Wolverine World Wide Inc (WWW) 2005 Q2 法說會逐字稿

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

Thank you, Candace. Good morning, and welcome to our second-quarter conference call. On the call today are Tim O'Donovan, our Chairman and CEO and Steve Gulis our Executive Vice President and CFO. We are delighted to be hosting this morning's call from New York, where Wolverine is celebrating the 40th anniversary of our listing on the New York Stock Exchange.

Later this afternoon, we'll have the honor to ring the New York Stock Exchange's closing bell. This will mark our long and excellent partnership with the exchange, as well as the evolution of Wolverine over four decades into a true industry leader.

Earlier this morning, we announced record second-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 any news site or it can be viewed from our corporate Web site at www.WolverineWorldWide.com.

Before I turn the call over to Tim O'Donovan to comment on our results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by securities laws. As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases. With that being said, I would now like to turn the call over to Tim.

Good morning and thanks for joining us today. I'm pleased to report record revenue and earnings for our second quarter and first half of 2005. This marks our 14th consecutive quarter of year-over-year revenue and net earnings increases. Revenue in the quarter of 215.7 million increased in the prior year by 8.5% and earnings per share of $0.22 were up $0.04, a 22.2% increase from the prior year.

The revenue and earnings increases in the quarter were broad-based, with the Hush Puppies Company, the Heritage Brands Group and the Outdoor Group all reporting double-digit revenue and earnings increases. Revenue was lower in the Wolverine footwear group due principally to the planned reduction in Bates military uniform footwear shipments. The $7 million reduction in Bates' shipments in the second quarter negatively impacted total Company revenue in the quarter by 3.5%. From a geographic perspective, revenue was particularly strong in Europe during the quarter, with Europe accounting for about 2/3 of the total quarterly revenue increase. The Hush Puppies, Caterpillar, Merrell, and Sebago brands all contributed to the significant revenue gains in Europe. Our investments in Europe over the last several years in brand building, infrastructure and service capabilities are paying big dividends, as our brands continue to gain market share in this important market.

Turning to our key business units, Hush Puppies had a very solid second quarter, posting its second straight 14% quarterly increase in global revenue. The Hush Puppies business was particularly strong in international markets, where revenue increased by over 20%. U.S. revenue was up about 5% in the quarter and 6% through the first half of 2005, an encouraging indicator that the repositioning efforts in the U.S. are gaining traction.

Sell-throughs at retail this spring season were very solid in both our men's and women's product ranges. The global strategy to move Hush Puppies up market with higher quality and higher-priced products is resonating well with the brand's new target consumer. As part of this Hush Puppies strategy, efforts have been focused on building new distribution to upper tier channels, including Federated Department Stores. The momentum with Federated continued to build during the quarter, and sales of summer and spring Hush Puppies products in the 221 Macy's stores currently carrying Hush Puppies products has been quite good. As a result, we expect continued growth through broader presentations and door count expansion with Macy's for both fall '05 and spring '06. A five-store test this spring with Marshall Fields was also successful and further door count expansion is anticipated.

Overall, we are pleased with the progress Hush Puppies is making this year and anticipate meeting or exceeding our full-year plan for this business.

The Heritage Group, which includes our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, had a strong second quarter with revenue up 11% and a significant increase in profit. The Caterpillar footwear business achieved solid revenue with profit gains in Europe and the U.S. and also benefited from the conversion earlier this year of the former Caterpillar distribution arrangement in Canada to an owned wholesale business. The new CAT product, including the premium iTechnology program, performed well at retail this spring around the world, in both fashion footwear specialty stores as well as in the brand's core industrial accounts.

Harley-Davidson footwear achieved an earnings improvement in the quarter on slightly lower revenues. During the quarter, the groundwork was laid in Europe to restructure the Harley-Davidson business from a distribution to a direct sales business. During the third quarter, we will begin servicing Harley-Davidson dealers and other European customers from our distribution facility in Holland. This is one step in the process of maximizing the potential of the Harley-Davidson footwear business on a global basis.

In the U.S. market, Harley-Davidson has introduced a premium collection of legacy inspired men's and women's boots. The collection will be introduced this fall in top-end retailers, including Nordstrom's nine-store Northeast region. With positive fall backlogs and aggressive marketing plans in place, we anticipate continued revenue gains in the back half of this year for the Heritage Group.

The Wolverine Footwear Group, which consists of the Wolverine boot, Bates and Stanley brands, experienced a revenue decline of about $7 million or 12% during the quarter, due principally due to the $7 million reduction in Bates uniform footwear shipments. As mentioned in previous conference calls, we anticipated a 15 million to 20 million decrease in Bates military uniform footwear shipments in 2005. And it now appears we will be at the high end of those estimates. Through the first half, Bates shipments to the military are down about 10.8 million. We currently anticipate additional reductions of about 8 million in the back half of this year, with approximately one-third of the impact in the third quarter and the remaining two-thirds in the fourth quarter.

Our strategy for the Bates business continues to focus on working with both our military and civilian uniform footwear customers to develop technically superior, innovative product that meets the needs of our men and women in uniforms. A good example is the work currently underway with the Air Force to field test three new Bates combat boots, which incorporate our Leather Division's proprietary performance sway and our patented direct attach constructed Bates DuraShocks Comfort System.

