Wolverine World Wide Inc. (WWW) CEO Blake Krueger on Q3 2018 Results - Earnings Call Transcript

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About: Wolverine World Wide Inc. (WWW)
by: SA Transcripts

Wolverine World Wide Inc. (NYSE:WWW) Q3 2018 Results Earnings Conference Call November 7, 2018 8:30 AM ET

Executives

Mike Harris - Wolverine World Wide, Inc.

Blake Krueger - Chairman, President and Chief Executive Officer

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

Analysts

Jim Duffy - Stifel

Steve Marotta - C.L. King & Associates

Jonathan Komp - Robert W. Baird

Edward Yruma - KeyBanc Capital Markets

Chris Svezia - Wedbush

Michael Kawamoto - D.A. Davidson

Laurent Vasilescu - Macquarie

Ross Licero - Telsey Advisory Group

Mitch Kummetz - Pivotal Research

Operator

Good morning, and welcome to the Wolverine World Wide Third Quarter 2018 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Mike Harris, Vice President for Corporate Finance. Please go ahead, sir.

Mike Harris

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

Earlier this morning, we announced our financial results for the third quarter of 2018. The release is available on many news sites or it can be viewed from our corporate website at WolverineWorldWide.com. If you would prefer to have a hard copy of the news release sent to you directly, please call Tyler Deur at 616-258-5775.

This morning’s press release included non-GAAP disclosures and these disclosures were reconciled with attached table within the body of the release. Comments during today’s earnings call will include some additional non-GAAP disclosures. There is a document posted to our corporate website titled WWW Q3 2018 Conference Call Supplemental Tables that will reconcile these non-GAAP disclosures to GAAP. The document is accessible under the Investor Relations’ tab at our corporate website, wolverineworldwide.com, by clicking on the webcast link at the top of the page.

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

We believe our underlying growth best reflects how our global businesses are performing in the marketplace. Also, recall that beginning in Q1, 2018, we separately disclosed the impact of changes in foreign currency on revenue to better isolate this variable. In addition, we’ll be providing adjusted financial results, which adjusts for restructuring and other related organizational transformation costs, divestitures and incremental inventory markdowns related to store closures, and the impact of environmental, non-recurring foreign exchange and other costs.

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

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

Blake Krueger

Thanks, Mike. Good morning, everyone, and thanks for joining us. Earlier this morning, we reported third quarter revenue of $559 million, representing underlying growth of 0.5%, 1.1% on a constant currency basis and adjusted diluted earnings per share $0.62, a 44% increase over last year. Reported earnings per share of $0.60 represent the record for the company.

We're pleased with our performance so far this year and have delivered excellent operating results, driven by our WAY FORWARD transformation. Our Q3 operating margin of 12.6% was up 80 basis point over last year and represents the highest quarterly performance of the year.

The global transformation of the company over the last 24 months has greatly improved the efficiency of our business model allowing us to generate significant earnings leverage and strong cash flow.

Our improved profit delivery, strong balance sheet and healthy liquidity position that put us in a position to invest in growth initiatives and focus on revenue expansion. Our 2018 quarterly revenue growth has been a bit more choppy than I would like to be, but our year-to-date results illustrate that our global growth agenda is gaining traction.

Year-to-date revenue has grown 2.1% and excluding our lower margin Leathers business which is dealing with some challenging market headwinds, revenue has increased 2.5%.

Leverage has been excellent, as adjusted earnings per share are up 37% during the same period and pre-tax earnings have grown at approximately six times, the rate of underlying revenue growth.

Our new brand growth model is proving to be effective, especially for those brands that were the earliest adopters of the new tools set. Merrell delivered year-to-date growth of over 7% and a seventh consecutive quarter of growth and is on a pace to deliver high single-digit growth for the full year.

Sperry’s year-to-date revenue was up low single-digit and the brand enters the fall winter season with strong boot momentum, which we expect will help drive high single-digit growth in Q4 and an over 3% growth for the full year.

Cat Footwear has been a more recent adopter of the new growth model, which contributed to mid-teens growth in Q3. A key component of our growth agenda is our digital direct offense and we have allocated nearly $15 million of our 2018 incremental investment to this area.

Obviously, there's a more immediate top and bottom line impact from this investment Year-to-date, growth in our own eCommerce business was dropped 27% and accelerated to over 33% in Q3. We expect similar growth in Q4, as we are off to a strong start.

We're also seeing a strong correlation between our online stories and performance at wholesale, which underscores the importance of effective digital engagement with consumers, a key premise of the new offense.

We've had a very good start to Q4, a steady flow of new product introductions across portfolio, supported by increased marketing spend in activation activities is helping to drive the accelerated eCom growth, up over 35% quarter-to-date and store com up approximately 10%. And also provide a healthy increase in consumer interest.

Let me speak directly to growth in the third quarter, which saw revenue grow mid single-digit. Q3 revenue was impacted by several unrelated item. Lean inventory positions for a few of our brands including much lower closeout inventory, some delayed product receipt and quarter in transportation issues, macro headwinds and our low margin Leather's business related to historically low leather prices and softness in Canada and some countries in Latin America.

Merrell's growth in Q3 was impacted by sluggish retail conditions in the international market noted above as well as lean inventories resulting from very strong growth in Q2 of almost 19%.

High-teens growth in the half one’s order’s in Q3, lower availability of close out inventory, which is actually good from an overall brand standpoint and are delaying some incoming product.

