Wolverine World Wide Inc (WWW) 2009 Q2 法說會逐字稿

Good morning, and welcome to Wolverine World Wide's second quarter 2009 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine World Wide. If anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Nicky. Good morning, everyone, and welcome to our second quarter conference call. On the call today are Blake Krueger, our CEO and President, and Don Grimes, our Senior Vice President and CFO. Earlier this morning we announced our second quarter 2009 results. If you did not yet receive a copy of the press release, please call Abbey Brandt 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.

This morning's press release included non-GAAP disclosures and these disclosures were reconciled with an attached table within the body of the press 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 Q2 conference call GAAP versus non-GAAP disclosures.

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

Thanks, Christi. Good morning, and thanks for joining us today. This morning we reported very good results for the second quarter of 2009. Revenue in the quarter exceeded our internal plan and our earnings leverage was strong. We are obviously pleased with our second quarter results and our continued progress on several key brand initiatives.

To this end, Merrell achieved excellent double-digit growth in the important US market. We made good progress in moving Hush Puppies up market in North America. Our consumer direct business reported significantly improved trends toward the end of the quarter. Our fast track integration of Chaco enabled us to deliver early shipments to our retailers and meet their demands. Our brands maintained and enhanced their positions as leaders in their respective categories.

In these times, we have positioned the Company to consistently deliver excellent financial results by protecting and building the equity and integrity of our 12 lifestyle brands. This means we will continue to offer our consumers great value for the innovation and design our brands deliver. All while maintaining our full price status and not participating in the current promotional environment. Overall, we were pleased with our first half performance and have increased our 2009 earnings per share guidance.

I would like to begin my brand review with the Hush Puppy group, which now includes the Cushe brand as well as Hush Puppies and Soft Style. Overall, the Hush Puppies group revenue in Q2 exceeded our internal forecast, but was still down upper single digits on a constant currency basis. For the group, continued retail consolidation and lower consumer spending contributed to reduced revenue in the quarter. In spite of the challenging economy, our efforts aimed at moving the Hush Puppy brand up market in North America continues to show progress. Revenue was up low single digits in constant dollars. Product innovation is driving our progress in North America, as evidenced by the early and very positive retailer response to our new Body Shoe concept, offering the advanced comfort of athletic shoes in casual footwear.

We have established a global strategy of extending the Hush Puppies brand presence by increasing controlled distribution by ourselves and our global partners. To help move Hush Puppies up market and accelerate growth in North America, we will open our first full priced concept store in Montreal in August. A second Montreal store is planned to open in September. These concept stores will enable us to provide a showcase for the brand and present a much broader product offering to the Hush Puppy consumer. During Q2, we also opened two new Hush Puppy value stores in the UK and both stores are performing significantly above plan and are in the top three of all stores in each center in terms of sales per square foot. We now have four Hush Puppies value stores in the UK.

In the quarter, new Hush Puppies concept stores were opened in Portugal, Japan, Indonesia and Bangladesh, and five new airport shops, featuring Hush Puppy apparel and accessories were also opened in China's major airports, including Beijing. This brings our quarter end global Hush Puppies store count to over 500 model branded concept stores and over 900 Shop in Shops. We also extended our agreement with our partner in India with plans to open 50 new Hush Puppy concept stores in this significant emerging market during the next five years.

Cushe, our new design led active lifestyle brand targeting younger consumers, is performing very well at retail at this early stage. While this brand is still in its infancy, sell in and sell through at influential retailers in North America and the UK have been very positive. This is also true with our own in store experience. We introduced the Cushe brand to our international distributors in May, and have had a strong global response, reinforcing our belief that Cushe will resonate with the younger consumer around the world.

Let's turn to the Heritage Brands Group which includes Sebago, as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson. In spite of the challenging global economy and stronger US dollar, Sebago and Harley-Davidson posted sales increases in the quarter. However, these increases were offset by a more challenging quarter for the CAT business, especially in Europe and overall group sales were down in the mid-single digit range for the quarter on a constant currency basis.

For CAT, over 80% of all pairs are sold outside the US market. While our international CAT business continues to be very solid, the stronger US dollar increased local product costs and had a negative impact on shipments to a handful of key international markets including our own European business.

Turning to Harley-Davidson, global revenue grew mid single digits on a constant currency basis for the quarter. This revenue growth was led by a strong performance in the US market, where consumers continued to respond well to key product initiatives, including the performance riding collection. In the US, sales to our top 40 retail accounts were up almost 20%, based on strong product sell-through. Harley had a very strong quarter from an earnings perspective and continues to be one of our most profitable and highest return businesses.

Our Sebago business also had a high single digit revenue increase for the quarter on a constant currency basis. This was based in part on the strong double-digit performance in international markets. The brand continues to expand its consumer touch points, opening two new Sebago brand stores and over 25 Shop in Shops in the quarter. This brings the brand total to almost 40 concept stores and approximately 115 Shop in Shops. Despite the difficult retail environment and the negative impact of the stronger US dollar, the Heritage Brands Group was able to deliver a significant operating margin improvement in the quarter.

Turning to the Wolverine Footwear Group, while revenue declined in the quarter from the prior year, earnings performance was solid and exceeded our expectations. A significant portion of the revenue decline was anticipated and related to lower Bates shipments to the Department of Defense. The Wolverine brand continues to be the industry leader in the core work category, with solid sell-throughs at its major retailers. However, in the US, the current economic environment has forced a number of factory closings and job eliminations, which has created challenges for domestic work brands, including Wolverine. The top 20 Wolverine brand customers generated Q2 growth in the high single digits, driven by the continued success of the brand's innovative Contour Well product line. But the independent work boot retail channel continues to face challenges this year.

