Wolverine World Wide Inc (WWW) 2006 Q1 法說會逐字稿

Good morning and welcome to Wolverine World Wide first quarter conference call.

OPERATOR INSTRUCTIONS I would now like to introduce Miss Christi Cowdin, Director of Investor Relations AND Communications for Wolverine World Wide. Miss Cowdin you may proceed.

Thank you, Liz. Good morning and welcome to our first quarter conference call. On the call today are Tim O'Donovan, our Chairman and CEO; Steve Gulis, our Executive Vice President and CFO; and Blake Krueger, our President and Chief Operating Officer. Earlier this morning, we announced record first quarter results. Our 15th consecutive quarter of both record revenue and earnings per share results. If you did not yet received a copy of the press release call please call [Erica Noll] at 616-233-0500 to have one faxed to you. The release is also available on many news sites or can be viewed at our Corporate website at www.wolverineworldwide.com.

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

Thanks, Christi, and good morning. Appreciate you joining us today. I'm pleased to report record revenue and earnings for the first quarter of 2006 and an improved earnings per share outlook for the year. This marks our 15th consecutive quarter of record revenue and record earnings per share. Revenue for the quarter of $262.8 million increased from the prior year by 7.2%. And earnings per share of $0.34 were up $0.07, a 25.9% increase from the prior year. The revenue and earnings increase in the quarter was broad based. With the Hush Puppies Company, the Heritage Brands Group and the Outdoor Group all reporting solid revenue increases and each of our four marketing groups achieving a double-digit increase in earnings. The most significant contributor to the Q1 revenue increase was the Outdoor Group , where continued momentum in the Merrell business led to a double-digit gain for the Outdoor Group, our largest revenue contributor.

Our brands realized solid results across geographic regions with revenue increases in our U.S., Canadian, and European wholesale operations as well as and our International licensing and distribution businesses. The Europe was again a bright spot, achieving a 12% revenue gain. This was in spite of the negative revenue impact of currency conversion relative to the same period a year ago. Profitability in Europe also improved during the quarter. As we are achieving greater scale and realizing the benefits of our past investments in European infrastructure. Our investments last year in consolidating all of our Canadian operations also resulted in strong revenue and profit increases during the quarter. We now have a very efficient Canadian operating model and are supporting the growth of our brands with much improved service to our Canadian retail customers. In other markets around the world, our international licensee and distribution partners enjoyed good success. This translated into improved profitability for this segment of our business.

Turning to our key business units, Hush Puppies global revenue grew 4.8% during the quarter while earnings grew at a double digit level due to solid gross margin gains and significant expense leverage. Revenues were particularly strong in Canada, and the International licensing business and were approximately flat in the U.S. and U.K. In the U.K. revenue was up 6% on a constant dollar basis, but flat after the impact of a stronger dollar on currency conversion. In the U.S. market, Hush Puppies women's revenue was up over 5%, while men's and children's sales were lower by a -- by a comparable amount. We continue to make headway in the brands repositioning efforts in the U.S. market. Q1 revenue with upper tier department stores and better grade independent retailers increased at the low teens rate. Hush Puppies better styling and higher price points are increasing the brand's appeal to retailers in this channel. Hush Puppies international partners continue to benefit from more appealing global product and revitalized brand imagery. During the quarter, new Hush Puppies concept stores were opened in Brussels, Belgium and Bogota, Colombia. Bringing the total number of concepts stores worldwide to 337. 25 new [Shop and Shops] are being opened this month in China bringing the total number of global Shop and Shops by the end of April to 552. We anticipate another strong year for Hush Puppies in the key emerging markets of China, Russia, and India.

The Heritage Brands Group, which includes our two largest license footwear businesses, Caterpillar and Harley-Davidson, had a strong first quarter. Revenue was up 8.6%, with gains for both brands across all geographic regions. Pretax earnings were up strongly with improvements in both the Caterpillar and Harley-Davidson businesses. The Harley-Davidson revenue increase was driven largely by increases with the Harley-Davidson Dealer Network. The dealers strong acceptance of new dealer exclusive styles resulted in sales increases in 15 of the top 20 dealerships. While starting with a small base, International Harley-Davidson sales also increased significantly in the quarter. Following the momentum established last fall, the CAT Business benefited from good sell through a of iTechnology work and casual product as well as fashion and retro boot product designed for the premium denim fashion consumer. The Wolverine Footwear Group revenue was 1% lower in the quarter, as a result of a decrease in Stanley licensed boot shipments and a small decrease in Wolverine Boots shipments, partially offset by modestly higher Bates uniform footwear revenues. During the quarter the Wolverine Boot business anniversaried last year's successful Wolverine MultiShox product introduction which had an impact on this year's first quarter to sales comparisons. The overall business trends for the Wolverine brand are good. Retailers have responded enthusiastically to Wolverine's fall product introductions, and this has resulted in a double digit order backlog increase at quarter end. Sell through with the ban -- brand's major accounts is very healthy and we anticipate a very solid year for this business.