Wolverine boot revenues were down slightly in the quarter due to a shift in the timing of new product shipments and reorder demand from Sears, which was partially offset by the addition of sales in the Canadian market resulting from the conversion earlier this year of the Wolverine boot business in Canada to an owned wholesale operation. The Wolverine boot business continued to experience an increase in average selling price as demand for premium-priced Wolverine MultiShox product remained strong. The Wolverine MultiShox product is experiencing strong sell-through at retail, and there will be significant marketing support behind the brand this fall season with a new ad campaign and media plan that will extend the brand's reach with over 400 million consumer impressions in 2005. Look for the new Wolverine boot television spots, which will begin airing on various cable networks starting today.

In addition to the success of the Wolverine MultiShox program, Wolverine is also gaining momentum in the rugged Outdoor and sport boot category with its key retail partners in the Outdoor specialty store channel. The Outdoor Group, currently consisting of the Merrell and Sebago brands, and in the future, the Patagonia footwear business, enjoyed an excellent second quarter, with revenue up by 25%, led by a 27% increase in Merrell revenue. Merrell's revenue for the first half is up 20%, while Sebago revenue is up 15%. Merrell's success in the second quarter was driven by broad acceptance of the new continuum performance product and strong sell-through of several new continuum initiatives, such as Aqua Sport and Chameleon, Merrell's innovative product that bridges the hiking and Outdoor athletic categories. The women's casual and performance sandal category also performed strongly, as did the entire children's range.

Merrell reorder activity across gender and distribution channels was very robust in the quarter, and better inventory support resulted in improved levels of service to Merrell's retail partners. Merrell's well executed line extension strategy is producing strong growth while maintaining the brand's premium distribution philosophy.

Looking forward to the fall '05 season, new categories, such as the fall-winter continuum line, will add incremental volume in the fourth quarter. For spring '06, the women's Pacific collection of low-profile colorful, ultra light sandals and shoes, will further contribute to the brand's momentum. The sport fashion segment of the line is also being very well-received, as evidenced by customer reaction at recent European trade shows, such as ISBO (ph) and Bread and Butter, as well as by North American retailers who have previewed the spring '06 line.

Turning to Sebago, the brand achieved a second consecutive quarter of double-digit revenue increase with particular strength in Europe. A conversion of several key European distributors to sales agencies has created a more competitive pricing model and resulted in increased demand for both classic Sebago products, as well as new product introductions. We are now successfully servicing our European Sebago business through our European distribution center and central services infrastructure. And our European retail partners are benefiting from this more efficient operating model and the reinvigorated brand image and fresh product. In terms of product, the new Sebago Campsite collection of premium hand sewn moccasins, and the Wave Extreme high performance water sport product, have performed very well at retail this spring, and opens the way for additional line extensions in both the premium hand sewn and performance water sport category.

In summary, we're encouraged by the strong response from consumers and our retail partners to our product and marketing initiatives across our brand portfolio. The Company's order backlog at quarter end was up a very healthy 12% when compared to the prior year. The backlog increase was widespread across our brands, with each of our four marketing groups achieving a 10% or greater increase in their respective order backlog.

Based on our strong first-half performance and the retailer response to our fall season programs, we are reiterating our previous estimates for our full-year results. In closing, we are off to an excellent start to the year and believe we have the 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 information about our results.

Thanks, Tim. And I would also like to thank everyone for joining us this morning for our second-quarter conference call from New York City. Earlier today, we announced record second-quarter revenue and earnings. Revenue for the second quarter 2005 totaled $215.7 million, which was an 8.5% increase over the 198.8 million reported in the second quarter of 2004. Earnings per share for the quarter totaled $0.22 per share for a 22.2% increase over the $0.18 per share reported in 2004's second quarter. This quarter represents the seventh consecutive quarter of double-digit earnings per share improvement.

Year-to-date revenue totaled $460.9 million, which equates to an 8.8% increase over the 423.6 million reported in 2004. Earnings per share of $0.49 compared to $0.38 for an $0.11 per share increase or 28.9%. The Company's operating model continues to drive strong operating leverage as year-to-date earnings per share have grown at a rate in excess of 3 times the rate of revenue growth.

The Company's growth continues to be well balanced, both by brand and geographic region. The Outdoor Group set the pace in revenue growth as the group accelerated its growth in the second quarter and year-to-date revenue is up 19.2%. Both the Hush Puppies and Heritage Groups had double-digit revenue gains in the quarter, while the Wolverine Footwear Group's revenue reflected the planned reduction in Bates military shipments. Additionally, international revenue growth continues to outpace the growth in the North American markets as our brands gain momentum in markets which, in our view, are underrepresented from a marketshare perspective.

