Wolverine World Wide Inc (WWW) 2008 Q3 法說會逐字稿

Good morning and welcome to Wolverine World Wide's third quarter 2008 earnings conference call. All participants are in a listen-only mode until the question-and-answer session of the call today.

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, Erin. Good morning, everyone, and welcome to our third 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 team are sitting in as well.

Earlier this morning, we announced record third quarter results. If you did not yet receive a copy of the press release, please call Amanda [Passage] 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 cost 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 our 25th consecutive quarter of record sales and earnings per share. Once again our multibrand, multicountry, multicategory business model enabled us to post record results. Our 50 years' experience in building brands around the world serves us well in this these challenging economic times.

We currently have the advantage of servicing many different consumer groups in approximately 200 countries around the world. Our sales growth in the quarter was driven by the exceptional topline performance of the Outdoor group, especially the Merrell brand. Our International businesses also had an especially strong quarter. Asset management and SG&A leverage were also very good as we improve all key operating and balance sheet metrics.

Overall, we are very pleased with our performance in the quarter and have increased our 2008 earnings per share estimate.

I would like to begin my brand review with Hush Puppies. We had excellent growth in our International business in the quarter, up almost 30%. But this was offset by slightly lower sales in Europe and larger declines in the US and Canada. As a reminder, we include only the license fee income [in] reported revenue for the International business.

Overall, Hush Puppies posted an 11% sales decrease in the quarter which includes the impact of our exit from the Hush Puppies Slippers business. Soft retail conditions, some factory product delays, and the bankruptcy of a significant US retail customer contributed to the lower sales in the quarter.

The Global Hush Puppies business, which is 50 years old this year, is strong and will exceed 19 million pairs in 2008. One of our key strategic goals is to expand our already large base of controlled distribution around the world for this brand. During the quarter, our global partners opened 19 new concept stores and over 120 Shop in Shops, bringing the quarter end total to 479 stores and 840 Shop in Shops. China alone had added 55 Shop in Shops in Q3, bringing its total to over 200.

While this was a challenging quarter in the US and Canada, Hush Puppies continues to perform very well in the international markets, reflecting the global strength of this 50-year-old brand.

The Heritage Brands group which includes Sebago as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, reported flat sales in the quarter. For the group, strong double-digit sales in the US, Canada and International markets were offset by challenging conditions in Europe. The Heritage Brands group achieved excellent leverage in the quarter with significant increases in operating profits.

The Cat brand continues to make very good progress in the US with sales in the mid single digits. Canada also had a very good quarter with sales up double digits and international, once again, posted a very strong double-digit increase. These increases were fueled by new innovative product in the Rugged Casual line and the new Super Duty Extreme Work Collection.

Harley-Davidson achieved a double-digit sales growth in the quarter, with the US and Canada posting strong double-digit increases. The vulcanized Garage collection and the new Premium Performance riding boots perform well in all key markets.

Sebago had a single digit revenue decrease in the quarter as very strong double-digit growth in the US was offset by lower sales in the international markets. Strong demand for the classic Docksides Marine product as well as the new Officers and Lakes Collections drove the growth in the US.

Overall while Q3 sales were challenging in Europe, the Heritage brands group delivered solid revenue growth in other markets and very strong operating results.

Turning to the Wolverine Footwear group. Revenue for the quarter declined in the mid single digit range as planned, primarily due to declines in private-label and Stanley businesses that we are exiting this year. This was offset by growth in Bates and HYTEST. Product innovation remains the growth lever for the Wolverine Bates and HYTEST brands.

In the quarter the Wolverine brand continued to succeed with the premium priced Contour Wealth Collection. Since its introduction, this product has sold nearly 200,000 pairs at retail at price points of about $120 to $140 per pair.

The Wolverine brand and our own Company by the way is 125 years old this year and continues to hold the number one position in the premium US work market.

The Bates business remains committed to bringing innovative footwear solutions to all branches of the US military. It continues to supply cutting-edge product to the Special Operations Forces. During the quarter the Bates civilian business introduced and delivered a revolutionary patented comfort technology. That's ICS or Individual Comfort System.

This new technology has been broadly accepted by both retailers and consumers and the early sellthroughs at retail have been excellent.

The Wolverine, HYTEST, and Bates brands continue to enjoy incredible brand loyalty and are recognized as the gold standard in their respective categories.

