Wolverine World Wide Inc (WWW) 2005 Q1 法說會逐字稿

Good morning, and welcome to the Wolverine Worldwide first quarter conference call. All participants will be in listen only mode until the question-and-answer session of this conference call. This call is being recorded at the request of Wolverine. If anyone has any objections you may disconnect at this time.

I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine Worldwide. Ms. Cowdin, you may proceed.

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

Earlier this morning we announced record first quarter results. 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 news 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'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by securities laws. As a result we must caution you that, as with any prediction or projection there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases.

With that being said, I would like to turn the call over to Tim.

Thanks, Christi. Good morning, and thanks for joining us today. I'm pleased to report record revenues and earnings for our first quarter of 2005. This marked our 13th consecutive quarter of year-over-year revenue and earnings increases.

Revenues for the quarter of 245.2 million increased from the prior year by 9%, and earnings per share of $0.27 were up $0.07, a 35% increase in the prior year. The revenue and earnings increases in the quarter were broad-based with the Hush Puppies Company, the Outdoor Group, and the Heritage Brands group all reporting solid revenue gains and double-digit earnings increases.

Geographically, revenues exceeded the prior year by 7.2% in North America and 14% in Europe and other international markets. Our investments over the past three years in Europe are yielding strong double-digit revenue and earnings increases. Operating margins in Europe improved against -- again this quarter as we leveraged our central services structure to provide excellent service to our customers in a very cost efficient manner. We are excited about our progress in Europe and are anticipating continued double-digit revenue growth in Europe.

Turning to our key business units. Hush Puppies global revenues were up 14% in the quarter led by very strong performance in international markets and a 7% increase in the U.S. The U.S. increase was driven in part by a 15% sales increase to the department store channel of distribution. The women's Hush Puppies business with Federated continues to strengthen with product in 221 Federated doors for spring '05, versus 195 doors last fall.

From an industry perspective the women's footwear business for spring got off to a slower than ideal start. However, Hush Puppies key items have been performing well, particularly sandals with embellishments, wedges, and product with a vibrant color pallet. Also, the strategy to segment the Hush Puppies line utilizing the soft style sub brand for mid-tier distribution channels is producing positive results as this product has benefited from improved styling while continuing to deliver on the comfort heritage of the Hush Puppies brand.

The Hush Puppies men's business enjoyed a very good first quarter also. Hush Puppies men's black label collection, our highest priced product, has been very well received and has been adopted by a number of upper tier men's specialty footwear stores as well as one of Nordstrom's divisions.

On the international front the Hush Puppies business in Canada, the U.K., and with our international licensees and distributors was also strong during the quarter. The brand's position with fashion footwear specialty stores such as shoe in the U.K. and the Aldo group in Canada continues to strengthen. The improved global product range is creating success with the brand's network of international partners who are relying more heavily on Hush Puppies sourcing support.

The Heritage Brands group, which includes our two largest licensed footwear businesses, Caterpillar and Harley Davidson, had a strong first quarter. Revenues were up about 8% led by strong performance of the Caterpillar brand in Europe, and a conversion of our former distributor arrangement in Canada to a wholly owned wholesale business earlier this year. The Caterpillar footwear business in the U.S. generated significantly better operating results, despite lower revenues in the quarter that resulted from fewer close-out sales and the timing of shipments and a shift in product assortments with two of our larger industrial accounts. Excluding these two accounts, sales to other CAT U.S. customers were up 11% in the quarter.

Caterpillar sales in Europe increased 17% in the quarter as a number of the more influential fashion footwear specialty stores increased their representation of the new Caterpillar product. This positive momentum is in sharp contrast to last spring when the CAT business in Europe was much less robust. While fashion athletics remains a strong driver in the footwear business in Europe, we are seeing the beginnings of a boot trend with a number of our key fashion retailers. Caterpillar business with international distributors was also strong, as the same product line driving the European business also performed well in other international markets.

Harley Davidson footwear achieved a double-digit earnings improvement during the quarter on modestly lower revenues resulting from lower reorder activity. The Harley Davidson footwear team is working pro-actively with the Harley Davidson dealer network to flow merchandise to their stores in a manner that will help improve the dealer's inventory turns and keep their boot assortment clean and well merchandised. This program resulted in slightly lower shipments to the dealer network in the first quarter. On the international front a former distributor arrangement in Europe has been renegotiated in order for to us market Harley Davidson footwear directly to the Harley Davidson dealer network and other retail accounts in many of the key European markets. The Heritage Brands group will leverage the existing CAT European infrastructure to execute the strategy.

The Wolverine Footwear Group, which consists of the Wolverine Boot, Bates, and Stanley brands, experienced a 3% revenue decline in the first quarter due entirely to lower Bates uniform footwear shipments to the Department of Defense. Wolverine boot shipments in the quarter were up 4% as a result of the success of the new Wolverine Multishocks product. As well as incremental sales in the Canadian market from the conversion of the Wolverine Boot business in Canada to an owned wholesale operation. Wolverine Boot experienced a significant increase in average selling price in the first quarter as the mix of business shifted more heavily to premium Wolverine Multishocks product. This is a breakthrough product that's enjoying strong sell-through at retail at premium prices.

To fully exploit the momentum Wolverine is creating with its new Multishocks introduction, the brand will be launching a new ad campaign this fall to reinforce the brand's connection with its core work, outdoor, and rugged casual consumer. Wolverine expects to make over 400 million consumer impressions with its media campaign this year. Look for new Wolverine television spots this fall as we introduce the Wolverine Relentless By Nature campaign.

As planned, Bates uniform footwear revenues were down in the quarter by $3.8 million. As mentioned in our last conference call, the Department of Defense requested that Bates accelerate the delivery of a combat boot contract during 2004. As a result of this acceleration, in anticipated lower overall demand from the Department of Defense in 2005, we estimated that Bates revenues would be 15 million to 20 million lower in 2005 as compared to 2004 levels. Based on first quarter results this estimate would appear to be in the correct range.

