Wolverine World Wide Inc (WWW) 2005 Q3 法說會逐字稿

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

Thank you, Ann Marie (ph). Good morning, everyone, and welcome to our third-quarter conference call. On the call today are Tim O'Donovan, our Chairman and CEO, and Steve Gulis, our Executive Vice President and CFO. Other members of the Wolverine management team are sitting in as well.

Earlier this morning we announced record third-quarter results. If you did not yet receive a copy of the press release, please call Stacey Craig (ph) at 616-233-0500 to have one faxed to you. The release is also available on money (ph) 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 now like to turn the call over to Tim.

Good morning and thanks for joining us this morning. I'm pleased to report record revenue and net earnings for our third quarter and first three quarters of 2005. This marks our 15th consecutive quarter of year-over-year revenue and net earnings increases.

Revenue in the quarter of 279.1 million increased from the prior year by 7% and earnings per share of $0.42 were up $0.05, a 13.5% increase from the prior year. The revenue and earnings increases in the quarter were broad-based with the Hush Puppies Company, the Heritage Group, the Outdoor Group all reporting solid revenue gains and double-digit earnings increases.

Due to the expected decrease in Bates' military footwear shipments, Wolverine Footwear Group revenues were 2.5% lower in the quarter while earnings were about equal to year ago levels. Revenue gains in the quarter were particularly strong in Europe, increasing by nearly 20%. The Caterpillar, Hush Puppies, Merrell and Sebago brands all contributed to the significant revenue gains in Europe.

The Company's investments in Europe over the past several years in brand building, infrastructure and service capabilities are yielding strong results as our brands continue to great share in this important market. Given our strong third-quarter performance and solid increase in order backlog we are increasing our earnings per share estimate for the year to a range of $1.26 to $1.28.

Turning to our key business units, Hush Puppies had a very solid third quarter with a 6.2% increase in global revenues and a very significant profit improvement. International markets drove the majority of the revenue increase and the U.S. market reported its third consecutive quarter of revenue gains, a positive indicator that the repositioning effort in the U.S. is gaining traction.

Hush Puppies' U.S. business with Federated Department Stores continues to expand. For example, as new fall product hit the sales floor, Hush Puppies was the number one footwear brand in the women's comfort department at Macy's East for the month of August. Hush Puppies is represented in 252 Federated doors this fall and has earned a position as a valued partner. With the recently reported expansion of the Macy's nameplate to former May Company stores we see continued door expansion over the next several seasons.

In addition to solid marketshare gains in both the U.K. and Canada, Hush Puppies' global presence is expanding at a rapid pace through its international licensee partners in 130 countries. International licensing revenues increased again this quarter at a double-digit pace as the brand's international partners are responding favorably to the brand's more contemporary image and updated product offering. Overall Hush Puppies is on track for an excellent year.

The Heritage Group, which includes our two largest licensed footwear businesses -- Caterpillar and Harley-Davidson, had a strong third quarter with revenues up 10% and a significant increase in profits. It was just one year ago that we created the Heritage Group to capitalize on the management skills of both the Caterpillar and Harley-Davidson brand teams. I'm pleased to report that the Heritage Group team has created a much more effective operating model and outperformed our expectations over the past 12 months.

During the third quarter the Caterpillar footwear business achieved a double-digit increase in both revenue and profits due to strong results in Europe and other international markets including Canada which was transitioned earlier this year from a distribution arrangement to an owned wholesale business. CAT products, including an expanded assortment of men's and women's boots incorporating the iTechnology comfort construction, performed particularly well at retail during the quarter. CAT footwear is experiencing another year of significant gains in 135 countries where the product is marketed.

The Harley-Davidson business reported an earnings improvement in the quarter on modestly lower revenues. Revenues were lower primarily due to fewer closeout sales and reduced sales to several volume accounts in the U.S. Internationally, we have developed a quick-to-market program for the expanding global distributor network while continuing to focus on Europe where the Harley-Davidson business has been restructured from a distribution to a direct sales business.

In the U.S. the response to new Harley-Davidson product initiatives, including the premium priced American Bison collection has been very positive. New product is being targeted at influential trend-leading accounts such as David Z and Shoe Mania in New York City where the brand has an expanded presence. Harley-Davidson closed the quarter with a solid increase in order backlog.

