Wolverine World Wide Inc (WWW) 2006 Q4 法說會逐字稿

Good morning, everyone, and welcome to Wolverine World Wide's fourth quarter and fiscal 2006 year-end earnings 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 you, Melinda. Good morning, everyone, and welcome to our fourth quarter conference call. On the call today are Tim O'Donovan, our Chairman and CEO; Blake Krueger, our President and Chief Operating Officer; and Steve Gulis, our Executive Vice President and CFO.

Earlier this morning, we announced record fourth quarter and fiscal 2006 year-end results. If you did not yet receive a copy of the press release, please call Patrick Hayne at 616-233-0500 to have one faxed to you. The release is also available on many news sites or it can be viewed from our corporate website at www.WolverineWorldWide.com.

Before I turn the call over to Tim O'Donovan to comment on our results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations, may be considered forward-looking statements by Securities laws. As a result, we must caution you that, as with any 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 our fourth quarter and full-year 2006. This marks our 18th consecutive quarter and 6th consecutive year of record revenue and earnings per share. 2006 was also a year of strong cash generation, which Steve Gulis will speak to in a few minutes.

The momentum established earlier in the year, carried through the fourth quarter and we're pleased to have ended 2006 with over a 10% increase in our order backlog for delivery in 2007.

Merrell and the Outdoor group continue to be the Company's most significant growth driver. We also enjoyed success across our brand portfolio with three of our four major marketing groups contributing to the Company's 2006 revenue increase and all four groups contributing to the year's earnings increase.

We also made good progress during the year in building our long-term global brand franchise, with solid results at our US, Canadian and European wholesale businesses, as well as in our international licensing and distribution business. We are now doing business in approximately 180 countries and global pairs sold under our brand name expanded to 46.5 million pairs, a 6% increase for the year.

Europe was again a major source of revenue growth, achieving record annual revenue of $219 million, up nearly 10% from the prior year. Revenue in Europe increased for the Hush Puppies, Merrell, Sebago, Caterpillar and Harley Davidson brands. While the profit contribution in Europe declined in 2006, our Sourcing group and European management team successfully offset a significant portion of the impact of approximately $3.3 million of antidumping duties incurred by our European operation.

North American revenue was up 4%, with increases in our Merrell, Hush Puppies, Caterpillar, Harley Davidson and Wolverine boot brands, more than offsetting declines in the Bates, Stanley private label and Sebago business.

North American earnings increased at a double-digit pace, due in large part to more favorable sales mix of higher margin product, as well as improved operational efficiencies.

Speaking of operational efficiency, we are continuing to invest in state of the art systems capabilities. All of our global businesses now operate on our SAP enterprise-wide operating system. We have one set of business processes throughout the Company and are adding functionality to our core SAP system that will further enhance product lifecycle management, demand planning, logistics and speed-to-market.

We continue to believe that supporting our brands, building an innovative product and marketing program, with world class backroom capabilities is a winning formula.

I would now like to turn the call over to Blake Krueger, our President and Chief Operating Officer, who will provide you with more specifics regarding our Branded operating group.

Thanks, Tim, and good morning to everybody. I would like to begin with the Hush Puppies Company, which enjoyed a strong fourth quarter, with revenue up over 9%. For the full-year, Hush Puppies global revenue grew by 4% and earnings increased by over 20%. This was the 5th consecutive year of revenue increases for the brand and the 20th quarter of earnings gains, as our Retail, Distribution and Licensing partners around the world continued to respond favorably to Hush Puppies' more contemporary product and up-market positioning.

In the US market, Hush Puppies' fourth quarter revenue grew by a solid 6% and profits improved significantly, due to a better sales mix of higher margin product. A portion of the fourth quarter sales gain was attributable to the strong sales group of a spring 2007 collection of Trends-Right women's casual products.

In Men's, the Street Smart waterproof collection continued to drive strong reorder business during the quarter. For the full-year, Hush Puppies' US revenue was up slightly, but sales of full-price, full-margin products increased by about 5% as the more focused product line resulted in significant [Latior] closeout.

In addition, [Comma] sales to upper retail channels increased by 6%, an additional indicator that our up-market strategy is working.

