Wolverine World Wide Inc (WWW) 2008 Q1 法說會逐字稿

Good morning and welcome to the Wolverine World Wide's first quarter 2008 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 turn the call -- I would like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Dana. Good morning, everyone, and welcome to our first 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 first quarter 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 new sites or it can be viewed from our corporate Web site at www.wolverineworldwide.com.

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

With that being said I would now like to turn the call over to Blake.

Thanks, Christi. Good morning and thanks for joining us today. I'm pleased to report that our Company prevailed in the face of a challenging retail and economic environment to post our 23rd consecutive quarter of record revenue and earnings per share. Rigorous execution against our long-standing business model led to our record Q1 performance.

This model is focused on three key elements. First, marketing a strong portfolio of eight lifestyle brands; second, leveraging our brands in almost 200 countries and territories around the world -- for Q1, for example, about 70% of our profits were generated outside the U.S.; and, third, marketing our brands to different global consumer groups through a number of different distribution channels. This model enables us to consistently achieve strong results while reducing our exposure to any single country, consumer group or fashion trend.

Revenue for the first quarter of $288.2 million increased 2.6% from the prior year. We achieved revenue increases in all regions, North America, Europe and in international markets. Our sales results also include a revenue reduction of about $3 million due to the exit in our -- of our transition businesses. [That's slipper] Stanley and private label.

Q1 earnings per share were $0.46, up 17.9% from last year's $0.39 per share. At quarter end, inventories were down 4% and our order backlog was up over 10%.

We are pleased with our first quarter results which were achieved in a tough retail environment. We believe 2008 will be another record year for the Company and we are increasing our 2008 earnings per share estimate to a range of $1.83 to $1.90 per share.

I would like to begin my brand review with Hush Puppies. Hush Puppies revenue declined to mid single digits in the quarter as a strong increase in the global licensing business was offset by lower sales in the brand's three wholesale territories. Our leverage, however, was good as earnings were essentially flat in the quarter. In the UK, Q1 shipments were adversely impacted by the financial reorganization of two significant customers. In the U.S., the sales force realignment that we implemented late last year to separate the domestic soft style and Hush Puppies businesses, as well as lower shipments to mid tier department stores graduated to a first quarter sales decline.

In Canada, we experienced challenges meeting demand at our Montreal distribution center at the end of the quarter. This impacted our ability to fully maximize shipping opportunities.

The Hush Puppies international licensing business had a strong quarter with double-digit increases in both revenue and earnings. Our international base of stores grew by the addition of four new stores, bringing a total number of global Hush Puppies concept stores to 402 at quarter end.

Our global Hush Puppies licensees will also help us celebrate a very important milestone for the Hush Puppies brand this year. Hush Puppies will be 50 years old this year and the special events have already held in Toronto, London and New York to introduce the new guest designer series. This series was developed by celebrity stylist [Philip Block] from New York and Rachel Fanconi from London. This initiative has generated substantial press and elevates the fashion quotient and product price point of our global Hush Puppies brand. Hush Puppies remains our most global brand and continues to build on its iconic heritage.

The Heritage Brands group which now includes Sebago as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, reported a mid single digit revenue decline in the quarter. This was the result of tougher trading conditions in several countries and our decision to refocus the distribution of Harley-Davidson footwear in the U.S. Earnings for the group were above our plan, but down a couple of percent from last year.

Proactive inventory management programs for the group yielded a strong double-digit revenue or -- excuse me, inventory reduction in the quarter. The group closed the quarter with a strong double-digit order backlog.

Cat footwear continued to make good progress in the U.S., reporting a low single digit revenue gain and also continued its strong performance in the international market. These results were offset by a mid single digit decline in Europe and lower volume in Canada, due in part to the previously mentioned constraints in our Canadian distribution center. Overall, revenues for the Cat brand were down in the low single digit range, reflecting market conditions and trends in the global group market. This is likely to continue into the second quarter.

However order backlog for the second half are up strong single digits, reflecting the positive reactions to the Fall Winter collections. For Cat, we have received very favorable reactions to the new Industrial Work Boot Collection, including the super duty extreme work product as well as the new nonslip and waterproof programs.

In the Lifestyle category, the extended iTechnology range and the new SRX Sport Collection have also met with good initial response.

Turning to Harley-Davidson, this brand continues to deliver against its strategic objective of expanding distribution outside the U.S. market. The European and international businesses reported solid growth in the quarter. Growth in international markets was offset by a planned revenue decline in the U.S. following our previously reported decision to refocus the distribution of Harley-Davidson footwear in this market. The impact of this strategy will continue through the first half of the year but the order backlog for the second half is showing a double-digit increase. This forward order position for Harley-Davidson is fueled by a very strong response from dealers and retail stores to the new Premium Performance Riding Collection and the introduction of the Southern California Garage Collection of lifestyle-inspired skate and vulcanized product.

