in Q2 with the Pro model, featuring Power Run and an innovative performance-enhancing carbon fiber plate. The shoe propelled Molly Seidel to a second-place finish at the U.S. Olympic Marathon trials earlier this year, and was the top-selling carbon plate running shoe in the run specialty channel in June, generating substantial buzz in the industry. The new Ride 13, one of the brand's largest franchises, is already delivering high double-digit growth versus the previous model. The brand ended the quarter with a double-digit order backlog increase. Saucony's product and business fundamentals are very strong, and the brand is clearly benefiting from the consumer running and health and wellness trends.
Internationally, the brand performed well in Europe, and in China, the brand and its joint venture partner opened 12 new stores during Q2, which are performing above planned levels and expects to open around 40 stores by year-end. Sperry.c om grew over 30% in the quarter, driven primarily by new customer acquisition. Its new Plushwave product collection continued to gain traction, and the brand executed its top-performing digital campaign in Q2. In addition, the John Legend partnership continued to resonate with consumers. The brand is planning a strong push behind the campaign this fall. Sperry also plans to expand its iconic Saltwater boot offering into men's and diversify the women's assortment this fall with new trend-right silhouettes. The brand is the leader in the rain boot category in the U.S. and is seeing encouraging category trends with retailers for the back half.
I'll also take a few moments to share our perspective on the macro environment and additional details on how the company will leverage its strengths to succeed moving forward. Throughout the pandemic, we have been actively engaged with business, government, and healthcare leaders to stay abreast of the latest global developments and adjust our own tech. From the very beginning, we focused on supporting our communities and frontline responders with personal protective equipment, as well as financial and product donations. As one example, our custom Chaco facility was converted to manufacturing protective face masks, which were provided to local hospitals and healthcare workers. While the timing for a vaccine is still unknown and much uncertainty remains, we are increasingly optimistic about the global prospects for our brands, many of which are benefiting from the strong consumer trend tailwinds.
Our company and business model are built to overachieve in the most challenging global conditions, which we certainly witnessed in the second quarter. We anticipate that each country will continue down a path of gradual recovery, encountering challenges and incorporating additional health measures along the way. However, global consumers, including new consumers to our brands, are responding to relevant storytelling and fresh, innovative product. During this time, we have increased our efforts and investments behind design, cutting-edge technology, digital executions, and new product introductions. New collections in performance categories like hiking and running, and need-based categories like work, including work around the home, will continue to win in the marketplace, underpinned by broader consumer trends related to health and wellness, as well as a more secure and comfortable home environment. Our brands continue to accelerate new product introductions across a number of trend-right categories.
Our long-term investment behind our digital capabilities and e-commerce business has positioned us well for the accelerating change in consumer behavior and online growth. We will continue to add to the meaningful investments made in our digital marketing platform, big data and AI tools, digital content, personalization, and mobile experiences. During the pandemic, we have increased digital marketing spend by more than 100%, fueling growth and new customer acquisition, and we expect to increase this investment by more than 60% for the full year. Digital innovation is beginning to drive our entire go-to-market process as well, enabling us to get the right product, more innovative product, in the right place at the right time. In June, we wrapped up our first-ever fully virtual and digital global brand conference, completed with less than 2 months' prep time.
This conference was rated best in class by our global partners, who represent our brands in around 170 countries and markets. We have increased the use of digital tools to design, sample, and style test products, and we're now piloting AI-powered trend analysis and advanced visualization to enable our product development process to be more effective, efficient, and responsive. These new tools will also deliver benefits related to demand planning, inventory management, and selling efforts. While this dynamic environment will continue to present challenges and opportunities, our leaner organization structure and enhanced digital capabilities are providing for faster decision-making and a more agile and responsive company. Our diversified business model helps us mitigate the pandemic-related risk, as we are not dependent on any single brand, target consumer, product category, geographic region, or distribution channel to drive the business and win.
We are encouraged by the company's strong performance in Q2 and believe our long-term strategy and operational rigor have prepared the company well for this unique time in the new global marketplace. Our brands are well-positioned relative to the consumers' evolving mindsets and shopping behaviors. Our balance sheet and financial position are very strong and capable of supporting accelerated investment... and our diversified and nimble business model enables us to pivot quickly as needed. We believe the company is built to deliver strong cash flow and create value for our shareholders in any market environment. Before I hand it over to Mike, I want to stress how incredibly proud I am of our team.
