Wolverine World Wide Inc (WWW) 2004 Q4 法說會逐字稿

Good morning, and welcome to the Wolverine World Wide fourth quarter and year end 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, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, please proceed.

Good morning everyone, and welcome to our fourth quarter and year end 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 fourth quarter and 2004 year-end results and increased our 2005 revenue and earnings estimates. Additionally, our Company's shares began trading this morning on a pre-split basis, reflecting our previously announced 3 for 2 stock split. If you did not yet receive a copy of the press release, please call Stacey Craig at 616-233-0500 to have one faxed to you.

The release is also available on many new sites, or it can be viewed from our corporate Website at www.wolverineworldwide.com. Before I turn the call over 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 am pleased to report record revenues and earnings for our fourth quarter and full year 2004. This marks our 12th quarter and 4th year of record revenues and earnings. It was also a year of strong cash generation, which Steve Gulis will speak to in a few minutes. While Merrell continues to be the Company's most significant growth driver, we have solid revenue increases for 2004 in each of our four branded footwear groups and double-digit earnings increases from all of our operating groups.

Geographically we experienced strong results in our U.S., Canadian and European wholesale businesses, as well as our international licensing and distribution businesses. Europe in particular had an excellent 2004 with strong results for Merrell, Caterpillar, Hush Puppies and the Sebago brand. Significant additional progress was made this year to improve the profitability of our European operations. While operating margins in Europe are modestly lower than our North American operating margins, the gap has closed significantly over the past 2 years. We have achieved critical mass in Europe and our central services structure has enhanced our service to customers while improving our cost effectiveness. We see continued opportunities for revenue and earnings growth in Europe. And have recently taken some steps to further extend our reach in this important market.

As of the first of this year we have converted Merrell distributors in Sweden and Finland to owned wholesale operations. We're also converting Sebago distribution arrangements in the UK and Germany to owned wholesale operations following a successful transition in France in 2004.

While not significant in size at this present time, these actions will enable us to better serve our customers. It will also improve our competitiveness as we take advantage of our existing infrastructure in Europe.

In Canada we have taken similar actions and are transitioning our Wolverine and Caterpillar businesses in Canada from a distributor model to wholly-owned businesses. Simultaneously, we're putting in place essential services structure in Canada which will mirror our structure in the U.S. and Europe. All of our brands in Canada are now operating as owned wholesale businesses with a common systems, distribution and logistics platform which positions us as one of the largest footwear marketers in Canada.

I would now like to give you a brief overview of our results in each of our major brands and offering groups. Hush Puppies global revenues were up 9.7 percent in the quarter, and 4.4 percent for the year. Hush Puppies U.S. footwear sales were flat in the quarter, while sales in the UK and Canada and international licensing revenues were each up double digits.

Hush Puppies profit contribution increased by over 50 percent in both the quarter and full year. These results were driven by strong improvements in the UK, Canada, international licensing businesses and from an improved business model in the Hush Puppies slipper business. While the global Hush Puppies business is performing very well, we have additional upside opportunity in both sales and earnings in the U.S. business.

With regard to the Hush Puppies U.S. business we continue to make significant investments to reposition the brand, and we're making progress in moving the brand upmarket. Hush Puppies sales to upper tier department stores increased by nearly 50 percent in 2004. We anticipate more growth in this channel in 2005 as our sell-through results have been very good.

For Spring '05 Hush Puppies women's products will be in 220 Federated doors, and a total of about 90 Marshall Field and Heck’s company doors. We're also achieving greater penetration of both men's and women's products in the better independent shoe store channel. While it is early in the spring season, Hush Puppies have several new products that are performing well, including 2 new ornamented moccasins and a web sandal collection.

Hush Puppies marketing campaign has been very well received both in the U.S. and with our international partners. The new brand imagery is helping drive business with more fashion forward retailers. For example, in the UK Hush Puppies sales to the top 10 fashion accounts grew by over 60 percent in 2004. Our international partners are also adding more controlled distribution with 33 new Hush Puppies concept stores and 46 new shop-in-shops opened in 2004.

The Heritage Group, which includes our 2 largest licensed footwear businesses, Caterpillar and Harley-Davidson, had a strong fourth quarter, with revenues up over 10 percent, producing a full year revenue increase approaching 5 percent. While the pace of growth in our Harley-Davidson footwear business moderated somewhat in 2004 as we anniversaried the previous year's 100th anniversary Harley-Davidson celebration. The Caterpillar business gained momentum in the second half of the year with sales increases in the U.S., the UK, Europe and with the brand's international distributors. After a relatively challenging spring '04 season, Caterpillar footwear sell-throughs increased significantly in the back half of the year, which resulted in strong reorders and a double-digit fourth quarter revenue increase.

The earnings contribution from the Heritage Group increased by 65 percent for 2004. Continued profit gains from the Harley-Davidson business contributed to the improvement. However, the big story was a significant improvement in the contribution from the Caterpillar business, which achieved strong earnings leverage as gross margins improved and expenses were well controlled. While 2004 was a turnaround year for the CAT business there's additional upside as the more focused product offerings and brand building efforts are resonating with both retailers and the CAT footwear consumer.

We also see long-term benefits in the synergies we can create with these 2 great global brands. We believe there are opportunities to leverage our position with key retail partners, both in the U.S. and internationally. One immediate benefit to the Harley-Davidson footwear business will be access to more international resources, particularly in Europe where we have a strong Caterpillar business and infrastructure.

