Wolverine World Wide Inc (WWW) 2008 Q4 法說會逐字稿

Good morning and welcome to the Wolverine World Wide fourth-quarter and full year 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.

Good morning, everyone, and welcome to our fourth-quarter and full-year conference call. On the call today are Blake Krueger, our President and CEO, and Don Grimes, our Senior Vice President and CFO. Earlier this morning we announced our fourth-quarter and full-year 2008 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 news sites, or it can be viewed from our corporate website at www.WolverineWorldWide.com.

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

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

Thanks, Christi. Good morning to everybody and thanks for joining us today. 2008 was a very good year for our company, and I am pleased to report another record year of revenue and earnings. This marks our eighth consecutive year of both record revenue and earnings per share, something we are very proud of, given the challenging economic environment. Our consistent performance is a testament to our team's rigorous execution against our diversified business model, which is multi-brand, multi-country and multi-category in nature.

Three of our four operating groups contributed to our record 2008 revenue, led by the Outdoor Group and the Merrell brand. Our international businesses also had a very strong year.

We recently made some tough decisions and announced a number of strategic moves which were centered on improving our operating efficiency, strengthening our supply chain and enhancing our service levels. These initiatives, which will consolidate and realign our operating infrastructure and global supply chain, position us to take advantage of longer-term opportunities but also help us address the shorter-term economic headwinds. We plan to have our strategic restructuring plan fully implemented by the end of this year. The beneficial impact of these moves has been incorporated into the 2009 revenue and earnings guidance we issued today.

I would like to begin my brand review with Hush Puppies. Overall, Hush Puppies experienced a mid single-digit revenue decline for the full year and a low double-digit decline for the fourth quarter. The unprecedented strengthening of the US dollar contributed to the reported revenue decline in Q4.

The Hush Puppies international business posted another record year with strong double-digit revenue and earnings increases. Building controlled global distribution on what is already a very strong base is a key strategic objective for Hush Puppies. During the year, 99 new concept stores and 221 Shop in Shop's were opened, bringing the global year-end total for Hush Puppies to almost 500 stores and 900 Shop in Shop's. Two new lifestyle stores featuring Hush Puppies footwear, apparel and accessories were also opened in Tokyo in the quarter.

Controlled distribution is playing an increasingly important role in our own operations. During 2008 the Company opened two Hush Puppies retail stores in Europe, both of which are performing well. During 2009 we plan to open two full-priced concept stores in Canada and one in the UK. Our strategy to move the Hush Puppies brand up market in the US is seeing favorable results in spite of the difficult US retail environment. Sell-in and sell-through of higher-priced product, such as our patented Bounce comfort technology men's product, has enabled us to open new, better-grade distribution.

We are also very excited to add our newest lifestyle brand, Cushe, to the Hush Puppies group. While small, this European business is precisely the kind of brand that will benefit from our established global infrastructure and brand building expertise, and it dovetails perfectly with Hush Puppies. Cushe is a younger brand with design-led relaxed style footwear focused on the energy and optimism of action sports. We look forward to a broader launch of this brand for the spring 2010 season.

Turning to the Heritage Brands Group, this group, which includes Sebago as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, had a solid year with revenue increases for Q4 and the full year. Operationally, the group had an excellent year by improving operating margins and posting strong double-digit Q4 and full-year earnings increases. These results were, frankly, impressive, especially in light of the currency headwinds in the back half of the year.

2008 is the fifth consecutive year of strong profit gains for the Heritage Brands Group.

For CAT, earnings were up in all regions for the year with another double-digit increase for the US, Canada and international markets. From a revenue standpoint CAT international and CAT Canada posted strong double-digit increases for the year, and the US business had a solid single-digit increase. This growth was driven by new, market-right product, including the very successful launches of the Super Duty work collection and the SRX sport collection, as well as an expanded iTechnology range.

CAT added over 450 Shop in Shop's in the year, bringing the global total to almost 1100.

Turning to Harley-Davidson, while revenue was down as planned mid-single digits for the year, the brand continues to be one of our most profitable and highest-return businesses. Sell-in and sell-through was strong for new, innovative product offerings, including the performance riding collection, which is focused on the core riding enthusiast, and the Garage and Crossbones collections that are targeted at a younger lifestyle consumer.

Sebago achieved a low single-digit revenue increase for the year and posted a very strong double-digit earnings improvement. New premium priced product offerings, including the Lakes Collection, the Officers Club and Admirals Club collections, contributed to these increases. Sebago also capitalized on the nautical global fashion trend, especially with its icon Docksides product lines. Sebago closed the year with 36 branded concept stores and over 85 Shop in Shop's. It was another very, very strong year for the Heritage Brands Group.

Turning to the Wolverine Footwear Group, revenue was up low single digits for the year and up slightly for Q4. Solid gains in the Wolverine, HYTEST and Bates businesses more than offset the sales decrease associated with the two non-core businesses we exited last year.

The Wolverine brand continues to focus on delivering great new product, as evidenced by last year's success of the premium-priced Contour Welt collection. The brand's commitment to product innovation was once again recognized by the retail community as retailers polled by Footwear Plus, one of the industry's leading trade publications, voted the Wolverine brand the winner of the design excellence award in the work category for the 10th consecutive year. And this is the only brand or business, frankly, to have won this award for 10 consecutive years.