The Wolverine Footwear Group, which consists of the Wolverine boot, Bates and Stanley brands, experienced a 2.5% revenue decline in the quarter due principally to a planned 1.8 million reduction in Bates' shipments to the U.S. military. As mentioned in previous conference calls, we anticipated a $15 to $20 million decrease in Bates military uniform shipments in 2005. Through the first three quarters of this year Bates' military shipments are down 12.5 million and we would anticipate additional reductions of 4 to 5 million 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 products that meet the demanding needs of our men and women in uniform. For example, new developmental combat boot test programs are underway with the Air Force and the Navy, both featuring our proprietary technologies such as our patented DuraShocks direct attach comfort system and Wolverine performance white leather.

Wolverine boot revenues were up in the quarter as consumer demand for premium priced Gore-Tex waterproof boots and Wolverine MultiShox product continued to strengthen. The Wolverine MultiShox product is experiencing strong sell-through at retail supported by a new marketing and media campaign that will extend the brand's reached to over 400 million consumer impressions in 2005. The success of the new Wolverine MultiShox product and marketing will further reinforce the brand's premium positioning in market leadership.

The Wolverine team will follow up this fall campaign with numerous in-store events with major Wolverine retail partners during the fourth quarter designed to enhance retail sell-through during the key boot selling season.

The Outdoor Group, currently consisting of the Merrell and Sebago brands and in the near future the Patagonia footwear business, enjoyed an excellent third quarter with revenues up 15%. Merrell achieved double-digit revenue increases in the U.S., Europe and Canada. Merrell's success in the third quarter was driven by broad global acceptance of the new Continuum performance product and strong sell-through of Continuum initiatives such as AquaSport 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. As a result of excellent retail sell-through, Merrell experienced increased levels of reorders during the quarter which contributed to the double-digit revenue increase. In addition, more effective merchandise planning and better inventory support resulted in improved levels of service to Merrell's retail partners globally.

Early deliveries of new fall merchandise programs are also performing well at retail which bodes well for our continued positive brand momentum. Another positive factor is the enthusiastic consumer response to Merrell's sport fashion product. This category has been a significant driver of the Merrell business in Europe and is now becoming a more important factor in the North American market.

In addition to expansion of Merrell shop-in-shops which now number 180 in the U.S. and Europe, brands were established with independent retailers during the quarter to open two Merrell specialty stores. One store has just opened in Frankfurt, Germany and a second is scheduled to open in Long Island next year. A number of Merrell's international distribution partners have also opened Merrell stores in markets such as Argentina, Panama, Venezuela, Saudi Arabia and Taiwan.

In addition to footwear, several of these international locations are also featuring a limited selection of Merrell apparel and enjoying a strong consumer response to both the footwear and apparel. This is a tangible example of the growing demand for a broader lifestyle product selection from the Merrell brand loyalists that has encouraged us to extend the Merrell product offering beyond footwear. This is an exciting initiative that will require investment and commitment, but offers significant financial and brand development opportunities.

Turning to the Sebago brand, revenues in the quarter increased by over 20% with growth in both the U.S. and Europe. The conversion earlier this year of European distributors in several key markets to owned wholesale operations has created a more efficient operating model and resulted in increased demand for existing as well as new product initiatives.

In the U.S. revenue grew at a double-digit pace in the quarter; fueled by new product introductions in the technical water sports area as well as for fashion categories. The growth opportunities for Sebago in the U.S. is significant as we're starting with a relatively small base in this market.

Before turning the call over to Steve Gulis, I did want to give you some insight regarding our strong order backlog. Our order receipts during the third quarter were very encouraging with excellent retail reception to our spring '06 product lines. This certainly contributed to the backlog increase of 19%. The increase was also broad-based with each of our four marketing groups reporting a gain in backlog including double-digit gains for three of our four marketing groups.

In terms of timing, our backlog per shipment in the fourth quarter is up low double digits while our backlog per shipment in '06 is up even more significantly. Another contributing factor to our backlog increase is the timing of spring '06 order receipts from a number of our major accounts, particularly Merrell accounts. As we become a more significant resource to keep customers in both North America and Europe these accounts are working earlier with our sales teams to plan the next season's business and maximize growth opportunities.

I'm pleased with the overall reception to our spring '06 product and marketing programs and encouraged by the vote of confidence we are receiving from our retail partners on a global basis as evidenced by our very strong spring '06 backlog increase. I'll now turn the call over to Steve Gulis, Wolverine's Executive Vice President and CFO, who will provide you with additional information about our results.

Thank you, Tim, and good morning, everyone. We are very pleased to announce record revenue and earnings for the third quarter with quarterly revenue increasing 7.0% and earnings per share increasing 13.5%. Our operating model continues to yield strong results as gross margin increased significantly during the quarter and we were able to increase our investments in marketing and new business initiatives for the future.

