Wolverine World Wide, Inc. (WWW) Earnings Call Transcript

Greetings and welcome to the Wolverine Worldwide Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, [ Jared Filippone ], Head of Investor Relations. You may begin.

Good morning and welcome to our second quarter fiscal 2026 conference call. On the call today are Chris Hufnagel, President and Chief Executive Officer, and Taryn Miller, Chief Financial Officer. Earlier this morning, we issued a press release announcing our financial results for the second quarter of 2026 and guidance for fiscal year 2026. The press release is available on many news sites and can be viewed on our investor relations website at investors.wolverineworldwide.com. This morning's press release and comments made during today's earnings call include non-GAAP financial measures. These non-GAAP financial measures, including references to the ongoing business and constant currency revenue growth rates, were reconciled to the most comparable GAAP financial measures in attached tables within the body of the release or on our investor relations website. I'd also like to remind you that statements describing the company's expectations, plans, predictions, and projections, such as those regarding the company's outlook for fiscal year 2026, growth opportunities, and trends expected to affect the company's future performance made during today's conference call are forward-looking statements under U.S. securities laws. As a result, we must caution you that there are a number of factors that could cause actual results to differ materially from those described in the forward-looking statements. These important risk factors are identified in the company's SEC filings and in our press releases. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. With that, I will now turn the call over to Chris Hufnagel.