Excluding the impact of the reduced Bates military shipments, North American revenue increased 8.5% while international revenue increased 32.4%. Foreign currency gains provided 1.6% of the second quarter's revenue growth and a 39.1% increase in European revenue drove the international increase. Reported gross margin in the quarter equaled 39.2%, which was a 120 basis point improvement over 2004's gross margin of 38.0%. This increase was on top of 2004's increase of 230 basis points. Approximately 100 basis points of the margin improvement resulted from foreign currency gains as our international wholesale operations were able to purchase product at lower cost, reflecting the U.S. dollar's weakness against foreign currency. The remaining increase resulted from an improved mix of higher margin lifestyle business. These improvements were partially offset by increased product costs from third-party sources and reduced domestic operational efficiencies in our own facilities.

On a year-to-date basis, gross margin has improved 120 basis points. The improvement is the result of the items noted above and the Company is operating at record gross margin levels. We continue to upgrade our product offerings, which allows us to deliver strong value to our consumer while simultaneously allowing us to merchandise more effectively, thus contributing to the improvement in our overall pricing margins.

Consolidated selling and administrative expenses for the quarter were 29.8%, which compares to 29.3% for the second quarter of 2004. Year-to-date 2005 selling and administrative expenses were 29.6% compared to 29.4% in 2004. The increase in expenses as a percentage of revenue reflects the infrastructure investment in our selling organizations, primarily Europe, and planned increases in employee benefit programs, pension and profit sharing.

Marketing expenses have been increased by approximately 10% on a year-to-date basis, while other corporate and divisional overhead costs have been reduced as a percentage of revenue by 60 basis points on a year-to-date basis.

Net interest expense continues to be reduced and 1.4 million and $0.8 million lower than in 2004 for the second quarter and year-to-date, respectively. The reduction reflects $15 million of principal payments on senior debt made in the back half of 2004 and minimal borrowing under the Company's line of credit facility. For the second quarter, the net earnings calculation includes an estimated annualized income tax rate of 32.4%, excluding the impact of any repatriation of foreign earnings under the American Jobs Creation Act of 2004. The Company is continuing its evaluation of the repatriation regulations and we expect to finalize our decision on repatriation in the second half of 2005. Also, average shares outstanding at 59.4 million were used in the fully diluted EPS calculation.

From a balance sheet perspective, accounts receivables totaled $157.3 million at the end of the second quarter, which is an 11.6% increase over 2004 second-quarter levels. We continue to have strong cash collections and our days sales outstanding have been improved slightly when compared to year-end 2004 levels. Inventories of 190.1 million reflects a 9.4% increase over second-quarter 2004 levels. The increase is in line with the rate of our sales growth and the increase in inventory reflects the increased demand for our brands in Europe and growth of the Merrell business. We continue to aggressively monitor our SKU level and we are targeting a low single-digit reduction for the year, which would be the fifth consecutive year in which the business would report a SKU reduction.

Our strong operating results and continued asset management program allowed the Company to produce $35.6 million of cash from operating activities in the first half of 2005. This is slightly below the record pace of $38.1 million generated in 2004 and puts us in a position to meet or exceed our 2005 plan of $75 million. A portion of this cash generation was used to repurchase stock in the quarter as we repurchased 670,000 shares of stock at an average price of $21.04 in the quarter. This brings our year-to-date purchases to 1,021,000 shares at an average price of $21.38, which is a 16.8% discount to our 52-week high, which was established in June.

Our balance sheet remains strong with cash in excess of $74 million available at second quarter end, and total debt approximating $44 million. Our total debt to total capitalization is 8.7%, which equals our year-end 2004 levels, and is an improvement over the 12.2% level at 2004's second quarter. We will pay down $10.4 million in principal on our outstanding senior debt in the back half of 2005, which should further strengthen our balance sheet position.

We are taking the final steps to complete the renegotiation of a $150 million five-year revolving credit agreement. This line of credit will provide required funding for long-term growth initiatives and general working capital purposes for the business. The terms of the agreement are very positive and reflect the continued strengthening of the Company's financial position.

The continued strong operating results and balance sheet management have allowed the Company to improve several of its core operating ratios. On a year-to-date basis, operating margins have improved 100 basis points to 9.6% and on a trailing four-quarter basis, operating margin is 10.7%. This improvement support our interim goal of generating operating margins of 11.5% for fiscal 2007.

On a trailing four-quarter basis, our after-tax return on assets is 11.5%, which reflects an improvement from the 10.1% reported at this time last year. Additionally, our return on equity of 16% has improved 200 basis points over 2004 levels. Both of these ratios are at historical highs and should continue to improve during the remainder of the year.

Looking toward the remainder of 2005, we are starting with a strong backlog position as we are currently up approximately 12% over last year's second quarter and the backlog supports our 2005 revenue guidance of 1.045 to $1.065 billion. It should be noted that we are anticipating the recent strengthening of the U.S. dollar to impact our revenue growth in the back half of the year.

Year-to-date, currency exchange rates have had a positive 1.4% impact on our sales growth and we are anticipating this positive impact to be offset in the third and fourth quarters. We are expecting the effect of foreign currencies to be neutral in the third quarter while the fourth quarter will have a low to mid single-digit negative impact on revenue growth. Full-year foreign currency impact is expected to be neutral to revenue. Gross margin improvements for the year are anticipated to continue, but at more modest levels than experienced in the first half of 2005. At current exchange rates, foreign currency contracts in place would generate gross margin expansion of 80 basis points in the back half of the year. If second-half gross margin expansion is achieved, full-year gross margins would expand by approximately 100 to 120 basis points.