The Outdoor Group consisting of the Merrell and Sebago brands enjoyed an excellent first quarter with Merrell revenues up 14% and Sebago revenues up 18%. Merrell's success in the quarter was driven by broad acceptance of the new continuum performance product and a strong sandal sell-in and sell-through, particularly in the women's casual category. In the U.S., Merrell experienced significant sales increases with key retail accounts such as Nordstrom, Cabella's, and Dick's Sporting Goods. Merrell also experienced strong reorders during the quarter, and was in a better inventory position than the prior year to service the increased reorder activity.

From a marketing perspective Merrell has initiated a new consumer campaign with the theme "Let's Get Outside." Extensive consumer research revealed many consumers view their outdoor activities as a route to a healthier lifestyle and overall sense of well-being. For today's outdoor consumer, it's not about conquering the outdoors but rather about living in harmony with the natural environment. Merrell is tapping into this consumer insight and broadening the appeal of the Merrell brand to consumers who are part of the new outdoors. This new marketing campaign will be executed in a variety of media as well as sponsorships of outdoors events and programming.

For example, Merrell is co-sponsoring Globe Trekker, an adventure travel show, that will air in 39 episodes on PBS television beginning this month. Merrell will air two 15-second television spots on each episode. Also, this month is Merrell's concept shop month with nearly all the 135 Merrell shop-in-shop operators participating in a two-week Merrell marketing event. Sell-through results so far have been outstanding.

Sebago had a strong first quarter with revenues increasing 18% on the strength of a reinvigorated brand image and renewed enthusiasm on the part of the Sebago customer base. As you may recall, this spring is our launch of the extensively redesigned Sebago product line. I'm pleased to report that the new product is performing very well at retail, both here in the U.S. and in Europe. New categories such as athletic marine are particularly strong. Additionally, the conversion of key European distributors to sales agencies has created a more competitive pricing model and resulted in increased demand for classic Sebago product as well as our new product introductions. We are now successfully servicing our European Sebago business through our European distribution center and central services infrastructure and benefiting from the efficiency of this business model.

In summary, we are encouraged by the strong response from consumers in our retail partners to our product and marketing initiatives across our brand portfolio. Our order backlog at quarter end was up 11% compared to the prior year. This healthy backlog increase was widespread across our business units, with the Hush Puppies Company, Heritage Brands Group, and Outdoor Group all with double-digit backlog increases. Based on our strong first quarter performance and retailer response to our fall season programs, we are increasing the Company's 2005 sales and earnings estimates which Steve Gulis will review with you shortly.

In closing we are off to an excellent start this year, and believe we have the right strategies in place to produce another year of record results in 2005.

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

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

We were extremely pleased to announce record first quarter revenue and earnings per share in this morning's press release. Revenue of $245.2 million exceeded 2004's first quarter revenue by $20.3 million, for a 9% increase. The revenue increase was balanced throughout the business as the Outdoor Group and Hush Puppies recorded mid-teen increases, and the Heritage Group had an upper single-digit increase. The Wolverine Footwear Group was impacted by the planned reduction in military shipments, while the Wolverine boots and shoes brand reported an increase in line with the industry's growth rate.

European and international revenue continued to accelerate and reported an increase of 14.0% while the North American operations grew at a rate in excess of twice the industry average or 7.2%. Additionally, the weakening of the U.S. dollar, when compared to the first quarter of 2004, had a slight impact on the quarter's revenue increase as foreign currency contributed 1.2% to the gain.

Record earnings per share in the quarter totaled $0.27 versus the $0.20 reported in 2004. Strong leverage from our business model continued to be generated in the quarter as we reported a 35% increase in earnings per share. This year's increase was on top of the 66.7% increase reported in the first quarter of 2004. The gain resulted from the sales increase noted above, strong growth margin expansion, and solid expense control. The earnings improvement was also balanced throughout the business with the vast majority of the operating units reporting improved results.

Gross margin in the quarter totaled 39.3% which exceeded 2004 first quarter levels by 130 basis points. The expansion resulted from an improved mix of higher margin lifestyle business and lower product costs for our international wholesale operations. Foreign currency gains accounted for approximately one-half of the gross margin improvement and benefits were also generated by the worldwide sourcing capabilities of Wolverine. We are anticipating improved gross margin for the remainder of the year and expect our annualized gross margin to improve by 80 to 100 basis points when compared to 2004 levels.

The Company's general and administrative expenses totaled $72.2 million in 2005's first quarter. Total expenses were 29.4% of revenue, which compared to 29.5% in 2004's first quarter. We increased our investment in marketing and product development expenses by 10.4% and were able to drive expense leverage in other cost areas. We will support our growth by expanding, marketing, and product development initiatives and continuing the development of our European-based selling organizations. These items, combined with increased employee benefit and pension cost, will result in a 30 to 40-basis-point increase in annualized selling and administrative costs as we invest a portion of our gross margin expansion in initiatives for the future.

Record first quarter net earnings of $16.3 million exceeded 2004's first quarter by $4.0 million. The net earnings calculation included an estimated annualized income tax rate of 32.4% and average shares outstanding of 59.8 million were used in the fully diluted EPS calculation. The estimated annualized income tax rate of 32.4% does not include any impact from the potential repatriation of foreign earnings and profits under the American Jobs Creation Act of 2004, as technical corrections are still being made to the congressional bill. We currently estimate that $70 million of foreign earnings and profits will be eligible for repatriation. However, the final amount to be repatriated has not been determined as we await the release of the above mentioned amendments.

