Wolverine World Wide Inc (WWW) 2009 Q1 法說會逐字稿

Good morning and welcome to the Wolverine World Wide's first quarter 2009 earnings conference call. All participants will be in a listen only mode until the question and answer session of the conference call. The call is being recorded at the request of Wolverine World Wide. If anyone has any objections you may disconnect at this time.

I would like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Augusta. Good morning, everyone and welcome to our first quarter conference call. On the call today are Blake Krueger, our CEO and President, and Don Grimes our Senior Vice President and CFO. Earlier this morning we announced our first quarter 2009 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 web site at www.wolverineworldwide.com.

This morning's press release included non-GAAP disclosures and these disclosures were reconciled with an attached table within the body of the release. Today's comments during the earnings call will include some additional non-GAAP disclosures. There is a posting at our corporate website that will reconcile these non-GAAP disclosures to GAAP. To view the document, please go to our corporate website, www.wolverineworldwide.com, click on investors in the navigation bar, click on webcast from the top navigation bar of the investors page and then click on the file called WWW Q1 Conference Call GAAP Versus Non-GAAP Disclosures.

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

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

Thanks, Christi. Good morning to everybody and thanks for joining us today. This morning we reported very good results for the first quarter of 2009 despite the difficult retail and macro economic environment. Revenue in the quarter exceeded our internal plan and our earnings leverage was very strong. Our ability to consistently deliver strong profit is a testament to our team's excellent execution against our multi-brand, multi-country and multi-category business model. We currently have the advantage of serving a wide array of consumer groups and about 180 countries around the world.

In these uncertain economic times, we are especially focused on protecting and increasing our brand equity and integrity around the world and maintaining the full price nature of our brands at retail. We continue to take share in a declining market and have redoubled our efforts to deliver innovative cutting edge product. We feel very good about our product offerings across our brands as we begin the second quarter. The current global retail environment is extremely promotional but we have not participated in the promotional fray. Maintaining full price status for our brands may cost us in sales in the short term but as our first quarter results reflect, the integrity of our brand has not been impaired and we are better positioned for long term growth in sales and profits.

I would like to begin my brand review with the Hush Puppies group which now includes our newly acquired Cushe brand. In spite of the challenging global economy and stronger US dollar, our Hush Puppies international and Canadian businesses posted solid revenue increases in the quarter. These increases were offset by lower sales in the US and Europe. These decreases were primarily the result of retail bankruptcies and consolidations caused by weaker consumer spending in both markets. Our European results were also negatively impacted by a stronger US dollar compared to the British pound and the euro. Overall, our Hush Puppies business in the quarter experienced a revenue decline in the mid-single digit range on a constant dollar basis.

Gross margin for the quarter improved 170 basis points over last year due to our continuing focus on better grade products and compelling design. The Hush Puppies brand is now marketed in over 140 countries worldwide, and making our already strong controlled distribution base even larger is a key strategic objective for the brand. During the first quarter, 6 new concept stores and 19 new Shop in Shops were opened, bringing the quarter end total to 505 Hush Puppies brand concept stores and around 900 Shop in Shops.

Product innovation is central to our Hush Puppies brand building strategy and is critical to our plans to move the brand up market in the US. As a result of new product offerings, including the Orbs Collection which features our lightweight 0g technology, Hush Puppies successfully increased the average wholesale selling price in the US by about a little more than $2 per pair during the quarter. Very good performance in the current promotional environment.

Early retailers interest in Cushe, our new design-led, younger, active lifestyle brand, has been overwhelmingly strong. We have already opened some of the best specialty store distribution in our domestic markets and have signed distribution agreements for 12 new international markets, confirming the significant potential of this exciting new brand. We will be launching the Cushe brand to our entire international distribution network at our May sales conference.

Let's turn to the Heritage Brands Group which including Sebago as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson. For CAT, sales performed in the quarter were adversely impacted by the international nature of the business where over 80% of all pairs are sold outside the US, as well as the impact of a much stronger US dollar. On a very positive note, the US business posted a single digit sales increase during the quarter based on the continuing strength of the Super Duty work program as well as strong sales to their top 30 accounts. For the quarter, the earnings leverage was excellent as CAT achieved a mid single digit earnings increase despite lower sales. Consumers are responding well to the new CAT product initiatives, including fresh offerings in the Legendary Rock Collection, the SRX program and the Ag Technology category. The fashion trend to work boot styling is also helping our sales efforts in Europe and we expect this trend to spread more broadly.

Turning to Harley-Davidson, revenue, as planned, was down for the quarter high single digits in constant dollars, reflecting both the weak retail environment and a continuing impact of the brand repositioning in the US. Harley is still one of our most profitable and highest return on sale businesses. Sell through of our new product concepts including the Performance Riding Collection continues to be positive despite the challenging retail environment. In the US where we sell about 85% of our product, sales to our top 40 retail accounts were up 15% driven primarily by the current trend towards classic American profiles including harness and biker boots.

Sebago's revenue decline in the quarter was primarily due to decreases in the US and European operations. US sales have been negative impacted by decline in the New York City area business due primarily to the significant reduction in tourists. In Europe where nautical inspired profiles are in trend, we're expanding our retail presence in opinion leading retailers on the strength of the iconic Docksides product line. We have received considerable positive PR in both the US and Europe related to our collaborations with Vane in New York City and the Paris retailer, Collette. We are on track to open 40 new Shop in Shops and three new Sebago concept stores in Q2, which will bring the brand to a total of about 40 concept stores and over 130 Shop in Shops.