We expect to continue our investment spending in our brand portfolio. We are planning a 50 basis point increase in selling and general expenses as a percentage of revenue for the full year when compared to fiscal 2004. This increase is the result of investments in marketing and product development initiatives, but also reflects increased support of our European selling organization and employee benefit cost increases. We are also incurring costs associated with the development of new programs, including the recently announced licensing arrangement for the Patagonia brand. We will be staffing a fully dedicated team for this business over the next 18 months prior to the initial market introduction of the product.

In total, if the full-year revenue range is met and estimated gross margin and expense levels are achieved, earnings per share would range from $1.22 to $1.27 per share. At this level, we would continue to achieve our stated growth objectives of full-year revenue increases in the mid to upper single digit level and double-digit earnings per share growth. We are off to a good start for fiscal 2005 and are optimistic about the second half of the year. I thank you for your time and would now like to turn the call back to Tim for some closing comments.

Thanks, Steve. I wanted to close today's call with a few thoughts regarding our recently executed footwear license agreement with Patagonia, one of the world's premiere performance Outdoor footwear brands. While this agreement will not result in significant revenue until 2007, we're excited about the long-term opportunity to develop a very innovative and exciting footwear program in association with the dynamic and forward-thinking team at Patagonia. In our view, the Patagonia brand enjoys a unique position with active outdoor enthusiasts, but we respect the brand for its quality, functional integrity, design ethos and also support Patagonia's commitment and leadership role to improving the environment.

Part of the Patagonia brand mystique emanates in the brand's Southern California surf and rock-climbing heritage. We believe these are all values that can be sculpted into a unique footwear product architecture that will have minimal overlap with our existing brand and product portfolio.

From a business perspective, several points should be noted. First, Patagonia has a unique distribution system built around a very close working relationship with the brand's Outdoor specialty store partners and a significant consumer direct business, consisting of owned retail stores, catalogue and Web site. Patagonia footwear will be a natural fit for these channels.

While our Merrell brand has significant distribution in the Outdoor specialty store channel, Merrell currently has a presence in only about one-quarter of the Patagonia U.S. dealer network.

Secondly, Patagonia also has built a strong international presence, particularly in Japan and Europe. We believe there will be significant opportunity for Patagonia footwear in these and other international markets.

Finally, the initial product launch is scheduled for spring '07. We will be making investments in this project over the next 18 months with no offsetting revenue. There will be some investment required to develop the long-term potential of this project.

In summary, we are enthused and honored to have been selected by Patagonia for their first-ever licensing program. We believe Patagonia is a natural fit with our global brand portfolio and represents an exciting long-term growth and profit opportunity for the Company.

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

(OPERATOR INSTRUCTIONS). John Shanley, Susquehanna Financial Group.

Good morning, guys. Tim, I wonder if you could give us a little bit of further background information on the product margins you're generating from your European product sales with the strong increase in forward orders, are we likely to see that translate into increased bottom-line results? Are you getting higher margins in Europe for the product than you would generally get in the states, for example?

John, I would say in terms of our European business, we've been improving our operating results consistently in Europe. We certainly have seen that trend continue for the first half of this year and anticipate that continuing into the back half. In terms of our overall margins, in total, our margins -- our pricing margins in Europe are pretty similar to what they are in the United States on a brand-by-brand basis. But I think what's really helping us in Europe is the fact that we've got some size and critical mass now, so that the infrastructure investments that we've made over the last several years, we're now spreading those infrastructures costs across much a more significant revenue stream.

Okay. And then in terms of the domestic business, Tim, is the at-once business likely to become a growing component of your major brands in the states and are the margins in at-once comparable to or better than the forward order margins?

In terms of the impact of the reorder business, during the second quarter, the reorder business was a significant contributor to our growth during the quarter. Typically in our second and fourth quarter, the overall percentage of reorders is a little stronger than it is in our first and third quarter. In our first and third quarter, we're making a lot of deliveries of initial product for the upcoming season; in the second and fourth quarter, we tend to wait a little more heavily toward reorders.

In total, I think that trend quarter to quarter is pretty consistent and I suspect it will continue to be that way. We certainly look in each of our brands to try to build some basic programs for our retail partners so that they have some core product that does reorder from season to season. That allows for more profitability from their part because they are not having to mark down things at the end of the season. So in each of our brands, we certainly strive to do that. In terms of our margins, our margins on reorder product are very similar to our margins on initial season shipments. There's not a big difference there between those margins.

Okay, that's helpful. And lastly, Steve, I wonder if you could comment on exactly what the efficiency problems were in terms of the U.S. distribution arm that you've mentioned and what are you doing in terms of correcting whatever those difficulties are?

It was primarily related to the Bates military reductions in our Arkansas facility, John, and we've taken appropriate actions to reduce those overhead costs. So it was an absorption issue, where we had -- and in those contracts, we have to have surge capacities. And when they accelerated those orders, we had to increase our production capabilities and now we have to scale that back down to more level -- to lower levels, which will be moderated over the long term.