One bright spot is the buzz at retail around the Wolverine ICS and Thousand Mile Boot programs, which have been placed in upper tier accounts. The Bates business is committed to being the leader in providing footwear solutions for all branches of the US military, as well as the global civilian uniform markets. Excluding the previously mentioned reduction in the Department of Defense shipments, the Bates business reported a high single digit sales increase for the quarter. The Wolverine and Bates brands continue to have incredible consumer brand loyalty, and hold the number one position in their respective markets.

The Outdoor Group, which consists of Merrell, Patagonia Footwear and the newly acquired Chaco brand, saw revenue increase double digits on a constant dollar basis during the second quarter. The Merrell US and Patagonia footwear businesses had a very strong quarter, both up double digits, and the group results also benefited from a strong start for Chaco.

We continue to believe that Merrell will be our first $1 billion brand. Merrell's Out Venture, that's its outdoor performance category, had an exceptional quarter 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 were the men's Moab, the women's Siren, and the Water Pro collection which was recently featured in Men's Journal and the buyer's guide for the National Geographic Adventure Series.

Merrell continues to exceed consumer expectations by offering cutting edge innovative product in the outdoor performance category. Merrell's Fusion, that's it's outdoor casual segment, launched new product that reflects the brand's foundation of comfort, versatility and durability, coupled with outdoor inspired style. Sell-throughs have been very good, especially for the new Celeste sandal collection and the Arabesque model. While our revenue increases in the Fusion category over the years have been very strong, we have increased our product development efforts in this category as we believe there is room for substantial future growth.

Merrell apparel continues to be a key brand building and growth opportunity for the brand. In the quarter, we completed the process of forming a dedicated US apparel sales force. The apparel product line is now more aligned with the D&A and strengths of Merrell footwear, and has been prominently featured in various outdoor and sports publications. New products for trail running, sun protection and commuter cycling in the 2010 spring product line have been very well received by retailers.

Patagonia footwear continues to gain traction and achieved a high double-digit revenue increase for the quarter. This growth was fueled by success in the brand's top accounts, which are experiencing strong sell-through of key models in the performance, lifestyle and surf categories. On the consumer front, Patagonia footwear continues to benefit from the strong editorial and consumer appreciation for the brand's ongoing commitment to limit its impact on the environment.

We successfully accelerated the integration of Chaco into the Outdoor Group, following our acquisition in late January 2009. Our early efforts were focused on operational improvements, especially product delivery and quality. Product sell-through has remained strong, and the reaction of retailers to our spring 2010 line has been very positive. Frankly, we've been a little and pleasantly surprised at the enthusiasm and loyalty of retailers and consumers for this authentic performance outdoor brand. We have high expectations for Chaco to become an important growth vehicle for the Company. The Outdoor Group continues to be the Company's largest generator of revenue and earnings.

With respect to the global economy and consumer environment, we believe the current challenging conditions will continue into 2010, along with what we currently refer to as a very choppy bottom. While we would have performed even better in an improved economy, we continue to work harder and smarter to perform in these times. Despite our view regarding the macro business environment, we have started to see a glimmer of better news within our own brands and businesses. Today, our brands enjoy a competitive advantage through an extensive global network of controlled distribution. Over 5,000 concept shops and stores, featuring our brands and products.

We directly operate over 90 stores under several different retail banners, most of which are located in the United States. Beginning in the middle of our second quarter, we started to see improved performance in both our Company-owned stores, as well as our eCommerce sites. Our stores as well as our eCommerce business ended Q2 ahead of plan and ahead of last year. This trend has continued into the first half of July. While I don't see this as a significant sign that the overall global recession is easing, it is encouraging that our brands and product offerings are registering with consumers who, while they have not quit spending all together, are much more focused and selective in their purchases.

Overall, we are pleased with our performance in the second quarter and the first half, which reflects the sell-through of our brands at retail and our proactive approach to managing our asset base and SG&A infrastructure. We have positioned our business and brands to perform in the current environment. Today, we are increasing our 2009 earnings per share estimate.

For 2009 and beyond, our priorities remain unchanged. We are focused on driving cutting edge innovation and design in our product offerings, capitalizing on our vast global reach, which now extends to over 180 countries, utilizing our size and purchasing power to drive efficiencies in our global supply chain, and generating the operating improvements and cost savings associated with our restructuring plan, all while prudently managing expenses and inventory. We are enthused about the potential for Chaco and Cushe, which are just beginning to gain traction under our direction. 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 second quarter results and our outlook for 2009. Don?

Thank you, Blake and good morning everyone. This morning I will review our second quarter financial results in a little more detail and offer additional perspective on the first half of 2009. I'll also provide some color on what we're seeing for the balance of the year.

We are very pleased that our solid earnings performance in the first two quarters of the year has given us the confidence to raise our full year earnings guidance, something that few companies have the luxury of doing in such a brutally tough and volatile marketplace. Earlier today, we reported second quarter revenue of $246.4 million, a decline of 7.8% compared to the second quarter of 2008 revenue of $267.4 million. Well more than half of the reported revenue decline was driven by a stronger US dollar as constant currency revenue declined only 3.1% in the quarter. We were pleased by the outstanding performance by Merrell and Harley-Davidson in the US market, a strong start for the recently acquired Chaco brand and continued double-digit growth for our licensed brand Patagonia. These wins were more than offset by the impact of tough trading conditions in many countries around the world. Nevertheless, our revenue performance in the quarter exceeded our internal operating plan.