Despite the very difficult retail environment and the negative impact of a stronger US dollar, the Heritage Brands Group was able to deliver a 230 basis point improvement in return on sales as a result of stronger margins and aggressive SG&A control.

Turning to the Wolverine Footwear Group, revenue exceeded our plan for the first quarter but was down from the prior year due to the expected reduction in Bates sales to the Department of Defense. Unlike the prior year, DOD shipments will be more back end weighted in 2009. Despite the revenue decrease, leverage was very good as pretax earnings for the group exceeded our prior year on the strength of higher average gross margin and the benefits of rigorous SG&A control.

The Wolverine brand posted a very good sales increase in the quarter on the strength of the US and Canadian businesses. Wolverine is the leader core work category and the success of the Contour Wealth Program drove first quarter revenue gain. Product innovation and comfort technology continues to be at the forefront of the Wolverine business as evidenced by the first quarter launch and positive retailer response to the Wolverine ICS and Thousand Mile Boot programs. This was a very good quarter for the Wolverine brand.

The Bates business is committed to being the leader in providing footwear solutions for all branches of the US military. As well as being the leading global provider to the civilian uniform market. All segments of the Bates business recorded strong double digit sales increases for the quarter with the exception of the previously mentioned DOD business which is back end weighted this year. The success of our Bates ICS technology fuels growth in the civilian sector. While the underlying strength of the Bates brand droves increases in the military exchanges and international markets. The Wolverine and Bates brands have incredible brand loyalty and are expanding their positions as the gold standard in their respective categories.

The Outdoor Group which consists of Merrell, Patagonia footwear and the newly acquired Chaco brand, saw revenue decline in the low single digit range on a constant dollar basis during the first quarter due primarily to very soft retail conditions in many of our major global markets. The Merrell brand is performing well at retail as evidenced by the sell through reports from our major customers and our own instore experience. In this economic environment where overall consumer purchases are down, consumers and retailers are turning to brands that they know and trust that represent durability and versatility and provide solid price to value relationship. Merrell brand and products deliver on all of these characteristics. Merrell's Out Venture, that's its outdoor performance category, saw continued success as the brand reinforced its position as the global leader in the performance outdoor segment.

Some of Merrell's key product drivers in this category are the men's Moab and the women's Siren collections which have become the gold standard in the multi-sport classification. That classification is the largest category of the outdoor footwear market and an area where Merrell enjoys a dominant number one position. Merrell's Fusion, that's its outdoor casual segment, launched new product that reflected the brand's foundations of comfort, versatility and durability with outdoor inspired style. Early spring sell throughs have been very encouraging, especially for the new Celeste sandal collection and the Arabesque models. When combined with consumer favorites such as the Encore Breeze and the MJ, Merrell is strengthening its position as the go to brand for outdoor lifestyle shoes and sandals.

Merrell apparel shipments were above plan for the quarter. We are in the process of forming a dedicated apparel sales force in the US demonstrating our commitment to this meaningful growth opportunity. The apparel product line is now more aligned with the DNA and strengths of Merrell footwear, positioning us for better long term success. Merrell's global retail presence for the first quarter continued to expand. And Merrell now plans to have over 100 Merrell branded concept stores and over 1000 Shop in Shops in place by the end of 2009.

We and our distributor partners are committed to a greater global presence for Merrell with the overriding objective to increase the consumer awareness of what makes Merrell special and unique. We are combining brick and mortar locations with a growing online presence which is experiencing sales growth above the industry average and attracting significant consumer traffic. We feel that direct retail can represent over [15%] of Merrell's revenue within the next five years (company corrected after the call).

Patagonia footwear ended the first quarter with a low single digit sales increase on a constant dollar basis and a solid order backlog position. The trusted Patagonia brand is performing well in this tough market. New additions to the performance category are selling well, including men's and women's multi-sport product. The men's lifestyle business also remains very solid. The new casual collection in the Surf category is also starting out the spring season with good sell through.

New to the Outdoor Group's lineup of brands is Chaco. Chaco is the number one sports sandal brand in the US outdoor specialty store segment and the number two sports sandal brand across all distribution channels. After acquiring the brand in late January, we successfully leveraged our sourcing and logistics infrastructure to improve Chaco's customer service and on time delivery for the spring season. This was a great effort by our team. The brand's consumer loyalty is as strong as ever and we have high expectations for Chaco as we move forward. The integration of Chaco is on track and we look forward to introducing the exciting new product program that have been developed for the spring 2010 season. The Outdoor Group continues to be the company's largest generator of revenue and earnings.

Overall, we are very pleased with our performance in the first quarter which reflects the sell through of our brands at retail and our proactive approach to managing expenses and our SG&A infrastructure. We expect the current tough retail conditions to continue for some time, and have positioned the business and our brands to perform in this environment. Our brands are delivering exceptional value to the consumer at full price and are performing for our retail partners.

As we look ahead, our priorities remained unchanged. We are focused on, first, driving innovation in our product offering. Next, capitalizing on our vast global reach. Third, utilizing our size and purchasing power to drive efficiencies in our global supply chain. And, last, generating the operating improvements and cost savings associated with our restructuring plan while we prudently manage expenses and inventory.

We are more enthused than ever about the potential for Chaco and Cushe and are also focused on taking advantage of the current market conditions to add to our brand portfolio with our proven plug-and-play model. We like our competitive position and view the current environment as an opportunity to emerge as an even stronger leader 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 Q1 results and our outlook for the rest of the year.

Thank you, Blake, and good morning, everyone. This morning I will review our financial results for the quarter in a bit more detail and speak more specifically about the progress we're making on the comprehensive restructuring plan that we announced earlier this year. I will also comment on our outlook for the balance of the fiscal year.

