Wolverine World Wide Inc (WWW) 2008 Q2 法說會逐字稿

Good morning and welcome to the Wolverine World Wide second 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 introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Vicki. Good morning everyone and welcome to our second quarter conference call. On the call today are Blake Krueger, our CEO and President, and Don Grimes, our Senior Vice President and CFO. Other members of the Wolverine Management time are sitting in as well. Earlier this morning we announced record second quarter results. If you did not yet receive a copy of the press release please call 616-233-0500 to have one sent to you. The release is also available on many news sites or 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 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 our 24th consecutive quarter of record revenue and earnings per share. Our team's excellent execution against our longstanding business model lead to our record Q2 performance. Our business model is multi-brand, multi-country and multi-category in nature. The distribution of our brands in almost 200 countries and territories around the world enables us to consistently achieve strong results, even in challenging economic times, and it also reduces our exposure to any single country, consumer group or fashion trend.

Revenue for the quarter of $267.4 million increased 6.8% from the prior year. We achieved revenue increases in all regions and across all of our branded groups. Our sales results also include a revenue reduction of about $3 million from the exit of our transition businesses. That's slippers, Stanley and private label. Q2 earnings per share of $0.33 were up 17.9% from last year's $0.28 per share. Included in our earnings results was about $2.4 million of one-time expenses primarily associated with the consolidation of our UK offices.

I would like to begin my brand review with Hush Puppies. Hush Puppies revenue increased 4.5% in the quarter. Importantly, the revenue gains were broad based across all regions and businesses. Hush Puppy International. which operates in about 135 countries through licensing and distribution agreements continued its strong performance with single digit revenue and double digit earnings gains. Hush Puppies base of control distribution around the world, anchored by over 400 concept stores, helped generate significant increases in global product orders from our licensees and distributors. At the end of the quarter, the international backlog for Hush Puppies was up very strong double digits, reflecting really the strength of our international businesses and later design innovation from the new Hush Puppies Global Design structure. Our new men's Casual product, featuring the Strike Back Comfort Gel technology helped contribute to this backlog increase.

The Hush Puppies Europe, Canada and U.S. Businesses also generated revenue gains for the quarter. This was gratifying considering the overall soft retail conditions in some of these key markets. These revenue gains helped drive a quarter inventory reduction of over 20%. Expanding our already large base of control distributions for Hush Puppies is a key strategic objective, and progress was made on this front during the first half. In the U.S, three Hush Puppies shopping shops were opened with Better Independence and the greater New York Metro area.

In the UK, we are excited to announce the opening of our first value retail store on June 7 in Braintree, England. Braintree is about an hour northwest of London. Initial sales results are very encouraging, and plans are in place to open one more store in the UK during 2008. Our international licensees added 26 shopping shops in the quarter to bring our global total to over 685. We are celebrating Hush Puppies' 50th birthday this year on a global basis and the PR buzz generated by the new guest designer series continues. Additional special retailer events have been scheduled in Canada, the UK, and the U.S, along with some charity partnerships to highlight the 50th birthday of this great brand. Overall, it was a solid quarter for Hush Puppies, and we're very pleased with the revenue increases across all global regions.

The Heritage Brands Group, which includes Sebago, as well as our two largest licensed footwear businesses, Caterpillar and Harley Davidson, reported a quarterly revenue increase of 6.4%. This was the result of increased shipments in CAT and Sebago in the U.S, Canada, and Europe, and increased shipments for Harley Davidson internationally. Inventory control initiatives lead to a double digit inventory reduction at quarter end. The CAT brand continued to make good progress in the U.S. in the quarter with a significant sales increase. These results were fueled by increased shopping shop installations and expanded distribution for our CAT rugged Casual line. The CAT footwear business in Canada was also up significantly with early placement of the super duty extreme work collection. Despite difficult trading in Europe, the CAT business reported a mid single digit revenue increase due primarily to greater demand for our active and rugged Casual footwear collections.

Turning to Harley Davidson, growth outside the U.S. Continued in the quarter with the European, Canadian and international businesses all reporting a sales increase. These increases were offset by a planned reduction in the U.S. Business which relates to our previously reported decision to refocus the distribution of Harley Davidson footwear in this market. We expect to return to growth in U.S. market in the second half of 2008, based on the strong reaction from retailers to the new vulcanized garage collection and the new Premium Performance riding boots. These products will hit retail in Q3.

Sebago brand posted a double digit revenue increase in Q2, reflecting strong performance in Canada, Europe, and the U.S. Increased sales in the quarter were generated by strong demand for our new product offerings, especially the Officers Collection of moccasins, hand-sewns and the new Lakes Collection, a driving moc inspired package of premium footwear. Regionally, sales were brisk in New York and Florida. During Q2, new Sebago brand concept stores were opened in Cairo, Egypt, [Cons] France, and Oslo, Norway. We now have 30 Sebago concept stores around the world with further expansion planned in 2008. Overall, it was a very good quarter for the Heritage Brands Group.

