Wolverine World Wide Inc (WWW) 2007 Q3 法說會逐字稿

Good morning and welcome to Wolverine World Wide third quarter 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.

Thank you, Chris. Good morning, everyone, and welcome to our third quarter conference call. On the call today are Blake Krueger, our CEO and President, and Steve Gulis, our Executive Vice President and CFO. Earlier this morning, we announced record third quarter revenue and earnings per share results. If you did not yet receive a copy of the press release, please call Libby Nienhuis at 616-233-0500, to have one sent 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 Blake Krueger to comment on our results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by securities laws. As a result, we must caution you that as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the company's SEC filings and also in our press releases. With that being said, I would now like to turn the call over to Blake.

Good morning and thanks for joining us today. I am pleased to report both record revenue and earnings for our third quarter 2007. This marks our 21st consecutive quarter of revenue, record revenue and earnings per share. Revenue for the quarter of $310.2 million increased from the prior year by 3.8%, and earnings per share of $0.54 were up over 17% from last year's $0.44. Partially offsetting strong growth in our core branded businesses was a revenue reduction of over $15 million due to the continued transition out of our lower margin business, businesses and lower leather demands. Our global business model is strong, and we again achieved record results while continuing to invest in our growth opportunity.

The Outdoor group was the most significant contributor to the Q3 revenue increase, with strong Merrell and Sebago shipments coupled with another quarter of Patagonia footwear sales, contributing to a strong double digit increase. The Hush Puppies business was up low single digits in the quarter while the Heritage Brands group posted flat results. Although the Wolverine brand business was solidly above last year, revenue for the Wolverine Footwear Group declined as expected in the quarter due to planned decreases in the military contract, Stanley, and private label businesses. I am very pleased with our third quarter results and the momentum in the business, despite a challenging retail environment. As a result, we are increasing our earnings per share estimate for the year to a range of $1.63 to $1.65.

I would like to begin my operations review with the Hush Puppy Company, which achieved increases in both revenue and earnings for the quarter. During the quarter, revenue increased in the Hush Puppies U.S, International, and European operations. These gains were partially offset by the previously reported decreases for Hush Puppies slippers, a low margin business we are exiting by year-end. Excluding slippers, Hush Puppy revenue for the quarter increased at a mid single digit level, where earnings grew at a double digit rate. Improved gross margins in operating efficiencies generated earnings leverage during the quarter. The Hush Puppy international business had another strong quarter with double digit increases in both revenue and earnings.

During the quarter, we continued to expand the Hush Puppy base of over 385 global concept stores. A new concept store design was rolled out in the quarter with new openings in the Philippines and Portugal and early feedback is positive. Additionally, a Hush Puppies lifestyle store opened in July in Tokyo, and this store features men's and women's footwear, men's apparel, handbags, and accessories. This is the third Hush Puppies lifestyle store in Japan, and a fourth is planned to open later this year, driving growth in global markets is a high priority and we are pleased the first Hush Puppies concept store will open in India by late October.

In the U.S, Hush Puppies revenue increased slightly for the quarter, driven by solid reorders on ballerinas and active inspired casuals for women, and a new collection of men's driving inspired moccasins featuring our proprietary comfort technology. Hush Puppies Harmony product, a new women's collection of eco-smart footwear was recently delivered to independent retailers and department stores in the U.S. Including Macy's, and early reports are solid as both retailers and consumers have embraced the concept. We are especially pleased by the initial reaction to the new Spring 2008 Harmony sandals and casuals. These products are consistent with our strategy to improve the Hush Puppy product offering, and establish a stronger base at retail in the U.S.

It was another solid quarter for the Hush Puppy European business, following a cool, wet Spring season, the overall retail environment in the U.K. improved, and autumn retail sales started at a steady pace. Back-to-school sales in the U.K. were good for the Hush Puppies brand and recent cooler weather triggered early boot selling. Overall, it was a very solid quarter for the Hush Puppy business, as the brand posted its 23rd consecutive quarter of year-over-year earnings increase.

The Heritage Brands Group, which consists of our two largest licensed footwear business, Caterpillar and Harley Davidson, posted flat sales for the quarter, and an earnings increase in the mid single digit range. Growth was especially strong in the U.S. market for both brands with each brand posting a solid double digit revenue increase. For CAT, strong growth in the U.S. was offset by lower revenue in Europe and Canada, due to a challenging retail environment and fashion trends affecting boot sales. Year-to-date, the CAT International business has great momentum with a very strong double digit revenue increase.

New products in the iTechnology category, combined with expanded shop-in-shop programs have provided sales increases across the broad spectrum of global markets. The iTechnology category with over 1.2 million pair projected for this year in the legendary Raw collection have become powerful product Marketing concepts for the brand. Harley Davidson had a great quarter with revenue increases in all global markets led by a strong double digit increase in the U.S., an improved rate of repeat orders for riding product was experienced in traditional retail channels, as well as the Harley Davidson dealer network. And I'd say that today, we have over 1650 Harley Davidson dealers around the world and a little over 850 of those dealers in the United States.