Earlier today we reported financial results for the company's first quarter of 2009. On a constant currency basis, revenue declined 5.2% to $273.4 million, down from $288.2 million in the prior year's first quarter which we believe is very good performance in such a challenging global economic environment. Reported revenue for the quarter was $255.3 million, an 11.4% decrease. More than half of the decline in reported revenue versus the prior year was driven by foreign exchange. Reported revenue exceeded our internal operating plans at at-once business during the quarter and slightly better than planned foreign exchange rates helped soften a lower opening backlog position. Our quarterly results included revenue growth in many of our international businesses and in the Wolverine and Caterpillar footwear businesses in the US.

We moved rapidly forward in the quarter with the restructuring plan announced in January, recording $14.5 million of non-recurring restructuring charges and related costs. Recall that this restructuring plan, which we expect will be fully implemented by year end, will generate annualized pre-tax benefits in the range of $17 million to $19 million. Fully diluted earnings per share in the quarter after adjusting for both the non-reoccurring restructuring charges and $2.2 million of increased year-over-year pension expense were $0.44 a share, a decrease of only 4.3% versus the prior year. Reported earnings, including restructuring charges, were $0.21 per share in the first quarter.

Turning to gross margin, of the $14.5 million in non-recurring restructuring and related charges just mentioned, $2.3 million were recorded in cost of sales. Adjusting for these charges, our gross margin in the quarter was 41.2% compared to a prior year gross margin of 42.2% with the decline driven by expected product cost increases, the impact of which will mitigate as we cycle through the fiscal year. Adjusting for the nonrecurring restructuring charges, gross margin exceeded plan in the quarter.

In the current economic and business environment with robust top line revenue growth more difficult to count on, we believe it is even more imperative for companies to carefully examine all aspects of their cost structures. It's a fundamental tenet that every single dollar of SG&A spend is expected to generate a long term economic return to shareholders. But in tough times you think about things differently. There are some new hires you don't make, some open positions you don't immediately back fill. Some meetings you conduct via video conference rather than hopping on a plane. And some non-essential projects you just defer. It's not that they're not worthy investments in and of themselves, but as basketball announcers are fond of saying late in a game, it's a matter of time and score, time and score.

Fortunately for Wolverine shareholders, the company didn't wait for the worst of the financial crisis late last year to instill this discipline. And as a result we are very pleased with our expense control in the first quarter. Included in reported operating expenses are $12.1million of nonrecurring charges related to the restructuring plan. And as just noted, $2.2 million of increased pension expense. Adjusting for these two items and the benefit from a stronger US dollar, total operating expenses decreased $7.8 million, or 9.1%. These adjusted operating expenses were 28.4% of constant currency revenue compared to 29.6% of revenue in the prior year. The effective tax rate for the quarter was 32.3% compared to 33.5% in the prior year, lower due to a higher proportion of earnings in the quarter from lower tax foreign jurisdictions, and the benefit in this year's quarter from last fall's extension of the US R&D tax credit.

The company repurchased approximately 406,000 shares in the open market during the quarter for $5.6 million at an average price of $13.77 per share. We will continue to evaluate opportunities to execute share buybacks. Fully diluted weighted average shares outstanding in the quarter were 49 million. Accounts receivable of $198.5 million at quarter end decreased 11.1% compared to the prior year, and the company remained highly vigilant in managing credit extensions and collecting cash in as timely a manner as possible.

Quarter end inventory increased 15.6% from the first quarter last year, though on a unit volume basis inventory was up only 11.8%. The increase was driven primarily by year-over-year product cost increases, a strategic pre-buy of core Merrell and Caterpillar inventory prior to anticipated cost increases, inventory from our recently acquired Chaco brand, and a build of buffer inventory in our leather business. Moderately higher inventory levels throughout the quarter enabled the company to fill a greater percentage of at-once orders. We are comfortable with our inventory position which remains current and will continue to improve over the balance of the year. Based on orders on the book, factory purchase commitments and expectations for the remainder of the year, we anticipate that most of the improvement in year-over-year inventory will occur in the third and fourth quarter, with the year-end inventory ending up below prior year's levels.

Our balance sheet remains strong with total interest bearing debt at quarter end of $94.4 million offset by almost $57 million in cash on hand. In addition to funding both the Chaco and Cushe acquisitions out of our existing credit facility, the end of the first quarter typically represents a peak for working capital investment. We expect to reduce the balance on our revolving line of credit during the course of the second quarter. Going forward, we believe that our low 0.6% level ratio, our strong and consistent cashflow, the breadth and depth of our brand portfolio and our broad geographic reach are key competitive advantages and provide us with ample flexibility in this difficult environment. Our internally generated cash flow is more than sufficient to fund ongoing operations while also sharing a portion of that cashflow with shareholders in the form of dividends or share repurchases.

Let me give you a little more detail on our restructuring initiatives. As noted, we recorded $14.5 million of non-recurring restructuring charges in the first quarter. When we announced the restructuring plan early January, we estimated first quarter charges in the range of $14 million to $16 million, so we were within the range of our estimates. The biggest single item in the quarter was a noncash impairment charge against tannery assets. We previously announced we were considering a range of alternatives towards the tannery operation including the possible closure. We have, in fact, reached agreements with third parties to provide tanning and related processing services to the company, and as a result of this transition, the company's tannery closed just last weekend. We remain in the leather business but with a more efficient business model that utilizes outsource processing and manufacturing.