Turning to the Wolverine Footwear group, revenue for the quarter increased 7.7% over the prior year, despite as planned, significantly lower sales for the private label and Stanley businesses that we are exiting this year. The sales growth was broad based, but all brands and regions reporting revenue increases. The HYTEST mobile distribution and the Bates businesses had an especially robust quarter, both with strong double digit revenue increases. The Wolverine brand continues to be the leader in the core work category with second quarter revenue gains in the low single digits, despite a tough U.S. work environment. Much of the increase was driven by the new premium price contour welt collection which continues to perform at retail with sell-throughs consistently in the 5 to 6% per week range.

The Bates business continues to be recognized by the military for cutting edge product innovation. In addition to shipping the special operations forces, the most technical boot provided to the U.S. military, that's the Alpine Tora Bora boot, Bates was able to win a tender for an innovative lightweight desert assault boot for the same military community. Both programs meet the tough demands of our military forces and have received strong feedback. Bates is focused on providing the very best and most innovative product to the U.S. military and the civilian service sector. The Wolverine, HYTEST and Bates brands continued 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 had another record quarter of revenue and earnings. Sales for the group were up 2.1%. In North America, Merrell sales were the strongest brand generated a solid double digit increase. This increase was partially offset by lower shipments in the quarter to a large international distributor, due primarily to the timing of its Fall delivery and some delayed shipments to Europe, all of which are expected to ship in the third quarter of this year. The Outdoor Group continues to achieve excellent profit leverage and increased gross margin continues to fuel brand building investments in product development and marketing.

Merrell's Outventure category had a strong quarter and continued to establish the brand as the leader in the performance outdoor segment. This category is showing double digit increases in 2008 for both shipments and backlog by virtue of its multi-sport, water sport, and hiking collections. Specifically, the Moab Ventilator, the Access Intercept, and the Water Pro Maipo are selling well globally for men, while the Siren and Chameleon art programs continue to appeal to female outdoor consumers around the world. Merrell's performance at retail was strong around the world across a broad range of product categories and channels of distribution. In the U.S, sell-through at retail were very strong. Merrell continues to gain market share as it pursues its mission to inspire the outdoor athlete in everyone with products at the horizon of performance and style.

The Merrell apparel program, which launched in Fall '07, is on plan. The business is expected to more than double in the Fall '08 season on a relatively small base, and the Spring 09 line is being well received by our customer base around the world. The Merrell direct-to-consumer initiative continues to expand with a goal to reach 70 branded concept stores globally by the end of 2008, and in addition to the Merrell stores, operated by our distribution partners, the first Company-owned U.S. flagship store will open in San Francisco in Q3 and will be followed with additional store openings later this year in Portland, Oregon and Birmingham, Alabama. In addition to flagship and regular price full line stores, Merrell will end the year with with about 700 shopping shops globally and 13 outlet locations in the U.S.

Turning to Patagonia. We are happy with the progress we are making with strong shipments for the quarter on a relatively small base. Steady progress is being achieved within the core North American market and we continue to add international territory. The men's product has been the center of our initial success at retail and is an example has moved into the number three position within our own multi-brand track and trail stores. Behind a well received line of innovative winter boots, the backlog for women's product has moved into the double digits and presents a future growth opportunity. The Outdoor Group continues to be the company's largest revenue and earnings generator.

Returning to our consolidated businesses, which includes footwear, apparel, and leather, our quarter end order backlog was up almost 4%. Our quarter end backlog number was impacted by about 2.4% due to significantly lower close out orders and lower orders for our discontinued businesses: slippers, Stanley, and private label. We were pleased with our positive backlog position given our better than planned shipments in the quarter and especially since our reported backlog number is weighted to our owned U.S, European and Canadian businesses, which are reported at the wholesale selling price while our other international orders are based on royalty or license fee income. On a parage basis, our quarter end footwear backlog was up over 8%. During the quarter, we also experienced a significant shift from future orders to at-once orders, which are shipped as received, and are not part of our quarter end backlog number. Overall, we are very pleased with with with our Q2 performance, especially in light of the challenging retail and consumer environments in several key markets. This record performance was achieved while managing our inventories to obtain a 7% reduction at quarter end.

Before turning the call over to Don Grimes, I would be remiss if I didn't take this opportunity to announce the recent retirement of Steve Gulis. Steve most recently served as President of our Global Operations group but most of you probably know him for the 14 years he served as the company's Chief Financial Officer. I have worked with Steve for over two decades and he made many valuable contributions to the Company during his 23 years here. We all wish him well during his richly deserved retirement. I am extremely pleased to officially welcome Don Grimes to the company who is participating in our quarter-end conference call for the first time. I know you'll all be kind to Don. Don brings a fresh perspective to the business with his extensive background in global consumer brands.

I will now turn the call over to Don, our Senior Vice President and CFO, who will provide you with additional information regarding our Q2 results. Don?