From a balance sheet perspective, accounts receivable increased $13.1 million, or 7.8%, and inventory levels increased $20.2 million, or 11.6%. We were pleased to report improvements in both our days sales outstanding and inventory turns as they improved 8.8% and 6.3% respectively when compared to 2004's first quarter end. Substantially, all of the inventory increase is in the Outdoor Group as Merrell continues its transition to the continuum product and Sebago expands its product offering. As noted in last quarter's call we anticipate Merrell's inventories to be at normalized levels by the end of the spring-summer season. Excluding the Outdoor Group inventories were down 4.8%.

The Company's cash position remains strong as we ended the quarter with $43.5 million of cash on hand, and our total debt to total capital ratio continues to be at historical lows. We expect to generate approximately $75 million of cash from operating activities this fiscal year, and we will continue to use the cash to invest in the business and build strong brands, reduce our outstanding senior debt, pay dividends, and repurchase shares of common stock under our previously approved authorization.

During the quarter, we repurchased 350,500 shares of common stock under our December 2004 authorized plan for a total purchase price of $7.7 million. Our average price of $22.04 approximated a 7% discount to our 52-week high which was obtained during the first quarter. Additionally, we declared a second quarter dividend which reflects a 50% increase over 2004's second quarter. Based on yesterday's closing price, our current annualized dividend yield approximates 1.3%.

Continued balance sheet management and earnings improvement has allowed us to significantly improve our return on assets and return on equity over the last 12 months. Our trailing 12-month ROA and ROE are 11.1% and 15.5% respectively, and reflect improvements of 110 and 140 basis points. We anticipate further improvement in both of these metrics over the remainder of the year.

In closing, we were very pleased with the strength of our first quarter results, and this positions us for a solid 2005. Based on the strength of our first quarter and our backlog increase we are increasing our annualized revenue range estimate to 1.045 to $1.065 billion. Additionally, we have increased our estimated earnings per share range to $1.22 to $1.27 per share. These results would be in line with our stated objectives of consistently reporting revenue increases in the mid to upper single-digit range and double-digit EPS increases, while improving our operating margins towards our interim target of 11.5%.

I thank you for your attention during our call, and I will now turn the call back to Tim for his closing comments.

Thanks, Steve. While we're very pleased with our strong start to 2005, we recognize much work remains to achieve our goal to be the premier global footwear company in the segment of the market we serve. In the short term, we have solid momentum across our brand portfolio based on innovative products, good sell-throughs at retail, and growing consumer loyalty on a global basis. Longer term we continue to be optimistic about our ability to achieve our long-term growth objectives. We believe we can achieve consistent 12 to 15% earnings per share gains on a mid to high single digit revenue gain, while also driving strong cash flow and improving returns on invested capital.

We thank you for joining us today, and will now turn the call back to the operator so we can take your questions.

Ladies and gentlemen, if you'd like to ask a question please key star 1 on your touch-tone phone. If your question has been answered and you would like to withdraw please key star 2. Again, that is star 1 to begin. Your first question comes from Angelique Dab from Monarch Research, please proceed.

Good morning.

Good morning, Angelique.

Could you give me an indication for Outdoor Brands, the percentage of revenue in the first quarter that was derived from European sales and then growth of Merrell and Sebago for Europe versus the U.S.?

We'd have to do a little calculating here, I think, to get at that for you. Just give us a second here.

Okay. And also I'd like a quick question on the sales during the first quarter to shops installed year-over-year.

I'm sorry, shop-in-shops?

Yes.

I can't give you the precise percentage increase of shipments to shop-in-shops, but I would say that, based on the retail sell-through we're seeing in those shops, they're continuing to perform very well. This shop-in-shops Merrell month that we're having right now we're seeing some just excellent performance. I talked to one of our shop-in-shop operators in the southeastern part of the United States, a single store location that sold 489 pairs of Merrell products last weekend, and that's pretty phenomenal performance. So, my sense is that those shops are continuing to do very well and we're seeing improvements in terms of their sales of retail and our sales to them. Angelique, with regards to the first question, Steve is trying to do a calculation here.

Our European business for the outdoor group was up mid-teens, so it was very consistent with our overall revenue growth there. And I think, Angelique, if you look at the portfolio of our overall revenue base, the Outdoor Group was the fastest growing group, so it would be increasing a little bit from where it was in our year-end annual report.

Thank you. And then last question, are you seeing any trends in Europe that you think might come back to the states?

I think a couple of things. One is, in the sports fashion category, we're -- where Merrell has had some product in Europe that's been performing exceptionally well. That's a category that didn't really take off in the U.S. quite as quickly as did it in Europe, and I think we're seeing more action in that category now in the U.S.

The second thing I would comment on is, London -- we look at London as being probably one of the most advanced footwear markets around the world, and our Caterpillar business in London in particular has been doing quite well. And we're seeing a lot of the fashion footwear specialty stores in London, putting some more emphasis on the Boot category. And while it's early to say that's going to be a global trend, it's encouraging. We certainly hope we see that trend moving to other markets.

Great. Thank you so much. Congratulations on a great quarter.

Thank you.

Thanks.

Our next question comes from Jeff Edelman of UBS, please, proceed.

Thank you. Good morning. Two questions. Tim, first, could you talk about any benefits you might have gotten in the first quarter from the early Easter and to what degree that might take a little bit away from second quarter sales?

Sure, Jeff. I think in looking at the -- Easter was certainly several weeks earlier this year, and I think some dealers may have brought in some -- certain seasonal merchandise a little bit earlier, but in looking at, the -- our backlog, I don't really see it having any significant impact, in terms of really pulling second quarter sales into the first quarter.

Okay. Is that backlog increase spread evenly between the second and third quarter?

If we would -- the backlog increase -- it moves week to week, so when you start looking at it quarter to quarter, I would say this, that, we feel, based on our backlog, our second quarter revenues, the kind of momentum we saw in the first quarter should carry into the second quarter.