Revenue of $279.1 million was reported for the third quarter of 2005 which is an increase of 7.0% over the 260.9 million reported in the same quarter of 2004. During the third quarter there was no impact from foreign currencies on our revenue growth as foreign exchange rates used to translate revenue from our international operations equaled 2004's levels. On a year-to-date basis total revenue of $740 million compares to $684.5 million for an 8.1% increase. Foreign currency gains have accounted for 0.7% of the year-to-date revenue gain.

At current exchange rates we are estimating revenues to be negatively impacted in the fourth quarter of 2005 by approximately 2% and this has been reflected in the updated revenue estimate released today. We had solid revenue growth throughout the business. The outdoor and heritage groups had double-digit revenue increases while the Hush Puppies global business reported solid mid single digit growth.

Turning to the Wolverine Footwear Group, Wolverine brands reported a revenue increase which was offset by a planned reduction in demand for bates military product by the Department of Defense. Our European operations reported strong revenue growth as they reported a growth rate approximating 20%.

Reported gross margin in the third quarter of 2005 was 38.9%, a 130 basis point improvement over 2004's third-quarter gross margin of 37.6%. This improvement is consistent with our year-to-date improvement as 2005 gross margin of 39.1% has improved by 120 basis points. In the third quarter 60 basis points of the gross margin expansion resulted from foreign currency gains as our international wholesale operations continued to purchase product at lower cost reflecting the U.S. dollar's weakness. The currency impact on gross margin was in line with our guidance and the balance of the margin improvement resulted from a stronger mix of shipments in our higher gross margin lifestyle businesses.

Selling and administrative expenses as a percentage of revenue were 25.8% in the third quarter of 2005 which compares to 25.0% in 2004. Increased marketing initiatives accounted for approximately 40 basis points of the increase and the balance resulted from expanded international operations, retail store openings and programs related to Merrell apparel and Patagonia footwear.

On a year-to-date basis general and administrative expenses are 28.2% of revenue in 2005 compared to 27.7% in 2004. This expense level is in line with our earlier estimates and we anticipate additional fourth-quarter increases which approximate $1.5 million as we intensify the activity level in both the Merrell apparel and Patagonia footwear initiatives.

Operating margin improved 50 basis points in the quarter and, on a trailing four quarter basis, operating margin has improved 80 basis points to 10.7%. We anticipate further expansion in the near-term and we are well on our way towards our target of delivering 11.5% operating margins in fiscal 2007.

Reported net earnings of $24.6 million for the third quarter of 2005 compares to $21.9 million in 2004. These earnings produced earnings per share of $0.42 and $0.37 per share respectively, an increase of 13.5%. On a year-to-date basis net earnings of $54 million and $45.2 million have been produced in 2005 and 2004 respectively. These net earnings translated into year-to-date earnings per share of $0.91 and $0.75 in 2005 and 2004 which is a 21.3% increase.

Our balance sheet continues to be strong. We ended the third quarter with cash on hand of $47.8 million and our total debt to total cap ratio was 8.6% and our revolving credit line balance was zero. Inventories at the end of 2005's third quarter totaled $196.4 million which is a 7.9% increase over 2004 levels. This inventory increase approximates our sales growth and the increase is primarily located in the Outdoor Group, our fastest-growing operation.

Accounts receivable at quarter end totaled $205.3 million, a 6.9% increase over third-quarter end 2004. Days sales outstanding continue to be lower than our targeted level of 60 days and our cash collections activities continue to be strong.

Cash flow from operating activities was strong as we've generated approximately $42 million of cash in the first three quarters of 2005. During the third quarter we repurchased approximately 960,000 shares of stock for a total price of $21.4 million. We have approximately 980,000 shares of stock available for repurchase under the October 2004 plan and we will continue to repurchase shares as deemed appropriate.

On the strength of our third-quarter results and the fourth-quarter outlook we have increased our earnings per share range to $1.26 to $1.28. This estimate incorporates planned expenses for new growth initiatives in excess of $1.5 million or nearly $0.02 per share. We have also focused our revenue estimate to $1.050 to $1.060 billion dollars. If these estimates are achieved we will exceed the billion dollar revenue mark and generate more than $100 million of pre-tax earnings for the first time in the Company's history. We have built a strong business model supported by a portfolio of global brands which is producing consistent growth and financial performance.