Stepping back for a second from the financial review, I would like to discuss some of the macro trends that are influencing how we evaluate our own performance in the quarter, and how it influences how we're looking at the balance of the year. We saw a continuation in the quarter, in fact we saw acceleration in the quarter of a couple trends we've been talking about for several months now. The first of these trends is retailers placing orders closer to their date of need. We've been broadly referring to this trend as a quote, shift from future orders to at once orders. But it has also manifested itself in dramatically shorter customer requested lead times. Let me share some data to illustrate how dramatic this shift has been.

For all orders received in the most recent quarter, the average order to shipment lead time based on customer's requested ship date decreased approximately five weeks versus the second quarter of 2008. The average requested lead time for futures orders decreased almost seven weeks versus the prior year. Those are significant shifts in such a short period of time, and it underscores the issue that almost every supplier in the footwear and apparel place is dealing with. Extremely cautious retailers are relying more and more on vendors to carry inventory to fill orders that historically would have been placed prior to, or at the beginning of a season.

In the second quarter, more than two thirds of the orders we received were classified as at once orders versus a little above half in the prior year second quarter. Despite these dramatically shorter lead times, our on-time delivery performance significantly improved in the second quarter versus the prior year, a testament to better inventory position to service our customers' needs and the operational improvements we have made in our sourcing and supply chain group, enabling us to deliver the better than planned revenue performance. The second trend that continued in the quarter was the overall improvement in the quality of our order backlog versus prior year with quality defined as the likelihood that the order on the books will ultimately end up getting shipped to the customer.

We're been hearing anecdotally from our sales force for the first two quarters this year, that in this environment, retailers are placing orders only if they really believe that they will take shipment. This is in contrast to a rate of cancelled orders in the last half of 2008, particularly Q4, that was much higher than our historical average as retailers responded to a significantly worsening global economic crisis and fears about the holiday shopping season. So, despite shorter lead times and the continuing trend towards at once orders, a better than average quality backlog this year compared to a lower than average quality backlog in the prior year, and sustainable improvements in our order fulfillment rate, makes us cautiously optimistic regarding the back half of the year. Sorry for the digression. We thought it would be helpful to many of you to share that data and how we think about it.

Back to the second quarter's results. During the quarter, we continued the implementation of the second phase of our restructuring plan, with initiatives focused on generating significant efficiencies in supply chain and sourcing, logistics, domestic manufacturing and back room operations. We recorded non-recurring restructuring and related charges of $7.9 million in the quarter and have now recorded $22.4 million year-to-date. Of the total charges recorded year-to-date, $8.1 million are non-cash charges, primarily asset impairment.

Adjusting for the non-recurring restructuring charges, fully diluted earnings per share were $0.27, which compares to fully diluted earnings per share of $0.33 last year. Adjusting for $1 million of the restructuring charges that impacted cost of sales and the impact of foreign exchange on both sales and cost of sales, gross margin was 37.7% in the quarter, compared to 38.3% in the previous year's second quarter. While many brands in our portfolio did benefit in the quarter from selective price increases taken over the past year, higher product costs and our decision to move some non-core excess inventory at a reduced margin contributed to the 60 basis points drop in constant currency gross margin. We anticipate significantly lower product costs in the last half of the year, and still expect full year gross margin to approximate the prior year.

Operating expense discipline remains a key area of focus for the Company. Our strategic restructuring plan was a natural result of a reassessment of our brand portfolio, our core competencies, and our most significant opportunities to create value. We have stayed ahead of the continuing global recession by identifying new and creative ways to more efficiently conduct business. As a result of these restructuring actions, operating expenses were down 6% in the second quarter, after adjusting for $6.9 million of non-recurring restructuring and related charges, a $3.7 million benefit to SG&A from a stronger US dollar, $2.4 million of incremental expenses directly associated with our newly acquired Chaco and Cushe brands, and finally $2.2 million of increased pension expense driven by last year's decline in the market value of pension assets. We will continue to tightly manage discretionary operating expenses over the balance of the year, while continuing to invest in our brands via product design, product development and marketing spend.

The effective tax rate for the quarter was 32.3%, compared to 33.5% in the prior year, driven by more favorable mix of taxable income earned in the lower tax jurisdictions. The Company did not repurchase any shares during the quarter, so we still have approximately 200,000 shares remaining under our current Board authorized share buyback plan. We will continue to evaluate share buybacks as appropriate. Fully diluted weighted average shares outstanding in the quarter were 49.0 million.

Accounts receivable of $182.9 million at quarter end decreased 6.5% compared to the prior year. Increased efforts towards cash collection and disciplined management of customer credit helped drive down our days sales outstanding at quarter end compared to the prior year. It is extremely important to remain vigilant in the credit and collections area, particularly in this uncertain economic environment. As we predicted during last quarter's earnings call, the Company made substantial progress in the quarter in reducing inventory, which were up only 6.9% versus the prior year compared to up 15.6% at the end of Q1, and up 18.7% at the end of 2008.

About half of the approximately $12 million year-over-year increase at quarter end was attributable to inventory from our recently acquired Chaco and Cushe brands, a small remaining amount of a strategic prebuy of core inventory purchased in Q4 of last year, and an increase in leather inventory related to Wolverine's Leather transitioning to an outsourced model. Although we expect our inventory position to continue to improve over the balance of the year, we will remain mindful of the need to have sufficient inventory on hand to respond to the industry trends discussed earlier.