Internationally, Hush Puppies distribution and licensing partners are responding enthusiastically to the brand's new product and marketing initiatives. During the year, over 100 new Hush Puppies concept stores and dedicated shopping shops were open. There are now close to 1,000 Hush Puppies concept stores and shopping shops operating around the globe.

Overall, it was a very solid year for the Hush Puppies business, with good progress on the brand's strategic agenda and strong profit improvement in most of our businesses, the US, Canadian, UK and International Licensing.

The Heritage Brands group, which includes our two largest license footwear businesses, Caterpillar and Harley Davidson, also had a very good year, with revenue up over 10%. This was fueled by growth in our own wholesale markets as well as very strong demand from our in distributors.

In spite of some less than desirable weather conditions for boots, fourth quarter revenue for the group increased by over 9%. Earnings from the Heritage Brands Group was up 8% for the year, with increases in the US, Canada and the international segments of the business, more than offsetting softer earnings in Europe, which resulted from the negative impact of antidumping duties.

We have a solid business model and 2006 marked the third consecutive year of strong profit gains for the group.

The positive momentum in the Cat brand for both the quarter and the full-year was driven by new product introduction, incorporating the iTechnology patented comfort system. We also introduced the legendary raw collection, which is aimed at the global fashion denim market.

For Harley Davidson, new product and merchandising programs tailored specifically for the Harley Davidson dealer network, continue to produce positive results. Revenue in the Wolverine Footwear Group declined by 9 % in the quarter and 3.4% for the full-year. The majority of the decline in both the quarter and the full year was due to the planned reduction in shipments to the US Department of Defense, as well as lower demands for the private label production and the Stanley licensed boot products.

Wolverine boot brand boot revenue was up 4.3% in the quarter and 2.4% for the full-year. That brand continues to gain market share in the US work and sport boot market. Based on market research data from both NPD and SportsScan, Wolverine boots grew its market share in both the core work and outdoor sport boot market for the second consecutive year.

Wolverine's commitment to product innovation was again recognized by the retail community, as retailers polled by one of the industry's leading trade publications voted Wolverine boots and shoes the winner of the Design Excellence Award in the work boot category for the 8th consecutive year.

As expected, Bates uniform footwear revenue declined by $9.3 million in the fourth quarter and $6.1 million for the full-year. This was somewhat better than we expected, as Bates offset a 50% decline in the fourth quarter Department of Defense business with double-digit increases in other segments of the business.

Looking forward to 2007, we expect continued weakness in the demand from the Department of Defense to negatively impact Bates' '07 revenue by about $13 to $15 million. We made the decision to transition out of the private label and flipper businesses in order to focus our resources and attention on our higher margin brands that fit better with our long-term strategic plans. We expect 2007 revenue to decline by about $16 million for these two businesses.

The net result of these mix changes within our Wolverine Footwear Group will be a higher margin business focused on fully exploiting the strong consumer loyalty for our four Wolverine Group brands.

The Outdoor Group, made up of Merrell, Sebago and Patagonia Footwear brands, had a very strong fourth quarter and full-year 2006. Outdoor Group revenue increased by nearly 18% in the quarter and over 16% for the full-year. Merrell's approximate 18% revenue increase for both the quarter and the full-year accounted for the majority of the increase in the group, despite investments in the brand, Merrell leveraged its growth as earnings were up over 20% for the year.

2006 was Merrell's 8th consecutive year of double-digit revenue and earnings increases. Geographically, the growth has been very widespread. Brand momentum remains very robust, with strong sell-through across all distribution channels. Merrell is now reaching consumers in over 100 countries and consumer enthusiasm for the brand across all product categories continues to accelerate.

Despite an unseasonably warm fall in some regions, fall season sell-through was strong for the brand with multi-sport, after-sport and sport fashion categories all showing impressive gains. At the hear of Merrell's consumer appeal is innovative product that looks great, feels great and performs beyond expectations. Merrell's consumer appeal was further confirmed by the retail community, which when polled recently by the Footwear Plus trade publication, voted Merrell the winner of the Design Excellence Award in the outdoor category for the 6th consecutive year.