Thanks, [ Jared ]. Good morning, everyone. Thanks for joining us on today's call. In the second quarter, our business results continue to track ahead of our expectations, driven by the team's strong execution of our global brand building model. We delivered better than anticipated revenue, growing 6% against double-digit growth last year, with adjusted earnings per share growing 14%, reflecting healthy SG&A leverage, while at the same time investing in our strategic priorities and key growth drivers. Merrell and Saucony, representing approximately two-thirds of our business, continued to lead the way with revenue up 10% and 9% in the quarter, respectively. We continue to make progress in building better brands, delivering compelling products, investing more in demand creation and telling better stories, managing the marketplace more effectively, all leading to elevating our brand's positions in their respective markets. As a result, we're seeing the cumulative, tangible effects of our consistent efforts. Across our portfolio, our brand generated increases in consumer interest and took market share in their key categories. And these gains in consumer demand are creating more consistent growth in the business, the company having now delivered seven consecutive quarters of year-over-year growth. Given the strengthening of our brands, the solid results we drove in the first half, and the continued momentum we're seeing in the business, today we're raising our guidance for the year, which Taryn will walk you through in a few minutes. But before handing the call over to her, I'd like to share more on our brands, including the continued growth of Merrell and Saucony, as well as the progress we're making in applying our playbook to set Sweaty Betty and Wolverine on a path to more consistent growth. I'll start with Merrell. Merrell remains focused on modernizing the outside with faster, lighter, more versatile product design and elevated brand relevance. The brand's consistent execution of its strategy has resulted in sustained meaningful growth and market share gains. And these continued in the second quarter. The brand delivered a double-digit increase in revenue with growth in all regions and outsized increases internationally, where its key city strategy has helped amplify the brand's momentum. Globally, Merrell's It Starts Outside marketing platform, launched earlier this year, is creating brand consistency and lifting purchase intent with our consumers. To extend the platform, the team executed a host of community activations as part of its Outside in the City series, redefining the outdoors in several key global cities, including London, Paris, and New York, with more cities planned in the coming weeks. Merrell once again had triple-digit basis point market share gains in the U.S. hike category, with three in the top 10 styles. The brand's key franchises, the Moab 3 and Moab Speed 2, are exceptionally healthy, each driving significant double-digit growth in the second quarter. The iconic Moab 3 is respected on the trail and remains relevant with collaborations and rematerializations like the sought after and sold out [ Khakis ] collab and the recently dropped [ Jollipack ]. In Trail Run, Merrell continued to entrench its position with its title sponsorship of the Skyrunner World Series, composed of elite trail running races around the globe in locations such as China, Japan, France, Italy, Spain, Chile, Argentina, and right here in the U.S. Merrell's sponsored athletes currently claim seven spots in the top 15 men's and women's standings, including the top four ranked men in the series. In the marketplace, the brand's premier franchise, the Agility Peak 6, continued to gain traction, up double digits globally, versus the previous model's comparable first season. On the lifestyle side of the business, the Wrap franchise continued to grow with additional silhouettes, more than doubling year-over-year at U.S. retail. The brand also continues to enhance its lifestyle offering with trend-right styles like the Moab 2 Woven Slide, the low-profile Relay, and hybrid Mary Janes and performance platforms, including the Moab Speed 2 and [ Speed Arc ], all of which are selling well. In June, the brand engaged influential partners at Paris Fashion Week as it continues to elevate its lifestyle profile globally and look to accelerate this side of the business in 2027. Merrell is performing well, and the brand remains on track to deliver mid-single-digit growth this year. Shifting to Saucony. We continue to believe that Saucony is uniquely positioned as a disruptive challenger brand at the intersection of two of the fastest growing categories in the market, performance and lifestyle running. In the second quarter, the brand drove solid growth in both categories around the world, on top of 40% overall growth last year. Saucony's key city focus, which started in London a few years ago, continued to help fuel strong brand heat, consumer demand, and revenue growth, particularly in Europe. In London, the brand held one of its own [ Mays ] Run Club races earlier this year, once again sponsored the London 10K last month, and plans to sponsor the Run Hackney Half Marathon this fall. In addition, Saucony has expanded its key city strategy to Berlin with sponsorship of the Berlin 10K a couple of months ago and a broader activation plan underway, then to Paris with a [ MAZE ] race back in February and plans for a host of activations, a new Pioneer store, and title sponsorship of the Eiffel Tower 10K. Creating tentpole moments by sponsoring race events that each reach a broad running audience, flanked by a series of community activations, often in partnership with run clubs and key retail partners, has proven to be an effective strategy. Saucony's brand search interest was up meaningfully year-over-year in the first quarter globally, with even faster growth in the UK. This past quarter, the search interest growth rate accelerated by almost two times globally and more than tripled in the UK, and France grew at an even significantly faster pace. Sell-through trends in the EMEA region are also very strong, creating a healthy pull dynamic, which we are actively managing to cultivate sustainable growth, focusing on disciplined distribution and segmentation strategies. Because of these positive results, our Key City Playbook is now being adopted by some of our distribution partners around the world. Our latest Saucony store opened in Hong Kong in the second quarter, and there are already plans to activate in Istanbul and Bangkok this year with race sponsorship and [ MAZE ] events, a store opening, and community activations on tap. In the performance running category, Saucony gained market share at U.S. run specialty in the quarter and showed well in major marathons this spring, ranking in the top five most worn brands at Boston and London, notably second among women at the Boston Marathon. With the brand's Endorphin collection, its pinnacle offering for elite runners, Saucony launched a new version of its most innovative shoe, the Endorphin Elite 3, and plans to launch an all-new endorphin model in 2027 that