The Bates Uniform Business was up modestly in the quarter due to increased sales of uniform footwear to the civilian sector market and reasonable levels of military demand. We continue to anticipate softening in the demand from the Department of Defense as the year unfolds. Bates is aggressively pursuing strategies to further penetrate the civilian uniform footwear market, and as indicated by the first quarter results is making good progress in this effort. New Bates product, such as the Ultra-Lite Tactical Boot Program, are selling through strongly at retail and further enhancing Bates reputation as the leader in the premium uniform footwear market.

The Outdoor Group consisting of Merrell, Sebago and in the near future Patagonia footwear, had an excellent first quarter. Merrell revenues were up 17% with strong gains in the U.S., Canada, Europe, and with International distributors. If you recall, last -- during last year's first quarter, Merrell enjoyed a very successful [sell-in] of the initial Continuum product. For spring '06, Merrell's innovative new product and continued strong retail sell through further expanded on last year's success. In addition to the core categories of a multi sport, after sport, and sports sandals, several emerging product categories, such as trail running and water sports contributed to the revenue gains. Merrell's women's business, in particular, was strong during the quarter as the brand has found the right balance between fashion and function to exceed the expectations of a broad range of women consumers. Merrell's collection of a low profile sports fashion footwear for both men and women continues to be a significant sales driver in Europe, Asia, and a number of other International markets. This category, which had been slow to gain traction in North America, is now also producing incremental gains for our North American retail partners. While Merrell's performance was consistently strong across distribution channels, gains in the outdoor specialty and footwear specialty stores were particularly impressive. Merrell's "Let's Get Outside" marketing campaign introduced about this time last year, is continuing to resonate with consumers who view their outdoor activities as a route to a healthier lifestyle and an overall sense of well-being. For today's consumer, it is not about conquering the outdoors, but rather about living in harmony with the natural environment. Merrill is tapping into this consumer insight and bringing new consumers into the brand who want to be a part of this new outdoor phenomenon.

Sebago sales in the quarter were down from a year ago levels. The extensive makeover of the Sebago line last year added elements of both style and pricing that went beyond our core com -- customers comfort zone. This led to a mixed retail sell through in certain categories and a more cautious Spring '06 commitment from some of our good retail partners. I believe the Sebago team has addressed these issues and re-emphasized core aspects of the line at premium, yet competitive price points. We have also strengthened our making capabilities in the Dominican Republic, which will benefit both our U.S. business as well as our European business. We continue to be excited about the global opportunity for the Sebago brand and look forward to improving back half results.

The Patagonia footwear project is moving quickly from an exciting concept to reality. The Patagonia footwear team is in place and is in the process of previewing the new-product line with selected retail partners. The initial line will be ready for a summer launch to the trade for spring '07 delivery. In terms of the line logic we believe we have identified an exciting nitch for Patagonia footwear that is complementary in every sense with the Patagonia brand positioning and culture. We will be launching the brand globally and have received considerable interest from a number of our international partners in joining that effort. The initial line launch will include three key categories: distinctive, outdoor product that reflect Patagonia's minimalist design philosophy, echo inspired casual and travel footwear, and surf inspired [sandalized] footwear. Clearly it will take some time to develop this new business to its full potential. However the more we have worked for the very talented Patagonia team and come to appreciate the power of the Patagonia brand, the more enthused we are about potential to build a unique footwear business that will be complementary to our other brands.

The Merrell Apparel introduction is also progressing on schedule and on budget. The design team has been hard at work since last summer. The apparel sourcing team is in place, a Hong Kong sourc -- sourcing office has been established, and design concepts are moving to the prototype stage. The next steps will be to preview early prototypes with selected retail and international partners, finalize the line, sample the line, and be ready for a November / December launch for the trade for delivery at retail in mid 2007. Looking forward, we are pleased with the overall response to the Company's Fall '06 product offerings, which is reflected in the very solid 14% increase in our order backlog position at quarter end. The backlog increase is broad based, with mid single digit or higher increases across each of our four branded groups. Furthermore our backlog increased during the quarter, which positions the Company strongly as we enter the fall selling season.