Bates also had an excellent year with a double-digit increase in the civilian uniform business as well as increased sales to the military. Strong sell-throughs of the new patented ICS, or Individual Comfort System product, contributed to the growth and helped reinforce Bates' reputation as providing the most innovative product to the civilian uniform and military markets. We are expanding the ICS technology to the Wolverine brand and have already received a very positive reaction from retailers. Both Bates and Wolverine continue to be recognized as the gold standard in their respective category.

The Outdoor Group, which consists of Patagonia footwear and Merrell, achieved a single-digit revenue increase for the year. Revenue decreased mid-single digits in Q4 as negative foreign exchange and soft retail conditions impacted the business.

Earnings leverage for the year was very good with the group posting a strong double-digit increase. The Merrell brand continues to perform very well at retail, as evidenced by the sell-through reports from our major customers and our own in-store experience. Merrell's Outventure -- that's its outdoor performance category -- saw continued success as the brand reinforced its position as the global leader in the performance outdoor segment. Merrell launched its road running initiative this year, which further positions the brand as a performance leader. This initiative is already starting to gain momentum, as Merrell recently won Running Network's best shoe award in the neutral road running category.

Merrell's Fusion -- that's the outdoor casual segment of the line -- launched new product that reflected the brand's foundations of comfort, performance and fit. The entire Encore collection was a huge success, achieving very high sell-through at retail. The success of the sport 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.

The Merrell apparel program, which completed its first full year, is still a relatively small business but received some very good consumer reaction as retailers reported much improved sell-throughs during the fall season. The product line is now more aligned with the benefits and strengths of Merrell footwear, which helped the initiative achieve improved financial performance. Merrell apparel has also exceeded our sell-through expectations in our recently opened San Francisco flagship store.

Merrell's global retail presence in the fourth quarter continued to expand with store openings in Hong Kong, Taiwan, a second store in Milan and two in Korea. The brand opened three stores in the US, including Portland, Indianapolis and Birmingham, and overall consumer reaction has been very positive. Merrell ended 2008 with 74 stores and approximately 850 Shop in Shop locations worldwide.

Merrell continues to be and received great endorsements from consumers, enthusiast and retailers. The Merrell brand was recently awarded the Footwear Plus Design Excellence award in the outdoor category, which was our eighth consecutive year of winning this award. Merrell was also voted by consumers as the best footwear brand from outdoorzy, an outdoor enthusiast community website.

Patagonia footwear, at the end of its second full year, reported sales up double digit for the year in spite of the downturn in consumer spending. The brand enters 2009 with solid momentum, really especially in the core North American market. The men's product has been the center of our initial success at retail with strong sales in the casual category and double-digit sales increases in the smaller performance category.

The women's category presents future growth opportunities as we are seeing strong sell-in of the brand's casual boots for women.

A couple of weeks ago our Company announced acquisition of Chaco, a performance outdoor footwear brand based in Colorado with a unique heritage and a strong consumer following. The acquisition also included ULU, a premium brand of distinctive and fashionable performance winter boots. The Chaco brand has a commitment to durable, technical and high-quality outdoor sandals, making this is perfect fit to grow alongside Merrell and Patagonia footwear within our Outdoor Group. As reported by Leisure Trends, Chaco is the number-one sport sandal brand in the outdoor specialty store segment and is the number two sport sandal brand across all distribution channels. This acquisition represents an excellent opportunity for Wolverine to leverage its world-class sourcing, logistics and product development infrastructure to build upon Chaco's leadership in the US market while expanding its business internationally.

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

Overall, we are very pleased with our performance in 2008 and our ability to post another record year of revenue and earnings per share. We were proactive in adjusting to the economic chaos and the weakening consumer environment that spread across major markets during the year.

We released our 2009 guidance today. On a constant currency basis, the top end of our revenue guidance reflects modest growth over 2008. From an earnings perspective the top end of our range on a constant currency basis and excluding incremental pension expense and the nonrecurring charges associated with our restructuring plan also reflects modest growth over 2008. While 2009 will likely present some challenges, we like our competitive position and view the current environment as an opportunity to emerge as an even stronger player in our industry.

I will now turn the call over to Don Grimes, our CFO, who will provide you with some additional information regarding our 2008 results and our outlook for 2009.

Thank you, Blake, and good morning, everyone. This morning I will review the financial results for the fourth quarter and full year ended January 3, 2000 in a little more detail, and then I will provide some perspective on how we see the current fiscal year.

Earlier today we reported record financial results for the Company's fiscal year ended this past January 3, our eighth consecutive year of both record revenue and earnings per share, performance of which we are justifiably very proud. Revenue for the quarter totaled $346.1 million, a 3.2% decrease when compared to revenue of $357.4 million in the prior year's fourth-quarter.

Negative foreign exchange reduced reported revenue growth by 3.3%, so on a constant currency basis we had essentially flat revenue in the quarter. Adjusting further for the absence in this year's fourth quarter of revenue from Hush Puppies Slippers, Stanley and private-label businesses, lines the Company decided to discontinue over a year ago, revenue growth in the quarter was plus 1.3%.