Thank you, Blake, and good morning, everyone. Earlier today, we reported record financial results for the second quarter ended June 14, 2008. Revenue for the quarter totaled $267.4 million, a 6.8% increase over revenue of $250.3 million in the prior year. Earnings grew 17.9% to $0.33 per fully diluted share versus $.28 per fully diluted share for the second quarter of 2007. We are very proud of the fact that a Company has now delivered double digit growth in earnings per share in 17 of the last 19 quarters, outstanding performance which reflects the effectiveness of our diversified business model.

For the first half of 2008, revenue reached $555.6 million , a 4.6% increase over the $531.4 million reported for the first half of 2007. Fully diluted earnings per share grew to $0.79, up 17.9% from $0.67 per share for the same period in 2007. We continue to achieve excellent operating and financial leverage as the rate of growth and operating income was more than twice the revenue growth rate and a rate of growth in earnings per share was more than three times the revenue growth rate. The strong revenue growth in the second quarter was broad based with all branded operating groups contributing to the increase.

Foreign currency translation, specifically a weaker U.S. dollar versus the Euro and Canadian Dollar had a 2% positive impact on reported revenue in the quarter, while our continuing planned exit from our private label, Stanley, and slipper businesses had a 1.3% negative impact on revenue growth in the quarter. Gross margin for the second quarter of 2008 was 38.3%, a modest improvement over the 38.2% gross margin in the prior year. Benefits from foreign exchange were essentially offset by higher freight and product costs, the latter being partially driven by the closure of the factory in China and incremental reserves related to the future liquidation of close out inventories. On a year-to-date basis, gross margin had expanded 88 basis points to 40.3%, driven by favorable foreign exchange and a positive shift in product mix.

Operating expenses in the second quarter were $76.5 million or 28.6% of revenue compared to $72 million or 28.7% of revenue in the prior year second quarter. As Blake mentioned, included in the quarter are $2.4 million of expenses related to the ongoing consolidation of our European operations which had a 90 basis point impact on our operating expenses as a percent of sales. Even with those expenses and a robust double digit increase in advertising expenses behind our brand portfolio, we achieved expense leverage in the quarter, driven by continued financial discipline, particularly in the General & Administrative area. Year-to-date, operating expenses are up 5.5%, reflecting both a 1.9% impact from foreign exchange and continuing investments in product development and brand support. Consistent with the first quarter, we booked tax expense using an effective rate of 33.5% in the quarter and we're still projecting a full year tax rate of 33.5%.

The Company repurchased 209,700 shares in the open market in the quarter at an average price of $28.21, resulting in weighted average shares outstanding used in the fully diluted earnings per share calculation for the quarter of 50.7 million shares. We remain confident that repurchasing equity at current price levels is an excellent use of the company's financial resources and in the best long term interest of our shareholders. We have 1.4 million shares remaining under our April 2007 share repurchase authorization, and we'll continue to opportunistically repurchase shares as deemed appropriate by our Board of Directors and Management.

Turning to working capital. Our active inventory management programs helped drive inventories down 7% to $171.7 million at quarter end. We believe that there are continuing opportunities for improvements in our overall inventory efficiency, improvements that may result in not only actual reductions in inventory but also improve service metrics; having the right inventory available at the right time. On a rolling 12 month basis, inventory turnover improved to 3.8 versus 3.6 at the end of last year's second quarter. Accounts receivable of $195.6 million at quarter end is an increase of 12.8% over the $173.4 million in the previous year. Much of the increase is due to very strong close to the quarter, shipments of products for which we haven't yet collected. A modest lengthening of terms, particularly with our U.S. customer base contributed slightly to the year-over-year increase. We believe the prudent use of our very strong balance sheet to facilitate sales growth is is entirely appropriate, particularly in today's turbulent economic environment. Our ARH continues to be quite strong and our Day Sales Outstanding remains below our own internal target.

Our performance metrics continue to improve. On a trailing four quarter basis, the company's return on assets improved 150 basis points to 14.4% at the end of the second quarter, and our return on equity improved 260 basis points to 20.2%. Both of these ratios are at historically high levels, with our return on equity exceeding 20% for the first time in more than two decades. Our net cash position remains solid as we ended the second quarter with cash of of $77.9 million and total interest bearing debt of $41.2 million, of which $30.5 million was drawn from our revolving line of credit. Cash from operating activities in the first half of the year was $40.1 million, an outstanding 19.3% improvement over the prior year.

Today we are reaffirming our previously stated 2008 revenue guidance of $1.23 billion to $1.26 billion. Given the uncertainty in economic environments, we expect second half revenue growth to be less robust than that experience in the first half. Growth in full year gross margin will be driven by favorable foreign exchange and favorable product mix, partially offset by increased product and freight cost. As noted during last quarter's call, we expect our full year operating expenses to increase as a percentage of sales, driven by the European consolidation expenses noted above, and continued investment in product development and marketing initiatives behind our brand portfolio. Net-net, we're projecting operating margin expansion of 30 to 50 basis points for the year. We are reaffirming our full year earnings guidance of $1.83 to $1.90 per fully diluted share.