We also continue to make progress on the second major component of the restructuring plan which is to consolidate North American and European distribution. In fact, we recently received free trade zone status from the Department of Commerce that will permit us to accelerate our North American consolidation ahead of the original time line.

The third major component of our restructuring initiative focuses on our two US manufacturing facilities. We're in the process of realigning our domestic manufacturing such that each of these two facilities focuses on specific productions, work and military boots at our Big Rapids, Michigan facility, and Bates Oxford shoes at our Jonesboro, Arkansas facility.

We also moved forward in the quarter with a fourth major component of our restructuring plan which is to consolidate certain support functions that were scattered across several continental European satellite offices into our recently opened office in London. And, finally, we are right-sizing the business in several different areas in order to drive increased efficiency. We estimate that about $1.2 million of the decrease in SG&A expenses in the first quarter were a direct result of the restructuring actions taken to date. Obviously the dollar amount of these benefits will accelerate over the course of the fiscal year. And, as noted, we still estimate ongoing annualized benefits in the $17 million to $19 million range.

Our exceptional brand portfolio and a business that is multi-category, multi-country, and multi-distribution channel in nature continue to serve us well. We are encouraged that we had many pockets of growth in the first quarter, especially when measured in constant currency or payers, both in the US and internationally. Nevertheless, continued uncertainty and challenging trading conditions remain the order of the day and there is still a lack of clarity as to when the housing market will hit bottom, when credit markets will begin to thaw, particularly for businesses and for those consumers without pristine credit histories, when employment rates will begin to recede, and therefore when consumer spending will pick up.

Official March retail sales in the US were reported two weeks ago and they came in well below the consensus estimate. This is a pattern that is being repeated in most, if not all, of the most important and developed economies around the world. So despite a very solid earnings performance in the first quarter, we remain appropriately cautious regarding the balance of the fiscal year. Today we are reaffirming the full year revenue and earnings guidance that we offered during our last earnings call. We continue to expect reported revenue in the range of $1.07 billion to $1.15 billion. Foreign exchange rate changes are expected to negatively impact reported revenue by $70 million to $90 million for the full year. Thus, we expect constant currency revenue in the range of $1.14 billion to $1.24 billion compared to prior year revenue of $1.22 billion. Based on recent order patterns, we expect revenue comparisons to be more challenging in the third quarter versus the second or fourth quarters.

We are still projected full diluted earnings per share for the year in a range of $1.50 to $1.70 excluding the impact of nonrecurring charges of $31 million to $36 million related to the company's strategic restructuring plan. Embedded in this earnings range is a $0.12 to $0.15 per share negative impact from a stronger US dollar, and $0.12 per share of increased pension expense. Adjusting for the nonrecurring restructuring charges, foreign exchange, and increased pension, earnings per share are expected in the range of $1.74 to $1.97 for the full year, compared to earnings per share of $1.90 for the prior year, a range that brackets last year's performance.

We remain very confident in both our portfolio brands and our unique business model. Large brands that still have significant growth potential, such as Merrell, are accompanied by smaller brands such as Sebago, Chaco, and Cushe, all of which have enormous growth potential, particularly given our broad geographic reach and extensive network of third party distributors and licensees. Most of our distributors and licensees are strong, financially sound businesses who continue to thrive and invest in new retail locations to support the development of our brands. We remain confident that our brands are not only effectively positioned to weather the current economic storm but will emerge poised for even stronger results when the global economy inevitably resumes growth.

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

Thanks, Don. We are pleased to have delivered another quarter of very good results which is the end result of a great team managing a proven business model. While we are not immune to the current economic environment, our business model is strong and allows us to efficiently build global brands, limit risk, and gain market share. One of our very good retail partners in the UK recently states, "These are serious times that require serious brand." We agree.

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

Thank you, sir. The question and answer session will be conducted electronically. (Operator Instructions) We'll pause for a moment to assemble the queue. Our first question comes from Mitch Kummetz with Robert W. Baird.

Thanks and good quarter. Let's see, I've got a few questions. Let me start with Don. You made a comment, tail end of your prepared remarks, about sales tougher in Q3 than either Qs 2 or 4. Could your just elaborate on that and maybe reconcile that with a comment you made on the last call where you'd said that tougher sales in the first half than the back half of the year. Has something changed there?

The order pattern is very volatile and unpredictable, Mitch, as I'm sure you can appreciate. What we said at the last earnings call, which we expected generally across the board, easier comparisons (I won't say easy but easier) in the back half of the year versus the first half. We've seen the order pattern jump around, and based on where we stand today, it looks like the third quarter is going to be a tougher comparison for us than either Q2 or Q4. So the only thing I can attribute it to is just the unpredictability of orders coming in from retailers. And obviously the backlog as it sits today doesn't represent 100% of the revenue we're going to record over the last three quarters of the year, but just to give you guys a little flavor as to how we see the last three quarters of the fiscal year playing out from a comparison to the prior year, it looks like Q3 will be a bit tougher than Q2 or Q4.

What are you seeing in the back log to suggest that? You guys didn't talk about the backlog in the call. Typically you give some sort of backlog number. I don't know if you could provide that. Is there something in the fall orders that suggests the cadence that you're referring to?

The backlog is consistent with where it was -- it has improved compared to where it was at the end of the fiscal year but it's still down on a reported basis double digits, obviously impacted quite significantly by foreign exchange. When you strip foreign exchange out and look at a constant currency backlog, it's down in the upper mid-single digits. And then the backlog last year had a significant amount of Bates business in it that, given the timing of our Bates business, we adjust it and reported backlog for FX and Bates is down in the mid-single digits. Obviously, our perspective on the last three-quarters of the year is, because that's about all we have, it's pretty heavily influenced by how the backlog ages currently, but as we saw in the first quarter, there's a significant amount of at-once orders to be filled and we plan on getting our share of that.