we believe will further elevate innovation performance for serious runners. In Saucony's Core 4 franchises, which are targeted towards a more casual runner, the brand introduced the new Triumph 24 and Hurricane 26 in the last couple of months, and they are driving franchise growth on saucony.com and early selling with positive feedback from our wholesale partners. Saucony also continued to fuel brand heat in its lifestyle business with compelling styles and thoughtfully selected collaborators who are helping develop the brand's relevance on several different dimensions. In the second quarter, the brand dropped collaborations with Studio Nicholson, Greyson, two with Engineered Garments, and Minted New York, the last of which was launched in an event hosted at our Covent Garden Pioneer Store in London, generating exceptional brand energy. This month the brand plans to drop a highly anticipated collaboration with Westside Gunn, building on a partnership that continues to strengthen the brand's credibility in streetwear and culture. In June, Saucony launched the [ Ride One ] as part of its extensive Paris Fashion Week presence, including a host of activations with influential collaborators, retailers, and consumers. They also introduced the [ Kinvara One ] and ProGrid Paramount in top of the pyramid distribution, while the ProGrid Omni 9 continued to drive growth globally. Looking ahead, the brand continues to develop its lifestyle strategy, leveraging its deep and diverse product archive, developing sharpness behind streetwear and fashion, and thoughtfully cultivating greater relevance with women as well as men. Finally, as we think about realizing Saucony's full potential, I believe that should include becoming a true head-to-toe run lifestyle brand. In close partnership with our Sweaty Betty product design and development team, we're developing a capsule apparel collection designed specifically for her that we plan to drop in our stores and online early next year. I'm excited for this test and leveraging the collective power of the company and what this opportunity could mean longer term for the Saucony brand. The brand's momentum remains strong and we're raising our outlook for the brand to mid-teens growth for the year. I continue to believe that Saucony is well positioned and that the opportunity for the brand remains significant. I'd now like to provide an update on the progress of Sweaty Betty and Wolverine, brands that we're focused on returning to sustained healthy growth through disciplined execution of clear strategies and implementing our proven brand growth playbook. It's important to note that while we don't expect performance to be perfectly linear, we're encouraged by the recent progress we've made and the real results we've seen in the marketplace. Both brands are reestablishing their premium positions, driving meaningful increases in consumer interest and purchase intent, and beginning to deliver growth in key segments of their business. Beginning with Sweaty Betty. Sweaty Betty is one of the original female activewear brands and focuses squarely on empowering women through fitness and beyond. Last year, we fully integrated this business into Wolverine Worldwide and developed a new strategic growth plan. As part of this effort, and as noted previously, we initiated an intentional and strategic reset of the U.S. market in the third quarter of last year. As a result, the brand was down low single digits overall in the quarter, but encouragingly grew approximately 3% when excluding the impact of the market reset in the U.S. The areas of the business that we prioritized are responding positively and contributing growth in the quarter. The UK direct-to-consumer business grew mid-single digits, with continued increases in key categories like bottoms and outerwear. We're seeing our investment in the brand's new store design lift performance as well, with four refits completed so far this year. The expansion of wholesale and distribution partners in Europe and Asia Pacific also continues to advance, with revenue up strong double digits and discussions for new partnerships progressing well. During the quarter, the brand executed several activations to continue to strengthen its bold, rebellious voice in the marketplace. This Born Sweaty, Go Shorty campaign increased purchase intent and helped drive strong revenue growth in the shorts category. The brand also effectively positioned itself relative to popular activities, including running with its Rule the Run event in April, and racket sports with its Power by London Padel event in June, and a Wimbledon event in July, all driving strong consumer engagement for the brand. Sweaty Betty brand is healthier today with a strong strategy in place and a determined team driving the business forward. We have more work to do, but I'm encouraged by our progress. Finally, finishing with Wolverine. Wolverine is the number one work boot brand in the U.S., and again added market share in the second quarter, its third consecutive quarter of gains. Brand grew revenue high single digits in the quarter, and we continue to make good progress driving towards more consistent, sustainable growth. Wolverine is focused on managing a cleaner, more disciplined marketplace and elevating its positioning with consumers. Behind these efforts and a stronger product line, the brand continues to lift average selling prices and drive double-digit growth in key franchises at retail, including the Tradesman Wedge and Loader II, and in Western Boot with the Rancher and Wheatland. Recalibration of the marketplace to optimize assortments and inventory at key retailers is still ongoing, resulting in some expected choppiness and near-term volatility at retail. But inventory is continuing to get cleaner and our new distribution and segmentation strategies, while nascent, are sharper. In the quarter, Wolverine also continued to build brand relevance by engaging consumers with more purpose-led, differentiated marketing. The brand's collaboration with Metallica Scholars introduced a limited edition boot and workwear collection that benefits trades education. And its American Dream contest launched a made in the USA Loader II DuraShocks boot and celebrated 50 tradespeople in our 50 states. These initiatives and previous upper funnel investments, like the brand's partnership with the Paramount+ series Landman, helped further accelerate growth of consumer interest in the quarter. Work remains to get us to where I believe we should be, but Wolverine's new product innovation and designs are performing. The brand's marketing is reaching more consumers and cultivating greater emotional resonance and the marketplace is responding. Importantly, we've added some new talent to the brand and prioritized its place in the workgroup portfolio. I continue to be enthusiastic about the brand's opportunity looking ahead and what a growing and more profitable Wolverine brand and workgroup can deliver for the company. Now I'd like to hand the call over to Taryn Miller, our Chief Financial Officer, to take you through our results for the quarter and our updated outlook for the year.