Earnings per fully diluted share of $0.49 in the quarter equaled the $0.49 per share in the fourth quarter of the prior year. Revenue for the full year was $1.221 billion, a 1.8% increase over prior-year revenue of $1.199 billion. The impact of foreign exchange on full-year revenue was minimal as foreign exchange benefits in the first half of the year were essentially offset in the fourth quarter.

Earnings per fully diluted share were $1.90 for the year, up 11.8% from the $1.70 in the prior year. We had excellent leverage as earnings per share growth in the year was more than six times the rate of revenue growth.

Full-year gross margin expanded by 40 basis points, excellent performance in a retail environment that became more challenging as the year progressed.

The fourth quarter's SG&A de-leverage, driven by lower than planned revenue and a flat gross margin, resulted in full-year operating margin of 11.5%, essentially equal to the prior year.

The effective tax rate was 26.4% in the quarter as we recorded the full-year benefit related to the extension of the research and development tax credit and benefits related to our Asian sourcing structure. Our full-year tax rate was 31.8%. The Company repurchased approximately 72,000 shares in the open market in the quarter for a little more than $1.4 million.

For the full year, the Company repurchased approximately 2.8 million shares in the open market for a total of about $74 million. We still have approximately 600,000 shares remaining under our current share repurchase authorization and, while mindful of the need for cash conservation and financial flexibility in these uncertain economic times, we will continue to evaluate opportunistic share buybacks.

Accounts receivable of $167.9 million at year end decreased 6.7% compared to the prior year, a rate of decline that is more than double the decrease in revenue in the fourth quarter. This is outstanding performance in a difficult credit environment and a testament to the vigilance with which we are managing both credit extension and cash collections.

Year-end inventory increased approximately $31 million compared to the prior year. This is our first increase after six consecutive year-over-year inventory declines and was driven by several factors; one, a strategic decision to make inventory investments in core product prior to anticipated 2009 cost increases; second, higher product costs driven by mid-year factory cost increases; third, the timing of spring inventory receipts, which fell into fiscal 2008, only due to the extra week in the fiscal year; and fourth, modestly lower than planned sales in the last two months of the fiscal year.

Much of the incremental inventory increase is represented by core, nonseasonal product in our Merrell brand, and we have plans to work through the inventory in a very balanced way.

We continue to have one of the strongest balance sheets in the industry, which permits us to take advantage of the unique and promising opportunities. Although of relatively small size, the recently announced acquisitions of both the Cushe and Chaco brands are examples of this. During the year we paid off the last $11 million of our 6.5% senior notes payable and generated cash from operations of $93.5 million. We ended the year with cash on the balance sheet of $89.5 million and interest-bearing debt of $59.5 million, for a net cash balance of approximately $30 million.

Our leverage ratio, defined as total debt divided by last 12 months EBITDA, was a low 0.4. The Company has significant financial flexibility and excellent relationships with key financial institutions, a source of meaningful competitive advantage in the current economic environment. We are pleased with our financial performance in the most recent fiscal year and believe the results reflect the strength of our brand portfolio and the benefits of our diversified business model. Nevertheless, the dramatic negative turn in the economic climate and consumer confidence in many major markets over the last few months is impacting practically all businesses and virtually all consumers spaces. We have not been totally immune and did experience some order cancellations during the fourth quarter, leading to lower than anticipated revenue growth.

As we enter 2009 it is clear that consumer spending will remain under pressure. Our backlog of future orders is down versus the prior year as retailers remain very cautious, and it's apparent that we will have tough comparisons in the first half of the year.

Based on the perspective we have on the first half of the year and the remarkable, almost unprecedented uncertainty regarding the back half of the year, we are offering initial guidance for 2009 revenue of $1.07 billion to $1.15 billion. Embedded in this revenue guidance is the assumption that the US dollar strengthens modestly from its current position versus the currencies against which we have the most exposure, the British pound, the euro and the Canadian dollar. And, as a result, negative foreign exchange is driving about $90 million of the year-over-year revenue decline. Our 2009 guidance does include the projected contribution from our newly acquired brands, Cushe and Chaco.

We announced early last month a broad restructuring plan that will result in operating efficiencies in our logistics supply chain and sourcing operation. We still expect non-recurring pre-tax charges in 2009 related to the restructuring plan in the range of $31 million to $36 million, which will deliver annualized pre-tax benefits in the range of $17 million to $19 million once all initiatives are fully executed.

As discussed last month, most of the non-recurring charges will be recorded in the first half of the year. Excluding the impact of the restructuring charges I just discussed, we expect a range of earnings per share in 2009 of $1.50 to $1.70 per fully diluted share.

Let me put this guidance in perspective by offering some color on specific issues. The foreign exchange assumptions just mentioned will negatively impact earnings by approximately $0.15 per share. We are targeting flat gross margin for the full year with negative foreign exchange and first-half product cost increases being offset by planned price increases, a second-half mitigation in product cost, some benefits from the restructuring initiatives just discussed and a slightly favorable product mix.

