Wolverine World Wide Inc (WWW) 2004 Q1 法說會逐字稿

Good morning, and welcome to Wolverine's World Wide first quarter conference call. All participants are in listen-only mode until the question and answer session of the conference call. This call is being recorded at the request of Wolverine. If anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Christie Cowden, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowden, you may proceed.

Thank you, Louise. Good morning, everyone, and welcome to our first quarter conference call. On the call today are Tim O'Donovan, our President and CEO and Steve Gulis, our Executive Vice President and CFO. Other members of the Wolverine management team are sitting in as well.

Earlier this morning, we announced record first quarter results, highlighted by a 66.7% increase in earnings per share and increases in our 2004 estimates. If you did not yet receive a copy of the press release, please call Stacy Craig at 616-233-0500 to have one faxed to you. The release is also available on many news sites or it can be viewed from our corporate web site at www.wolverineworldwide.com.

Before I turn the call over to Tim O'Donovan to comment on our results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by 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 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 would like to turn the call over to Tim.

Good morning, and thanks for joining us today. I'm pleased to report a very strong first quarter of 2004, with record levels of both sales and earnings. Sales for the quarter of 225 million increased in the prior year by over 17%, and earnings per share of $.30 per share were up $.12 for a 67% increase from the prior year.

The Merrell (ph) business had an exceptionally strong quarter with significant gains in both sales and earnings. We also experienced positive earnings contributions from all of our other major branded footwear groups. Our investments in Europe are yielding strong results and accounted for a meaningful portion of the gain in sales and earnings. Importantly, our plan to improve operating margins in Europe is working, and our operating margins are approaching our target level.

Several initiatives undertaken in the back half of 2003 also contributed to the record results. With Sebago business acquired in November of 2003, added $9.8 million to sales in the quarter and produced a positive earnings contribution during the seasonally important high-volume shipping period for the brand.

Also, our efforts to refocus and streamline our slipper business had a positive impact on earnings, as losses were dramatically reduced during the quarter, which is, historically, a very low-volume period for slipper sales. Steve Gulis will provide additional details in his presentation regarding the current and future impact of the Sebago acquisition and the slipper restructuring initiative.

Turning to our key business units, the Wolverine footwear group achieved a low double-digit sales increase in the quarter, with a mid-single-digit gain in the core Wolverine boots and shoe business and double-digit gains in both the Harley-Davidson and Bates businesses. Stronger reorders during the quarter contributed to the sales increase.

There was also a stronger demand in the safety and industrial sector. The Harley-Davidson footwear sales increase was a result of strong reorders from the Harley-Davidson dealer network as well as the addition of about 100 new independent retail accounts during the quarter. I'm pleased to report that demand remains very brisk from both the Harley-Davidson dealer network, as well as our other Harley-Davidson accounts and is outpacing even 2003 levels, which were boosted by last year's very successful celebration of Harley-Davidson's 100-year anniversary.

Our Bates uniform business was also strong, with growing demand from both military and civilian uniform accounts, as well as several big box sporting goods accounts, which are now carrying Bates' product.

We are successfully transferring proven comfort and performance technology from our Wolverine boot brand to the Bates brand. This is providing both our military and civilian customers with a superior product, and gives our Bates brand a strong competitive advantage. Profits in the Wolverine footwear group were up just over 18% in the quarter, as we achieved good operating leverage on a low double-digit sales increase.

Caterpillar footwear sales in the quarter were flat with year-ago level. Sales in the U.S. were up high single digits, due principally, to increased demand in the industrial work segment from the brand's key accounts. Sales in Europe were down mid-single digits as a response to the spring product line was not as strong as we had planned. However, the response to CAT fall product is much stronger and we anticipate improvements in the back half of the year.

From a new product perspective, the CAT footwear team has developed i-Technology, a new and proprietary comfort technology that marries the benefit of the rugged construction of a classic cap boot with the comfort elements found in state-of-the-art athletic and comfort casual footwear.

A range of new product incorporating this i-Technology construction innovation is the centerpiece of the CAT fall product line and has contributed to a several million-dollar increase in fall order bookings. CAT footwear sales international distributors were also up as several new distributors came onboard, and there was a positive response to new product offerings.

Hush Puppy company sales were up low single digits in the quarter. International sales were very solid, particularly in the U.K. In the U.S., Hush Puppy sales were slightly lower than a year ago, as gains at upper tier retailers were offset by lower sales in close-out and discount channels.

As a result, the average price per pair was up about 6% and gross margins improved by 100 basis points. Efforts to upgrade product in retail distribution are gaining traction. For example, women's Hush Puppies were in 47 federated department store doors last fall, 134 doors this spring, and will be in about 175 doors for this fall. The product sell-throughs are strong and the contemporary casual niche we have identified for the brand is filling a need in the vendor matrix of both department stores and better grade independents.