Their actions and hard work in response to the pandemic's impact have enabled the company to not only support our communities and remain on strong footing, but to exceed our expectations and emerge even stronger, positioned to invest and win in the new global marketplace. With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who will provide additional commentary on our performance in the second quarter. Mike?
Thanks, Blake, and thanks to all of you for joining us on the call today. I would like to start by briefly echoing Blake's comments regarding our global team. Their focus and hard work have driven the performance of our brands in the toughest of times, and have helped us to reinforce the financial health of the business. This has put the company on solid ground, and I'm very grateful for their contributions. On today's call, I will start by providing details on the company's second quarter results, and then share an update on current business trends. Revenue for the second quarter was $349.1 million, down 38.6% compared to the prior year, or down 38.3% on a constant currency basis.
On this revenue performance, the company generated $115.6 million of operating cash flow, significantly exceeding our highest expectations entering the quarter. While the majority of physical stores were closed for much of the quarter, our e-commerce business excelled, growing 96% year-over-year at accretive margins. Our digital and e-commerce platforms delivered a crucial payback on our multiyear investment and proved their potential to drive the business at a larger scale. In total, these platforms represented about two-thirds of total U.S. sales in the quarter. The company benefited from approximately $10 million of international orders that shipped at the end of the quarter instead of in Q3, as previously anticipated. On a regional basis, North America and EMEA performed the best, driven by e-commerce growth and the performance of consumer-relevant product categories like hiking, running, and work.
Asia Pacific and Latin America were down more significantly due to a greater dependence on casual lifestyle categories and a more severe and prolonged impact from the pandemic in Latin America. Our diversified and nimble business model again played a critical role in mitigating risk. Compared to the prior year, inventory of $386.5 million was down 5% at quarter end, and down 7% when excluding new stores and the impact of incremental tariff costs. This compares very favorably to the projections entering the quarter of a mid-teens increase in inventory. Promotional activity was limited to certain brands with seasonal product, and we were successful in working through this inventory.
The full-price wholesale business and the increased mix of our higher-margin e-commerce business helped drive gross margin for the second quarter to 42.2%, 170 basis points better than last year. Most brands delivered nice gross margin expansion for the quarter. Adjusted selling, general, and administrative expenses of $129.6 million were down nearly $38 million compared to last year due to lower sales and quick action taken to adjust to the unplanned downturn in the global economy. Select furloughs, organizational changes, and compensation changes for the company's management team accounted for nearly half of these savings. Reductions in traditional marketing and travel costs were also key contributors. We continued to invest heavily in our growing e-commerce platform and increased Q2 marketing spend in this area by more than 100% compared to last year.
We also focused more investment dollars behind Merrell, Saucony, and Chaco to take advantage of evolving consumer trends that started during the quarter. An important note here on the quarterly phasing of SG&A expense for this year. Some cost savings were more beneficial in Q2 due to the timing of certain events, including furloughs and other compensation changes, the closure of our retail stores, and the significant reduction in warehouse and customer service support at the beginning of the quarter. We remain disciplined in managing all of our costs, but project that SG&A expense in Q3 and Q4 will progressively increase from Q2 as the demands of the business increase and as we invest to support growth entering 2021. We expect approximately $22 million of such costs to come back into the third quarter.
Adjusted operating margin was 5.1%, lower than last year due to lower revenue, but well ahead of our projections entering the quarter. Net interest expense rose $3.8 million as the company took proactive liquidity measures and raised $471 million of new debt in the quarter. We project that net interest expense will be approximately $45 million for the full year. Adjusted diluted earnings per share of $0.08, $0.09 on a constant currency basis, significantly exceeded our expectations entering the quarter. Let me now shift to the balance sheet. We are very pleased with the accelerated progress made on inventory management. Our brands have sufficient core inventory and are poised to support improved customer, prioritize future production to bring new and innovative styles to the consumer, especially through digital channels.
Overall, the inventory is healthy, and we expect progressive improvement in our inventory position as we move through Q3 and Q4, helping us to deliver solid operating cash flow during the second half. We expect normalized closeout sales in the second half of the year due to the reopening of discount retailers that were closed for much of Q2. The $115.6 million of operating cash flow generated in the quarter was an outstanding result. Our team over-delivered on nearly all metrics to drive this. We were especially pleased to see stronger than anticipated cash collections from our global customers. Our overall day sales outstanding was 54 days, well below our expectation and a testament to the strong customer partnerships and the global relevance of our brands in this environment.