Like many companies, Wolverine's defined benefit pension plans, which were more than fully funded at the beginning of the year, experienced a significant decline in the value of pension assets during 2008. As a result, we will record approximately $9 million more pension expense in 2009, or about $0.12 per share.

Some of the annualized structuring benefit of $17 million to $19 million will reduce the cost of sales, but most of the benefit is in the form of reduced operating costs. Our guidance assumes that we will realize a portion of the operating cost savings in 2009, with the savings accelerating for the year as specific initiatives are executed.

In addition to freezing nonunion salaries as announced last month, we are implementing good old-fashioned belt tightening in other areas of the Company. Because of the lack of clarity regarding full-year revenue we aren't offering a target for SG&A as a percentage of sales, but I will tell you that we are planning on a reduction in SG&A for the full year.

We expect the newest additions to our brand portfolio, Cushe and Chaco, will generate slight operating losses this year as we make needed investments in product design and development and divisional infrastructure, gearing up for the spring 2010 season.

Finally, we are estimating a full-year effective tax rate of 32% and average shares outstanding of 50 million.

None of us knows how long the current challenging economic conditions will persist. Notwithstanding that obvious statement, Wolverine now markets 10 powerful lifestyle brands in various stages of development that complete in diversified distribution channels and about 180 countries around the world. We are challenging ourselves to push for market share gains and operating efficiencies in every area of the Company. We are taking actions through our strategic restructuring plan, our recent acquisitions and a thorough examination of all sources of profit growth. We believe that when this economic cycle bottoms out, as it inevitably will, our Company will emerge as an even stronger player in our industry.

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

Thanks, Don. We're obviously pleased to have delivered another record year. Our strong and diversified business model, which enables us to efficiently build global brands, limits risk and gain market share while delivering for our shareholders, is very good and operates in a variety of economic climates. Above all, we remain focused on delivering new, exciting and innovative product to our loyal consumers.

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

(Operator instructions) Jim Duffy, Thomas Weisel Partners.

I wanted to dig into the inventory a little bit. Can't you characterize the types of product from -- maybe give us an example of the types of product from Merrell that you invested in, in advance, to capitalize on favorable costing, and maybe quantify what the costing benefit was of taking that inventory early?

Yes, I can give you a little guidance there. If you looked at it in terms of product categories, it would concentrate mostly in the multi-sport, in the Chameleon area, as well as some in the moc area. So it was basically core carryover product.

I think, Jim, another thing you have to keep in mind about the inventory is, we were down about $18 million at the end of 2007, so this $30 million or thereabouts comparison is against an inventory level that was probably a little low last year.

Just to kind of quantify the whole inventory situation, I would think the strengthening dollar more than offset some of the cancellations we had in the quarter. That might be a good way to view it. And then the rest of it was split almost a third, a third, a third between timing, our 53rd week, our strategic purchases and cost increases that came last year that, frankly, was built into our inventory. So I hope that gives you a little more color.

Well, it does. The decision to bring some of the inventory in early -- can you characterize the margin benefits you will see from that?

The benefit the related to the inventory pre-buy actually is a little bit less now than what we thought we actually -- with the excess capacity that factories [evolved] for the actual cost increases that we were anticipating, that were being discussed when we made the pre-buy decision, have evaporated some, which is really a positive thing.

So the net financial benefit is somewhat minimal, but I think it was a good strategic decision at the time. Obviously, the only impact is on year-end working capital because we do have -- it's core product, and we feel like we will be able to sell it at full margin.

And then, you spoke to price increases expected for the year. How much -- what's the order of magnitude there?

We are really in the process of bringing those down. As you know, we did a pretty good job last year of mitigating price increases for product in 2008, keeping it low- to mid-single digits. Obviously, in the back half of the year there were much higher price increases that the factories tried to put through for 2009. We're in the process right now, frankly, of reducing those and taking those price increases down.

Our spring '09 price list kind of on average are in the mid-single digit year-over-year increase, but I think fall '09 is a little bit in a state of flux as it relates to what the actual product costs would be. And I would expect fall '09 year-over-year price increases to be a little bit less than that.

Okay, makes sense, dynamic environment. In that context, not the most favorable environment to be launching new retail concepts, have you been favorably inclined towards the performance of the Merrell stores? Do you continue to see that as a strategic direction for the Company?

You know, we do. If you break out our own retail business last year, it was rather interesting. The outlets, of course, like everybody's outlets, suffered from lower traffic simply because you didn't have to go to an outlet mall to get a discount last year, as we all know.

But even last year, our full-price concept stores, Track 'n Trail and then the few Merrell stores we had opened, had a mid single-digit comp store increase, which was significantly better than the FTRA numbers that were published. We had almost a 30% increase last year in our e-commerce business. So we have been very pleased with the performance of Track 'n Trail. We have been very pleased with the performance of Merrell stores. We have plans this year to open probably a net eight stores, and four or five of those stores would be Merrell stores, full-price Merrell stores, just to put it in perspective.

So certainly, as measured against the industry and some other distribution channels, our concept stores did very well. The new Merrell store in San Francisco on Union Square continues to do very well, as well.