While we would like to devote 100% of our efforts to develop an innovative product, great marketing and strong consumer relationships, we must also deal with geopolitical issues, and in our case this means the impact of European dumping duties. On March 23rd, the European Commission announced provincial trade measures of certain leather footwear imported into the European Union from China and Vietnam. At that time we issued a press release estimating the 2006 impact of anti-dumping duties to be approximately $0.04 to $0.05 per share which continues to be our estimated impact of the dumping duties on '06 results. This estimate took into consideration the projected sourcing mix for the remainder of this year, exemptions for athletic footwear sold under our Merrell and certain other brands, and other relevant facts. Our European sales represent approximately 19% of our planned 2006 revenues. And over the past several months we have been working with our sourcing network to develop alternative sources of supply, which are not subject to the dumping measures. While there is a concerted longer-term effort to alter the sourcing mix, in the short run our priority is maintaining product quality, continuity, and positive sales momentum with our European customers. In addition to supply chain solutions, we're also expect to implement selected price increases and will further pursue other product and non-product related cost -- cost savings to mitigate the longer-term impact of anti-dumping.

In summary, we are pleased with the overall strength of the business as evidenced by our strong Q1 results. We believe we can achieve strong results in 2006 in the upper half of our previously stated earnings per share estimate of $1.34 to $1.40. I would now like to turn the call over to Steve Gulis, Wolverine's CFO and Executive Vice President, who will provide you with additional information about our results.

Thank you, Tim, and I would like to thank everyone for joining us for our call this morning. We are extremely pleased to announce our record financial results for the first quarter of 2006. Revenue of $262.8 million exceeded 2005's first quarter by $17.7 million for a 7.2% increase. With the exception of the Wolverine Footwear group, which Tim discussed, we had solid revenue gains in all operating groups. Our sales improvement was led by a 17% increase in Merrell business, as their business continues to be strong around the world. All reported revenue was also impacted by a stronger U -- U.S. currency when compared to first quarter 2005. In the currency hitting negative 1.5% impact on the quarter's revenue growth. Overall, we were pleased with the balance and strength of our revenue growth. Revenue earnings per share in the quarter totaled $0.34 versus the $0.27 reported in 2005 for a total increase of 25.9%. Record gross margins of 40.3% were reported in the quarter, a 100 basis point increase in our business model generated expense leverage of 40 basis points. Operating margins equaled 11.3% for the quarter, up 140 basis points. Double-digit earnings improvements were reported in all four branded groups, with the Heritage Group reporting the strongest percentage increase and the Outdoor Group continuing to be the largest profit contributors to the business.

Gross margin for the quarter totaled 40.3%, which compared to 39.3% in the first quarter of 2005. The strong expansion was a result of our larger mix of higher margin shipments which generated 70 basis points of improvement and 50 basis points of improvement resulting from currency, which lowered the cost of product for our International wholesale businesses. The currency impact on product cost was flat for our European operations, and we realized currency gains in our Canadian and Dominican Republic operations. We also experienced improvement in the efficiencies within our domestic manufacturing operations and these improvements were offset by slight cost increases incurred on our imported products.

The Company's general and administrative expenses totaled $76.2 million in the first quarter of 2006. Total expenses were 29% of revenue, which compared to 29.4% in the first quarter of 2005. Included in 2006 expenses was $1 million of investment spending on the Merrell Apparel and Patagonia Footwear initiatives and we expensed $0.3 million of cost related to the adoption of FAS 1223R incentive based compensation. These two items increased expenses at -- as a percentage of revenue by 50 basis points in approximated $0.02 per share. Excluding these items, the earnings per share increase for the quarter would have improved to 33.3%. Record first quarter net earnings of $19.6 million exceeded the first quarter of 2005 by $3.5 million, a 21.7% increase. The net earnings calculation included an estimated annualized income-tax rate of 33.2%, and average shares outstanding of 57.2 million shares were used in a fully diluted EPS calculation. The estimated annualized income tax rate of 33.2% reflects an increase in the percentage of our earnings being generated in taxable jurisdictions, and this rate is expected to be used throughout 2006.

From a balance sheet perspective, accounts receivable increased 4.0% on a 7.2% revenue increase. Our day sales outstanding continued to be below our goal of 60 days and we continue to look for further ways to improve our cash collections. We are also able to produce a significant reduction in inventories. Inventories were reduced $14.7 million for a 7.6% reduction when comparing first quarter 2006 to first quarter 2005 levels. We are pleased to report that our inventory management programs continue to produce solid results and a reduction in our inventory levels over the last six months has allowed us to improve our inventory turns by 0.2 turns when compared to the same period in 2005. We continue to believe that further improvements are available in our inventory utilization within the business. Overall, the Company's total working capital investment was reduced by $13.2 million for improvement of 4.0%.