We now expect operating cash flow to be between $200 million and $250 million dollars for the full year. During Q2, we amended the company's senior credit facility to provide enhanced flexibility within our capital structure and borrowed $171 million dollars of incremental term loan debt. We also sold $300 million dollars of senior notes that mature in 2025. Together, the proceeds from these actions were used to repay prior borrowings under our revolving credit facility, resulting in longer-term financing and additional borrowing capacity overall. More recently, in Q2, we paid down $665 million dollars in revolver debt, reducing the outstanding balance to $125 million dollars at the end of the quarter.
Total liquidity at the end of Q2 was approximately $1.1 billion, including cash of $423 million and $669 million of revolver capacity. Our bank-defined leverage ratio was 2.16 times at the end of the quarter, lower than at the end of Q1, and well below the 4.5 times ratio required by our financing agreement. Based on our current projections, we are confident that the company will remain well within its leverage ratio requirements and in full compliance on debt covenants for the foreseeable future. We have great confidence in our brands and in our ability to adjust to the dynamics of a volatile global marketplace. The environment remains uncertain, with somewhat limited visibility. As a result, we are not providing detailed guidance at this time, but we'll revisit this issue as conditions stabilize.
As we continue to manage the business to maximize growth and cash flow, we are experiencing the following trends so far in the third quarter. Our performance and need-based brands, including Merrell, Saucony, Wolverine, Cat Footwear, and our other smaller work brands, are performing better than our lifestyle brands. We expect this to continue, especially for Saucony, as it accelerates its momentum in H2. Reorder trends from our wholesale customers have been positive for the last several weeks. Many retail stores are now open, but traffic is still recovering as consumers become comfortable with returning to physical shopping environments. Store traffic in the U.S. has slowed recently as consumers react to the apparent second wave of the pandemic being experienced in several states. Our e-commerce growth remains robust, but has moderated to about 50% in the last few weeks as physical stores have reopened.
We expect current growth rates to continue for the balance of the quarter. Gross margin remains healthy, but should moderate to more normal levels as stores reopen and we return to a balanced wholesale revenue mix. Around the world, our third-party partners are managing inventory and coping with a variety of market dynamics. We expect EMEA to perform better than the other regions, partially due to the relative strength of our own businesses there, followed by Asia Pacific. Latin America will continue to lag, recovering more slowly. Overall, we do expect a sequential improvement in revenue from Q2 to Q3. Based on current trends, coupled with the current backlog and reorder trends, we expect third quarter revenue to be down less than 25%. The global economy continues the reopening process, but as we have seen here in parts of the U.S., not without some volatility.
As such, we remain focused on adeptly adjusting course as needed and managing the fundamentals of the business. The company has proven an ability to consistently generate earnings and cash flow for its shareholders, even in severely compromised global market conditions, with Q2 providing the most recent example. Our diversified global portfolio effectively mitigates risk, while our nimble operating model and relatively low fixed cost structure enable us to pivot quickly when faced with challenges. The company has the liquidity and the balance sheet to weather near-term headwinds while we fuel future investments. Our team is focused, experienced and determined, and I am confident in our ability to emerge an even stronger company. Thanks for your time this morning. We will now turn the call back to the operator.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jim Duffy with Stifel. Please proceed.
Good morning, guys. Terrific execution.
Thanks, Jim.
Yeah. I'm sure you guys are gratified by the return you're seeing on the investments that you've made in digital capabilities. Wanted to start by talking about the increased use of digital in your business processes and go-to-market strategies. And we're seeing some changes across a number of industries with the pandemic. As you guys look forward, can you kind of shape maybe some of the P&L influence of increased use of digital capabilities in your operational strategies? You know, how does this influence the kind of structural margin opportunity for the business?
Well, I think it's gonna be a benefit, Jim. On the marketing side, obviously, there'll be a bit of a shift here from traditional marketing to digital marketing, but the ultimate goal here is to shorten the overall supply chain, not just the making of shoes, but development to hitting the consumer's hands. You just simply have to be closer to the consumer, and especially in challenging times like this, you need to do that in order to take risk out of the equation. So we see digital as being a broad enhancer when it comes to that kind of operational discipline and shortening the supply chain.