Merrell's brand presence continues to grow, with well over 500 Concept Stores and dedicated shopping shops now in operation around the world. Additionally, Merrell's Let's Get Outside marketing campaign is resonating with consumers, who view the outdoors as an integral part of their lifestyle. Merrell is tapping into a growing global market that ranges from hardcore outdoor athletes to more casual outdoor enthusiasts, like me.

Once these outdoor consumers experience Merrell, their affinity for the brand and intent to repurchase is among the highest reported for footwear brands by NPD Market Research. Our opportunity is to reach more of these outdoor enthusiasts and invite them to join the growing number of Merrell loyalists.

In connection with our opportunity to engage more consumers and deepen their relationship with the Merrell brand, we are excited to be launching the Merrell Apparel program to retailers around the world during this winter's trade shows, beginning with Outdoor Retailer in Salt Lake City and ISPO this coming week in Munich. While we're still early in the launch, we are encouraged by the positive reaction to both the brand and the program, as Merrell once again seeks to establish a unique design point of view in the outdoor sector.

Initial apparel shipments to retail are planned for July through September of 2007.

Turning to the Sebago brand. After a tough first quarter of 2006, Sebago achieved solid revenue growth and profit improvement in each of the last three quarters. Efforts to add excitement and energy to Sebago product and marketing to focus the product line on the brand's marine heritage, are being well-received. This is evidenced by the fact that we had an 18% revenue increase in the fourth quarter for Sebago.

The Patagonia Footwear launch is underway, with the initial 32 styles of Patagonia Footwear now being delivered to the brand's retail partners here in the US, as well as in select international markets. While it is very early in the spring '07 season, early sell-through reports are very encouraging and we look forward to the launch of the brand, that is, footwear in the very near future, with Patagonia's catalogue and website. This will expose the footwear product line to millions of loyal consumers of the Patagonia brand.

The Outdoor Group has been the Company's most significant growth driver over the past several years and we are very pleased to report continued momentum for the Merrell brand, as well as key growth initiatives that will fuel the growth of this business for the future.

In addition to the strong 2006 performance of our wholesale footwear brands, I also want to highlight the growth in revenue and earnings by retail business, which consists of 16 multibrand full-price Track 'n Trail stores and 66 value center stores.

Same-store sales were up solidly in 2006, as consumers responded enthusiastically to the strong presentation of our product. This translated into improved growth margins and profitability.

Overall, we are very encouraged by the strong response from consumers and our retail partners to our products and marketing initiatives across our brand portfolio. We begin 2007 with a Company-wide order backlog increase of over 10%. Excluding the impact of lower Bates Department of Defense orders, our year-end backlog would have been up 14% and the increase in backlog is spread across all four of our branded footwear groups.

Based on positive customer demand for our spring '07 product lines and good initial response to our fall '07 line, we are anticipating another record year for 2007.

I would now like to turn the call over to Steve Gulis, our CFO and Executive Vice President, who will provide you with additional information about our results as well as our outlook for '07. Thank you.

Thank you, Blake, and good morning, everyone. This morning I will review the financial highlights of the fourth quarter and full-year 2006. And I will finish my portion of the call with some insight into our financial goals for 2007.

We are very pleased to announce that we exceeded our annual estimate and achieved record revenue and earnings per share for the fourth quarter and full-year. Fourth quarter 2006 revenue of $341.7 million exceeded the $321 million reported in the fourth quarter of 2005, for a 6.5% increase.

Earnings per share improved 16.7% to $0.42 per share in the fourth quarter of 2006, which compared to $0.36 per share reported in the same quarter of 2005. The fourth quarter of 2006 includes a $0.02 per share favorable adjustment to the annualized tax provision of the Company, as we concluded a tax audit and closed several open tax years with the IRS.

Revenue increases during the quarter were broad-based, with Merrell exceeding our expected growth rate in the fourth quarter. Included in the fourth quarter's revenue was the planned reduction in the Department of Defense contract business and this reduction had a negative 2% impact on the growth rate.

