Wolverine World Wide Inc (WWW) 2004 Q3 法說會逐字稿

Good morning and welcome to Wolverine World Wide third quarter conference call. (OPERATOR INSTRUCTIONS). 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. Christi Cowdin (ph), Director of Investor Relations and Communications for Wolverine Worldwide. Ms. Cowdin, you may proceed.

Good morning everyone and welcome to our third 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 third quarter results. If you did not yet receive a copy of our press release, please call Stacey Craig at 616-233-0500 to have one faxed to you. The release as also available on many news sites or it can be viewed from our corporate website at www.wolverineworldwide.com.

Before I turn the call ever to Tim O'Donovan to comment on our results, I would 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 now like to turn the call over to Tim.

Good morning and thanks for joining us today. I'm very pleased to report our 11th consecutive quarter of record revenue and net earnings. Sales for the quarter of 260.9 million increased from the prior year by 13.2 percent. And earnings per share of 55 cents were up 15 cents for a 37.5 percent increase.

I should also point out that our earnings this quarter were the highest quarterly earnings in the Company's 120 year history. On a year-to-date basis revenues are up 12.9 percent, and earnings per share are up 38.3 percent. Results to date are running well ahead of our original plan for this year. And we're very encouraged by the strong response from consumers around the world to our brands and product offerings.

The record results for the quarter were also broad-based with 3 of our 4 branded footwear groups contributing to the strong sales increase in the quarter, and all four of the groups producing profit improvements. Both our U.S. and international businesses grew in the quarter, with international revenue increasing over 20 percent. The investments we have made over the past several years to develop our capabilities in Europe and elsewhere around the world are yielding solid results.

Turning to our key business units. Profits for the global Hush Puppies business improved in the quarter; however, revenue was down 2.9 percent due to the timing of Hush Puppies slipper deliveries and lower U.S. wholesale revenues. The Hush Puppies' UK business was particularly strong while the Canadian and international licensing businesses also reported solid sales and profit increases in the quarter.

Lower Hush Puppies sales in the U.S. were primarily the result of fewer closeout shipments and lower promotional product sales to lower tier distribution channels. Hush Puppies sales to the better department store channel grew significantly during the quarter, as there is a growing acceptance in this channel of the upgraded Hush Puppies product quality, styling and brand imagery. Hush Puppies business with Federated department stores continues to develop positively, with store expansion as well as greater product breadth in existing locations.

Most importantly, the fall line is performing well. For example, at Macy's flagship Heralds Square store in New York, women's Hush Puppies recently have 3 of the top 10 selling styles in the comfort department. We're also encouraged by retailers' reception to the new Hush Puppies Spring '05 line. For example, Marshall Field recently committed to a multi-store test of women's Hush Puppies for Spring '05 in addition to the men's test that is going on currently this fall. Another positive indicator is the Hush Puppies order backlog for Spring '05, which is up in the U.S. and all other geographic markets.

The challenge for Hush Puppies in the U.S. market continues to be adding new business in the right channels at a fast enough pace to offset declines in discount oriented channels that we're deemphasizing. We remain confident in the Hush Puppies brand strategy, which not only will reposition our U.S. business but is also driving strong revenue and profit growth in the UK, Canadian and international licensing businesses.

The Wolverine Footwear Group realized an 11 percent revenue increase in the quarter due principally to a large increase in the base uniform footwear business. In addition to greater penetration of the civilian uniform footwear market, Bates shipments in the quarter benefited from accelerated demand from the U.S. for military combat boot products.

The Bates team is working very proactively with various military special forces units, the Department of Defense and individual branches of the military services to develop state-of-the-art uniform footwear products incorporating the latest material and boot construction innovation. We continue to successfully transfer boot technologies proven in the civilian work and work boot (ph) market to our uniform footwear customers, reinforcing Bates leadership position in this important market segment.

Wolverine boot revenues in the quarter were up slightly. Carriage (ph) shipments were up more significantly during the quarter; however, the average price per pair was modestly lower than the comparable quarter last year.

While committed to meeting the price point needs of our retail partners and their customers, we have been working to provide innovative new features and benefits in our boot products to support our premium brand positioning. This effort is beginning to gain traction, and the average price in our current order backlog for the Wolverine boot business is up about $4 per pair from the comparable period last year.

The key to this strategy of owning the high ground in the category is innovative product, such as Wolverine's new MultiShox patent pending boot construction. Wolverine MultiShox provides comfort, durability and is 30 percent lighter than conventional work boots. Launched at the August World Shoe Association Footwear trade show, Wolverine is receiving a strong response to this new product innovation that will begin to hit retailer shelves later this year with the major introduction to consumers planned for the first quarter of '05.