The Outdoor Group, which consists of the Patagonia footwear and Merrell brand, had an excellent quarter. Sales for the group were up almost 9% and earnings were up at a strong double-digit rate. Momentum in the Merrell brand continues with overall revenue up 8.6%. Merrell's Outventure, that's its outdoor performance category, had a strong quarter and continued to establish the brand as a global leader in the Performance Outdoor segment.

This category is showing strong double-digit increase in 2008 by virtue of its multisport, water sport and hiking offerings. Specifically, the Moab, the [Innerset], the Water Pro collections are selling very well globally for men, while the Siren and Chameleon Arc are programs that are performing well with the female outdoor consumer.

In addition Merrell launched its Road Running initiative during the quarter which, again, positions the brand as a performance leader. This initiative is already starting to gain headway as Merrell recently won Running Network's Best Show Award in the Neutral Road Running category.

Merrell's fusion -- that's its Outdoor Casual category -- had an excellent success this quarter as new product initiatives reflected the brand's foundations of comfort, performance and fit. The entire ONcore collection was a huge success, achieving very high sellthrough at retail. The success of the Sports Fashion category, especially in Europe, continued with the launch of the Circuit Collection.

Merrell also continues to do very well in the Women's Sandal category.

We continued to expand Merrell's retail presence in the third quarter with store openings in Korea, Peru and the Philippines. The brand opened in its first US flagship store in Union Square, San Francisco just about two weeks ago and the initial consumer reaction has been stronger than anticipated.

There are nine new concept stores planned in Q4 including Portland, Oregon; Birmingham, Alabama; Indianapolis, Indiana and Beijing, China. We expect to end the 2008 year with about 70 Merrell mono-branded stores and around 700 Shop in Shop locations around the world.

Patagonia Footwear sales in the quarter were up double-digit and the brand enters the fourth quarter with solid momentum. Steady progress is being achieved in the core North American market and we continue to add international territories.

The men's product has been the center of our initial success at retail with strong sales in the Casual category. That would include the Honeydew and the Cedar Collections and a stronger product offering in the Performance category. The women's category presents future growth opportunities for us as we see strong selling of the brand's Casual Boots for women this fall.

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

We are obviously very pleased with our record Q3 performance, especially in light of the challenging retail and consumer environment in several markets. We ended the quarter with a positive quarter backlog as measured in dollars and almost a double-digit increase in order backlog is measured in actual pairs.

Our record Q3 performance was achieved while improving all of our key asset management and balance sheet metrics. Today, we are increasing our 2008 earnings per share estimate to a range of $1.87 to $1.92.

I would now like to turn the call over to Don Grimes, our CFO, who will provide you with some additional information regarding our Q3 results. Don?

Thank you, Blake, and good morning, everyone.

Earlier today we reported record financial results for the third quarter ended September the 6th, 2008. Revenue for the quarter totaled $318.9 million, a 2.8% increase over revenue of $310.2 million and the prior year.

Earnings grew 14.8% to $0.62 per fully diluted share versus $[0.54] per fully diluted share for the third quarter of 2007. These results represent the 25th consecutive quarter of record sales and earnings per share growth, a performance of which we are very proud especially considering the turbulent economic environment in several key global markets and the resulting impact on consumer confidence and consumer spending.

We believe this continued excellent performance reflects the power of our brand portfolio and effectiveness of our diversified business model.

For the first three quarters of 2008, revenue reached $874.5 million, a 3.9% increase over the $841.5 million reported for the first three quarters of 2007. Fully diluted earnings per share grew to $1.41, up 16.4% from $1.21 per share for the same period in 2007.

We are extremely pleased that we delivered for our shareholders a rate of growth in earnings per share more than four times the revenue growth rate. Excellent operating leverage driven by gross margin expansion, SG&A discipline and opportunistic share repurchases at favorable prices.

As mentioned earlier by Blake, the 2.8% revenue growth in the third quarter was led by the Outdoor group, and in particular, our Merrell brand. A weaker US dollar contributed minimally to the revenue growth in the quarter and was more than offset by the impact of our decision last year to exit the Stanley Slippers and private-label businesses.

