Wolverine World Wide Inc (WWW) 2006 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 a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine World Wide. 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.

Thanks very much, Carlo. Good morning 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. Blake Krueger, our President and Chief Operating Officer, is currently traveling on business and is unable to join us on this morning's call.

Earlier this morning we announced record third-quarter results, our 17th consecutive quarter of both record revenue and earnings per share. If you did not yet receive a copy of the press release, please call Darryl Jackson at 616-233-0500 to have one faxed to you. The release is also available on many new sites or it can be viewed from our corporate website at www.WolverineWorldWide.com.

Before I turn the call over to Tim O'Donovan to comment on our results I'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 predictions or projections, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases. With that being said I would now like to turn the call over to Tim.

Good morning and thanks for joining us today. I'm pleased to report record revenue and earnings for the third quarter and an improved earnings outlook for the full year. This marks the Company's 17th consecutive quarter of record revenue and earnings per share. Revenue for the quarter of $298.9 million increased from the prior year by 7.1%. And earnings per share of $0.46 were up $0.04, a 9.5% increase from the prior year. The revenue and earnings increases in the quarter were broad based with the Hush Puppies Company, Outdoor Group and Heritage Brands Group all reporting revenue and earnings increases.

Revenue and earnings for the Wolverine Footwear Group were down in the quarter due principally to lower Bates Department of Defense shipments and lower private-label slipper shipments. Through three quarters each of our four marketing groups had achieved solid earnings increases. Revenue gains in the quarter were particularly strong in Europe, increasing by nearly 15%. The caterpillar, Hush Puppies, Merrell's and Sebago brands all contributed to the significant revenue gains in Europe. North American revenue was up about 3% during the quarter with the lower Bates and private-label shipments noted earlier offsetting larger gains in the Company's other North American businesses.

Other international markets also realized strong revenue gains. On a year-to-date basis revenue gains are well-balanced with North America up 5.6%, Europe up 8.7% and other international markets also up strongly. As a result of our third-quarter performance and solid business momentum we are increasing our earnings per share estimate for the year to a range of $1.41 to $1.44, up from our previous estimate of $1.38 to $1.42.

Turning to our key business units, Hush Puppies' global revenue increased by 4% during the quarter with the strongest gains in Canada and Europe. In the U.S. footwear revenue was up slightly in the quarter as lower closeout sales offset a strong increase in regular price shipments. Hush Puppies' profits increased at a solid double-digit pace during the quarter, primarily due to the significant improvement in gross margin associated with higher priced, higher quality product shipped to upper tier retailers.

In the U.S. the cooler weather has helped jump start fall business, and Hush Puppies' retail sales in the 256 Macy's stores currently carrying the brand are excellent with several new fall 2006 women's casuals generating strong weekly sell through at full price. In the strategically important better independent shoe store channel, third-quarter shipments increased 9% as Hush Puppies' men's Street Smart and new casual [Out Smart] waterproof collections generated solid orders.

Internationally the back to school business in the UK was very strong for Hush Puppies and in Canada our fall 2006 women's casuals and tailored casuals are enjoying excellent sell through. Our initiative to build Hush Puppies in key emerging markets including China, Russia and India is on target to exceed our 25% growth goal for the year in these markets.

During the quarter we also added to Hush Puppies' base of 340 independently owned concept stores around the world by opening a second store in Caracas, Venezuela and a new lifestyle store in the megamall in the Philippines which is down the fifth largest mall in the world. Overall we are pleased with Hush Puppies' third-quarter results and encouraged by the consumer reaction to Hush Puppies' fall collection of exciting footwear.

Following the positive trends established in the first half, the Heritage Brands Group, which includes the Company's two largest licensed footwear brands, Caterpillar and Harley-Davidson, had a strong third quarter. Revenue for the group was up 10.9% led by the caterpillar brand which achieved revenue increases in all regions. On a year-to-date basis Heritage Brands Group revenue and profits are both up double digits.

Two years ago we created the Heritage Brands Group to capitalize on the global management skills of both the Caterpillar and Harley-Davidson brand teams. I'm pleased to report that the Heritage Brands Group has created a much more effective operating model and outperformed our expectations over the past 24 months. The double-digit revenue increase achieved by the Cat brand in both the quarter and on a year-to-date basis has been driven by new product introductions such as the iTechnology patented comfort system and the legendary raw collection of fashion right boots to accessorize the current trends in the premium denim market.