Revenues for the Harley-Davidson business were also up modestly in the quarter, as the business anniversaried the strong demand in last year's third quarter which resulted from Harley-Davidson Company's 100th anniversary celebration. We continue to be pleased with the strong consumer response to Harley-Davidson footwear and the strong sell-throughs being realized by the Harley-Davidson dealer network and our other retail partners. One opportunity we will be pursuing more aggressively in the coming months is the international expansion of Harley-Davidson business.

I would also like to announce an organizational change that will create a new footwear group, the Heritage Brands group. This group will include our Harley-Davidson business as well as our Caterpillar Footwear business. There are a number of synergies between these two great branded businesses, with upside opportunities to leverage our position with key retail partners, both in the U.S. and internationally.

One immediate benefit to the Harley-Davidson business will be access to more international resources, particularly in Europe where we have developed a strong Caterpillar infrastructure. The global CAT organization was also strengthened during the quarter as a result of this organizational change with several new appointments which will provide the management talent necessary to sustain renewed momentum in the CAT business. CAT footwear revenue was up 9.3 percent in the quarter with double-digit increases in the U.S., a triple digit increase in the international distributor business, and a low single digit increase in Europe.

We were pleased to see a strong start to the fall season for the CAT business. CAT Footwear profit contributions in the quarter were very strong as margins exceeded plan and expenses were well controlled. The fall business is also benefiting from a number of innovative new products that incorporate a patent pending comfort system trademarked i-Technology. This construction marries the durability of a welted boot construction with comfort features found in performance casual and athletic footwear.

Our CAT international business is experiencing an exceptionally strong year. Efforts over the past year to strengthen the CAT international distributor network are paying dividends with several new distributors coming online, and existing distributors achieving success with the new product and marketing direction for the brand.

The Outdoor Footwear Group, which consists of the Merrill and the Sebago businesses had an outstanding quarter, and accounted for just over half of the Company's revenue growth in the quarter.

Merrell global sales were up nearly 19 percent with gains in every region. Revenues in Europe and from international distributors were particular strong. Sales in the U.S. and Canada were also up double digits. Driven by continued strong consumer demand for the Merrell brand, our retail partners increased Merrell deliveries during the third quarter in order to maximize the opportunity for the brand during the fall/winter season. Reports to date on retail sell-through are good and we expect to have another very successful season.

Looking forward to Spring '05, Merrell's Continuum product concept is being very well received by the brand's key customers. This concept of segmenting the line into the end use silos provides products within each silo that logically progress from relatively light intended use up to highly technical and intense use. Continuum is striking a cord with our retail partners who believe it will allow them to better serve their customers. Combined with a very impactful design and color story, Continuum will add excitement to Merrell presentations at retail, and fit beautifully with the Merrell shop-in-shop program. While there will be some of the new Continuum products delivered in the fourth quarter the real impact of this program will be seen beginning Spring '05.

With regard to Merrell shop-in-shops, 51 shops have been installed so far this year, bringing the total number of shops to 111. The results continue to be very exciting with over a 40 percent uplift in sales on an account for account basis when a shop is installed. What's more as we anniversary shop installations from last year, we're continuing to see volume increases. We expect to implement another 20 to 25 shops in the fourth quarter, and will continue rollout this program in 2005 in the U.S., as well as in Europe and other markets.

Turning to Sebago, we're tracking slightly ahead of our transition plan this year. The integration process has generally gone very well. And we now have a making, sourcing and logistics platform in place to better serve our global customers and grow the business. The reception to the completely redesigned Sebago Spring '05 product line has been very encouraging. And we're experiencing renewed interest for both existing Sebago customers as well as new customers.

On the international front, the Sebago business in Europe, the brand's strongest international market, will begin to benefit from our ability to provide inventory support for our customers from our European distribution center. We're also receiving strong interest in the Sebago brand from a number of our distributor partners around the world. We're well positioned to develop a much larger international component to the Sebago business in 2005 and beyond. I've had the opportunity over the past few months to interact with a number of our Sebago distributors and retail partners around the world, and the more we work with the Sebago brand the more enthusiastically we are about the potential for this business.

Overall as a Company we're encouraged by the strong response from consumers and our retail and international partners to our product and marketing initiatives across our brand portfolio. While strong fall deliveries drove our record third quarter results, we're also pleased with response to our Spring '05 initiative as reflected in our 19 percent quarter backlog entries.