The Sebago brand had a very positive start to the year, posting a revenue gain in the high single digit range and delivering a strong earnings improvement in the quarter. This reflects very good product sell-through and an excellent retail response to new higher margin product introductions. In the quarter, the U.S. and European Sebago businesses grew at a double-digit pace, despite challenging retail conditions. Sebago has also had a very positive reaction to its Spring and Fall '08 collections, including the new Lakes Collection, a driving moc-inspired package that leverages the brand's premium handsewn heritage as well as the Officers Collection, a rugged casual line of moccasins constructed handsewns. Sebago also expanded in better grade distribution in the quarter, both domestically and in international markets. It was another good quarter for the Heritage Brands group.

Turning to the Wolverine Footwear group, revenue was up in the mid single digit range as strong sales in Bates and the HYTEST mobile distribution network offset lower sales in the U.S. for the Wolverine brand and, as planned, significantly lower sales in the Stanley and private label businesses that we are getting out of this year. Our Wolverine international and Wolverine apparel businesses also posted revenue increases in the quarter.

The Wolverine brand continues to focus on delivering innovative new product. The Contour Wealth Collection, of premium priced boot product which is direct attach product, continues to outperform with very good sell-throughs at retail. Wolverine continues to hold the No. 1 position in the domestic work market.

The Bates business had an excellent beginning to 2008 as the military substantially increased its requirements during the quarter. Bates continues to be recognized by the military for cutting-edge product. During the quarter the brand began shipping the Alpine Tora Bora boot to the Special Operations forces. These high-value boots have received a very strong initial response and are the most technical boots provided to the U.S. military. With revenue gains in all channels of distribution the Bates business achieved the highest first quarter revenue in its history.

The Wolverine and Bates brand continues to have incredible brand loyalty and are recognized as the gold standard in their respective categories.

Continuing with the Outdoor Group this group, which consists of Merrell and Patagonia, had another excellent quarter. Q1 sales increased in the upper single digit range with Merrell accounting for virtually all the increase. The group achieved excellent leverage as earnings were up over three times the rate of the sales increase.

Merrell is off to another great start this year with solid first quarter increases in the U.S., Canadian, and European businesses. The timing of shipments to a couple of larger distributors resulted in lower sales for the Merrell international business. Merrell closed the quarter with the solid double-digit increase in order backlog.

For spring, there was a strong consumer response across the entire Merrell product line which is substantially broader than it was just several years ago. Merrell's growth over this period of time has been driven by the consistent development of superior product and the extension of the brand into new product categories. The entire product line performed well in Q1 but Merrell had an especially strong spring season in the multisport category, including the new aqua sport Chameleon Speed and the women's Siren product line and the women's Casual category.

The quality of Q1 sales was even stronger when compared to the prior year as the sales mix for the quarter included substantially less close out and discontinued merchandise. This in turn contributed to the strong earnings leverage Merrell achieved in the quarter.

The global retail presence for Merrell also continues to expand. 15 new [shop and shops] were opened in the quarter and we now have over 500 concept stores in shop and shops in place in over 100 countries. Our first Company-owned Merrell store in Whistler, Canada -- home of the 2010 Winter Olympics -- is doing well and performing above our plans. This will be followed up by more Merrell store openings in the U.S., including a flagship store on Union Square in San Francisco.

The intent of the Merrell consumer to repurchase the brand is the highest of any footwear brand, athletic or nonathletic, as reported by MPD Market Research. We continue to believe that Merrell will be our first billion dollar brand.

Turning to Patagonia, the footwear business that we launched last year continues to gain momentum. Although still a relatively small business, Patagonia footwear has captured the essence of this great brand and met the needs of the very loyal Patagonia consumer. Sales continued to build in the Patagonia web site, catalogs and concept stores where the parent brand does over half of its business. Our goal, which is to market the best footwear with the least harm to the environment, is being achieved. Patagonia footwear ended the quarter with a strong double-digit order backlog.

The Outdoor Group continues to be the Company's largest revenue and earnings generator.

Overall, we are pleased with our Q1 performance, especially in light of the challenging retail and consumer environment in several key markets. Our brands are now marketed in almost 200 countries in territories around the world which mitigates our exposure to any single market, consumer group, or fashion trend. Our Fall 2008 product lines were well-received by our retail partners and we entered the second quarter with our overall order backlog up over 10%. A significant amount of that increase is scheduled for the third and fourth quarters.

I will now turn the call over to Steve Gulis, our Executive Vice President and CFO, who will provide you with some additional information regarding our Q1 results and our outlook for 2008. Thanks.

Thank you, Blake, and good morning, everyone. This morning I will review the first quarter 2008 financial highlights for you and give a brief update on our estimates for the remainder of the year.