In addition to growth in the U.S. international markets for the Cat brand have been strong in Canada, Russia, Latin America and the Middle East. In Europe, Cat's largest market, the brand has also experienced good growth in spite of weak retail conditions in the UK and several other key European markets.

For Harley-Davidson product and merchandising programs tailored specifically for the Harley-Davidson dealer network continue to produce positive results. On a year-to-date basis sales to this channel have increased by 6% and 33 new dealers have added footwear to their merchandise assortment. Third-quarter results for Harley-Davidson were adversely impacted by the timing of new product deliveries. However, Harley-Davidson's order backlog at quarter end was up over 20% and we expect solid fourth-quarter results.

After a double-digit revenue gain in Q2 Wolverine Footwear Group revenues declined by just over 10% in Q3. The majority of the decline was due to the planned reduction in shipments to the U.S. Department of Defense and lower demand for private-label slipper product. While up on a year-to-date basis, Wolverine brand boot revenues were down 2.3% during the quarter due to lower shipments of rugged casuals and outdoor sport boots.

Retail sell through and resulting reorders for Wolverine's top tier technical work product, Wolverine MultiShox, was up again in the quarter due in part to Wolverine's relentless by nature fall media campaign which now is in full swing. The combination of television and print media will make 460 million consumer impressions, reaching Wolverine's target audience an average of four and a half times this fall. The Wolverine brand has a leading share of voice in its core product category and we continue to invest in building long-term consumer loyalty to the brand.

Bates' revenue was down about $3 million during the quarter due principally to the planned reduction in demand for combat boots from the U.S. Department of Defense. As discussed in previous conference calls, we expect that lower demand from the Department of Defense to impact Bates' 2006 revenue by about $12 million. This reduced demand is reflected in our Bates order backlog which was down significantly at quarter end. We expect this lower demand from the Department of Defense to significantly impacted fourth-quarter revenue and to carry over into 2007. As a result we are planning Bates military revenue down again next year.

The Outdoor Group continues to be the Company's most significant growth opportunity with revenues increasing by 19% during the quarter. Merrell's 20% revenue gain accounted for the majority of the increase with Sebago revenue also up about 5% in the quarter. The Outdoor Group continued to be the Company's largest profit contributor in Q3. For both the quarter and year-to-date Merrell achieved double-digit revenue increases in the U.S., Canada, Europe and with international distributors. Brand momentum remains very robust with strong sell through across premium distribution channels and geographic regions.

The Continuum product concept solidified Merrell's leadership position in the performance athletic outdoor segment of the market. And the consumer response to new product introductions and line extensions has been very gratifying. In addition to outdoor performance product, Merrell's innovative casual offerings also resonated with both men and women consumers. New fall women's casuals are generating very strong double-digit retail sell through with a number of key retailers, and we are looking forward to a very strong fall/winter season for the Merrell brand.

I was pleased that Sebago revenue and profit increased for a second consecutive quarter. Efforts to focus the productline and add excitement and energy to the Sebago product and marketing are being well-received by the brand's retail partners and loyal consumers. We continue to be enthused about the potential for Sebago to become an even more significant global brand as well as a significant revenue and profit contributor to the Company.

The Patagonia footwear project is progressing rapidly and has launched its initial 32 Style Patagonia Spring '07 footwear line. We have established a separate Patagonia sales team who have been out presenting the line to a select group of outdoor specialty retailers here in the U.S. as well as in Canada and key markets in Europe. We're encouraged by the positive response to the line and the level of interest on a global basis. We're also partnering with the Patagonia apparel company to have footwear product presented in their retail stores, catalog and website beginning early in 2007. There will be a few Patagonia early shipments late in Q4 with the bulk of the initial shipments planned for the first half of 2007.

The Merrell apparel program will launch to the trade late this year and early next year with initial deliveries to retail beginning in the third quarter of 2007. A separate Merrell apparel sales team will be in place by November and will be armed with all the appropriate product and marketing materials to begin calling on target retail accounts beginning in December. Additionally, a significant number of Merrell's international distributors have also committed to participate in the apparel launch and are finalizing their plans for their respective markets.

We continue to be enthused about the opportunity to develop the Merrell brand over time into a leading global lifestyle brand with a distinctive point of view and a unique appeal to consumers to appreciate the Merrell design esthetic and its outdoor performance edge. Looking forward, the fall season has gotten off to a solid start with generally strong results for most footwear retailers in September.