Merrell is now in a much better inventory position and is poised to deliver low teens growth in Q4 with new product introductions and a significant increase in demand creation.

Sperry’s growth in Q3 was impacted by lower closeout sales from transportation related delays and late product delivery. Sperry would have also benefited from a stronger offering of transitional product for the back-to-school season. Both of our largest brands are positioned for strong growth in Q4

Now let me provide more specific details on third quarter results for our brand groups in key brand. Starting with the Outdoor & Lifestyle Group, underlying revenue grew 2.9% compared to the prior year, up 3.9% in constant currency with Merrell growing at a low single digit rate and Ked growing at a mid teens rate. The sales growth was partially offset by a low double digit decline in Hush Puppies, and a low single digit decline in Chaco.

Merrell’s growth was primarily driven by strength in e-commerce in stores along with new product introductions, including Jungle Moc 20, celebrating the 20th year of this franchise, and strong performance in core collections such as the Chameleon, Siren and MQM series.

We expect Merrell to deliver low teens growth in Q4 as new product introductions accelerate, increased marketing drives expanded consumer engagement, and our DTC business becomes a bigger component of the overall revenue met.

Keds revenue growth was driven by the North American Asia-Pacific region. The key Work category experienced double digit growth led by the recent launch of the Excavator XL and the continued success of the threshold product. The brand's e-commerce business was also up over 80% in the quarter.

Chaco experienced 35% growth in the e-commerce business in the quarter driven by solid performance across sandal offering, new women's boot collections and several limited edition introductions. However, this strength was offset by some softness in the sandal business. We expect Chaco to return to growth in Q4.

Moving to the Boston Group, underlying revenue for the Boston Group was approximately flat versus the prior year. Sperry was flat with mid-teens growth at tad and mid single digit growth for our kids business. Saucony was down high single digit.

The U.S. wholesale and e-commerce businesses were strong in the quarter, Vulcanized Sneakers continue to perform well at retail and the brand has experienced an early start to the boot season behind the success of the Salt, Water and Siren collection.

Sperry’s collaboration with Vineyard Vines has also generated strong consumer excitement and will help Sperry deliver high single digit growth in the fourth quarter. Keds mid-teens growth was primarily driven by strength in the U.S. market and nearly 40% growth in e-commerce. The Keds brand has developed a very successful collaboration strategy with Rifle Paper, Kate, Spade and others, which has helped fuel increases in online traffic and brand to improve.

Saucony was down high single digits in the quarter, which was slightly better than Q2. Challenges were centered around the U.S. market, partially offset by attractive underlying growth in the EMEA region and a 25% increase in e-commerce business. We expect improving year-over-year revenue trends for Saucony in the fourth quarter, as the efforts of our new leadership team begin to take hold.

And closing with the Heritage Group. Underline revenue for the group was up 2.6% compared to the prior year. Wolverine brand revenue increased double-digit with the other brands in the group Bates, Harley-Davidson and HYTEST experiencing declines in the quarter.

Double-digit growth for the Wolverine brand was driven by e-commerce growth of almost 50% and successful product introductions for the autumn winter season, including the Bandit, I-90, Farmhand and Blackhorn collection. The brand continues to perform well in the robust U.S. work category and ended the quarter with the number one market share position in this market segment.

As a company, we're pleased with the progress we are making on our global growth agenda, which is focused on a more innovative and fast product creation engine, a digital-direct offense and accelerated growth in the international market.

We're also beginning to realize the benefits of the new tools, process and capabilities from our WAY FORWARD transformation initiative. Merrell, Sperry and Cat Footwear were early adopters of the new growth model and are the first brands to see significant momentum from our efforts and investment over the last 24 months. We remain well positioned to invest for the future, drive organic growth and add new brands to the portfolio to lever our global platform.

With that, I'll now turn the call over to Mike Stornant, our Senior Vice President and Chief Financial Officer, who’ll provide additional commentary on our third quarter financial performance and further insight into our expectations for 2018. Mike?

Michael Stornant

Thanks, Blake, and thank you all for joining us today. In the third quarter, the company delivered its fourth consecutive quarter of underlying growth and its highest quarterly adjusted operating margin since 2011.

It is clear that two years of transformation work has resulted in significant and even more importantly, sustainable result. We are on track to deliver solid underlying growth for the year and expect to exceed our 12% adjusted operating margin target in 2018.

During the third quarter, we delivered revenue of $558.6 million, resulting in growth of 0.5%, 1.1% growth on a constant currency basis. Excluding declines in our lower margin Wolverine Leathers business, our footwear brands grew 1.5%, 2.1% on a constant currency basis. Gross margin of 41.6% improved 170 basis points compared to last year's adjusted gross margin, as most brands in the portfolio delivered meaningful margin expansion.

The excellent gross margin performance was related to better mix from the strong growth in our e-commerce business and lower leather sales, certain product cost benefits from our transformation initiatives. And the portfolio changes made in 2017. Gross margin also benefited from lower markdowns and lower closeout sales in the quarter compared to the prior year.

Adjusted selling, general and administrative expenses of $161.6 million decreased $1.9 million compared to 2017 and included $13 million in incremental investments related to growth initiatives.

Adjusted operating margin was a very strong 12.6% better than expected and 80 basis points higher than last year. Adjusted pre-tax earnings grew over 13% in the quarter, illustrating very strong earnings leverage from our business model.