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

Thank you, Tim, and good morning everyone. We're very pleased to announce record revenue and earnings per share for the third quarter, with quarterly revenue increasing 13.2 percent and earnings per share increasing 37.5 percent. Our operating model continues to be efficient and on a year-to-date basis we have expanded operating margin 130 basis points, driven primarily through gross margin expansion.

Sales of $260.9 million were reported for the third quarter of 2004, which is a 13.2 percent increase over the $230.6 million reported in the same quarter of 2003. Earnings per share increased 15 cents per share or 37.5 percent to a record 55 cents per share.

Foreign currency gains accounted for 2.1 percent of the quarterly revenue increase, and Sebago provided 2.4 percent of the game. This quarterly performance has brought our year-to-date revenue to a total of $684.5 million and earnings per share to $1.12, which represent increases of 12.9 percent and 38.3 percent respectively. Increases in international-based revenue continue to be strong, with increases of 21.4 percent and 23.4 percent for the third quarter and year-to-date respectively.

Earnings contributions continue to be balanced. And we anticipate domestic and international earnings contributions to be approximately 50-50 for the full year. This performance is in line with our expectations and continues to support our diversified operating philosophy.

Reported gross margin of 37.6 percent for the third quarter was even with the 2003 level as we begin to anniversary the significant increases experienced last year. Year-to-date gross margin has increased 130 basis points, driven by the improvement in our business mix and inventory management programs. Over the last 5 years gross margin has expanded 830 basis points. And when compared to 2002 levels, gross margin has been improved 220 basis points. We expect further gross margin expansion which will be used to support continued investment in our brands and expansion of operating margins.

We were pleased with the expense leverage which was generated in the quarter as expenses as a percentage of revenue equaled 25 percent in 2004 versus 26.2 percent for the third quarter of 2003. The 120 basis points of leverage resulted from incremental revenues in quarter and continued expense management. On a year-to-date basis are expenses are flat with 2003's at 27.7 percent of revenue, despite increased product development, marketing and employee benefit costs. We continue to support our brands on a global basis through increased investments in both product development and brand building marketing initiatives.

Reductions in interest expense for the quarter and year to date reflect the continued impact of principal reductions on outstanding debt, and our annualized income tax rate continues to be 32.0 percent. Outstanding shares totaling 39.9 million were used in the third quarter earnings per share calculation, and reflects the recent share repurchase activity. Reported net earnings of $21.9 million for the third quarter of 2004 compares to $16.4 million in 2003. On a year-to-date basis net earnings are $45.2 million in 2004 versus 33.1 million in 2003.

These earnings levels equate to 55 cents and 40 cents per share for the third quarters of 2004 and 2003 respectively, and $1.12 and 81 cents per share for the year-to-date period in 2004 and 2003 respectively. These earnings levels continue to exceed our financial objective of growing net earnings at twice the rate of our revenue growth.

From a balance sheet perspective, we continue to make improvements. Accounts receivable at the end of the third quarter of 2004 were $.6 million higher than third quarter end 2003. This minor increase assisted us in improving our day sales outstanding by 8.7 percent since year-end 2003. Our inventory management programs continue to pay dividends as inventories increased $1.1 million, or only .6 percent, and inventory turns have improved 9.7 percent since year-end 2003. Additionally, our working capital investment, net of cash, has been lowered by $23.2 million, which represents an 8.2 percent reduction.

We continue to generate strong cash flow from operations and we continue to use the cash in a balanced approach. During the third quarter we made our final scheduled principal payment on the 1994 senior note, totaling $4.3 million. Additionally, we continue to repurchase shares under the December 2003 repurchase program authorized by our Board of Directors. During the quarter we repurchased 1,082,900 shares at an average price of $22.85, for a total of $24.7 million. Year-to-date, we have repurchased 1,923,000 shares totaling $45.9 million, with the average purchase price being well below current levels.

Additionally, as announced last evening, our Board of Directors approved the repurchase of an additional 2 million shares of stock over a 24 month period. We will continue our plan of opportunistically repurchasing shares based on market conditions.

Looking forward to the fourth quarter, we have a solid start with our backlog being up approximately 19 percent. The backlog is balanced across the business with the Hush Puppies, CAT, and Merrell Groups having strong double-digit increases on a global basis. The Wolverine brand also reported a solid double-digit backlog increase. Their increase was partially offset by Department of Defense reductions, resulting in a single digit increase for the Wolverine Footwear Group.