While we can all think of lots of reasons why consumers might be pulling back, the current evidence is that the better branded footwear business is quite strong. We are hopeful the positive September trend will continue resulting in a strong fall season and encouraging retailers to plan more aggressively for the spring '07 season.

Turning to our order backlog, the backlog was up nearly 6% at quarter end and is broad based with double-digit increases in Hush Puppies, Heritage brands and the Outdoor Group. The Wolverine Footwear Group backlog is below year ago levels due to the previously discussed reduction in demand for Bates military footwear from the Department of Defense. Excluding the effect of the lower Department of Defense order backlog, the Company's overall backlog increase exceeded 10% at quarter end.

One final matter I wanted to address is the anti-dumping situation in Europe. As most of you are aware, earlier this year the European Commission imposed temporary anti-dumping duties on most leather footwear imported into the EU from China and Vietnam. These temporary duties are set to expire on October 6th. The European Commission recently proposed final anti-dumping duties of 16.5% on China product and 10% on Vietnamese product imported into the European Union. These rates are modestly lower than the current temporary duty rate.

There are a number of EU members who are opposed to these additional duties and believe they serve no useful purpose and will only result in higher consumer prices for footwear. Wolverine and a broad group of footwear retailers and consumer groups agree with the EU members opposed to these duties and are actively lobbying the EU to vote against the imposition of additional duties. We expect a vote to take place tomorrow. We have a variety of actions to address the impact of these duties and Steve Gulis will discuss the related effect on our operations. I will now turn the call over to Steve Gulis, Wolverine's Executive Vice President and CFO.

Thank you, Tim, and good morning, everyone. We are pleased to announce record revenue and earnings for the third quarter with quarterly revenue increasing 7.1% and earnings per share increasing 9.5%. The earnings per share results reflect strong operating leverage generation from our business model as the 2006 third-quarter results include a $0.03 earnings per share impact related to the adoption of FAS 123R stock option expensing in investments in our Merrell apparel and Patagonia footwear growth initiative.

Combined with our first-half results year-to-date revenue has increased 8.1% and earnings per share have increased 15.4%. Revenue of $298.9 million was reported for the third quarter of 2006 which is an increase of $19.8 million over the $279.1 million reported in the third quarter of 2005. The planned reduction in our Bates military contract business had a negative impact of 1.1% on the quarter's growth while foreign currency translation contributed 1.6% to the third quarter's growth rate. The Heritage Brands Group and Outdoor Group reported double-digit revenue increases in the quarter and the Hush Puppies global business reported mid single-digit growth. Wolverine Footwear Group's revenue declined in the quarter primarily resulting from Bates business and reduced private-label shipments.

Reported gross margin in the third quarter of 39.3% reflects a 40 basis point improvement over the 38.9% reported in 2005's third quarter. 110 basis points of margin improvement was produced from initial pricing margins, sourcing improvements and manufacturing efficiencies. This improvement was partially offset by 60 basis points of increased product cost on our European operations related to the levying of dumping duties on product being sourced from the Far East. These duties, which began to be phased in during the third quarter, had a $0.02 per share impact on the third-quarter's operating results.

The effect of foreign currency on gross margin was neutral during the quarter as the erosion of margin related to currencies in our European operations was offset by benefits recognized in our Canadian and Dominican Republic operations. In the fourth quarter of 2006 we estimate the impact of anti-dumping duties to be slightly higher than the third-quarter's impact and expect foreign currency to be neutral.

Selling and administrative expenses as a percentage of revenue were 26.1% in 2006 and compared to 25.8% in the third quarter of 2005. The investment in our Merrell apparel and Patagonia footwear initiatives increased our selling and administrative costs as a percentage of revenue by 50 basis points. Excluding these investments we generated expense leverage of 20 basis points. For the year-to-date we have generated 30 basis points of expense leverage inclusive of our investment spend and 70 basis points of leverage exclusive of the spend.

Operating margin for the quarter expanded 10 basis points on a year-over-year basis and for the year-to-date has increased 30 basis points. We are on target to meet our goal of generating operating margins of 10.7% in 2006 and obtaining 11.5% operating margins within the next two years.