Before turning the call back over to Blake, I'd like to tell everyone how excited I am to have joined Wolverine World Wide as Chief Financial Officer. The opportunities for our strong brand portfolio around the world are enormous, and I believe my extensive background in branded global consumer products will enable me to partner with Blake and the entire organization in an incredibly effective way. I have the opportunity to meet with several of the research analysts that cover Wolverine during the Stanley show last month in New York and I look forward to meeting many more of you at the WSA show in Las Vegas later this month. With that, I'll turn the call back over to Blake for closing

Thanks, Don. In closing, we are pleased to have delivered another quarter of record revenue and earnings. Rigorous execution against our business model, which is multi-brand, multi-country and multi-category in nature, allows us to efficiently build global brands, limit risk and gain market share while delivering outstanding financial results in a variety of economic climates. Thanks for your time and attention this morning. 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 today. (OPERATOR INSTRUCTIONS). We will take our first question from Jim Duffy with Thomas Weisel.

Good morning, Jim.

Jim?

Can you hear me?

Sure can.

Okay, good. I had a question on where you guys are seeing strength and weakness globally. If you could provide a little bit of color on sort of the overall environment.

Yeah. I guess obviously being in 200 countries and territories around the world has its advantages. Obviously, there are some consumer and retail issues here in the United States and certain countries in Europe, maybe primarily UK, that is also the case, but this is also in light of the fact that we have many other significant territories that are doing just fine. What's interesting in Q2, the USA was actually on a growth basis, percentage growth basis, our second best performing region, which we found very encouraging and frankly it's a testament to our product innovation and what our brands are putting out there for the consumer.

And are you guys feeling any slowdown in Europe?

Yeah, I think there is some slowdown and some credit issues in the UK, primarily, maybe a little more than some of the other countries in Europe. Their currency remains fairly strong and it's still a large and very important market. As you know, our business in Europe has grown from about 3% five or six years ago to over 20% today, and we still feel like we're underdistributed in Europe, and we've got plenty of room for growth.

All right, and then just one last question about the Outdoor Group. How should we think about that shift in revenues into Q3 ?

It's hard to think about anything in this environment in a concrete form, but there was a pretty significant shift to large international distributer. I'm trying to recall probably in total in 3 to $3.5 million range, so that will be shipping in Q3 as opposed to maybe a similar shipment in Q2 last year. So I probably think in those terms.

Okay, and should we be looking for sort of a return to that mid single digit -- or mid single to high single digit growth in the Outdoor Group in the back half?

Yeah. We believe so. We think Q2 sales performance is really impacted by the delayed shipments to the international distributer. We had some product delays from the Far East going into Europe that also impacted our European sales in the quarter and frankly, in Q2, the Merrell brand in particular had much fewer close out sales, which also had an impact on their overall sales number, and I think also in the United States and a few other markets the retailers are cautious and it's for that reason that we really saw an uptick in our at-once orders and a fall off, really a transfer from future orders to at once orders in the quarter which was just the opposite of our experience in Q1, so we'll wait and see what happens in Q3 and 4 but I think retailers are understandably cautious, especially in the USA market and they're only ordering as necessary and they're really relying on those brands like Merrell, which continues to out perform.

And I will add to that, this is Don by the way, that obviously we avoid getting revenue guidance by quarter, but our ability to view future business is clouded by the fact that Blake talked about it that shift from future orders to at once orders so that shift has made it more difficult to get a good handle as we sit here today on what the revenue will be in Q3 and Q4.

And Steve, we'll miss you. Thanks.

He's in Hawaii right now, probably having as good a day as we're having.

Good for him.

Yeah, I know.

Our next question will come from Susquehanna Financial, John Shanley.

Good morning, John.

Congratulations, guys on another impressive quarter.

Thanks, John.

Blake, I wonder if you could give us a little bit of guidance in terms of the strong sales results of the Merrell brand in the U.S. Is that being derived from existing retail accounts or have you opened up any new channels that have also helped to stimulate the strong growth of the brand in this country?

Well, obviously, the new running program is going after some new distribution for the brand, but that's very very small based in the quarter and at the present time and most of that growth is going to come in the future. I would think for about the last couple of years, Merrell has been primarily focused on taking additional shelf space from the competitors in the retailers and other distribution channels that it's in.

You mentioned in your preliminary comments that you feel Merrell is gaining market share. Do you have any specifics that you can share with us in terms of what Merrell's share of its specific market is?

It's really hard to say, as you know, it depends on how you split up the market. They are clearly the dominant player in multi-sport and really in outdoor performance. Still gaining market share. The retailers in the U.S. are having a bit of a tough time now with traffic counts and sales, so as Merrell sales go up , they're obviously taking in a macro sense, market share from somebody and continuing to perform for the retailers, and as you know, John, in times like these, the retailers tend to refocus back on those brands that have historically performed for them and continue to perform, so we're encouraged despite maybe the overall gloomy news regarding the

That's great to hear, and also in your comments about the Merrell store expansion, do you see this as a potential catalyst to really make an aggressive move into retailing, and is there a possibility that you consider converting the Track and Trail stores into the Merrell outlet if the market opportunity exists for strong growth in that category as well?