As we had projected in April, our strong cash flow in the second quarter enabled us to reduce our revolver balance to $34.8 million from $93 million at the end of the first quarter. The Company ended the quarter with $79.2 million in cash and total interest bearing debt of $36.4 million, or net cash of $42.8 million. Our leverage ratio at the end of the second quarter, based on last 12 months EBITDA was a very low 0.3. The Company's strong and predictable cash flow remains a key competitive strength with operating cash flow more than sufficient to fund operations, expand our brand portfolio and pay a healthy dividend to shareholders.

Just a brief update on the status of our restructuring plan. As mentioned, we recorded restructuring charges in the second quarter of $7.9 million, which is just below the expected range that we had previously communicated of $8 million to $9 million. The largest components of the charge in the quarter were related to the continuing consolidation of our manufacturing and distribution operations, and the closure of our Rockford based leather tannery. The leather processing operation for our Wolverine Leathers business is now fully outsourced.

There's been a little confusion since we announced in January the possibility that we would close the tannery as part of our restructuring. Allow me to clarify. We are still in leather business, selling our proprietary finished leather to our own divisions as well as third party customers, but the profitability of this business to Wolverine is now enhanced by outsourcing the actually leather production.

We continue to expect the restructuring plan to be fully implemented by the end of 2009, with an estimated range of non-recurring charges between $33 million and $36 million for the full year. Once fully executed, the restructuring initiatives are estimated to generate annualized pretax benefits of $17 million to $19 million, compared to the operating structure that existed prior to the restructuring. Some of the benefits are being realized throughout 2009 as initiatives are executed, and we estimate there are approximately $3.5 million of benefits reflected in the second quarter's results and $5.4 million year-to-date through Q2.

Although global financial and credit markets have stabilized since our last earnings call, and governments around the world are putting forth best efforts to help pull us out of this global recession, significant uncertainty regarding the timing and the arc of eventual recovery remain. Nevertheless, we believe in the ability of our brand portfolio to deliver, even in tough times, and also believe that our diversified business model continues to offer the Company a competitive advantage in today's marketplace. We are pleased with our first half earnings performance and are cautiously optimistic about the prospects for the second half.

As a result, we announced earlier today that we are raising our earnings guidance for the full year 2009. Excluding the non-recurring full year restructuring and related costs, we now expect earnings per fully diluted share in the range of $1.55 to $1.73, up from our previous estimate of $1.50 to $1.70. Included in this guidance is a negative year-over-year impact of $0.11 to $0.14 per share from foreign exchange, and $0.12 per share of increased pension expense.

The projected negative foreign exchange impact is driven in large part by the timing of foreign currency forward contract purchases. Recall that our foreign subsidiaries purchased forward contracts on FX to hedge inventory purchases. Most of the contracts that matured in last year's Q3 and Q4 were purchased earlier in 2008, before the swift strengthening of the US dollar and most of the contracts that will mature in this year's Q3 and Q4 were purchased before the recent weakening of the US dollar. Thus, we expect most of the full year FX drag to occur in the second half of the year.

We have tightened our estimate for full year revenue and now project reported revenue for 2009 to be in the range of $1.07 billion to $1.12 billion. On a constant currency basis, revenue's projected in the range of $1.12 billion to $1.17 billion, as we are now estimating an approximate $40 million to $60 million negative impact relating to foreign exchange for the full year 2009.

Looking ahead, we will continue the financial discipline and relentless focus on execution that have long defined the Company. While we are resolutely looking for operating efficiencies, we are not sacrificing the long-term in exchange for short-term wins. We are still investing in product, technology, innovation, function and features, because investments in products have contributed to where we are as a Company today. We can't control the macro elements that impact us and all of our competitors but we are taking every measure possible to ensure our brands are well positioned in their respective market. Many opportunities for growth remain for our core brands in existing and new markets, and we are extremely excited about the two newest additions to the portfolio, Cushe and Chaco. Our core strength of the company are our unique and diversified business model, our unmatched portfolio of brands, and the team that we built to grow our brands globally.

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

Thanks, Don. We're obviously pleased to have delivered another quarter of good results which is the end result of a great team managing and executing 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. Thanks for your time this morning. We'll now turn the call back to the operator so we can take your questions. Thanks.

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jim Duffy of Thomas Weisel Partners.

Good morning, Jim.

Good morning, everyone. My question relates to the SG&A. Typically you see a greater sequential decline in SG&A from the first quarter to the second quarter and contemplating that you had $3.5 million of benefits from restructuring on a pro forma basis, can you provide a little commentary about SG&A dynamics during the quarter?

Yes, just to clarify, that $3.5 million of benefits, Jim, not all of it was in SG&A. There was a fair portion of that that benefited cost of sales.

Oh, okay. What would that split be, Don?

We said earlier in the year about two-thirds would be SG&A and one-third cost of sales and we were talking about the full year, $17 million to $19 million. That's a good number for the second quarter as well. One additional comment regarding SG&A, or two comments actually. There's timing issues as it relates to some of the marketing and advertising spend that I guess hurt a little bit the Q2 SG&A performance compared to the first quarter. Second comment is that we had a bit of a true-up of our incentive comp accrual. There's a portion of our incentive comp programs that are driven by total shareholder return, and the very nice and very justifiable run-up that we had in the second quarter on the Wolverine share price contributed to the adjustment of that accrual at the end of Q2, which contributed about $1 million of incremental SG&A in the quarter.

Helpful. Thanks. I'll jump back in the queue.

Our next question comes from Scott Krasik of CL King.

Good morning. And good quarter.

Thanks.