We also announced our initial estimates for 2006's revenues and earnings per share this morning. It should be noted that the earnings per share estimate includes $4.5 million or approximately $0.05 per share of spending allocated to the development of the Merrell apparel and Patagonia footwear initiatives. While these initiatives will not be contributing to our revenue base until 2007, the opportunities are exciting and we believe they will contribute to the sustained long-term growth of the Outdoor Group.

Our 2006 estimates are for revenue to range from $1.110 billion to $1.130 billion and earnings per share to range from $1.38 to $1.44. These ranges support our goal of consistently generating mid to upper single-digit revenue growth while generating double-digit earnings per share growth. Operating margin improvements are expected to expand as both gross margin increases and expense leverage should occur.

The earnings per share range does not include any expense related to the effect of adopting FAS 123R accounting for equity based plans for 2006. Our current estimate of the impact of expensing stock options and the timing provisions related to the stock awards under FAS 123R ranges from $0.07 to $0.09 per share for 2006 or 5 to 6% of earnings per share.

We are finishing the third quarter of 2005 with our eighth consecutive quarter of double-digit earnings per share improvement and a strong plan for 2006. The business model which we have put in place is focused on increasing shareholder value and we will be investing in the future of your Company to assure that we have the ongoing initiatives necessary to drive the business in the future. I thank you for your time and will now turn the call back to Tim for some closing remarks.

Thanks, Steve. Looking to the future I wanted to spend a few minutes discussing two exciting growth opportunities that we'll be investing in over the coming months. The first opportunity relates to extending the Merrell brand beyond footwear.

As I indicated previously, we have many of our Merrell customers and international distribution partners who are anxious to offer consumers a broader selection of Merrell product to fit with their active outdoor lifestyle. We believe the time is right for an expanded Merrell product presentation and are in the process of building a team with the capabilities to develop, source and market a very focused line of Merrell apparel to complement our rapidly growing Merrell footwear business.

The line is being developed for introduction to the trade late in '06 with initial deliveries at retail planned for mid-year '07 for the fall '07 selling season. Developing the Merrell apparel program is an important step to expand Wolverine's expertise and capabilities to move from a footwear focused company to a company capable of fully capitalizing on the lifestyle potential of Merrell as well as other global brands in our portfolio.

Patagonia footwear is another significant growth opportunity for the Company and our business plan for this opportunity is progressing rapidly with product scheduled to hit the retail market early in '07 for the spring '07 selling season. Since our last conference call we've had the opportunity to interact in-depth with the Patagonia team and are more enthusiastic than ever about the opportunity to create an innovative footwear offering that will complement Patagonia's core brand values.

Outdoor enthusiasts around the world respect the Patagonia brand for its West Coast Mountain Heritage, its quality, functional integrity and design ethos. These consumers also support Patagonia's commitment and leadership to improve the environment. We believe these are all elements that can be sculpted into a unique footwear product architecture that will offer consumers a distinctive point of view not currently available in the marketplace.

Both of these initiatives are designed to further strengthen Wolverine World Wide's global brand building capabilities and to position the Company in premium market segments with hat exciting growth prospects. We thank you for joining us today and we'll now turn the call back to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS). Jeff Edelman, UBS.

Thank you, good morning. Nice job. I guess, Tim, for you, we've seen where the manufacturers in Asia have been squeezed by higher costs. At what point will they be passing these costs off to you and presumably we should start to see it reflected in selling prices?

Jeff, I think clearly there are some cost pressures in Asia relating to energy, relating to labor. And over the past several months we've seen certainly some impact in terms of our pricing from Asia. It hasn't been that significant a number yet and I think our plan is that we can successfully engineer the product and pass on those kinds of increases at the levels we're currently seeing into the marketplace to maintain our gross margins while continuing to offer product that represents real value to the consumer.

Okay, thanks. And then secondly, Steve, I always wrestle with the order rate and sales expectations. If we look at that double-digit order rate and we back out the loss of volume from Bates, it looks as if back into the sales guidance we're looking at a lower rate of sales than the orders. Could you give us some sense of where else we might see some -- or what else would account for some of this slippage?

Sure, Jeff. You know, I think as we've historically said, using that order backlog number, particularly in our business, is difficult to say that's going to be inaccurate predictor of the next quarter's sales in particular. And a couple of reasons for it -- one is our business, particularly in the fourth quarter, becomes a much more reorder at once driven business. Our shipments in the fourth quarter, for example, are weighted more heavily -- over half of our shipments will be the result of reorders that will occur in the quarter as opposed to advanced orders that we had in our hand when the quarter began.