Europe and the international markets also expanded on the launch of new product programs, the lightweight shock absorber product, paramilitary looks, and women's fashion products in Fall colors performed well. As expected revenue in the Wolverine Footwear Group was below last year's third quarter due to the continued phase out of the private label and Stanley businesses as well as lower planned shipments to the Department of Defense. The core Wolverine brand had a very good quarter with a solid revenue increase.

The base business continues to be recognized by the military for its product innovation. By aligning with elite military units such as the Special Operations Forces, we've developed highly technical solutions that have led to relatively small but influential contract awards over the last two quarters. The [Chembile] anti-terrorism boot is one example, and the new Alpine mountaineering boot is another. Despite our innovation and leadership position with the military, we continue to expect demand from Department of Defense to be down by about $14 million this year with sales leveling off in 2008 at pre- war levels. We continue to focus resources to accelerate growth in the Bates Civilian Uniform and international sectors, which grew at a strong double digit pace in the quarter.

The core Wolverine boot brand grew by more than 7% in the quarter and exceeded our plan. A strong increase in the mobile distribution channel as well as successful sell-in and sell-through of new product incorporating the patented MultiShox comfort system, and the CarbonMax safety toe technology contributed to this success. New products also helped the Wolverine brand maintain its number one ranking in the core U.S. sport market. The Outdoor Group, which consists of Merrell Footwear and apparel and the Sebago and Patagonia footwear brands had an excellent quarter. Sales for the group are up almost 20% with another double digit increase for Merrell Footwear. For Merrell, the brand momentum continues with revenue up approximately 16% for the quarter. Merrell Footwear entered the fourth quarter with a strong double digit order backlog. The Merrell product line continues to build a loyal consumer following across-the-board and is now marketed in over 100 countries.

While a diverse set of product offerings in both the out venture, that's the performance based product and the Fusion , casual based product categories are driving the brand's growth, there has been an especially strong response to its multi-sport and trail running offerings. Merrell's casual women's product is also performing well at retail and the performance is really across all product categories here. The Chameleon category for Merrell has almost become a separate standalone product segment for the brand, and the new women's Siren collection, which is a multi-sport product featuring a women-specific [last] is also performing very, very well. I got back from a trip at Macy's a couple of weeks ago, and it's performing well at Macy's and Nordstrom and it's also performing well in outdoor specialty shops.

The global retail presence for Merrell continues to expand in the quarter with store openings in Grenoble, France, Tokyo, Japan, Lima, Peru, Milan, Italy and Sevierville,Tennessee. There are 14 plant store openings in Q4, including Chamonix France, Nashville, Tennessee, and Whistler, Canada, the home of the 2010 Winter Olympics. Our goal is to have 50 global Merrell concept stores by the end of 2007. Our new Merrell apparel program was delivered to retailers around the world during the quarter. We expect initial season shipments to be in the $7.5 million range, somewhat lower than originally forecast, due to current retail conditions and the tough Fall/Winter outerwear season last year. As we've said, Merrell apparel is a longer term initiative for the Company with a four to five year implementation plan to reach our profit goals. From the launch we've learned several things and are making appropriate adjustments.

First, the apparel should have been aligned a little bit closer to our footwear classification, like multi-sport and Chameleon. Second, the offering was a little too casual and should have been more athletic performance in nature, and third, the branding was probably a little too subtle, especially for our international markets, where the consumer prefers a more prominent logo. The launch was also stronger in the international markets as many of our global distributors have strong retail businesses and are looking for Merrell apparel to help accelerate the opening of Merrell concept stores.

Our Sebago business continues to build with a Q3 global revenue increase of over 20%. Strong double digit increases in both the U.S. and European markets contributed to the momentum in the quarter. Retailers have responded well to our upscale product and marketing initiatives which led to the opening of over 100 new accounts in the U.S. and Europe during the quarter. Sebago has experienced double digit growth in the year in all four product categories: marine, dress/casual, sandals and kids. We view Sebago as a real growth opportunity for the Company with the ability to build on its already strong global consumer base.

In the first full year of business, Patagonia footwear has captured the essence of the brand and we have delivered product that meets the expectations of its core consumers. We achieved first year distribution with leading retailers in over 30 countries. Sell-through was strong, especially in men's, and led to increased store expansion with key U.S. And global retailers. Sales continue to build in the Patagonia website, catalogs, and concept stores. Our goal, to market the best footwear with the least harm for the environment, is being achieved. The Outdoor Group continues to be the company's largest generator of revenue and earnings.