Thank you, Chris, and welcome everyone. Our second quarter results exceeded expectations and reflect the continued progress we're making across the business. The operating model we've built, combined with continued investment in our brands and capabilities, is strengthening the portfolio, improving profitability, and reinforcing our confidence in the long-term earnings potential of the company. Merrell and Saucony drove the company's revenue growth in the quarter. Growth combined with disciplined cost management contributed to 80 basis points of adjusted operating margin expansion while further improving our balance sheet and financial flexibility. Given our strong first half performance and continued execution across the business, we are raising our full year 2026 outlook. I'll now take you through the highlights from our second quarter. Revenue of $506 million exceeded the high end of our outlook, driven by better-than-expected performance in both the active group and workgroup. Reported revenue growth was 7% compared to the prior year, or 6% on a constant currency basis. The following channel, segment, and brand performance is provided on a constant currency basis. Wholesale revenue increased 8% compared to the prior year, reflecting strong international performance and continued growth in the U.S. DTC revenue was approximately flat versus the prior year. Active group revenue increased 8% in the second quarter, with performance across the segment exceeding our expectations. Merrell revenue grew 10% in the quarter. Strong wholesale performance was driven by international markets and continued gains in the U.S. Ongoing strength in sell-through across core franchises and key accounts supported the brand's momentum. DTC revenue declined compared to the prior year, reflecting a deliberate shift in marketing investments towards upper funnel brand building activity. Saucony revenue increased 9% in the quarter, building on 40% growth in the same quarter last year, driven by growth in both wholesale and DTC. Wholesale growth was led by international markets with continued gains in the U.S. The brand continues to build momentum across both performance and lifestyle categories, supported by ongoing marketing investments and new products that are resonating with consumers. Sweaty Betty revenue declined 3% in the quarter, reflecting the planned and ongoing reset of its U.S. business. The brand delivered another quarter of growth in UK DTC and international wholesale, reflecting encouraging consumer response to its broader product assortment. Workgroup revenue declined 2% compared to the prior year, which was modestly ahead of expectations. Progress across the workgroup portfolio continues to vary by brand, but the actions underway to enhance product offerings and improve marketplace health are beginning to gain traction. While there's still more work to do, we are encouraged by the early results. Consolidated gross margin was 46.5%, a decrease of 70 basis points from the prior year and 10 basis points above our expectations. Gross margin was pressured by an approximate 310 basis point unmitigated tariff headwind and a modest impact from elevated oil prices on freight costs, although mitigation actions offset most of the tariff impact. Adjusted operating margin was 10%, an increase of 80 basis points compared to the prior year and 50 basis points above our expectations. Tariff-related pressure on gross margin was more than offset by strong revenue growth and disciplined management of operating expenses. Earnings per share increased 14% year-over-year to $0.40, compared to $0.35 in the prior year and above our outlook of $0.35 to $0.38. Net debt was $443 million, down $125 million versus last year. Turning to our outlook for 2026, we are raising our full year outlook and now expect revenue to be in the range of $1.98 billion to $2 billion, representing reported growth of approximately 6.2% at the midpoint. This compares to our prior outlook of $1.96 billion to $1.985 billion. Our foreign currency assumption is unchanged at an estimated $14 million benefit versus the prior year. As a reminder, the prior year included a 53rd week in the fourth quarter, which contributed approximately 70 basis points to full-year 2025 revenue growth, primarily within our DTC business. On a constant currency basis and excluding the 53rd week in 2025, we now expect revenue to increase approximately 6.1% at the midpoint. The following segment and brand outlook is on a constant currency basis. Active group revenue is now expected to increase high single digits, up from our prior outlook of mid-single-digit growth. We continue to expect workgroup revenue to be approximately flat compared to 2025. At the brand level, we're raising our outlook for Saucony to mid-teens growth, the high end of our prior low to mid-teens range, reflecting the first half performance and continued momentum across categories. The investments we're making to build consumer demand are strengthening the brand's market position and driving durable growth. Our outlook for the remaining brands is unchanged, with Merrell expected to grow mid-single digits, Sweaty Betty expected to decline low single digits, and Wolverine expected to be approximately flat compared to 2025. Gross margin is now expected to be approximately 46.9% compared to our prior outlook of 46.4%. The improvement primarily reflects stronger marketplace execution, supply chain efficiencies, and modestly lower tariffs. With respect to tariffs, our updated guidance assumes existing tariff rates remain in place for the balance of 2026. This assumption reduces the estimated unmitigated tariff impact by approximately $2 million compared to our prior outlook. While we continue to believe rates may ultimately return to UFLPA levels, the timing of any change remains uncertain. Our guidance excludes any potential refund related to the $36 million of UFLPA tariffs previously paid, which we continue to actively pursue. Adjusted operating margin is now expected to be approximately 9.9% compared to our prior outlook of 9.5%, reflecting the higher gross margin and meaningful operating leverage for the year, while also making strategic investments in our brands and key capabilities. Interest and other expense is projected to be approximately $23 million and the effective tax rate is projected to be approximately 18%, both unchanged from our prior outlook. As a result, adjusted diluted earnings per share is now expected to be in the range of $1.55 to $1.65 compared to our prior outlook of $1.43 to $1.58. We are increasing our operating free cash flow outlook to $115 million to $130 million from $105 million to $120 million previously. We continue to expect capital expenditures of approximately $20 million. Moving to our third quarter outlook. Revenue is expected to be in the range of $495 million to $500 million, representing reported growth of approximately 5.8% at the midpoint compared to the prior year. On a constant currency basis, revenue is expected to increase 6.5% at the midpoint. Active group revenue is expected to increase high single digits, while the work group is expected to be approximately flat to the prior year. Gross margin in the third quarter is expected to be approximately 47.4%, down 10 basis points compared to last year. This includes an approximate 180 basis point unmitigated tariff impact and a modest headwind from higher oil prices on freight costs, with mitigation actions and other business initiatives offsetting the majority of those impacts. Adjusted operating margin is expected to be approximately 10.4%, an increase of 130 basis points compared to last year, with the improvement driven by revenue growth and disciplined cost management, which more than offset the impact of higher tariffs and elevated oil prices on gross margins. As a result, adjusted diluted earnings per share is expected to be in the range of $0.42 to $0.45 compared to $0.36 last year. To summarize, our second quarter results reflect continued progress across the business, led by the strong performance of Merrell and Saucony. We're improving profitability, strengthening our financial position and seeing encouraging traction across the portfolio. The balance sheet is meaningfully stronger than it was two years ago and while the external environment remains uncertain, our confidence in the business continues to grow. Our increased outlook for 2026 reflects both the strength of our first half results and the progress we're making across the portfolio.