The third quarter effective tax rate was an unusually low 7.8%. Given the continued strength in our cash flow generation, we were able to make unplanned $40 million discretionary contribution to our defined benefit plan, late in the quarter, which essentially brings our pension plan to fully funded better.

This result in any one-time tax benefit of approximately $6 million or $0.06 per share. Third quarter adjusted earnings per share of $0.62 grew 44.2% over the prior year. Excluding the one-time tax benefit noted earlier, adjusted EPS was $0.56 in line with our expectations for the quarter, reported earnings per share with $0.60, which represents record earnings for the company.

Transitioning to the balance sheet. Our inventory position in SKU management continued to improve during the quarter. Inventories were down $14.4 million or 4.3%, with the majority of this decrease attributed to store closures and portfolio changes executed last year.

We're pleased with this improvement but as Blake mentioned, some brands were tight on core inventory in the quarter which held back Q3 revenue. We expect inventory levels to increase by the end of the year as our brands gear up for growth in wholesale, online and owned store channel.

Cash flow from operations was strong, driven in part by inventory reduction and better than expected earnings. Two discrete items offset the excellent organic cash flow performance in the quarter, the $40 million voluntary pension contribution and they used to $53 million related to the wind-down of our accounts receivable sale program.

On a year-to-date basis, these actions impacted cash flow by $127 million. Excluding these strategic actions, we expect cash flow from operations to be approximately $240 million for the full year.

During the third quarter, we repurchased $20 million of our stock. bringing our year-to-date total to $70 million and an attractive average price of $31.65. We have over $130 million still available under our current share repurchase program.

We ended the quarter with total net debt of $434.4 million and a credit agreement net leverage ratio of 1.7 times. The company has significant flexibility to execute future actions intended to drive total shareholder return, due to this healthy leverage position and total liquidity of approximately $1.5 billion available at quarter end.

Now let me cover our updated outlook for the remainder of 2018. We now expect 2018 revenue to be approximately $2.24 billion dollars with underlying growth of between 3% to 5% expected in the fourth quarter. The updated guidance reflects the softer top line performance in the third quarter, ongoing weakness in certain Latin American markets and the impact of the bankruptcy of a Working customer.

Full year gross margin is now expected to expand approximately 150 basis points, up slightly from our previous outlook. We expect fourth quarter gross margin to expand by approximately 80 basis points. This is lower than year-to-date trends, due mostly to the moderation of the impact from 2017 portfolio changes and certain accelerated way forward benefits that were recognized in the fourth quarter of 2017.

We are on track to spend $40 million to $45 million in 2018 to fuel future growth initiatives. Including these investments, full year adjusted operating margin is now expected to be approximately 12.1%, reported operating margin is expected to be approximately 11.7% including $8 million to $12 million of cost to manage the company's legacy environmental matter.

These cost estimates and other remediation activities remain unchanged from our previous assessment. We now anticipate 2018 net interest and other expenses to be approximately $23 million. We expect the tax rate to normalize during the fourth quarter and we now expect our full year tax rate to be in the range of 15% to 16%.

We are raising our outlook for full year adjusted diluted earnings per share to be in the range of $2.12 to $2.16, an increase of 32% over last year at the high end of the range. Reported diluted earnings per share are expected in the range of $2.09 to $2.13. While the operating results for the business continue to exceed our plan for the year. It is also important to acknowledge the benefits we are seeing from a strong and diverse global business model.

This model helps us reduce certain risks that can play smaller or single brand companies. During 2018 we will deliver solid organic growth despite headwinds from sources outside of our control like economic and political unrest in some Latin American countries, customer bankruptcies in a very volatile leather market.

We are able to overcome these challenges because of a new brand model that emphasizes growth in our direct to consumer channels and expansion of our international businesses. We remain focused on driving consistent and sustainable growth, as we implement our brand growth model and execute against our global growth agenda.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jim Duffy of Stifel. Please go ahead.

Jim Duffy

Thank you. Good morning, guys. Hope you're doing well.

Blake Krueger

Good morning.

Jim Duffy

A couple of questions for you guys. As a – field all of your prepared remarks it seems like the U.S. may be a little bit better than expected or at least tracking in the international maybe lagging some. is that a fair assessment. and b, can you speak in some detail around what you're seeing in international market maybe compartmentalize the size of the Latin American business and risk there into 2019?

Blake Krueger

Yes, I mean, I think your – Jamie your assessment is pretty accurate, especially with respect to Q3 and Q3 U.S. was the standout EMA was positive, low single digit increase and most of the challenge we had came from Latin America, handful of countries that are experiencing economic political and inflationary pressure.

In Q3 maybe I'm guessing around $8 million of the impact from our international market, a bit of a surprise. We think that's probably going to continue a little bit into 2019. We don't see some of the challenges that those countries face as dissipating any time especially soon. So, certainly the size that we can handle, but it is what it is in some of those countries

Jim Duffy

Thanks. And then shifting gears to Saucony brand, you had some product related issues coming into the year, new leadership there. Can you speak a little bit of detail about the factors that give you confidence and stabilization inflection in that brand looking forward?

Blake Krueger

Yes, I mean, I think Saucony makes some great product, an award winning product and it’s going to continue to do that. I think there is an opportunity for the new management team there to really raise the bar on product.

And so fundamentally in that technical run world and some related categories it’s the product related issue and that will probably take some time. I would probably view 2019 a bit of a turnaround year for the Saucony brand, but the new team is on it. And we have complete confidence in their direction.