The Wolverine Footwear Group, which consists of the Wolverine boot, Bates and Stanley brand, experienced a 1.2 percent revenue decline in the fourth quarter, but achieved a 5.4 percent revenue increase for the full year. Bates Uniform footwear sales were up double digits in both the quarter and full year, which more than offset reductions in the Wolverine and Stanley boot businesses.

The Wolverine Footwear Group earnings contribution increased by over 20 percent in the fourth quarter and by 15 percent for the full year. The profit improvement resulted from gross margin expansion and good expense leverage. Both the Wolverine and Bates brands contributed to the improved earnings in the quarter and for the full year.

Wolverine Boots experienced a small sales decline in 2004 due principally to lower average selling prices as the business responded to consumer demands for more boot product in the 80 to $120 retail price point category. While Wolverine's average wholesale selling price declined during the year, the brand gained 1 full point of market share in the work boot category, according to MTD Research.

Looking ahead, Wolverine Boot appears to be well-positioned for both top and bottom line growth in 2005. The brand has never been stronger, holding a number 6 position among all men's footwear brands in the nonathletic segment of the market, and a 5 percent -- and the number 5 position rather, in the rugged outdoor footwear category. Wolverine also shares number 1 position in the work boot segment.

What's more, Wolverine's introduction of a new patent pending innovative boot construction, Wolverine MultiShox, has been the brand's most successful sell-in for a new product introduction in the brand's 100 year history. This has resulted in a significant increase in Wolverine's year-end unshipped order file. This new product also carries a higher average wholesale selling price, which should reverse the downward trend in average selling price that we have experienced over the past several seasons.

While a majority of the Wolverine MultiShox introductory deliveries will take place in the first half of '05, we did deliver this new product to 60 Sears stores and 80 Academy stores late in the fourth quarter. The Wolverine MultiShox product quickly moved to the top 10 percent in terms of sell-through performance in both of these accounts.

In the outdoor and hunting category, Wolverine's Gore-Tex Bighorn Boot was the number 1 performing boot at retail this fall in the outdoor category. According to Sport Scan info, which tracks POS data from retailers such as Dick's, Sears and Sports Authority. We were also pleased to learn that retailers polled by one of the industry's major trade publications voted Wolverine Boots and Shoes the Design Excellence Award winner in the work boot category for the 6th consecutive year.

The Bates business achieved a record year in both revenues and profit contribution in 2004. Revenue gains were achieved in both the military and civilian uniform footwear segments of the business. However, a significant portion of the sales gain in the year resulted from increased demand from the Department of Defense, and from a request from the Department of Defense for Bates to accelerate delivery of a combat boot contract. For 2005 we expect demand from the Department of Defense to return to more normalized levels. As a result, our plan for 2005 anticipates Bates' revenues decreasing in the 15 to $20 million range.

While there is demand volatility in the military segment of the Bates business, we continue to see opportunities for Bates to become the gold standard, and the brand of choice for men and women in uniform who need high-performance footwear. Our ability to extend product innovations from our Wolverine boot and Merrell brand, and new materials from our leather division to better serve the needs of the Bates consumer is a tremendous competitive advantage.

For example, Bates was recently awarded a contract from the Marine Corps for a new state-of-the-art combat boot, which incorporates Wolverine's high-performance waterproof leather and our patented direct attach DuraShock out sole technology. Bates has also been asked by the U.S. Special Forces to develop a new mountaineering boot. As the various military services, particularly the elite forces, look for commercially proven innovative technologies, we are uniquely positioned to capture a larger share of this market.

The Outdoor Group consisting of the Merrell and Sebago brands, had a very strong fourth quarter and full year 2004. Merrell revenues were up over 11 percent in the quarter and nearly 17 percent for the year. Sebago revenues doubled in the quarter, as last year's fourth quarter included only a partial quarter of Sebago revenues. For the year, Sebago revenues were very close to our $30 million sales plan. And the earnings contribution exceeded our plan for the business. We're pleased that Sebago was modestly accretive to earnings during this transition year when the business under went one dramatic changes, which impacted almost every aspect of the business. We remain excited about the Sebago opportunity and believe we now have the making, sourcing and logistics platform in place to execute Sebago's new product and marketing initiatives.

With regard to new product, we have recently delivered several new Sebago products in the marine performance category. Initial sell-through reports are strong. Another encouraging sign is the healthy increase in the Sebago order backlog, and the fact that over a third of the backlog is for new women's Sebago product versus less than 10 percent a year ago. While starting from a small base, Sebago should be our fastest-growing brand in 2005.

Turning to the Merrell business, we had another outstanding year for the brand, with double-digit revenue growth in the U.S., Canada, the UK, Europe, and with the brand's international distributors. Fall sell-throughs were strong with the Multi-Sport, After-Sport, and sports fashion categories all showing good gains. In addition, Merrell had a few stand out items, such as the Primo Chill, a shearling lined clog which sold out to the pair.

Merrell's brand presence continues to grow, with 136 U.S. shop-in-shops in operation at year end. In 2005 an additional 25 shops are planned for the U.S., and 18 shop-in-shops will be opened in Europe. Consumers are responding enthusiastically to the expanded Merrell product offering in the shop-in-shops, which is driving strong sales increases for our retail partners.

In addition, this spring Merrell will be launching a more aggressive consumer marketing campaign under the tag line, Let's Get Outside. Our research tells us that a growing number of consumers around the world look to their outdoor activities as an integral part of their lifestyle and a high priority in their spending hierarchy. This growing market ranges from hard-core outdoor athletes to more casual outdoor enthusiasts. Once these consumers experience the Merrell brand, their affinity for the brand and attempt to repurchase is very strong. Our goal is to reach more of these outdoor enthusiasts and invite them to join the growing number of Merrell loyalists.