It's hard to predict exactly the pockets and how much of the savings, SG&A savings will become out of the equation in that regard, but we believe it's going to be fairly substantial, especially when you consider traditional sourcing and product development, back and forth to China, Asia, and other manufacturing centers. We believe that's gonna eventually fall by the wayside and be replaced by digital capabilities.
Yeah. And Blake mentioned in his comments the fact that, you know, we think we can take a lot of those costs, you know, product-related costs out with the digital solution, virtual solutions that we're already using, but had to test in an accelerated timeframe. But also, it just helps us manage the inventory. We can be closer to the consumer. The decisions we're making about the inventory and when we make those really helps us drive down our exposure there. So we're seeing some really immediate benefits from that approach.
Great. One number that really jumped out at me, you guys mentioned 600 basis points operating margin leverage in the owned e-commerce business. How were gross margins for the e-commerce business in the quarter? Was it promotional? And can you speak to some of those leverageable expenses? I'm curious how much of that leverage related to ad rates, which I think were depressed during the quarter, which may have helped customer acquisition costs.
I think there are a couple of big drivers for us. Gross margins were up actually year over year, nicely. It wasn't a—I mean, we were promotional with a couple of brands that needed to move some seasonal goods, but overall, the promotional cadence was better than sort of normal. And I would say from that standpoint, you know, helped us on the gross margin line, along with the fact that we were introducing some new products in the quarter, which were at a higher margin. So that was positive. The drivers on leverage, really a couple things. The way we run our e-com business, right?
We have a platform that supports our entire portfolio, and that cost structure, you know, definitely is variable to a certain degree, but we were very much able to support the e-com demand, both in terms of the infrastructure with the e-com center of excellence and our warehouse, customer service, and other support services very well, and that helped leverage the results there. And then, you're right, we did get some benefits from some depressed, you know, advertising costs. But overall, the organic interest in our sites really allowed our marketing money to work a lot more effectively in the quarter. So our ROAS on that spend was higher because we saw some very healthy organic interest and organic search drive traffic to the site.
Great. I'll leave it at that. I look forward to following up after the call.
Thanks, Jim.
Our next question is from Chris Svezia with Wedbush. Please proceed.
Good morning, everyone. Thanks for taking my question. Well, just first, I wanna go to Saucony for a moment. Just to go there, just, would you expect that to return to growth in the back half of the year, just given the double, you know, the strong backlog increase, what you're seeing on e-com in response to product? Just further color on that based on what you said about the backlog.
Yeah. So that would be our goal, obviously, affected somewhat by the timing of new product introductions. There are a number of new product introductions that could fall at this point into Q4 or Q1, so it's a little bit up in the air. But Saucony has tremendous momentum right now, driven fundamentally by innovative product and a lot of buzz in the marketplace. So we would expect certainly a return in Q3 to growth for Saucony.
Okay. Thank you. And just, I guess, Mike, for you, just the exit rate for Q2 on, on revenues seems to be somewhere in that, you know, somewhat less than 25% or that preliminary thought process you gave for Q3, which doesn't really imply too much of an improvement sequentially in terms of what you're seeing. Is that just because of, A, you know, just your concerns about COVID spikes in certain markets, how quickly Latin America and some international markets come back?
Yeah.
Things of that nature, just based on some of the other comments you made, wholesale, you know, sales seem to be slowly moving in the right direction. Is that just more caution about how this all unfolds or just any additional thoughts?
For sure, and we continue to be cautious here, Chris. It's the wise thing to do. I think it served us really well, how we managed the business in Q2. You know, June saw some improvement. You know, we, we came out at the beginning of June with sort of our outlook at the point—at that point in time for the rest of the month, and things proved, proved out a little stronger. July, July was an improvement over June, but at the end of the day, you know, we still have some uncertainty that we, we're, we're not able to control. So, you know, I would, I would say overall, though, the, you know, the trends in the business and the shift, you know, is probably most prominent as obviously move from e-com growth to more traditional wholesale channels.
But the demand there has been good in our at once order trends in the last several weeks have been positive there. So there's been a kind of surge recovery there, and obviously, we'd expect that to maybe settle down a little bit in the back part of the quarter.
Understood. Final thing, just for me, real quickly, just on gross margin. I'm just curious what you would characterize as normal, or maybe if you can break apart how much of the, call it, 170 basis points improvement in Q2 is just driven-
Yeah
By strength and mix. I'm just curious, does it turn negative, or is it just normalized in terms of less of a gain because you're selling in still full price product or not, don't have to be promotional?