Jim Duffy

I was surprised to hear that you didn't mention Saucony as one of the brand that was earlier to adopt the new go-to-market strategies. Is that just because of the product issues and the management transition?

Blake Krueger

I think, frankly, Jim that was an issue that was also tied to the old management team. That mindset has changed.

Jim Duffy

Okay, great. Thank you guys.

Blake Krueger

Thanks, Jim.

Operator

And our next question today comes from Steve Marotta of C.L. King & Associates. Please go ahead.

Steve Marotta

Good morning everybody. We're just talking about the new go-to-market strategy in Merrell, Sperry and Ked were early adopters. Can you talk a little bit about who the new adopters if you will, will be particularly in the fiscal 2019 period, and how that may affect your organic growth trend?

Blake Krueger

Yes, I mean, I think the rest of the brand – the new adopters for 2019 and Q4 of this year quite honestly will be the rest of our brand. So again maybe a little less sophisticated process for some of our very or our smaller brand, but the rest of the brands will be adopting the new the new model.

Mike Harris

This is Mike, Steve. I think adding to that, what we're seeing in the business and the ability I guess the benefit of having a portfolio like this to see the direct benefits of those activities. It's not just a model; it's very specific activities in different channels that are creating results that are measureable.

And so even in Q3 where we might not have had quite as much in the product pipeline as we wanted. There was clear relationship there between that work and the outcome. So our ability to have tested this pretty rigorously over the last nine to 12 months has given us even more confidence that the model is focused in the right areas and to Blake's point now, as we roll it out to the rest of the brands, we have even that much more confident in its ability to be successful.

Steve Marotta

A quick follow up. First, can you talk a little bit about your cost of good exposure to China sourcing and domestic demand specifically?

Blake Krueger

Yes. I mean, we've been – we've had a strategic action plan for the last five years to diversify out of China and we've been executing against that. This is long before Trump was elected, long before we were involved in a potential terror situation. So as a company, compared to the U.S. footwear industry, we have much lower exposure than the average company here in the U.S.

When we look to 2019, we expect about 15% mid teens theoretical exposure in a worst case scenario should tariffs be imposed. Obviously, there would be a six month delay to any – a ramp up in a worst case scenario. So our exposure would be even less for fiscal 2019.

And like everybody else, should that occur we'll, one, either continue to diversify our sourcing base, offset some of the price increases with other action or simply pass on the cost. I think it's frustrating, because the footwear industry is the highest tariff duty industry of all U.S. category. So putting additional duties and tariffs on the footwear industry, at least domestically here doesn't seem to make much sense, but we're -- we've been on this for years now.

Steven Marotta

Thank you. That's helpful. One other quick follow up. Can you, at the very least, remind us what the long term goals are from a sales and an EPS standpoint? There was a lot of noise, obviously, over the last year or two given all our taxes as well as the benefits of this transformational strategy.

I'm assuming that from this point forward actually there might be even an incremental benefit above and beyond your normal growth plan next year. But can you remind us a little bit what those normal growth plans are? As well as – and again, without disclosing your order book, but as I know it's something you do not do, any indications for next year either tracking above or below the trend?

Blake Krueger

Yes, longer term we would have a target of high single-digit organic growth for the company. On the leverage side, we've always been excellent when it comes to dropping profit all the way down to the bottom line. So it's probably a one-and-a-half multiple of that at a minimum going forward.

For 2019, we still -- we know -- we realize we have our global growth agenda to put in place for several of our brands yet. And as we looked at 2019, we would be, frankly, internally disappointed not to achieve low single-digit growth. So we would be aiming above that but given all of our efforts over the last couple of years that's our internal mind therapy.

Steve Marotta

Very helpful. Thank you very much.

Operator

And ladies and gentlemen, our next question today comes from Jonathan Komp of Robert W. Baird. Please go ahead.

Jonathan Komp

Yes, hi. Thank you. I wanted to first maybe circle back on some of the inventory constraints and delivery constraints in. I'm wondering if you could any further dimensionalize or you think those impacted sales are kind of the overall results?

Blake Krueger

Sure. I mean, when I look at Q3, you know we had some transportation, some late deliveries. As you can imagine in this new tariff environment, we had a little difficulty getting an adequate number of trucks to all of our warehouses to impact Q3 shipments.

We've already just talked about our low margin leather business and internationally we had some challenges in Canada and Latin America. We were also lean on inventory. With hindsight for a few of our brands, we've corrected that now and are close out to we're way down which is actually beneficial from a brand standpoint. But when you total all of those together, they amount to probably at least $35 million in Q3.

And it's hard to quantify. Some of the missed sales, when we were out of some core stock for a few of our brands. But our best guess would be about $35 million or more missed revenues in Q3.

I think the, Jon to be clear about some of those inventory issues too. We did have a couple of our brands we had a really strong Q2, special and some of the core inventory. We've been in as you know, putting a lot of pressure on new management and in fact the inventory management with all of our brand teams. And that that obviously allowed us to bring our inventory levels down. But I think in a couple of cases we might have overcorrected there.

But it was a temporary issue for us. We're not doing any of those kind of issues necessarily impacting us in Q4. And I think it's given us an opportunity to make a few adjustments in a couple of key areas to make sure that we've got that under control.