Another factor to consider is that when we're trying to measure and give you information regarding our order backlog, we're taking a snapshot in time at the end of each quarter and we're using the currency rate in effect on that given day to make that measurement. But that can change and if the dollar weakens, for example, we can get a change in the actual sales results as we ship those orders two or three months after that measurement date at the end of each quarter.

So I think those are some of the factors that come into play here in addition to the ones that you mentioned.

Thanks. That's very helpful.

Jim Duffy, Thomas Weisel Partners.

A question on the inventory growth. It moderated some relative to what we've seen in past orders where inventory growth was ahead of revenue growth. Do you expect that you can maintain this and are you comfortable with your current inventory position?

Jim, this is Steve. We're pretty comfortable with where we're at from an inventory perspective. There's a couple of pockets of opportunity; but to be frank with you, there's always a pocket or two of opportunities out there. I think the important thing from my perspective is that the most significant portion of the increase is all in the Outdoor Group and that is really supporting the Merrell growth and the Sebago initiatives around the world.

So I think that we need to make sure we have the proper inventory levels to support those businesses. But we continue to internally keep a tight rein on inventory controls and manage it aggressively. But you know, there are a couple pockets out there we'd like to have lowered a little bit.

But I also think our markdown exposure, because of our SKU management and what we've done with going narrower and deeper, we really are managing the closeout exposure much more aggressively. So the fact that we may be deeper in some products -- in core products gives us a comfort level that we're not exposing ourselves to significant gross margin erosion because of excess inventories.

It seems like you guys have done a nice job of managing the inventories. And looking forward here can we expect them to grow roughly in line with revenue or is there even opportunity to have inventories -- take more inventory out of the model?

You know, I would tell you, Jim, at a minimum we should be in line with revenues and we've got internal targets to have our inventories grow at a slower rate than our revenue growth. So we are focused on driving more efficiency out of our inventory level.

Okay. I'm going to try to slip in one more question here. In the past I've always heard you guys say we don't want to just put a fleece vest out with Merrell's symbol on it and try to sell that as an apparel offering. Can you provide a little color on your thoughts on the direction for the Merrell apparel line?

Jim, you're absolutely correct. Merrell's success has been driven by product innovation and we believe the same equation needs to hold true and as we expand into other product categories beyond footwear. So the investment we're making is heavily weighted toward design, toward developing capability to develop very innovative products.

Okay. What types of products would be looking for? Any thoughts there or do you not want to reveal that because of (multiple speakers)?

I think it may be a little premature to go into a great amount of detail, but I think one good way to think about it, if we look at Merrell's historical success, I believe one of the keys has been that in the footwear arena Merrell occupied that space between where brown shoes and athletic shoes start. And we've been able to exploit that theme in the market I think quite successfully. Our thought process as we move into other product categories like apparel is going to mirror that same strategy.

Okay, thank you. Nice quarter, guys.

Lee Backus, Buckingham Research.

First, great quarter, guys. First question on international. Last year I believe international was over 50% of operating profits and you keep pointing out the strength of international in this quarter. I guess two questions around that. Where do you see that as a percentage of operating profits this year and where are we in the growth curve as far as the international business?

Lee, as far as the mix of international, if you take a look at our year-to-date results this year, our revenue mix is about 75% domestic and 25% international and our earnings are about 50-50. A little bit of edge towards the North American side, but basically 50-50. So we're getting a good balance there because we're getting solid growth in our earnings in both -- in all of our operations.

Our growth rates on the international revenue side have been quite strong. In the third quarter international was up about 17% and North America was up about 4%. But we're getting very good leverage off of our operating models in the U.S. and the leverage isn't quite as strong in the international operations because we're still building some of those businesses.

Lee, I think on the second part of your question about where are we on the growth curve, I think we're still at a relatively early stage. When we look at our market penetration in Europe, for example, compared to North America we believe we have a long way to go to reach anything close to comparable penetration. So we would envision stronger growth internationally over certainly next year and I would think several years into the future.

And second question, just on the environment. Could you comment on the environment out there? Because so much of your business in Q4 is reorder business, just talk about inventory levels at retailers, retailers' mood, how the whether or other macro factors have impacted their mood or your business?

Surely. It's a pretty broad question. I think in general -- and I'm going to limit my comments here to the footwear sector. The footwear business has been holding up reasonably well in spite of a lot of things going on in terms of consumer confidence and other issues. We use the national shoe retailers association comp store sales that we get periodically to look at sort of what's happening and we're seeing some continued comp store sales increases from that pretty broad group of footwear retailers. That's not large; we're talking in the 2% range. Maybe not quite as robust as it was earlier in the year, but still pretty solid. So I think it does get down to the excitement that we can create a retail with our brands and our product and I think we have been outperforming the marketplace and I believe we can continue to outperform the market.