Okay. And then, Steve, for you, I noticed you had a LIFO credit last year in the first quarter -- in the fourth quarter, which you realized. As you're seeing sourcing costs continue to go lower, could you tell us how you're accruing LIFO versus last year?

We're relatively flat right now, Jeff, with where we're at at LIFO, because the inventory levels are up slightly, and that's offsetting the calculations in the overall reserve requirements. So, so, there's really no impact in the quarter's results, and that's a floating number that we watch and monitor every quarter, but it doesn't swing significantly quarter to quarter.

Okay. So if your inventory levels move up in line with, let's say, expected sales, or slightly below, and the price change remains the same, then do we see another credit, or does it reverse?

I think that you're going to see it being relatively flat and inconsequential to the overall operations.

Okay. Fair enough. Thank you.

Our next question comes from Noelle Grainger from JP Morgan, please, proceed.

A couple of things. First, on Merrell, hoping maybe you can elaborate a little bit in terms of the new continuum roll-out. What's selling best? What's your tweaking, what you've learned, and kind of continuum at this point in the stores representing kind of what percentage of your offering, or what percent of your distribution is carrying it at this point?

Overall, Noelle, what continuum was designed to do was to really reengineer our thinking about the whole performance -- performance side of the Merrell product line, which is about half our product offering. So it was a major program. And in that category, we're seeing strong performance, we're seeing it across a number of distribution channels. Certainly the multisport segment of that category is probably the most broadly distributed and the highest performing segment of the overall continuum program.

I think the real impact of continuum is that it -- the line logic behind it makes it much easier for our retail customers to purchase the line to display it at retail and to assist consumers who are coming in looking for a particular kind of product for a particular end use. And that logic has, I think, really touched a cord with retailers. They like the idea a lot. They've -- it helps them organize their presentation, and it makes it a lot easier for them to, I think, put the consumer who comes into their store into the right product to look at consumer needs. So it's -- we see it as a long-term opportunity to just improve the way that we present our line to the retailers and the retailers, in turn, present our product to the consumer.

How's the -- I'm going to call it, kind of the running-esque styles performing, is that multisport -- or?

Yes, it is multisport, but we also have some specific trail running product, trail running product to meet a couple of different end uses, some with Gore-Tex, some without. And that product is not as large as the overall multisport category, but it's a good category for us.

Okay. And then, Steve, in terms of your top line guidance, which you've tweaked up at this point, you came in nicely ahead for the first quarter. If your backlog is indicating maybe a similar kind of high single-digit trend for the second quarter, even with the high end of your range would imply a movement back into kind of the mid single-digit range or the lower end of the mid single-digit range for the back half. Anything to note there regarding that, or is it kind of just conservatism at this point?

No, I don't think it's conservatism, I think it's more of the visibility we have. Remember, our backlog really gives us an indication for about the next six months, and retailers are still holding on to future orders a little bit longer, so, we don't have as concrete of visibility into Q3 this year as what we had a year ago but we were pretty comfortable with our product line.

The other piece that I would tell you is, we still get over half of our business in the mail on a weekly basis, and, the retail environment has been okay, but hat not been robust, and, that's what we have kind of inferred into our calculation and our estimates for the full year, is a reasonable retail environment but not a robust one.

Okay. Thanks very much.

Our next question comes from Elizabeth Montgomery from SG Cowen. Please proceed.

Hi, guys. Congratulations on another really good quarter.

Thank you.

Good morning.

I have two questions. I guess the first one, Steve, can you talk about what your outlook for growth is in Europe, revenue growth is in Europe for the year?

Yes. I would think, we would be looking at double-digit growth there, and that goes back to the concept, Elizabeth, that we think our brands are ultimately underrepresented in that marketplace, so there's more opportunity from a market position. We've talked about the fact that the better leather footwear market is about 25% bigger in Europe than it is here in the U.S. and our brands are significantly -- have significantly less penetration in that market. So, we would -- as we place our product and gain further distribution expansion we would look for accelerated growth rates in Europe.

Okay. And then, I apologize if you mentioned this and I missed it. Did you talk about how Hush Puppies product was doing in the U.K.?

Didn't specifically in the U.K., but it's -- our Hush Puppies business there is excellent. We've continued to have a very positive trend in the U.K.. We've really solidified our position with the more fashion-forward retail segment of the market in the U.K., and are performing just real well in that market. We did last year, and we are -- did again in the first quarter of this year.

Okay. Then could you also just give a bit of an update about the test in the Finish Line stores? And any plans to expand the distribution of Merrell through the rest of the year?

Sure. The test with Finish Line is still a work in progress. We're working very proactively with them, in terms of the trying different things in different geographies in different stores. It's working well in -- but in terms of trying to predict exactly where that will be, I think would just be premature to do that.

When do you think you might be able to?

Well, that's going to have a lot to do with Finish Line's management, but I would expect by the time we have this -- our next quarterly call we -- at that point in time we may have something more to report there.

Okay. Great. Thanks a lot. Good job.

Thank you.

Our next question comes from Jim Duffy with Thomas Weisel Partners. Please, proceed.

Thank you. Nice quarter.

Thanks, Jim.

I'm hoping I can get you guys to elaborate a little more on the general retail environment, changing dynamics that you've seen there? Over the course of the first quarter, what are the current inventory levels at retail? And things of that sort.

Sure, Jim, why don't I take a stab at that. I think, during the first quarter, you had some weather trends that helped certain segments of the market and probably hurt some others. In the women's category, sandals didn't get off to as fast a start in certain parts of the country as they did in others because of sort of a cool weather pattern. By the same token, I think, some of the cold nasty weather in the northeast corridor helped retailers clean up a lot of seasonal merchandise, and they continued to sell boots at a pretty good clip in January and February.