Overall, we are encouraged by the momentum in our business and the Q3 performance that was spread across our brand portfolio. Our strong and diverse global business model permits us to post excellent earnings gains while we transition out of or right-size several lower margin niche businesses. We are pleased with the positive response from our global retail partners to our Spring '08 product line. Our order backlog was up over 11% at quarter end, a substantial portion of which is slated to ship in the first quarter of 2008. I will now turn the call over to Steve Gulis, our Executive Vice President and CFO, who will provide you with some additional information on our third quarter results and our outlook for

Thank you, Blake, and good morning, everyone.

We are very pleased to announce record revenue and earnings per share for the third quarter of 2007, with revenue increasing 3.8% and earnings per share increasing 17.4%. The Hush Puppies Company, Outdoor Group, and Heritage Brands Group all contributed to the record performance in the quarter. While the Wolverine Footwear Group's operating results were impacted by the phase out of several footwear initiatives, the Wolverine brand posted solid improvements in both revenue and operating earnings. We were pleased with the balanced results which were generated in the quarter. Combined with our first half results, year-to-date revenue has increased 5.2% and earnings per share have increased 15.2%. Revenue of $310.2 million was reported for the third quarter of 2007, which is an increase of $11.3 million over the $298.9 million reported in the third quarter of 2006.

Operations which we are phasing out of, private label, Hush Puppy slippers, Stanley, and certain military contracts, and the previously announced softness in our leather business had a 6.5% impact impact on our revenue growth in the quarter. Revenue generated from new initiatives, Merrell and Wolverine apparel and Patagonia footwear, contributed 2.7% to our growth. These combined changes were in line with the forecast communicated during our second quarter 2007 conference call, as we estimated a 4% negative impact to our revenue growth for these items. Foreign exchange gains contributed 2.1% to our third quarter, while revenue in our core operations increased by 5.5% on a constant dollar basis during the quarter.

Reported gross margin of 40.3% in the third quarter of 2007 is a 100 basis point improvement over the 39.3% reported in the third quarter of 2006. Improved business mix, 120 basis points, and foreign currency gains in our international wholesale operations, 80 basis points, drove the increase, and reduced contributions from our domestic manufacturing and leather operations offset 100 basis points of the improvement. For the year-to-date, we have increased gross margins by 50 basis points and continue to forecast a full year improvement of 70 to 90 basis points.

Selling and administrative expenses as a percentage of revenue were 26.0% in the third quarter of 2007, and compared to 26.1% in 2006. Selling and marketing costs increased 40 basis points when compared to 2006 levels as we continued to drive long term growth initiatives in our operations. These increases were offset by reductions in the overall employee benefit cost of the business and produced the noted improvement. For the year-to-date, 2007 selling and administrative expenses have improved by 10 basis points, resulting from the changes noted above and we continued to forecast a 40 to 60 basis point increase for the full year as additional marketing and brand building initiatives will be undertaken in the fourth quarter. Operating margin for the third quarter improved 110 basis points to 14.3%, and contributed to the 70 basis point year-to-date improvement. We are on target to improve our operating margins for the full year by 40 to 50 basis points and meet our 2008 goal of attaining 11.5% operating margins.

Reported net earnings of $29.5 million in the third quarter of 2007 generated a record $0.54 of earnings per share. This $0.54 of earnings reflects a 17.4% increase over record 2006 results. Our estimated annualized income tax rate for 2007 is 33.5%, and we had 54.2 million weighted average shares outstanding for the third quarter. We continue to generate strong operating leverage out of our revenue growth, as year-to-date earnings per share of $1.21 reflect an earnings increase of 15.2% over 2006 on a 5.2% revenue increase. Despite erratic market conditions, our balanced portfolio of global brands continues to allow us to deliver consistent financial returns for our shareholders.

Our balance sheet continues to be strong. We ended the quarter with approximately $25 million of cash. Our inventory management programs continued to produce solid results as overall inventory levels were reduced 3.4% when compared to 2006 third quarter levels. We are focused on improving the efficiency of our inventory investment and we anticipate further improvement in our inventory turn ratio. Accounts receivable collections continue to be better than our targeted 60 days, and the aging of the receivables is strong. It should be noted that the end of the third quarter is our peak working capital period, and historically, we have reduced working capital investment during the fourth quarter. At quarter end, our total debt to total capital ratio is 4.3%, and we anticipate further improvement by year-end as we make a scheduled senior debt principal payment of $10.7 million in the fourth quarter.

During the third quarter, we repurchased approximately 1.2 million shares of stock at an average price of $27.16. On a year-to-date basis, we have repurchased 3.5 million shares at an average price of $28.11, and we have approximately 4.6 million shares remaining for repurchase under the April 2007 Board authorized repurchase program. Continued repurchase, as deemed appropriate by both the Board of Directors and Management, is anticipated.