We actively repurchased shares under our board authorized repurchase program during the quarter. We repurchased approximately 860,000 shares during the first quarter at an average price of $21.71 for a total purchase price of $18.8 million. We have authorization to repurchase an additional 2.1 million shares, and we anticipate continued utilization of this authorization, as we believe our share price to be under valued. The Company's cash position remains strong, and we ended the quarter with $46.2 million of cash on hand and our total debt to total capital ratio of 6.5% continues to be at historical lows. We expect to generate cash from operating activities in excess of $100 million for the year and anticipate our capital investments to approximate our depreciation levels. This will allow us to continue to invest in growth initiatives for the business, reduce debt, and repurchase shares while providing funding for the dividend increase announced in February.

The strength of our operating results and balance sheet management programs have generated improvements in our return on assets and return on equity. Our trailing twelve month return on assets and return on equity are 12.2% and 16.9% respectively, and reflect improvements of 100 and 120 basis points when compared with the same time period a year ago. We anticipate further improvement in these metrics on a year-over-year basis going forward. The strong results reported in the first quarter are allowing us to improve our outlook for the full year of 2006. We continue to confirm our revenue estimate $1.11 billion to $1.13 billion and our earnings per share range of $1.34 to $1.47. Gross margin is expected to expand for the year by 70 to 90 basis points with margins in the second and third quarter remaining consistent with 2005 levels and expansion opportunities being available in the fourth quarter. Expense levels are anticipated to be in line with plan and the increases related to FAS 123R in our development initiatives will be spread proportionately over the remainder of the year.

In closing, we are very pleased with our first quarter results and believe that our brands are properly positioned in the market to produce further market share gains. We are expecting another strong year of cash generation and record earnings per share, and based on the strength of our first quarter results, continued execution -- execution of operational improvements and consumer demand for our global brands, we feel that the upper half of the earnings per share range can be achieved. We look forward to providing you with further information on the progress towards this goal throughout the year. Thank you for your attention, and I will now turn the call back to Tim for his closing comments.

Thanks, Steve. We're off to a very good start in 2006, and are pleased with the strength of our business model that allows the Company to overcome economic obstacles like those we are experiencing in Europe while continuing to invest in exciting new projects that will fuel the future growth and help us achieve our vision to excite consumers around the world with innovative footwear and apparel that brings style to purpose. Thanks for joining us this morning. And Steve Gulis, Blake Krueger, and I would now welcome your questions.

[OPERATOR INSTRUCTIONS] Adam [Averson], Lehman Brothers

Good morning. this is actually Adam Averson calling in for Bob.

Hi Adam, how're you this morning?

Pretty good. With a regards to the anti-dumping duties, how long will it take to redirect sourcing?

Adam, you know I think that's a difficult question for us to -- to answer at this point in time. You know, looking -- looking ahead, the European Commission will be considering these preliminary dumping duty measures over the coming months with final measures expected in the Fall of 2006. And I think as, the year unfolds, clearly we will be taking action, trying to look beyond what I think we've -- I think we have a pretty good handle on what the impact is in 2006. We've given that -- that estimate $0.04 to $0.05 per share, going beyond that into looking at beyond 2006, I think it's premature. Our past practice has been able to look at the next year's estimate when we talk about our third quarter, and I think by then we'll have a much better handle on, first of all, what are the final regulations and two, what other steps we may be able to take to mitigate the impact of dumping duties.

Okay, thank you. And then just switching gears, can you give an update of the [door] plan for Hush Puppies at Federated going forward?

Sure, Adam, we're in about 240 Federated doors this Spring season. That's up from where we were the same time a year ago. Looking forward to the Fall season, at the current time, I think we believe there will be maybe another 10% or so increase in -- in doors for the Fall season. A good deal of it still depends on -- on Federated's merchandising plan as they digest the May Company acquisition. Some cases they are going to be moving more rapidly to change the merchandising mix. Other cases, it may take some time. So we are certainly working closely with them, and also we want to be sure that the doors we're in are the right ones and that it's going to be a successful program for -- for both Federated and for us.

Okay. Thank you.

John Shanley, Susquehanna

Hi, it's John Shanley. Congratulations guys, on a very impressive quarter. Tim, can you give us an idea of the overall percent of the Company's revenues that were derived in the first quarter from the Outdoor Division as opposed to the total Company revenue and is the division growing at a faster pace than the Company as a whole?