Okay, thank you.

Elizabeth Montgomery, SG Cowen.

Congratulations on another great quarter. I guess the first question I had was for the Merrell apparel products, can give us an idea of kind of what the distribution for that will be? Then I also had a question on -- I think Tim was talking about introducing new styles that kind of allow you to engineer products to maintain the margin. What percentage of your sales are generated by styles that you introduced within one year?

And then I had a -- my final question was, it seems like Merrell could still get greater brand awareness and I wondered if the apparel products may help with that. But should we be looking for additional marketing spend just behind kind of building more brand awareness for the brand?

Sure, Beth. Very good questions. With regard to distribution, our target would be to mirror Merrell's footwear distribution. So certainly outdoor specialty stores would be right at the center of the target. We think where Merrell has been successful with other upper tier retailers, in department stores and other kinds of outdoor retailers, that that would certainly be targets that we would envision where the apparel program could be relevant.

You know, in terms of sort of our mix of business and engineering new product to maintain margins, I would -- a couple of comments there. One is that when we have carryover product that's been in the production pipeline and there may be some modest let's say increases in component prices that go into that product, there are other things that also help us when we have product that tends to span several seasons. A lot of the initial development in terms of molds and lasts and patterns and things that we amortize typically over a certain amount of product, once those are fully amortized we begin to get a little break on those cost factors.

So we can offset some of the those modest let's say component or labor price increases because of that. In total it varies pretty significantly across business units. Our brands, like Merrell, like Hush Puppies -- we're introducing even more new product every season than we would in let's say some of our more basic businesses such as in our boot categories. But we have --at current levels I think we feel pretty good about our ability to be able to maintain our margins.

And the Merrell advertising thing? Sorry.

Oh, yes. Thank you for reminding me. We have been and continue to increase our investment in the Merrell brand. As Steve mentioned, during the third quarter there was quite an increase in our marketing spend during the quarter which exceeded the level of our revenue increase during the quarter; a good deal of that behind Merrell. And part of that going into really the development of our presence at retail. Certainly some being invested in media, but also our presence at retail.

There's about 180 Merrell shop-in-shops in the U.S. and Europe now. There are many, many more if we include all of our international distributor partners around the world. And those are our investments that we're making to develop brand, but we think that's an important ingredient. And as you said, I think having an apparel program down the road is another excellent way to further reinforce the brand presence with the consumer.

Great, thanks a lot.

John Shanley, Susquehanna Financial Group.

Good morning guys, and let me add my congratulations on a very impressive quarter. Tim, I wonder if you can give us a little bit more guidance in terms of the Merrell brand sales and forward order position in Europe versus the U.S. market. Is it growing at a much more rapid clip as it seems to be and, if so, what does that bode for the future in terms of operating profit contribution from Merrell in Europe?

Very good question, John. The answer is yes in terms of the growth in Europe. The pace of the growth in Europe is quite significant, growing at this stage roughly double the pace of the growth in North America. And we front-end loaded a lot of the infrastructure in Europe in terms of offices and infrastructure and sales capability. So we expect to get some leverage as we grow. We also are reinvesting some of that in terms of brand building efforts in Europe with more marketing, more shop-in-shops, building our brand presence. But we think we're at a relatively early stage of really exploiting the full brand opportunity for Merrell in Europe.

What's the percentage breakdown between Merrell Europe versus the U.S. currently and where do you see it eventually shaking out?

In rough numbers Europe would be -- probably about between 35 and 40% in terms of revenues of our revenues in the U.S. market for example. While I think it will take time, we see no reason why the Merrell revenues in Europe shouldn't be at levels more comparable to levels in the U.S. We won't get there in a couple seasons. That's a long-term outlook, but I think it's not unrealistic to expect Europe should be -- it is in total a larger market than the U.S. market. So we should be able to equal our U.S. business.

That's great. Europe seems to be clearly performing well for the Company in all of its major product lines. Is there any intention on the Company's part to buy back more of its European distributors and, if so, what are your options in that respect?

John, over time we have -- what has made good economic sense and where our partners who would see a benefit from maybe converting from being a distributor to being a sales agent in a given market, we have made those moves. There still are certainly areas within Europe where we still have distributors representing us who are doing a very good job. And I don't think there's going to be -- that it's going to be rapid moves in that area, but I think over time there will be opportunities from time to time in some of the markets currently covered by distributors.