Additionally, the weakening US dollar versus European currencies had a positive impact on the quarter's revenue growth rate of 1.3%.

For the full-year 2006, revenue totaled $1,141.9 million compared to $1,061 million for fiscal 2005. This equates to an increase of 7.6%. Foreign currency exchange rates added 0.5% to the year-over-year revenue growth and the reduction in the Department of Defense contract business reduced the growth by 0.6%.

Several international regions of the world continue to fuel our revenue growth as we gained market share in these important markets. For the year, Company-owned European operations grew approximately 10% and now represent about 20% of our total revenue base. Additionally, our Canadian operations grew at a double-digit rate.

Our strategy of taking direct control of our branded operations in these markets is working. The global footwear market grows at a long-term rate of approximately 2.5% to 3%. And if we achieve our stated revenue growth rate of mid to upper single-digits, we will clearly be gaining market share.

Earnings per share of $1.47 for the full year of 2006, compared to $1.27 per share in 2005. The reported full-year earnings per share exceeded the high end of our December 18, 2006 estimate by $0.03 per share, with $0.02 of the increase resulting from the reduced tax provision noted earlier.

Our operating earnings continue to be well diversified, with both the US and international operations each contributing approximately 50% of the earnings base.

Operating margin improved 10 basis points for the full year 2006, with gross margin improvements of 50 basis points being partially offset by increased selling and administrative expenses.

Gross margin expansion was driven by improved business mix, with our higher gross margin businesses growing the fastest. Antidumping provisions on our European operations reduced annualized gross margins by 30 basis points and the impact of these costs were partially offset by price increases, as well as efficiencies and product cost improvements achieved in our sourcing and manufacturing operations.

Fourth quarter gross margin improved 140 basis points over 2005 levels. The fourth quarter gross margin includes 40 basis points of antidumping duties and the antidumping duty provision impacted earnings by $0.02 per share.

Selling and administrative expenses as a percentage of revenue increased to 27.9% for 2006, which compares to 27.5% in 2005. Investment spending in the Patagonia Footwear and Merrell Apparel initiatives added 60 basis points to our selling and administrative expenses. And the incremental expense for the adoption of FAS 123R stock option expensing added an additional 30 basis points to our expenses for the full year 2006.

Exclusive of these incremental expenses and investments, our core selling and administrative expense management continued to be strong, as we achieved a 50 basis point reduction in expenses, excluding the items mentioned above.

Selling and administrative expenses as a percentage of revenue increased to 27.9% in the fourth quarter of 2006, which compares to 26% in the fourth quarter of 2005. The items mentioned above added 100 basis points to selling and administrative expenses in the fourth quarter.

Net interest income for the year was $0.2 million, which compared to net interest expense of $1.9 million in 2005. Strong cash flow, higher returns on short-term investments and reduced debt levels produced the improvement.

The income tax rate for the full year and fourth quarter 2006 were 31.6% and 27.2% respectively. These rates include the benefits of finalizing several open years under IRS audits and the years are now closed.

We anticipate 2007 tax rates to approximate 33.5%, which reflects a change of profit mix by geographic region.

Earnings per share for the quarter and full year were at record levels and total shares outstanding of approximately 57 million were used in the full-year diluted earnings per share calculation. We expect total shares outstanding to approximate this level for 2007, as we anticipate utilization of the remaining 1.2 million share repurchase authorization approved by our Board in December of 2005.

The Company's balance sheet continues to be strong, with a total debt to total capital ratio being 4.1% and a net cash position of $103 million. Our return on assets improved to 12.8%, a 120 basis point improvement over year-end 2005 and our return on equity of 17.6% improved 140 basis points when compared to last year.

Net of cash, working capital levels at year-end increased 3.6%. Accounts receivable were reduced 2.9% from year-end 2005 levels and days sales outstanding at year-end of 57.5 days reflects an improvement of 2%.

Inventories increased 14.2%, supporting the continued growth of the Outdoor Footwear Group. Approximately 90% of the increase in inventory is within the Outdoor Footwear Group and the increase supports Merrell's double-digit backlog, the continued global growth of the Merrell brand and the introduction of Patagonia Footwear. There is very little cold weather product included in the inventory, as the majority of the product represents current in-line goods in the Outventure and Fusion categories.