John I'll let Steve take a look at that percentage number. It is clearly our largest revenue contributor. In terms of growth, yes. Our Outdoor Group has been growing at a double digit pace for the last seven years, and continued to do so again in the first quarter. So it clearly is growing at a faster pace than the overall -- overall business. Yes, we're really pleased with -- with the continued strong reaction that we're receiving to the Merrell line. Our ability to continue to innovate, our ability to -- to enter new product categories, to keep the growth momentum is -- they've just unexceptional job there. All the vital signs for that business continue to look very strong.

Are the product margins, Tim, significantly different for the Outdoor Group versus the the it overall Company's product margin levels as a whole?

John, yes, particularly with -- with the Merrell business, our margins there are -- are some of our of our very best margins along with Harley-Davidson some -- a few of our other more lifestyle driven businesses, they are our high -- highest margin businesses.

Okay. And I don't know Steve has the numbers yet , if not I can ask another question.

Yes, John, I think the key is if you looked at our year end annual report, the Outdoor Group was about 33%, I believe, of our total revenue base. Okay? And we indicated that Merrell had a very strong first quarter. So it would be a -- a little bit higher than that in the first quarter. But I think that, slightly above that range would be the right area to look at. For going forward for the full year, we would in -- expect the Outdoor Group to be more than 33% for fiscal 2006 because it is anticipated to be the fastest-growing group within our portfolio.

That's great to hear. Tim, also on Hush Puppies, can you give us an aside from Federated, you mentioned that you're getting a low double-digit gains in the upper tier department stores. The is that people like Nordstrom's and Dillard's or basically what other accounts were you talking about in reference to that?

In addition to Federated, John, accounts like the [Belks] for example, we've had a very good relationship with, the business is growing there. So it's, there are other some department store groups where -- where seeing growth. The other -- other area that, we've been focused on and are quite pleased, is -- is this specialty shoe channel. We're targeting those influential specialty shoe stores. And there was a time due to the makeup of the Hush Puppies line, the price points that we were selling at some years ago, where we were all less attractive brand for that channel. The changes that have been made in the product line now, the quality of the product, the style content, and the price points we're at, we are a much more attractive brand for those better grade independent shoe retailers and we saw quite -- quite good response from them. And are looking for them to be an equally important part of our growth with the department store channel.

That's great. Are you benefiting from some of the difficulties that other brands like Nine West are encountering in the market? Are you taking shelf space from those brands?

I don't know if I could zero in on a specific brand that were taking shelf space from, but I think it's more about, having a proposition for these better grade retailers that really is on the mark in terms of market right product. Good marketing support, and a re-energized, revitalized brand image. It's -- it's really giving them the elements that -- that they need and we -- we're pleased with -- with how that's working, not only in the U.S. market but on a global basis.

Last question I have is on licensing revenue. It was strong in the quarter. Is that primarily Hush Puppies or are you getting some traction with licensing some of the other brands as well?

It's a combination, when we look outside of our owned the businesses in North America and Europe, we have strong distribution for many of our key brands, around the world and those are through a combination of both licensing and distribution agreements. And we did see a good growth in -- in both distribution revenue as well as licensing revenue in those other International markets.

Great. Thank you very much and again congratulations on a really super quarter guys.

Thanks.

Jim Duffy, Thomas Weisel Partners

Thank you so much. Nice quarter.

Morning Jim.

Good morning Jim.

Good morning. Maybe you gave it and I missed it but did you guys give the absolute revenue numbers by business line?

No, we -- we did not, Jim. Okay? You'll get more break down in the Q filing as to growth rates associated by -- by group, okay, but we don't give specific brand detail. We did indicate the Merrell growth in the call, though, and that was at a 17% rate.

Okay. So we'll have to wait for the Q for the business line specifics?

Yes.

Okay. You had also mentioned the Outdoor Group is the largest contributor to operating profit. We have a pretty decent that handle from John's questioning on what that is to revenue. What percentage of operating profit comes from the Outdoor Group?

I think it's fair to say, Jim, that the operating margins on the Outdoor Group are -- are at the higher end of our overall portfolio levels because of the lifestyle nature of that business. However, as -- as you go forward, we are also investing in that -- that -- that group both through the Merrell Apparel and Patagonia Footwear Group, which will be reflected in the operating margin contribution from the overall Outdoor Group. So I think you have to be a little careful looking at historical levels and extrapolating that out because the investment spend. But I think is fair to say that it is our strongest operating margin producer and it obviously is above our corporate averages.

Okay. So you look at contribution to revenue at kind of mid 30s% as a contribution to operating profit above 50%?

It is above the revenue, yes.