The Hush Puppy business around the world is very good. Sales in the U.K. were up strongly in the quarter. We now have distribution in both Harrods and Selfridges department stores in London. Licensing revenues were also up in the quarter and along with operating margin improvements in the Hush Puppy wholesale business, contributed to a significant increase in Hush Puppy company earnings during the quarter.

The Merrell business had a very strong first quarter with sales up over 25% and double digit increases in every region. The business in Europe more than doubled as the brand is expanding rapidly with major European sporting goods stores, specialty outdoor and department store retailers. In Europe, the fashion athletic and multi-sport product categories were particularly strong.

In the U.S. and Canada, sport and casual sandals were up significantly, as were the multi-sport and core outdoor categories. Shipments in the U.S. were up significantly to REI, Galyan's, The Sports Authority, Cabela's, LL Bean, Gander Mountain, Dick's Sporting Goods, Bass Pro, Federated and Nordstrom. Sell-throughs have been very good and this has resulted in reorders exceeding our original plan.

The Merrell shop-in-shop program continues to generate sales increases for our retail partners and for Merrell. Nineteen new shop-in-shops were installed in the quarter, including our first three in Europe. The pace will pick up in the second quarter with about ten new shops opening each month. Sales during the first quarter to shops installed last year were up about 50%. The shop-in-shop strategy is clearly working and will be an area for continued emphasis throughout the year.

Merrell's profit contribution during the quarter increased by nearly 40%, on the strength of improved margins, expense leverage and stronger than planned sales increase.

With regard to Sebago, first quarter sales and profit contribution slightly exceeded our plan on the strength of the international business. Due to the spring season appeal of Sebago's Docksides boat shoes, the first quarter is historically the strongest quarter of the year. Our full-year expectations for Sebago sales of about $30 million and a small profit contribution continue to be appropriate during this transition year.

Behind the scenes, there has been considerable activity in setting the stage for a Sebago relaunch for Spring '05 delivery. The transition of Sebago manufacturing to the Dominican Republic will be completed in the second quarter. New Far East sourcing is being established to support new product categories to complement Sebago's historical strength in classic boat shoes and handsewn moccasins.

Efforts are also underway to add more energy and vibrancy to the Sebago brand imagery and marketing support materials. We will be inviting selected retail partners to a special relaunch celebration at the New York Yacht Club during the upcoming FFANY trade show the first week of June. The broader relaunch will occur during the Spring '05 industry trade shows in July and August.

While we are at a very early stage of capitalizing on the global strength of Sebago, we remain excited about the future opportunities for this great brand.

In addition to our branded global wholesale and international distribution and licensing businesses, we also had positive sales contributions during the quarter from both our retail and leather businesses.

Looking forward, our order backlog at quarter end was up approximately 12% compared to the prior year. The backlog increase is distributed across all four of our major footwear groups. On the strength of our first quarter performance, our double digit order backlog and anticipated re-order business for the remainder of the year, we are revising upward the company's 2004 sales and earnings estimates.

We now expect 2004 revenue to range from 960 to 980 million, up from our previous estimate of 945 to 965 million, and expected earnings per share to range from $1.44 to $1.52, up from our previous estimate of $1.37 to $1.43.

In closing, our first quarter results were very gratifying. Clearly, retailers are more optimistic than at this same time a year ago. We believe this improved environment along with the enthusiastic consumer response to our brands will translate into record results again in 2004.

I will now turn the call over to Steve Gulis, Wolverine's Chief Financial Officer and Executive Vice President, who will provide you with additional information about our results.

Thanks, Tim. And I would also like to extend my greetings to everyone joining our first quarter call.

We were extremely pleased to announce record first quarter revenues and earnings per share in this morning's press release. Net revenue of $224.9 million exceeded 2003's first quarter revenue by 17.4%. As Tim noted, three of our four operating groups had revenue increases, with Merrell leading the way.

The weakening of the U.S. dollar since the first quarter of 2003 contributed 3.4% of the quarter's revenue increase, and the recent acquisition of Sebago added 5.1%. We continue to generate strong operating leverage from our business model and reported an earnings-per-share increase of 66.7%. Earnings per share in 2004's first quarter total $.30 per share versus the $.18 per share reported in 2003.

The strong earnings gain was supported by a solid increase in revenue, strong expansion of gross margin and expense leverage. Our earnings continue to be balanced within the business operating unit, with all four branded footwear units reporting earnings improvements.

Additionally, international operations generated approximately 60% of operating earnings in the first quarter of 2004 and reflects the strong performance of the Merrell and Hush Puppy's European operations.

Gross margin of 38.0% improved significantly in the first quarter and exceeded the first quarter of 2003 by 190 basis points. This improvement reflects a one-time 100-basis-point increase from the slipper realignment initiatives taken in late 2003, and also benefits from foreign exchange range contracts.