The continued strength of Merrell's sell-through at retail has necessitated deeper inventory positions, as retailers continue to rely on the brand to meet consumer demands.

During 2006, we repurchased 1,827,000 shares of stock in the open market at a price approximating $23.25 for a total use of $42.5 million. Of the total repurchase, 300,800 shares were repurchased in the fourth quarter at an average price of $27.57. The repurchases for the year averaged a 20% discount to Monday's closing stock price of $28.97, which supports our ongoing repurchase strategy.

Shares remaining for repurchase under previously approved programs by the Board of Directors is 1.2 million shares.

As we enter 2007, our portfolio of brands has produced a solid backlog, approximately 10%. This backlog includes a continued shortfall of orders in the Department of Defense business and exclusive of the DOD business, the backlog increase approximates 14%. This backlog principally represents demand for the first half of 2007 and is balanced on a branded and geographic basis. This backlog increase reflects the continued acceptance of our product lines by consumers around the world.

For 2007, we are reaffirming our guidance, with revenue ranging from $1,200 million to $1,230 million. At the midpoint of this range we would be achieving our long-term objective of consistently increasing revenue at a mid to upper single-digit rate annually.

The revenue estimate includes the initial full year of shipments for Patagonia Footwear and fall of 2007 shipping for Merrell Apparel. Also included in the estimate is the phase-out of the slipper and private label businesses, as they are not meeting our required financial returns.

Continued contraction in the Department of Defense business is expected to be $13 to $15 million, with the majority of the decline occurring in the first half of the year. Longer-term, we expect the Department of Defense business to stabilize at this level for 2008 and into the future.

Gross margin for 2007 is anticipated to expand by 60 to 80 basis points. This expansion reflects the anticipated gains from foreign exchange rates in our European operations and continued improvement in the overall margin due to business mix. This margin expansion is inclusive of an incremental 40 basis points of EU antidumping duties, primarily occurring in the first half of the year and equates to approximately $0.06 per share.

Expenses as a percentage of revenue are estimated to increase 30 to 50 basis points. Continued infrastructure investments will occur in the Patagonia Footwear and Merrell Apparel initiatives as we launch the product line and complete the infrastructure investment.

This gross margin expansion and increased selling and administrative expense will result in an increase in operating margin of approximately 30 basis points. If achieved, this operating margin expansion will assist us in reaching our interim goal of 11.5% for fiscal year 2008.

Earnings per share for 2007 is estimated to range from $1.56 to $1.62 per share. Included in this estimate is an annualized tax rate approximating 33.5% and shares outstanding of 57 million. Net interest income is planned to increase in 2007, as we are carrying less debt and the rates of return on short-term cash investments have improved over year-ago levels.

Pretax earnings growth at the midpoint of this range would exceed 10% and the increase in tax rate will impact the EPS growth rate by 2%.

In closing, we are confident that we have the brand portfolio and business model to deliver solid 2007 results and continue to provide our shareholders with solid investment returns. I thank you for your time and will now turn the call over to Tim for some closing comments.

Thanks, Steve. We're pleased to have achieved our 18th consecutive quarter and 6th consecutive year of record revenue and earnings per share. There is positive momentum in the business and we look forward to continued strong and consistent performance.

Our brand building strategy to develop innovative products supported by creative marketing is resulting in market share gains for our brands on a global basis. What's more, growth is coming most rapidly in our higher margin businesses, allowing the Company to invest in brand building and new initiatives to fuel future growth, while also enhancing shareholder value today.

We have a strong team in place to manage our growth opportunities and I am pleased that last December the Company's Board of Directors endorsed my recommendation that Blake Krueger, Wolverine's President and Chief Operating Officer succeed me as CEO, effective with the Company's April 19th annual meeting.

I will continue to serve the Company as Chairman of the Board. Blake is a talented and seasoned executive, who will do a great job at CEO.

Thanks for joining us this morning and Steve, Blake and I would now welcome your questions.

[OPERATOR INSTRUCTIONS] Bob Drbul from Lehman Brothers.