With that, let me turn the call back to Chris before we open up for questions. Thanks, Taryn. To close, I believe our brands are better positioned in the marketplace today, align well with consumer trends, and they are leaders and innovators in growing and attractive categories. And importantly, they continue to get stronger each quarter around the world, both those that are already performing like Merrell and Saucony and those that are not yet as consistent as we want them to be. Our team is better, our strategies are more sound, our execution is sharper, and our brands and company are healthier. As a result, our business is better than we anticipated entering the year, giving us confidence to raise our guidance for 2026. Another important chapter in our transformation story that has now become a growth story. While our progress is encouraging, we believe a bigger opportunity is still ahead of us for the company, our team, our brand, and our shareholders. Everyone at Wolverine Worldwide remains focused to make every day better. With that, thank you for taking the time to be with us this morning, and we're happy to take your questions. Operator?.

We will now begin the question and answer session. [Operator Instructions] The first question is from the line of Jonathan Komp with Baird. Your line is now open. Please go ahead.

Yes, hi, thank you. Good morning. Could you maybe just share a little more insight what you're seeing in the running market in general from a standpoint of overall competitiveness and discounting? And when you look to the second half implied guidance for Saucony, what's given you confidence in the acceleration? Is it simply easier comparisons or are there other factors?.

Sure, thanks John. Yes, the run category is obviously a very attractive and growing category and we're thrilled that we have one of the original running brands in Saucony performing the way it has and the trajectory we see. But certainly fiercely competitive and we've got sort of great respect for the competition that's out there. At the same time, we think we've got a great team. I think one of the strongest product pipelines that we've had. And it's good to, I think we're in a good position. As it relates to the acceleration in the back half, I think you did point out, good 9% growth in the second quarter on top of 40% growth last year. And a little bit easier comparison going into the back half, but visibility remains good. I think the important thing to note about Saucony is that we're a global growth story. It is not just a U.S. sector growth story. So really pleased by the progress we're seeing really around the world. The way our partners are leaning in and the receptance that we've seen to both performance run and the lifestyle. So we remain bullish on Saucony and think the prospects for the brand remain bright.

Yes, that's great to hear. Thanks, Chris. And then maybe, Taryn, just... Could you frame up how to think about the guidance rates for the year, the profit flow through looks very strong. How much of that is flowing slightly better tariff assumptions versus underlying improvements in the profitability. Thank you.