We are extremely pleased to announce record financial results for the first quarter of 2008 as revenue of $288.2 million increased 2.6% over the $281.1 million reported in 2007. Earnings per share increased to $0.46 per share, a 17.9% increase over the $0.39 per share reported in 2007. These record results reflect the strong balance of our business model as our brand diversification, international reach and distribution strategy all provided benefits during the quarter.

We had several areas of the business with solid revenue growth in the quarter. The Merrell brand, Sebago brand, our own retail operations and royalty-based licensing and distributor businesses had the strongest revenue growth rates during the quarter. Also, currency benefits of 2.6% were offset by reductions in reorder rates in several of the branded operations as the retail environment in a number of key markets impacted at once order rate.

Despite these retail challenges, consumer acceptance of our brands around the world has never been stronger. Record earnings per share totaling $0.46 in the quarter were driven by strong gross margin improvement in the business, a 160 basis point improvement. This resulted from an improved mix of higher margin goods being shipped in our branded footwear businesses, 40 basis points, initial pricing margins generated by the brands in footwear, 70 basis points and the positive impact of foreign currency, 50 basis points, which occurred primarily in our continental European operations which operate with the euro as their functional currency.

The Company's selling and administrative expenses increased 4.9% to $85.2 million. As a percent of revenue, 2008 first quarter selling and administrative expenses were 29.6%, a 70 basis point increase. The majority of the increase reflects expanded investment in brand development through product marketing and retail placement initiatives, particularly in the Merrell brand.

Corporate expenses in the first quarter were flat on a dollar basis with 2007 as we continued to aggressively control spending in areas not related to brand building. The combination of the gross margin improvement and the increase in brand development initiatives resulted in a 100 basis point improvement in operating margin on a year-over-year basis.

Operating income for the business increased by 11% reflecting our strong operating model. We continue to forecast full year operating margin expansion of 40 to 60 basis points, primarily driven by further gross margin expansion.

Record first quarter 2008 earnings per share of $0.46 exceeded the first quarter of 2007 by $0.07 per share, or 17.9%. The estimated annualized tax rate for both years was 33.5% and the weighted average shares outstanding used in the fully diluted earnings per share calculation for the first quarter of 2008 was 51.5 million shares. We are pleased that the Company has generated a double-digit increase in earnings per share in 16 of the last 18 quarters.

From a balance sheet perspective, accounts receivable increased 12.2% on a year-over-year basis. This increase reflects the strong demand for Spring goods which were shipped during the back half of the quarter. Our day sales outstanding of 58.9 days continues to be below our internal goal of 60 days and the overall aging of the Company's accounts receivable continues to be strong.

Inventories of $188.2 million at quarter end represent a decrease of 4% when compared to the first quarter 2007 levels. Strong inventory management programs continue to be executed throughout the business. This has not only resulted in a more efficient use of working capital, but has also generated a portion of the gross margin improvement as we have less end-of-season closeout merchandise to move into retail channels.

We continue to mine additional inventory improvement opportunities throughout the Company's supply chain and believe that further efficiencies can be obtained.

During the quarter, we repurchased 1,817,100 shares of stock at an average price of $26.22. These repurchases were executed at a 15.5% discount to our recent 52-week high and continue to provide our shareholders with a solid return. We have approximately 1.6 million shares remaining in the April 2007 Board-authorized repurchase program and we will continue to evaluate the appropriateness of further repurchases on a go-forward basis.

The Company's cash position remains strong and we ended the quarter with $47.5 million of cash on hand. Additionally, we have total interest-bearing debt of $70.8 million at quarter end. Our overall capital structure remains strong, and the cash generation and borrowing capacities of the business allow us to drive further shareholder value by funding growth initiatives and providing appropriate returns of cash to our shareholders.

The quarter's strong operating results and aggressive management of our balance sheet have generated further improvements in our return on assets and return on equity. On a trailing 12-month basis, return on assets improved to 14.3%, a 160 basis point increase over 2007 levels. Return on equity improved to 19.7%, a 230 basis point increase over 2007.

These returns reflect top quartile performance when compared to other companies in our footwear and apparel peer group. Additionally, the improvement in these metrics are consistent earnings per share gains and continued cash flow generation from operating activities has consistently created value for our long-term shareholders.

I would be remiss if I did not address the cost pressures which many industries are experiencing for product sourced in Asian markets. Today, approximately 85% of the footwear consumed in the U.S. is sourced in Southeast Asia. Virtually all footwear companies are experiencing higher prices, particularly from China, and we expect price increases in the 3 to 5% range. These price increases reflect the increased cost of labor, oil and industry, rubber, transportation and appreciation of the yuan.