Some of the other things that Blake mentioned, especially the close out piece, obviously that's driving gross margin expansion for us in that quarter, much cleaner, not just in our warehouses but the marketplace for our key brands, it’s the pipeline of inventory and position in the marketplace is a lot cleaner.

I think just allowed us to be a lot more positive about the opportunities and open to buy one into Q4. So there were some temporary hit there in Q3 where we probably won't recover in Q4. But when you shifted the fourth quarter, the real focus for us is not on those kinds of issues, it's really – it's really the challenges we're seeing in our international markets, particularly Latin America and then we're navigating this new issue for us which is the bankruptcy of one of our workflow customers that was originally kind of in our plan for the fourth quarter to be about a $5 million to $10 million contributors.

So, those are really the headwinds for Q4. You can see in the prepared remarks, how excited we are to see both Merrell and Sperry really perform at a very high level in Q4 driven on the success and performance of the product flow, innovation, and the fundamentals of the of the new brand model including a really strong performance in our e-commerce business in Q4. So the learnings from Q3, luckily we learned quickly, we fixed it quickly and we're moving on. And, of course, we're now dealing with some other challenges. But I think overall prepared to overcome those and the fourth quarter was a strong growth.

Jonathan Komp

Got it. That's helpful. And maybe as a follow-up since there's a number of moving parts there, but is there any way to boil all that down to when you think of your core operating guidance now being at the lower end of your prior range, where do you think you would have shaken out kind of excluding those factors or maybe you said differently are there any kind of underlying parts of your business that are less optimistic than they were 90 days ago?

Blake Krueger

No, absolutely not. I look at the successes the way forward, initiatives that were more focused on our operational performance and our margin expansion in our ecommerce and DTC businesses all on track. I mean, I would say ahead of schedule frankly in some cases.

The challenges in the international business, even Canada in Q3 was a little bit tough for us but we're going to see that come back in Q4 and that'll be a return to growth in that particular market. But yes we've had some headwinds in the international market that we didn't anticipate in that.

But that has not had really any direct correlation with execution or – any of the underlying fundamentals of our way forward initiatives. So I'm feeling as encouraged as ever about that, and I think as we go into next year we're going to continue to see the benefits of that and Blake mentioned it, right. And we're going to see the rest of our brands execute on this game plan a little bit more effectively and that's going to be a tailwind for next year.

Jonathan Komp

Understood. And then and then maybe one other topic just the 45 million of incremental investment that you're spending this year. How should we think about that in terms of, kind of, on a multi-year basis, kind of, what's fixed or embedded in the cost structure versus what maybe more discretionary going forward?

Blake Krueger

About half of that number, I would say would be fixed if you well if you were to call that, nothing's ever fixed, but more fundamental to adding resources, people, tools, things that we needed to be able to kind of invest more into to support this brand growth model. So, about half of that is going to definitely anniversary into next year.

We'd say the rest of it is somewhat discretionary, although, obviously we're seeing results from that from that investment. And the reason that we stay bullish on the amount and despite a little softer top-line we're still continuing divest investment at that level this year, because we're seeing good results. But it will probably be a similar amount next year, John, but maybe not dedicated in the exact same way or invested in the same specific initiatives will probably move some things around as we've tested and learned along the way. But overall I would sort of bake the similar amount in your projections for next year.

Jonathan Komp

Okay. And last one if I could just. Would you mind maybe talking about the increase year-over-year in receivables, I might have missed something you said about your securitization?

Blake Krueger

Yes. We, kind of, hit on that quickly, in 2014 we put our receivables, sales program in place at a time when the cost of our debt was higher and there was a different need to generate a one-time cash infusion into the business. And we've been operating under that receivables sales program for a while. This year, earlier this year we realized a couple of things. Number one, our cost of our debt as we've improved our leverage cost of our debts gone down.

And it didn't make a lot of sense preparing a fee on that program that was actually higher than our credit facility. And so – and also since 2014 our cash flow of generation has been really strong. So we didn't really need that tool and we certainly didn't need to pay a premium for it. So we wound it down and we'll see a nice benefit from that in 2019. There should be about a $1 million upside to our overall interest cost because of that.

Jonathan Komp

Okay. All right. Thank you.

Blake Krueger

You’re welcome. Thanks.

Operator

And our next question today comes from Edward Yruma of KeyBanc Capital Markets. Please go ahead.

Edward Yruma

Hi, good morning. Thanks for taking my question. Matt on for Ed. So you discuss some brands are tied on an inventory. Can you talk about how your Dash [ph] projection has performed this year? Do you have any examples of being able to chase trends this year? And how will your capabilities with Dash change next year at all. And how can the centralized data team affect how you forecast inventory. And finally with inventory, can we expect inventory to start to pick up now. Now as reported sales return to growth and you lap the portfolio changed last year?

Blake Krueger

That's a mouthful. So let me try and deal with a few of the items and I'll pass it over to Mike. But we expect our inventory to start to increase as our organic sales increase here. We've had dramatic decreases reduction in SKUs over the last couple of years. We're kind of now at a levels that we believe we're in a level set area and we expect our inventory to kick up here over time a little bit to service demand.

With respect to Dash, we've had several programs, a dozen or more programs utilizing that specific tool in our way forward transformation and we're still learning from it. But we expect to see a broader application of that tool certainly as we get into 2019.

Only thing I would add is that by the end of Q4, our inventories will be up high single-digits probably double-digit. We need that inventory not only from the standpoint of just start of the course of growth we're expecting in our various channels but also because of the importance of bringing new product into the pipeline. So some of that increase will come from the introduction of new items that are planned for the first half of the year.