Gross margin for the third quarter of 2008 was 40.4%, a modest improvement over the 40.3% gross margin in the prior year. Similar to the second quarter benefits from foreign exchange and favorable product mix were partially offset by higher product costs from our third party manufacturers and higher freight costs.

On a year-to-date basis, gross margin has expanded 58 basis points to 40.3%.

Operating expenses in the third quarter increased 2.3% to $82.4 million or 25.8% of revenue compared to $80.5 million or 26% of revenue in the prior year. We are pleased to have achieved expense leverage in the quarter which was driven by continued financial discipline throughout the business.

Year-to-date operating expenses were up 4.4%, reflecting general inflation and continuing investments in private development and brand support as we balance the need to be disciplined in this uncertain environment, with the desire to invest in promising initiatives that we believe will generate superior returns for shareholders in the years to come.

Our effective tax rate was 33.5% in the quarter and we continue to project a full year tax rate of 33.5%. The Company repurchased approximately 745,000 shares in the open market in the quarter at an average price of $25.41 per share, resulting in weighted average shares outstanding using the fully diluted earnings per share calculation for the quarter of 50.0 million shares.

Year-to-date, we have repurchased approximately 2.8 million shares for a total of about $72.6 million. We had approximately 678,000 shares remaining under our April 2007 share repurchase authorization and will 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 2.1% at quarter end to $194.1 million. We believe that our philosophy of going narrower and deeper in our product offering continues to pay dividends as we continue to provide excellent service to our customers while improving our working capital management. We still believe there are further opportunities for improvement that can result in both actual reduction in inventory and enhanced service levels.

Accounts receivable at $240.5 million at quarter end increased 2.1% over the prior year on the 2.8% revenue gain in the quarter. Our net cash position remains solid as we ended the third quarter with cash of $74.3 million and total interest-bearing debt of $81.6 million, of which $70.9 million was drawn from a revolving line of credit.

The Company's seasonal working capital requirements tend to peak at the end of the third quarter or early in the fourth quarter. And we expect operating cash flow in the fourth quarter will enable us to meaningfully reduce our revolver balance by year end.

Wolverine World Wide continues to have one of the strongest balance sheets in the industry, a fact that has served us well in the recent past and will continue to serve us well as we evaluate future opportunities to grow, both organically and via portfolio expansion.

Our performance metrics continue to improve. On a trailing four quarter basis the Company's return on assets improved 90 basis points to 14.5% at the end of the third quarter. And our return on equity improved 240 basis points at 20.7%. Both of these ratios are at historically high levels.

Wolverine is fortunate to have eight brands that compete in about 200 different countries around the globe, thereby reducing the impact of any particular market on our consolidated results. We are encouraged and pleased that even in an environment of relatively broad-based economic turmoil, we are raising our full year earnings per share guidance to a range of $1.87 to $1.92 on revised revenue guidance of $1.22 billion to $1.24 billion, representing full year EPS growth of 10 to 13%.

We expect fourth quarter revenue growth to be more modest in the growth rate we have experienced year-to-date.

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

Thanks Don. We are obviously pleased to have delivered another quarter of record revenue and earnings. Solid execution against our business model allows us to efficiently build global brands, limit risk and gain market share while delivering outstanding financial results in a variety of economic climates.

In these times, you simply win with superior product. All of our businesses are focused on executing our multibrand global strategy which, at its core, continues to deliver new, exciting and innovated product that exceeds the expectations of our loyal consumers in about 200 countries around the world.

Thanks for your time and attention this morning. And we'll now turn the call back to the operator so we can take your questions.

(Operator Instructions) Scott Krasik with CL King.

Good morning. Just a couple of financial questions right off the bat in case you [addressed] it -- I'm sorry I missed it. You had about $800,000 of other income in the quarter. What was that?

That was a gain on three measurement of some US dollar-based monetary assets in our foreign subs. And with the strengthening of the dollar at the end of the quarter, we had an inordinately high US dollar balance in our UK and European subsidies in the quarter. And that was a remeasurement gain that occurred, based on the strengthening of the dollar late in the quarter.

Okay. Good and then, again, if you addressed it, I'm sorry. You moved some of the debt around so you don't have (inaudible) show any long-term debt at this point, it is all in current?

Yes. We actually -- that's because it is under the revolver and the part that's classified as short-term is based on our intent to repay over the next 12 months. So it is $70 million of the long-term debt is the revolver and $10 million is the existing long-term debt that will be paid off by the end of the year as well.