We have increased our 2004 annual revenue estimates to 975 million to $985 million range. This increase is supported by a strong backlog position. And several other factors which may impact fourth quarter growth includes the following. The fourth quarter of 2003 included an extra week of shipping due to our 52, 53 week accounting cycle. We anniversaried the addition of Sebago during the quarter. Foreign exchange gains are expected to moderate during the quarter as we anniversary the weakening of the U.S. dollar. And at-once shipments were very strong in the fourth quarter of 2003. Historically at-once shipments account for a significant portion of our fourth quarter business.

Shifting to earnings. We're anticipating our annualized gross margin expansion to slightly exceed 100 basis points. And we're forecasting annualized expense leverage of 10 to 20 basis points. These financial metrics will produce a strong performance for the year and our earnings leverage what exceed our two-time revenue growth goal. Based on this, we have updated earnings our per share range to $1.60 to $1.62 per share, an increased from our previous estimate, which was $1.44 to $1.52 per share.

In the news release issued this morning, we provided our initial 2005 estimates which reflect the increased 2004 information noted above. We're estimating 2005 revenue to range from 1.035 to $1.055 billion, and earnings per share to range from $1.77 to $1.84 per share. This guidance provides a mid-single-digit revenue increase and double-digit EPS improvement. Achieving earnings per share in this range would significantly exceed the forecasted growth rate of the S&P 500 for 2005.

We expect to achieve the earnings increase from a combination of gross margin expansion, expense leverage, reduced interest expense, and the beneficial impact of our active share repurchase program. These 2005 estimates are in line with the long-term financial objectives we outlined last year, and will continue to support Wolverine's position of being a consistent top tier performer in our industry and creator of shareholder value.

I thank you for your time. And I would now like to turn the call back to Tim for a couple of closing comments.

Thanks, Steve. In closing I wanted to highlight two dynamic initiatives that position Wolverine to meet its 2005 targets and continue our growth. First, we have expanded the geographic scope of our portfolio of brands. The investments we have made to enhance our international operating and management capabilities are creating new wholesale and distribution opportunities. New and expanded international programs for Merrell, Hush Puppies, Caterpillar, Harley-Davidson and Wolverine brands continue to open avenues for profitable growth and leverage our global infrastructure.

Secondly, we have accelerated our lifestyle business and invested in product innovation across all of over brands. I can not recall a time when consumer and retailer enthusiasm for our product offering has been so strong. In Merrell the Continuum product concept and shop-in-shops are fueling growth. Sebago's launch has been a success, and the reengineered product is compelling. The impact of the Hush Puppies repositioning is energizing our business on a global basis. CAT high-technology is supporting strong fall business. And the Wolverine MultiShox concept is a technology breakthrough attracting strong orders.

These technologies and innovations provide the platform for our future success. Our strategic portfolio of brands has never been stronger. And our product innovation and global reach position Wolverine for further growth as we strive to be the world's premiere non-athletic footwear company. We thank you for joining us this morning. And we will now turn the call back to the operator so that we can take your questions.

(OPERATOR INSTRUCTIONS). Scott Krasik of C.L. King.

Great quarter. A question -- the first question is on Merrell Europe. I think you guys have definitely anniversaried the point of where Merrell Europe becomes profitable. And I was just wondering what sort of sales levels you need to hit in Merrell Europe to get the same level of profitability as you have for Merrell in the U.S., or if that is even possible?

This is Steve. I think the best way to look at that is to go back to the acquisition when we indicated that the first year was going to be relatively a breakeven business. And we indicated that it would take us about 3 years or to the end of 2005 to get the Merrell Europe operations at our average operating margins of our business. So we're well on our way to that directionally towards that goal. And I think by the end of next year we can achieve what our initial targets were.

Is there anything in the model that says that you can get better than Company average operating margins?

I always look at everything on interim targets, Scott. So that was our initial goal to get to our averages by the end of 2005. Our overall Merrell business, their operating margins are better than our average of the Corporation, and we would ratchet those up once we achieve the initial interim target.

And then, Steve, I guess this question is best answered by you. I think you had said in the past that September is really when you get an idea of what the pension expense is going to be for next year? And with a period of potentially interest rates rising, would that lean to reduce your expected pension expense, and then reduce the cost that is going to run through the P&L next year?