At the heart of Merrell's consumer appeal is innovative product that looks good, feels great and out performs expectations. The Merrell Continuum concept has helped our retail partners better organize and simplify the product line into consumer friendly categories with easily understood performance characteristics. The reception in the trade to Continuum has been excellent and resulted in a 20 percent increase in Merrell's year-end order backlog. We're now shipping major quantities of the new spring line to our retail customers around the world. While we're on the very front end of the new spring season, early sales reports from our retail customers regarding the Continuum product is very exciting.

The Continuum concept carries through to the fall season with the addition of several new product categories, including a much stronger presentation of fourth quarter winter product. The Merrell team just returned from a key fall trade show, Outdoor Retailer. And I have the opportunity to see firsthand the dealer response to the fall line. While we're still in an early stage of the fall booking season, Merrell's major accounts are enthusiastic about the fall line. And this bodes well for continued growth for the Merrell business in 2005.

We were also pleased that retailers polled by the Footwear Plus trade publication voted Merrell the Design Excellence Award in the outdoor category for the 4th consecutive year. In this same retailer poll, Wolverine World Wide was voted Company of the Year.

Overall we're encouraged by the strong response from consumers and our retail partners to our product and marketing initiatives across our brand portfolio. We began 2005 with a companywide order backlog increase of over 13 percent. The Hush Puppies, Heritage Brands and Outdoor Groups all ended 2004 with double-digit increases in order backlog, which is indicative of the solid response to our spring/summer product offerings. The Wolverine Footwear Group have a decline in order backlog due entirely to the Bates military contact situation I previously discussed. Given our strong fourth quarter finish and the solid level of backlog increase, we look forward to another record year in 2005.

I will now turn the call over to Steve Gulis, Wolverine's CFO and Executive Vice President, who will provide you with additional information about our results, as well as our increased 2005 sales and earnings outlook.

Good morning everyone. As Tim has already noted, we're very pleased to report our record fourth quarter and year-end 2004 results. This morning I will review the financial highlights for the quarter and the year. And I will finish my portion of the call with some insight into our financial goals for 2005. I would also note that the previously announced 3 for 2 stock split was distributed yesterday, and that today is of pre-split trading.

For the year, we reported record sales of $991.9 million or an 11.6 percent increase over 2004. Fourth quarter sales totaled $307.4 million, reflecting an 8.7 percent increase over the fourth quarter of 2003. This is our 5th consecutive year of record sales and our 12th consecutive quarter of record earnings per share increases.

Merrell generated a strong double-digit sales increase in both the quarter and year. And our other branded Footwear Groups generated mid single digit sales increases for the year. The strengthening of foreign currencies versus the U.S. dollar added 1.5 percent and 2.0 percent to our fourth quarter and annual net sales increases respectively. Approximately 27 percent of the Company's annual revenues were generated from international initiatives in 2004, which was up slightly from under 25 percent in 2003. Our record pre-split earnings per share of $1.64 for 2004 is a 29.1 increase over 2003 results.

In the fourth quarter we generated record earnings per share of 52 cents, which is a 13 percent increase over 2003's fourth quarter. All of our operating groups recorded double-digit increases in operating earnings for the year, as we obtained significant leverage on our revenue increase. The Company's global initiatives continue to drive improvements as international operations reported an increase in pretax earnings which exceeded 35 percent. And our domestic operations reported a better than 15 percent increase in pretax earnings. Overall, international initiatives produced approximately 54 percent of the Company's operating earnings with a balance being generated by domestic activities.

We ended the year with operating margins of 10.1 percent which was a 110 basis point improvement over 2003 results. The operating margin expansion was driven by improved gross margins totaling 100 basis points and was supplemented by 10 basis point of expense leverage. Approximately one-half of the gross margin improvement resulted from lower product costs in our Company-owned international wholesale operations, as the weak U.S. dollar allowed foreign operations to purchase product at lower cost. The balance of the gross margin expansion resulted from improved product mix and continued improvements in our inventory management programs which resulted in lower markdown requirements. Additionally, our slipper and leather operations improved their operating efficiencies and produced improved gross margin levels.

Expense leverage was obtained in distribution and administrative areas. And this leverage was offset by increases in product development initiatives and profit-sharing provisions. Interest expense for the year was $2.2 million lower than 2003 levels, resulting from debt principal payments made in 2003 and 2004. This reduction also reflects lower working capital borrowings during the year and interest income from invested cash. Additional interest expense reduction is anticipated in 2005 as we enter the year with $16 million less debt.

Our overall tax rate for 2004 was 31.8 percent, which is an increase from the 31.0 percent rate recorded in 2003. The 2004 rate was in line with our estimated annualized rate. And the 2003 rate included the cumulative impact of research and development tax credits, which reduced the overall effective tax rate in 2003. Excluding any impact related to the repatriation of foreign earnings as allowed under the American Jobs Creation Act of 2004, we estimate that our 2005 tax rate will approximate 2004's rate.

We're analyzing the impact of the Act's provisions and currently have $96 million of available earnings and profits. However, $26 million of this earnings base may not be repatriated, as the earnings have been earned in jurisdictions with tax rates which approximate our statutory U.S. rate. The repatriation of all or a portion of these earnings may increase our overall tax rate in 2005. And any impact related to the Act will be separately disclosed as it is recorded.

Shares outstanding on a pre-split basis were 40.3 million shares for the year. On a post-split basis total shares outstanding are 60.5 million, and post-split earnings per share calculate to 34 cents and $1.09 per share for the quarter and year respectively. We are estimating approximately 60.5 million shares outstanding in fiscal 2005, which includes estimated share repurchases and the impact of share price appreciation on outstanding options.