Tim, congratulations on all your accomplishments and best of luck.

Thank you, Bob, appreciate it.

I guess the first question that I have is, Steve, you talked a little bit about your inventory levels and how you're positioned. Can you guys maybe address what you think, if there are any inventory levels sort of out in the market that are higher than optimal, given some of the unseasonably warm fall weather that we've had around the world?

Bob, I just got back from a couple of days at the Outdoor Retailer Show and had a chance to talk with a number of retailers. I guess we certainly had some warm pockets of weather here at the end of November and December this year and frankly, it didn't seem to have much of an impact on retailers or the at-once business until after the first week of December.

And then starting about the first week of January, as you well know, in the Midwest and Northeast and some other areas, we've been unseasonably cold. So, our general impression is that retailers will have an opportunity here, if they had some excess cold weather product, to move it. We're not looking for any kind of a significant impact on '07 orders and business.

I would say that some retailers, the inventory level is absolutely fine and especially those selling the Merrell production. Cold weather product sold through quite well. But there are a few retailers out there that had some cold weather products to move and quite frankly, this cold snap here for the last month or so, which is expected to continue, will help them move that inventory.

Great. And then another question that I have for you, when you talk and look at the concept stores for the Merrell business and where they ended '06, where do you think that number will be at the end of '07?

It's hard to tell right now. We think the introduction of Merrell Apparel is frankly, going to help fuel the expansion of Merrell concept stores. We have a couple in the United States right now. We have about 25 around the world.

Bob, as you know, many of our international partners are retailers as well as wholesalers and the ability to get an apparel product line coupled with the Merrell footwear line, we believe is going to accelerate that expansion.

We're going through the process right now of working through individual plans with our key international partners, so it's pretty hard to put a firm number on any increase. But it will be up and we think it will accelerate.

Okay, great. Thanks, Blake. Good luck.

John Shanley of Susquehanna Financial.

Either Tim or Blake, the Merrell brand continues to do extremely well, despite a clearly tough brand shoe market environment in both the US and Europe. Can you give us your thoughts as to what primarily helps to differentiate the Merrell brand from that of its major competitors and the likelihood of this differentiation continuing into fiscal '07, based on your pre-line reaction from retailers in both markets and the bookings you've generated to date for fiscal '07?

John, I think first and foremost has been Merrell's fanatical focus on product and product design and staying substantially ahead of the pack. We don't see any letup there. The foot is on the pedal all the way to the floor and that's going to be the continued focus going forward.

We also think Merrell Apparel will help the sale and expansion of our footwear line. But Merrell has also done it by, in a reasoned manner, expanding its product line into new product categories and doing that very successfully in a well thought out manner before they enter a new product category.

And then thirdly, they've also had a devotion and a focus on their distribution and they pay great attention to their distribution and will continue to do so. I think it's those three macro factors that give us some confidence in the continued future of Merrell.

I was just going to add one thing to Blake's comments. And that is, in the European market we still feel that we're under-represented from a market share perspective, so that opportunity can also continue to help us grow that business, specifically in that market. We are underpenetrated from a market share perspective compared to what we are in the US market.

Right. Can you give us an idea of what percentage of Merrell's product sales are now coming from Europe versus the US market, Steve?

Yes. Let me look at that and maybe ask another--hold on a second, I've got it right here. It's about 25% now, so it's pretty close to our corporate averages--a little above our corporate averages of Europe being about 20% of our volume.

Is Europe growing at a faster pace than the US market for Merrell?

Yes.

Okay, great. Tim, you mentioned the antidumping duties in your preliminary comments. Where does the Company stand in terms of investigating alternatives to China for sourcing tariff impacted products for the European market?

John, we've got our sourcing team, obviously, working hard for probably 15 months now on that project and we've certainly made some progress. We've expanded our presence in India, for example. So we are taking some steps. Also looking at the specification of the product, applying for more exclusions under the athletic exclusions. So doing a series of things, but it still will have an ongoing impact in 2007. We're doing what we can to mitigate it, but we're not going to be able to get out of the way of all of it.