Actually what has happened over the last couple of weeks is even with the federal interest rate move the discount rates have gone down and that increases the liability, and that would drive more pension expense, it wouldn't reduce the expense. But I think even with the impact of the interest rate movement, Scott, we anticipate driving SG&A leverage next year. So that would be absorbed by other cost-cutting and cost efficiency measures within the total corporate structure.

And just specifically the pension expense year-over-year, would that be flat then again?

It would be up -- it would be up somewhat. And we don't know what that number is yet, but it definitely will be up.

Adam Abramson of Lehman Brothers.

I was hoping you could talk a little bit more about Caterpillar and what drove sales this quarter after some weaker quarters the past few times?

Sure. I think there's just been a lot of work done on product innovation within the Caterpillar brand, and also I think some very impactful marketing initiatives in terms of really focusing on our consumer targets for the Caterpillar brand. And making sure we're addressing that consumers needs, not on a global basis. And some of those efforts over the past year are -- really began to bear some fruit, particularly in the third quarter where we did see pretty broad-based gains for the Caterpillar brand. We're certainly encouraged by that and are going to continue to put more effort behind those issues.

And then also could you give a little insight in inventories by brand?

This is Steve. I would tell you that our overall inventory position is obviously very good because we had a very slight increase. And I would say if you looked at it by brand that would be a consistent comment you could make. I think two things that I really like are that not only are our inventories in good shape, but also our understanding is that retail inventories are in good shape. So that always bode well for our business as well as the retailer, so we look at their inventory levels also.

But at any point in time there is always a pocket here or there where we feel that we can do a little bit better. But I am very pleased with our inventory levels right now. I think the other thing is that we are probably at that level where increases in inventory investment will be required to fuel our growth. But we would expect that at about half the rate of our sales increases. So to expect flat inventory levels forever I think would be -- wouldn't be the right thing to do. But I think getting further efficiencies out of our inventories are definitely a target that we have.

Lee Backus with Buckingham Research.

Congratulations on a great quarter and a great year so far. Steve, could you talk a little bit more about operating profit margins? You are certainly reaching sort of the peak margins that you've had historically. And certainly it looks like they're going higher. Now is that only because of the growth of the higher margin businesses like Sebago and Merrell, or are you saying just improved margins in some of your core Wolverine business?

I think definitely the mix has some benefit to us. But as we drive faster growth in our lifestyle businesses that is going to continue to have an impact. But also businesses like Hush Puppies where we have upgraded the product. We're selling better product to better channels of distribution. Also our inventory management programs, we've reduced our SKUs from about 110,000 SKUs to 80,000 SKUs. And that gross margin impact has a nice benefit to the operating margin line also.

We think that we made a big jump in operating our margin improvement so far this year. We want to hold onto the majority of that if we can through the rest of the year. And then we think further expansion is available. We still have both the CAT Europe and Merrell Europe businesses with operating margin expansion opportunity. The U.S. Hush Puppies wholesale business has opportunity for further margin expansion. So there is other opportunities for us going forward to continue to get better operating margins. But you're right, we're at levels that are very strong for us. But we think that -- we have targeted further expansion.

Where are your Hush Puppies margins now compared to where they used to be in times when you would feel that very strong Hush Puppies business?

They're not going to be anywhere near where they were back in the 1996 to 1998 range, because they were really on fire at that point in time. I guess it is just fair to say because we don't give any profit numbers by division, that there's opportunity from operating margin expansion in the U.S. Hush Puppies business, and I would have to leave it at that.

Any goals as to where you think your operating profit margins could get to over a long period of time?

Over a longer period time, over the next three years, if we get another 100 basis points I think that would be a good achievement for us, a strong achievement.

Jeff Edelman of UBS.

Good morning and nice job. I have got a question. I am trying to reconcile some of the comments last quarter. You talked about the backlogs. You talked about the third quarter was going to be seasonally more important for Merrell, but also that the fourth quarter was also your biggest fill in quarter of the half. So could you sort of walk through where you saw the biggest surprise and the biggest jump in sales, and what that might it taken from the fourth quarter?

Sure, Jeff. I think we -- as we have been indicating over the past several quarters, we have seen a shift in our business which we like, which is as we build a bigger proportion of our business in our lifestyle segments like Merrell, we're commanding more retailer attention in terms of getting more advanced orders that tend to impact our first and third quarters more significantly than historically had been the trend.