A 70-basis-point improvement in Hush Puppies reflects the repositioning efforts undertaken around the world and 30 basis points of improvement was generated in the Merrell business, as they gained synergies in their global operations. We are anticipating quarterly gross margin increases in the 30 to 40 basis point range for the remainder of the year, which would generate a 60 to 70 basis-point improvement on an annualized basis.

As a reminder, in the back half of 2003, we realigned our slipper operations by segregating the Hush Puppies branded and private branded operations. This allowed us to significantly reduce inventories, focus our product offerings and eliminate redundant selling and administrative expenses.

A significant portion of this benefit was recognized in the first quarter results. We expect the realignment to have a modest impact on operations going forward, as we now have a much stronger operating platform.

The company's general and administrative expenses totaled $56.3 million in 2004's first quarter. Total expenses increased $9.5 million over 2003 levels, with $4.3 million of the increase resulting from the addition of Sebago and the impact of foreign currency translations of our European and Canadian operations. We were pleased to keep our distribution expense flat with 2003's levels, resulting from efficiencies in our centralized services model, and thus improving -- and this improvement was partially offset by further investments in sales and marketing initiatives.

Total selling and general expenses generated 20 basis points of leverage, as expenses as a percentage of revenue totaled 29.5% in 2004 versus 29.7% in 2003. This leverage improvement, combined with our gross margin improvement, generated operating margins of 8.5% in 2004's first quarter, which compares to 6.4% in 2003.

Record first-quarter net earnings of $12.3 million exceeded 2003's first quarter by $4.9 million. These earnings resulted in earnings per share of 30 cents, which is a 67% improvement over the 18 cents reported in 2003. The net earnings calculation included an estimated annualized income tax rate of 32% and average shares of 40.6 million were used in the fully diluted EPS calculations.

From a balance sheet perspective, we continued to make improvements. Accounts receivable of $168.7 million reflects a 1.8% increase, which is considerably below our rate of revenue increase.

Day sales outstanding continued to improve and reflect a 9% improvement on a rolling 12-month basis when compared to prior year levels. Total inventories of $173.6 million compared to $174 million for the end of the first quarter in 2004 and 2003, respectively. Flat inventories and increasing revenue assisted us in improving our inventory turns by 10.3% when compared to 2003 levels. Our overall focus on expanding operating margins and reducing working capital investments have improved both our return on assets and return on equity.

For the trailing 12-month period ending with the first quarter of 2004, our return on assets improved 130 basis points to 10.0%, and our return on equity improved 120 basis points to 14.1% from the comparable period in 2003. While still below our target levels of 12.0% and 15% for ROA and ROE, respectively, we are making significant progress.

Total debt at quarter end was $59.9 million, which compares to total debt of $82.7 million at 2003's first quarter end and reflects 2003's principal payments on our senior debt. Our first-quarter 2004 total debt to total capital ratio calculates to 12.1%. During the first quarter, we repurchased 255,000 shares of stock under previously approved stock repurchase programs at an average price of $22.87, using cash totaling $5.8 million.

We increased our annualized cash dividend by 18.2% in the quarter and ended the first quarter of 2004 with $36.8 million of cash on hand.

In closing, we were very pleased with the strength of our first-quarter results, and this positions us for a strong 2004. Based on the strength of our first-quarter results and our backlog increase, we are increasing our annualized revenue range estimate to $960 to $980 million. The midpoint of this range would produce a sales increase of approximately 7% for the remainder of 2004, which would be a strong performance, given the strength of our operations in the back half of 2003.

Additionally, we have increased our estimated earnings per share range to $1.44 to $1.52 per share. This range reflects operating leverage at one and a half to two times the projected revenue growth rate, which is consistent with our long-term goals.

The midpoint of this earnings per share estimate is based on our expectations of 70 basis points of annualized improvement in gross margins, approximately 30 basis points of leverage on selling and administrative expenses, and reflects continued investment in the Sebago business, which just completed its strongest quarter of the year.

I appreciate you joining us for our first-quarter update, and I will now turn the call back to Tim for a couple of closing comments.

Thanks, Steve. While we are very pleased with our strong start to 2004, we recognize much work remains to be achieved to reach our goal of becoming the premier global footwear company in our segment of the market. In the short term, we have very solid momentum and are benefiting not only from strong acceptance of innovative new products, but also from very good sell-throughs at retail, and double-digit levels of reorders.

As we move into the back half of the year, comparisons will be more challenging, and we will need continued strength in reorders to achieve the upper end of our new 2004 estimates.

We remain very enthusiastic about our growth objectives. Our strong and growing brand portfolio gives Wolverine the flexibility to enter new markets and reach new consumers on a global basis. We believe we can achieve consistent 12% to 15% earnings per share gains on mid to high single digit sales gains, while also driving strong cash flow and improving returns on invested capital.