The Company continued to generate record amounts of cash during 2004. In 2004 the Company generated approximately $105 million of cash from operating activities. This equates to $2.60 of cash generation per share on a pre-split basis.

Our capital acquisitions, which totaled $18.1 million, were slightly below our annualized depreciation and amortization of $19.1 million. On a pre-split basis, we repurchased 2.2 million shares of common stock in open market purchases at an average price approximating $24.50. Of this total, 250,000 shares were repurchased in the fourth quarter. These repurchases averaged a 23.5 percent discount to yesterday's closing stock price. And total cash used for repurchases in the year totaled $53.1 million. On post-split basis, we have 2.9 million shares available for repurchase under our October 2004 approved program. And we will continue to repurchase shares based on various market conditions.

We continued to aggressively manage our balance sheet as we focused on inventory management and cash collections. We reduced the Company's overall SKUs by 5.1 percent, which is in line with our 2004 goal. This reduction was obtained despite the conversion and transition of the Merrell Performance product to Continuum. Strong fourth quarter retail demand generated a smooth transition, and there was minimal impact on Merrell's margins during this period.

Overall inventory levels at year end increased 11.5 percent, which approximated the annualized revenue increase. Merrell accelerated the receipt of Continuum product as retail demand was high, and they wanted early delivery of Spring 2005 products. This timing difference should normalize once the initial demand of Continuum is serviced. And we expect Merrell's inventories to be significantly lower by midyear. Exclusive of the Merrell increase, finished goods inventories were slightly down in the other footwear operating groups.

Cash collections improved dramatically throughout year. And we ended the year with a 2.3 percent accounts receivable increase on a sales increase of 11.6 percent. Stringent cash collection procedures improved account visibility and reduced incentive programs assisted us in lowering our days sales outstanding to 58.7 days, which was a 10.4 percent improvement over 2003 levels.

Our debt position continued to improve as we paid down $16 million of long-term debt during 2004. Our total debt to total capitalization ratio improved to 8.7 percent. We ended the year with a cash balance of $72 million, and a net cash position in excess of of $28 million. We announced in December of 2004 a 50 percent increase in our annualized dividend rate, and continue to invest in new business initiatives for the future. These items, combined with continued share repurchases and debt reductions, will be the primary uses of our generated cash.

As we enter 2005, our portfolio of brands has produced a solid backlog position. We are entering 2005 with approximately a 13 percent increase in backlog. This backlog is balanced throughout our brand portfolio, and principally reflects demand for the first half of the year. Also, the backlog is balanced geographically. Our product offerings are solid. And we believe that the product in each of our brands is the best that it has ever been. This belief is being endorsed by the retail community as reflected in our backlog.

We have increased our previously announced fiscal 2005 revenue guidance by $5 million dollars, and are projecting revenues to range from 1.040 billion to $1.060 billion. The midpoint of this range approximates a 6 percent increase, which is more than twice the rate of the footwear market's growth.

The global Hush Puppies and CAT businesses are anticipated to grow at mid single digit rates, while Merrell and Sebago are anticipated to grow at double digit rates. These increases will be supplemented by a slight increase in our core Wolverine brand business and a reduction in our Bates military contract business. The Bates contract reduction was anticipated for 2005 as the Department of Defense accelerated demand on outstanding contracts in the back half of 2004.

Gross margins for 2005 are anticipated to expand by 40 to 60 basis points. We expect this expansion to result from business mix changes as we anticipate a higher percentage of our business to be in higher margin lifestyle businesses. The elimination of lower margin Bates military contracts will also contribute to this gross margin expansion.

We have planned a relatively stable U.S. dollar evaluation as compared to foreign currencies, and anticipate margin expansion in our international operations as sourcing efficiencies are obtained.

Expenses are anticipated to be flat as a percentage of revenue in 2005 when compared to 2004. Expanded investment in product development and marketing initiatives is being planned as we drive our brand development for the future. Additionally, employee benefit cost increases will occur as pension and health care costs increases will impact our quarterly earnings by approximately 1 cent per share each quarter. This expense scenario, combined with our gross margin expansion, will give us another solid increase in operating leverage, as we anticipate a 50 basis point increase in operating margin as we drive toward our interim goal of 11.5 percent.

As discussed earlier, interest expense will be lower as our debt levels have been reduced and our estimated annualized tax rate is projected to be 3 2 percent prior to any repatriation. Shares outstanding are estimated to approximate 60.5 million shares for the year. Our positive business outlook resulted in an increase in guidance with post-split fiscal 2005 earnings per share ranging from $1.19 to $1.24 per share. We expect this earnings improvement to be balanced on a quarterly basis.

This guidance is in line with our long-term goal of delivering consistent double-digit earnings per share increases. We expect that 2005 will be another strong year for the Company and its shareholders. We continue to be proud of the operating results we have obtained and the shareholder returns which have been generated. We feel that we have the brand portfolio and operating model to generate further growth. Consistent delivery of double digit earnings per share growth and strong generation of cash should allow the Company to be valued at a premium to its peers and produce additional shareholder returns. We come as a management team, are committed to this.

I thank you for your time, and would now like to turn the call back to Tim for some closing comments.

As we enter 2005, I expect 3 key factors to drive our success. First we have a powerful and well balanced portfolio of unique and appealing global brands, which are focused on exciting areas of the market. Second, our global infrastructure allows us to exceed customer expectations throughout the world, and provides a platform to support continued global growth end market share gain.