Understandable. Steve mentioned that you're able to pass on some of those cost increases to retail customers in Europe. Can you give us an idea as to the likelihood of being able to continue to do so in fiscal '07?

John, we took the price increases that we felt were prudent when the antidumping duty came into effect. Can we continue to push pricing? We will try, but it's going to be more difficult, I think, going forward. But I think one way to look at it is, of the total magnitude of the antidumping duties for the Company, we probably mitigated through multiple efforts, about 50% of that. So I think between price increases, alternative sourcing, product reengineering, we were able to offset about half of the overall impact. That's probably about where it's going to end.

Okay. That's fair enough. And the last question I have is also to you, Steve. As the Company sales base continues to expand in lower tax jurisdictions like Europe, should we anticipate in our models that the tax rate will go down for the overall Company as we get into fiscal '07? Maybe you can give us some guidance of what we should model for tax rate, both the first quarter of '07 and fiscal '07. That would be really helpful.

We're looking at about 33.5%, John, for the annualized tax rate in '07. And one of the things that's happening as our profitability increases, our lowest tax region of the world, the Dominican Republic, is a smaller piece of our overall profit. So, European taxes are pretty comparable to the US where we're operating, so having more European mix is not bringing our overall tax rate down. So we expect a slight increase for full '07 in that you're always applying your estimated annualized tax rate to the quarter. So you would go in with that 33.5%.

Scott Krasik from CL King.

Congratulations on a great year. The increase in the Outdoor inventory, particularly in Merrell, is that more indicative of the shift from Q2 business into Q1 and preorder versus reorder?

I guess, Scott, I don't really think so. Merrell had pretty excellent sell-through in all product categories this fall. It's got strong momentum going into the spring and the summer, across all product categories. So the inventory spread is really not any significant shift in timing. It's really just there to support the future growth.

So the seasonality that we saw in 2006 in Merrell sales by quarter, that should be relatively similar--obviously, there's going to be some movement, but--?

Yes, Scott, I believe that's true. You're going to see the first and third quarters continue to be more futures order driven and the second and fourth quarters be more at-once driven. That trend we're not expecting to change.

Sure. Can you talk about feedback from the OR show on apparel? Were there any specific pockets of either strength or weakness that the retailers saw in the line that you weren't expecting?

I sat in on a couple of presentations and some other things, of course, to do with the show. Just in general, I can say, I believe we had five selling stations at OR for apparel. Both stations, at least the two days I was there, seemed to be constantly filled. I had trouble squeezing myself and a few analysts that were out there into the booth, giving them a peek at the apparel line. Other than that, it's hard to say right now. We're still very early in the order process.

Okay. And then can you give an idea--I'm not sure if you gave it specifically, for the Q4, that 6% increase in Hush Puppies revenue, what was the breakdown between the better business versus your soft styles?

It was a pretty healthy increase in our independent and better grade department store business in the fourth quarter, significantly less closeout sales in the fourth quarter, so the quality of that sales increase was much higher than years past.

Is that traditional business still declining or has that flattened out at this point?

No, we've actually taken steps to separate the soft style business from Hush Puppies. We have a separate management team now, separate sales team and quite honestly, as we brand that wholly soft style, we think there may even be a growth opportunity in that segment, away from Hush Puppies.

Okay. Just in Q4 though, it continued to decline a little bit?

Yes. It was pretty flat in Q4.

And Steve, just lastly, I didn't hear the number, how much stock did you buy back in Q4?

A little over 300,000 shares.

Okay. Thanks, guys, congratulations.

Mitch Kummetz with [DA Davidson].

Let me start with Bates. I think that you guys said in your remarks that you would expect it to be down another 13 to 15 million in '07. Is that worse than what you were previously thinking and could you give us a little bit of color on how you expect that to hit the quarters? I know that you'd mentioned bigger impact in the first half.

Mitch, it is a little bit more, but I think it's somewhat timing from '06 to '07. We ended '06 a little bit better and stronger than what we expected. So some of that is going to fall into '07. And really, our backlog that we talked about being up 10% and in total 14% ex-Bates, that's about a six-month backlog and the majority of that reduction is reflected in that backlog already. So you'd see that hitting in the first and second quarters.