Reported net earnings of $26.1 million in the third quarter of 2006 generated an all-time record $0.46 of earnings per share in the quarter. This $0.46 reflects a 9.5% increase over 2005 third-quarter results. Additionally third-quarter net earnings includes $0.05 per share of costs related to growth initiative investments, FAS 123R and anti-dumping duty surcharges. Through three quarters earnings per share of $1.05 reflects an improvement of 15.4% over the $0.91 reported in 2005. These results are in line with our long-term objective of consistently driving double-digit earnings for growth, and for the year includes $0.10 per share of costs related to the above noted items.

Our balance sheet continues to be strong. We ended the quarter with over $70 million of cash and we had $32.2 million of debt. Our total debt to total capital ratio is 6.1% and further improvement is anticipated by year end as we will make a scheduled principle payment of $10.7 million on our senior debt in December of this year.

Working capital management continues to be effective as accounts receivable days sales outstanding were under our goal of 60 days and finished the quarter at 57.9 days. Inventories increased on a year-over-year basis by 4.5% which were solidly below our rate of revenue growth. It should be noted that the end of the third quarter is our peak working capital period and historically we have reduced the working capital investment during the fourth quarter.

For the year-to-date we have generated $29.8 million of cash from operating activities which is down from the $41.6 million of cash generated for the same period of 2005. The reduction is primarily due to modest growth in working capital needs and our cash generation to date puts us in a good position to achieve our 2006 target of generating $100 million of cash from operating activities for the full year.

During the third quarter we did not repurchase any stock under our authorized repurchase program as our stock price continued to move upward throughout the quarter and during our buying window. We continue to have approximately 1.5 million shares of repurchase authorization available under our current program and we will continue to exercise the program as deemed appropriate. On a year-to-date basis we have repurchased 1.5 million shares of stock under the authorized program at an average price of $22.40. This repurchase price reflects a 24% discount to the recent intraday 52-week high of $29.48.

On the strength of our third-quarter results and the 6% backlog increase which Tim reported, we have increased our guidance for the remainder of the year. We are maintaining our previously stated revenue guidance of $1,120,000,000 to $1,140,000,000 which includes reduced shipments in our Bates military contract business. We anticipate these planned reductions to be 12 to $14 million in the fourth quarter which will have a 4% impact on 2006 fourth-quarter revenue growth.

Our earnings per share guidance has been increased to a range of $1.41 to $1.44 from $1.38 to $1.42. We continue to project annualized gross margin improvement of 70 to 90 basis points and a 70 to 90 basis point increase in expenses is anticipated for the full year. Additionally this morning we announced our initial guidance for 2007's revenue and earnings per share. Our 2007 estimates are for revenue to range from $1,200,000,000 to $1,230,000,000 and for earnings per share to range from $1.56 to $1.62.

We anticipate that the increases in revenue generated by our Merrell apparel and Patagonia footwear initiatives will be partially offset by continued reductions in our Bates military contract business and the phase-out of our remaining slipper operations. Operating and margin expansion will be principally driven from gross margin improvement inclusive of additional anti-dumping duty provisions. We have forecasted the current proposed anti-dumping duty provisions into our 2007 estimates and the impact on 2007 approximates an additional 4 to $5 million of cost over 2006 levels.

Continued investment spending for the Merrell apparel and Patagonia footwear initiatives is anticipated during 2007 while we continue to develop the baseline infrastructure required for the business. However, these initiatives are expected to add to the earnings per share improvement in 2007. Our interim target for operating margins continues to be 11.5% by fiscal year end 2008 which would be an 80 basis point improvement from the levels projected this year. We do not expect to get all of this improvement in one year, but we will make progress towards this interim goal in 2007.

Fiscal 2006 is shaping up to be another record year for the business. If we are able to achieve the midpoint of our guidance, revenue growth will be in line with our long-term objective and double-digit earnings per share growth will be generated for the fourth consecutive year. Additionally, we are pleased with our brand positions around the world and progress is being made in our new growth initiative. Looking to the future we believe that 2007 will be a favorable year for the Company and its shareholders. I thank you for your time and will now turn the call back to Tim for some closing comments.

Thanks, Steve. We're pleased to have achieved our 17th consecutive quarter of record revenue and earnings per share and believe the momentum in the business will lead to continued strong and consistent performance. Our brand building strategy to develop innovative products supported by creative marketing is resulting in marketshare gains for our brands on a global basis. What's more, growth is coming most rapidly in our higher margin businesses allowing us to invest in brand building and new initiatives to fuel future growth while also enhancing shareholder value today. Thanks for joining us this morning and Steve and I would now welcome your questions.