Yes, thanks for the question. Regarding our gross margin operating margin, and higher expectations, there's been no meaningful change to the tariff impact we've previously discussed. We said that we had previously estimated around a headwind of around $50 million on the year, and that assumption is reduced by roughly $2 million, which really leans towards what we're seeing in terms of the bigger raise that we're seeing in terms of gross margin and operating margin versus our previous expectation is the structural changes we're seeing in the business, really driven by the stronger revenue and seeing more full price sales from healthier inventories and the supply chain efficiencies driving structural improvements in the business.

Your next question is from the line of Mitch Kummetz with Seaport Research Partners. Your line is now open. Please go ahead.

Yes, thanks for taking my questions. Chris, in your prepared remarks, you mentioned accelerating the Merrell lifestyle business in 2027. Can you just remind us what percent of Merrell is lifestyle? And can you talk a little bit about what opportunities you see for lifestyle, particularly going into next year?.

Yes, it's a smaller portion of the performance sort of outdoor business for sure. But we certainly think about Merrell today as the broader outdoor lifestyle opportunity beyond the trail. And I think the team has worked really hard on that and I'm really pleased with the progress that we've seen. And I think you're sort of seeing some of that come through in our 1TRL efforts to sort of bridge that performance to lifestyle piece. And then certainly obviously legacy styles like the Jungle Moc, which continue to grow, the team being able to sort of tap into trend, seeing things like the Relay, the Wrap collection, and then taking sort of classic outdoor platforms like the Moab Speed and so forth and so on, and making them in more lifestyle styles, like our slides, or just rematerializing and make them for everyday wear. And I think you're seeing that show up importantly, I think, in our marketing as well, just how we're presenting the brand at merrell.com, how we show up on our social feeds. And I think the team's done a great job sort of bringing the outdoors to the city under the platform of It Starts Outside. So the bigger opportunity beyond outdoor is certainly outdoor lifestyle, and I think that is going to be a key unlock. And certainly as we think about Merrell's trajectory over the last handful of years, the market share gains, the consecutive quarters of growth and the outlook we have, I think that that's a piece to it. Importantly, we have to open up appropriate distribution. And I think our sales team has done a nice job opening up new doors for us to show up where that product is sold and specifically where it's sold to her. So really pleased the progress in total and I think the greater lifestyle opportunity beyond the trail for Merrell but I can't discount the fact that we still are the leader in trail. Three of the top 10 styles for the first time in the last quarter came from Merrell and really extended our market share lead there by triple basis point gain again. So really pleased in total by the Merrell business and certainly the trajectory that we see.

And then on Saucony, I think you said in your prepared remarks that you gained share in U.S. run. I believe that's an improvement over the last quarter. If it is, maybe if you could address that. And then as far as the back half outlook for Saucony, it sounds like you're very confident there and then you have good visibility. I think that on the lifestyle side your door count in the back of this is coming down so can you maybe kind of address that in the context of the overall Saucony growth projection for the back half.

So I'll answer the two specific questions that you have a good memory. The run specialty share we did gain in Q2, and that was an improvement over Q1, which we are encouraged by. We anticipate second half lifestyle doors to be approximately flat to first half, but no change from what we told you in February. And I certainly think the momentum we continue to see in Saucony is encouraging not just here in the U.S., but certainly around the world. And I think back to John's earlier question, like the running category, I think brands that innovate and bring fresh new product to market, I think those are the brands that are winning. And I think Saucony has done a great job, whether it's the [ Azure ] launch this year, which we just made the biggest single launch in the brand's history, to updating Core 4, the Triumph and the Hurricane. We've got a new Endorphin Elite out, and I think the best, fastest Endorphins are going to be coming out in 27. So brands that continue to innovate, I think we'll continue to win, and we certainly remain bullish on the Saucony product pipeline and the way that team is driving the business.

Your next question is from the line of Laurent Vasilescu with BNP. Your line is now open. Please go ahead.

This is Lucas Cohen on for Laurent. Thanks for taking our question. Just wanted to see if you could elaborate more on the deliberate DTC pullback for Merrell in the quarter. I know you highlighted some DTC strength in prior quarters. So just wanted to get some more context there. And then did the mix of Merrell full price sales continue to improve in the quarter? And is Merrell continuing to gain share in hike? I think you had mentioned last quarter they gained share 12 of the prior 13 quarters in hike. Thank you.