We thank you for joining us today and we'll now turn the call back to the operator so Steven and I can take your questions.

Thank you. (OPERATOR INSTRUCTIONS)

And your first question comes from Bob Drbul from Lehman Brothers. Please proceed.

Thanks, good morning.

Good morning.

Good morning, Bob.

A couple of questions. First, on the strong performance in Merrell again this quarter from the acceleration in the fourth quarter, does that change at all sort of your view on the long-term opportunity of this business, now?

Bob, our view on the long-term opportunity really has never wavered. We continue to believe that Merrell can become a very large business. The consumer loyalty to the brand and the product has really been quite remarkable. When we look at people, current consumers' intent to repurchase, it is remarkably strong.

And I think we're also seeing now that we're gaining some real growth in Europe and other international markets. So it remains very much in our opinion that the Merrell business is one of those unique brands that has the opportunity to become a very large business, considerably larger than it is now.

Could you share any - in terms of the in-store shops, as you talked about, could you share any examples in terms of how much of a sales lift and margin lift that the retail partners are getting on some of these in-store shops?

Sure, Bob. It varies considerably based on the location, the traffic, but they've been universally successful. When we track the first-quarter results for stores that have been open now a full year, they continue to track up about 50%, and that's in aggregate.

So it continues to be, we think, a wonderful opportunity for our retail partners to improve their Merrell business. It gives us an opportunity to make a much broader presentation of the Merrell product line, so that consumers who have experienced the brand and are looking for a -- to purchase again, now instead of having a dozen SKUs to choose from, they have 40 and 50 SKUs to chose from.

Okay, if we can move to the Hush Puppy business for a minute, can you talk a little bit about the improvements on the operating margin line in terms of where you are in that process, and sort of your expectations for -- in the guidance you just gave us for the full year '04? Specifically on the operating margin.

Bob, this is Steve. First, I'd start by telling you the operating margins for all of our international businesses are very, very strong, and the place that we've been focusing improvements on is in the U.S. business. And I think Tim alluded to the average price increases that we're incurring, and that's about 6%, and it is better margin product also.

We're not all the way to where we want to be. We've historically talked about having a 10 to 11% operating margin level in our businesses. We're not there yet, and we have some work to do to get there. And I think it will come from two ways. A piece of it will come from growth, and a piece of it will come from continuing to improve our distribution channels and sell higher-priced product, better product, to better channel through distribution. And it's starting to -- you're starting to see the impacts of that in the operating results today.

So we had a nice, strong improvement in our profitability in the U.S. Hush Puppy business, even though the sales volumes were flat, and that's due to the shift of the distribution that we have.

Okay. Next question is on the at-once orders. How big, in terms of a percentage of the business this quarter, was it? And when you look at the contribution from this quarter, when you look at it for the rest of the year, in your assumptions for the anticipation of the reorder of business, what are the assumptions that you're making to get to the revenue guidance that we're talking about?

Bob, during the first quarter, the reorder business was really quite strong. It was up about 14% during the quarter. And that's a level of reorder increase that we haven't experienced in quite some time. Reorders -- we saw the trend strengthen in the back half of last year, we began to get some meaningful increases in the third quarter, fourth quarter. Reorders were pretty good. They weren't at that level, but they were good.

So our expectation is that we're not going to see that level of reorder increase in terms of a percentage, but we've got built into our estimates that we would be seeing some mid single -- good mid, solid mid single digit increases in reorders. And part of that expectation is based on, as we get into the back half of the year, we're going to be going up against numbers that were pretty good last year.

In terms of the percentage contribution, like, how much versus the backlog type business, how much was that one this quarter as a percentage of it?

I think in the long run, and it can bounce around a little bit, but it's roughly - given our current mix of businesses, about 50%.

Okay. Okay. And then one final question for Steve. Can you talk a little bit about your assumptions around the pension expense and sort of your thought process as you look at the rest of the year?

Well, our pension expense for 2004 is fixed, Bob, and I think if you go back to our October and February calls, we indicated that our pension expense would be flat this year. So that's what's embedded in our analysis going forward.

Okay, great. Thank you.

And your next question comes from John Shanley of Wells Fargo Securities. Please proceed.

Good morning, and congratulations on a really nice quarter, guys.

Thanks, John.

Thanks, John.

Tim, I wonder if you could take us through a little bit more on the Merrell product line, particularly in Europe. Are the margins that you're achieving in Europe on the brand comparable to what you are attaining on the U.S. market, and the sales gains across both genders, in other words, men's and women's and I guess in some kids' business in Europe, comparable to what you normally generate in the U.S. market?

John, in terms of the margins, the margins are very comparable. The gender mix in Europe right now is leaning a little stronger in the men's area than it is in the U.S., and we see that as an opportunity. The mix in the U.S. is approximately 50% women's, 8, 10% kids, 40 -- a little bit more than 40% men's. Europe currently is leading more strongly toward the men's category, but we think that over time our efforts will be to create the same kind of very balanced gender mix that we have in the U.S. market.