It's about the revenue, it's above 50% of total operating profit?

Jim, I think you said the revenue, as we reported in '05 the Outdoor Group would have been a 33% of our -- of our revenue.

Okay.

I think what Steve is saying is that from a profit contribution standpoint, we would be a little bit above that.

Okay. Can you provide a little detail how you are making such progress on the inventories? It's very impressive progress there. A little color as to how that's come about will be helpful. Thank you.

You know, [inaudible] use a tough taskmaster, that's the answer, but I'll let him explain it.

I think it's really ongoing process that we've been driving into our overall philosophy for -- for the last several years, and we continue to focus in on it. It began several years ago with our SKU focus and we have driven that from we own in the warehouses right back to the product development cycle as to what are we going to build for the upcoming season so that we have a appropriate uses of -- of all product that we're going to be adopting. And then I think the other -- the other key is is that we want to make sure that we're aggressively driving inventory through our distribution channels. So that where if we buy something that we may be a little excessive we are getting rid of it much quicker because we can get better prices, okay, we can get better return on it and then we're not carrying it in our inventory levels going forward. So -- so really having the mindset in the operating divisions of making sure that we're investing in our inventory dollars effectively is -- is what we're -- we're really focused on, and it is working throughout the world.

Good. So each of your different businesses has a different order cycles that sales processes. Can you speak to the percentage of the backlog that's represented by the Outdoor Group?

Jim, I would say in -- in general terms, the Outdoor Group, the percentage of orders booked for the -- for the next season relative to our Company averages higher. We have some businesses, like our -- our Wolverine Boot Business, or our Bates Business, where reorders -- where the product changes less frequency, where reorders on existing product make up a higher percentage, of our -- of our revenues for those businesses. Some some of our other businesses like Merrell is more future order driven. So it -- it typically represents a -- a slightly stronger portion of our backlog than -- than it would of our revenue. So if our revenues last year for the Group were 33% of our total, our backlog would be somewhat higher than that.

Okay. Final question. There was an update to guidance on, I believe it was, March 23rd. What's changed since that last update that's giving you more confidence in the business?

Sure, Jim. I think a couple of things that -- that certainly as we wound up this first quarter and it -- we were pleased with -- with the results for the first quarter. And secondly, the -- our incoming orders for the Fall season over the last month or so has continued to be quite strong. So that resulted in a 14% backlog as we ended the first quarter. So I think that was -- those were the things that are giving us more confidence in terms of looking at the remainder of the year. A lot of it being driven by the strength of the -- of the business right now, and retailer acceptance of our Fall product offering.

Good. Sounds like the business and it is in a very healthy state. Thank you.

Thanks, Jim.

Mitch Kummetz, D.A. Davidson

Yes, thank you. Tim, let me start with just a few quick questions on the backlog. I hope I get a little bit more color there. First of all, can you tell us with the -- with the constant dollar increases and then -- and then secondly, from a couple of your comments it sounds like Fall orders have come in really well. I just want to confirm that the backlog at the end of Q1 and consolidated that you're seeing what sounds like a bigger increase on -- on Fall orders that what -- what remaining Spring orders you might have in the backlog. And then -- and then lastly on the backlog, I know that at the end of Q3 you reported a big increase there that was somewhat inflated by some early orders on the Spring product and I just wanted to see if there was an early orders on Fall product that's making maybe the backlog look a little stronger than otherwise?

Sure I think starting off with on a -- on a constant dollar basis our backlog would be slightly higher than the reported backlog. Not dramatically higher but in a 1.5 to 2% range, if you valued it at a constant dollar basis. The in terms of a the trend of how orders are coming -- let me back up and -- in terms of the makeup of that backlog and when is it due to ship, there is still backlog that -- that is related to the second quarter, but as -- as you know, due to the seasonality of our business, typically our first and third quarters are when we ship the initial seasons goods. And our second and fourth quarter tend to be somewhat more reorder driven. So while there is still backlog at the end of the first quarter for shipment in Q2, the -- certainly the bulk of that backlog is Q3, Q4 is due for shipment in Q3 and Q4.

And then -- and then lastly, any -- any early orders on -- on Fall product that may have inflated this backlog increase somewhat artificially or is -- are you --?

I would say on balance, I think we've had a general trend over the past several seasons of -- because of the strength of Merrell and the fact that Merrell represents a much more important part of a lot of our -- our customers sales plans. They are working with Merrell and anxious to -- to lay out their plan for Merrell somewhat earlier than maybe they would have, a couple of years ago. But other than that general trend that we've been experiencing over the past several seasons there's no dramatic shift, I don't think, in the timing of when we're receiving orders from our major accounts.