Edward Yruma

Okay. So on Keds, really nice growth in e-comm continues. What do you think causes this brand to translate so well on e-commerce? I know you've discussed cleaning up the channel on Keds. Can you talk about maybe your progress there?

Okay. So on Keds, really nice growth in e-comm continues. What do you think causes this brand to translate so well on e-commerce? I know you've discussed cleaning up the channel on Keds. Can you talk about maybe your progress there?

Yes, I mean I think most of the channel cleanup is behind us now, so that certainly helped contribute to the e-commerce growth. Fundamentally, it’s the team their focus on the consumer. When you look at Keds right now, when you look at the price point, when you look at vulcanized footwear they've got the Keds brand has a lot of tailwinds right now. So we have big expectations for the Keds brand, but we also have and have had for some time big expectations in the owned e-com area and the team continues to execute very well against that.

Edward Yruma

Okay. Thanks.

Operator [Operator Instructions] Today's next question comes from Chris Svezia of Wedbush. Please go ahead.

Chris Svezia

Good morning, everyone.

Blake Krueger

Good morning.

Chris Svezia

So I wanted to touch on Merrell. I guess when you step back and look at the brand and the growth that you've seen you launched a lot of product for Moab, Chameleon now Jungle Moc as we start to move forward. Is this going to be one of the situation whereby you look at wow, we done a lot growth is going to moderate, or can you build upon this single-digit growth? In other words is that – I am not going to say, most sustainable but how do I think about that as we move forward given it's had most of the transformation you've done a lot of work on product? Going forward something like these levels of growth mid high single digit sustainable?

Blake Krueger

Yes. I mean for Merrell in particular, we would be counting on this. It's our largest brand as you know a lot – some of the growth this year has been a little choppy as they've implemented the brand growth plan and model. Some quarters of low single growth in other quarters its very high-teens growth. We would hope that that level down a little bit and a little more predictable, but their product pipeline and crisp compelling story is more robust than it's ever been. And we don't see any letup in momentum for the brand. I would say most of the some of the great growth this year which will primarily – will end-up high-single-digits in 2018. We're still driven kind of from the performance category. Although, you can argue is the Moab today performance to or is it casual wear lifestyle footwear, but a lot of it comes from the performance area and the brand is just beginning to capitalize on the lifestyle area. So we have high expectations for the male brand so does the team and our view of the product pipeline and compelling stories is more robust than it's ever been.

Michael Stornant

Yes. I mean for Merrell in particular, we would be counting on this. It's our largest brand as you know a lot – some of the growth this year has been a little choppy as they've implemented the brand growth plan and model. Some quarters of low single growth in other quarters its very high-teens growth. We would hope that that level down a little bit and a little more predictable, but their product pipeline and crisp compelling story is more robust than it's ever been. And we don't see any letup in momentum for the brand. I would say most of the some of the great growth this year which will primarily – will end-up high-single-digits in 2018. We're still driven kind of from the performance category. Although, you can argue is the Moab today performance to or is it casual wear lifestyle footwear, but a lot of it comes from the performance area and the brand is just beginning to capitalize on the lifestyle area. So we have high expectations for the male brand so does the team and our view of the product pipeline and compelling stories is more robust than it's ever been.

Blake Krueger

So Merrell’s also a very diverse brand relative to geography in the international business that is e-commerce business is doing really well our stores are performing really well, primarily right now. So when you think about the company and all the different channels and all the different elements of the growth agenda Merrell is probably the primary brand in the portfolio that represents and can perform and grow in each of those categories and channels. And they're having success in just about all of them despite, Latin American in the back half of this year which has obviously impacted Merrell they're still going to deliver high-single-digit growth for the year. So Merrell is one of the bigger brands in that marketplace, but overall the diversification there and the focus on the digital auctions as well has been a major contributor and that's going to continue into next year.

Chris Svezia

Okay. Thanks. And then just on the Sperry business, I don't think the word boat was mentioned, I think that's the first, but I guess, maybe the fact, where are you in – on a compression in that category as it relates to this very brand, and how do we think about that, I guess going forward given what's going on with foods and what's going on with campus [ph] when his brand really begin to accelerate, just kind of how do we think about that?

Michael Stornant

Yes, I think in the quarter both as an overall category here in the U.S. across all brands continued to decline, less declined than we've seen in quarters over the last 18 months or so. Boat for Sperry was also down in the quarter, down a little less than it has been in the past and Sperry owns that category and the Sperry team understands that it's their job to keep the boat silhouette fresh and appealing to the consumers.

We know we're going to go through cycles, always have in this country in the boat/shoe category, but Sperry is the giant there and it’s positioning in south to take advantage of that in the future.

The good news for Sperry is that boot, vulcanized product, collaboration, Vineyard Vines, everything else is working. And so the brand still has broad appeal. Certainly no brand drag especially in the core U.S. market. So we're pretty bullish on Sperry. We view 2018 as kind of the turnaround year for the brand in 2019 and beyond there as the growth year.

Chris Svezia

Okay, thank you. Final question, just – I’m going to go -- Mike to you, just on your comments about the potential – will it exceed 12% operating margin target this year, your guidance says 12.1. I guess, we're splitting hairs here, but historically your confidence…

Michael Stornant

No, I want to clarify that first. I'm sorry to cut you off. I mean, don't forget it was not that long ago that were we set a really bold goal to get to a 12% operating margin run rate by the end of 2010, right. And through the course of this year we've increased our expectations around that and are delivering on that.