On the strength of our third quarter results, and the 11% backlog increase which Blake reported, we have increased our earnings per share guidance for the remainder of 2007. We are maintaining our revenue estimate with full year revenue expected to be in the low end of the previously communicated $1.2 billion to $1.23 billion range. Earnings per share estimates have been increased to $1.63 to $1.65 per share, reflecting solid year-to-date performance of the business. If these estimates are achieved, our full year results will continue to meet our stated goal of consistent mid to upper single digit revenue increases, and double digit earnings per share improvements.

This morning, we also announced our initial guidance for 2008 revenue and earnings per share. Our 2008 estimate is for revenue to range from $1.245 billion to $1.275 billion and for earnings per share to range from $1.78 to $1.84 per share. Finalizing the phase out of previously announced businesses will negatively impact revenue by approximately $12 million, and the Bates military business is expected to stabilize in 2008. Growth from our core operations and new initiatives will drive mid single digit revenue improvements for the year. Gross margin expansion is expected to continue during 2008, with a portion of the improvement being offset by increased spending in brand development and marketing initiatives. Continued operating margin expansion is anticipated with the fiscal 2008 operating margin target of 11.5% being achieved or slightly exceeded for the full year.

For 2008, we are estimating an annualized income tax rate in line with 2007 levels and our current and anticipated share repurchase activity should lower the weighted average shares outstanding. Fiscal 2007 is shaping up to be another very strong year for the business. Our portfolio of global brands is producing record results in a challenging environment. If we achieve the midpoints of our guidance for 2007 and 2008, both years will achieve our stated financial objectives of consistently producing mid to upper tier single digit revenue growth and double digit earnings per share growth. Our brands are positioned to deliver continued performance and we believe that 2008 will be another positive year for our shareholders.

I will now turn the call over to Blake for some closing comments.

Thanks, Steve. We're pleased to have a achieved our 21st consecutive quarter of record revenue and earnings per share. Our brands are marketed in approximately 180 countries around the world, and this geographic spread, coupled with our diverse brand portfolio, underlines our strong business model. We have positive momentum in the business with the ability to invest in new growth initiatives, while delivering a consistent return to our shareholders. We'll now turn the call back to the operator so we can take your questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go first to Robert Drbul of Lehman Brothers.

Hi, good morning. Two questions. First, with the early earnings on the Merrell apparel, how quickly can you make the adjustments on the three challenges that you see, and when you consider sort of the longer term potential, do you still believe that the numbers are out there for that one? The second question that i have is when you look at the fourth quarter, can you just talk a little bit about your reorder assumptions in terms of the full year numbers in the fourth quarter, just in the fourth quarter?

Sure. Bob, first on Merrell Apparel, frankly we're as enthusiastic as we've ever been about this initiative. We have strong demand across the globe for that product. It's seen as a cornerstone from taking the current level of maybe 36 Merrell stores up to the current Hush Puppy level of 385 stores. Some of the lessons we've learned this Fall obviously are going to take a little while to be fully implemented. We have tweaked the Spring/Summer '08 line, and we've made more changes in the Fall '08 line but the full effect of our changes frankly won't be seen until the Spring '09 line, just inherently the nature of the business. The Spring '08 line was basically put to bed before the Fall '07 line even hit the stores, so we're looking at a two to three season ramp up here and to shift our direction a little bit and full implementation to be really in Spring '09 line which will deliver late next year. And what was your second question?

The second question, Bob, was on the reorder activity for the fourth quarter. As our business cycles always are, first and third quarter are more futures driven with the second and fourth quarters being more at once driven, and given the retail climate out there, it's been very erratic and it's very hard to get strong reads on what's going on out there, but if you looked at the industry data on a year-to-date basis, the overall footwear consumption is slightly down and so we have been relatively conservative and are anticipating reorders to be relatively flat with prior year levels in the back half or for the fourth quarter.

Thank you very much. Good luck.

Thanks, Bob.

We'll go next to John Shanley of Susquehanna Financial Group.

Thank you, and good morning.

Good morning, John.

Blake, I wonder if you could give us a little bit more insight into what's really driving that Merrell brands growth both in terms of the double digit sales and double digit forward orders. Is it new accounts contributing to this in both Europe and the U.S. Or is it basically better penetration of existing accounts?

I would say, John, there are obviously always new accounts for Merrell, and they have a very disciplined approach to their distribution strategy, which has served them quite well. I would say primarily, though, the additional penetration of existing accounts, I had one account tell me in the last quarter that every time we do a style out and we set the Merrell Shoe up against all of the competitors, we keep coming back to Merrell, and they're finding it difficult to limit the line in their stores, but I would say underlying everything is a very very strong management and product development team, as you know, John, that's a very deep team over there, and it's a fanatical focus on product.

Are you getting more SKUs into some of your major retail accounts, be it the REI's or some of your major European accounts or is it basically just expanding what you're already doing in those accounts, I'm just trying to get an idea of whether you're just getting more shelf space?

We're taking shelf space from the competition, we're getting more SKUs in.