And secondly Tim I was hoping you could maybe speak qualitative -- qualitatively to your -- to your outlook for -- for reorders in the second quarter? And I guess what I'm getting at with that question is, comment on sort of where you see things at retail in terms of inventory wise and what you would expect maybe the need for product going forward as -- as Q2 is more of a reorder quarter for you. You say that -- you say that retailers are in more in need of product? You know of, obviously, depending on economic and weather conditions, but -- ?

Yes, but I think that the -- there may be a little tricky part of this Spring season, Mitch, was the timing on Easter. Easter's three week -- was three weeks later this year than last year. So when we look at various benchmarks on retail sales performance, like the National Shoe Retailers Association, numbers on same store sales, the trend was January was -- was pretty solid. February just okay. March, because of the Easter timing, a little weaker. We have only one week of April results from those -- from that survey results, and it was pretty good the first week in April. So I think it's going to take a composite of -- of really getting March and April together from a retailer's perspective to get a handle on how their business is. So I think we're -- we would expect a -- a reasonable level of reorders, but I don't know if there's anything that says there's going to be -- and I think inventories are in pretty good shape, but this timing in Easter, retailer's sales are peaking later this season because of that timing than they -- than they would have a year ago.

Okay.

And that may have some impact on how retailers are going to reorder here in the second quarter.

Have it. And then lastly, a question for -- for Steve, and it has to do with the SG&A. Excluding the impact of investment in Merrell Apparel and Patagonia as well as the impact of FAS 123R, it looks like your SG and would have been down about 100 basis points roughly from last year in the first quarter. Where -- where did you -- where did you see -- see that leverage?

We're getting at both at the loss selling levels, Mitch, and were also getting at in our distribution arenas. In our core overhead costs also, I mean we -- we try to make some room for some of the investment spending we're doing this year. If you take a look at the comments that we had closely, we talked about our operating margins for the full year in our last call been relatively flat with our gross margin expansion being offset by ex -- expenses going up primarily related to those two -- two items you noted. So -- so we're looking at flat, if not slightly better expenses for the full year. But we look to be on track for that right now.

Okay. And then you mentioned that in terms of investment in both of those initiatives as well as FAS 123R, that you would expect that to -- to flow pretty evenly over the balance of the year? Does that mean you expect about a $1million each quarter for investments and about 300,000 on the options?

No, what I was -- what I was really saying was the balance was going [inaudible] more or less flow through for the year because -- if you take a look at our -- and be careful with the fourth quarter because you have four -- you have 16 weeks in there versus 12 weeks in the other two quarters, so you're going to get an escalation because you just have more time in that fourth quarter.

Have it.

So -- so you have to be -- you're going to have a little bit of ramp up towards the end of the year.

Okay. The great. Thanks, guys.

Jeff Edelman, UBS

Thank you. Good morning. Steve, I just have a question on the guidance you originally had for the first quarter. Are you have provided that with after five 5 weeks of the 12 week quarter had passed. So my question was in the ensuing seven weeks, where -- where did you see the biggest upside to the margin? Was a currency?

Yes, first of all, Jeff, I just want to make sure that we don't give quarterly guidance, we gave our guidance for the full year in conjunction with our year-end conference call which was at the end of February. So I think that's -- that's what you're referring to. Where we -- where we were at then. At that point we indicated that our gross margin expansion we anticipated to be in that 60 to 80 basis point range. We were better than that this -- for the first quarter. And a piece of that came from the currency impacts that we discussed in -- in the -- in the call. Especially the mix of that we anticipated Europe to be down, but after the repatriation, there's been a little bit of -- of benefit coming back from -- from these weakening of the U.S. dollar, but also the Canadian and Dominican Republic operations had currency gains which were stronger than what we anticipated at that time.

Okay. Then as we think about the business over the next three quarters, you said, year-over-year, relatively flat gross margin second and third quarter with improvement in the fourth quarter. What would be the major drivers of -- of that following what we just had in the first quarter?

Well, if you take a look at our -- our full-year margin expectations we still are going to have a positive impact from mix as our life style business are growing the fastness out of our portfolio. Included in our margin will also be the negative impact, okay, from the dumping duties because that's where that will come in. And that will primarily be in the latter part of the year. Because of the nature of the flow through of that inventory once it's brought in. The we're anticipating a slight increase for F X four the total year. Okay? And the other big -- the other opportunity for us really remains in the fourth quarter were we had year end inventory adjustments last year and we reduced our inventories as dramatically as we did, we had some offsetting LIFO accounting adjustments and also some intercompany property elimination adjustments. Those should be relatively not occurring so there -- there should be some opportunity for margin improvement in the fourth quarter because those items should not anniversary.