Are we likely to see any impact on that in the back half of this year?

You might see -- you might get a little bit but not as much as but we had in the first half, because we were coming off that significant increase.

All right, great. Thank you very much. Appreciate it.

Elizabeth Montgomery, S.G. Cowen.

Hi, guys. Congratulations on another good quarter. I had just two real quick questions. Steve, did you give the specific amount that marketing expense ended up in the back half of this year?

I did give what the front half was. We were up 10%. And we would expect our back-half marketing to be at roughly that same rate, which would be in excess of our revenue growth.

Okay. Then, in terms of gaining distribution for Hush Puppies and some of the department stores, the Hush Puppies business in the U.S. right now, do you have a breakout for how much of that is kind of through independents and specialty stores versus through department stores?

Beth, I don't have it off the top of my head, a specific number for you. But what I can tell you from a trend standpoint, the department store business is -- we're obviously working to grow our distribution in both channels. The department store segment of it is growing more rapidly now, principally because of the strong results with Macy's and Federated.

So the additional doors will actually have a pretty meaningful impact on the sales growth of the Hush Puppies brand?

Yes. Adding -- and it's not just door count, but it's also getting a broader presentation of product within existing doors also.

Okay, great. My last question was just, so the portion of the Hush Puppies business that is generated by the international distributors, can you guys maybe talk a little bit about how those distributors -- or how you wouldn't see the impact from a stronger U.S. dollar in terms of your operating profit received from those distributors?

Beth, they are actually paying us royalties primarily in U.S. dollars. And a lot of their growth, okay, on that side of the business is becoming -- coming from more brand presence in their markets. So they're getting marketshare growth in their international markets with our licensees under the Hush Puppies brand. So the benefits, some of them do source their product from our factories and pay U.S. dollars, but we would not see any impact of that. That would be all in their markets. So the growth that we're seeing in the international markets is because of better brand presence in the Hush Puppies licensees.

Okay, great. So there's not a huge amount of exposure there in terms of FX rates?

No.

Okay. That's very helpful. Thanks, guys.

Noelle Grainger, JP Morgan.

Hi, good morning. First question kind of relates to your backlog. Your backlog has been running the past couple of quarters and this quarter at a pretty healthy low teens. Your revenue has been coming in in kind of the high single-digit range. And you specifically have commented this quarter about the strength of at-once, so I'm trying to figure out kind of that mapping or the disconnect between backlog growth and your top-line growth.

Noelle, I think a couple of things to keep in mind. First is that backlog is not just a single quarter's backlog. It's a backlog over principally the next two quarters. And as our reorder business was up, I think if you tried to weight the mix of the two, it gets a little bit tricky to get a 1 to 1 co-relation with what sales growth is. But it is trending in a fairly consistent pattern. I think our -- I don't know how else to really explain that other than to say that in a quarter like our second quarter, for example, our reorders tend to be roughly half of our business, and our initial product shipments with future orders is about half of our business. So I think the actual sales results are reasonably consistent with the mix of future orders and reorders.

Okay.

Noelle, the only thing I would add to that is the impact that the Bates reduction is having. If you went back to the first-quarter call, I think there was a comment in there --- and I don't remember the number, so I won't try to tell you what it is -- regarding what the Bates impact on the backlog was. And if you adjusted for that in the shipments, you'd see a better correlation, I think, of what you're looking for.

Bates is, all of that, is in the backlog?

It would have been at the end of the first quarter, you would have seen the reduction -- that backlog would have been impacted by the reduction that occurred in the second quarter, the 7 million of sales reduction that Tim referred to.

Okay. And Steve, with respect to your comments in terms of currency impact on sales in the back half, any other moving pieces that you might want to remind us of other than that? In the absence of other dynamics, it would seem like then that 3Q is going to have a stronger top-line profile than 4Q. Is that the right interpretation or is there anything else going on?

Yes, you're going to see a -- we think, given where our current rates are at, the revenue side in Q3 should be pretty neutral and we would be giving back the gains that were really generated from FX in Q1 and Q2, we'd be getting that back in Q4, so that would be neutral on a full fiscal year on the revenue side. And then we're out and have bought forward currency contracts and locked into our product needs for roughly the next six months of the back half of the year, so we're pretty well -- we can forecast what the impact and what our pricing will be there and what the adjustments will be or what the pieces are there. So we've got pretty good visibility there.

I think the other thing that could change or that could impact us is there going to be more pricing pressures out of China? We've seen a little bit and we've reacted accordingly and are protecting our initial pricing margins. We're seeing just a touch of it, not anything to get overly concerned about from our perspective. But there's a lot of things moving in the China market and that's going to affect everybody. We're not the only ones that could be impacted by that if something occurs.

That was actually my other question, which was I was hoping maybe you could elaborate a little bit in terms of the primary drivers -- is it really the components or is it labor? And what have you assumed in your back-half model? Have you assumed a bit of a bigger drag than you saw in the first half?