We are responding to these cost increases by maintaining a flexible and diversified sourcing strategy, reengineering product where applicable, and passing on selective price increases to our global customers. We have dealt with these challenges on a proactive basis in the past and we will continue to take appropriate actions to protect the profitability of our business model.

Our strong first quarter results and a solid order end backlog in excess of 10% position the business for continued growth in 2008. We are maintaining our revenue estimate in the range of $1.230 billion to $1.260 billion and have increased our earnings per share estimate to a range of $1.83 to $1.90, an increase from our previous estimate of $1.80 to $1.88. We are estimating continued operating margin expansion for the remainder of the year with gross margin increases being partially offset by continued investment in our growth brand.

As discussed earlier, cost increases from sourced factories around the world are impacting the overall product cost. However, these pressures will be offset in other areas of the business as gross margin improvements are expected to continue from pricing improvements, strong inventory management, positive impact from foreign exchange, and continued improvements in business mix.

In closing, we are very pleased with our first quarter results and our strong start to 2008. Our diversified business model is benefiting our shareholders as our brands continue to grow market share in these challenging times.

I thank you for your time and attention and will now turn the call back to Blake for some closing comments.

Thanks, Steve.

We are pleased to have delivered another quarter of record revenue and earnings. Our business model, which is multibrand, multicountry and multicategory in nature, minimizes risk and permits us to outperform in a variety of economic climates. This model also enables us to consistently deliver excellent financial results while investing in growth initiatives and product innovation.

We will now turn the call back to the operator so we can take your questions. Thanks.

(OPERATOR INSTRUCTIONS) Jim Duffy with Thomas Weisel Partners.

Great quarter, guys. Question for you on the license business. In aggregate, what type of growth rates have you been seeing on your license business portfolio? That seems -- is that seasonal or is it growing as a percent of the mix?

Our royalty-based licensing businesses are growing a little bit faster than the base of our business, Jim. We have strong international partners that really represent our brands well in their local markets and it is driving nice improvements for the overall business right now.

When you look at it in terms of a return on capital decision, are there businesses in that international licensee portfolio that it would make sense to acquire or bring in-house? Or are there not many that are at that stage?

I think at this time we are constantly reviewing that precise issue in our internal meetings, but we still have lots of upside opportunity in Europe. As you know, we own our operations in greater Europe, Canada and the United States and Europe has been a very good growth vehicle for the Company for some period of time.

So whether we will vertically integrate at some point in the future in select countries around the world, I don't know. But right now we are focusing where we are at.

So as for now it is a prioritization of resources, I presume?

Correct.

And then a question on the Bates business. That was, I suppose, stronger than you had expected. Does that changed your outlook for the Bates business for the year?

Not really. We think Bates really has found a normalized level. I'm not sure our government is the best merchandisers that exist out there, but they had -- they hit us with some unexpected requirements in the first quarter, and we were able to, frankly, our manufacturing team to respond and meet those needs. So we think it hasn't really changed our full year outlook for Bates.

And then the final question, you have been doing a good job on the expense side by having Steve do two jobs. How is the CFO search coming along?

Very good. We are going to announce something next week.

Okay. Great. Congratulations again, guys.

Mitch Kummetz with Robert W. Baird.

Thanks, let me add my congratulations. Can you just comment a little more on the retail environment? Steve, you made the comment that reorders were soft in the quarter. I know it is tough to do, but how much of that do you think is a function of it's a tough environment in general versus unfavorable weather? And can you talk a little bit about how you guys see inventory levels at retail right now, given that business has been soft?

Yes, let me address a few of those issues. I think retailers, probably starting last summer, were looking to plan excitement in their stores through their future orders. So future orders, I think in general, have stayed pretty steady across the industry and the smart retailers are planning that excitement period by period.

I think where retailers, where volatility maybe has increased a little bit is in at once still in orders and retailers are looking to adjust their inventory level through at once orders. And so for example the first six weeks of this year, you might see at once orders were down and then a surge up in the next five or six weeks as they started to get a handle on their Spring season.

So it's -- the orders are volatile. I would think at once, still in orders are a little bit more volatile across the industry than future orders. As far as inventory levels, I think we have all seen the March numbers and I think the small independents out there and the outdoor specialty shops that they're operating fewer stores and really, they are very good operators and they keep a good eye on their business. We do a lot of business with those people.

If we continue to have some high single-digit and double-digit comp store decreases in the mid tier department stores and other retail channels, you are going to see some inventory continue to build up there. There is probably again right now a little more athletic inventory out there than brown shoe inventory.

Okay and then, Blake, you just mentioned that futures orders have been a little more steady than the at once business. I know your backlog is up over 10%. When you look at that, obviously, at this point into Q1 that backlog is a mix of some, still some Spring deliveries and then, obviously, some Fall stuff as well. And when you look at the two, pre(inaudible) orders for Fall versus Spring, are they pretty comparable. Or is Fall coming in better than what Spring was or vice versa?