And if you look back several years ago when our boot businesses, our slipper business, some of those kinds of businesses represented a larger proportion of our overall sales, we had a little different -- a different mix in terms of the timing of shipments. So I think clearly the strength of Merrell's performance, for example, in the quarter with that kind of 19 percent sales increase in the quarter is an indicator of our retail customers giving us advanced orders and wanting to bring that product in early in the season, because it has now become a more important part of their fall plans for the season and they want to get it in the stores and have the opportunity to take advantage of the strength of the strength of the brand. I don't know if that adequately answers your question?

Right. Then are the backlogs that you have got now more balanced towards the first half, since you're talking spring product or does some of that fall into the fourth quarter?

Some of it does fall in the fourth quarter, but a significant portion of it now it falls into '05 deliveries.

Steve, if we look at the gross margin it appears as if you had the strongest growth obviously from you're more profitable businesses. And undoubtedly currency gave you some plus in the quarter too. One, could you quantify that? Then could you discuss whatever offsetting factors might have affected the improvement in the margin to come in at a reported flat level? And does that represent opportunity next year?

I think what you have got to really look at is that the level of our gross margins today, if you go back to a year ago you will see a big step up from the second quarter of 2003 to the levels we have had since that point in time, the third quarter of 2003 to current. So we're going against a much higher level, Jeff.

And you're right, our business mix drove some gross margin expansion. But the one thing that offset that during the quarter was we had an acceleration of demand in our Department of Defense business which offset the pick up that we had from the other growth areas of the business. So we talk -- on the sales side one area that was not anticipated at the beginning of the quarter was the acceleration of some of that Department of Defense. That provided some of the additional topline growth, but at the same time it had a drag on the gross margin expansion that we would have had if the mix would have been more similar to what occurred in the first half of the year.

Christopher Svezua from Susquehanna.

Congratulations gentlemen on a great quarter. Just a couple of quick questions. First I was just wondering if you could talk a little bit about lead repositioning of the Hush Puppies brand? Where do you think you are in the grand scheme here?

And I guess more specifically, if you look at the backlogs for the Hush Puppies business heading into spring you indicated it being up. Can we anticipate revenues rebounding as we had into the Spring '05 selling season?

I think if we take sort of a broad view of the Hush Puppies brand repositioning, we began that process first really in our Canadian and UK businesses. And we have seen very positive results there. Our UK business right now is really on fire. We're driving some very strong sales and profit increases. So we have a lot of conviction about strategy working because we have some real-life examples where it has.

The U.S. market comment it still is a work in process. And I'm pleased with what we are doing in terms of the reception from those tiers of distribution that we're really targeting for growth. We are growing in those tiers. But at the same time in addition to the new things we need to do there's some old things we need to stop doing. And that is having an impact on the overall U.S. revenue as we saw in this particular quarter.

And that trend in terms of our changing our mix in terms of distribution channels is going to be an ongoing trend as we emphasize the upper tier and move out of some of the mid and lower tier. I'm encouraged by the backlogs increase we have in Hush Puppies. We've gotten a strong response to the product lines. But I would expect we have a good opportunity to see some gains, but at the same time I want to be a little cautious because there are still some areas of the business that we're deemphasizing while we're putting a lot of effort behind upgrading the brand and the distribution channels that we're selling to.

Tim, are you still saying traction in terms of the number of Federated doors that you're getting the brands positioned in during the quarter? And do you anticipate that increasing as you head into spring?

Yes, we are. I think our second quarter conference call I mentioned that we had orders for fall from 188 Federated doors. In fact, that number is actually closer to about 194, 195 doors. We have had a few more additions between this call and the last call. Going into spring, we don't have a final door count for spring, but given the reception we've had -- the meetings at a very senior level with Federated -- I'm pretty confident we will see a further door expansion as we go into to the spring season. And I also should mention that what we have been talking about principally with Federated has been in the women's area. We are also now beginning to get some penetration with our man's product also.

Terrific. And one last question. Just on the growth that you saw during the quarter in terms of topline, and your backlog positioning up 19 percent, I was just wondering if a lot of that growth, or any of that growth, is coming from new channels of distribution? I guess specifically for the Merrell brand, being up so strongly during the quarter. I'm sure a lot of that backlog also is representative of strong orders for Merrell brand as well. But more specifically I guess in terms of the specialty retail channels, I think you're putting the product in about 50 Finish Line stores during Q4. I'm just wondering if you just have any thoughts in terms of the feedback and in terms of direction of the business in that channel of distribution?

As you mentioned that is a relatively -- something new for the brand, and I can't really give you concrete results at this time specifically with regard to the athletic distribution channel. But we're certainly encouraged by the interest that we have there. And I think it could be a great opportunity for us.