So you will be -- your intent is to get out of the revolver? Completely?

Not close the revolver out, but over the next 12 months, just to pay the revolver significantly down.

Okay. Good. Blake, maybe talk a little bit about Merrell. Obviously it rebounded from the second quarter. I assume you benefited from that $3 million distributor order? And maybe if you could just give a little bit more color on where you are seeing the growth in Merrell at this point?

I mean obviously the momentum in Merrell continues at retail. We haven't really seen in -- in any significant market, any evidence of the slowdown. The report cards I see from the US customers and sellthrough reports and the [NPD] data all indicate that the terms are good, the sales are good.

Merrell is continuing to take market share even in what this year is turning out to be -- a pretty tough environment for the footwear industry. Maybe not as tough as some other industries out there or some other categories of apparel, but still relatively speaking, pretty tough for us.

And Merrell really is having success both in the Performance category, the Outventure category and in the Fusion category. But it's pretty good news across the board for Merrell.

So your European sub business, that's holding up in line with the Company averages?

Yes. In Q3 that was very good. And as you know, there are a few soft spots in Europe right now, but that business held up very good in Q3.

Scott, this is Don. We had some questions in New York a couple of weeks ago about Merrell's sellthrough in retail. Some questions indicating that some data had been seen that indicated Merrell was slowing down and Blake and I were scratching our heads. We came back and mined a significant amount of NPD data and through the eight months through August -- we don't have obviously through September -- but in US department store channels based on NPD point of sale data, both on men's and women's lines Merrell has gained 20 basis points of market share on each of those.

So the data that we are seen for US department stores indicates that Merrell's growth continues.

John [Shanley] with Susquehanna.

Thank you and congratulations on a nice quarter, guys.

Blake, can you give us an idea of the future order numbers particularly leave for the Heritage and the Outdoor groups?

Yes. I mean, we usually don't bring our -- break our future orders down by group, but we had pretty good -- we had pretty good increases across the board. Maybe Cat was a little bit lower, but Harley-Davidson has responded well. And Sebago has got some good momentum going into Q4 and Q1. So we feel pretty good there.

With all the comments that you had about the success of Merrell, I assume their future numbers are pretty good as well?

Yes. We try not to break them down, but of lot of brands would like to have Merrell's numbers, obviously.

John, I will say that, across our portfolio, Merrell and Wolverine, Sebago, Harley and Patagonia are positive. And that's partially offset by negative backorder positions for Bates and Caterpillar and Hush Puppies.

Is that primarily because of the European situation?

Yes. I think the softness especially in the UK market is hurting -- has had a little bit of an impact on Cat.

Okay. Good enough. Blake, the Merrell business as you indicated was doing particularly well in the US. Is the sales results in Europe equivalent to THE success you are having in the US market?

I would just -- excuse me, John, I'm just trying to scramble for some information here, but yes. I mean, sales results in Europe were at least as good on a percentage basis as the United States.

So we have not seen Merrell -- we have really not seen any significant slowdown yet for Merrell in Europe. But as you know, as a whole, our brands are still at this point a bit underserved in Europe. We have a lot of growth opportunity in Europe. The total sales for our brands there is about $250 million and greater Europe is the largest better grade market in the world for footwear.

So we still feel we have got lots of growth opportunity in Europe for all of our brands.

That include the UK?

Yes.

As is the case for most of our brands I mean the International markets -- what we define outside of our owned operations of the UK, continental Europe, and Canada and the US tend to have the fastest growth rate because they are just operating off of a smaller base typically.

But within what we classified as Europe which does include the UK, the Merrell growth in the quarter was very strong.

That's great to hear. Less question I have is on the second quarter conference call you had mentioned that you expected SG&A to likely deleverage in the second half of the year yet it increased slightly in the third quarter.

Are there some kind of cost savings or cost reductions or marketing spend reductions that you are accomplishing in the quarter that may knock it down again in the fourth quarter?

I will say, John, that we are certainly examining every dollar of operating expenses in this environment, maybe more so than we would have otherwise.

I think coming out of the first quarter, the Company talked about pretty robust full year gross margin expansion partially offset by some SG&A deleverage. And then I joined the Company in late May and obviously the outlook for -- on a number of different levels has changed as it relates to factory cost increases.