Okay. And last question I have is on forward orders being up so strongly, 19%, is there a possibility, Tim, that some of the orders that you have for delivery in the spring of '06 may come into the earlier fourth quarter of '05 that could drive up your sales a little bit above the 4 to 5% sales increase that you're guiding us to currently?

John, I think looking at the timing of when people want the merchandise, and historically we always have some spring season merchandise that does ship late in the fourth quarter, but I think we've pretty well factored that into the sales estimates that we provided (indiscernible). I wouldn't expect at this stage to see any significant shift there.

Thanks a lot. Again, congratulations on a great quarter.

Jean Fontana, Lazard Capital Markets.

Good morning, great quarter. I just have a question specifically on Wolverine. Given that Wolverine it sells to sort of the more economically-sensitive customer, I mean you talked about the overall market and retailer outlook, but what about the distribution for the Wolverine boot? Do you see some more caution there?

Yes. You know, I think again the differentiator for us, you know, we continue to believe is really product innovation. You know, if you're in the commodity product arena, I would be a lot more concerned. I think when you have really innovative product that we are dealing really in the premium end of the market in our boot categories, and that consumer has developed a terrific loyalty to our premium product because they have gone through the learning curve of experiencing buying commodity products and what that means in terms of comfort, durability. So to say we are immune from economic trends, we're not, but I think we have still strong prospects for our boot business.

Great. And then for the Sebago business, it sounds like in the U.S. I guess performance is picking up from the second quarter. Can you just talk about that a little bit? Is this just because people are reacting well to the new line or sell-through improving?

I think having more new product at retail certainly is helping us there. We did have a little more sales momentum in the U.S. in this most recent quarter than we did the two previous quarters, although the back-half for the brand historically has not been as important as the first half. So, no, we are making good progress there. We still see a lot of opportunity. I think we believe we are still at a very early stage of really taking full advantage of the opportunity with this brand, not only in the U.S. market but in Europe and other markets around the world.

Mitch Kummetz with D.A. Davidson.

First off, Tim, on the backlog, you mentioned that the 19% increase was probably a little skewed by early receipts on spring orders. Could you give us some sense as to what you think the number would have been had that not occurred?

Boy, Mitch, it's a good question, and I think to go through an analysis account by account by account I think is very hard for us to really get there. I think we are certainly aware of the fact that we have, particularly in the case of Merrell, some of our major accounts in Europe and also a few in the U.S. who -- and because Merrell is becoming a much more significant factor in their business, we are early on in their planning process for the next season which is great, because it allows us to really work with them very proactively on flowing product as our business gets bigger into these major retailers in a way that will benefit them and I think create better sell-through. I think it probably certainly added a couple of percent, but to really put a number on, I'd hesitate to try to do that.

Okay. But even if you were to try to adjust for it, you would probably still say that your spring forward order position is stronger than what you have in store for Q4? Would that be pretty --?

Absolutely. Absolutely correct.

And do think that's a reflection of just you guys taking market share or do you think that retailers are actually being more aggressive with their orders going in this spring than they were going into fall? Because I don't know -- I guess I don't get that sense?

No. Mitch, I think your sense is correct. I think what's happening here is -- one, we're seeing and have seen over some period of time, as our business mix has shifted, a shift to having a stronger first half of the year. Maybe if you look back historically our sales mix between spring and fall, if we went back several years ago, tilted more heavily toward fall because of our strong boot businesses. And as we've grown the Merrell business, as we've added the Sebago business, as we've improved our Hush Puppies business we're I think seeing a shift to having a stronger spring business and a little more balance between our mix between spring and fall.

Okay. And I know you don't want to spend too much time talking about Merrell apparel just yet, but is it safe to assume that that business would encompass sportswear and outerwear, men's and women's, just in sort of broad strokes?

Yes. It's going to be focused -- you know, we're not going to attempt to introduce too many products across too many categories and we want to have products that are distinctive and really speak to the Merrell brand reputation for innovation. But we would anticipate it being multi-gender and we would anticipate it covering several product categories.

A couple quick questions for Steve. First off, housekeeping, average diluted shares outstanding for the quarter?

59.3 million roughly.

59.3. And what share account is assumed in your '06 guidance? I know you had said you would buy back more stock as you deem appropriate, but are you kind of looking at 59.3?

Yes. And because -- you know, that share account has been on a weighted average perspective and when you buy shares late in the year you don't get much impact from it. So 59.3 would be appropriate.