Well, yeah, that's a good question because I mean, I think normal for us was really to just kind of talk about a normal mix. But we're, you know, there was suppressed closeout demand in the second quarter, and some of that's gonna shift into Q3. So that'll have a negative impact on gross margins just for the quarter. It's just a little bit of a timing shift there. But, you know, when you look at sort of the gains that we had in Q2, 170 basis points, two-thirds of that, more than two-thirds of that was really from e-com mix and just first quality versus closeout mix.
So I think we're gonna see a big portion of that kind of come back in Q2 and get back down into the, you know, 40-41% range for the third quarter, not Q2, Q3.
Understood. Okay. Thank you very much. All the best.
Mm-hmm. Thanks.
Our next question is from Jonathan Komp with Baird. Please proceed.
Yeah. Hi, I appreciate the color on the recent trends. I just wanted to dig in a little bit more on the casual brands, you know, what you're seeing there, just given the, you know, a couple of them that lagged in the second quarter. Maybe just to start there, if you could give more color on what you're seeing.
Yeah, I think it's several things, Jonathan. I think one, everybody's aware of consumer trends right now. So there's some distinct consumer trends for us right now that are tailwinds for many of our brands, and there's a few that are headwinds. So I would... A couple of our Boston brands, more than the rest of the portfolio, have a bigger U.S. department store base in their business, for example. That obviously was not very robust in Q2, so that's having an impact. And there's been, just on the consumer side, a general a focus on, you know, outdoor run, work, at-home comfort, probably at the expense of dress, casual fashion, and traditional casual shoes. And we're certainly seeing that in a couple of our brands.
We think that's probably gonna continue here until the pandemic runs its course here over the next six or nine months.
Just to maybe clarify, I assume those brands you expect down more than 25% still, just given the, you know, some of the positive callouts you had in the other performance-driven brands, just trying to-
Yeah, that's correct. Yeah, that's correct. I would expect those brands to be down in that range. Certainly down more than are some of our other brands that are benefiting from the tailwinds.
... Okay, great. And maybe bigger picture when you look out with your crystal ball, maybe this is a broader industry discussion, but you know, just trying to think about how you're planning to be able to capture the lost sales here. Maybe any thoughts on, you know, kind of big picture timeline? And related to that, just with some of the cost discipline, do you think you need to get back to the prior sales levels to get to achieve the same level of profitability? Or do you think, you know, some of the cuts that you're making are gonna be permanent here?
I think some of the structural changes will be permanent. I think there's been significant changes over a very short time in consumer behavior. Maybe five years of consumer behavior compressed down to six or nine months, especially around the use of technology and the changes that that's enabled. So we think that's gonna be permanent. That requires our business and all businesses, frankly, to adjust and be agile and be fast and operate with some pace. And a broader picture with respect to the pandemic, it really varies by region by region, and in the United States, state by state or even labor shed within a particular state. So we believe there's gonna continue to be some volatility until there's a universal vaccine.
I don't have a crystal ball, although I've been on a committee advising our state's governor on it with health experts and other CEOs on approaches to address the pandemic and lower the curve. But I think it's gonna be 6 or 9 months, a little bit of fits and starts. One of the things that has been surprising to us has been the quick spike in consumer trends, whether it's to the outdoor or running. Even in the running category, there's been a tremendous influx, for example, of new consumers to the sport. And subsequent surveys have shown that the vast majority of those new consumers are gonna remain with the sport. So we see some of those trends continuing on well past probably the lifeline of this particular pandemic.
Okay, that's a helpful color. Thank you.
Thanks.
Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.
Hi, good morning, and congratulations on the progress.
Thank you, Dana.
As you've seen the e-commerce, as you've seen the e-commerce channel and digital accelerate, what do you think the opportunities are for gross margin potential versus the other channels? And how do you see it as being operating margin accretive? Thank you.
Yeah, I would think, one, it's going to be gross for us anyway. I know it's different for certain companies, but our e-commerce business has always been accretive to our overall bottom line results. We do not even though we're going to and have increased our investments in e-com and digital, we think that is gonna be continue to be the case. So we would see this shift to a more DTC e-commerce model, benefiting gross margin over the long run, more than we may have seen it have an impact a year or two ago, and certainly a beneficial impact on our bottom line as well.