The sandals situation, a lot of moving parts here with the timing of Easter. But my sense is that, as the weather is breaking, sales are gaining momentum, they're picking up, back to what we would, I think, closer to what most retailers had planned for that category. My sense is, I think retail inventories in general are in pretty good shape. Retailers today have better systems, they do a much better job really managing their inventory levels and just avoid getting themselves in trouble pretty effectively.

So the retailers themselves have taken a bit more cautious stance on forward orders?

We have -- certainly there, I think, in terms of fall business, we're seeing a few things coming in a little later than maybe we did a year ago at this same time. I wouldn't say it's a significant trend, but it -- we always like to have as much lead time as possible to plan our next season's business.

I think the one thing that's worked in our favor is, we've gotten much more focused in our product lines, reduced our SKUs, and even when we may not have a purchase order in hand, we have sufficient executive sales coverage out there working very aggressively with our major accounts to have a pretty strong feel of where they're headed in terms of product selection and we're making some advanced buys based on that information.

Within the Merrell backlog, can you give a commentary on the mix of product between the casual and sport performance?

I think the one very good thing happening with the Merrell business right now is that we're -- if you just generally segment the line into the continuum performance side and then the more rugged outdoor casual side, we're seeing good sell-throughs and broad acceptance on both segments of the Merrell product line, and that's true not only here in the U.S. but globally.

Okay. Steve, quick question for you. Your cash flow from operations guidance, 75 million, that's roughly in line with net income.

Yes.

It seems you're not looking to take some working capital out of the model.

We indicated last year, Jim, that, from a receivable perspective we thought that we were very close to being about as good as what we're going to get. We're continuing to target modest improvements, but what we're really looking at more efficiency improvements than we are dollar reductions, and so that we're not going to be generating cash or freeing up cash from a working capital reduction.

Not even on the inventory side? As you anniversary some of those Merrell inventories coming out of Q4?

We will, but we should get some of that out of Q4, but the other side, too, if you look at Merrell's inventory growth historically, compared to their sales growth, it was significantly below their sales growth levels, and as that business gets bigger it is going to require some inventory investment, and, if you went back the last 24 months, you would have seen the inventory level increases there being pretty minor compared to their sales growth levels.

Okay. Thank you, guys.

Your next question comes from Scott Krasik from C. L. King. Please proceed.

Hi, guys.

Hi, Scott.

Couple questions. First of all, Hush Puppies, I guess 7% increase in the U S, that's the first time we've seen a pretty good increase like that. Can you sort of give some indication of if that's sustainable and where it came from and does that mean that you sort of cycled the soft styles transition?

Scott, I think it would be -- we're still in a mode of upgrading, of improving styling, of expanding distribution and, it was really encouraging to see the success in the first quarter. A lot of it was driven by the better department store tier of distribution, and Hush Puppies business in that tier improved 15% in the first quarter, and we would certainly anticipate that we're going to do better whether we're going to be at that kind of increase quarter to quarter, I think it would be premature for me to tell you that we're going to be running at that kind of rate. But certainly we're more encouraged by the sell-throughs at retail and the acceptance and the Federated business that we've been talking about consistently over the last several quarters continues to be quite good. We're anticipating, again, more growth with Federated this coming fall.

Okay. Are you still at about 50/50 break down between the newer product and soft styles?

We're probably shifted a little more toward newer product at this stage, but soft style remains a significant part of the product line.

And then, I guess there were a couple of situations, one CAT distributor, another in the Wolverine Group where you've switched them over to being wholesale customers. Was that a meaningful part of the sales increase this quarter?

I think what you're referring to is, in Canada we had previously had a distributor who was representing our Caterpillar brand and Wolverine Boot brand in Canada, and we purchased that business at the first of the year and converted to the an owned wholesale business, and during the first quarter that added to our, incrementally to our revenues, roughly about 1%.

Okay. And was there another one in Wolverine, or did I just write that down wrong?

It was Wolverine and -- the Wolverine brand and the Caterpillar brand in Canada.

So both related to Canada. Okay. And then just -- can you give some indication of where -- or who didn't take continuum, or where you're going to get better growth in continuum, either for the fall or for next spring because people wanted to see how it performed at retail in the first place?

Well, I think, Scott, if you know the Merrell management team, any -- I would say there's almost nobody where that product would have been appropriate that didn't buy it. I mean, it was broadly -- for anybody in the performance and outdoor category carrying Merrell, they would have bought into the continuum. Our opportunity, we believe, with continuum is as we expand. For example, in the fall season we have created a new winter category within the continuum line. That's a category that's relatively new, and so we believe that could drive incremental business for us.

When we look forward to other seasons, we have a category within continuum around water sports, which is a newer category for us, and that, we also believe, could drive incremental business. So the opportunity is for when you look at the end use silos that we've organized the product into would be to get retail accounts to expand the number of those silos that they're purchasing within the continuum program.

Okay. And then, I know that the foreign earnings repatriation isn't final but have you sort of thought about order or preference of what you might do with the --?

The real opportunity there, Scott, is to not have a limit on what you can do with that cash. It's not -- I don't think -- our total cash position is not going to change. It just gives us more flexibility with that cash as the offshore cash would -- could be used for domestic purposes. So, the overall cash position doesn't change, it's just a matter of increasing our flexibility by utilizing the repatriate

Okay. And, I'm sorry, just lastly, have the Merrell guys, especially now that Keen is getting pretty big and Teva is doing a pretty good job. I mean, it's not really affecting the performance, but are you starting to get different questions maybe when you go in to sell some of your retailers, that you have to give a better explanation why they should buy every SKU of Merrell, as opposed to just taking a couple of the best selling because then they can switch to some of the other pretty good selling brands?

Scott, I think the strategy that the Merrell team has been employing is, one, they have very innovative product with strong sell-throughs at retail. And at the end of the day, that performance at retail is what creates more open to buy. And we're performing very well at retail. Certainly there's other brands out there in the category who are, too. But it's, with the kind of performance that we have, I think it becomes very persuasive when you have strong sell-throughs and strong maintained margins to encourage our retail partners to buy the line more aggressively.