I think if you looked at our order backlog right now just give you a little bit of an idea on timing, you would find that our Q2 scheduled deliveries at this point are lower than our Q3 and Q4. That is not saying that Q2 is weak at all but just that our backlog right now is skewed into the Fall season.

And how about -- it sounded like as you what to the different segments of the business that backlog, I think, is up across all of those businesses. Is it also up U.S. versus international? It sounds like international business might have been a little bit softer in the first quarter.

Our international business was actually pretty good in the first quarter and if you look across, we don't break it out by brand. But I think virtually all of our brands have a backlog increase. Several of them, half of them double-digit. So we feel good.

And then lastly, are you guys still expecting stronger sales growth in the back half than the first half? And I guess a lot of that because the backlog for the back half is a little bit stronger because when you look at your full year sales guidance at least the [hind] of that guidance would imply stronger growth in the back than the first. And to your comments, Blake, it sounds like the backlog skews a little bit more towards Qs 3 and 4 than Q2 as well.

Yes, that would be correct. I think we are still anticipating a challenging retail environment for the back half. But we feel that the growth rates could improve on the back half over the first half. That is correct.

Okay. All right. That's all I had. Thanks.

Kate McShane with Citigroup.

Good morning. Most of my questions have been answered, but I was wondering if you could provide us with any commentary on the global [microenvironment]? We have been hearing conflicting things about Western Europe, I guess in particular, in terms of the strength or the weakening of the economies over there. And I was just wondering what you were seeing in your business as a result of that?

We can give you a little insight. We try not to frankly overconcentrate on macroeconomic issues. We figure if we can continue to develop superior product, we are going to win in any environment.

But I think it seems to be a little bit softer right now in Europe. I would say that the UK, maybe, is a little bit softer than the Continent at the present time. You also have to remember that going back three and four years ago the UK had a very strong three- or four-year run for footwear and, really, apparel.

So I think the U.S. economy still is the engine for the world. Maybe it won't be the case 100 years from now, but at the present time it is still the engine for the world. So there is a little softness in markets out there, but with our global business model it mitigates a lot of that risk.

Okay. Thank you. And the numbers that had been coming out of Sebago have been improving and very strong and I wondered if there were any further plans to expand Sebago's distribution beyond its current distribution channel?

Yes. I mean, I think in the United States, in Europe as you know the Sebago brand is a premium brand. It's (inaudible) in all the better footwear shops. We think, frankly, there is a lot of growth for Merrell. We -- or I mean for Sebago. We do not, though, however, intend to take Sebago down market at all. We have got plenty of growth opportunities in our designated distribution channels.

No plans to bring it into the mall more? Like -- not to name specific, but we've seen (inaudible) at finish line for example.

Yes we don't have any of those plans at the present time.

Todd Slater with Lazard Capital Markets.

Great job, everyone. Just on the international, 70% of your EBIT came from international in the quarter. Is that right?

That's correct.

Is this an appropriate run rate that we should be considering for the year. Does that actually increase, do you think?

It's a little higher than what our average was last year, Todd, for the full year so I think in later quarters in the year you'll see the mix come down a little bit. But probably a 60/40 international U.S. mix for operating profits is probably still a pretty good ratio to look at on a full year basis. Any one quarter can deviate from that a little bit, but I think that is the appropriate range to look at going forward.

Well, maybe it would be helpful to look at what sort of the revenue run rate is and if that's obviously growing faster than domestic revenue?

The revenue run rate is -- we actually were up in all regions of the world last year. So our International revenues were solid. We were up mid single digits in most of our international areas in the first quarter so that was pretty solid performance.

So that is running a little faster than domestic?

Yes.

Yes.

And you would expect that to continue for the next back half?

We think that there's -- our market share in the international markets is not as developed as what it is in the U.S. market for several of our brands. So there is more opportunity in those international markets.

Right. Okay, and that's a higher margin, obviously higher margin business?

The licensing drives a higher -- and royalty-based business drives a higher operating margin. But the wholesale businesses which we own are pretty parallel to the U.S. wholesale businesses.

Okay with licensing and all, it is higher?

Yes.

Can you just remind us how you manage the currency fluctuations? What would happen to the P&L theoretically or directionally if the dollar strengthens or is flat against other currencies in the back half of the year? Is that a potential issue?

We are buying forward contracts for product being bought for our owned international wholesale operations. So we are out six-, a little bit into the nine-month range. It depends on where we are at on the calendar buying forward contracts so that we are locking into our product costs for a six- to nine-month basis.

So there is a pretty significant delayed impact and the reason we do that is that way we can protect our initial pricing margins by taking appropriate actions at the wholesale level. So if we saw the dollar strengthen quickly and we knew that our product cost was going to go up in those markets, we would have to take other actions to protect our pricing margins. So we have the time built in to take appropriate actions to protect our gross margins.