Got it. And then just on in-
That's, and frankly, that's taking into account increased investments that we know are going to continue.
Yeah, and Dana, you just... all you have to do is look at the second quarter results that we talked about earlier and really the ability at these levels, at this scale, to enhance the operating margin by 600 basis points was pretty tremendous. And we had to, you know, chase some things and change some things in the middle of the quarter to respond to that demand. So I think it bodes well for our ability to leverage as you're inquiring about.
Mm-hmm. And then as you think about inventory, which showed also nice improvement too.
Mm-hmm.
How do you think about inventory by brand as you move through to the holiday season? What are you seeing out there in terms of demand? Thank you.
Sure. We're certainly seeing spikes in demand behind certain consumer trends in some brands. We've got a few brands that are a couple of brands that are chasing some inventory right now, we believe for Q4. Obviously, when you have something as white hot as Endorphin is for Sperry, or I mean, Saucony right now, you never have enough inventory. So we're chasing some inventory for Saucony, for sure. Some of the more fashion boot product probably, and the new boot product for Sperry as well. Overall, though, the team did a pretty tremendous job of keeping the company in business, keeping our supply chain operational. And hats off to the team, obviously, for all those efforts in Q2.
I would think with this, we are going to see, at least domestically here, probably a continued shift, to at once from future orders for a quarter or two at least. So it just puts a little more, burden on us to have the right core inventory for those retailers and really over-communicate with those retailers like we have been, so we can really manage our business with them... many of those retailers remain in a state of flux right now.
Thank you. Look forward to seeing the continued progress.
Thanks.
Thanks, Dana.
Our next question is from Matthew DeGulis with KeyBanc Capital Markets. Please proceed.
Good morning. Thanks for taking our questions. So with e-com up almost 100% and wholesale down, it's a pretty big delta. So I'm wondering your thoughts on if this is more of a permanent shift, and you'll be a much bigger DTC company moving forward, and what this does to your business on a predictability and inventory ordering perspective?
I think it's going to be a permanent shift. It may not be as dramatic in the short term as Q2, but we see that as a permanent shift, accelerating shift. I've read some predictions that overall, consumer online will be up 50% or more this year in the U.S. market, for example. So we don't see the consumer retreating from the use of technology, digital and online. Certainly, the company is gonna shift to have more of a DTC focus as we look forward here. And that's frankly one of the reasons why we're investing so much in digital capabilities. We need that digital analytics, AI-powered predictions, to help us make the very best decisions when it comes to inventory.
They really, both of those, go hand in hand, at least for our business.
Thanks. In the wholesale channel, I'm wondering if you'd give us any color on how you're thinking about the back half of the year, and if you could break that down by store type, like family, sporting goods, online only, and the others.
Yeah. We've seen stores gradually open up here as throughout Q2, but we know that some states now in the United States, for example, I'll restrict my comments right now to the domestic market, are experiencing a second wave or something approaching a second wave. We have seen store traffic overall decrease in some of those markets in some of those states, and we think that probably will continue until trends reverse with respect to the virus. A little bit surprising in Q2, we had the rural channel, the farm and fleets remained open fairly much as the central businesses throughout the country. I think that contributed to our relatively strong work boot performance in Q2. We continue to see the case.
We think the sporting goods channel will continue to remain open and perform well. Mall-based retailers, it's a little bit more of a mixed bag there, depending on the state and in some cases, the city. So we know the consumer still has a level of fear or concern about going into crowded environments. You wouldn't know that from the news when you look at the beaches and some of the younger millennial parties, but we know that exists generally for consumers right now. So we think those environments will continue to be a bit challenged here for a while. And likewise, I think the family channel is a little bit mixed as well. Some areas open and doing fairly well, and then some areas and states not so well.
So we think we're gonna see gradual improvement here across all channels as we roll forward. The big spike, I think, is going to be tied to a vaccine and some real headway on that front. But we longer term and short term, we see the consumer continuing to focus online and using technology to make their life more safe and convenient.
Matt, one more thing. Our digital pure play customers, right? They continue to do very well in this environment and were strong contributors in Q2. As part of our traditional wholesale business, that's become a bigger and bigger part of the overall mix and helped us deliver two-thirds of our U.S. revenue through the online channel in the second quarter.
Thanks, all.
Our next question is from Erinn Murphy with Piper Sandler. Please proceed.