Super, good to hear. For the Spring '09 Merrell apparel product line, are you basically going back to the drawing boards and relaunch the line in terms of the type of focus that's going to be in the offerings so that it's more in sync with the footwear, and does that also entail bringing in the additional merchandising talent to age in that effort?

Yeah. We've made some changes to the Spring '08 season and the Fall '08 line, John. We're going to be making more changes to the Spring '09 line. As you know, we have within the last quarter, hired a General Manager from Merrell Apparel from Nike, we're about to hire some additional Senior Management talent in that group, so you will see an improvement along the three items that I've stated for this coming year. We are not retrenching. There is strong demand, $7.5 million in sales in this environment, the first season is not bad. Frankly, we looked at buying a number of outdoor apparel companies that didn't even have $7.5 million in sales for an entire year, and had been in business for many many years. So in that respect, it's a little bit below our expectations but not a bad launch, so we're focusing on changing what we can change here the next two seasons and lining up closer to the footwear.

That's great to hear. And lastly, I wonder if you could give us some more of an update on Hush Puppy Brands penetration of the upper tier department stores in the U.S, is it meeting your expectations? Do you see further growth opportunity for the brand with some of the major department store accounts that the brand services?

Yes. I think we're focused on additional department stores for the Hush Puppy brand but we're really focused on expanding our shelf space in the good stores we're already in. We would rather have a real presence in a store than an item here and an item there, so that's been the focus. There's been a pretty strong positive feeling about the Harmony line for example, that is resonating with well with consumers and retailers both this Fall and especially for this coming Spring, so we feel good about where the brand is heading here in the United States, obviously in our opinion, there's a lot more room for increased sales here in the United States market.

Has the Hush Puppy brand been able to achieve higher ASPs as it goes into the department stores?

Yes, they've been as you know, John, they've been taking their average selling price up on a pretty steady basis over the last three years, and that's what a lot of the better grade retailers wanted. They would prefer to sell some shoes that have a little special appeal and a little bit higher retail price.

But also higher margin for the brand?

Obviously.

Yeah, John, the higher, the better product at higher prices and better margins is driving the operating improvements that you're seeing in the U.S. model.

Super. Thank you very much, guys. Appreciate it.

Okay, thanks, John.

We'll go next to Jim Duffy, Thomas Weisel Partners.

Hi, Jim.

Thank you, good morning, everybody. Wondering if you could provide your views on the inventory levels that you're seeing at retail? You mentioned that it's somewhat of an erratic environment out there. Any help you can provide on perspective into the inventory levels would be helpful, thanks.

Yeah, it's been domestically, it's been pretty erratic for over a year, very warm last Winter season, but then bitterly cold and that helps clear out some winter inventories. What we're seeing right now is that inventories appear to be pretty much in line. I think retailers are very cautious, a little bit cautious. The FDRA comp store numbers for the United States have bounced up and down all year, and we're currently a little bit in a down cycle there, as you know, but so retailers are a little bit cautious but really inventories seem to be pretty much in line. They've had a little bit of a cautious attitude for most of this year.

And you guys have done a great job of keeping your inventories clean. To what extent does the phase out of your slipper business and some of these other lower margin categories that you're de emphasizing contribute to that?

Yes, it does have some impact on it, Jim, but I would tell you that if you took a look at our core businesses, we're seeing nice improvements there too, so I don't want to say that it has not contributed to it but I would tell you maybe a percentage point or two that has improved us, but at year-end where we get through the majority of this cycle, the significant inventory improvements that we've been making throughout the year are going to be attributed to ongoing businesses, not on the phase outs.

Okay, and then Blake, question for you. There was a bit of a disconnect between what you said about the CAT business momentum and international markets and then the results that you spoke about in Q3. Can you provide a little more color around that, please?

Yeah. I would say first of all, that the CAT Business in our international markets frankly has been on fire all year and big significant increases in virtually every market around the world. That's a distributor business. We own our operations obviously in Europe, Canada, and the United States. The United States had a strong double digit increase this quarter. Europe was off a bit this quarter. We really think some of that was attributable to the boot trends going on in Europe right now that we're swimming up stream a little bit like a number of other brands in that arena. I would also say our CAT International business tends to be more rugged, casual, inspired footwear, a substantial majority as opposed to a boot business, probably the European business is a little bit more focused on boots, so that's just a snapshot of what's happening around the world in CAT. Our [parage] increase in Caterpillar this year will be up significantly.

Very good. Keep up the good work.

Thanks, Jim.

We'll go next to Mitch Kummetz with Robert Baird.

Good morning, Mitch.

Yes, good morning, thanks. I've got a few questions. Let me start with one for Steve. You mentioned that businesses and trends plus leather hurt the revenue by about 6%, and the new business initiatives helped by about 2, which would be a net impact of about negative 4%, I think you'd said. What is that for the year as a whole and then remind me what you said about '08, the impact of those two factors on '08 because again if some of these are like the Bates military normalizes, and then the slippers you've exited that business by the end of the year. How much of a positive impact is that on a net basis in '08?