Finally, we have an exceptionally talented team of managers and associates throughout the world who are committed to achieving premier status with our retail customers, consumers and shareholders.

We look forward to reporting our progress in 2005 in future calls. Again, I would like to thank you for joining us this morning. We will now turn the call back to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS). Bob Drbul of Lehman Brothers.

Nice quarter. Nice job. Congratulations. A couple of questions for you. First, if we could start with the Merrell business, 2 questions on that. When you look at '05 in general, I know you have a 20 percent backlog, what is your expectation for the full year in terms of revenue growth for the Merrell brand in '05?

We're anticipating that the Merrell brand will have a double digit revenue increase, low double digit, I might just want to clarify that. But a double digit revenue increase in '05.

And when you look out the Continuum line, what is the percentage of sales that you would expect to come from that line in '05, and as well as like the percentage of the SKUs that are in that business?

On the Continuum line -- is a redefinition of a whole segment of Merrell's business and would constitute approximately half of their sales and half of their SKUs.

And Steve, a bigger picture question for you. In '04 where did you guys end your marketing spending in terms of percentage of sales? And I know you gave some SG&A guidance for '05, how does that look for '05 in terms of the total increases?

The marketing spend for '05 is being planned at a double digit increase, so in excess of a rate of what our sales increases are. In absolute dollars we were up in '04 over '03, but just slightly as a percentage of sales.

Jeff Edelman from UBS.

Two questions. One, you have given us some sort of direction of earnings. You have never really talked about quarterly distribution of sales. And last year Merrell was really front loaded in the first and third quarter. Would you also expect sales this year to be more balanced?

I made the comment that we expected our earnings improvements to be relatively balanced. And I guess you can imply that revenues would have to be driving that earnings base so that the revenue growth would be fairly balanced. We don't see any big changes in our trends quarter to quarter because of new business activity.

Good. And then secondly, one of the large footwear manufacturers in China, Julin (ph), came out with some lower earnings and talked about higher raw material costs, especially for soles. Could you sort of give us a sense of what is happening to your costs and overall what is happening to your average selling price? I know you said Wolverine was going up, but for the rest of the product line?

I think in general our sourcing team has done a pretty good job of keeping a lid on price increases. But it is correct that particularly petroleum driven components, which impacts out soles, mid soles components there are real increases there. And we are seeing some modest increases in our prices out of China. Nothing that is that significant.

As we put new product into the marketplace we price it accordingly. Some of our brands that have higher percentages of carryover product, we have made some modest price increases in a few areas to compensate for that. I think in terms of the average selling price I would expect we would see throughout the Company a small increase in average selling price, but I think you're talking in the 1, 2, 3 percent range.

So you're pretty much maintaining the gross margin than?

We're fighting very hard to maintain the gross margin, yes.

Okay. Are you able to capture any more in that?

I think the areas where there's opportunity for us is as we introduce really innovative, exciting new product. That is where there is an opportunity for margin improvements. You know in a brand -- other specific situations are out there like Sebago where we are going to have very significant margin improvement because we have completely reengineered the product line. We changed the manufacturing and sourcing mix. We have done a lot of things that will impact margins. Our business mix also has an impact on margins. Less -- a lower percentage of our sales in areas like Department of Defense contracts, a higher percentage in brands like Merrell, Sebago. You know that mix change also has a favorable impact on margins.

Okay, thanks. Great quarter.

Scott Krasik from C.L. King.

Good quarter. If we could switch to Hush Puppies for a minute. Clearly you've gotten back into the department store doors that you were looking for, probably a little bit more among Federated, but certainly on Marshall and Heck. Where are you in terms of repositioning the brands at the J. P. Penney's and lower tier soft styles to really get to the point that, okay, this is the Hush Puppies business that we going to have and we're going to grow going forward?

We think -- as you know in the last several seasons we have been working very proactively with our -- the existing Hush Puppies accounts as well as the new accounts that we have been looking to expand with. And I think we have come a long way along that process. We have new packaging, new branding on that segment of the product line that we wanted to differentiate from Hush Puppies. So I would say, are we 100 percent there yet? We are not, but I would say we have made a considerable progress there.

Will we see good growth in the U.S. in '05?

We're planning for growth in '05. You know I think -- we still know there is transition issues, so we're planning single digit kind of growth for the U.S. in '05. But I'm hopeful that we are going to achieve that.

And then back to Merrell for a second. I guess you had expressed an interest in doing product line extensions yourselves rather than doing the licensing where just -- you maintain control over the brand. Given the so-so to slightly above-average performance of the suitcase and the packs, where are you with some of the other line extensions like clothing being the biggest one, I guess?

That is still in the work in process stage. We haven't made a final decision on when and how we might move beyond where we are right now in terms of product categories. But it is certainly something that we're working on and just aren't prepared at this point in time to predict the timing on that.

And then Steve, just lastly, if you can give a housekeeping. Do you have the shares outstanding both pre-split and post for Q4?

We're always going on the annualized basis and then you back in. So for the numbers I gave, which was 40.3 million and 60.5 million would be the numbers you want to use.

Elizabeth Montgomery with SG Cowen.

Congratulations on a really good quarter. I think I have 3 questions. I guess the first one, since it doesn't appear like Merrell is slowing down at all, and since it seems like we should be looking for, I think, you said single digit growth for Hush Puppies in the U.S.? Is there a time when you would consider revising the long-term revenue growth rate goal of maybe high single digit annual revenue growth?