Okay. Thanks, guys. Good quarter.

Our next question comes from Chris Svezia with Susquehanna International. Please proceed.

Good morning, gentlemen. Add my congratulations as well.

Thanks, Chris.

Couple quick questions. Most of them have been answered. But, I was wondering maybe you can answer this question. With regard to the strong floor order growth, particularly with the Heritage group, I was wondering maybe if you could just add a little color on the U.S. component of that business, particularly at Harley Davidson. I was just wondering if you add a little color in terms of, do you anticipate that business seeing some improvement based on strong floor order growth as you look towards the next two quarters and maybe toward the back half of the year?

Chris, we planned the Harley Davidson business in the U.S. up modestly this year for a couple of reasons. One of it relates to the Harley Davidson dealer network. They have been phenomenal partners of ours, and when the very first year of the business, they represented 40% of our sales, and as the business grew over the last seven years they still represent 40% of our sales. But I think Harley Davidson is not inclined to want to have us take over all the floor space in their dealer network. So there is some constraint there in terms of from a practical standpoint of they want to, in those retail venues today, present a balanced mix to the customers coming into the stores of not just footwear, but apparel, accessories, and all the other things that make the Harley Davidson brand so exciting.

So, we've been cautious, in terms of our planning for Harley Davidson, based on believing that we're getting pretty mature with the dealer network, and that's why a lot of our emphasis this year is moving to looking at some other market opportunities, particularly in Europe, where we think we're underdeveloped, we're underdeveloped with the Harley dealer network, we're underdeveloped with other retailers at large, and I think, you will see more growth in the Harley business coming in Europe over the next couple of years than perhaps in the U.S. market.

Okay. That clears it up. I appreciate that. Maybe, if you can comment a little bit on the Merrell business, seeing continued very strong growth in that business, particularly domestically, and given the fact that the marketplace is not obviously growing at those levels, can you maybe just add a little color, and given the fact that you're not really, to my knowledge, growing the account base that dramatically, can you talk a little bit about where you might be gaining share in that channel of distribution?

Sure. I think that one of the strengths, again, of the Merrell business has been, we're dealing with the top tier of retailers but with -- in a number of different venues with independent -- better grade independent footwear stores, better grade department stores, upper tier sporting goods market, outdoor specialty stores, and so while we've -- the Merrell team has been very disciplined in terms of their distribution approach, we're continuing to create some new opportunities, particularly with the better tier of footwear specialty retailers, for example, further expansion of shop-in-shops, more aggressive marketing programs to drive consumers into stores.

We believe there's still a substantial amount of growth opportunity for the brand without moving away from our very disciplined distribution approach. Part of the discussion we're having a little earlier about continuum and product categories, we also see opportunities to introduce new product categories within the Merrell brand that haven't been strong categories in the past.

Okay. My last question is just, I guess kind of looking at the recent announcement in terms of merger activity, the recent merger between K-Mart and Sears, and I was just kind of wondering about your thoughts in terms of the opportunities. I know you do a business at Sears in the Wolverine boot. And I know, obviously, Federated is certainly a very important customer for you, and the proposed acquisition of May Company by Federated, I was just wondering if you would talk about opportunities as you see them possibly playing out towards the back half of the year and maybe as you go into next year as well for those two channels of distribution?

Sure. Our overall within the Company, our -- we had a much larger business with Federated than we do with May Company. We're -- so, if Federated were to, in some of the May Company locations, move to a -- and merchandise those locations in a way that would be more consistent with Federated's general approach, that would certainly some benefit to us, we believe, but I think those things are going to take -- not going to happen in a short period of time. I think those kind of merchandising changes will take some time to unfold, so I would not plan that there's going to be any real short-term next couple of quarter kind of impact on any of that.

In terms of situation at Sears, it's just really beginning to unfold, and we really don't have enough information at this point to make any comments about it. As you may probably are aware in the K-Mart previously has had a leased footwear operation with Foot Star.

Right.

And currently those locations, K-Mart locations, continue to have a leased footwear department with Foot Star, and to our knowledge that isn't changing, at least not at this point in time. So, whether there will be any opportunity further down the road, it's just not clear at this point.

I guess time will tell there ultimately. Thank you very much. Congratulations.

Our next question comes from Bob Drbul from Lehman Brothers.

This is actually Helise Owens on behalf of Bob. Just two quick questions. I was wondering if could you give the cap for the number of Merrell shop-in-shop you have here in the U.S.? Secondly, just if you could talk maybe a little bit more about the heightened marketing and product development expense, maybe what -- what major initiatives that was spent toward, if it was Merrell or sort of a combination of several things?

Sure. I think with regard to the product development, we've got really aggressive plans across our brand portfolio so it's pretty broad-based. We're making -- continuing to make some significant investments in the whole redevelopment of the Sebago product line, disproportionate as to a percent of sales to what we normally spend. But there's strong initiatives really across our brand portfolio, because we continue to believe that product innovation is a very key differentiator. It really is what makes the difference in our industry.

And the one -- while we're not in a rapidly growing industry, in the non athletic part of our industry it is a highly fragmented business right now that -- if you have the right product, with the right brand imagery, right marketing, the opportunities to grow very rapidly are -- remain to be, I think, very exciting. The number of shop-in-shops, 135, we're planning on opening about another 25 this year in the U.S. and around 18 or 20 in Europe.

Great. Thank you very much.

Our next question comes from Jean Fontana from Lazard.

Good morning. I just wanted to talk to you about Hush Puppies a little bit. And, outside of Federated, what opportunities do you see for new doors for that brand? Now that it's been performing well at retail, do you think you can gain some more interest from other department stores?