Okay. Pretty equally, you think?

It has a little bit to do with the timing of when we get the final releases, but I think from a modeling perspective that's a fair way to look at it.

Okay. And then as far as backlog goes, you mentioned the impact from Bates, but could you address the backlog in terms of the contribution from Patagonia? Could you give us a number as to what that would have been if you exed out Patagonia orders?

It would have, frankly, been pretty small, substantially less than 1%.

That's the impact for Patagonia?

Correct, the impact from Patagonia in our year-end backlog.

All right. And then a couple of last questions. In terms of the gross margin in the quarter, Steve, I think going into the quarter you were suggesting a 70 to 90 basis point improvement in gross margin for the year and it looks like you came in at around 50. I would think that that would reflect worse Q4 gross margin than expected. Is that accurate and if so, is there anything that contributed to that?

It's always difficult. There's always your year-end adjustments in inventory levels, etc. With our inventories being up, we had a little bit more inner-company proxy eliminations and that really was where we probably didn't forecast as accurately as what we could.

I'm pretty pleased with 140 basis point increase in Q4, year-over-year, Mitch. And I think that in this environment to have an annual gross margin expansion the way we did, which includes the ABD impact, I think that that shows that our brands are strong and we're getting good pricing in the marketplace.

Okay, understood. And then lastly on the taxes, I understand what you're saying about expecting the rate to increase, but I'm a little curious, in the fourth quarter, if I were to strip out the $0.02 benefit from taxes, I would have come up with a rate of about 30% for the quarter, which I think puts us at 32.5% for the year, which is actually an improvement from '05 to '06. I guess I'm just not understanding why that would all the sudden reverse itself. And first of all I'm not sure--confirm if I'm doing the math correctly.

Once we adjust for the one-time impact, I think we're going to have about a half of a percentage point increase in year-over-year, if I'm not mistaken and it may be between a half to a full percentage point. And again, it's the profit mix that we're having and where it's occurring, Mitch. We've looked at our profit contribution for '07, country by country, region by region and we're pretty aggressive with how we operate our businesses from a tax perspective and that's where our profitability is falling today.

Okay, that's helpful. Thanks, good luck.

[OPERATOR INSTRUCTIONS] Elizabeth Montgomery from Cowen.

Nice quarter and congratulations to Tim and Blake. I guess I really have one question and it seems like your [stores are paying] about $30 million in revenue from the new businesses next year. I wondered what opportunity you'd have to chase demand in those, in terms of getting more product into the stores, if the retailers [inaudible]?

On the Patagonia Footwear front, obviously, we have our sourcing network and we're going to be able to respond in a pretty proactive way to what we learned from retailers. As you know, that footwear is just kind of hitting the retailer shelves. Now early sell-throughs have been very good, so we'll have to see on Patagonia Footwear. The reads are pretty good right now, but we'll have to see how the year goes. We're very enthused.

On Merrell Apparel, that frankly, our plan is in place. We're going to only have one selling season this fall. Those orders, some of the sheep stock and other supply chain decisions have been made. It's going to be our first season on apparel. If we get a couple of hot items, we may have a little less opportunity that we'll have in future years to respond to those items, but we feel pretty comfortable with where we are right now from a merchandising standpoint.

Sam [Cougar] of FTN Midwest.

Very nice quarter. I'm starting to hear some rumblings upstairs of some significant leather price increases coming. Are you seeing that and if so, how are you going to manage maintaining price points and so on and so forth?

You're right. High prices, as you know, go through some price fluctuations up and down from year to year or over a period of several years. We had some pricing pressures last year that we were able to respond to, with oil that hit $75 a barrel as a company. So just when oil comes down significantly, of course, the leather prices have up-ticked. So it's really nothing out of the ordinary. It's things we're responding to selectively with price increases in some of our boot lines. That's not a particular issue that's keeping us up at night, but it is there and hide prices are at a fairly high level right now.

Thank you. At this time we have no further questions. 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 everyone 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, February 14, 2007. Thank you and good day.

That does conclude today's conference. We thank you for your participation. Have a wonderful day.