Great. Thanks. Good morning. I guess two questions for me. First, just around the uncertainty of school starts and just the broader back-to-school season, could you just speak to how you see that impacting Sperry and Keds in particular in the portfolio? And then I have a clarification on Saucony.
Yeah, I mean, unfortunately, for families with younger children and even kids going back to universities, the patchwork of approach to school openings this fall is causing, you know, a lot of concern and a lot of volatility. We do not anticipate any kind of universal approach there. As you know, Erin, back to school is not really material to our company overall, as a selling event. You know, our kids group, even that is more focused on younger children, so, we don't think it's gonna have much of an impact. But we think it's going to be, from a consumer standpoint, a more volatile back-to-school season. We see parents investing in technology, as many schools are focused on a virtual-only format, at least for the first semester or first couple of months.
We see a parent spending on their home, whether it's a desk or to create a little bit of a school/work environment. I think some of that is gonna come at the cost of traditional consumer soft goods, especially in the apparel sector and a little bit in footwear. So it's a challenging environment, you know, and it's different for every state. In Boston, our offices are open, and but our on-site daycare is not open. In Michigan, our offices technically are not open now. We have still some pretty restrictive guidelines there, but our on-site daycare here is open. So there's gonna be a number of challenges for parents and kids this certainly this fall.
Okay. And then my follow-up, and maybe, Mike, this is for you, just on Saucony. I believe you're lapping the takeover of your Italian distributor. How does that impact the second half growth rates that you were speaking about earlier on the brand? Thank you.
Yeah. I mean, we definitely saw a nice benefit last year from the addition of Italy as we acquired that distributor. So yeah, we're anniversarying some really nice numbers there in Q3. As Blake mentioned, we still expect Saucony to return to a growth position in the third quarter based on the momentum there, the order book, the trends that we're seeing in the category. So it's good that you called that out because I think that even strengthens the Saucony story that we're comping up against the addition of that business a year ago.
Great. Thank you both.
Mm-hmm.
Thanks.
Our next question is from Susan Anderson with B. Riley FBR. Please proceed.
Hi, good morning. This is Alec Legg for Susan. Thanks for taking our question. Just a quick follow-up on wholesale orders. You mentioned they were trending positively the last few weeks.
Mm-hmm.
I remember last quarter, you mentioned reducing inventory receipts by about $300 million this year. But as retailers have started opening it up, have you seen any categories or wholesale partners that have started chasing on categories? And do you anticipate that inventory receipt reduction to be less than $300 million this year?
Well, we took cancellations back at that time based on the uncertainty back in, you know, really March, April timeframe. Since then, obviously, gained more confidence, more certainty, more clarity from our customers to be able to go back and replace some of those cancellations. Overall, I think, you know, as I mentioned, our outlook for inventory is still very positive, and we expect by the end of the year to still be down over $40 million year-over-year in inventory. But we have the ability to surge if our spring demand were to pick up over the next 60 days, and we needed to bring in some more spring merchandise for December and January deliveries, you know, we still have some time to do that.
So I would say that, you know, we have inventory—we have brands that—many of our brands have seasonless inventory. It's very good core product that sells year-round, and, and I think for some of our brands, like, Blake mentioned around Sperry's boat business or boot business, that did get pushed into Q4 a little bit. But other than that, our inventories are strong, our positions are solid, and I think we're, we're in a very good position, certainly for Q3. So far in the quarter, we've been able to fulfill the, the unexpected demand at a very high level. So we're, we're confident in the inventory trends.
Perfect. Thank you.
Our next question is from Mitch Kummetz with Pivotal Research. Please proceed.
Yes, thanks for taking my questions. I just wanted to—Mike, I wanted to drill down on your outlook a little bit, first on sales, and then I got a follow-up on margins. So, you mentioned that Q3 sales, you expect them to be down less than 25%. I think you also made the comment that July was better than June. You know, my sort of back-of-the-envelope calculation is that June was maybe down around 20%. So I'm kind of curious as to what you saw in July.
Yeah.
Was it sort of down teens or?
No, June was down, you know, much higher than that.
Okay.
But July was, you know... And again, I won't quote the specific trends by month, but I would just say that we saw a progressive improvement, especially in the wholesale side of the business in July, as we just started to see more and more, reorder demand come as the stores were opening or after the stores were open. So we saw that occur and saw some good, you know, trends and consistent trends for the month of July.
So is the down less-
But they're still in the same-
Yeah, go ahead.