Okay, great. And then final question, Don -- CapEx budget for '09?

We are targeting in the range of $20 million, Jim. We will continue to evaluate that over the first half of the year. That compares to $24 million in 2008.

Chris Svezia, Susquehanna Financial Group.

First, you mentioned on the backlog position. I was wondering if you could just maybe add some color, where it stood, and just maybe some color between domestic and international would be helpful as well.

I can give you a little color on that. I guess we all know that orders either at-once or future orders have been very volatile the whole fourth quarter from retailers as really the whole retail -- and that's large department stores, down to mom and pops -- really focused on reducing their inventories and trying and catch falling consumer demand.

That being said, I've really never seen a time like the present when our order backlog or anybody's order backlog was probably less relevant as a predictor of future sales. For us at year-end overall, we had about a mid single-digit decrease in pairs in our order backlog, when you exclude the timing of some large, low-margin orders related to the Bates military business.

So I will say that, since year-end, over the last four weeks our backlog position has improved significantly. But in this environment I'm sure you can appreciate that the orders -- there's still quite a bit of volatility in the orders. The retailers are really requiring the brand owners and wholesalers to carry what they need so they can order the merchandise and get it when they need it. And we are pretty good at that.

And there was no material difference between our international backlog position and our domestic position.

When you talk about down mid-single digits in pairs, how should we look at that from a dollar value perspective?

On a constant currency basis and taking out some pretty significant low-margin base business that was in the backorder position -- or the backlog at this point last year, the dollars were down mid-single digits.

Okay. And then, when you are giving your revenue targets, broadly speaking, for 2009 and you're talking down 5 to up 1.5, ex-currency, and when you're talking about with currency, it looks like it's down 12 to down 6, give or take, can you maybe just talk about as you see it right now -- I know visibility is difficult -- in terms of what potentially will be the drivers? I'm assuming incrementally the Merrell business. Maybe just talk about Hush Puppies, just near-term, what the outlook looks like. Maybe just add some color about segment drivers as we look to 2009.

To be honest, all of our branded groups had a very good 2008. And so, when you have the advantage of operating in about 180 countries around the world with eight to 10 brands, you really have the ability under our business model to diversify risk. We are really not subject to -- while we are not immune from the current consumer environment and consumer spending, we are certainly not exposed to any single country, any single fashion trend or risk.

We expect all of our brands to grow next year. First and foremost, we are going to stay fanatically focused on creative product. As you know, we are not a follower. We don't follow fashion trends. We try and look out over the next two hills and set trends with each of our brands.

I think some of the success we had in 2008 is directly attributable to that focus on superior product. And you saw that in Merrell and in the new ICS product that's coming out in Bates and the Wolverine brand and really spread across our line.

So as far as trends are concerned, we are seeing a little bit of a boot trend coming back. It's not quite the halcyon days yet, maybe, of the mid '90s with Nirvana and grunge and everything else, but you are seeing a boot trend emerge in Europe and several other markets.

Although we don't offer revenue guidance by individual brands or operating groups, if you take the relative performance of our operating groups and our brand in 2008 and extrapolate that over the guidance that we've offered up for 2009, that would give you some perspective on how we think things are going to look.

Also I will say that we are expecting tougher first-half comparisons than the second half in terms of year-over-year growth.

Right, okay. Just a point of clarification. On the fourth quarter where you mentioned Outdoor Group, I think, was down mid single digits, maybe just a point of clarification. How much can you break out possibly was Merrell ex-currency? Just trying to get some feel around what was going on domestically versus international on the Merrell brand.

Of that mid single-digit decline, about a third of the decline was driven by FX. And in the Outdoor Group, as I'm sure you appreciate, Merrell is the driver, the dominant brand within that Outdoor Group.

So it was down a little bit in the US, just given what was going on in the fourth quarter?

Yes, I think -- as you know, Merrell is very, very strong, Chris, in the US, in the outdoor specialty segment, either the chains or the mom-and-pop operators. And, while no distribution channel is immune from the current environment, really that outdoor specialty channel, which is an enthusiast distribution channel, really got by the first three quarters of last year pretty clean. But even they were impacted in the fourth quarter of '08.

Okay, the last question I have here was just a point of clarification on the pension expense. Historically when you guys were fully funded, what impacted did that have, if any, on your P&L? I'm just trying to get an idea of how we should look at this, if this is obviously a cash item. Just trying to get our hands about how we should be looking at this number as we go through 2009.

Well, there are two issues. One is the pension expense that we'll record on -- per GAAP, and the other is the pension funded status. And the year-over-year incremental pension expense in '09 will be the $9 million or the $0.12 a share that we talked about. The pension plans as of the end of '08 are fairly significantly underfunded, as probably a lot of defined benefit pension plans are. So we will have a more significant cash contribution to our pension plans in 2009, in fact, exceeding the actual dollar amount of the pension expense.

We are still working through what our funded target status will be, so I can't give you an exact number today. But there will be a pretty significant contribution to the pension plans during 2009.

So there are cash expenses that flow through the P&L and flow through the cash flow statement?

They are different, but they are related, I guess.

Mitch Kummetz, Robert W. Baird.