If you take a look at what we said at the end of the second quarter, Mitch, we said that overall, the back half of the year was going to have a negative 4% impact and we were very close to that in the third quarter. For the full year, you probably are going to have a, I want to say a 10 to $15 million negative impact, okay?

Okay.

And with a majority of it in the back half of the year, because if you remember the cycles of the Hush Puppy slipper business and private labels, those are primarily back half businesses.

Right.

So you're seeing more impact in the back half of the year from that. Okay? On a go forward basis, we anticipate about $12 million worth of additional revenue reductions from those initiative s with the military contract business being relatively flat and I would tell you the increases in our new initiatives would be equal to that reduction or slightly higher than that, so the overall impact would be fairly neutral on '08, and that's why I said the comment in my prepared remarks being that the mid single digit revenue increase would be driven from core operations.

Okay, good. That's helpful. Appreciate that explanation. And then secondly, on the backlog, up more than 11%, that's a nice increase from where it was in Q2. I think Blake, you mentioned in your comments that a portion of that is going to hit in Q1 so should I assume that the pick up in backlog going from Q2 to Q3 is primarily driven by strong Spring orders? Is that the case?

I would think which is really our normal timing, but that's correct. It would be primarily Spring orders, some pull ahead product where people want the products early on our backlog, just there's probably a third of our backlog in Q4 and a couple of thirds in the Q1 and that would be probably normal for us.

Okay. And is some of that pick up in Spring a function of the net impact of these businesses or the new businesses and businesses in transition or is it more just more represents just good orders Encore business?

It really represents just solid orders across our brand portfolio. Frankly, if you took our businesses in transition and even excluded Merrell Apparel and Patagonia and had an apples-to-apples basis on our backlog, our backlog would be even a little higher.

Okay, good. And then lastly, I guess a question for Steve on the margins for the balance of this year, I'm having a hard time to understand gross margins through the first nine months, gross margin up 50, SG&A down 10, I'm especially having a hard time understanding how SG&A will be up 40 to 60 for the year even if you are spending marketing and brand building, how much spending would have taken place there and where is that focused?

Well I think there's going to be a few areas. It's going to be on some of the new developments with Patagonia and apparel but the other initiatives too is we've got new retail stores coming online which drive our SG&A without a lot of sales revenue in it because you have the fixed costs associated with those stores out of the box so that's part of the impact on that also.

Okay. All right, thanks, good luck.

Thank you.

We'll go next to Kate McShane with Citigroup.

Hi, good morning.

Hi, Kate.

Most of my questions have been answered but I notice that we're starting to lap the EU tariff, finally, it's been I guess for a year. Has there been any change incent about the possible renewal of this tariff which I guess won't happen for another 12 months but has there been any political shift that you're aware of?

You know, from the very beginning, we hope for the best and planned for the worst. We've tried to develop our sourcing strategy and stayed flexible in that regard. Right now we're planning on this thing being a forever type arrangement and maybe we'll get lucky and it won't be but right now, that's our attitude and how we're approaching sourcing, how we're approaching engineering our product and bringing it into Europe. It comes down to the pretty basic fact, Kate, that it's a big revenue producer for the EU today and how are they going to replace that revenue with what type of tax base, and as long as they have one in place that's producing it, the likelihood of them eliminating it, we think, is fairly unlikely so as Blake said it would be great if it did but we're not planning on it.

And has any of your sourcing actually changed or have you seen any kind of shift in your sourcing or is that a much longer term plan?

Well, it takes a little bit, you know, you don't shift out of Southern China immediately.

Right.

There's no doubt that shoes are, a lot of shoes, about 85 % in the United States Are continuing to come out of China for awhile but Europe, for us, it's a growing market about 20% of our sales now from 3-4% just several years ago, and we're able to stay flexible enough whether it's India and whether it's a number of other countries in the Far East to combat some of that duty.

Okay, thank you.

Thanks.

We'll go next to Scott Krasik, CL King.

Hi, thanks.

Good morning, Scott.

Quick couple questions. On the backlog of 11% on the same currency basis, what is that?

On a same currency basis, it might be down slightly but I would tell you it probably would still be double digits, Scott.

Okay, so maybe 15-20% of that sort of impact?

Yeah, maybe a little bit less than that.

Okay. And then on Hush Puppies, just trying to look at next year, it's a little bit difficult but using the mid points of the revenue guidance range, clearly most of the increase is going to be coming from the outdoor segment. Are you modeling continued declines in that soft styles Hush Puppies business?

No. Actually, Scott, we recently hired a General Manager for that soft style business and our updated styling in that line has seen some pretty positive reaction. There is a need for that product here in the U.S. Marketplace and we don't view that as a transition type business. We view that as, in its own right as a small growth vehicle for us.