But in addition to that, we are continuing to see a very strong response to Merrell's product offering. This Continuum concept has been really well received by retailers, both the existing retailers who have been strong proponents to the Merrell brand, but I think other retailers who look at it and say gee, we would carry Merrell in the past in one or two product categories. This may encourage us to expand the breadth of what we're doing with Merrell. Just because this whole idea is a very impactful one, and I think retailers can envision what it is going to look like on their wall and how they can direct consumers to the product that is going to be just a very appropriate product for whatever that consumer's end use will be. So that with the shop-in-shop expansion, there's just still a great deal of enthusiasm for what is happening with Merrell, and not just in the U.S. market but also in all of our international markets.

And, Tim, just a last question just off of that. As you continue to look at new channels of distribution for the Merrell brand, are you still able to maintain the same level of margins for the Merrell products for your retail partners?

Yes, we are. And I think what is driving that is just the fact that we have -- are providing retailers with good margins on the Merrell products at their level. And they are having success in selling the Merrell product at full price. And as a result, our margin performance in many of the retailers that are major accounts for Merrell, we are one of the leaders in terms of the margins that retailers are realizing on the Merrell product. And the retailers are doing well. We're doing well. So it is very much a win-win formula that we're committed to and so are our retail partners.

Terrific. Sounds good. Congratulations gentlemen.

Mitch Kummetz of D.A. Davidson.

Three questions. Starting with your backlog, you guys -- you saw a sequential increase going from Q2 to Q3. You also mentioned that you were shipping fall holiday earlier. To me that suggests that your spring backlogs may be particularly strong. Can you give us some sense as to how the backlog shakes out Q4 versus Q1?

Mitch, there is -- as we entered the quarter there was not a great deal of difference between the percentage increases in the fourth quarter and in the first half of next year. They were reasonably similar in terms of the magnitude of them.

Secondly, as far as your European business goes, internationally I think you mentioned that you're up 21 percent. Part of that was driven by currency, but there was also mention in the press release that you saw some strong results in Europe. Is that a function of improving retail environment there, or is a just a matter of you guys taking share from some of your competition?

I wish it was an improving retail environment, but that is really not the case. Depending on where we think about in Europe that is -- it is not an easy market right now, and certainly in certain countries such as Germany. I clearly believe we're gaining market share in Europe for our brands and that is the principal driver. If we had a little more buoyant retail environment there I think it would even look better.

Okay. A question for Steve, just in terms of the guidance that you gave for '05, could you give us a sense of step -- you know, how you guys are looking at your interest expense as well as shares that we should be using in our models?

I think from an interest expense perspective, we will have paid down about $15 million worth of senior debt by the end of this year. So if you annualize that out at about 6.7 percent, it is about $1 million reduction in interest expense. That is assuming that our revolving credit is very limited. And we have very little variable debt right now. We have been in a little bit now, but nothing with our cash position we don't anticipate that to change unless something more dramatic happens. So we get pretty good interest leverage from that perspective.

There's a lot of pieces that have to be balanced with the share count. It has a lot to do with our share price. Okay? What happens from the repurchase activity, and obviously, all the option activity that occurs. But I would say that we would be around that 40 million share range. I think that is what we're looking at right now, assuming our stock reacts in a normal matter and that the market doesn't do -- doesn't go to an extreme either direction.

Okay. So next year you'll probably be looking at 1 million less in interest expense. You're looking at slightly fewer shares. Given your sales and earnings guidance that is still implies some operating margin improvement. Do you see that improvement coming more so on the gross margin side or the expense leverage side?

I think it is going to be much more balanced then we have seen this year. I think you're going to see 20 to 30 basis points, maybe 15 to 25 on the gross margin line, and also 15 to 25 on the expense side. I think it is going to be more balanced.

And then lastly, as you ran through the various divisions, you gave sort of percentage increases, except on the Outdoor segment. I think you said that Merrell was up roughly 19 percent. But could you say what the increase was for the Outdoor Group as a whole?

In terms of -- in speaking of sales increase, in addition to that 19 percent Merrell sales increase you would have the -- you would have also Sebago sales with no comparable sales in the prior year quarter.

That was the 2.4 percent that I had talked to at the beginning.

Would you guys be willing to give us the absolute numbers on those 4 segment, just for the purposes of helping us with our models? You do it in the Qs but --?

It will be in the Q filing, and I have that right at my fingertips right now. But if we -- you are looking at quarter or year-to-date?

For the quarter. I could talk to you about that off-line if you prefer.