Don, you made the comment just on that last question or one of the last questions that -- on your sales outlook for the year, a tougher first-half comparison than second-half comparison. So I am guessing your sales outlook for the year suggests that sales are going to be down more on a percentage basis in the first half than the second half?

That would be a correct statement.

Okay, and what visibility do you have at this point on the second half? Have you received any fall '09 orders or had many conversations on fall '09 yet, to give you any visibility there?

We certainly have a lot better visibility in the first half than in the second half. As Blake mentioned in talking about the backlog, we have been encouraged by the order trends over the last -- the first four to five weeks in the current fiscal year. So our views on the second half aren't based strictly on blind optimism. It's based on more recent order patterns and conversations and discussions that our business folks have with their key retail customers.

Okay, that's helpful. And then, on the SG&A, in terms of your outlook for the year there, I know you're not guiding to a number or a percentage, but you did say that you would expect benefits to accelerate over the course of the year. Was that comment specific to the cost savings that you would expect coming out of the restructuring, or did that include just overall SG&A, including belt tightening over the course of the year?

That includes both, Mitch.

Okay. And then I think on the call a month ago when you announced the restructuring plan, you talked about annual cost savings from that plan of $17 million to $19 million. I know you're not expecting to get all of that this year. How much do you think you can get in '09 out of that restructuring? How much is built into the guidance?

Well, really, we are not quoting a specific number of the $17 million to $19 million. Obviously, that $18 million midpoint, once fully executed, will be the net savings we will be realizing versus what we otherwise would have been recording as cost of sales and operating expenses. But I guess we are providing a little flexibility in terms of when we are able to execute some of these.

There are some pretty comprehensive large initiatives related to distribution, consolidation and manufacturing realignment, and so we are giving ourselves a little, I guess, wiggle room. But the number is not insignificant, built into the '09 plan, but we are not offering a specific number in terms of what the benefits will be in '09.

And then, on gross margin for the year, you said flat/down in the first-half, up in the second half. You talked about the cost impact and then some pricing. What about the impact of FX on your margins for the year? Are those also going to put more pressure on the first half than the second half?

Yes, they will. Just to clarify, Mitch, when you said -- I said gross margins will be down first half. FX would be a drag and product costs will be a drag in the first half versus the second half. I didn't offer any guidance on gross margin, first half versus second half.

Okay, got you. On the new brands that you have acquired, can you talk about what sales and earnings impact you would expect to see from those brands in '09?

We are not disclosing those brands' revenue. We had built into the guidance a small operating loss on both brands as we make needed investments in, as I said, design, development and infrastructure. But a very modest operating loss in 2009. Really, the benefit will be in the 2010 season.

We will be having a broader launch for both brands in spring 2010, just to give you a little more insight. Cushe today is not a -- it may be a gem, but it's not a very large brand. We've said before it's less than 100,000 pairs. And Chaco has been in the $20 million range, just to give you some idea.

Okay, that's helpful, and then just a few quick last questions. Don, again, you mentioned that your guidance for the year assumes some strengthening of the US dollar. Can you put that in context? How much strengthening is based into the outlook?

We are planning on $1.30 for the dollar versus the pound, Mitch, and $1.20 versus the euro and $0.75 versus the Canadian dollar. Put that in perspective, our average rate in '08 for the pound was $1.86, so that's a 30% strengthening of the dollar. The average rate on the euro was $1.47. For us, that's almost a 20% strengthening of the dollar versus the euro in our plan. And then, we experienced a $0.95 versus the Canadian dollar, so that's a strengthening of about 20% versus the Canadian dollar as well. So that contributes most of that $90 million of negative foreign exchange impact on the revenue line.

Got it. And then, on the inventory, the items that you mentioned, I assume you have put those in order of magnitude in terms of the inventory increase?

Yes, but as Blake mentioned, they were all fairly close in terms of the dollar impacts.

The last one you mentioned was lower Q4 sales. I guess there's maybe some excess inventory generated as a result of that. How do you think about that? Is that going to put pressure on the gross margin in the first quarter, in particular, as you move through some stuff? It didn't sound like you really felt like there was a lot of at-risk inventory.

We really don't. We had closeout sales, or we sold closeout inventory of about $40 million during the course of 2008. We feel really good about where we are, even though the year-over-year dollar increase is somewhat significant. And the percentage increase, as Blake mentioned, 2007 inventory was down pretty significantly versus 2006.

So it has been a hot topic of conversation and has been addressed at length internally, and we feel good about what our plans are to move through the inventory without any detrimental impact to our gross margin.

Okay, thanks. And then lastly, real quick, shares outstanding in the fourth quarter, average shares?

In the quarter we had 49.5 million shares outstanding, on a weighted average. At year end, we had 48.9 million shares out.

Todd Slater, Lazard Capital Markets.

Thank you, and congrats on a good quarter and really good work on the accounts receivable.

I was wondering if you could give us a little bit more color on what you're seeing internationally in Europe in terms of maybe individual geographies and how fast is the environment slowing, where are the relative stronger versus weaker markets, and what you're seeing maybe in Asia as well? That would be great.