Yes, I'll try to remember those questions and maybe I'll go in reverse order. Triple basis point, triple-digit basis point gain for Merrell. The number one leader in hike with three of the top 10 styles in the U.S. today. And a lot of credit to that team on what they have done. As it relates to Merrell DTC, I would say at total across the portfolio, I think the underlying health of our brands and the performance globally continues to be strong. You're seeing that show up in brand health metrics, Google search interest, and in market share gains. And I think that is a credit to the work that the teams have done over the past couple of years. As it relates to DTC, I think the story is a little bit different by brand. And for Merrell specifically, we're consciously moving marketing dollars up the funnel to work on awareness for the brand. That has always been sort of a lagging indicator for us, and I think our team in place is now more consistently moving those dollars up the funnel, which we think is in the long-term best interest of the brand globally. And I think you're seeing those things begin to take through in those brand health metrics, which we think will help both our wholesale business and our DTC business. But that conscious shift in marketing spend obviously puts some pressure on Merrell in the short term at direct-to-consumer. We think that will even out over time and we do think is in the best long term interest. And I'm fortunate to be in a position where we can make these decisions about our investments across the portfolio as different things are working, to best manage the brand, best manage the company and our brands for long term sustainable growth that ties back to our value creation model. Really optimistic about Merrell. We do know that the DTC business, we know that we need to improve that, but I do think we're taking the right steps today to show longer term improvement. So we remain bullish on Merrell's global opportunity, both here in the U.S. and around the world, as well as wholesale and our own channels. Thank you, Lucas.

Your next question is from the line of Peter McGoldrick with Stifel. Your line is now open. Please go ahead.

Yes, thanks for taking my questions. I wanted to ask on the Saucony brand, as we think about the upgraded outlook, you represented the global uptake of the brand. Can you point to the key regions of incremental international traction for Saucony?.

Yes, good question. We're really pleased by the progress in EMEA and give a lot of credit to that team over there. Take everyone back to sort of February of 24, that really was the start of our key city strategy and the company's key city efforts really started with Saucony in Europe, specifically in London. And we think three years, sort of moving three years past that, that really has helped elevate that brand and awareness and affinity in that market. And we're seeing a strong uptick there. We led with performance run, both from a product standpoint and from an activation standpoint, you know, really sort of doubling down on London, sponsoring London 10K, investing in run clubs. And that decision to really distort investments to London has really paid off. And now we're beginning to take those learnings to other cities, Paris and Berlin and beyond. And then we sort of followed run with lifestyle introduction. And we've learned from the U.S. on how to roll that out, how we can win as we roll that out. And we're applying those learnings to the rest of the world. But certainly if I think about regions that are, again, Saucony in total is performing very well, standout regions would certainly be Europe.

Excellent. And then on inventory, inventory dollars decrease meaningfully on the books year-over-year compared to the go forward revenue growth outlook in the back half. Can you help us think about the spread between inventory and the outlook and the quality of inventory on the books and ability to service the revenue that's in the back half outlook.

Yes, thank you. Thank you for the question, Peter. At the end of the second quarter, as you noted, the inventory was down around 17% from the prior year. Overall, our inventory is in a healthy position. The year-over-year decline is, that's really a combination of timing factors and timing of receipts, as well as the continued benefits that we're seeing from our efforts to improve. We've talked about before our efforts to improve our inventory management and our productivity across the portfolio. So the combination of timing, as well as those initiatives that we've been taking to be more disciplined with our working capital are what you're seeing. To be specific to your question and important, we are confident at the current inventory levels that we're at, together with the planned receipts in the second half, they'll fully support the increased revenue outlook for 26.

Your next question is from the line of Sam Poser with Williams Trading. Your line is now open. Please go ahead.

Operator, we don't appear to have Sam. Sam, are you there? Hi, sorry about that.

Your next question is from Mauricio Serna with UBS. Your line is open, please go ahead.

Great, good morning. Thanks for taking my questions. Maybe I wanted to ask about Saucony. You raised the guidance towards the higher end. Could you break that down? Where's the guidance increase coming from when you look at the lifestyle versus performance segment? Just high level, could you talk about what you're seeing in the U.S. in terms of like sell-through for both performance and lifestyle, and just in terms of like the full price selling and just also concerns on promotions. You've heard that it's been like relatively highly promotional in the space. So I just was wondering if you were hearing anything or sorry, not hearing, but seeing anything like that on your business. Thank you.