Your comments, Blake, about feeling better about the backlog, you had previously talked about the third quarter being the weakest quarter of the year and I know currency has been a play into that, but maybe talk about the visibility, what you're seeing on the fall orders and also have you heard any commentary from retailers that they feel more confident about bringing spring 2010 orders in earlier. I know they didn't do much of that a year ago.

First, let me see if I can address your backlog questions first. I mean, for our business, backlog has been a good indicator of future performance in past years. Over the last two or three quarters, it's become less of an accurate indicator for a number of reasons and frankly, that has to do with the Q3 and Q4 impact of the economic slowdown last year. And so if you look at our backlog today, as Don indicated, the quality of our backlog is much higher than it has been historically. Like many people, we took some order cancellations, a significant amount in Q3, and especially Q4 of last year.

So those order cancellations would be in our 2008 backlog figure, but obviously are not in the 2009 figure backlog figure, but obviously are not in the 2009 figure that we used for comparisons. So that really goes to Don's comments about significantly increasing the quality of our backlog. We think, frankly, our backlog quality has never been better than it is now because you can get future orders out of people, out of retailers, they really expect to take that product in, so -- and I'd say that the backlog, we don't usually talk about backlog spread amongst our brand groups, but our backlog position is probably higher for -- a little bit stronger for Merrell than some of our other brands.

Scott, I will say that at the end of Q1 we did offer a little color on Q3 versus Q4 and Q2. We don't offer quarterly guidance revenue or earnings guidance. We want to, based on how the backlog was aging on April 22nd, the date we announced Q1 earnings, it appeared that Q3 was going to be the toughest of the remaining three quarters from a revenue comp standpoint. As we sit here today, our outlook on Q3 and Q4 is about the same in terms of year-over-year revenue growth. So it doesn't appear that Q3 is going to be materially worse than Q4.

Okay. That's helpful.

Provide that same level of assistance, I guess.

To the retailers feeling confident about bringing spring 2010 orders forward, any thoughts there?

I think my general impression is that the inventory levels at retail are as good as I've seen in the past year, but I think everybody is still being very, very cautious, especially for example department stores. While we don't have a large percentage of our business with US department stores, they're being ultra conservative in their order placement at this time. So I think generally retailers are expecting a relatively soft back-to-school season and they are planning conservatively for the holiday season at this point in time. When things snap, when things turn around, they're going to expect people like us to be able to deliver what they need on a much quicker basis and we've been preparing for that for some time.

All right. Well, I think that's good. You'll be prepared to fill the orders. Don, then just lastly, you talked in the first quarter about savings above and beyond the restructuring, I think it was $7 million in that nature. Did you pull back on some of those other programs in the second quarter or are you saving those?

We definitely didn't pull back, Scott. As I mentioned to the first questioner, Jim, there was a bit of a timing issue on some marketing and advertising spend as well as the impact of the increase in our share price on both the long-term incentive comp portion of our incentive comp program that contributed about $1 million to SG&A in the quarters versus the first quarter.

For the back half of the year, aside from the restructuring savings, do you expect to get additional savings from some of these programs or will they be offset by incentive comp?

I think if you look at the first half of the year in terms of an adjusted SG&A decline, that would be a good barometer for the second half of the year.

Excluding the restructuring?

Excluding restructuring.

Okay. That's helpful. Thanks so much.

Thanks.

Our next question comes from Chris Svezia of Susquehanna Financial Group.

Good afternoon or excuse me, good morning, everyone.

Good morning, Chris.

Hi, Chris.

Good morning. Just touch on the currency impact, if I might have missed this. Don, maybe you could just clarify what the currency impact was for the second quarter? I think last conference call you mentioned currency would have the biggest impact in Q2, lesser degree in Q3 and sort of a minimal impact in Q4. I think you just commented that it seemed like it was shifting a little bit more to the second half, given how you're hedged.

Yes. What you cited was really kind of the -- it's the translation impact of foreign exchange as opposed to what I'll call the product cost or the transaction cost of foreign exchange was driven very heavily by the forward contracts that's we've entered into to hedge inventory purchases.

Okay.

And the net impact in Q2 of FX, when you take into account the contracts that matured, and the contracts that mature in the quarter are entered into six to nine months prior to the actual quarter, but the net impact of FX translation and transaction in Q2 was $0.01 a share negative in the quarter.

Okay.

So that compared to I think about $0.015 of benefit in Q1. So on a year-to-date basis, FX in total were about flat. So the biggest negative impact year-over-year for the full year is going to be driven by the second half of the year, the maturation of the forward contracts that again as I mentioned in the prepared remarks that were entered into this year, before the dollar more recently weakened, and were entered into in the prior year before the dollar significantly strengthened in the Q3, Q4 time period.

Okay.

So therefore, I knew there would be questions regarding the $0.11 to $0.14 impact, given what the actual FX impact was in Q2 so we wanted to clarify. It's mainly being driven by the timing of when the contracts were entered into. The dollar weakened and strengthened so rapidly last year and this year respectively that the timing of the contracts entered into versus the contracts maturing having a big kind of a big effect on the FX impact on reported results or projected results as well.

Okay. All right. That's helpful. Thanks. And just on -- with regard to the direct consumer piece of the business, you mentioned improving trends in the second quarter. Could you maybe just talk about of the 90 or so stores that your Company owned, can you give us the comp number or give us any parameters about what dynamics occurred, what the magnitude of the shift was in terms of improvement?