Yes, Jean, we do. I think there's opportunities with a number of other department stores. And the other opportunity is this tier of better grade independent shoe stores. Our -- the hush -- as Hush Puppies has moved its price points up, has moved the quality of the design, the quality of the product up to a new level, it creates a much larger opportunity for us to expand our distribution with that better tier of independent specialty footwear stores. So that's certainly a major focus for the brand in addition to the department store channel.

Okay. And how is -- how is Sebago women's doing? I know that's been an effort for you. You talked overall that the brand is doing well, but I was wondering women's specifically, are you gaining some traction there?

We are. We ended 2004 with the women's backlog representing about -- I think it was about 35% of our Sebago backlog. So, we're encouraged by the kind of reception we're getting for the women's product. We've got some new product at retail. Right now it's performing well, so while it's still a work in process, it's -- we're seeing some encouraging signs there for sure.

Okay. Last question now. For Merrell didn't you acquire some distributor businesses as well in Sweden and Finland? Is that going to impact sales positively?

Yes, we did. It didn't have much of an impact on the first quarter. Pretty small. But over time it should add some incremental sales for us in northern Europe for Merrell, yes.

Okay. Thank you.

Thank you.

Our next question comes from Lee Backus from Buckham Research. Please proceed.

From Buckingham American. Congratulations, guys, on a great quarter.

Thanks, Lee.

Tim, you've talked in the past about the shift of business from the Q2 and Q4 into Q1 and Q2 as people ordered more up-front, the expense of reorder. Have we cycled through that now so that we're not going to see that trend continue as we saw it last year, or have we just got so much momentum in Q2 that we should still see the same kind of strong growth in Q2?

Lee, certainly our second and fourth quarter are more dependent on reorder activity than our first and third quarter, just by the nature of delivering seasonal merchandise on the front end of the season in Q1 and in Q3. So we are more heavily dependent on reorders in both those quarters. So, it's -- you have a little less visibility, and are simply more dependent on retail sell-through and reorders in Q2 and Q4. I mean, it's --.

yes, but we've been seeing a shift from more up-front orders and less reorders, which have driven Q1 and Q3 over the last year. Have we now cycled through that so we shouldn't see that shift continue?

Yes, maybe what you're -- I think what you're referring to, Lee, is probably as, the Merrell business, for example, has become a bigger proportion of our overall business, by the nature of that business, it's more forward order driven.

Correct.

As opposed to, let's say, our Wolverine boot business which is more of basic reorder driven business.

Right.

So, as long as we have these lifestyle brands growing faster than our core brands, I think we would continue to see some -- that shift continue.

Okay. But, you're saying that with for Q2 of this year you're seeing such strong backlog that Q2 should also be up pretty strong quarter for you?

We believe it will be a -- should be a good quarter for us. Again, it is dependent on having good reorder activity also.

Lee, one of the things, just to add to Tim's comments, we always look at the success of our brands on a seasonal basis, and we understand that the street doesn't do that, but we really like to look at our businesses, well, how did we do spring-summer, fall-winter, versus the prior year, and that kind of takes the order patterns out, and that's how we value and evaluate the success of our brands as we continue to develop and grow.

Okay. Also on Sebago, at WSA I got the sense that you were cutting out some of the lower end distribution from Sebago, but at the same time the business is very strong. So does that mean that the business is even stronger in the key accounts that you wish to go forward with?

Lee, I think a lot of -- you're correct, we did -- prior to our acquiring that business there were some distribution brought on board that we didn't think was really appropriate for the brand, as well as there was some, in the previous company, preparing the company for sale, cleaning up some inventory that was in the business prior to our purchasing it. We cycled through most of those changes really in the '04 year.

Okay. Thank you very much.

Our next question comes from Mitch Kummetz from D. A. Davidson. Please proceed.

Thanks. Few questions. First, Tim, on the backlog, could you tell us what the increase was excluding Bates at the end of the quarter?

Yes, backlog would have been 3% higher if you excluded Bates.

So, a little more than 14%, then?

Right.

Then just continuing on Bates for just a second, could you discuss what the outlook is for that business over the balance of the year? It was down 3.8 million in the quarter. Would you expect it to be down somewhere in the 4 to $5 million range in each of the next three quarters, or is there any one quarter that's going to be more or less than that?

I think, as we indicated, in our last conference call, we -- in looking at the business, we believed it was going to be about 15 to $20 million of lower revenues in that business because of the Department of Defense business, the acceleration of some orders in 04, and the general forecast that we had for an going Department of Defense business, and based on first quarter, 3.8 million lower, I think our 15 to $20 million range is probably still a pretty good range.

But it's even across quarters, then? There isn't any one quarter that stands out?

No, there's not any one quarter that -- we would expect that to be spread reasonably. I mean, it won't be identical quarter to quarter but it certainly should be in a reasonable range quarter to quarter.

Two last questions. First, on the Outdoor Group, I know you gave a lot of numbers on there for the quarter, but I don't think you gave just an overall percentage increase for that business for the quarter. Or, if you did I didn't hear it.

The Outdoor Group in total, revenues were up 15%, 14% in Merrell and 18% in Sebago.

Right. Okay. And then, lastly, maybe a question for Steve. Your SG&A, I think was down 10 bips in the quarter, you're guiding for 30 to 40 basis point increase for the year. Is that a function of high -- of advertise -- or marketing coming up as a percentage? I mean, it sounded like it was up around 10%, 10% increase for the quarter, but then you've got some marketing initiatives that seemed to hit later in the year. Is advertising going to grow at a faster rate than the 10% that did it in the first quarter?

Yes, it probably will, it will be marketing. Also, some of our product development initiatives, with the timing of the development of our lines, okay, that's not necessarily consistent quarter to quarter also. So, the primary place will be -- we're going to be seeing increases are both marketing and product development. The other piece that could have some impact and will have some impact is FX, as the dollar has changed versus the prior year, that will increase dollar up, the absolute dollars in those expenses also.