Okay and just remind me, I may have missed this so I apologize. [Forex]. How much of the quarter had a kind of a Forex benefit was there in the quarter, also relative to LY?

There's about a 50 basis point of the 160 basis points of gross margin improvement came from the weakening of the U.S. dollar, primarily against the euro.

And then just a guidance question. Tax rate, I think, came in about 33.5% which is higher than your tax rate guidance for the year of, I think, 32.8. How should we be modeling the rest of the year?

Right now that is our annualized estimated tax rate. One thing that is out there is that Congress has not improved the [recent] R&D tax credits and so we are not allowed to include any benefit from R&D credits in our annualized tax rate. So if -- depending on what happens with the elections and Congress and everything else, we would expect that to occur sometime in the year, but at this point we can't provide for that and that does have some fairly positive benefits for us.

But in the meantime you are not -- that's not in your guidance or it is in your guidance?

It is not in our guidance because we are not allowed to project it.

So we should be using maybe a little bit higher tax rate?

The tax rate of 33.5% would be an annualized rate.

Got it, okay, perfect. Great. Thanks very much.

Jeff Edelman with UBS.

Couple of questions here. 1, how much is your royalty income running at this point? Where is it classified? Is it classified as revenue or just in the cost of goods?

It is in our revenue base and it runs around 6, you know, 5 to 7% of our overall revenue on any quarter.

Secondly how much is your fill in business running on average overall?

If you look at the averages on a long-term basis, our future to at once order mix is right around 50-50. With the changes that are occurring in the market right now, it might be sliding a little bit more futures driven to where we might be seeing it a little bit more 60-40 in a year like this, but still a significant portion of our overall business does come from at once weekly reorders.

Okay. Now you're futures are in U.S. dollars correct?

All of our orders stats that we indicate are translated to U.S. dollars.

Then could you help me reconcile? The beginning of the quarter you had a deficit 10% increase in futures. Second quarter, you've got a 10% increase back weighted. Your sales would have been roughly flat if we exclude currency, which would suggest a fairly noticeable fall off in first quarter fill-in business and if we are looking at some shift in timing in here, do we see a worse or let's say, a more negative comparison in the second quarter in terms of topline?

I think the most difficult -- there is no direct correlation behind what our order backlog rate is and what the next quarter, the next two quarters are going to be because there are so many variables out there. We get at once orders in the quarter. We also get future orders in the quarter which are shipped in that quarter.

So there are all kinds of things that can impact the overall environment. I think the way to look at it and the way I encourage people to evaluate the backlog is, is there adequate backlog or does there appear to be adequate backlog to drive the revenue growth that the Company is estimating? And beyond that it's very difficult to say, "Gee, Q2 should be this because the backlog did this", or what all the changes are.

We are in a difficult retail environment right now or challenging retail environment that has probably more impact than our at once and in quarter futures. So there are a lot of variables in there.

I think you have to take a little bit higher look at that and to try to drill down. I haven't been able to do it in my 15 years as CFO find a direct correlation.

I'm trying to help you get a way.

If you get it, can you e-mail it?

Let me ask you another one. You want to make sure you've got enough inventory to ship, so if we take into consideration everything you have said and then your inventory is down 4%, is this because you are just turning it faster? Or you have been conservative on the take in and therefore if you get the fill-in business you'll have to scramble even faster?

No, I think one of the things we've done over the last couple of years is try to focus our inventory on being narrower and deeper, because retailers frankly are also waiting longer to place their at once orders and some of their future orders. They want it and they want it when they want it. You can't blame them. It's challenging out there. So we are just narrower and deeper with the right stuff more than we were, say, two to five years ago.

Okay. I follow. Thank you. Oh, wait, Steve, one other thing. What does the other expense in there -- it looked like it was a significant increase versus a credit -- income last year?

That had to do with some of the translation in our European operations I believe it was. But I will follow back with you on that to confirm that.

Scott Krasik with CL King.

Blake, you hadn't mentioned Merrell apparel this quarter. Where are we at with that?

Merrell Apparel is on plan for the year. We are really as excited as we have ever been about the opportunity. We probably couldn't have timed our launch of Merrell Apparel in a worse environment, but we can't control that.

Certainly our conservative approach is paying off, given current market conditions. But in 2008 we will be in 35 to 40 countries. About 40% of the apparel will be in the USA. The product line has been refocused and redesigned. The full impact of that will be seen in the Spring '09 line that will start to ship this fall.

And we expect Merrell Apparel this year to be roughly in the $12 million to $15 million range.

So assuming you had some sales in the first half, that would imply that the back half would actually be a little bit below year ago?

No. I think both of them will be above a year ago.