Okay, so in '08 that should be growing?

It should be growing a little bit.

Okay, good. And then just lastly, you did mention that you're committing to more retail stores. Can you give us an update exactly where you are with Track 'n Trail and Merrell and Hush Puppy Outlets and what the plans are on a go forward basis?

Yeah, frankly, we've got our outlet stores which like everybody's this year with the heavy promotions in department stores and in the malls this year have experienced some lower traffic counts. It's been a little bit of a challenging comp store environment. Our Track 'n Trail stores, were about 17 stores and one of our newest stores is out in Bridgewater in New Jersey. That continues to show positive comp store gains this year, year-to-date, it's in the mid to upper single digit range for Track N Trail. Merrell Footwear is about 50% of all footwear sales in the store and they are carrying a good selection is of apparel including especially Merrell apparel.

The new store in Bridgewater is about a little over 50% footwear and about 45% apparel at this point, so we feel very good about Track 'n Trail. We also feel very good about our e-commerce business which has been up a strong double digit every year for the last four years and that's having a real positive revenue gain this year as well, so we plan to focus on our concept stores as you know we're opening our first North American Company owned store in Whistler, home of the Olympics in 2010 and we're excited about that.

And to Track 'n Trail you'll open in '08?

Yes, we'll open a handful in '08. We'll probably shift our emphasis a little bit to Merrell stores.

Okay, and then just lastly on Patagonia, you didn't give a dollar number there for the quarter year-to-date. Has that really met, missed, exceeded your expectations? I know some of your core independent Merrell dealers passed on in the first year, so what is your thinking there?

Yes, as you know, any new brand and just about any new category can be tough to get a lot of shelf space the first season. We're very pleased with Patagonia the first year here. What we've learned especially in our 17 Track 'n Trail stores , it is not cannibalizing Merrell at all. The footwear line has its own unique branding and presence and look. It's priced about 15 to 20% higher than Merrell. We expect this year for the first full year to be, I don't know, around $12 million, $12 to $13 million in sales for Patagonia. We've been especially pleased just recently with some large reorders on some of the strong reorders on some of the product that was placed this Fall and it's also come from some of our better outdoor specialty shops an

Okay, thanks so much.

We'll go next to Todd Slater, Lazard Capital.

Good morning.

Hi, Todd.

With a third of the backlog increase presumably from likely to benefit the fourth quarter, you expect any revenue acceleration from Q3 or revenues still get impacted by the exit of the private label and Stanley business?

No, they will still be impact, Todd, from the private label, Stanley businesses, the military contract business in the fourth quarter, so you will still see some of that and again it goes back to traditionally, the slipper business is a private label business was very back half weighted.

So if we see the sort of conservative reorder, conservative reorder business in the fourth quarter, then you should see similar types of revenue growth in the third quarter?

Based on our guidance of the low end of our range, I think you'd see a slight pick up in overall revenue levels in Q4 versus Q3.

Got it. Okay, and then Europe, you said 20% of sales now, could you just talk about the total international penetration to what some of the mix that you think this could go to?

Well, I think overall on a year to year basis, our obviously -- we felt that our international portfolio is continuing to drive a faster operating earnings growth than what our domestic operations are, so longer term, we'll be over that 50/50 and we'll probably have 60/40 type mix with international profits being higher than our domestic profits. On the revenue side, we still have a lot of our international revenues coming from distributor and licensing operations, so they will be in that 35 to 40% range with the domestic operations being the balance.

Okay, great. Thanks, that's helpful and then just trying to focus on fourth quarter gross margins since you're coming up against the toughest comparison in a long time. What's your sense of your ability to sustain the level of gross margin improvement you've seen so far this year?

Yeah, we're pretty comfortable with it right now. Our product cost is pretty much locked in, so we should know what our product cost is. One thing I really like, Todd, is that our inventories being down 3.4% at the end of the third quarter give me a comfort level that we feel that we own the right inventories and core product so that there should not be any unusual markdown susceptibility to the inventories that we own, so we're not heavy into any seasonal product where if it doesn't sell, we have issues. So we feel pretty good with where our inventory levels are at, and we know what our product cost is, so we should be in pretty good shape.

Okay, and maybe you could touch on the ForEx benefit you saw in the revenue or margin side?

And I think that's part of the reason for our Q4 confidence in gross margins. We go and buy forward contracts so we have been locked into what our product cost is, so there will be some FX improvement in Q4, and that gives us that comfort level on the gross margin side, and I think you would see a similar our year-to-date revenue impact of FX is very close to what the Q3 was, around 2%, so we would anticipate that to be similar in the fourth quarter.

What was the ForEx impact in Q3 on the gross margin line?

I think it was 80 basis points is what I commented.

80 basis points and then lastly just the factors going to the 8% increase in the accounts receivable?