Yes, our retail management team took some actions earlier this year to really improve the performance of our own stores, 90 some stores here, primarily in the United States, such as going narrow and deep on key product assortments, trying not to be out of stock when that consumer walks through the door and they want some core product. That had a significant impact. In addition, we're seeing an overall good response to our product development efforts and innovation by virtually all of our brands, both brands are featured in our own stores. And we also made some improvements to our eCommerce web sites to improve the timing and make those sites even easier to use, so it was really a combination of various things, including putting some full priced Merrell product in our Merrell value outlet stores, that has an impact on our performance.

So all of those -- all of that effort the last four or six months came together it seemed in mid May and we started about mid May to significantly outperform the FDRA retailer index and as you know, that index on a comp store basis is down about 5 to 6% for the year, which is probably the toughest year the US footwear industry has experienced in at least several decades that I've been around. So we're very happy about the consumer response to our product and really our outperformance, which really started about mid-quarter for us.

Did the comp trend Blake at all turn positive or -- ?

I think for our physical stores, bricks and mortar stores, we had a low single digit comp store decrease for the quarter, which was significantly better than FDRA and when I look at the April, May and June numbers that were just out recently, most of the other retail players.

That would be for the full quarter, Chris and really as Blake indicated, we saw a nice turnaround in mid May so the latter part of the quarter we saw a better improvement than the modest 2.2% comp store sales decline.

Thank you very much. Appreciate it.

Thanks.

Our next question is from Kate McShane of Citi Investment Research.

Hi, good morning.

Good morning, Kate.

Good morning.

Was wondering if you could give a little bit more color on the reason for the increase in guidance today and how much is it from an improved currency outlook?

Well, we said with our initial guidance that we were expecting a $0.15 per share negative FX impact and we're at $0.11 to $0.14 per share now. So not much of the increase in guidance is related to a change in the FX outlook. It's really we've overdelivered versus our internal plans for the first two quarters of the year. We have plans to continue to be vigilant and disciplined on the operating expense side. We are pleased with the way Chaco is being integrated and we're pleased with the performance particularly in Q2 for Chaco. All those things come together, converge to cause us to be a little more optimistic regarding the full year. Obviously as you get a couple quarters under your belt, like any well run Company, we had some reserves and cushions in our internal operating plan that we presented to ourselves as well as our Board of Directors as well as what influenced our communications to the outside world and as you get six months into the fiscal year and you perform according to plan, you get a little more confident regarding the back half of the year.

That's helpful, thank you. Can you talk about the strength of the Merrell brand? How much of the double-digit increase is a result of new distribution that may have happened during the quarter and how much would you think is from market share gains and are you still seeing retailers focus on the top three or five brands at the expense of tertiary brands at retail?

Let me take the last part of your question first, Kate. I think retailers in general have pared down the number of brands they're carrying in their stores. They're looking to purchase closer to need, and they naturally have narrowed their choices to the strongest brands in their portfolio. And over the past 7, 8, 9 years, Merrell has been one of the strongest performing brands especially here in the United States.

The Merrell increase in the quarter really didn't come from new doors and new distribution, for the most part. It just came from excellent sell-through, primarily at our existing base. I think sporting goods and some other channels performed a little bit better than the outdoor specialty. Sporting goods and independents versus outdoor specialty and maybe department stores, which remain pretty conservative.

Those channels performed better but the Merrell performance line, that's their Out Venture segment of their line, had another outstanding quarter and they're clearly the dominant player in that category. And it was spread, really the sales performance in the quarter for Merrell was really spread across men's and women's. Women's land sandals, performance product and the same for men.

Okay. Thank you so much.

Thanks.

(Operator Instructions). Our next question comes from Diana Katz of Lazard Capital.

Hi, great quarter.

Hi.

Hi. I was wondering if you could comment on your decision to move some non-core excess inventory, what was the dollar amount of that inventory moved and the impact on gross margins? And which brands that was from? And which brands that was from? Also, you previously stated you expect inventory down year-over-year and flat gross margins. Do you still expect that? Thank you.

Yes, the closeout inventory in the quarter, we have closeout sales every quarter, Diana, as I'm sure you can appreciate. We called it out in the discussion on gross margin because the closeout sales in the quarter were a few million dollars more in this year's Q2 than last year's Q2. It was across the entire brand portfolio and in addition to having a higher percentage of our revenue in the form of closeout sales, the gross margin we earned on those closeout sales this quarter was a little bit less than the margin on closeout sales than the prior quarter, so that was a contributor to the 60 basis point decline in constant currency gross margin. It was not anywhere near as close as the higher product cost but it was a factor in that so what drove that is the desire to manage out inventory that was otherwise classified as dead inventory. So the gross margin on that were very low. We are still expecting full year flattish gross margin. We expect there to be significant margin, gross margin expansion in the second half of the year. So that is still in the -- embedded in the full year forecast.

Great. Thank you very much.

Thank you. Our next question comes from Mitch Kummetz of Robert Baird.

Yes, thank you. I just wanted to follow up on Kate's question about Merrell. In the quarter I guess your sales were down almost 8%, last quarter down a little over 11, so about a 4 point improvement Q2 versus Q1. But then the Merrell business I think Blake you said it was up low double digits constant dollars, last quarter I think it was down low single digits in constant dollars. A much bigger swing in that business sequentially from Q1 to Q2. Is that is a function of Q1 being hurt by weak prebooks and Q2 really benefiting from strong reorders or how should we think about that significant sequential improvement in the Merrell business.

Blake said that the Outdoor Group was up double digits on a constant currency basis, not the Merrell brand.

Right.

Okay.