They will both --? Okay, good. Then there was some talk about Merrell getting into the road running category. Are you guys still on plan with that?

Yes we are. We have got a collection of great new shoes. We brought in some street running talent to develop those shoes and we are on plan. We are not expecting that to be a large out of the box. We are very interested in gaining credibility.

As you know Merrell has incredible credibility in the multisport category and trail-running categories and we want to get in those. Get a beachhead in those, the best 50 to 75 running shops across the country. So that may not be a large business out of the box, but we think it is key to the Merrell brand going forward.

Sure and then just lastly, qualitatively, you had some planned and unplanned management change at Outdoor and Hush Puppies. Talk about or have there been any hiccups? Have the transitions been smooth? Have there been any changes in philosophy?

No. I have to tell you the teams are performing well. I'm probably a little prejudiced, but I think we have one of the very best teams in the entire industry. You don't post these consistent results without some very, very talented people, but there's been no let up at all in Merrell or the Outdoor Group, for example.

And no changes in direction on anything?

Correct.

And then Steve, just lastly, I'm sorry. The gross margin benefit you expect to get from currency and the second quarter generally?

Yes. I would say that the second quarter should be or could be pretty much in the same range probably, at a 30 to 50 basis point type improvement.

Thanks.

Jeff Mintz with Wedbush Morgan.

To follow up on Todd's question from earlier, can you give us the breakdown U.S. international as a revenue in the quarter?

I think the best way to do it is low single digits for the U.S. then followed by a higher increase for Europe and then the highest increase upper mid single digits for international, if you wanted to break it down that way.

And what was just the percentage breakdown? You said 70% of EBIT came from International, but how much of your overall revenue came from outside the U.S.?

About 40% of our revenue base is outside of the U.S.

40%, thanks. And then Steve, probably a question for you in terms of the taking on of debt and the plans for the balance sheet in terms of the share buyback.

How should we think about the balance sheet through the rest of the year in terms of increased debt and the need for that?

I think there's a couple of key things there. One is that we do historically use working capital in the first three quarters of the year and then we generate a lot of cash at the end of the year as our peak working capital period is at the end of the third quarter. So but we felt there was some opportunity to accelerate our share repurchase program in the first quarter and we did that, and I think it paid good dividends to our shareholders.

And we will continue to look at consistent share repurchases if they are appropriate. I think, given the environment out there also, we will maintain a very strong balance sheet position. I mean our Net Debt position is not that high and we really want to make sure that we have flexibility in our capital structure if we see opportunities arise.

Then my last question just on the distribution issues in Canada, kind of what happened; and more importantly, do you feel that those orders are lost? Or is it just a delay into the second quarter?

We do not feel that those orders were lost. There were some challenges. Our growth up there has outpaced the capabilities of the distribution center up there. So we are looking at some alternatives so that we can address the same peak period which would happen at the end of the third quarter. So we've got plenty of action plans under way to eliminate any further issues.

Great. Thanks very much and good luck.

Chris Svezia with Susquehanna Financial Group.

Good morning, everyone. Congratulations. A couple, I guess, a couple questions. I guess first, Blake, can you maybe just flush out some of the issues and opportunities with regard to the Hush Puppies business and obviously the wholesale business? Having some challenges and licensing business doing well.

Maybe you can talk about what is going on in the UK with reorganization in some of your -- two of your key customers and do you anticipate backlogs to improve for the Hush Puppies business going to the back half of the year?

Yes. We think right now Hush Puppies is in a positive backlog position overall for the business. The UK retail environment turning first to that country, it has been tougher. We did have a couple of significant customers that went through some financial reorganization. Parts of their business were sold. We have managed to keep a substantial portion of that business. So that's the good news.

But Hush Puppies is one of the world's great brands. It is 50 years old this year. Over 19 million pairs, one of the top five brown shoe brands in the world. We have been steady and very steady growth in our international market over the last five or six years. We don't see that changing.

At over 400 stores and 650 shop and shops, it's one of the biggest brands out there around the world for dedicated points of sale. So we are as excited as ever about the potential for Hush Puppies.

In the U.S. market, we knew this year was going to be tough because of some of -- what we believe, the correct actions we took last year to separate the soft style business for example from the Hush Puppies business.

But we are getting a shot in the arm with the Guest Designer Series and some of the other chatter that is going on about the brand right now.

How has the transition for the soft style product at Penneys, how was that done for you? Are you pleased with the performance?

Yes, we actually are. It's really a question of now restaffing and allocating some appropriate resources to each of those two businesses' soft style and Hush Puppies, at least when you look at it domestically.

And the positive backlog that you referenced, Blake. Is that towards, I guess, the second half of '08 you see the improvement?

Yes, that would be a more second half weighted.