So we have been just a little more disciplined on the SG&A side. And that generated the SG&A leverage in Q3. We are going to be as disciplined going forward as we have been in Q3. We are maintaining our outlook of 30 to 50 basis points expansion and operating margins for the full year, and with some gross margin expansion offset by some SG&A leverage for the full year.

You look at this point that you could be leveraging positive in the fourth quarter?

Without giving specifics on the fourth quarter, we are going to target the operating margin expansion in that 30 to 50 basis point range.

Kate McShane with City Investment Research.

Good morning. Would you mind repeating what you said about the backlog number? I think you said in units the backlog was up double digits, but in dollars -- how much was the backlog up?

It was up in dollars low single digits. That -- and there were a number of factors that impacted the dollar figure this quarter. FX had a pretty significant impact to reduce it. We had lower closeouts. We didn't have the orders from our discontinued businesses. There was some change in the timing of Bates orders.

We also saw this quarter, again not as dramatic as Q2, but a shift, a bit of a shift from future orders to at once order size as retailers were really playing it a little close to the vest, watching their inventories very closely and placing a little bit fewer at once orders or more at once orders and fewer future orders. So those things all impacted the dollar amount.

The good news is that our (parrage) backlog was up almost double digit which shows really -- it really reflects a very strong acceptance of our brands around the world. That is really attributable to a great backlog in many international markets.

And as you know, in our backlog figure for International orders, we don't report the wholesale selling price. We only report the license fee or royalty fee. So that gives you a little more.

On an apples-to-apples basis, Kate, the backlog in dollars would be up in the mid single digit range, but on the unit volume basis closer to double digits. Just under double digits.

Okay. That's great. And can you give us an update on Merrell apparel? Does your backlog number include that specific product? And what can we expect and what are the retailers saying about the lines for this spring?

We remain very excited about Merrell apparel obviously and we are excited because the retail sales through this fall have been noticeably better. We are having some real successes across a broad range of retailers.

It's still a relatively small business for us. It's a business that we are focused on doing it the right way and not making it large. So we are not so focused on large, we are more focused on what it can do for the brand and how it can help accelerate the opening of Merrell Monobranded stores especially in the international market.

So you'd see it domestically. I would say domestically it's about 30% of our business; Europe about 25%, for example, maybe 30% international, and maybe 15% in Canada where it's also had very, very good success. And as you know we took some steps about a season or two ago to align the apparel closer to the footwear; really focus more on that seam between performance and style where Merrell footwear really operates and make the branding more prominent.

So we took some actions six months to nine months to a year ago to really refocus it and it's showing through in sellthroughs this fall.

Great. And if I can squeeze in just one more question about average selling prices. Did you see an increase in your average selling prices during the quarter and can you remind us how much you expect ASPs to increase going into 2009?

Answering the 2009 question first, Kate, I guess throughout all of 2009 I guess the prices for Fall '09 are still being worked on and a lot of that is a function of the cost increases that we expect to see coming out of factories. We are negotiating those and so final Fall '09 price list have not been published.

As it relates to average selling prices across the entire portfolio, for '08, we are seeing an uptick in average selling prices because we're reacting to the increase cost that we've been experiencing this year to date. We've been quoting that we are seeing a 3 to 5% average increase in ex factory costs this year and we are expecting to see mid single digit increases next year.

So we will be adjusting prices accordingly and we haven't seen, I guess to the point of your question we haven't seen the tradedown such that average selling price and not what we're selling are coming down to offset the price increases that we're taking.

Thanks very much.

Mitch Kummetz with Robert W. Baird.

Just a couple of quick questions on the backlog. Blake, you mentioned that currency had a negative impact on the backlog. Could you say what the backlog was in constant dollars?

And then also I would imagine that the backlog now, there's a component there of Spring '09 orders. Could you talk a little bit about how those are coming in versus the Fall portion of the backlog?

Yes, I don't have the constant dollar figures right in front of me, but FX in the quarter had at least a 2 point plus impact, percentage point impact on backlog amount just to put it in perspective. So it was pretty significant in the quarter, the dollar strengthening at quarter end.

We are seeing -- we are continuing to see the same retail reaction in owned markets that we have experienced throughout this year. People are -- in certain markets, the UK, the US -- concerned a little bit about the economy. Little things like are we going to get a bailout plan passed and a few other things that are on their mind.