Do you think Merrell could achieve something comparable in terms of the top line in the European market to what it generates now in the U.S. market? Is the market potential as great in Europe as it is in the U.S., in other words?

Yes, it is, John. And when we look at the overall market size in Europe, if it's a little over $40 billion at retail in the U.S., it's closer to $50 billion of retail in Europe. So clearly there is 20% more footwear being sold in the European market, so it has certainly comparable market potential. And we're at a very different stage in Europe. While we've had our business in the U.K. for some period of time, in continental Europe, our efforts there are really - this is about the third year that we've really had a major -- any kind of significant presence there. And what's gratifying right now is the retailer and consumer acceptance of the brand is very strong.

Domestically, you gave us a whole liturgy of retail partners that you're now working with. Do you expect that to continue to expand? Are there new channels of distribution domestically that you're looking for the Merrell brand to go into, or any particular big chains that may be seeing the brand on their shelves this coming fall selling season?

John, our principal effort has been working with our core existing partners, and that's why our shop and shop effort plays a very significant role in that. But one channel where we believe there is an opportunity for Merrell, and we will begin to see some distribution in that channel is with Finish Line. They will be adding Merrell to 50 of their doors this fall season, and we're very pleased about that.

We think the Merrell product line today, with the strength that we have not only in the after-sport category and multi-sport category, but also in the sports fashion category that we've got a product line now that lines up very nicely with a strong partner like Finish Line.

Great. Steve or Tim, you mentioned that gross margin was up pretty strongly in the Hush Puppy product line. Are the margins that you're getting from these new department store accounts that you're opening up in a much bigger way comparable to what you get from some of your other Hush Puppy customers, such as Penney's?

Yes, John, this is Steve. We get very strong margins with the department store base that we're expanding. One of the things that Skip and his team has been concentrating on is to make sure that we have profitable expansion as we go into those distribution channels.

We want to make sure that -- it's a tough environment to deal with, but if we have the right product with the right marketing message, the retailer is making very strong money on it, and we can make good money on it. So it is a win-win for both of us and the margins are very strong and can get us to the business model that we think is appropriate.

I think the other thing, John, that's helping us in Hush Puppy margins is we have a much more focused product line today and as we've focused the product line, it's had quite a nice impact, too, in terms of the markdowns that we're taking on discontinued products.

So we're experiencing a much better situation in that arena. It does sometimes have an impact on sales, but it has the right impact on the bottom line.

Right. It looks like you may be displacing some of the department store private label businesses. Is that where most of the momentum in the department store channel is coming from, or do you think you're taking it away from other brands in that channel?

John, I think it could be a combination of both of those. What's working now is I think there is a clear niche that a number of our retail partners see for the brand, and it's in there - the comfort area, for example, in their women's collection, but we're bringing to that overall matrix that they currently have an element of fashion, an element of color, an element of style, and when you see it on the sales floor, it adds excitement to a sales floor that otherwise can be pretty much dominated by black and brown kinds of shoes.

Right. The last question I have is on Sebago. Has the brand gotten further penetration in terms of additional either retail counts or retail channels, and are you still getting about half the brand's revenue out of Europe? Is that trend likely to continue?

Europe -- particularly in this first quarter, Europe was very strong. And Europe represented more than half the sales during the first quarter. In terms of significant new distribution, we certainly have added some distribution, but I think people are -- most of the people we're talking to are really waiting to see our spring '05 relaunch and the new product that is associated with that, and that whole process will begin in the first week in June, and we would expect subsequent to that, that launch at the Fashion Trade Show in New York in June, that we would begin to see you know, some significant new account activity.

Super, again, congratulations. Nice job on the quarter.

Thanks John.

And your next question comes from Lee Buckus (ph) from Buckingham Research. Please proceed.

First let me add my congratulations to a great quarter and a great outlook. Tim, could you discuss what you see as inventory levels, which are retail accounts, or how do they compare to last year at this time?

Yes, my sense is that the you know, retailers inventories are in quite good shape. You know their sales for most stores were good in February and even better in March. Yes, I think our retailer activity is probably the most tangible evidence we have of how retailers are viewing their inventory, and when we see a 14% increase in our reorders during the quarter, that tells us that inventories are in good shape and that retailers are filling back in those key sellers.

So you don't think there was a shift of reorder activity from Q2 to Q1 that reorder activity should continue into Q2?

It's hard to predict how the reorder activity will carry into Q2. You know, I think whether retailers are going to you know, want to chase the last sandal sale well into the season is always hard to predict and we're certainly not anticipating that we're going to continue to see a 14% level of reorder increase, but given the environment a year ago, I think clearly the environment's considerably better than it was a year ago. Retailers sell-throughs are stronger, their margins are better, you know. It's just a more buoyant environment than it was a year ago at this same time.