I think the slowdown in consumer spending has spread, to a certain degree, across borders. Probably, the US was still one of the first countries to be affected, maybe followed by the UK. We still have some very good markets in Europe, and we have some softer markets in Europe, and that's generally true around the world. You're seeing a softening of demand.

We're pretty fortunate to be in the footwear industry. Historically, in tough times the footwear industry suffers less, and you saw that when you looked at the fourth quarter by product category numbers in just the US. So luxury was -- and some of the apparel categories were down two, two-plus times the amount of footwear. Still, it was a tough quarter footwear in the US, but historically speaking the footwear industry does pretty good.

If you are out with great product, even in tough times, you are going to do pretty good.

I guess, if I could just maybe get your view of what you're seeing in terms of the stress on the retail environment, if you think about the types of customers you ship to, how would you characterize the health of the department store world versus the athletic stores versus the specialty mom-and-pop's? And have you assumed some store takeout, some rationalization, in the supply in your '09 projections?

Yes. I would think, having been around retail recently, I think all retailers, mom-and-pop's up through the larger department stores, focused on inventory reduction, obviously, lots of promotions in Q4. They were trying to catch the falling consumer spending. I think you're going to see some more stress on some of the larger chains, both in the US and in some other select markets. Most of the independents, the smaller operators -- they are pretty sharp people, the ones that are left, and they are going to do just fine. They were probably some of the quickest people to respond to the current situation.

So from what I am seeing at retail right now, I think overall people did a fairly good job in trying to adjust inventories in Q4. At some point, they're going to need to have inventory on their shelves when their customers are walking through the front door, to sell them, if they are going to generate gross margin dollars.

So in that respect, as you know, for a couple of years we have been focusing on our narrow and deep inventory position, and that's very good in this current environment.

And Todd, to address something that may be on your mind, as I'm sure you are aware of the Stylo reorganization in the UK which is one of our major retail customers for Hush Puppies and CAT brands in particular. Our guidance and our plans for '09 certainly factor in their plan of reorganization and the likelihood that a number of their doors will close. So we are factoring that into our thinking for '09 in our guidance.

So it sounds like you are saying that the independents are relatively stronger. I'm just curious, what percent of your order book is from that bucket? And are you seeing better order trends, relatively speaking, out of that group?

We're seeing pretty good order trends the last four or five weeks from a lot of different channels. As you know, our Company in total has relatively low exposure to the US department store segment. Merrell, for example, does only about 20% of its total USA volume with department stores -- Nordstrom's, Dillards and a couple of others.

So as a Company, we have relatively low percentage of our overall sales domestically through the department store channel.

Jeff Blaeser, Morgan Joseph.

What are your expectations for store and Shop in Shop growth in 2009? And, do you expect any impact from potential bankruptcies?

I don't see any potential -- when we look at us opening concept stores, I've already given you those numbers for our own territories. We're going to be opening a couple stores in Montreal and a store or two in Europe and some more Merrell stores here in the United States. Our international partners, though -- we had a very high number of store openings and Shop in Shop's that were put in place in 2008. That has been a focus area of ours for some time. The return on Shop in Shop's is, as you know, very, very high.

So, where appropriate, we certainly have the resources and the inclination to put in as many Shop in Shop's as is consistent with the brand distribution strategy. So our own store plans are pretty well set, and we are working closely with our international partners to increase their controlled distribution as well.

So you would expect it to increase in some number in 2009?

I think clearly an increase, maybe not the same rate that we experienced in 2008, which was quite pleasing to see, the number of -- the increase in the number of points of controlled distribution.

And then, going to Heritage and Wolverine, I think you said they were both up year over year despite very challenged vehicle, marine, construction industry trends. Are you gaining market share, seeing any added pressure in those categories, relative to the economy, or do you just consider your product relatively immune to those conditions?.

Well, as you know, in the US, CAT is a top five work boot brand. Wolverine is probably the number one player in the US. Both of those brands really don't sell very much, I believe, to the entry-level person. They're selling more in pure work to the person that views boots as one of their tools that they use on the job site.

Interestingly enough, if you read the papers you would have thought the work category for 2008 would have suffered. The work and civilian uniform businesses in our country for 2008 were actually very, very good. And it's kind of counterintuitive, but that's what the numbers show.

Market share data is somewhat difficult to get, and at least I've found, in our industry, and it's not as timely as I would like to be. But I think you have to conclude, Jeff, that, to given the performance for Heritage Brands Group and Wolverine Footwear Group, that we did gain market share during the course of 2008, given that both of those operating groups grew their revenue.

Sam Poser, Stern Agee.

Can you talk a little bit about currency? Because we have spoken to you about currency in the past, and it wasn't a big deal. Is there a way that you can sort of walk us back through maybe the positive effects of currency in the beginning of 2008 so we have some comparisons in 2009?

Sure. Our revenue growth in 2008 was 1.8% on a reported basis. Currency provided 30 basis points of that revenue growth. So on a constant currency basis, revenue growth has been 1.5%. Currency helped our gross margin in 2008 by about 100 basis points. And so when we look forward to 2009, I already covered our assumptions regarding the three major currencies that we have exposure to. But to kind of put our currency exposure in context, every 10% change in those three currencies that I referred to -- the pound, the euro and the Canadian dollar -- impact our top-line revenue by about $27 million and our EPS by about $0.04 a share.