(OPERATOR INSTRUCTIONS). John Shanley, Susquehanna Financial.

Tim, Europe seems to be a real major growth vehicle for the Company from what you indicated on the call and your press release. Was it strong or equally strong across all the major brands including Hush Puppies, Merrell and Sebago? And were operating margins substantially different in Europe than those brands achieved in the U.S. marketplace?

John, what we were really encouraged by in the third quarter is that we did have revenue gains across really our brand portfolio in Europe. In terms of margins, our margins in Europe are quite good. However, during the quarter we were impacted by anti-dumping -- those temporary anti-dumping duties, so that had a negative impact on our profitability in Europe. We still have a very good business model in Europe, but did absorb, I think as Steve indicated, about a total of $0.02 per share of anti-dumping duty in those European businesses.

If the duties are in effect made permanent tomorrow, will that have an impact on your business in the European market in 2007 do you believe or comparable to what it had in the third quarter?

John, this is Steve. For the full year of '07 if the current duty structure stays in place there would be an additional 4 to $5 million of cost over 2006 levels. And that vote is going to take place either tomorrow or the following day. So we will know the outcome of that at that point.

Okay, that's great. Thank you for the insight. Also either Steve or Tim, can you give us an idea of the expectation now for the new product initiatives in terms of revenue for both Patagonia and Merrell apparel? Is this something that's going to be a significant contributor to revenues next year do you believe?

John, in terms of the overall scale of the business, it's not going to be all that significant. I mean, combining those two programs together we would be looking at something that would impact our revenues in the roughly 2.5% kind of range. So it's good and we believe we're just getting started. Because as we pointed out, the Merrell apparel program really is half a year's revenue because we're really launching for the fall season. We think over time that that 2.5% should grow to be more a significant number.

Great. The last question I have is on Hush Puppies. You mentioned you were particularly pleased with the progress the brand is achieving in upper tier retail channels. Can you give us an idea of approximately what percentage of the business is now upper tier versus the other channels that you're servicing? And are the operating margins substantially different between the upper tier and the other retail outlets?

The upper tier businesses have continued to grow and the other thing that's really helping us in the brand is we have a more focused productline and I think are simply building better product. We also have substantially reduced our closeout sales in the third quarter and on a year-to-date basis for Hush Puppies. I would say roughly we've got about half of our volume now and the upper tier's still have not significant business in the mid tier also, but clearly it's growing most rapidly in the upper tier.

Our pricing margins really don't differ substantially across those distribution channels, but there are some -- somewhat fixed costs on a [periods] basis. And as we're selling higher priced product we get better leverage on that product even though it's at similar initial pricing margins to the overall productline.

Okay, that's very helpful. Thank you very much and congratulations on another nice quarter, guys.

Thanks, John.

Jim Duffy, Thomas Weisel Partners.

Hello, everyone. A couple questions. So there's news articles out this morning reporting that the anti-dumping duties were imposed for a two-year period. Is that -- is there some chance that that's changed in the next couple days or are those articles jumping the gun?

Our reading of that, Jim, is those articles are sort of jumping the gun. There has been an alternative proposal put forward that would call for these duties to be in place for two years and it's certainly possible that the Commission may take a vote on that alternative. And we're just going to see how that plays out over the next day or two.

But it's not over yet; there's --?

No, it's not over yet and even after that vote there very well could be some protests from China or other countries that would be affected by this. So I think it's a saga that's going to probably take a little while here to unfold.

Yes, it seems that way. So you guys are operating the business as if it is going to occur and that's baked into your guidance and those are kind of the numbers that we're working with at this point?

That's correct.

That's correct. What we have planned is the last proposal that was on the table which called for duties of 16.5% on China product and 10% on Vietnam product. Additional duties.

Should be interesting to follow for sure. A question for you on the backlog. How much of your business at this point is currently done on a backlog order process would you say?

I think it varies a little bit from quarter to quarter. Typically our first and third quarters are somewhat more future order driven because we're making those initial product deliveries. When we put it all together future orders probably drive a little over half of our volume today and reorders make up -- so I'd say it's maybe a 55/45 kind of split.

Is that percentage of futures orders growing as Merrell grows as a percent of the mix?

Yes, as our business mix has changed over the last couple of years some of our businesses -- our more basic businesses like our work boot businesses are more reorder driven. Merrell and some of our more lifestyle oriented businesses are more future order driven so that we've seen some modest increase in the importance of future orders over time.