Well, I think that that is just basically timing of shipments, so we feel when our DSO's are at 57 days which is really the best we've been in the last at least the last 20 years, when I've been in the business, so your receivables can reflect the timing, and most of our releases really happened late, the back half of August and into September, and our quarter ended the eighth or so of September, so it's just the timing of shipments and collect ability.

Okay, great. Thanks a lot.

Thanks.

We'll go next to Elizabeth Montgomery with Cowen.

Hi, guys, congratulations on the quarter.

Thanks, Beth.

Thank you.

I apologize if somebody asked this earlier but I guess, Blake or Steve, did you guys give a specific dollar number that you feel Patagonia and Merrell need to get to before they achieve your operating margin targets?

No, we haven't, Beth, and I think the key there is, it's not too dissimilar to our European initiatives back in 2001 and 2002 where we took those on. Sometimes we get the sense that everybody is looking for this point in time where apparel and Patagonia are just going to take off and change the overall dynamics of our business. I think everybody should look for gradual improvements in those businesses and that four to five years from now, our overall operating margins in both of those businesses should be comparable if not a little bit better than our current corporate averages. So I don't think there's an inflection point out there where all of a sudden, it's going to take off, and so that's really what happened in CAT Europe, and that's why, and Merrell Europe and that's why we look at this as a longer term initiative, and to sum up the conversation that Blake had earlier related to the Merrell opportunity with apparel, we still feel that Merrell can be our first billion dollar brand and in order to do that, apparel has to be a significant portion of that and when I say significant, I'm talking 20 to 25% of that. So to really maximize what Merrell can be as a lifestyle brand, that apparel initiative is important but it's not an overnight or a one or two year initiative. I mean, we've just shipped product for two months now.

Right. No, that makes a lot of sense.

So, I'm just trying to make sure everybody understands how we're viewing it.

And kind of in relation to the billion dollar brand opportunity for Merrell, I guess when you guys first started thinking about opening Merrell stores, you were working with a partner and kind of using the same model that you've used for Hush Puppies and some of those international markets, and it sounds like the store in Whistler and the concept stores are going to be done yourself I take it?

Yes. I think in the U.S. market, there will be a mixture of concept stores that are done, Company-owned, and as appropriate with some of the key and better operator independents with some franchise stores with them. Internationally, the focus will be on our distributor network in over 100 countries for Merrell and as you know, a lot of those distributors and their particular markets are as much retailers as they are wholesalers.

Have you guys ever thought of doing the same thing with Hush Puppies in the U.S, maybe to just kind of like jump start that business a bit more, since it seems to be doing so well in international markets?

Yes, in fact we're looking at several locations now to open one or several Hush Puppy stores next year in the U.S. market to really coincide with with Hush Puppies 50th birthday celebration. Hush Puppies is a brand that will be 50 years old next year.

Okay, that's exciting. And then my last question, I apologize if I just missed this but the scaling back of the Stanley, is that kind of just scaling it back and right sizing that or are you guys leaving that license in June 08?

I think we're planning on leaving that license. We took Stanley as kind of a niche business, which is focused on a single kind of lower tier retailer. It's become a business that we frankly can't scale to meet our longer term profit requirements. It's never amounted to more than 1 or 1.5% or something of our overall sales, so it's just a business we've decided to transition out of.

Was that the one that was in Payless?

Yes.

Okay. All right, thanks a lot, guys.

Thanks, Beth.

We have a follow-up with Jim Duffy with Thomas Weisel Partners.

Yes, the 11.5% operating margin target for '08 has been in place for some time. You guys have a Board meeting coming up in the next week or so. Will we get kind of an updated multi-year plan from you at some point soon? Is that your thought process?

Jim, I don't know if I'm that bright. I'm not a faint heart, but giving you guys a detailed multi-year plan may not be in the cards, but obviously we've got a Board retreat. We do it every other year, coming up. We're doing this year's in China, and we're going to be focusing on our long term strategic goals and opportunities.

Jim, I think your point is right. We have had 2008 out think for awhile. Internally we've been focusing in on a number a little bit higher than that over the last 12 months, I would say, but if you took our current business mix and you looked at what are the potential margin improvements out there, and this is a theoretical of everything is hitting well, you might be in that 13.5, 14% operating margin level. At this point in time, I think it would be remiss to get up in the 15% range because I don't know, our mix of business is a little different than some others out there, but that's the type of longer term opportunity that does exist, so I think that Management would agree with maybe the premise of your comment that there is further expansion available out there. I think it will be at a relatively graduated pace and -- but there is further opportunity there.

Very good. Thanks.

Thanks, Jim.

At this time, think are no further questions. I would now like to turn the call over to Ms. Christi Cowdin. You may proceed.

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 17, 2007. Thank you, and good day.

This concludes today's conference. We do appreciate your participation. You may now disconnect.