Yes, one of the things that we deal with every time we have a conference call and every time we are looking into the future, is we have pretty good insight into the next 6 months of business. But we have no clue what is going to happen in the back half or what the environment might be. And that is why as we -- when we give our guidance we would rather become more aggressive as the year goes on, if that is the appropriate thing to do than have to change midstream because of a change in retail conditions or other market impacts that could be out there. We think that is a much better strategy. And we're giving everybody our best prediction based on the data that we have today, and that is really where we are at.

That makes a lot of sense. My second question is on the Merrell -- the new marketing campaign for Merrell. I apologize if someone else asked this already. When will we first see that? And is it print or is it point-of-sale? Is it going to the tied into the shop-in-shops program? And if it is, are we going to see it kind of in some newer distribution channels, maybe like the Finish Line test?

In terms of the campaign itself, it is -- it will be principally a point-of-sale. I assume there will be some media behind it. And also we're investing quite a bit more in Merrell in our '05 plans in terms of participation in various events. That has been a very effective way for us to really be where the Merrell core consumer is, in an environment where that consumer is really interested in learning more about brands like Merrell. So it will be a combination of avenues to really reach that core Merrell consumer. Certainly point-of-sale will be very strong. And we will incorporate some of those new themes into those shop-in-shops.

Also, I believe you will see some of it in Vegas when you come see the product at the booth. So you'll get a flavor for it early when you make your visit there.

Okay, great. And I forgot my third question. So on I might get back in later.

John Shanley of Susquehanna International.

Tim, can you give us an approximation of the Outdoor brands percentage of the revenue in the fourth quarter that was derived from sales in Europe? And also, could you comment on the growth curve in Merrell and Sebago product in Europe versus the U.S.? Is that what is really driving the Merrell line, or is it just a part of the whole equation?

John, it is really just a part of the whole equation. When we look at the Merrell business -- you know, we had a double digit sales increase in every market they serve. Europe has been growing faster just because we had a lower sales base in Europe. And I would anticipate that we will continue to see Europe grow at a faster pace. But frankly what I really like about what is happening is we are growing in every market.

Is Merrell still about 20 percent Europe versus 80 percent U.S. approximately? And is Sebago still about half Europe?

I think Steve is going to do a little math here on the Merrell business. Sebago actually is a little more than half in Europe. But I think as we really get some momentum going in the U.S. business, I would expect over the next several seasons that that it would be more in that 50-50 range.

While he is calculating that, maybe we can talk a little bit about Hush Puppies. A 2 fold increase in operating profits in the quarter is certainly very substantial for Hush Puppies. Is the driver, Tim, on that increase coming from the momentum that you have in the international marketplace or the change in the merchandise flow into more department store business domestically, or is it equal?

Right now it is being driven by the international business, because we're continuing to make some significant investments in the U.S. business. We have an infrastructure in place that is geared for a much bigger business than we currently have in the U.S. But -- so that profit increase is the result of very strong performance in our UK business, excellent performance in our Canadian owned wholesale business, and then a very nice increase in our international licensing business around the world, which as you know is a major profit contributor.

And I think the other interesting thing that is happening is all the work that we're doing in this repositioning effort in the U.S. in terms of product and marketing, all those things are fueling our international growth. Because a lot of the same things that are needed for this are exactly what is needed in the international markets. And if we could take an instant tour on Hush Puppies stores around the world you would see exactly the same graphics in places like South America, in Asia, that you're seeing in Macy's on 34th Street.

Good to hear. And also on Hush Puppies, do you have any sense from the prelines that you may have done with the department store accounts whether Skip has gotten any kind of indication of how well the brand is likely to do in terms of the fall '05 season with the department store accounts?

Yes, we have sort of previewed with -- although the accounts haven't gotten firm commitments from them, but in terms of the number of styles they're taking -- style out meetings it is a very nice increase over last year. And I think what Skip and the team are really working on there is in terms of the doors that -- we will see some door expansion, but more significantly is getting a broader selection of product in a lot of the key doors that we're in. I think we have a fire power and the product line to make that happen.

Super. It Steve doesn't have the Merrell thing I can get that later. But I do have one other question for him, and that is on accounts payable. It was up pretty substantially at the end of the fiscal year, particularly in relationship to the percentage increase that it was at the end of fiscal '03. Can can you give us an indication of what is driving that? Is that just due to the purchasing of the distributorship, or was there something else got on there?

Is primarily the inventory that we brought in, and the terms and conditions that we have for payment settlements in the Far East under our trade card arrangement. So it is really tied into the inventory that we brought in early for Merrell.

So it's just a timing issue, is that right?

Yes, yes, it is just a timing issue. And then back to your question on Merrell in the European market, their revenue base is about 20 percent of the overall Merrell business -- Europe is. Are you there, John?

I've got it. Thank you.

Jeanne Fontana from Lazard.

One quick question. Are you going to be -- now you have repositioned the Harley-Davidson brand into the Heritage Group are you going restating those sales numbers?

Yes, in terms of the things that -- our quarterly SEC filings and we will be reporting that as the Heritage Group.

So you'll see those comparisons, yes.

But as the 10-Qs come out, you're not going to just do a quarterly -- just a breakout.

It will be reclassified in the Qs going forward also on a quarterly basis.

And then just in terms of you had mentioned during the call that you saw Hush Puppies sell-through as strong in the independent retailers. Can you talk about how Hush Puppies sell-through was in the department stores, the better department stores? You said that --?

Yes, we had a very good fall season with Hush Puppies sell-throughs. And it was -- one area that I think out there that was -- caused some problems for people in the department store arena in the women's category were boots. Hush Puppies mix was not -- was predominately shoes. But we did have 2 boots that were fairly broadly distributed in the department stores. And we had good sell-through on those boots, so that was good news. Because that was not necessarily the case in the more fashion driven part of the boot business.