Yes, certainly. Thanks, Mauricio. Yes, I think our raise in Saucony sort of reflects both the delivery that we've had and certainly our outlook for the second half. And I think it's important. It is sort of broad-based growth. It's run and it is lifestyle. And we're seeing nice business, healthy business around the world. So we remain optimistic. With all of that said, it is a fiercely competitive space. We've got a tremendous number of great challengers, but I think brands that are bringing compelling, innovative product, packaging them with great stories, and then working hard on the ground game to win that battle on the floor, I think those brands will continue to win. And obviously the gain and the improvement in market share gains this quarter versus last quarter gives us encouragement. What we're seeing at saucony.com gives us encouragement. And then importantly, just the feedback from our partners and what they're seeing and hearing. So, and again, I think it's important, I know we focus a lot on the U.S. business, but I think it's important to say that Saucony is a global growth story, which is why I'm glad I got the earlier question about Europe. The progress that we're seeing over there. So it is broad based and I would say pointing to the diversification of Saucony's growth beyond one category. Beyond one channel, the fact that we can grow performance run, the fact that we grow lifestyle, the fact that we can grow globally, the fact that we grow DTC and wholesale. I think that diversification is part of the brand growth story beyond just a few styles in a specific channel. So we remain optimistic about the potential for Saucony. We think it remains great, and it's our job to go chase that growth responsibly.

All right, quick follow up just on Merrell, just given the strong performance in the second quarter, just wondering why there doesn't seem to be an increase in the revenue guide for that brand. And maybe could you unpack a little bit more, like how much of the growth in the quarter would you attribute to core hike versus lifestyle? And lastly, just quick question for Taryn on the description of the gross margin increase outlook. You mentioned reference stronger marketplace execution. Could you explain a little bit more? Like what does that mean? Thank you.

I'll talk about Merrell first and then Taryn can hit the second point. Yes, again, really encouraged by the progress that we have seen in Merrell. And again, it's important to note, it's sort of iconic pieces that we have breathed new life into, like the Moab 3 that continues to be just a dominant boot in the marketplace. It's the Moab Speed 2, which we introduced a few years ago, and how important franchise that that has become, and then thoughtful sort of segmentation distribution strategies and really managing the marketplace well. And it's not just a U.S. story for Merrell. We're seeing good upticks in performance across Europe as well. And obviously we've got important businesses in Asia Pacific with our partner out of Japan and obviously Xtep in China. And so I think both the performance outdoor piece as a lifestyle piece give us encouragement. And then I would really point to, we anticipate to be a record marketing investment in the brand this year around the new It Starts Outside platform that the team has developed and seeing market share gains in Merrell continue, seeing very strong Google search interest globally for the Merrell brand, I think gives us confidence. And it's important this is, you know, Merrell was the first brand to lead the company out of the turnaround in the back half of 2020, the first company to grow consecutive growth quarters and then a long string of market share gains actually accelerating to triple digits in the quarter. And I think it's also important to know domestically in the U.S. that hike category had been under pressure for several years. We're actually beginning to see hike category. And I think all of those things bode well for the outlook for Merrell. So good first half, no change to the second half outlook. Now we're going to go execute.

And, Mauricio, building on John's earlier question, when I talked about the, you know, more significant part of our, a majority of our increase in our margin outlook was due to structural or marketplace execution, so to put more color on that, that's things like healthier inventories and brand heat that is driving more full price sales. Chris just talked to investing in marketing and brands and capabilities. That is part of that brand heat that enables us to drive more full price sales, as well as product design optimization. So working with our supply chain teams and working with brands in terms of how they're driving cost efficiencies, as well as in the supply chain team, they look at logistics and their sourcing in terms of how we're driving savings. So when I'm talking about structural or marketplace execution, it's really across the board in terms of getting those more full price sales with the investments we're making in our brands and our capabilities, the supply chain, working with the brands and with our teams in terms of driving efficiencies there as well.

Awesome, thank you so much and congratulations on the results.

Your next question is from the line of Sam Poser with Williams Trading. Your line is now open. Please go ahead.

Can you hear me this time? Hello? Can you hear me?

We can hear your dog.

Yes, sorry about that. It's all good. So the follow-up question on the inventory, the very common shift and the ones in freight delivery. I think he said, was there a timing shift on inventory that was part of it? I don't think she's got any interest in the beginning of July instead of the end of June.

Operator, I'm sorry, we can't hear Sam unfortunately.

Your next question is from the line of Ashley Owens with KeyBanc Capital Markets. Your line is now open. Please go ahead.