We see Merrell retail as really an opportunity of growth for the Company to be honest. We also like eCommerce and we also like several of our other potential avenues. I think you have to remember that although we operate 91 or so stores here in the United States, we've got 3600 points of global distribution for our brands around the world. Most people today don't realize that Hush Puppy has 400 branded Hush Puppy concept stores around the world and that's very powerful. We think Merrell can get to globally, maybe around 70 stores by year-end and clearly the potential for Merrell stores over the long run, whether we own and operate them in our own territories or our distributors operate them globally is in my mind, at least as great as it is for Hush Puppies.

Is your preference to have Company owned stores or does it matter to you one way or the other?

Our model, our international distribution model is frankly great. We like in many countries around the world, our good international partners, are retailers as much as they are wholesalers, and in a lot of those markets the retail is less overbuilt, a little bit more wide open than it is here in the United States. It's an easier competitive environment, so in the short and near term, even though we're going to be opening Company owned Merrell stores like we did in Whistler, the home of the Winter Olympics, or our new store in San Francisco or a couple of others we've got scheduled this year, we'll be putting as much time and effort behind expanding our international base of control distribution for Merrell. Big time opportunity for the Company especially when coupled with apparel.

Super. I wonder if you could comment on what's prompting the renewed vigor of the Bates operation, that had been a troubled part of the Company for the last several quarters and all of a sudden seems to be a real vigorous growth opportunity. What's going on that's --

I think, John, as we said over the last couple of years, we expected this year the Bates business to reach kind of a pre-war normalized level, and so I think we've gotten there. Quite honestly, I think our sales this year in Bates have been front end loaded in the first half. I think we said that at our year-end call and maybe in our Q1 call, so we expect some fall off in Bates in the second half of the year but fundamentally, the success in Bates like most brands in our industry is driven by product innovation, and even in tough economic times, if you're out there with superior product, you're going to do just fine.

Okay. Last question I have is is on any price increases that you're finding in China specifically, and what that may mean in terms of your Spring '09 wholesale pricing structure, are you going to have to raise prices in order to absorb some of the cost increases that you're incurring in China?

Yeah, I think the pricing pressure from China in my opinion is going to continue. Maybe if we see oil back down at $90 a barrel and some other things happening it will abate at some point, but the strengthening of the Chinese currency and labor costs and food and energy over there is going to put pressure on footwear, and the United States sources today, over 85% of all footwear consumed comes from China, so I think you're going to see prices going up. I think for the second half primarily, which includes much of our Spring/Summer '09 lines, we were able to negotiate and we believe lock in place 3 to 5% price increases, which when I talk to my friends around the industry appears to be almost best-in-class performance, so I don't know what the second quarter of '09 will hold or the rest of '09 but we expect the pricing pressure to continue. We're going to stay flexible on sourcing initiatives. We're going to look at reengineering product, not take the quality out of the product by reengineering it, and we're going to continue to look at select price increases.

John, we felt some of the impact of increased factory costs in the latter part of Q2. Part of of that was driven by the closure of one factory. I think I read the other day about 2000 shoe factories have closed in China, some of the middle sized factories have closed down due to profit pressures but we had to shift some production for our soft style shoes to another factory at a higher cost, and we felt some of that impact in Q2, but as a result, our brands have gone forward with some price increases in the latter half of '08, planned price increases in the latter half of '08 so we're trying to respond appropriately.

And the retail has been fairly responsive in terms of of being able to bear these price increases or are you getting a lot of resistance?

In the U.S. In particular, they've been amazingly quiet. I think everybody, you have to remember that although footwear is centered in China, many other industries from electronics to furniture to you name it is also centered in China, and I think the consumer in general and the retailers also in general understand that some of the price increases coming back or coming through from China are frankly warranted by macroeconomic conditions.

Okay, that's good to hear. Thank you very much. Keep up the good work.

Thanks, John.

Next we'll hear from Mitch Kummetz with Robert W. Baird.

Yes, thanks. A couple questions on the backlog, because I'm having a little bit of a tough time understanding, I guess it was up over 10% at the end of Q1 and now I think Blake you said up around 4%.

Correct.

In dollars, and you did talk about a shift towards away from futures towards at once, but when you put in the last quarter I think you had said that the backlog at that point which was up again over 10% was more skewed towards kind of Q3 and Q4 versus Q2, so you actually seeing, cancellations on those orders that you'd already received at the end of Q1 or are you just not, over the course of the second quarter are you just not getting in the orders that you were getting in a year ago at this time?

Yeah.

Give us a little more color on that.