And then Merrell you said that some retailers wanted some early shipment of the new product in the fourth quarter. Is that going to affect your first quarter sales at all, because you beat your annual sales goal by $7 million, but you only raised sales by 5 million in 2005.

I think (technical difficulty) of Merrell we said earlier deliveries. A lot of that increase in Merrell inventory was inventory that is actually in transit at the end of the year, and is really designed for delivery in the first quarter. And that is why, as Steve explains, you're seeing an increase in our overall inventories at year end, and that is for Merrell, and that is principally for first quarter delivery. So it really didn't impact our fourth quarter.

The sales (technical difficulty) planned and most people expected in the fourth quarter was really the result of a couple of things. One of them was Bates. As we mentioned, the Department of Defense asked us to accelerate deliveries of some product, which we did in the fourth quarter. And as we have explained in the call, that is going to have an impact on '05 sales.

The second factor was, as Steve reported, we did have some impact in currency in the fourth quarter, which was a little stronger than what we had expected it to be. And those were really the principal drivers.

And then just could you talk a little bit about the competitive environment in the work boot business? Timberland is coming out with the Proline, and there's a lot of product innovation across brands in that area. I know you're coming out with the Wolverine MultiShox boot. Can you talk about what you think you're doing better in terms of how you're going to gain market share in that area?

I think you're very correct. It is an intensely competitive arena. It is an arena that we believe we are extremely well versed in in terms of our ability to read that market, understand that consumer and what that consumer needs. And the way that we built market share over a long period of time in that market has been really exceptional product and then strong marketing. And that is the formula we're going to continue to pursue. The Wolverine MultiShox product in our opinion is a much better product than anything that is out in the market. It is wonderfully -- it is lighter, it is more durable. And where we've got it at retail we're getting a strong response to it.

And the second factor is marketing. We have continue to have the largest share of voice in that category with consumers by consistently marketing our Wolverine boot brand, and we're going to continue to do that. And also been in our Caterpillar business we made good progress in growing our market share in the Caterpillar business with that work boot customer in 2004, particularly in the back half of the year. Again it was product driven with high technology, a great new product innovation. So we've got I think a very strong position in that market. And it is not going to be easy, but I'm confident we are going to be able to gain market share there.

Tim Duffy from Thomas Weisel Partners.

A question on the inventory. It seems like the majority of the growth in the inventory was from the Merrell side of the business. To what extent is that spring product versus fall product? It sounds like mostly spring?

You're exactly right. The comment I made, if you excluded the Merrell U.S. increase, and you took a look at our finished goods inventories for all of our other footwear operating groups, you had a slight decline. So our inventories were flat there. All the increase was in the Merrell product. And it was primarily the -- it was almost all the Continuum product coming in early. So that is what -- we anticipated this blip to occur, and I think in my comments I made a comment that you should see that take care of itself by midyear. So we have some opportunities there.

Okay. So what you see in the inventories at present, you have worked through some of that as you shipped?

Yes, and the comment I made on the call from the margin impact on the transition, it appears that the majority of that, the vast majority, is behind us from a transitional perspective. So we're not sitting on any inventories that are going to create any margin erosion as we transition.

Got you. Good. A question on the Bates business. I saw the Marine Corps contract that was announced yesterday. Is that the type of thing that could be factored into your guidance, and you guys kind of a assign probability to winning these contracts that you know are outstanding? Or is that kind of incremental stuff?

No, you're correct. At any given time we have typically have 6,000 contracts that are in various stages. And we plan which ones we're pretty confident we should -- we will win or a portion of -- or that we will win a portion of those contracts. So that was factored into our '05 plan. And looking at the flow of those contracts leaves us to believe that the blip that we saw in '04 is not likely to repeat -- that segment of our business would go back to what I would call a more normalized level of 2000 -- probably slightly about 2003, but more in that range. And the impact of that is going to be lower revenues for Bates. We're estimating in the 15 to $20 million range.

I see. So like this contract we heard about yesterday, with the June '06 expiration, how should we think about the flow? If we hear further contracts coming along, how should we think about the flow of that revenue? Is it kind of ratably across that time period?

It really depends on the Department of Defense -- these various military services needs. The other thing I would just caution you the way those contracts get reported, they report the maximum value of those contracts. And the way those contracts are given there's a minimum quantity in the contract and a maximum quantity. What is reported in the Federal Register and those other sources is, for whatever reason, is always the maximum quantity. Government has no obligation to take that quantity. The only obligation is the minimum quantity. The minimum quantity could be 25 or 30 percent of that maximum quantity. And we typically don't plan that we are going to receive the maximum quantity. We plan somewhere in that mid range. So the numbers that get reported, I think in terms of what really happens further down the road, they are overstated.

That's helpful. A final question, you mentioned consumer's appetite for lower-priced point product in the work boot category. And MultiShox is coming in with more premium pricing. Do you have any data on the sell-throughs to date in that series and the economy? Is there enough product on the shelf and enough history with that to --?

I think it is still early but what happened very quickly in both those accounts was that the sell-through rates on that new product was in the top 10 percent of all the products in that category in both those accounts. So that is good news. And I think we've got a product that is a highly engineered product, but it is at the premium end of the range, but not out of reach for many of the consumers we're targeting there.

Thanks. Nice quarter guys.

(OPERATOR INSTRUCTIONS). Mitch Kummetz with D.A. Davidson.