Also for Steve, you talked about the impact of currency on the quarter as far as sales, any way of quantifying on the operating profit line?

From a gross margin perspective, Lee, there was a little less than 50 basis points of our improvement came from foreign currency and that was spread throughout the division, so a piece of that was in the Merrell number that we quoted, a piece was in Hush Puppies. So it was spread across, but it was a little less than 50 basis points.

So you think that would, was that partially offset by SG&A or do you think that gross margin indicates the improvement in operating profit margins?

No a piece of that is being offset by increases in SG&A, so when you get down to the bottom line impact of all of it, it's not really significant to our overall operation, okay. So the two really net one another out when you get all said and done.

Okay, thank you.

And your next question comes from Scott Krasik from CL King. Please proceed.

Yes, hi Tim, hey Steve. Great quarter again.

Morning.

Thanks Scott.

Okay, well let's ignore Merrell for a few seconds. Sebago, because you're -- you're really doing a full relaunch of the brand and really changing the brand identity, do you feel the need to work with the retailers as you go through this development process and see if they're going to be accepting of everything or you know, just because you worked magic with Merrell, they say, you know bring it on.

Yes, I wish it was all that easy, Scott. No, I think the, first of all, we are making significant changes to the brand, but they all are going to play back to the brand for Heritage. The Sebago brand had wonderful distribution, some great products. It simply was in need of some refurbishment in terms of putting energy and vibrancy into the brand and the brand image, updating, you know, a lot of the elements of the brand to I think to give is a slightly more contemporary and exciting kind of image.

And clearly on the product side, there just had not been the kind of product development effort, you know, in recent years that we think is required to really move the brand up to the next level.

So it's, how will retailers respond, we began talking to retailers about this brand before we ever made the acquisition, goes back to late last summer, and our discussions with retailers about the brand was that they had a great deal of affection for the brand. They believe the brand had a place in their stores. What they were really looking for was fresh new product, what's a more aggressive marketing.

And they indicated to us then and have continued to indicate to us that they want to see this brand grow. They want to see it be a more important part of their business and that's true internationally as well as here in the U.S.

Okay, so if, and no retailer sort of said off the bat, well if you go me a pink, open-toed boat shoe, forget about it, we're looking for the penny loafer and the docksider?

No and I think they have confidence that you know as global brand builders, that we're going to do it intelligently that we're going to keep that strong brand heritage that Sebago built over many, many years, but take and labor that sort of classic heritage part of the product line and brand image and add into it some excitement.

Okay, good. On Hush Puppies, you know, last fall I think you guys would quote occasionally you had sort of high single-digit weekly sell throughs on a lot of your items. You know, has spring on the department store business, is that been pretty consistent, above average sell-throughs on.

I would say in most cases, Scott, yes, sell-throughs have continued to be quite good this spring. You know, geographically probably stronger in some areas than others. I would say our West Coast business right now is probably trending stronger than the East Coast. We get a little warm weather in the East Coast and I think that should kick in too. But no we feel quite good about the consumer acceptance for the product.

That's interesting, has the recent resurgence of Hush Puppies, has the West Coast been ahead of the East Coast in terms of acceptance or is this sort of just a weather newer thing.

I think it's just in terms of the spring, specifically the spring reorder business has probably taken off even more strongly on the West Coast than the East Coast. But in terms of our market penetration, it's really quite balanced at this point.

Okay, have you noticed your traditional retailers, whether it's Penney's or Sears or some of the others, has there been any backlash against this sort of shift to soft styles and move away from you know, Hush Puppy branding and then are they going to other alternatives, because they feel sort of left out?

No, I don't think so. At this stage, Scott, we are enjoying good sell-throughs on that product, the performance is there. So you know, I think the strategy is working and as long as you know, our good retail partners we support them and they see strong sell-to at retail, you know, I think they're going to remain enthused about what we're doing.

Okay, good and just a couple on Merrell. The shop in shops that are now comping for a second year, are those still comping up?

Yes. They comped up about 50% in the first quarter.

Well those are the shop in shops that are comping in the first year, have any actually comped in their second year?

No.

No, and then the three you opened in Europe, how long ago have they opened?

They just opened in the last several weeks. There's one in a very good fashion independent retailer in Coven Garden (ph), one in Portaenglish (ph), which is a premier department store in Spain, and also one that's -- store that opened in Germany. It's very early on, it's all happened in Europe in about the last 30 days.

Okay, well I saw this robust month, is there any reason to think that it's different, has anything been different than these things have opened in their first month in?

No, no, it's so far everything is working in a very similar pattern to what occurred in the U.S., and we've got, it's caused quite a bit of interest from other retailers who have seen these shop in shops, and so I think we're anticipating that we're going to have a lot of enthusiasm for the shop in shops from retailers in Europe just like we've experienced in the U.S.