Okay. Thanks, guys.

Our next question comes from Sam Poser from Mosaic Research. Please proceed.

Good morning.

Good morning, Sam.

I got a bunch of questions now. Track 'n Trail stores and the overall other -- you're -- the two other lines that you didn't discuss, the other brands and licenses and other business can you talk about all of in that one?

Sure. I think our retail businesses really have two components, 11 Track' n Trail stores and then about 60 outlet stores, and that business was up in the -- was up in the quarter based on some respectable comp store sales increases and we probably had a new store or two, I would guess, also during the quarter.

In terms of other parts of the sort of the other businesses, we have a leather business, and that business had an increase in sales, it's not a big business in terms of our overall revenue, but we did have an increase in that business. We're seeing demand for our performance leather, not only for our internal use, but also some external customers like New Balance, Adidas, and others.

Do you have the revenue numbers for those two lines?

I don't think we disclose that anywhere, Sam, on a quarterly or annualized basis.

It was on the Q last time, at least the other brands where you could back out the other brands and licenses.

It's all other, combined. Hang on a second. It will be eliminations. It's going to be about just under $19 million, I believe.

Great. And then on the continuum program, I've seen it in a lot of the stores. How happy are you with the way it was purchased in, and -- because I'm seeing it's sort of looking real good and then seeing it choppy in some stores, like buying items. How are you working to evolve that to get it bought in the appropriate segments, basically?

It's certainly an ongoing project. I think the, our Merrell team working very diligently with their field sales organization and the other avenue we're pursuing there is we've continued to add to our Merrell tech rep force. We now have 14 people in the Merrell organization whose sole mission in life is to work with one on one with retail accounts, both on clinicing their people on the sales floor, on working on presentations at retail. So, that team is dedicated to trying to make sure that the Merrell presentation at retail is impactful and properly represents the brand. But, as you know, we're is impactful and properly represents the brand.

But, as you know, we're operating in not our real-estate, it's other people's real-estate, and we can certainly encourage, train, do everything possible, but at the end of the day the retailer is going to decide how he wants to present it.

One last question. On to the comment you made on the coming boot trend, or what you're seeing, what timetable -- I mean, how do you see that evolve based on history? Are you seeing any similar responses from retailers in the United States looking forward and so on, that they are being more active on some of the more boot product, not hikers but more in the boot categories?

I think one of the major impacts, if you were to go to London today, and were to look at the market you're going to see, for example, a much stronger Caterpillar presence than you would have seen a year ago at this same time. And I think one of the benefits of that is that, a lot of the top-tier retailers do shop the market, do visit Europe and hopefully those -- some of those trends that are doing well in a market like London, perk their interest, and we see -- we see the interest carry forward into the U.S. and other international markets. At this stage of the game I would say the activity we've seen to date tends to be more U.K., European based at this stage.

Great. Thank you. Congratulations.

Thanks, Sam.

And the last question comes from Steve Riccio from Landmark Capital. Please proceed.

Hey, guys. Great quarter. I may have missed this because I was off the call for a little period of time, but Track 'n Trail, could you give me a sense as to where you see that going? Currently you have, what, about 10, 11 stores now. Do you intend on growing that out to a significant number of stores, or ?

Steve, at this stage, we have only budgeted a couple of store openings this year, because we -- we were reasonably aggressive in the back half of last year with new stores, and we are evaluating the performance in those stores that we opened last year. We're continuing to -- those stores that have -- where we have comp store sales results are running -- continue to run quite positive, but I think it's it's too early for us to really say that we would be going beyond our current plan.

The one benefit that we're seeing some -- the stores -- we have a big enough base of stores now to really be able to get a read on a lot of our own new product, and if you were to look at one of the Track 'n Trail store windows right now what would you see is a very strong Sebago presentation this month, where we've taken a lot of this new Sebago product, both men's and women's, and that's in prominently displayed in -- in the windows, and as you walk into a Track 'n Trail store, and we're making use of the information we're gleaning from that to really help us fine-tune our product and marketing efforts. Whether we will go beyond that kind of utilization of the stores is -- we really need more time to see how the stores perform.

Well, unless I'm wrong here, I think you've been sort of testing these stores, what, for three years now? Is that right?

The first -- we had two stores in the Grand Rapids market, right near our headquarters, but there's only five of those stores that have actually cycled on their second year at this point.

Okay. But it seems to me that you should be coming pretty close to a point where you're going to make a go/no-go decision on these things. No?

At this stage, Steve, I think we're -- we're going to need certainly more time before we're prepared to look at anything more aggressive than what we've currently got planned.

Okay. Now, one other question, sort of larger macro question on Europe, and, again, my apologies if you touched on this earlier, but I'm trying to get a sense of the size of the opportunity you see in Europe in terms of sales. Do you think that's equal to the U.S.? Greater than the U.S.?

In terms of the overall size of the market at retail, the U.S. market is in total a 42, $43 billion market at retail and footwear, European market, if you use the word Europe broadly to include eastern Europe and western Russia, you're talking about a market that's over 50 billion. So it is a big market. We've dealt in that market in the past through a variety of vehicles, including licensing and distribution arrangements, as well as through an expanded owned operation base.

There is, we believe significant potential for growth in Europe. We grew at a very nice double-digit pace last year. We grew again at a double-digit pace in the first quarter this year. Certainly, for the near term we anticipate continuing to grow at a double-digit pace there.

And, have you put any numbers out in terms of your sales goals for say three, four, five-year period?

No, we haven't.

Okay. All right, great. Again, great quarter, guys. Thanks a lot.

Thank you.

Thank you. 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 Worldwide 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. The replay will be available through May 4, 2005. Thank you, and have a good day.