To start with I was hoping you give us a little more color on the backlog. Tim, you had mentioned that Wolverine backlog is down because of Bates. Do you happen to know what the backlog for that business is if you exclude Bates, and then backlog for the Company as a whole if you exclude Bates?

Yes, in rough terms the decline in the Bates backlog would have an impact on our overall year-end backlog that would approach 4 percent.

So we can think of it around 17 percent excluding Bates.

That's right.

And Wolverine would have been up then excluding Bates obviously.

Wolverine has a nice healthy increase in our order backlog.

And then Steve, I think you mentioned, and I can't recall your exact words, but I think you said that looking at the backlog stronger in the first half. And I wouldn't think that there is a lot of fall orders in the backlog. But are you seeing later ordering for fall this year versus last year in the backlog?

My comment was that the backlog primarily covers demand for the first half of the year. Because there is very little -- very little back half orders out there at this point in time. So really the entire backlog from that perspective is for first half demand. So after Vegas, when people finally start doing their final line -- line outs -- that is when we will start seeing a little more activity on the back half of the year. But it will be a little while before we begin a better handle on the back half, or see any visibility and into the back half.

Got it. And then on Bates, Tim, again you mentioned down 15 to 20 million in '05. Could you say how much that business was up in '04 versus '03?

It was up in that same similar range.

So when you say back to more normal levels, that is just -- it was up maybe 15 to 20 million in '04, and then it is just coming back down to where it was in '03?

Exactly right.

Then just a couple of last questions. One, housekeeping, you mentioned, Tim, in your prepared remarks on the Heritage business you said up over 10 percent. Can you be more specific, just help me out with my model? Can you give me an actual percentage increase? And also for the Outdoor business too, because I know you gave Merrell and then Sebago, but if you could just give me a combined number for that?

You're looking for -- what are you looking for?

The percentage increase in both Heritage and Outdoor year-over-year?

Fourth quarter?

Correct.

Outdoor was up mid double digit, mid teens. And then Heritage Group was up -- was a little higher than that, around the 20 percent range.

Okay.

That's fourth quarter revenues.

Got it. And then lastly, I know your guidance doesn't reflect any expensing of stock options, but if you were to have to do that, would that have a material effect on your guidance?

I'm sorry?

In terms of expensing stock options, I believe you said that your guidance doesn't reflect that. If you were to have to do it, would that have any impact on your guidance, or how much of an impact, could you speak to that?

It is not included in our guidance. It would be about anywhere between 1 penny to 2 cents per share per quarter once we adopt it on a post-split basis.

Your final question comes the line of Mr. Sam Pozer of Mosaic Research.

Can we talk a little more about Sebago and where that -- you said it ended up just under your $30 million target. And how that is rolling out into 2005? Are you seeing that?

Yes, we're pleased with where we are with that business. We expect it to grow -- to be our fastest growth brand, and obviously off a small base. We had a good response to the new product introductions that we had out there for the spring season. We've got an increase in our order backlog at year end. As I mentioned, not only the increase in the backlog, but the women's category which had not been a strength for the brand and our backlog has -- just over one-third of that backlog is for women's product, which is up very dramatically from historically percentage of women's business at the Sebago brand and had (indiscernible) over time.

So a lot of things that we're hoping to achieve, I think we're doing well. The marine performance product, which is more athletically inspired product, that was a brand new category. We're just delivering that product, but several of the accounts we've gotten that are selling it well already. The sort of classic product continues to do well. So all the signs are positive.

Have you spoken to a sales number there, or could you speak to a revenue number for 2005 there?

We indicated that we thought both the Merrell and Sebago businesses would be up double-digit. The Sebago business is a pretty small base. And I think in Tim's comments he made that it would be a stronger double digit increase in Sebago's situation because it is a smaller base.

And then moving on, thank you. On the Bates business ex the military issues, can you talk about the growth there? Or is it really a pretty flat business?

I would say there are 3 components to that business. One component is this contract business with the Department of Defense. There's another component where Bates is the dominant supplier of uniform dress oxfords. And for example, in all the military PXs they are a supplier of boots to the military PXs, which are optional items that servicemen and women purchase in addition to the product that they may get issued. In fact a significant business for Bates. We're supplying all the military academies. And then we have a civilian uniform business where we are supplying uniform footwear for civilian purposes for police, postal all those segments.

We would expect to have, excluding that contract business, certainly an increase in the civilian part -- a nice increase in our civilian uniform footwear business. And probably a reasonably flat performance in that PX driven business, just because all the service people -- nobody is home. They are all deployed. So there is just not the traffic in those retail venues that there would normally be.

And then just one last question on the Hush Puppies. Can you talk about the timeframe that you're envisioning to get the U.S. business up? And what percent of that business currently is independent versus department store in total?

In terms of the mix of business, we really are looking at it a couple of ways. We are looking at it in terms of what I would call the upper tier department stores, like Federated. We also have a business with some more moderate department stores.

I was really talking about the new -- the product is going in the new direction.

The product that is going the new direction in terms of its overall percentage of the mix, in both if we took the men's, women's, the whole Hush Puppies U.S. business, I would say that product is approaching probably 50 percent of our sales now and growing. Where what I would call the older, more mature, lower-priced point product is declining.

And that process is going to continue. What the real key is for us to get sufficient momentum in that new product with those new distribution channels to be not just offsetting, but more than offsetting that business that we're deemphasizing. And I would think we should start to see that happen in '05.

Thanks. Great quarter, thanks.

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 World Wide I would like to thank you all for joining us today. And as a reminder, our conference call replay is available on our website at www.wolverineworldwide.com. The replay will be available through February 16, 2005. Thank you and have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Good day.