Okay, and then I guess just the continued outperformance of Merrell and you know, the introduction of the luggage packs, you know, has that given you any desire to move up the time table on whether you work with somebody on opening Merrell stores or license those out? Sort of what's the time table on that?

We do have some independent retailers who have expressed an interest in Merrell, operating a Merrell store. We've done some design work on developing what we think a Merrell store would look like, and you know, it's something that we're in discussions on. I would anticipate that we would have at least one of those stores opened with an independent retail partner by late third quarter, early fourth quarter of this year.

Okay, but that hasn't, has the time table moved up just because it's been so exciting or that's sort of where you've targeted?

It's pretty much where we've targeted. You know, I think we've, if you look at, you know, the history of the Merrell brand, 10 times larger than it was when we bought it in November 1997, we've grown it aggressively, but hopefully we've done it intelligently and thoughtfully, and that's you know, continues to be our approach, you know. We don't want to open a Merrell store until we've got a design that we really think carries through the whole excitement and innovation that's associated with the Merrell brand.

Okay, and then just lastly to truly beat the dead horse, Merrell in Europe, if you could sort of draw comparisons between how the business developed after you bought it in '97, '98, '99, 2000, in terms of distribution and how it caught on and where it caught on, you know, are you seeing any difference in Merell Europe now versus Merrell U.S. North America then, maybe with department stores first, or outdoor only, I mean just?

I mean it's following a -- I mean the distribution channels are a little bit different, but it's following a not dissimilar pattern to what we saw in the U.S. We're getting you know, good acceptance and good sell throughs in outdoor specialty stores, in sporting goods stores, and in department stores. So it's, and in independent retailers. So we're getting a similar mix of distribution channels to how the brand was developed in the U.S. market. So it's, I think the strategy that we used in the U.S. is a sound one and we're pretty much following the same game plan in Europe.

Okay, great quarter guys. Thanks.

Talk to you later.

And your next question comes from Mitch Clements (ph) from D.A. Davidson (ph). Please proceed.

Yes, thank you. Still have a few questions. With regard to the increase in operating income by segment, I think in your prepared remarks Steve, you mentioned 18% increase in the Wolverine Business and I think near 40 on the Merrell side. What was it for Hush Puppies and Cat?

This is Tim, with regard to Hush Puppies, as Steve mentioned, we made some significant realignments in our slipper business and added to the Hush Puppies business, the branded portion of our slipper business and because of the addition of that, you know, we had a some of that benefit of that slipper repositioning favorably impacted the overall Hush Puppy company profit contribution during the quarter, excluding that piece, we still had a very nice double-digit increase in the Hush Puppy company profit, including it, it was even more significant than that.

Okay, and then how about on the Cat side?

That side was just about flat with a year ago.

Sales and operating income?

The, the -- yes.

Okay, and then as far as the Merrell concepts shops are concerned, how many do you have now at the end of the quarter?

At the end of the quarter we would have had 89.

Okay, and then you mentioned that you're adding 30 in this quarter. So where will you end up for the year?

Mitch, let me back up. We had 79 at the end of the quarter. We've added 19 in the first quarter. Our plan this year was to add about 70 to the 60 that we opened last year. So we'd anticipate ending the year at about 130.

Okay, so you haven't increased that plan?

No, not at this stage.

Not at this stage, and how many of the 130 are going to be international. You mentioned three in the quarter that you just opened the 19 of them.

That's all that's currently, all that's currently in our plan for Europe. We need a little time to evaluate the three that we just opened this month. If those three produce the kind of results we'd like, we may change that, you know, later on in the year, but the totals I just gave you don't anticipate any other additions in Europe right now.

Okay, and then Hush Puppies, in your prepared remarks you mentioned that, you know, increased distribution at the upper tier has been offset by you know, lower distribution at the mid-tier, at what point do you anniversary the drop in distribution at the mid-tier?

But if, not only did mid-tier -- Mitch, a piece of it too is sales to, you know, of close-out kinds of products. And with, in order to accomplish what we need to do with Hush Puppies, it's not only the things that we're, new things we're doing, it's the old things we're not doing. But I guess one way to sum it up is we would expect before this year's out within our U.S. business that we would have a mid-single digit sales increase for the brand.

Okay, all right, and then a couple last items. On the Harley business, I think you said that was up double-digits in the quarter. Did the comps become harder into the second and third quarter as all of the anniversary hoopla really took effect last year in the summer?

I would say they probably, I mean we enjoyed quite nice reorders in the Harley business in the third and fourth quarter, so from that perspective the comps probably do get a little tougher in the back half of the year. In total we had planned our Harley Davidson business this year up high single digits and that's I think probably still at a pretty realistic expectation.