But our orders for Spring are pretty good. Quite honestly as you know historically the footwear industry has less volatility than many other consumer goods (inaudible) and in tougher times -- and this had been a challenging year for footwear in the US -- but in tougher times, the footwear industry does pretty good. Footwear and accessories.

They usually come out of it earlier than many other product categories. So we are optimistic about next year.

Can you talk a little bit about what is happening in retail right now in terms of inventory levels at retail? How clean are they? And tighter credit, how much is that having an impact on some of your customers especially some of the smaller independents?

I think the inventories, frankly, are pretty good at retail. The people that -- the retailers that weren't working on their inventories a year ago have certainly had a year to work on them and tweak them and get used to this consumer environment.

So in the United States, our general impression is that inventories are pretty good. Maybe they are a little bit heavier at some of the department stores and the independent, but the outdoor specialty shops and the independent footwear shops, these are tough and smart operators. Really the best of the best are left here and they've been on this for some time.

So we think inventories are pretty good at retail overall for us. As you know we don't, in the aggregate, have a lot of our volume focused on the US department store sector. That is not where we do a majority of our volumes, certainly.

And the retailers are just plain and smart. If you are narrow and you are deep and you have what they want, they are going to order it. You just need to make sure that you got the right stuff for them.

Okay and on the International business, what was the actual overall International sales growth in the quarter? And then maybe, Don, it didn't sound like currency had any real impact on international revenues, but it sounded like it helped the gross margins out a little bit. So maybe you could talk about the earnings impact from currency in the quarter as well?

Yes. In the quarter our US business represented about 56% of total revenue. So obviously International was about 44%. And the impact of foreign exchange on the revenue translation was fairly minimal in the quarter. It was just a little over $1 million, but as it relates to the impact of FX in total on earnings kind of consistent with what we talked about less quarter, the -- over the last few years, the weaker US dollar has impacted our ability and other footwear companies and other broader retail companies from their ability to take price increases in Europe.

And we think there are so many dynamics that are intertwined with what has been a trending weaker dollar over from five years ago to now, that we are not really taking that revenue translation impact and dropping into the gross margin line or to the operating margin line and saying therefore the FX benefit on those margins on those profit lines is X%. Because I think it gives somewhat of a distorted view of the impact of FX on our organic growth rate or stripping out that to get the organic growth rate.

So it had a minimal impact on revenue translation. A little bit more of a percentage impact on reported operating expenses. Our reported operating expenses actually were up almost a percentage point due to FX, but beyond that we -- if the dollar had been stronger, versus prior year, we would have taken price increases.

And so that is why we are not going to try to distill it down to FX impact on EPS, for example.

Then one last question. With Hush Puppies' revenues being down as much as they were in the quarter and granted that does include the international licensed business, but how should we think about that in Q4? It sounded like there were a number of factors that contributed to that drop in revenue. And I'm not sure how much of those were ongoing.

Yes, we would expect more normal performance in Q4 for Hush Puppies, overall. The International business had a very, very strong Q3 and the momentum there is very good. We did have some factory closing product delays for Hush Puppies. Especially that had an impact domestically on Q3 results, and we've taken some action there. And that should be back to normal by Q4.

Thanks. Good luck.

Todd Slater with Lazard Capital Market.

Thank you very much and kudos. You guys did a great job on the expense line especially. Especially in light of the growth initiatives you guys are focused on.

My question is do you think you still have enough room for operating margin expansion in '09 with all of the higher sourcing and freight costs and perhaps the higher dollar? Can you stay disciplined on the operating expense line next year and maybe raise prices enough, commensurate with some of your cost increases to offset the other pressures and maintain your long-term EPS growth model?

Lastly, could you just quantify what you are seeing right now, what you are thinking of your long-term EPS model? Thanks a lot.

As it relates to the first question we certainly we are in the middle honestly of our 2009 planning. We are towards the tail end of our 2009 planning process. Although things will change as we close out 2008.

But we are certainly planning for operating margin expansion next year. I think that our gross margin expansion or outlook for that next year is not as strong as it would have been six months or nine months ago.

As a result we will have to be a little more disciplined on the SG&A side. It's always a challenge of balancing how much you are investing for the future with how much you were able to spend currently and we are not planning for gross margin deterioration and we are not planning for operating margin deterioration.