So, when I think about the stake in the ground that we put out it was really around that and we have over delivered not just in terms of the margin itself, but in the timeframe as well, so

Chris Svezia

Okay. So don't take into context of 12.1 is what the guidance is that you can comfortably exceed that, it's just more 12% -- you’ll exceed 12% that being 12.1?

Michael Stornant

Well, the guidance is approximately 12.1, I guess, but yes I mean, I'm not – I guess, my reference to the target was the target we put out there more than a year.

Chris Svezia

Okay, got it. All right. Fair enough. All right. Thank you. All the best.

Michael Stornant

Thanks, Chris.

Operator

And our next question today comes from Michael Kawamoto of D.A. Davidson. Please go ahead.

Michael Kawamoto

Hey guys. Thanks for taking my question. Just on Merrell, can you highlight some of the products that you're excited about for 4Q and then into next year. I think, the point is hiking and some lifestyle – anything that you're excited about?

Blake Krueger

Yes, I mean the entire hike category remains robust that Moab 2 and Chameleon 7 and some products that we'll be introducing here in just a week for the fall of 2019 season. Nature's Gym remains a very strong category for the brand. So, from Bare Access product up through trail running and other athletic products for use in the outdoors that's an expanding category for the brand. Quite a bit of growth activity in that. And then also mentioned Merrell work right now. So Merrell work continues to expand and grow every quarter. That's been a good -- little bit more of a niche category for the brand, but the loyal Merrell consumer has responded well to that brand elasticity and extension.

Michael Kawamoto

Got it. Thanks. And then you guys recently hired a CMO for Merrell. Can you just talk about maybe some of the initiatives that you are -- that are being worked on there, I saw one trail project, any more color there?

Blake Krueger

Yes, I think the Merrell, like all of our brands, realize that in today's world, it's their job to maintain and increase their brand interest that are search interest and that can be with big product stories that can be with excitement stories. You may remember from just a quarter or so ago the Saucony collaboration on Dunkin' Donuts that was only 1,000 pairs or so, but the excitement that generated with consumers across many different channels was incredible. So, Merrell is implementing a full digital offense and that the primary focus right now and they've just got plenty of ammunition to make that a success.

Michael Kawamoto

Got it. And then just one more. You mentioned before that China is area we've add resources and begun to focus on, how we're thinking about that region just given all the noise that's going on right now?

Blake Krueger

Well, when we look at the 1.4 billion-person China market. Frankly at the moment, we view that as a tremendous opportunity for growth. We've got a few great partners there. We've got some owned initiatives in that market. But we're currently underpenetrated in that important market and despite the chatter around tariffs and trade wars and this and that, that's going to be a very important consumer market. So, we're focused on China.

Michael Kawamoto

All right. Thanks for your time and good luck for rest of the year.

Blake Krueger

Thank you, Michael.

Operator

And our next question today comes from Laurent Vasilescu of Macquarie. Please go ahead.

Q - And our next question today comes from Laurent Vasilescu of Macquarie. Please go ahead.

Laurent Vasilescu

Good morning and thanks for taking my question. I want to follow-up on the gross margin. Mike maybe you can give a little bit more color on the components in bps terms for 170 bps of adjusted gross margin expansion in the quarter. And then it looks like 4Q could be up on an adjusted basis maybe 40 bps. Any more thoughts on that that would be great?

Blake Krueger

Sure. Yes we went through some of the key contributors in the prepared remarks on gross margin. We typically don't break it down in bps, but I would say, the big benefits are certainly they certainly continue to be product cost initiatives and improvements there. We are not just benefiting from a diversified sourcing base right now, but the work that's been done to stabilize the factory base and work with our vendors to get pricing improvement on our product cost has been really critical this year and last year. So, a big chunk of that is coming from pricing. Some of it certainly the improvement of the portfolio changes we made a year ago -- the store closures and some other things that have helped us to drive that. And then, the organic growth in our business and e-commerce, especially which is a high margin business. We're seeing growth in our like-to-like stores as well.

So it's really across the board, Laurent. It's not really one specific driving factor. I do like the fact that the first quality mix of our inventory and our top line sales is much stronger. So the lower flows out there as well as the headwind on revenue gives us stronger performance on the margins. When we go into Q4, I would expect gross margins will improve by more than 40 basis points.

So it's really across the board, Laurent. It's not really one specific driving factor. I do like the fact that the first quality mix of our inventory and our top line sales is much stronger. So the lower flows out there as well as the headwind on revenue gives us stronger performance on the margins. When we go into Q4, I would expect gross margins will improve by more than 40 basis points.

Laurent Vasilescu

That's great to hear. And then I wanted to follow up. I think you've talked about a bankruptcy of a work-through customer. Maybe you can parse that out in terms of the third quarter the impact in dollar terms? And then, as we think about the next 12 months how do we think about that number, that customer on an annual basis?

Blake Krueger

Yes. It wasn't really -- there really wasn't a Q3 impact there. This is really a Q4 issue for us. And we've been able to operate on really good terms with this account. And so, we've been able to navigate through this with a little bit of impact, obviously, but been able to mitigate that to some degree and we would expect next year that we'd be able to continue to work through that through continuing to work with this account and/or the customers finding that product in other channel.