Sure. Let me first say that future orders are always subject to some percentage of cancellation push-back, delays, whatever, so a dollar of at once orders obviously computes to a higher sales number than a dollar of future orders. Our Q2 backlog though, what was interesting is I tried to give you the footwear parage number which kind of puts our global business in perspective, but I think our Q2 backlog number was, well, first and foremost affected by our strong shipments over plan for the quarter which is a very good thing. We had about a 2.4% impact because of lower close out orders and obviously lower orders for Stanley, slippers and private label. Our backlog number that we've always quoted of course is more weighted to our own businesses which are the footwear and the backlog is wholesale selling prices opposed to license or royalty income, but what we saw in the second quarter, and it frankly surprised me a little bit, was a pretty significant shift from future orders to at once orders, and that would impact our backlog number. At once orders are not in our backlog number, but I think it's just retailers being relatively cautious and waiting to order what they need, and not burden themselves with future orders. That may reverse. The trend was just the opposite in Q1. Maybe it's going reverse in Q3 and Q4, but it clearly was a significant trend in Q2.

Mitch, just to to underscore what Blake said, if you take the official reported backlog of almost 4% and adjust it for the 2.4% related to the close out and the discontinued businesses, you get about 6.5% and then if you evaluate that in the context of the really strong revenue growth in Q2 and the shift between at once and futures, I think you come up with a number or at least a conclusion that is more consistent with what you've seen in the past in terms of the backlog number.

Okay. And then since you already had some back half orders in your backlog at the end of last quarter, should we be thinking that the decline in the backlog reflects that you would expect less sales growth in Q4 than Q3? I would imagine that you would have had more Q3 orders in your backlog versus Q4 orders at the end of last quarter. Now you probably have a larger portion of Q4 orders then?

Well, I think, you know, we are just into the Q3 but just to give you a little color and a little guidance, I would say today our view on Q3 is that Q3 is going to be a little stronger than Q4 right now. Again, that could change with order trends, that could change with the ratio of futures to at once orders, but right now, I would think that Q3 is going to be a little bit stronger for us than Q4.

Okay. That's helpful and then maybe a little help on the margins as well. First, Don, you mentioned about $2.4 million in incremental expense from this consolidation?

Yeah, in SG&A, yes.

Yeah, when does that anniversary? When do we stop seeing that impact?

You mean going forward?

Yeah.

That we recorded the expense in this years quarter O so when you get to next years Q2, we wouldn't have those expenses but there will be, our full year earnings guidance reflects some additional consolidation type expenses in Q3 and Q4. That's embedded in the earnings guidance and embedded in the operating margin growth that I cited.

Okay. All right and then when we're thinking about gross margin versus SG&A over the balance of the year, gross margin up around 10 bps in this quarter, SG&A down 10 bps which is the opposite of what we saw in the first quarter where gross margin was a lot stronger and SG&A was higher as a percentage of sales, should we expect kind of the Q2 trend to continue over the balance of the year, to get to your guidance? I mean I think you mentioned continued benefit from FX and mix shift over the balance of the year but then some opposite impact adverse impact from production and all that.

Right. We do expect gross margin expansion in the latter half of the year versus the prior year, but as we said before, we also expect some SG&a deleveraging on a full year basis, and that will continue in Q3 and Q4 as we continue to make investments behind some of our initiatives, but net-net, we're projecting 30 to 50 basis point operating margin growth versus the prior year.

Okay. All right, that's all I had. Thanks.

Thank you.

Todd Slater with Lazard Capital Markets has our next question.

Thanks very much, good morning.

Good morning.

Just you said you saw some slowdown in the UK. I just wonder if you could talk about your expectations for second half growth internationally in the UK, which is an important market for you as well as the rest of the world.

Yeah. I would think that right now, we expect very good growth in the second half in our international markets, including Europe in that overall definition. Some markets, like the UK are experiencing a little tougher retail conditions, probably not at the level we've experienced here in the United States, but I think the UK in particular is experiencing some of that right now. A lot of our other international markets though, licensing and distribution are very solid with strong backlog positions for that segment of the business.

Okay, and would you mind updating us on the international segment in terms of revenue and EBIT margin contribution in the quarter or for the year?

I don't know if we normally give that level of detail quite honestly.

I will say that in the first quarter, Todd, we cited that our non-U.S. businesses contributed 70% of the operating profit or EBIT in the quarter. In Q2 that dropped to about 60%.

Okay, is that due to seasonality or is that --

I believe that we had cited a full year go forward was about 60/40 between international and U.S, and so obviously what we experienced in Q1 this year was kind of excessively high in terms of the mix between the U.S. and non-U.S. pieces of the business from a pre-tax contribution standpoint.

So we're back down to normalized levels, Q1 was a bit of an anomaly?

We are.

What was the ForEx benefit in terms of EPS in Q2. I know you mentioned how much it affected revenues. How much are you assuming in the back half of the year as well?