That would be great.

Elizabeth Montgomery of SG Cowen.

Congratulations. I think most of my questions have been answered, but I just had a couple questions to clarify. I guess the first one is about Hush Puppies. If I can just ask the same question maybe a different way. Of the business in the U.S., or of the distribution in the U.S. that you maybe want to scale back, how much of that have you already completed?

This is Tim. I think we are well along the process. I think there is still some work there to be done. But if I had to give you a rough percentage I would say we're probably two-thirds of the way to where we want to be.

And the second question I guess just to make sure I understand the gross margin outlook. Even though this is really the first quarter that you're anniversaring the big increases from last year, the Merrell Continuum should be a boost to the gross margin because of this SKU count reduction, and that should -- with that shipping over the next couple of quarters, we can still look for a pretty solid gross margin improvement over the next two? Is that fair?

I think we've got to be a little bit careful, because I think there was an article out there in the press that talked about a big retraction in Merrell's SKUs. Okay? But the Merrell Continuum product line on the out venture portion, the queue count is pretty level with what our current performance athletic goods are for the Merrell brand. So it is consistent. So there is not going to be an retraction of SKU count because of Continuum coming in. It is much more structured analysis and use of SKUs, but I don't think there's going to be a big retraction there.

This is Tim. Just for example, just to follow up on what Steve is saying, one of the things that Continuum does is we're entering some new product categories that Merrell historically has not had a big presentation in, such as the whole water sports category. So on a category for category basis there has been some very effective SKU rationalization. But at the same time we're entering some new categories here that does add SKUs. And overall when we're looking, our Merrell margins are very good, and the Merrell margins of going forward are comparable to where they have been.

And the last question. If you could give us an update on the Track 'N' Trail stores?

Sure. We have 9 Track 'N' Trail stores in operation right now. We have opened a number of them over the last 6 or 9 months. And we're still in a mode of test and evaluation with those stores. The stores that have anniversaried their first year in operation, we like the trend. They're trending up quite nicely with comp store sales in the mid teen range. But we are testing a number of things. We're testing some types of locations. We're testing some store size. We're testing some variations in the merchandise mix. And are going to be really evaluating those results of the stores that we currently have opened over the next 5 to 6 months. And we're hopeful that that learning process is going to lead us to a format that would offer a greater expansion opportunity.

(OPERATOR INSTRUCTIONS). Scott Krasik with C.L. King.

A follow up to the last question. Do you have an initial plan for the number of stores you're going to open in 2005?

We have a very -- just for capital budgeting purposes we have a rough plan, but it is a fairly conservative plan at this point, because we believe it is going to take us a little while to really fully evaluate the stores that we have opened over the last several months here. But clearly if you look at our balance sheet, we have the wherewithal to move aggressively if we see the right opportunities.

And then on Hush Puppies, I guess you talked about the Marshall Field test. I think you have a test with a couple of other May divisions. Can you talk about what that is like going for fall, and how you expect that to ramp for spring?

Yes, our principle -- there's a number of things going on, of course, but the Heck Company, through the division of May Company, is currently where we have been working very closely with them on a test also. It is still relatively small in terms of the overall impact on the business, but is another opportunity. And now with Marshall Field's being a part of May Company, and the relationship we're developing with Marshall Field's I think those for the time being are going to be the two areas of emphasis in terms of the relationship with May Company.

Just then just lastly on Hush Puppies, you just sort of touched on the men's test. And is that going as planned or above plan or better even?

It is fairly early in the fall season. We have just delivered that product into the Federated stores for this fall, so it so far so good. But it is pretty early in the season to really draw any conclusions.

Would that be sort of -- if I look at who you would be replacing that would be Bass, sort of at the Bass price point at those department stores?

It would be -- the price points would be in the 75 to $90 retail price point range.

And then Steve, just lastly, as you move Harley-Davidson over to this new Heritage Group are you going to be restating your revenue numbers?

We're going to do that in conjunction with our '05 guidance when we give more detailed guidance on '05 in February. That is really when the business moves will occur here.

So the third quarter Q (multiple speakers) will have Harley-Davidson still in the Wolverine Group?

Yes. We will finish this year under the current divisional format.

Okay. Again, great quarter guys.

At this time we have no further questions. I would now like to turn the call over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Thank you. On behalf of Wolverine I would like to thank you for joining us today. And as a reminder our conference call replay is available on our website at www.wolverineworldwide.com. And this replay will be available through October 20, 2004. Thanks and have a good day.