In the same, kind of in the same ballpark as what we're talking about for the full quarter. Slightly better in July than that, but overall, I think, you know, you know, good gives us good confidence because the out-of-the-gate trends were in line, if not a little bit better than the overall outlook we're providing for the quarter.
Got it. So, so what, what explains kind of the deterioration, the expected deterioration over the balance of the quarter? Again, is that just being cautious, or is there something you're seeing that suggests that, you know, that's why you're doing that?
Yeah, I don't think it's a significant deterioration.
Got it.
I think there's just, again, we know what the timing and phasing of when we sell in new product in the quarter, and that just happens in certain months. And we're also, you know, there's a dose of caution in there, Mitch, for sure. You know, we just don't know what the last few months of the quarter here, or the last six weeks at this point, will necessarily hold as it relates to all this uncertainty. But, you know, we feel good about the outlook based on where we are so far in the quarter.
Got it. Just trying to better understand that.
Sure.
And then on margins, I think you made the comment that on SG&A, that $22 million in costs come back in Q3.
Mm-hmm.
Are you basically saying that from a dollar standpoint, that like Q3 SG&A should be $22 million higher than Q2, or are there other factors to consider there?
No, that's about the right way to think about it. I mean, part of that, part of that $22 million is obviously variable costs, though, right?
Yep.
As we surge up with wholesale revenue and our warehouse and customer service teams and all this, you know, infrastructure. More commission sales in the quarter, things like that. Marketing spend with our wholesale, you know, brands. So, but yeah, that's essentially the way to think about it. It's not fixed costs coming back in, but much of it's variable costs related to the new demands of the business in Q3 versus Q2.
Got it. Thanks, and continued success.
Thanks, Mitch. Thanks.
Our final comment is from Laurent Vasilescu with Exane BNP Paribas. Please proceed.
Hi, good morning, and thanks for taking my question. Mike, Mike, I wanted to follow up, and I'm not sure if I heard right, but are you projecting sequential improvement, 3Q to 4Q? And I think you called out about $10 million of pull forward revenues into 2Q from 3Q. Are you anticipating any pull forward from 4Q into 3Q? Just maybe some color on that would be very helpful.
Sure. No, not at this point. We don't necessarily view there to be any major opportunities in the, at the end of the quarter. And we tend to. In this particular case, in Q2, it was nice to see that we had some strong customer demand, specifically in Europe. The international business tends to be where we have some of that timing shift. And for us, in the second quarter, it was really the strength of our European business that pulled some of that demand into Q2. But at this point, the outlook that we have wouldn't contemplate any significant shifts from Q4 to Q3.
Okay. Very helpful. And then, as you push forward with your DTC strategy, I noticed in your filing this morning, you parsed out $4.5 million in new store inventory. Just curious to know, what your store count is, currently. Is it still 96, or... And how many stores do you plan to open for the full year?
We're not planning to open any additional stores for the rest of the year. I think the store count's in the low 90s right now. We've had a couple stores come off their lease naturally, so and we wouldn't plan to be opening any new stores in the environment we're in today. But pretty good, stable position at just over 90 stores. And actually seeing, you know, as Blake mentioned, that all the, for all the reasons, whether it's state by state or otherwise, but in the aggregate between our Merrell, Sperry, and multi-brand stores, they're operating at a little above 70% of what the plan levels were for the third quarter coming into the year.
So not a complete return to normal, but in many cases, with conversions being much higher than they were a year ago, performing at about that 70%+ level right now.
Very helpful. And then as a last question, following up on Chris's question on gross margins, I think you mentioned briefly that, you know, we should think about 40%-41% range for 3Q. I understand that mix might be an impact, but just curious to know if FX, cost, anything we should think about as a downside to the gross margin?
not compared to Q2, really, Laurent. It's really, it's really the mix for the e-com and wholesale-
Okay
... that'll drive the gross margin. And as well as I mentioned, just some shift on closeouts from Q2 to Q3. More, there was some suppressed demand in Q2, and we just, stores weren't open, the retailers weren't open, and we expect that to kind of come back in Q3.
Very helpful for all the color. Thank you very much.
Thanks, Laurent.
We have reached the end of the question and answer session. I would like to turn the conference back over to Brent Parent for closing comments.
On behalf of Wolverine Worldwide, I'd like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wolverineworldwide.com. The replay will be available until September fifth, 2020. Thank you, and have a good day.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.