And then a second question for you Steve. Your sales and earnings guidance for '06 would imply some continued operating margin improvement in the business. Given that you're expecting some -- to incur some additional expenses on these growth initiatives, do you think most of that operating margin improvement is going to happen on the gross margin line or would you also think you can get some leverage on your fixed expenses?

No, Mitch I think my comment was that there was going to be much more balance to our operating margin expansion. We're going to get some from gross margin, but also we are anticipating expense leverage next year even though we are adding in -- adding the investments in our new business initiatives.

Okay. Let me ask just one last question. On Bates, any contracts coming up for bid that could have an impact on that business next year?

Mitch, there's always a series of contracts that are in various stages of -- there will be I think and roughly we've had around nine different contracts that have been involved in that business and there will be some new contracts coming up in the fourth quarter. But I think what we've really seen in Bates is we had a very solid business with Bates. We had a large increase in the business, principally in '04 as the military geared up and asked ourselves as well as other suppliers to gear up to meet those needs. And we see things sort of settling back to the pre 2004 levels which likely would mean even a small reduction in Bates' likely revenues next year, not a big one but a small one.

Okay, great. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Scott Krasik, C.L. King & Associates.

Actually this is Gerry Gallagher (ph). I have a couple of questions. A lot of your competitors last year have recently implemented some new strategic initiatives to reduce their raw material costs and improve their supply chain efficiencies. I'm interested in what you guys are doing to improve your supplier relationships to overall drive down supply chain costs and improve efficiency?

Sure, Jerry. One, I think we've made a lot of investments over the last five or six years in creating a very strong IT systems platform. We have all of our global businesses operating on our SAP enterprise wide system, so that gives us good visibility into the business. We're looking at adding further functionality to our SAP system in terms of forecasting and tools that will allow us to even interact with our supply base and contract factory base even at levels beyond what we're currently capable of. So it's certainly investments we're making in the business and things that we're executing now, but also new tools that we see coming on the horizon over the next 18 months as these investments come to fruition.

Are you making sure your suppliers are getting the best possible cost at the right time? Are you scorecarding them? Are you measuring them?

We believe we are. We have a strong sourcing team. We have 140 people on the ground in Asia, for example, who are working with our key sources every single day including the key supplier base that supports them. And you know, I think we have a very experienced team very competently going about making sure that we're getting the best value in the products we're delivering.

Following your Company over the last couple years I've noticed quality has always been a key driver of why you guys have been able to achieve such great results. What are you guys doing to make sure you keep up with your quality standards? Are you scorecarding your suppliers? Are you meeting with them regularly to (inaudible)? How are you making sure they're meeting your strict guidelines?

Jerry, all of the above of the things you mentioned. We do have supplier score card. We meet with them on a regular basis. We have our own people who are our employees in each of these contract facilities monitoring the quality of the product on a daily basis. We have a consolidation center in Asia, for example, where if one of those containers leave for our distribution centers in the U.S. and Europe we do a final inspection in that facility just as one more check in the process. So I think we have a very thorough and robust process that makes certain that we're delivering excellent quality products that also represents a very strong value.

Bob Drbul, Lehman Brothers.

Just one question for you guys. Can you just give us an update on the concept shop programs for Merrell, Hush Puppies and Sebago and sort of where that is and where that's going at the end of this year and any plans for next year?

Sure, Bob. In terms of beginning with Merrell, we have about 158 Merrell shop-in-shops in the U.S., We have another 22 in Europe. And we're going to be continuing to expand those. Globally our international partners if we added up all of them -- all the points of sale or retail, there's 125 Merrell shop-in-shops in China. There are some in Taiwan. There are 28 Merrell stores in South America and other Asian markets. There's quite a presence.

In the case of Hush Puppies, we have our -- particularly in the international arena have had many of our international partners who have used retail stores as well as shop-in-shops as a major vehicle to grow their Hush Puppies business. There's over 600 Hush Puppies stores and shop-in-shops. So all these vehicles we believe are very, very important to really building a brand presence. And when we look at where we're spending our marketing dollars today, we're devoting a pretty significant segment of our marketing dollars to those kinds of initiatives.

Great. Thank you very much.

I would now like to turn the call over to Ms. Christi Cowdin.

Thank you. On behalf of Wolverine World Wide I would like to thank you for joining us today. As a reminder, our conference call replay is available on our website at wwwtoWolverineWorldWide.com. The replay will be available through October 19, 2005. Thanks for participating and have a good day.

Ladies and gentlemen, thank you so much for your participation once again in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.