And Blake, could you just comment on the environment as you see it today, especially compared to a couple of months ago when you guys reported Q4? Are you seeing a stabilization out there at retail? How are retailers handling this environment right now in terms of how they're planning their businesses in terms of orders versus reorders? And are you seeing fewer cancellations now than you might have through the fourth quarter based on any shifts in the environment?

I guess generally, Mitch, we expect 2009 will be difficult and probably one of the toughest years in a few decades for the footwear industry. On the other hand, most of the retailers have had at least a half year, and the good ones nine months, to work on their inventory. So when you focus in on retail inventory, inventory on hand at retail, right now it looks pretty good. It appears, especially the specialty and independents and outdoor specialty where we do a lot of our business, for example, in the US, , they're smart operators and they have their inventories in line. But they're also concerned about the current environment. So the pace of incoming orders continues to be pretty volatile from week to week, it's hard to predict.

On the other hand when you do get orders, there are orders that retailers are less likely to cancel and are probably overall of a higher quality. So what we saw in the first quarter, for example, is our cancellations were down. And so our order backlog is probably as high a quality as it's ever been. Overall though, it was a challenging quarter of Q1 for retailers in the United States. I think you saw FDRA reported a negative 6.2% decrease in comp store sales. That's challenging for the footwear industry. A lot of other product categories in industries would love to have that. We're planning on 2009 being a challenging year, but no different than Q1 where we performed

Okay. And two last questions. One for Don. In the guidance you're now saying FX negative impact at $0.12 to $0.15. That's changed a little bit. I think last quarter you said $0.15. What was the FX impact on earnings in Q1? And does that get worse in Q2? And at what point -- can you work through the balance of the year?

Yes, Q1 actually, Mitch -- actually I'm not glad you asked the question but we'll talk about it anyway. The foreign exchange, as we noted in the supplement to the earnings release, had a negative impact on revenue of $18 million in the quarter. But also because of the way we translate the results of our foreign operations into US dollars for consolidation purposes, they had a lowering impact of $14 million on cost of sales, such that FX had a negative impact on reported gross profit of about $3.5 million. But we also had a positive impact on operating expenses of $4.3 million. When you cycle all the way down to the operating income or EPS line, it had a slight positive impact on EPS of about $0.01 in the quarter. And the reason we have that range of $0.12 to $0.15 now is -- we probably should have had a range in the first quarter -- but FX was better than plan in the first quarter, and as we sit here today spot rates are more favorable to what we're using for our full year forecast. We have a little bit of conservatism in our own internal forecast, but we feel pretty confident or comfortable with that $0.12 to $0.15 range for the full year.

So positive $0.01 impact on Q1, you're obviously expecting it to be negative for the full year. Where do you expect it to have the biggest negative impact? On Q3?

Well, I think the benefit in Q1 had to do with four contracts that actually were maturing in Q1 this year versus Q1 in the prior year. But we expect there to be a pretty significant negative in Q2, a lower negative in Q3, and then based on what our plan is for Q4, just a slight negative in Q4.

And last question, Blake, you mentioned in your comments Merrell direct business could be 50% of the total down the road. And I think you said 100 Merrell stores by year end, 1,000 Shop in Shops. Where are those numbers today? How much of that is company owned on the store side? And can you just talk a little bit about how you expect that direct business to grow over that time frame?

I think I said 15% of sales. Maybe you --

I thought it was 50.

15% of sales. I'll take 50% though. I think the Merrell brand is unique, frankly, and it's still being discovered. If you look at the unaided brand awareness, Merrell is still pretty low. If you look at intent to repurchase, Merrell always falls in the number one or number two positions even when athletic brands are thrown into the mix. We see a lot of upside growth for Merrell. We think a lot of that is going to be driven by controlled distribution. That's just not stores we own which are about 15 now if you count Merrell outlets in the United States. But in the shorter term, a lot of the stores in the store acceleration is going to happen in international markets. So I'm trying to recall, we closed the quarter with about 70 or 75 mono brand standalone Merrell concept stores. And the Shop in Shop and the store opening pace, even in this environment, is preceding.

Thanks, good luck.

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

Thanks for taking my questions. Blake, in your discussions with retailers, do you get the sense that they have increased clarity on what demand levels are going to be as they look out to fall? Is there still a high degree of uncertainty in their own estimates as they forecast their business?

I guess my overall, Jim, gut feeling on that issue is that retailers are going to operate like they operated in Q1 until they see some definite signs of consumer traffic returning to their stores. So they're going to be very judicious with their orders. They're going to rely on vendors such as us to have the stock in hand to service their at-once needs. So I see this environment continuing until there's some significant shift in consumer sentiment. I don't see it getting any worse from their viewpoint throughout the rest of the year. I think they're already operating, the good retailers are already operating in this environment and have adjusted to it.

There seems to be a belief that things are still down on a year to year basis but it does feel like we're finding a bottom from a demand standpoint. Is that the way the retailers that you speak with are thinking about their business?

I personal believe so. But, again, if I had a crystal ball, I'd probably be in the new Administration. So that's a pretty difficult guess. But that's my gut reaction, yes.

Okay. That's helpful perspective. And then Don, with regards to the inventory you talked about some planned increases. Can you speak to the inventory position as it relates to gross margin flow across the balance of the year? You mentioned that you're comfortable with the inventory. Do you expect any measures to try to move inventory to impact gross margin?