Noelle, let me answer the first half and I'll let Steve talk to the impact. I think the principal driver right now is -- has been -- oil pricing and its impact on components, as opposed to -- certainly there is some labor pressure in southern China. But I think principal thing has been component pricing, outsoles and other things that are petroleum driven. And as Steve mentioned, it hasn't been all that significant, but it's really the first time we really experienced any inflationary pressure there in probably three years or so. But we are having to look at our pricing margins, and on new product, make sure that we're covering ourselves in terms of adequate margins which we've been able to do.

So basically, you are passing it through?

Yes.

And from a modeling perspective, Noelle, we've locked into with our factories what our pricing is, so we're able to establish proper wholesale prices for our products. So the margins that I talked about for the back half, that's got -- our product price is locked in for all intensive purposes.

Okay. Thanks so much.

Jeff Edelman, UBS.

Thank you. Good morning. Two short questions. One, Steve, I guess based on what you said about fill-in (ph) business, then a larger portion of the backlogs would probably fall in the third quarter than in the fourth quarter?

Jeff, I think in terms of our visibility into the backlog, we have more visibility, obviously, in the third quarter than the fourth quarter. And the -- because there's still orders that will be taken yet for holiday delivery, November, December.

In terms of if you looked at the components of our sales in Q3 and Q4, it would follow a pattern not dissimilar to the first and second quarter, where in the third quarter, probably roughly 55, 60% of our shipments results from future orders and the remainder from reorders were in the fourth quarter; it historically has been more of a 50-50 kind of mix.

Okay. And then secondly, Tim, I believe in the last call, you talked about seeing some signs of interest in boots emerging in Europe, which sometimes sparks a fashion direction in the U.S. Is there any update on that?

Yes, Jeff, in terms of talking to our team in Europe, they particularly in the UK and to some extent in France and in a few other markets in Europe, our fashion footwear specialty store accounts are feeling pretty good about boots and we're seeing that reflected, for example, in our Caterpillar forward orders and their enthusiasm for the brand right now. So we're expecting a pretty good fall season, particularly in the UK, where the trend seems to be strongest.

In terms of its spilling over in the U.S., I can't say at this stage that we've seen any real strong indication of that. But I think, again, if there's a strong fall response to boots, London tends to be in that category, a pretty good future indicator. So I think it would be a positive sign and certainly those fashion forward accounts, they are pretty enthused about the boot category for fall.

Great, thank you.

Lee Backus, Buckingham Research.

First, congratulations on a very good quarter and excellent consistency over the last couple of years. Just first, could you just sort of describe the attitude of retailers going into the fall season? I know they did have some difficulties last year with the weather, but just talk about the mood of retailers going into fall. (multiple speakers)

Sure, Lee. I think it sort of starts with most retailers on what's happening now. And I think early in the spring season, it wasn't the greatest, but fortunately, the last six or eight weeks, the overall footwear business at retail has been pretty good. So I think that's positive. When it comes to how people have planned fall, I think they've been certainly a little more cautious in the boot category. And I think they have moderated their plan to boot inventory, particularly in women's fashion boots, for example. But I think there's a lot of exciting new product out there in both men's and women's and children's arena that are not quite as seasonally driven as fashion boots. And so I think their overall attitude about fall is pretty positive. I think the mix of how they are going to merchandise it may be a little different than they did for the fall season last year.

Could you discuss your own retail stores? How you're doing with those?

Sure. We have two components to our retail business, our outlet business and the Track 'N Trail stores. The 11 Track ‘N Trail stores that are open right now, trending very positive in terms of same-store sales increases. On a year-to-date basis, they are up low double-digit. You know, again, the mix of product in those stores that's really performing, as you might imagine, it's certainly Merrell in a major way. But I think also, in the overall scheme of things right now, I think footwear and accessories, in terms of consumer's response is even stronger in apparel. There's a lot of really quite nifty new product out there in the footwear arena; color has played a very strong role this spring and I think it will into fall, too -- maybe a little different palate, obviously. But there's just things out there that consumers are responding to and are excited about. So I think the overall outlook for this fall season should be pretty good.

That's both domestic and international, or at least Europe, from what you're saying?

I would say yes. In Europe, Lee, I think that would just be a little more cautionary note because there are parts of Europe where the economies are still tough. Germany is still a very tough market. UK has gone through a period of some pretty tough retail. We've been gaining market share very significantly. So in terms of the overall market there, I'm not sure it's going to be so easy. But we're pretty optimistic about our business in Europe because we've just been outperforming the market over these past several seasons and I think that's going to continue into fall.

And the fashion trends seem to at least be with you in Europe.

Absolutely, they are.

What about the rest of the international? Anything going on there?

Yes, the rest of the international business around is very solid. Business in Asia and in South America, where we're dealing through distribution arrangements and licensees, our partners there are doing quite well.

Okay, thank you.

Jim Duffy, Thomas Weisel.

I wonder if you could provide a little bit of additional color on the mix of the orders in the backlog. I think you'd said plus 10% across all business lines. Am I remembering that correctly?