Well we are assuming some moderate foreign exchange benefit to reported revenue and EPS but as it relates to the impact of foreign exchange on earnings on a year-to-date basis, we did cite that the second quarter benefited about 2 % from a weaker U.S. dollar and we can all do the math and come up with about a $5 million revenue impact on foreign exchange. We also have foreign exchange impacting operating expenses that we incur in foreign currency and I think I've quoted about a 1.9% increase on a year-to-date basis for that, but consistent with past practice, we're purposely not quoting a specific FX impact on anything other than sales and operating expenses because there are too many other factors we have at play here. The way I look at it, and the way the Company looks at it is that every Company in the industry that has a presence in the UK or Continental Europe has been a beneficiary of the weaker U.S. Dollar really over the last five years or so, and in a fluid and dynamic competitive marketplace, there are many pricing decisions primarily that are getting made and in some cases don't get made that are the direct result of foreign exchange trends, so many of the major European retail chains are aware of the foreign currency trends obviously, and they're pushing back on some pricing that otherwise we would be able to take so I think to take the foreign exchange impact on the top line and net off the foreign exchange impact on the operating expenses and drop that to the bottom line and say this much of EPS Is driven by foreign exchange is a simplistic way of looking at it and in my mind not really reflective of reality. There are too many other factors at play here to distill it down to something as simple as that so there for, we're limiting our public comments regarding the impact of FX to the impact on reported revenue and reported operating expenses.

So are you implying or suggesting that going forward if FX becomes less of a benefit on the top line, there may be a more beneficial offset somewhere else, so it's not quite as relevant or I'm just trying to understand. You gave the numbers in the first quarter.

To the extent there's less benefit from foreign exchange going forward, everyone will be impacted by that and there will be more opportunities for front line price increases. Pricing opportunities there kind of directly related to the foreign exchange environment everyone is experiencing.

Got it. Okay, well thank you very much.

Okay. Thanks.

Moving on we'll hear from Kate McShane with Citi Investment Research.

Good morning, Kate.

Good morning. Most of my questions have been answered but I wondered if you could give more detail behind the three Merrell retail stores you plan to open, how big these stores will be and are they going to be wholly owned by you guys or is it going to be a partnership like your other Merrell stores?

Yeah. The three stores we're currently planning including the flagship store we're opening on Union Square in San Francisco In Q3 will be owned by the Company. I don't have the exact figures on the size of those stores but I think the San Francisco store is in the 2500 square foot range, it will carry the full Merrell Footwear line as well as Merrell apparel and Merrell bags. The other two stores will present Merrell's lifestyle brand as well.

Okay. And then in terms of your gross margin, is there any way you you can quantify how much of your gross margins were impacted by markdown money you had to pay during the quarter ?

I would say, I'm sure we can quantify it but just speaking generally, I would say it was a relatively small impact in the quarter, very small impact in the quarter.

Okay. Thanks very much.

Thank you.

Moving on we'll hear from Scott Krasik with CL King.

Yeah, hi, guys, thanks.

Good morning, Scott.

In the U.S, for as good or as well as the Outventure Merrell stuff is doing, I've gotten some pretty mixed responses in terms of your casual product line. Is that just as big as it's going to be some have you hit a little wall there? Is there something that you can do to really get that Casual part of the business going again?

No. I think the Fusion part, the Casual portion of the Merrell line has really been, you know, Merrell 10 years ago was a men's hiking boot brand and it has truly been one of the success stories in our industry. It's been a success story not just through performance outdoor product but really the Fusion portion of its line. Internally, we think there are plenty of growth opportunities on the Fusion side of the line. Our sell-throughs on Fusion products, the report cards we get from our Top 10 customers have been very very good, whether it's women's Casual sandals or some other men's products, so but we do believe that there is plenty growth opportunity even in the USA, the largest market for Merrell that portion of the line.

And it just so happened the outdoor stuff drove this quarter but it could very well shift?

Yeah, I think the multi-sport in particular and hiking and some of the sand all product, the performance so far in Q2 and so far in Q3 has been excellent.

Okay, good. And then Don, I wasn't sure, I mean in the last two quarters you've given the gross margin contribution from currency. I think it was 50 basis points in the first quarter. Are you willing to give that for the second quarter?

No. We're not going forward with that, Scott, because of the reasons that I mentioned in the conversation with Todd a few minutes ago.

Okay. Thanks, guys, good luck.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS). Next we'll hear from Jeff Mintz with Wedbush.

Thanks very much. A couple additional questions on backlog. Are the delayed Merrell shipments that you talked about, are those included in the backlog or not?

The delayed shipments to the international distributer would be in the backlog number. They would not be in there at the full wholesale selling price or what might be the wholesale selling price. It would be in there at the much lower royalty fee income level.

Okay. And then the second question kind of related to backlog is given the excellent inventory control that you had, kind of what do you see as your ability to meet the increase in at once orders and the shift that you might be seeing from your retailers?