We feel very comfortable with our inventory position, Jim, and we don't believe we're going to have any margin pressure or plans to get inventory by year end down year-over-year. Just to provide a little flavor to where we are at the end of the first quarter, our inventory is up a little over $29 million year-over-year. Of that, I cited in the prepared remarks, the impact of the newly acquired Chaco brand, that's about $3 million of the incremental inventory. We think, we calculated that about $9 million a quarter in inventory is related to inventory that we bought early both in Q4, as well as a little bit in Q1 prior to anticipated cost increases, and we feel very good about our plan to move through that inventory in ways that protect and don't hurt our gross margin.

And then I referenced a buildup of buffer inventory in our leathers business. That was about $2 million. When you adjust for those three items that are either one-off, non-recurring, or we feel good about our ability to manage through them, inventory was up 8.3% versus 15.6%. And a big chunk of that is driven by year-over-year product cost increases. To answer you question we're not planning on any margin pressure from our plans to move the inventory. And we sat down with each of the finance leaders in the operating groups and gone through detailed plans quarter by quarter, period by period as to how they are projecting their inventory, what's committed to buy, what our sales forecasts are,and how inventory will cycle through each quarter of the fiscal year.

And Blake, in this new world order where maybe retailers are more hesitant to commit in advance, do you anticipate that requires you to carry more inventory? What's the strategy with regards to that?

I think it goes back to really a strategy we've been following for over a couple of years. It's narrow and deep, narrow and deep. You need to decide what are your core items, what are your core winners. You need a little of everything but you need to be narrow and deep in the stuff you believe retailers are going to come back and place at-once orders for. We have very good merchandisers, we have a very good view of our individual distribution channels for our brands. And we've done a pretty good job in that area.

Great, thanks so much.

We'll go next to Kate McShane with Citi.

Thank you. Thank you for breaking down the inventory further. I just had a timing question. Since it does seem that product costs are going down with oil prices going down, and also it sounds like labor prices are going down in Asia as well, why is one of the reasons the inventory build is flying ahead of higher prices?

I think Kate, you have to remember, prices are higher in Q1, for example, or were planned to be higher compared to Q1 of last year. We expect the pricing pressures to moderate substantially as we get towards the back of the year and the shipments start flowing for the fall and the spring 2010 season. So prices are -- you're right, prices are coming down. Factories are looking for orders. The big factories are concentrating on the big companies and the big brands. But we're going to see most of the relief on pricing pressure coming in the second half of the year. Although I will say the prices in the first half, obviously are not as high as we had anticipated six months ago.

Kate, that incremental inventory we're talking about was based on commitments that were made by primarily the Merrell and Caterpillar brands in the fourth quarter to commit inventory purchases prior to what had been communicated as planned pricing increases. So, you're right, In the second half of this year we will see some mitigation of cost increases and see that benefit in our gross margin.

And I assume that benefit in the second half is incorporated in your year end guidance?

Yes, it is.

Okay, great. And then just a trend question, if you could go through more detail on that, in your category discussion, I think you mentioned when you were talking about the Caterpillar brand that there's a work boot trend emerging in Europe and that you expect it to be more expansive. Can you just give a little bit more detail about that and where you think consumers are shifting from?

In this environment, I don't think there's been too many clear fashion trends in the footwear business or as clear as might have been true in the past. And as you know, fashion trends and categories come and go and there has been a shift back to classic boot styling. It can be biker boots, it can be harness boots, it can be two or three of our brands, some other people's brands, as well, but there's been a shift back to that more rugged durable look. We're seeing it in the fashion accounts.

When our Wolverine brand, for example, can come out with a thousand mile boot, that's really a fashion collection that's going to be sold in better independents. And you see where that interest is coming from. You get a gauge on where the leading edge of the trend is. It's hard at this point, obviously, in this consumer environment, to predict how big that trend will be or how long it will last, but it's pretty widespread already.

Okay, great. And then my last question is about ASPs. I know you mentioned for Hush Puppies you saw an increase of $2 per pair during the quarter. What about for the overall company? How much of the increase did we see in the quarter and how much is expected for the rest of the year?

It depends really brand by brand. We would expect, for example, in domestic Hush Puppies business to for our average selling price to continue to rise, frankly, probably above the $2 amount I quoted in my prepared comments. But we don't see any big decrease in the average selling prices for our brands throughout the year. We think that's going to be pretty steady to up. Probably the price increases that are still flowing through to a certain extent in the first half will help contribute to higher average selling prices. We've been very careful, truly not to let our brands spiral down into their promotional morass. And if you can protect the full price value of your brand in the consumers' eyes in this environment, we believe you're going to come out of this environment much, much stronger.

Okay, thank you. That's very helpful.

We'll go next to Chris Svezia Susquehanna.

Good morning, everyone, and congratulations on nice execution during the first quarter. I have a handful of questions here. First, can you quantify how much of your business during Q1 was at-once and also year-over-year? Just give us an idea what it was last year and this year in Q1.

I would say the shift to at-once as a percentage of overall incoming orders continues. So our future orders in the quarter, our at-once performance would have been actually significantly better than our future orders whether you measure it in constant dollars, units, or reported dollars. We see that shift really which is a shift of risk from the retailers back to the brands is a trend that's going to continue, at least for some time. So other than that, it's hard to quantify. But maybe in years past where our at-once orders might have been 45% or thereabouts of our overall incoming orders in a given year, 45% to 50%, it's probably increased 5 points from that.