And, Steve, a question for you on the gross margin trends. I mean obviously the outperformance [clearly] on the gross margin for the quarter, I guess as you look at the gross margin in the quarter and the initial pricing, is any that being driven by the increase [positing] pricing that maybe you are passing on to your higher sourcing cost? Or has that not impacted the P&L? Is that more of a second half scenario?

I think that is going to be more prevalent in the second half. We did move a few prices in the first half of the year to accommodate some of the price cost increases that we had. But from a gross margin perspective we are expecting further improvement, but not at the rate that we had in the first quarter. Probably about half that rate overall for the remainder of the year if you took the balance of the year would be the appropriate way to look at it.

We think, again, that's the balance of the things that I mentioned in our prepared remarks.

And is that also a function of continued reduction on, in terms of inventory? I mean you're down 4%. I think you were down 10% coming out of last year.

It's not just -- the peer reduction doesn't necessarily drive it as much as the proper management of it and the timing of when we are getting rid of stuff and getting the best prices we can and not purchasing closeout merchandise basically.

So yes, a piece of that will be further inventory management. But it doesn't necessarily mean there would be a reduction in inventory.

I see. So it's an improvement in the quality in terms of the inventory as you go forward.

The efficient -- I could call it the efficiency of the use of the inventory.

Then the last question I have is just on your -- you didn't talk too much about your direct-to-consumer business?. Maybe talk about Track and Trail, what is going on in the outlook business and any color, possibly, on same-store sales performance for that division?

Yes. Just to give you an ideal we closed the quarter with 91 stores. I think we had 72 in the outlet arena under a number of different fascias, and 19 Merrell and Track and Trail stores. Our stores themselves were down between 1 and 2% comp store sales decrease in the first quarter.

I have to tell you, compared to the rest of the world out there, that's pretty superlative performance actually and but those stores carry, for the most part, our brand. So it is just an indication of how our brands are performing at retail.

Our e-commerce business for the quarter was up, I think, over 40%. So we are very pleased with the growth in that vehicle and, overall, for the first quarter as a blended direct-to-consumer we would have been up close to 5% comp store when it's all blended together.

Thank you very much, gentlemen. Congratulations.

Sam Poser with Stern Agee.

Good morning and congratulations. Just a couple of follow-ups. In the U.S., other than the Merrell brand, what are we looking for for the rest of the year looking at Caterpillar and Harley and Hush Puppies and so on? I mean, can we expect to see the topline start to improve? Clearly you are managing the businesses quite well.

Yes. I think, Sam, for example Cat had a sales increase in the U.S. in the first quarter and when you look at where that brand is positioned here, that was pretty good performance. I think everybody is holding their breath a little bit about the retail environment for the rest of this year, so it is hard for us even to sit here and predict.

We can look at our backlog and look at the feedback we are getting from retailers, and believe that we are going to have improvement in virtually all of our brands in the second half [and] the last three quarters. But we had a bit of a mixed bag in the USA in Q1.

[FOB], how have the standards changed from the retailers of how they are viewing filling in businesses? Are they shifting in general to buying their own deeper as well? Are they raising their expectations of an item or of a brand so if it is not really performing extremely well, they really back off? Are they backing off the fill ins more than they had, let's say a year ago?

I think it is fair to say that retailers have gone narrower and deeper also. That benefits everybody because it is easier for us to make sure that we are in stock on core products, but it also keeps them from having all that fringe product which may not be what the consumer really wants and desires.

So I think that paralleling the merchandising mix and making sure that there is an agreement between the provider of the product and the retailer as to the direction of what we are going to sell to the consumer in the season is important. So that has had some positive benefit. You are not out there trying to guess what the retailer is going to reorder. You pretty much know because you go into the season with a pretty focused perspective on a partnership basis, really.

Some of your competitors have started to -- are going through some large transitions and because of the way you price your goods and so on as you said I believe six to nine months out, you're locking in your prices for those lengths of times. And I think some of your competitors may not have done that.

Are you finding that is putting you at a competitive advantage when you look at when you are showing the product to people and working on your price value relationships across all of your brands?

I think it is giving what it really gives is it gives everybody time to merchandise in and to flow in the pricing that has to occur. So it is not an overnight and you don't get that dramatic drop.

We were criticized at one time, Sam, for not having as big a pickup in that arena because we were going out and the dollar continued to weaken and we didn't get all the benefit of the steepness of the erosion of the U.S. dollar. But having that time is very valuable and I think that that -- if you can work with your account base to say this is what is going to be happening down the pipe, it does give you a benefit.

Thank you very much and continued success.

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

Thank you. On behalf of Wolverine World Wide, I would like to thank you again for joining us today and as a reminder our conference call replay is available on our web site at www.wolverineworldwide.com. The replay will be available through Wednesday, April 30, 2008. Thanks and have a great day.