Mitch, from a macro standpoint, I think people were frankly just kind of retailers and everybody were feeling their way into the first quarter and as time has progressed, people have gotten used to operating in this type of environment. So you're seeing maybe a more -- I'm not sure I would call this a more normal trading environment, but certainly people are learning how to operate, the good operators in this type of environment. Merrell had a good Q2, maybe some of their Q1 performance was impacted by retailers being ultra conservative, but as you know, retailers need to pay their bills with gross margin dollars as well, and they have to have the product that the consumers demand, so I think there was some of that involved in our Q2 Merrell performance. Okay. And then Don, help me out with the full year sales guidance because you guys beat your internal expectations, sales expectations on the second quarter and yet the full year sales guidance, particularly on a constant dollar basis, is coming in a little bit. Is that a function of more of the business shifting to at once, so you have less visibility, so you're being more conservative with your back half outlook or is there something else that you're seeing that causes you to take down the full year guidance in constant dollars even with the Q2.

Without question, we have less visibility into the second half of the year than we would in the normal year. Last year we had visibility that we thought was good. As it turns out it really wasn't that good because of all of the order cancellations that came in the last half of the year. When we built our operating plan for the year, by quarter, we did it by period, we roll it up by quarter, back at the beginning of the year, we like many companies, Mitch, were expecting to have a very, very tough Q1, a little bit less tough Q2, a little bit better Q3 and kind of hopefully cycle through and get our head above water in Q4. That was probably pretty consistent across a range of companies.

We did have a tough Q1. Maybe not as bad as we had projected. We had a little bit better Q2. The outlook now for the back half of the year, the economic recovery that we thought would be kind of picking up steam in late Q3 and Q4, by all accounts it appears it's going to be a little bit delayed from that. Europe remains very, very tough from a trading strand point and we just have a more cautious and conservative outlook on the second half of the year based on where we stand today than when we developed the initial plan back in the January time period.

One quick last question. On the Wolverine group, Blake, I don't know if you mentioned it or maybe I missed it. What were the sales for the quarter? I don't know if -- I assume they were down, but were they down double digits in constant dollars?

Yes, I mean, in constant dollars they were down in the -- overall for the group and that includes Bates and High Test, they were down in the mid-teens in constant dollars and --

Okay.

But as you know, most of the Wolverine group is US-based and US-centric, probably the most of any of our branded groups.

With a big part of that decline, Mitch, is kind of timing of Bates business. We still feel full year Bates is going to have a decent year but the business is pretty unpredictable based on Department of Defense orders, so a large part of that decline in the quarter. It's kind of hard to assess the Bates business quarter by quarter and if it has an impact on the entire Wolverine Footwear Group, it causes a similar challenge there.

Appreciate the color and good luck.

Our next question comes from Sam Poser of Sterne Agee.

I've got a few questions. Number one, can you give us the actual reported dollars by segment, outdoor, the different groups, please?

Hang on one second. Sorry, I had the percentage changes and the dollar changes. I'll give you the dollars. You're interested in the dollars themselves or the percent change?

No, the dollars themselves.

For Hush Puppies Company, $27.1 million. For Wolverine Footwear Group, $49.7 million. The Outdoor Group, $92.9 million. Heritage Brands Group, $45.1 million. And the other would be $30 million.

Thank you. And then also, do you guys factor your receivables?

No.

No.

Okay. And do you think that that's going to prove to -- how do you see that being a potential advantage to you this year, given the problems that CIT looks like they're having right now?

Again, our DSOs were down about a day at the end of the second quarter compared to the prior year, Sam, which in this environment I think is quite a testament to the effort being expended on the part of the Company. So we feel very good about where we are from a working capital standpoint and even better about where we're projected to be by the end of the year.

Two other quick questions. With the FX, will the gross margin -- what do you see the gross margin impact, the FX gross margin impact for the back half of the year?

It's going to be negative. On a year-to-date basis, we're about flat from an FX standpoint and we're projecting $0.11 to $0.14 of FX full year drag, most of that's going to be in the cost of sales area so it's going to impact our gross margin. Again, I like to talk about constant currency gross margin so I would rather adjust our reported revenue for FX and then adjust our reporting cost of sales for FX to get a constant currency gross profit.

Your gross margin on a constant currency basis is what you're looking at to be flat with the previous year.

No. We're talking reported gross margin to be flat with the prior year. Excluding restructuring charges.

I think the other factor, Sam you have to take into account, our gross margin in the first half was impacted by negotiated prices that were significantly higher for product in first half that were negotiated in 2008. We've also negotiated very hard on product prices for the second half of this year and have had some pretty the second half of this year and have had some pretty significant decreases. So you'll see that impacting gross margin as well, FX aside, in the back half of this year.

For the first half of this year, our average product cost increase was in the high single digits, up to double digits, depending on the brand and for the second half of the year we're looking at low single digits, maybe to low middle single digits depending on the brand in terms of year-over-year product cost increases. We study the margin quite closely Sam. Full year flat gross margin reported adjusted only for restructuring charges is achievable.

Okay. Great. And then one last question. When you talked about your backlog being of great quality, does that imply that basically that the backlog is down but you feel very confident you're going to ship everything that you've got.

Maybe not great quantity but great quality.

That would imply that the backlog is down but you feel comfortable with everything you've got.

Correct. That's correct. I mean, it's simply given what happened in Q3 and Q4 last year and the cancellation area, it's just not an apples-to-apples comparison anymore and we have that experience under our belt with respect to Q1 and Q2.

To what degree is the backlog down on a year-over-year basis, given that exception?