We are planning for growth in both of those and the challenge will be to deliver that. But that is what our expectation and our outlook is, going forward.

And if I could just follow up there. Is the gross margin expansion or lack of -- or not deterioration that you commented on largely a function of price increases? (multiple speakers)

I think we are going to address this pricing situation. Still some pressures coming out of China a number of different ways. One, we are going to stay flexible. So we will be looking at sourcing, different sourcing alternatives, for certain lines and certain brands. We are going to look at re-engineering product. That's not taking the quality out of the product, but re-engineering product to offset some of those.

We are going to expect our factories also to get leaner and adopt some principles of lean manufacturing. And many of those factories are already on that path.

Then I think the last thing you have to remember is there's a lot more to the supply chain than just FOB cost out of the factory. The supply chain. We've got a very good supply chain and we ship about 40 million pairs of footwear to 200 countries around the world. But we've got some pockets of inefficiencies and some potential improvement.

So we are going to squeeze more out of our macro supply chains to address. Then we will selectively take some price increases as we have this year.

Are you planning -- in your operating margin expansion plans for '09, are you planning for a stronger dollar, a significant change, let's say? Or any meaningful change in that calculation relative (multiple speakers) --?

Our current outlook is for a modestly stronger dollar.

And to answer your second question, I mean, the Company's position has been for a number of years in mid single digit revenue growth and double-digit earnings per share growth. I mean, nothing has changed our outlook in terms of our desire to grow earnings per share at a double-digit rate. So that has not changed.

Jim Duffy with Thomas Weisel.

I was wondering if you could provide some perspective on the leather operations?

I'm sorry. We had trouble picking you up.

I was wondering if you could provide some perspective on leather operations?

Yes. Our leather business is having a -- frankly, it's having a very good year for us. Demand has been steady throughout the year.

In the overall market, leather prices have been pretty stable this year, pretty stable over the last six months. So the pricing pressures that we've seen from China really have not had that much to do with leather increases. And our own Wolverine performance leather business has been very good this year.

And then, a second question I had was around the bankruptcy of one of your US customers. Is that expected to have a hangover in 4Q?

I think it will have an impact on Q4 and maybe next year going forward. So it wasn't a majority or a large significant customer, but it was still a significant customer. So you'll see a little bit of an impact on Q4 for Hush Puppies and into next year a little bit.

Could you help me quantify that a little bit?

It's about -- I would -- you would be safe in saying it was about the $2 million level.

All right, thanks. Very helpful.

Jeff Blaeser with Morgan Joseph.

Good morning and thank you. Can you give us any difference you are seeing on retail inventory levels, Domestic versus International?

Right now if I focused on Europe, I think Europe is trailing the US by about six to nine months. So our impression in Europe is that inventory levels overall are good. They are having some of their -- they are where we were maybe six or nine months ago, some countries in Europe.

I would say my overall impression -- and this is really a guess -- is that inventories are probably a little bit tighter here in the United States, simply because all of our good retailers have been working on that factor for a year now.

Now, next year would you have any expectations for whether we will flip-flop Domestic being a little stronger than [Internationally] or too early to tell?

I wish I had that crystal ball. I can't even tell you if we are going to have a bailout bill passed by the end of this week. So --.

Are you asking about whether we expect sales growth to be stronger in the US next year or inventory position?

Growth rates more so. Obviously you are dealing with more easier comps on the Domestic side.

Yes, frankly, we are just trying to be out there with secure product because we know in the Footwear industry, if you are out even in tough times with superior product, you are going to take market share. So even though the economy may continue to chug along and struggle a little bit here for a while, those people that have superior product are going to do just fine.

And, on the Merrell side, ex Apparel do you have a Merrell footwear growth rate? I'm assuming that was a blended that you (multiple speakers).

The Merrell footwear growth, I'm trying to recall, would have been up -- upper mid single digits in the quarter.

Thank you.

Heather Boksen with Sidoti & Company.

Good morning. everyone. A lot of my questions have been answered, but had a couple -- still a few. You mentioned the first -- the stores, the Merrell stores in San Francisco has been better than you guys anticipated so far. Given those results, I mean I guess maybe can you talk about you know, you are going to opened nine stores in Q4, but what the longer-term opportunity for Merrell apparel and retail -- I'm sorry Merrell retail stores in the US?