And Chris, what we have typically seen as a company in years past is that our actual reported revenue growth in the quarter will almost always trail what the beginning of the quarter backlog percentage might otherwise indicate. In Q1 we actually delivered better revenue growth in our starting backlog. So obviously we had nice at-once business and, thankfully, we had the inventory on hand to fill the at-once business. There was a market reversal of trend, at least as it relates to opening backlog versus actual reported revenue for the quarter, and that speaks to what Blake mentioned a few minutes ago which is the overall higher quality of our backlog, we think, in this type of environment.

Don, is there a slightly higher margin associated with the at-once business relative to the future contract business?

There should be, frankly. We've never sat down and compared it in great detail. But yes, there should be. When people are placing at-once orders, obviously, they're usually buying at the full wholesale price.

And your future orders are more heavily skewed towards the larger orders, you may offer some volume discounts. So average margin will be higher on the at-once business.

Right, right, that makes sense. Just going off the higher inventory position and the at-once piece, are retailers just looking at your inventory position and relying more on at-once and that's in part why, when you look at the third quarter backlog position, it's not as strong as you might have envisioned earlier? Is it just how retailers are looking at it, or you see something more structurally in the business?

I think it's just -- we don't see anything structurally in the business. I think it's just we're trying to be transparent and give you a current snapshot on where we stand today on current order flow. Order flow has been tougher for everybody to predict almost going back a year. And we're just trying to be open and transparent and give you some insight. But we don't see anything structurally in that. Q3 is obviously a big season for the retailers and I think they're still just being judicious in how they're placing orders and they're watching their own inventories very, very closely.

The large retailers are very frequently quoted as saying they're expecting their suppliers to carry more inventory to enable them to manage their inventories down. And I don't think it's as simplistic as a retailer calling up and saying, "What do you have, what can I get from you?" They're trying to place the orders that they want and they're asking whether the suppliers have that inventory in hand.

And just to switch gears for one second. On just the international piece of the business, could you maybe just add some color about what's happening in Europe? Can you also just give us an idea of what percentage of your Q1 business was done internationally, and just update in terms of Europe, what's happening in the UK, what's happening on the mainland? Is it getting incrementally worse or is it starting to bottom?

Let me try and address that a couple of different ways. Our international businesses and our Canadian businesses have a very, very good quarter in Q1. Especially our international businesses were positive. Europe I think trailed the US, in my opinion, into the recession and I think Europe, frankly, is still kind of feeling around for the bottom. And the US may be three months or four months ahead of Europe. I'm just giving you my macro impression. I'll be over in Europe again next week.

As far as the split between geographic split in sales, obviously with the stronger US dollar, you would expect our North American sales, our US sales to have picked up in the quarter and that's what has occurred. So normally, Chris, we would have had a 60/40 split. We would have about 60% of our sales in a given year attributable to the US, 40% outside the US. That split in Q1 was probably 70/30 and not so much in pairs but just in reported revenue.

Okay. And then last few questions I have quickly. Just on the bankruptcies you're seeing out there in the marketplace, what's going on with Sportsmen's Warehouse, GI Joe's, a handful of other retailers, any impact to your business or order patterns? And then lastly, just on the ASP front quickly, you're seeing higher input costs still. It seems like you're doing a good job passing it on to retailers. What impact does that have as we look for the balance of the year specifically on the gross margin? I think you had talked about gross margin being roughly flat in the past. Do you feel that that could be better? Or are you still cautious as you look at that gross margin line relative to pricing?

I'll address the latter part of your question first. The Q1 gross margin, when you adjust for the restructuring charges that were included in cost of sales, was 41.2%. It was down 100 basis points from the prior year. And we cited as the reason for that the anticipated higher product costs. And we took price increases. The average selling price in the quarter was up. But obviously, it wasn't up enough to offset the higher product and higher freight costs. We expect that challenges from higher product costs to mitigate as we cycle through the year. We're still standing behind the flattish full year gross margin that we talked about at last quarter's call. But I would say there's probably less upside to that flattish full year gross margin projection as I sit here now than maybe three months ago.

And Chris, to your first question, I think you know that our customer base is very, very diverse. Not just geographically spread, but also amongst now 10 brands in different distribution channels. We do not have a single customer that is really material or significant to our business. On the other hand, when you have some of the bankruptcies, administration filings, whether it's in the UK or the United States, we are seeing doors go out of the retail network. I don't know when that's going to bottom out. We do some business in the US with some of those people you have mentioned and a few others that have filed for Chapter 11. But none of those customers is material.

Thank you very much.

Our next question comes from Sam Poser with Sterne Agee.

Good morning, I've got a few questions. Number one, I just want to go back to the inventory for a second. You mentioned, Don, that the inventory levels were higher because of increased prices and so on. But I was trying to figure out how much increased prices helped sales in the first quarter. And shouldn't those increased prices translate into increased sales going forward?

Are we talking product cost increases or selling price increases?

The inventory levels are up 16%, 11% in units, and sales are not going to be up that much either way, I wouldn't guess. The question is is -- you say you're comfortable with it, but I'm trying to figure out how much may be at risk here just given that it's not in your guidance, the numbers aren't in your guidance, the kind of increases that are reflected in your inventory right now.

Again, Sam, the 15.6% percentage increase on a reported basis. If you adjust that, there' a newly acquired brand, there's Chaco, that's $3 million of the inventory increase. A Wolverine Leathers inventory buildup, a buffer inventory of $2 million, that is part of the increase. When you go back to last year's Q1, last year's Q1 inventory was down $8 million year-over-year. And we actually saw in the first quarter of last year, there were some orders we just couldn't fill. There were some shortages across certain brands. So you could say, and I would maintain, that our inventory at the end of last year's Q1 might have been a little too skinny, a little too lean. And some of the increase this year versus last year is really just having the right amount of inventory on hand in order to fill orders.

