Chris Hufnagel: Yes, great question, Sam. And that has been sort of the big work that we’ve done in Saucony – Saucony around strategy, and I think Saucony has an amazing opportunity in front of it. I think for a long-time, the brand was potentially a little bit – have too much of a myopic focus on the ends of the spectrum. The really Elite Run, which is beautiful innovative product, but the market size just isn’t big enough. And then on the lifestyle side really focused on the collaboration piece, the sneakerhead piece that is very cool but also doesn’t have a lot of scale. So as we think about Saucony, we want to maintain great innovative product, which is why the Endorphin 4 collection was so important. And we want to maintain an amazing credibility in sneakerhead culture, which is why we’re so glad that we won the collaboration of the year last year with J-Tips [ph].
At the same time, the big commercial opportunity for Saucony moves a little bit towards the middle, and that’s as performance run as a lifestyle opportunity. And I think you have seen that pivot in us, specifically in color and materialization, and specifically the work around her. At the same time the broader lifestyle opportunity around the original, specifically the retro tech, which currently is in fashion right now. So I think us opening the aperture on Saucony, thinking about the greater market opportunity, maintaining – maintaining the high ground in innovation and coolness at the ends of the spectrum, at the same time having a much stronger focus on the bigger commercial opportunities, more towards the middle.
Sam Poser: Thanks. And then I have just one other question on housekeeping. The reduction of $20 million from the – from the new licensing businesses, number one, does that mean that since you only took $4 million out of your revenue, that something went up, like something’s better than what you thought it was before? And if so, what is it?
Mike Stornant: Sam, the guidance adjustment that we made to revenue was exactly the $20 million that we referenced, and it’s solely related to the change in the business model. So, early May, we announced the change. So we have revenue under the wholesale model in the first four months of the year and then a shift in the – in the last eight.
Sam Poser: Okay, and then – and then the other question is – the other question is on interest expense. What do you foresee the interest expense being for the year, within your guidance?
Mike Stornant: About $40 million.
Sam Poser: As your debt comes down?
Mike Stornant: Yes. We had net, net interest, I think, last year of about $63 million. So coming down to about $40 million in our in our guidance right now, driven by the ongoing progress we’ve made in reducing the debt.
Sam Poser: Got you. Okay. Thank you very much.
Chris Hufnagel: Thanks Sam.
Sam Poser: And congratulations, Mike.
Mike Stornant: Thank you, Sam.
Operator: Thank you. The next question comes from Jonathan Komp with Baird. Please go ahead.
Jonathan Komp: Yes. Hi. Good morning. And Mike, good luck with the transition. Congratulations on your role change going forward.
Mike Stornant: Thank you, John.
Jonathan Komp: Yes, thank you. And, Mike, if I could follow-up maybe just first with the gross margin drivers in the first quarter, I know you called out some mix tailwind. So could you maybe just talk a little bit more about the drivers and the gross margin expansion, how you see that going forward? And then really just the second half operating margin inflection that you talked to, if you could review some of the drivers there?
Mike Stornant: Sure. I think that the good news on the gross margin performance in Q1 which was slightly ahead of our guidance for the quarter was that we saw the benefit and the crystallization of a lot of the work that has been done over the last year to improve the supply chain performance, but also the cost structure. And whether that be the reduction in the transitory costs that we had to contend with for 2023 and slightly previous to that and obviously the product cost initiatives that we put into place in the middle of 2023. So those all came to fruition as we expected. The benefit from just a healthier inventory, having worked through a lot of that end of life inventory in 2023 is painful as it was, set us up for a much cleaner business this year.
And starting in Q1 we saw the benefit of that, and then I would say again as we mentioned on the revenue side, all the elements of our gross margin contribution in the quarter were quite solid. Our full price margins held up to plan. We were able to drive a good amount of e-commerce improvement on our gross margins as well by being less promotional and driving a healthier business there. So all the things that we kind of laid out in our original guidance back in February, Jon, really kind of came together in the first quarter, and we expect that trend and those benefits to continue throughout the balance of the year. On the H2 operating margin expansion, obviously driven off of a couple of things that are really important to restate, one is just the sequential improvement in some of those profit improvement initiatives that we called out.
Those are starting to be more prominent especially on the gross margin side in Q3 and Q4. So some of those savings that are benefiting our autumn winter assortment is going to start to show-up in Q3 and Q4. The cost reductions and restructuring benefits will be fully in place by the back half of the year. So you’re seeing a stabilization on SG&A expense in the back half, while we obviously expect to see sequential improvement in revenue and growth in the fourth quarter. So being able to continue to drive the SG&A efficiency and leverage that to the bottom line as we grow the business. All in all really important part of our model as we kind of think about pivoting into 2025, but seeing some real proof points in the latter part of 2024 in terms of how we’re a leaner better structured organization now.
So I think it’s really those drivers and the healthy mix of revenue that we, we see sequencing into the third and fourth quarter.
Jonathan Komp: Okay, great. And Chris, if I could just follow-up on Merrell, the outlook to improve and inflect to growth later in the year, could you just maybe talk about what you’re seeing from the outdoor industry supporting that view and some of the Merrell specific drivers that you expect to support that inflection? Thanks again.
Chris Hufnagel: Yes. Yes. Sure. Thanks, Jon. Yes, for sure. In Merrell, I mean, the outdoor category has been under pressure for quite some time. And I’ll go back and say it’s up to the category leader to breathe newness and heat and innovation to that category. And that falls squarely on the shoulders of Merrell. We’re not counting on dramatic improvement in the outdoor category. So we’re very much focused on the things that we can do. Encouragingly in Merrell, we continue to gain market share, which is great. And there was a period of time here for a company where Merrell was losing share quarter after quarter after quarter. We stem that during COVID and we continue that today. I’m encouraged by our efforts to become lighter and faster, more athletic, and that’s the Moab Speed 2.
So early indications of that launch are very positive, extremely positive. And sort of how that has been embraced really globally and the sell throughs that we’re seeing and the replenishment that we’re seeing and the reaction to the fit and the style and the color. At the same time, the Moab 3 continues to be good. And as we sort of lap some of the very difficult market conditions with overinventoried and the rogue selling as those things abate, we’re encouraged that Merrell is in a good position to capitalize. We also, Merrell, have to extend beyond just core hike outdoor. For Merrell to truly become a great global brand, it really needs to extend beyond just that core hike business, which is why we work so hard in trail run. We’re gaining share in trail run, which is encouraging.