Well, as you know, we've been on the narrow and deep inventory philosophy for two years now, and so we think we're pretty good at it. We obviously carry a little of everything but we try and be narrow and deep for each of our brands and the stuff we believe is really going to sell-through and the stuff that the retailers are going to come back and want some immediate deliveries, on, so I think Don said that we always believe we have room for improvement in our overall inventory, our aggregate inventory, but on the other hand, our performance, especially this past quarter when there was a significant shift to at once orders from future orders was confirmation that we're doing a lot of things well in keeping the right stuff in our warehouses for our retailers.

Okay, great. Thanks. And then Don, do you happen to have the number of shares, the share count at the end of the quarter handy?

The actual shares outstanding?

Yes.

49.6 million shares, that's not the weighted average shares for the quarter, that's at the end of the quarter.

Okay, great. Thanks very much.

Okay.

Our next question will come from Sam Poser with Sterne Agee.

Hi, Sam.

Good morning. Just a quick question. When you shifted Sebago out of the Outdoor Group into the Heritage Group, can you give us an idea of how that impacted both Q1 and Q2 so the value of that just for planning purposes?

We really don't think it had a huge impact on either quarter from an overall Company, Sam, standpoint. I mean, there's a separate Sebago team Product Development General Manager and everything else. We made that shift as you know primarily to take advantage of the infrastructure that the Heritage Brands Group has in Europe and also the strong international infrastructure Heritage Brands has and frankly, to let the Outdoor Group focus primarily on Merrell which has been our main growth driver over the last several years.

I guess yes, but I mean, in dollars though, in sales dollars, how much did that really impact let's say that better than expected number in the Heritage Group? I mean, without Sebago, would the Heritage Group Have been negative?

The growth rate is normalized for reclassifying Sebago into Heritage.

Oh, so you reported those on a --

Yeah, apples-to-apples basis. Reclassified for our year Sebago activity into the Heritage Brands Group.

Oh, I see what you're saying, okay, very good. And then on a diluted basis, what share count should we use for the balance of the year?

In the 50.5 to 51.5 million range is is is kind of what we're going forward with now. Obviously, we will continue to opportunistically buy back shares but then the unknown is the share price, which has an impact on the fully diluted calculation.

Okay, and then what kind of, what was the profit matrix or lack of of better term of your own stores versus the distributer run stores?

It's hard to give you any even general comments on that. I will tell you that our own stores, about 90 stores in the USA substantially out perform the FDRA index in the first half of the year, so as you know, Sam, the comp store FDRA index year to date is down about 5% and the performance of our stores which carry primarily our brands was although it was negative, it was much better than that. Our eCommerce business year-to-date is up significantly and was up well over 50% in Q2.

And just one last question. With the new stores, with the Merrell stores starting to come in, you you had spoken earlier about possible Hush Puppies stores in the U.S. as well. Is this, I mean, this is, is this a situation where you're going to take back more business for yourself, possibly away from some of the retailers that aren't managing your brand as well as you would like?

We don't view it that way. We really view" as a necessary brand building growth initiative, and if you look back over the last 20 years, wherever a brand has levered in some level of control distribution, its wholesale business almost every time grows , and the business with its existing retailer base becomes even stronger, so it's not just a top line in a P & L impact. We're trying to show the Merrell brand in particular in the best possible light as a true lifestyle brand, so we wouldn't anticipate opening these stores as frankly taking back any business. I suspect when we open the Merrell flagship store on Union Square in San Francisco, I expect the Merrell business at Macy's which is a block away will

Are you able to, are you you planning on making money on that store on Union Square?

We hope so.

I mean the rents aren't prohibitive enough to do that ?

Well, Sam, you know the rents are always outrageous, but I don't know if we'll make money on the store in the first year out of the block, but our plan is to make money on all of our retail stores.

Okay. Well continued success. Great quarter.

Thanks, Sam.

Moving on we'll hear from Heather Boksen with Sidoti & Company.

I just had one quick question involving what you were talking about with retailers switching to more at once order s. Is that phenomenon really occurring across the brand portfolio or is it more in any one particular group or brand ?

Actually, it was in Q2, it really occurred across the brand portfolio, and as you know, we've got eight grade brands and a variety of different target consumers and distribution channels but it was at least in the United States, something that was pretty universal in Q2.

All right, thanks.

Sure.

We'll take a follow-up from Mitch Kummetz with Robert W. Baird.

Yeah, thanks. Just to get on the backlog, can you talk about how it breaks up by-product group and then U.S. Versus international? I think you'd said that Hush Puppies backlog was up double digits. Could you talk about the three other groups and then again U.S. versus international? Was it up for both those two?

Yeah, I think our backlog was up for all of our regions. I would say on a parage basis, our international backlog at the end of Q2 was the strongest.

Okay. And then by product group, was it also up for Wolverine, Heritage and Outdoor?

The backlog was up across all of our major brands.

Okay. All right, that's all I had. Thanks.

Thank you.

Thanks.

Thank you. At this time we have 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 ore conference call replay is available on our website at www.WolverineWorldWide.Com. The replay will be available through Wednesday, July 23, 2008. Thank you, and good day.

Once again that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.