Right, Jim. We have a 10% or greater backlog increase across our four major groups. That is the Hush Puppies Co., the Heritage Group, the Wolverine Footwear Group, and the Outdoor Group. So it's quite consistent and balanced across those four groups. With three of the four up 10, 11% and then the fourth, the Outdoor Group, up a little more than that.

And then the Wolverine side, that's maybe a little stronger than expected, given that Bates is likely a drag on that?

Well right now the Bates backlog is actually pretty much on a par, slightly up actually from a year ago, which was not the case at the end of the first quarter. So that's certainly helping the Wolverine footwear. And our Wolverine Footwear Group backlog for fall is quite healthy too.

It seems there's been some expanded distribution of the MultiShox?

Yes, expanded distribution of MultiShox and just the performance at retail of that product. Plus, we have a strong sport boot component to our Wolverine boot line; that would be things like gortex boots, waterproof boots, sport boots, of that rugged outdoor casual. And our retail partners in those channels who serve that market have, I think, are pretty favorably disposed toward the strong product and marketing that the Wolverine boot group has lined up in that category. So we've got some positive increases with some of those Outdoor specialty store accounts.

Good. Steve, question for you on the guidance. You've given us a little bit more on the gross margin. It looks like 100 to 120 BPs year-to-year, versus I believe the previous guidance was 80 to 100. And then you're giving a little more back on the SG&A. I think 10 BPs. Is the 10 BPs in SG&A all Patagonia investment?

A significant piece of that is Patagonia. We're anticipating a lot of -- we're going to be staffing on the design side, color, getting -- that's for the initial investments will occur. And we're anticipating a 10 BP side on an annualized basis would be about where we would anticipate being by the end of this year.

Okay. And so netting the two, we've got an additional 10 BPs in operating leverage. It seems the consistency and the guidance from last quarter a little bit less confidence, given the currency effect on revenue in Q4?

You know, that's not really a concern for us. I think the impact of the revenue growth slowly. We just want to make sure everybody understands what the impact on the revenue side will be. If we hit our numbers the way we expect to, Jim, we're going to have a very solid sales growth this year with virtually a neutral FX impact and we'll have gross margin expansions supporting our expense structure investments. And we're going to be well on our way to moving our operating margins from 10 or 10.1 at the end of last year to that 11.5% for fiscal 2007. So we might -- we're going to be getting there a little faster on the front end than maybe what we thought and anticipated six to nine months ago. So we feel pretty confident and comfortable that the back half of the year could be very solid for us.

Okay, great. And one final question, if I may. A little commentary on the strength at Merrell. Are we seeing -- that's a pretty big number year-to-year growth. Is it replenishment in existing accounts or are we seeing some additional penetration of new accounts? What's (multiple speakers)?

Jim, there is some penetration of some new accounts -- some of the upper tier department stores and some others. But the majority of it is expansion within the existing account structure as people have responded very positively to the continuum concept and added product categories that perhaps they previously didn't carry.

And how about in Europe? Is it additional distribution or same retail?

In Europe, it would be more additional distribution because we're just at a much earlier stage of development for the brand there. But we are currently growing with existing accounts. But new distribution there is playing a much more significant role.

Great. Thanks for taking my questions. Nice quarter.

Angelique Dab, Monarch.

Good morning. Congratulations on a good quarter. Could you give us a little color with regard to Sebago and penetration of accounts and channels?

Sure, Angelique. Sebago -- a lot of effort has gone into really reengineering the product, the whole brand image. And the spring season was our first opportunity really to have an impact on the product line that was at retail. Not everything worked, but there were a couple of categories that did work quite well, some of our classic hand sewn moccasins product. And then a new category of more athletically-inspired performance, marine product, did really quite well at retail. And that was really in markets across Europe as well as the U.S. So I think we're pleased with where we are at Sebago. Still a lot of work to be done to really get it to where we think its full potential is, but we're making solid, steady progress and we're pleased with what's happening there.

Great. And then could you also comment on how many Shop in Shops you had at the end of the quarter?

I think we were at about 135 Merrell Shop in Shops at quarter end. I could be off a few, but that's in the ballpark.

Okay. Great. Thank you so much.

Scott Krasik, C.L. King.

On Merrell Europe, assuming you continue on the sort of double-digit growth that you've been experiencing, have you made the major investments already and therefore start to leverage even greater? Or is there still some ongoing investment that you expect to make?

No, the investments that we're having and incurring in Europe, Scott, is primarily around our selling organizations to make sure we have proper market representation. And we have to be careful as Americans not to think of Europe as one market. The French like to be sold by Frenchman; the Germans like to be sold by Germans. And so we're establishing a network of regional selling offices and selling staffs. And that's really where that investment is occurring, and once we get our baseline going. But I would tell you we're probably, within the next six to nine months, we should have that infrastructure pretty well -- the baseline infrastructure in place and then any investments would be over at that point. And then you would see that growing more proportionately with the sales growth.

So 12 to 24 months out, the margins should be going up in Europe?