It would be --

On a reported basis, it's down mid-teens. When you adjust for foreign exchange, adjust for the businesses we exited previously, adjust for the timing of the Bates business, and when you look at the excessive cancellations that we had in the last half of last year and we studied this quite hard to look at what the cancellation rate was versus our historical average and what we expect it to be this year, the backlog was down mid single digits.

Thank you very much. Good luck.

Our next question comes from Jeff Mintz of Wedbush Morgan.

Thanks very much. Good morning.

Good morning.

I guess, Don, a follow-up on the marketing and that expense. You said there was a shift in timing into the second quarter. What's kind of the overall plan for that for the year? Is it planned down from last year and have you made any adjustments to the plan as we've gone through the first two quarters?

I mean, we're very mindful of continuing to invest in the brands, Jeff, not just in product design and development but also in the advertising and marketing spend. We are projecting a modest full year decline in that area but the decline would be less than in the other areas of operating expenses. As we continue to re-evaluate full year plans, there may be a slight adjustment to that versus the original expectations for the year but nothing significant.

And Don, have you found that you're kind of getting more impressions for your advertising dollar based on what's going on in the advertising world?

I would say overall --

Yes. Absolutely.

We don't do a lot of direct to consumer advertising where I think that issue would probably be more prevalent but I think the general answer to your question is yes.

And frankly, we continue to invest in avenues that get us closer to the consumer, our eCommerce sites, our stores, the stores of our international partners around the world. We're focused on those venues. Whatever drop that Don this year referred to is what I would probably call soft marketing dollars, show costs and some of those items.

Okay. Great. That's helpful. And then Blake, could you just comment a little bit on the Outdoor Group international business, particularly the Merrell business in the quarter?

Yes, I mean, the Outdoor Group and all of our international businesses, there's a clear advantage to the Company to being in 180 countries around the world and we've got some countries that are struggling right now, but yet we also have the advantage of some countries that are rolling along just fine. So we still think we're getting and taking market share around the world, especially some of the smaller competitors and smaller brands, just don't have the infrastructure or financial wherewithal to stay present in a number of these markets and we're there and we've been therefore decades and we're there to stay and that's helping us a little bit on the competitor side.

Okay. Great. Thanks very much and good luck.

Bye-bye. Thanks.

Our next question comes from Beth Montgomery of Longbow Research.

Hi, guys. Congratulations on the quarter.

Thanks, Beth.

Most of my questions were already answered but I wondered if you could talk about Chaco and like kind of how much it contributed to the Outdoor Group's growth in the quarter? And then just a clarification. The Merrell business I think in the press release, Blake, you said the Merrell business in the US was up double digits.

Correct.

Is that Merrell or is that just outdoor?

That's Merrell. The reference in the release is Merrell, USA business, which we were obviously very happy about.

Okay.

With respect to Chaco, Chaco sales in the quarter were around $8 million and we were very, very pleased with that. That's really a testament to the -- our operations team and brand team that took that brand on, really at the front of the season, and in midseason and was able to perform and meet our retailers' expectations. So Chaco's been a bit of a pleasant surprise. The loyalty to that brand is very, very strong.

Okay. And I would imagine that Q2 is a big quarter for Chaco so we might not see that much of a --

Absolutely. Q2 would probably be the biggest quarter this year.

Okay. All right. Thanks, guys.

Thank you, bye-bye.

Our final question comes from Jeff Blaeser of Morgan Joseph.

Good morning. Thanks for taking my question.

Hi, Jeff.

Good morning.

Just wanted to touch back on the at once order trends that you mentioned earlier, how that influences your inventory decisions, how that could influence inventories and on the other side, the flip side, I'm guessing that they're asking you for something, I'm guessing you're getting something back. What kind of impact does that have on your prices and your margins?

Well, to your point, the gross margin we earn on at once orders is clearly higher than it is on future orders. A lot of the future orders are large orders from large customers that would have volume discounts already built into them but we do charge more for an at once order that we're shipping out of our warehouse and we earn a higher margin on that. The first part of the question was?

Will the increase in the at once impact your decisions on inventories?

Well, that's -- actually, that's something we had a lot of discussions about because in normal times, we're trying to manage our inventories down as we are, we made great progress in the quarter on managing inventories. However, we're also mindful of the need to have inventory on hand given the changing trends that we talked about during the prepared remarks about having the inventory on hand, the right inventory to fill at once orders because you can -- you run the risk of managing your inventories down so low that your order fill rate drops precipitously and you're missing a lot of at once business that you would otherwise have.

Our strong balance sheet and what it costs us on a revolver which is a very low LIBOR plus 40 basis points, the current cost on our revolver is about 70 basis points all in. The carrying cost of inventory, the true incremental carrying cost is very low, as long as it's the right inventory you feel you can sell at full gross margin or something close to that. That's something we're continuing to work with on a brand by brand, operating group to operating group basis.

Could you given us an order of magnitude on the positive impact on margins that you saw in the second quarter from that trend?

I don't have a number in front of me, Jeff. We can look at it, maybe circle back with you.

Okay. Great. Thank you very much.

Thanks.

Thank you. At this time, I would like to turn the call back over At this time, I would like to turn the call back over to Ms. Christi Cowdin. You may proceed.

Thank you. On behalf of Wolverine World Wide, I would like to thank you all for joining us today and as a reminder, our conference call replay is available on our website at www.WolverineWorldWide.com. The replay will be available through Wednesday, July 29, 2009. Thank you and have a great day.

This concludes the teleconference. You may now disconnect your lines.