Okay, and then lastly on Merrell, what percentage of that business is Europe, at least in the quarter?

Steve's just doing a little math here.

While he's doing that, you mentioned that it doubled in the quarter. What is your outlook for the European business for the balance of the year, I imagine you don't expect it to continue to double.

We don't, we don't, Mitch. It was about 25%. That includes the U.K. and Continental Europe was about 25% of Merrell sales this quarter.

Okay.

And we would expect that that business will grow at a faster pace than the U.S. business, but, you know, clearly we're getting into a big enough business that we're not going to be doubling sales every quarter.

Okay, all right, great, thanks.

Thank you, and once again, ladies and gentlemen, to ask a question, please press star-one on your touchtone telephone. And your next question comes from Sam Poser from Mosaic Research. Please proceed.

Good morning.

Morning Sam.

Morning Same.

A couple questions. Number one what, in the U.S., you mentioned, you mentioned the West Coast retailers were better, but in Merrell, where have you seen a regionally the biggest growth, you know, in Merrell this year?

Sam, I would, the one thing we have in Merrell is our distribution for the brand is really quite evenly distributed across the United States, and I don't think you can point to any, it just has never been and is not a regional brand, which is great.

I really couldn't point to one part of the country and say it has been significantly different than any other part.

And then in Europe, you mentioned that the U.K., you were in, and you were starting to see, I mean, clearly you're starting to see some activity with Spain and Germany as you open those shops.Where's the biggest growth coming on Continental Europe right now?

It's coming from France, Germany, Spain. It's, again, we were at a, you know, a relatively low level of penetration in those markets. So it's, again, what's good about it is I think it's happening, you know, fairly strong across the major markets in Europe. Merrell did have, we've had a very successful distributor in Scandinavia for some time who had built a quite a good business there. But you know, the brand was had minimal distribution up until a couple of years ago, when France, Germany, Spain, Benelux (ph).

Got you. And then with the accessories, the Merrell bags and so on that I believe are launching this spring, what is the response to that been and how, and is that a needle mover at all?

I think we've had good response to it in terms of its real impact on the business. We're not planning for, you know, significant sales contribution this year. We'll make the initial deliveries of that product beginning in June. And, you know, I think we're going to have see how it unfolds. Clearly it adds a new dimension to the brand, particularly in areas where for example we have shop in shops and that's where, you know, those initial, most of the initial deliveries will go to those channels.We also have some of our strong retail partners who are, who are testing that product, people like REI, but they're not going to begin with an all-store program. They're going to begin with, you know, a dozen or so stores. So I think it will be something that will take some time to unfold and become a more meaningful part of the business.

And just two more questions. One you mentioned the Caterpillar was soft in Europe this spring, but being well received for fall. Overall that's been a business that's, -- it's had difficulty finding its identity over the last few years. Where does that stand in the process right now of getting it wrapped up?

No, I think our business with Cat in Europe, we acquired, as you know, the business from our former distributor there a couple of years ago. There were a lot of things that needed attention. Systems logistics, warehousing, in order to have a level of customer services, to really be able to meet the expectations of our retail partner.

So there was a lot going on in that area and we've gotten some benefits from that. Last year our Caterpillar sales in Europe, we had a nice increase in the business last year. I think the issue this spring was we just didn't have as strong a lineup of spring product as we needed, historically the brand has been a stronger fall brand than a spring brand due to the boot content of the product line, and that's still the case.

You know, I think in looking at where the brand is positioned as a lot of the fashion retailers in Europe have moved a lot of their inventory to retro-athletic sport fashion, clearly those categories are not as strong for a brand like Caterpillar as the boot categories.

I think what we're seeing is that while the number of brands in the boot category may have been reduced by some retailers, Caterpillar is a brand that's still there. It's a brand that they believe in, and I think there's, while there's work to be done there, you know, we still have a big business for caterpillar in Europe and believe it's a business that we can build.

And then you talked about the on the gross margin, you talked about the one-time benefit of 100 basis points with the reorg of the slipper business. Can you just walk through, I mean you had, what a 190 basis point improvement this quarter. What kind of improvement should we be looking for? We aren't going to look for 190 for the rest of the year, I would assume?

That's right, Sam. The overall improvement for the year, I indicated in our call notes was to be 60-70 basis points, for annualized gross margin improvement, and to get there you'd have to have about 30 basis points for the remainder of the year, and that blend would get us there, an that's about 20 basis points, the 60-70 is about 30 basis points higher than what we initially thought it would be at the beginning of the year, given our earlier guidance, so our gross margin expansion on an annualized basis will about double.

Great. Well thank you very much. Congratulations.

Thanks Sam.

Thank you. At this time, we have no further questions. I would now like to turn the call back over to the Wolverine World Wide Management Group for the closing remarks.

Thank you everyone for joining us. We appreciate it and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, good day.