Sure. We think there's -- right now, when we take an international view of Merrell, Merrell is still early in the brand curve. Early in its lifecycle. And it is sitting here today with about 70 stores around the world. The Hush Puppies brand is around 480, for example. With the addition of Merrell [bags] and Merrell apparel, the opportunity from a retail vertically controlled perspective is at least as great for Merrell as it currently is for Hush Puppies.

In the US, we will selectively open stores ourselves. We are -- have a pretty constant stream of requests coming from great independents who would like to open up Merrell stores here domestically. So we have opened up some franchise stores and we will continue to open up some franchise stores.

On the International side all of those stores would be -- all of those stores would really be opened with our guidance and product flow help, but they would be opened by our international partners on their nickel and with their capital. We obviously see Merrell apparel as a key component to opening up Merrell lifestyle stores and, frankly, helping to make Merrell our first billion dollar brand.

That's helpful. You didn't really mention it, and I know it's still up in the air, but with regards to in Europe the footwear duty. What are you guys planning with respect to that? Are you factoring that into -- what are your expectations there going forward with that for your business?

Our expectations and our planning is that they are going to continue. We believe that the original decision was 100% political and 0% economic. We think some of the recent votes that have taken a negative view of those duties by some of the member states are correct, but we also understand the EU Commission process.

It is going to be a long process and maybe they will eventually get back to the right results and throw the duties out. But right now we are planning on the duties staying in place for next year. That's how we planned 2009 for sure.

Okay, so on the off chance they got repealed think you would revisit it, but for now you are planning conservatively with regards to that?

Yes. We would say realistically given what we know about the Commission and the revenue stream, they've been in joint.

Got it. And lastly just a couple of housekeeping questions. Diluted share count for the third quarter and CapEx and depreciation and amortization?

Diluted share count for the third quarter was using the EPS calculation was 50.0 million shares.

Okay.

I am sorry. What was the next question -- CapEx?

CapEx and depreciation and amortization in the third quarter.

Year-to-date CapEx was $12.5 million. Third quarter was.

I can figure it out from there.

Yes. Okay.

And depreciation and amortization?

One second. There should be music playing while we are on hold. Sorry. For the full year depreciation, is projected to be into $22 million to $23 million range. So I will get back to you with the actual Q3 depreciation amortization.

All right. Thanks.

(Operator Instructions). Jeff Mintz with Wedbush.

Most of my questions have also been answered. I was just wondering if you could go through -- last year on the Q3 call, you've provided guidance for the out year for 2008. Can you just talk about why you chose not to provide guidance for 2009 on this call?

Yes. It's just the markets are so fluid and unstable right now, we have -- you're right, the last couple of years, I guess, I'm not sure how long ago that we have been providing next year guidance with the Q3 earnings call.

But we still have three plus months left in this fiscal year and with the way the markets are and consumer behavior is gyrating on almost a weekly basis, we just made the decision that we will have much better visibility to '09 when we get deeper into the fourth quarter. So we will get our 2009 guidance either with our Q4 earnings call or sometimes appropriately before then.

Okay. Thanks very much and good luck.

(Operator Instructions). Scott Krasik.

Don, [what] is the operating income percentage international?

The operating margin?

No. The -- you had said international people (multiple speakers)

We do, we typically disclose the revenue breakout between US International but not down to the -- not the profit contribution.

In the second quarter you said there was more than 60% of your total operating income.

I'm sorry. Sorry. The pretax contribution -- sorry. It is still 60% International and 40% US.

Okay. (multiple speakers).

Then, this is sort of tongue in cheek, but you guys have been talking about the impact from exiting the Slipper business since I think third quarter last year. The private-label boot business since the second quarter. When are we past that?

Actually I think we will be past it after Q4. You are right. It has been a consistent theme. We actually had about $13 million of full year '07 revenue from those three exited businesses. And we have $4 million in Q4 of last year.

So we will have a negative impact on reported Q4 revenue growth from the decision to exit those businesses. But once we get past Q4 and '09 we won't talk about it ever again.

Thanks.

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

Thank you. On behalf of Wolverine World Wide, I would like to thank you all 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, October 15, 2008. Thank you and have a great day.

Again thank you all for joining us. That does conclude our conference today.