Okay and then just one off -- one final question. Can one construe that the mix will go against you in second quarter or the other factors will have more of an impact?

No, I -- I -- I think that the mix should be -- should not be a negative impact for us. The in any quarter. You're going to have more currency impact being not as strong in the second and third quarter which is going to level those out.

Okay. Thank you.

Yes.

Scott Krasik CL King & Associates

Hi, guys, great quarter.

Thanks Scott.

Was there a material impact on the negative side to from reducing the Hush Puppies slipper business that -- that occurred in the fourth quarter?

Scott, in terms of -- I think what you're referring to is when we reported our fourth quarter results, we -- we mentioned that our revenues from our Hush Puppies Slipper Business were lower in the fourth quarter last year, and that we were planning that business to be less significant. The Slipper Business is really a back cap business so there really was no material impact of the first quarter.

Okay. But you're at the level now where you like this -- you've aggregated all the unprofitable -- less profitable doors? [inaudible]?

I mean, in the scheme of things, that's a relatively small business of ours and something we'll continue to evaluate. But, we're a big believer in -- in -- only investing in profitable businesses and we de-emphasized that business last year because we want to have a profitable business. And in the total scheme of things, it's -- it's really pretty immaterial.

Okay. A good. And then are you going to show Patagonia at [Fannie] in June?

We will be previewing some of Patagonia product with a few of our selected retail partners who will be at that -- at that show. As you know, it's -- that shows principally geared toward the more fashion side of the footwear market. But clearly we have a lot of very good independent retailers and particularly in the northeastern part of the country there. So we'll be previewing the product there. The larger introduction really will happen as we get into the main trade show season. For Fall the outdoor retailer show, for example, would obviously be a very important place. But there'll be some product that we'll have that Fannie show, yes.

Okay and will you show Merrell Apparel at outdoor retailer? This year?

Well it's really -- the Merrell Apparel program is -- is a Fall '07 program so the trade show cycle for Merrell Apparel is a season later.

Okay.

So we would be introducing that to our -- some of our key retail partners previewing it in the latter half of the year. But it would be at the January / February [inaudible] trade show.

Okay. And then can you give us some sense as your Merrell European business being driven by preorder selling? Are you getting the same sort of mix now that you get in North America with bigger preorder business and less reorders? Is -- is Europe a bigger reorder business because it's still relatively, I guess, newer there than in North America? And then could you also talk about are you opening Shop and Shops in Europe for Merrell?

Yes, Scott, I would say now the pattern in Europe in terms of advance orders is probably very similar to the pattern we're seeing in -- in our other markets around the world. And in terms of the overall environment there for Merrell, it -- it remains very strong. We're opening new doors and in Europe where we have a more mature business in the U.K. and continental Europe. Our -- we really launched the Merrell product in ernest in continental Europe just a few years ago so we're at a little different stage of its development there at an earlier stage in its development. And there are opportunities for more -- certainly more Shop and Shops in Merrell and we'll be -- we'll be adding some Shop and Shops in Merrell. That will become an even more significant factor as our apparel comes online in -- in '07.

Okay and then just lastly, can you comment on the -- the trend in boots for Fall? There are a lot of manufacturers out there who are really committing heavily to boots. Where would that benefit you? Do you -- do you feel like you're making that type of investment?

Scott, I think we're -- we're in a -- if we had to sort of talk about the overall fashion trends we'rer in I think we -- we have been and probably still are in a strong sandal / boot kind of cycle. Sandals for the Spring and boots play an important roll in the Fall. And we -- we like that because we obviously have some brands that are very strongly positioned in the boot business like Caterpillar and Harley-Davidson and our Wolverine Boot business. But I think one thing we do see in the marketplace, it's -- it's not driven by a single look in boots, it's across a very wide spectrum from rugged outdoor boots to -- to certainly some dressier styles. I think the one area we see is a good opportunity for us is the more casual boot category product with something in interesting treatments, some embellishments, those are the kinds of things that we think are going to be important and we have several of our brands that can play in that sector.

Okay. Thanks, guys. Congratulations.

Thanks Scott.

This ends the Q&A portion of today's conference. I'll turn back to management for closing remarks.

Okay. Thank you. On behalf of Wolverine World Wide, I would like to thank you all for joining us today. As a reminder our conference call replay is available at our website at www.wolverineworldwide.com. The replay will be available through May 3, 2006. Thank you and good day.

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