Yes. And one thing that in Europe, we talked back -- after we acquired those businesses in 2002, we said by the end of 2005, we expected the operating margins in those businesses to roughly be where the U.S. are. And we commented about that at the end of last year and it looks like we're on track to meet that. So we've gone from a breakeven perspective in 2002 to bring our operating margin levels in our European wholesale businesses up to our corporate averages. And then we'll be refining that to try to get more leverage as we go forward. So first we had to get to our average levels and then the refinement above that. And we should be there by the end of this year.

Okay. And then in discussions with some better independent retailers, it doesn't seem like there's a shortage of people who would want to open Merrell retail stores. But nothing has really come about. What's going on there?

Scott, there are certainly a number of parties who have expressed some interest. And we've had conversations with a number of those parties. There will be a Merrell store being opened this fall in Huntington, Long Island. It is an independent retail customer of ours and there is a location that's been secured and stores in the process of being really put together. Right now, we'll open this fall.

Is this a test or are you doing other things simultaneously with retailers in other parts of the country?

We're having conversations with a number of other parties who have expressed an interest. But this is the first concrete -- where our lease has been signed and things are happening. Whether some of the other discussions will get to that point, it's certainly possible. But I would guess maybe next year would be a more likely time for some other independent retailers to be looking to open Merrell stores.

And just this location -- is this a strip mall or a mall or --?

No, it's a street location in a highly trafficked area in Huntington.

Okay. And then just lastly, do you think given the investment and time dedicated to Patagonia by the Outdoor Group, will that delay any line extensions or moves into Merrell apparel? I think when you had done Sebago, there was some talk that maybe Jacques and his team's focus on Sebago delayed any decisions on some further line extensions. So how do you see that playing out?

Scott, I think a couple of things. One, we are going to add resources to work on the Patagonia project, dedicated resources. Secondly, we are continuing to look at line extensions for Merrell. We're beginning to make some investment in that arena. The output of that is still a ways down the road, so I'm really not prepared to talk about it in depth today. But there are investments being made currently in initiating some action that would set the stage for our entering into some other product categories.

But the thought that the focus on Patagonia won't delay or take away (ph)?

No.

Jean Fontana, Lazard Capital Markets.

Hi. Thank you. I just wanted to clarify one point. When you were talking about your revenue guidance for 2005 in the first quarter, were you already incorporating your views on Forex? Or is this something where you see Forex having a greater impact but the core businesses are doing better than expected?

You were referring, Jean, back to the first-quarter comments (multiple speakers)?

Right. When you gave revenue guidance for the year.

When we gave -- we increased our revenue guidance, I believe after our first-quarter call, which reflected some of the positive that we saw over and above what we anticipated. And some of that was the FX. So part of that, I think our guidance was increased by $5 billion on the range side. So that included some of that FX side. But our overall businesses are doing slightly better than what we anticipated. So when the FX balances all out, you'd see that our overall businesses are doing slightly better than what we expected in the first -- when we went into the year, if you will.

Okay. And I'm sorry, did you discuss -- I might have missed this -- the accounts receivable increase was a little higher?

It really reflects the timing of the shipments. Some of our shipments were later in the quarter, so they were sitting in the receivable balance. But I did comment that our days sales outstanding have actually improved since year-end slightly. So that means that the speed of which we are collecting that cash continues to improve. So we've been looking at -- we made significant strides in improving our DSOs. And we said that we probably were at a level that we didn't think that there was a lot of improvement available. We had a slight improvement, but basically, relatively flat. So I think we're right about where we expected to be, Jean, and that's just purely a timing of when shipments occur and when the amounts are due.

Okay, thank you.

Marie Driscoll, Standard and Poor's Equity Research.

Hi, just under the bell! Good morning and thank you. I have two questions. One question is, please clarify this (technical difficulty). And someone else earlier (technical difficulty) you mentioned that (technical difficulty) 20 million. (technical difficulty) 10 million in the second (technical difficulty).

Marie, unfortunately, you are breaking up, so we can't hear your question.

Hold on a second. Sorry. Can you hear me better now? I apologize for that. My question (technical difficulty)

You're still breaking up, Marie. Sorry.

The basic backlog, is it up versus last year? And your (technical difficulty) --?

Marie, the answer to that question is yes. The base backlog is up very modestly from a year ago, but we are anticipating $8 million of reduced shipments in the back half of the year. And a couple of things -- one, a significant portion of our base business does come in the form of reorders. Some of those reorders come from our military customers -- PX Systems and other parts of our military business. And in looking at the timing on contract deliveries anticipating what those reorders are going to be, our best estimate is that we're going to see that $8 million decrease in the back half of this year.

Okay. Then, it sounds like you have a lot of opportunity (technical difficulty). What kind of growth were you (technical difficulty)?

Marie, we are totally losing you. We couldn't hear any of that question at all.

Okay. I'm wondering what kind of growth you're looking at for Europe for the next two to three years.

Marie, we have been experiencing double-digit growth in Europe. And certainly for the next 18 months, two years, we think we can continue to achieve a low double-digit growth rate in Europe.

Okay. And I'll talk to my tech department about the phone. Sorry.

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 World Wide, I would like to thank you for joining us today. And as a reminder, our conference call replay is available on our Web site at www.WolverineWorldWide.com. The replay will be available through July 27, 2005. Thank you and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.