So if currency ends up being 10% better or worse than the rates that we have embedded in our plan, that would have about a $30 million revenue impact or about a $0.04 EPS impact. So, does that help, Sam?

Yes, it does. Also, can you talk about what -- in sales, on the revenue line for the -- I know you made -- with the restructuring, how should we be looking at the retail in leathers line of revenue on a year-over-year basis?

We're going to continue to expand our controlled distribution, what is reported as our retail sales. So that will continue to go up, and you can factor in a net increase of eight stores and probably on average a mid-year opening of those stores.

With respect to the leather division, we're going to remain in the leather business. We have been studying alternatives with respect to the making of leather at our tannery in downtown Rockford. So we may very well outsource those functions, but we will still be in the leather business for 2009.

So we would continue to see -- so that would just be sort of normalized? Because, with your guidance, and you say that you expect to see growth in all of your branded lines -- is that in constant currency?

That was more of constant-currency comment. But, to answer your question, Sam, regarding restructuring, we are still in the Wolverine leather's business. What's going to happen as a result of the restructuring likely is that outsourcing of the processing of the leather from our own tannery to third parties. So you won't see an impact on the revenue line from the restructuring.

And then, what products and what geographies are you seeing the cancellations in?

Really, Sam, it's difficult to give you any really specific. There's none that really stand out. It was kind of all categories and kind of across the board.

Every brand experiences order cancellations every quarter, even in good times. But the pace accelerated a bit in the aftermath of the October Wall Street and consumer crises.

With the Outdoor Group business being down, is that apples-to-apples against just Merrell and Patagonia last year? Or, is that because you moved out Sebago at the beginning of the year? Is that --

It's apples-to-apples. We reclassified Sebago in the prior-year numbers.

Scott Krasik, C.L. King.

If I am just looking at the sales guidance apples-to-apples with the [1.220] because you hadn't excluded currency before, sort of midpoint gets you a 9% decrease. Is there a seasonality to the new businesses? Should we think about the first-half sales being down double digits? Because then, then you pick up the new business sales in the second half of the year, or --?

We are certainly -- if you choose the midpoint and get the 9% down, if that ends up being a full-year number, I think you could be fairly certain, it would be a double-digit decline in the first-half and less than that in the second half.

Okay. And then, generally, is there a seasonality? I mean, like Chaco is a big sandal business. Should that be affecting third-quarter business?

Those businesses are not large. Obviously, Cushe is very, very small at this point. Chaco is a sandal business, but they do a good business throughout the year, maybe a little heavier for Chaco in the first-half of the year, shipments. But they have been an in-stock item in our Track 'n Trail stores 12 months a year for a long time.

And then maybe talk about, because our checks have indicated that that core Merrell product has held up pretty well, but the fusion, the fashion product, that you really haven't been able to grow that. What is the outlook for the business? Have you lost share? Are there new emerging brands that are doing a better job on the fashion side?

I don't think we've lost share on the fusion side. This sell-through reports that we get continue, really, across all of Merrell's categories, indicate pretty good sell-through to the ultimate consumer at retail. So I think our performance categories, I would characterize as performing better overall. And Merrell, as you know, is kind of a dominant player is that multi-sport and performance categories.

But, Merrell is a big business now, but Merrell also has plenty of opportunities to expand its business in the future, especially in the fusion part, casual part of the line.

Blake, what is the distribution now for the apparel, the Merrell apparel?

The apparel distribution would be -- geographically, if I was looking at it, maybe 30% in the US, 25% to 30% in Europe, 45% international. As you know, we've got a number of our international partners that want to open Merrell lifestyle stores. So we've got a good chunk of that apparel going to the international segment. It's about 50-50 men's and women's, still.

In the United States, you would see some at Dick's and a little bit at Scheels and Paragon, and then some independents, Mountain Sports and Peter Glenn and that sort of thing. In Europe, you would see it in maybe Blacks' and field and track and snow and rock or Decathlon, those type of stores.

Don, I would assume pension was probably a favorable line item in G&A last year.

I'm sorry -- favorable in terms of a credit versus an expense?

Correct.

No; we actually had pension expense in 2008.

Okay, so then -- I mean, the last time I think it was a major expense was '03, I guess, coming out of '02. You didn't exclude it from the guidance. So could we just be consistent there, just because that's what you had always done in the past?

We just thought it was worthy of calling out this year, or '09, because of the significant increase. I mean, it's kind of the unprecedented drop in market value of pension assets. Quite honestly, I'm not sure what drove that big increase in pension expense from a few years back. I'll look at it and see.

Probably the market drop in '02.

Yes.

Jeff Mintz, Wedbush Morgan.

Actually, all my questions have been answered, so thanks very much and good luck.

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

On behalf of Wolverine World Wide, I would like to thank you all for joining us today. As a reminder, our conference call replay is available on our website at www.WolverineWorldWide.com. The replay will be available through Wednesday, February 18, 2009. Thank you and good day.