But if you adjust for the three items I cited, the 15.6% increase comes down to a plus 8% increase and that's mainly driven by year-over-year product cost increases. We don't have any kind of huge closeout initiative. Obviously we're going to have closeouts every year, and there's closeout business in our forecast for the rest of the year. We don't have any massive incremental closeout initiative to get inventory down to what we're projecting at the end of the year. It's really just managing the purchases over the last nine months of the year which we're doing. Our comfort level isn't pulled out of thin air. It's based on a pretty detailed plan as to how we're going to get our inventory to what we're projecting by the end of the year.

And then you talked about currency impact in this quarter both across the different line items. How did that compare? Can you give us some background on currency impact over the last few years as well? Maybe we can get that offline. It appears when it was hurting -- when it was helping you -- like when the dollar was weaker, you didn't talk as much about currency, and now that the dollar is getting stronger, you start talking about it. So how do we get real apples to apples? Is there a reconciliation we could get from the bet the last few years on currency impact, all directions?

I don't have the multi-year currency analyst in front of me. You're right, when the dollar is stronger, it's great management. When the dollar's strong, it's foreign exchange, right? But yes, in answering Mitch's question we said that currency is having about a $0.015 benefit in the quarter which seems counter intuitive when you think about foreign exchange rates on average reflecting a stronger dollar, this year's Q1 to last year's. But when dissect that, if you ignore the contract impact of foreign exchange on our EPS, foreign exchange would have had about a negative $0.025 impact on the quarter's earnings, but then the year-over-year forward contract impact is a positive $0.04. So it's that little anomaly that result in a positive $0.015 to EPS from foreign exchange in the quarter. You're right. I'll have to give you offline more of a multi-year summary of the foreign exchange impact on either revenue or the bottom line.

I think the other thing, Sam, you've got to realize, one of the reasons we're trying to be so transparent now on this issue is that the dollar weakened over a six year period. So it was a gradual -- pretty steady by gradual -- weakening of the dollar from 2001 on over about at least a six or seven year period. And the dollar strengthened in six months from what had previously taken six years to weaken. So I think it's having an impact on a lot of business. And we're just trying, when we speak in terms of constant dollars or on a few items on units, we're just trying to give you a real insight as to what the real health of the business is.

When we talked a full year $70 million to $90 million negative impact of foreign exchange, we didn't have any single one year over that six year period that Blake's talking about where foreign exchange helped anywhere near that amount.

One last thing. You did a really good job of controlling the SG&A outside of the currency effects. Can you talk about the different elements that went into those SG&A savings and how much more of that we can expect to see throughout the year, advertising or whatever it may have been.

We didn't go hard to advertising in marketing. We really tried to avoid doing that because we want to continue to invest behind the brands even in a tough economy and a tough environment. So that wasn't where a lot of the savings came from. It came from our selling line items, our distribution costs, and G&A. And a lot of it is what I call good old fashioned belt tightening. Some of this is the direct results of the Initiatives that we took last fall and then other initiatives we took earlier in the first quarter which was part of the restructuring plan where we actually are starting the process of efficiency gains and headcount reductions that will result, when it's all done, in a net headcount reduction of 450 employees across the company. It's just recognizing what I talked about in the prepared remarks. In this type of environment, you just look at things differently and you manage your expenses tighter across the board. But we purposely tried not to go to advertising and marketing because we really want to continue to invest behind the brand.

But do you have a detailed breakout you could get to everybody on the blood and guts of those savings?

You mean by line item?

Or just to some degree -- a little more color.

We'll have to evaluate what level we've disclosed in the past and what we're comfortable doing right now, Sam. I'll have to think about that one.

Thank you very much.

Our final question today comes from Elizabeth Montgomery with Longbow Research.

Hi guys, congratulations on a good quarter. I know you gave a lot of detail about the brands at the beginning, Blake. But I wondered if you could talk about Merrell a bit more specifically in Europe?

Yes, I can. I mean, as you know, we have a new Vice President leading our European operations for Merrell. I would say like all of our brands, we are under-distributed in Europe. As we sit here today, all of our brands, CAT, Hush Puppies, Merrell, has more upside potential in Europe than in some other geographies. But the brand continues to sell through in Europe. We're in the process of shifting our strategic direction a little bit over there to make sure that all the countries in Europe present the Merrell brand in its full breadth. As you know, in Italy, for example, Merrell started out more as a sprint, active fashion brand. We've made some very good headway in bringing the brand back to its roots which is performance outdoor styling. So we are just focused on building our brand throughout Europe. We're still under-distributed, still, frankly, for the company. Lots of upside potential in Europe.

So for Merrell, as you guys focus a little bit more on the performance aspect of it, you haven't seen the Fusion line actually slow. You're just more focused going forward on the performance side. Is that accurate?

Correct. And that might actually be a little reversed for a country like the UK, for example, where Merrell has had a very strong heritage in Black's and other retailers on the performance side of the business. And there may be more near term upside on the Fusion side of the line. Europe is many different countries and we're attacking each country slightly differently.

All right. Thanks, guys.

And Ms. Cowdin, I'd like to turn the conference back to you for any closing remarks.

Thank you. On behalf of Wolverine World Wide I'd like to thank you for joining us. As a reminder, our conference call replay is available on our website at www.wolverineworldwide.com. The replay will be available through Wednesday, May 6, 2009. Thank you and good day.

Thanks.

Thank you.