Laurent Vasilescu

Okay. Very helpful. And then my last question. I wanted to follow up on the AR question. With regards to that $53 million impact on the wind down. Should that number increase in the fourth quarter? Or maybe asked a different way, how do we think about accounts receivable to increase year-over-year on a reported or adjusted basis for the fourth quarter?

Blake Krueger

I think, we'll have another $10 million or so in Q4 to completely wind that down and then the comparisons going forward will be like-for-like.

Laurent Vasilescu

Okay. Very helpful. Thank you very much and best of luck for the holidays.

Blake Krueger

Great. Thank you.

Operator

And our next question today comes from Ross Licero of Telsey Advisory Group. Please go ahead.

Ross Licero

Hi. Thanks for taking my question. Could you just provide a little color on AUR versus units sold?

Blake Krueger

For – in connection with? The…

Ross Licero

I guess, the trends across the categories.

Blake Krueger

Well, I think, as we all know, there's been a very strong trend over the last several years to athletic and into vulcanized footwear that tends to be lower price point product. When I take a macro outlook, especially at the U.S. market, we think that trend is going to continue. We've also though had success at the upper end, where we have traditionally played from the mid tier on up to, like, the Wolverine 1,000 Mile program. So there continues to be a strong trend toward vulcanize.

You can see that in the Sperry business, where that bad category is grown by a very large percentage for Sperry or just a short period of time and that's actually important to call out because for Sperry to be delivering the growth that they are - topline growth that they are, they're doing that with some product categories that are at a lower average price. We haven't really seen a major impact on our overall business, with respect to specific price increases that we've put into play, but the cleaner closed out mix that we talked about before, the vulcanized trends that Blake's talking about.

Those are factors that are obviously impacting our overall AUR for the company, but it's really hard to measure that, given the different channels, given that international component. It doesn't always tell the right story, even if you would give me a statistic there. The brand by brand we're seeing just - fundamentally we're just seeing a healthier mix across almost all of our brands right now.

Ross Licero

Okay. Thanks. And then on the Saucony brand, are you guys seeing just a loss of unit per door or are you rationalizing any doors there?

Blake Krueger

No. I think we’re in their core run specialty channel. We're seeing lower unit in the U.S. As I indicated in my prepared remarks, EMEA[ph] was a bit of a bright spot for Saucony. They've got a very strong business in Europe in both technical run and on the original side. So that was a bright spot for Saucony in the quarter, but they are focused on resurgence in the technical run arena.

Ross Licero

Okay, great. Thanks.

Operator

And ladies and gentlemen we have time for one final question today. And the last question comes from Mitch Kummetz of Pivotal Research. Please go ahead.

Mitch Kummetz

Yes. Thanks for taking my questions. I guess I've got a few first. First on Canada you mentioned that Canada was I think a bit of an issue in the quarter. Could you elaborate on that? Is that something that you would expect to continue into the fourth quarter?

Blake Krueger

Actually Mitch, in Q4 we expect a rebound in Canada. But as you also know that market over the last 10 years has gone through a substantial amount of consolidation. And we think it's been a pretty stable position right now, but certainly a lot of consolidation just over the last five years or so. So we expect a rebound in Canada in Q4.

Mitch Kummetz

And then on Latin America, I know that in your segment reporting you kind of break out, there's another piece outside of the EMEA and Canada. Is there any way you can kind of size the Latin American market for us? Tell us how much it was down in the quarter how much you expect to be down in Q4?

Blake Krueger

Yes I mean - it's a little bit easier I don't have some of those numbers right in front of me. A little bit easier in the corner. When we - in Q3 when we look at the Latin America it was probably down $3 million, $4 million in Q3. But as you know we've got some multi decade distributors and programs. Latin America is a very strong region for us, obviously over the years we've seen a lot of volatility in this region and we're just going through a time right now where we expect some volatility here over the short term certainly for the next year or two.

Michael Stornant

And then unlike some of the other candidates, example where we would expect that to just be a Q3 issue. Latin America is really going to actually be a bigger headwind for us in Q4…

Mitch Kummetz

So Mike if I recall correctly on Latin America you guys do a lot of Hushpuppies license business there, which is pretty high margin for you. If Latin America is soft does that have any margin impact?

Blake Krueger

I mean, it does, but actually the particular brands are probably being most impacted by this would be Maryland at cost line standpoint.

Mitch Kummetz

Got it. And then last question just in terms of the brand outlook for some of your brands like you said Merrill high single digits now in the year. I don't know if you touched up on this already but what's your outlook now for Sperry on the year and Saucony I think you kind of gave that on the last call.

Blake Krueger

I think we'll see some upward softening in Q4 better result for Saucony. It could -- it'll be an improved outlook for Saucony in Q4. We've think EMEA will continue to perform for that brand. Merrell we said, high single digits for the year. Sperry, we expect about, for the complete year 3% or so growth, the low single digit area but around 3% growth for the year. And 2018 was a bit of a turnaround year for Sperry. We expect our performance to be certainly above that for 2019.

Mitch Kummetz

Got it. All right. Thanks guys. Appreciate it. Good luck.

Blake Krueger

Thank you, Mitch.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Harris for any final remarks.

Mike Harris

On behalf of Wolverine World Wide, I'd like to thank you for joining us today. As a reminder, our conference call replay is available on our website at WolverineWorldwide.com. The replay will be available until December 7, 2018. Thank you and good day.

Operator

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect and have a wonderful day.