Okay. And you mentioned you expect the Bates business down in '07. Did you give an order of magnitude as to how much you're expecting that to be?

No, and we haven't at this stage but I think a reasonable guess would be that it would probably be in a similar range to what we experienced over the last two years which was roughly that Department of Defense business decline of around $12 million. So I think in terms of some guestimate I would say that's probably a reasonable number to think about.

Okay. So excluding the Bates business, looking at the Wolverine Footwear Group do you expect to continue to make forward progress there? Is this -- your Q3 numbers kind of a temporary setback?

Me we certainly would. On a year-to-date basis our core Wolverine boot business is up, was up quite significantly in Q2, off a little bit in Q3, but our backlog is up and we would expect that we'll end the year with a revenue gain in our core Wolverine brand boot business.

Great. Thanks, congratulations on a great quarter.

(OPERATOR INSTRUCTIONS). Jeffrey Edelman, UBS.

One question on sourcing. Have you got any capability to move to other countries in the event these duties remain or are the cost of logistics just so prohibitive it doesn't make sense to do?

I think we're constantly reevaluating our sourcing mix around the world and trying to make intelligent decisions there that give us some versatility and flexibility. Clearly there's tremendous infrastructure that's been created in China in particular and more recently in Vietnam. So that certainly poses some challenges for us, but we have historically sourced product in other markets. We source in India, we source in Brazil. So we do have sourcing capabilities in other markets and so we'll be -- based on the geopolitical situation around the world and trying to defray risk and take into consideration cost, quality, delivery -- we're going to be looking at all those pieces and trying to make sure we have an intelligent sourcing program that's well diversified.

Okay, good. And then Steve, could you sort of go through which divisions today or product groups are running at a profitability less than the corporate average and whether or not it's reasonable to expect them to show a balance over the next couple of years or are they just inherently lesser profitable due to mix?

Jeff, we have some slight mix in our operating models just due to the types of businesses we have. For instance the Bates military contract business runs at a lower initial margin but also has a lower-cost structure. So the operating margins there would not be maybe as high as some of our lifestyle businesses. But we don't go brand by brand because also we have our licensing mix in those different businesses which impact it, so it's not purely an apples-to-apples.

Having said that I will tell you that the operating margin improvements we're looking for are broad based, that we expect contribution to those businesses or to that increase across the board. And in addition to that also geographically we do not feel that the European businesses or any other region of the world should be below our overall corporate averages. So we use a very balanced approach to that.

And then just one final question on Hush Puppies. It appears that the store count at the Macy's stores has leveled. Are you pretty much distributed in the stores where they're willing or where you can put the Hush Puppies in? I assume there might be some converted May stores that would go in there. But is there further opportunity there or are we pretty much topped out now?

Jeff, there is further opportunity. Our emphasis there has really been also to get a good presentation in the stores we're in. So rather than sell a couple of SKUs to a lot of stores, we'd like to make a real brand presentation in the stores we're and I think Macy's agrees with that philosophy. But there is opportunity looking forward to the spring season, fall season there's 256 stores, the spring season we would expect the brand to be represented in a little over 300 of the Macy doors for spring.

Okay, thank you.

Scott Krasik, CL King.

A quick question just on the quarter. The European business was very, very strong. I remember in the second quarter it was down. How much of the performance in the third quarter was just a shift in timing of sales or really either an improvement in the consumer or something better that you're doing?

Scott, there was no specific shift in terms of timing of deliveries. We pretty much shifted when the retailers wanted it. I will say that the spring season in most of Europe was not terrific. It started late and I think that had some influence on the second quarter. The environment in most of the markets in Europe in the third quarter was gradually improved throughout the quarter, so it was certainly better than the second quarter. But I think as we talked at the end of the second quarter we had a substantial backlog increase for fall in Europe at the end of our second quarter and shipped that product in Q3 and that really drove that 15% revenue increase.

Okay, good. And then Steve, could you just go through -- using the high end of your ranges here, for 2007 it looks like you're implying about $90 million of sales growth, the new initiatives on 2.5% would be about $30 million and you're assuming the Outdoor Group grows at about 10% that's another almost $40 million. So it just seems like you're not implying a whole of the growth in the other three divisions. Can you talk about that any maybe where you're going to see more of the growth or less?

I think the one factor you didn't put in there was the reduction in Bates contract business which we're anticipating and also the phaseout in our slipper business which we mentioned in our call notes. So there's a couple offsets to some of those increases, Scott. But if you look at our core growth across our business, it's in that mid to upper single-digit range and that's where we want to consistently be with our operating model and we happen to have a few new initiatives coming on and we have some reductions. And you know what? Every year that seems to be the case that you have some ups and some downs. So we're pretty pleased with the balance that we'll be able to still forecast the production of a revenue growth in the range that we typically drive toward.

Are you internally forecasting Merrell -- the core Merrell footwear group to slow down at all or still to be strongly in double digits?

We're certainly forecasting the Merrell business up. We are exceeding really are plan for this year with Merrell. We would be planning our core Merrell footwear business up certainly in the high single-digit range for '07.

Okay. And then -- I'm sorry, just lastly, I completely missed it. Steve, did you say you did buy back stock in the quarter?

No, we did not.

Okay. Thanks so much.

Elizabeth Montgomery, Cowen and Company.

Hi, guys. Congratulations on the great quarter. I had a question about the investment spend behind Merrell apparel and Patagonia. When do you expect those to be neutral or to kind of get to a normalized company operating margin if you can tell yet?

Beth, it's pretty early to figure out when we're going to get to our normalized operating margin, but when we pro forma'd the business long-term we obviously definitely feel that we can reach our average operating margin. This is probably a situation which is not to dissimilar to our Cat European initiative. When we went in there we had a year of investment and a year of breakeven and then it took us three years to ramp to our average operating margin.

So I think it's that type of a time frame that you have to look at. These are definitely initiatives that have some short-term investments and some strong long-term paybacks and so this is not something to expect overnight. But I indicated that we would have some improvement to the operating earnings next year and we would continue to see consistent improvement, but we don't think there's going to be a quick spike which takes it from one year from a lower-level up to operating margins overnight.

Okay. Do you have a revenue level at which you think it will reach breakeven profitability -- the two combined?

No, but -- not the revenue basis per se, but I would say that in the shorter term we would be close to that breakeven level in the '08-'09 range.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Todd Slater, Lazard.

Thanks, and nice quarter again. Just want to clarify a couple of items. Are the, first of all, the tariff duties assumed in your '07 guidance? And if so how much? Is that 4 to $5 million increment in that 156 to 162 number?

Yes, there's an incremental 4 to $5 million, Todd, for 2007 over what we have embedded already in '06. It is in the number.

In the number, okay. So obviously if that goes away there might be some upside and if it doesn't it's already baked in?

Time will tell on that.

What's the fourth-quarter -- your fourth-quarter increment?

The impact in the third quarter was $0.02 a share I believe and we are indicating that we think it's going to be slightly higher than that in the fourth quarter. If you go back to our original guidance we said it was going to be $0.04 to $0.05 for the year and it's tracking on that pace.

So sort of the implied $0.36 to $0.39 in the fourth quarter is -- includes a roughly $0.03 estimate?

That's correct.

And then lastly, am I correct in understanding that the fourth quarter is more impacted than Q1 and Q3 by sort of reorders or replenishment?

Yes, that would be fair to say. Both our second and fourth quarters, the back half of the season are more susceptible to reorder activity than what the first and third quarter would be because you have your initial season shipping in Q's one and three.

Okay. And I'm just wondering if you baked in what that could be and reorders might be in the fourth quarter based on the strength you're seeing this fall or not at this point?

Todd, I think we're pleased with what we saw in September, it was a little better than frankly we would have had planned, but we have a long way to go yet in the fourth quarter. So we'll just see how the quarter unfolds. I think what Steve's laid out in terms of our revenue guidance for the full year is really our best guess of what we think we'll have.

But it just doesn't seem like you've increased your fourth-quarter assumptions at all since the last (multiple speakers).

Well, I think as Steve pointed out, you're looking at a 4% reduction in revenues in the fourth quarter attributable to those lower based Department of Defense shipments. That's a pretty significant impact on the fourth quarter.

Sure. Okay, great. Thanks a lot.

Thank you. At this time we have no further questions. I would now like to turn the call over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Excellent, thank you. On behalf of Wolverine World Wide I'd like to thank you for joining us today. And as a reminder, our conference call replay is available on our website at www.WolverineWorldWide.com. The replay will be available through Wednesday, October 18, 2006. Thank you and good day.