Wolverine World Wide Inc (WWW) 2009 Q3 法說會逐字稿

Good morning, and welcome to Wolverine World Wide's third 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 like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you. Good morning everyone and welcome to our third quarter conference call. On the call today are Blake Krueger, our CEO and President, and Don Grimes our Senior Vice President and CFO.

Earlier this morning we announced our third quarter 2009 results. If you did not yet receive a copy of the press release, please call [Abby 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 attached tables 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 Q3 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 projections there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases. With that being said, I would now like to turn the call over to Blake.

Good morning and thanks for joining us. A somewhat sad day here in Michigan, given the Tigers lost late last night, but we'll proceed with the call. This morning, we reported very good results for the third quarter behind strong earnings leverage. Our multi-brand, multi-country and multi-category business model continues to deliver solid results even in this challenging retail and macroeconomic environment. While retailers are cautious and continue to be very conservative with their inventory levels, our brands are selling through nicely on a full price, non-promotional basis. We remain focused on delivering innovative, cutting edge product, protecting and increasing our brand equity and integrity and positioning the Company for accelerated growth once we cycle out of the current recessionary environment.

During the quarter, our revenue results reflected the tough environment and unfavorable currency comparisons. However, consumers actually vote with their wallets and the strength of our brands is clearly evidenced by the strong consumer response to our product offerings. To this end, for Q3 our 94 Company owned stores reported a strong double-digit revenue increase on a comp store increase of over 4%. In addition, we've seen our 2010 order backlog build to a solid increase. Overall, we are very pleased with our performance throughout the year and third quarter and have increased our 2009 earnings per share guidance for the year. Don will share some more details on that in a few minutes.

I would like to begin my brand review with the Hush Puppies group. Overall, Hush Puppies group revenue in the third quarter exceeded our internal forecast but was down upper single digits on a constant currency basis. The majority of the decrease was centered in our international licensing business and in our UK wholesale business, both of which felt the impact of a stronger US dollar. The Hush Puppy business in North America was down only 1% in constant dollars as we are making progress in our efforts to move the brand up market.

During the quarter, we opened our first Company-owned full price Hush Puppy concept store in Montreal, Canada. This store is performing exceptionally well and has exceeded our internal sales plans by a substantial margin. Our second Montreal store opened just last week and is also performing well above our plan. These concept stores will help us showcase the brand and present a broad product offering to the consumer. With an average unit selling price of over $110 US, we are seeing positive results from our efforts to add style, content and trade the brand up in North America.

Our consumer direct business in the UK also continues to outperform the market. Our back-to-school business was especially strong as our proprietary children's measuring and fitting proposition, Fit Left, Fit Right, drove strong back-to-school sales in the quarter. We plan to open our fifth Hush Puppies value store in the UK in November. The Hush Puppies brand also continues to perform well with better tier retailers in the UK. Building controlled distribution continues to be a key strategic objective for Hush Puppies. In addition to the Company's direct retail investments in the quarter, our international distributors opened concept stores in Dubai, India, Indonesia, Singapore, Costa Rica, Portugal, Spain, Shanghai, China and the Philippines. This brings our global store count to 513 concept stores and over 900 Shop in Shops.

Cushe, our new design-led, active lifestyle brand targeting younger consumers is generating positive buzz in many footwear markets. Retailers at both the outdoor retailer and surf shows were very enthusiastic about the Cushe brand and products. As an aside, we had several shoes stolen off our booth at the outdoor retailer show, so that's probably the ultimate compliment for design and innovation. Early sell-through in the US, Canada and Europe for Cushe has been very encouraging. To date we have signed distribution agreements covering 25 countries for Cushe and our first pop-up store recently opened in Manila. While Cushe is very early in its growth cycle, our fast-past international expansion and placement in several key US influencer accounts reinforces our belief that Cushe represents a significant midterm growth opportunity.

Let's turn to the Heritage Brands Group which includes Sebago as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson. Overall revenues were in line with our forecast, but down upper single digits versus last year, on a constant dollar basis.

Our CAT, our European business in the quarter, experienced a mid single digit revenue increase in local currency, driven by the continuing trend towards classic boots looks, a style trend that has contributed to a double-digit revenue increase for Italy in the quarter. Italy is our most fashion-forward market. The legendary raw collection of premium boots has helped CAT expand to better grade distribution in the UK and is already showing positive reorder activity on new products shipped during Q3. While our international CAT distributor business continues to have strong support at both the retail and consumer levels, the stronger US dollar and tighter credit controls resulted in restricted shipments to a handful of large international markets. In the US, we have experienced very good sell-through rates on new industrial boots indicating that our ongoing investments in product innovation continue to drive consumer interest.

Turning to Harley-Davidson, we experienced revenue increases against the prior year in our owned European and international distributor operations which were offset by a planned decline in the US. While our top 40 retail accounts were up 12% in the US, this did not offset broader based at once weakness, especially with second and third tier Harley-Davidson retailers. Internationally, we launched a Harley-Davidson dealer exclusive eCommerce website servicing almost 500 international dealers with a broad selection of styles, shipped direct to the dealer from the US. Harley-Davidson footwear continues to be one of our most profitable and highest return businesses.

Our Sebago business experienced a strong double-digit revenue increase in Canada and Europe during the quarter. These increases were offset by revenue declines in the US, primarily due to soft reorders and in our international distributor business due to slower moving premium priced product. The brand continues to expand its consumer direct touch points, opening two new Sebago brand stores and five Shop in Shops in the quarter, bringing the brand total to 42 concept stores and 120 Shop in Shops. Despite the difficult global retailer environment, the Heritage Brands Group posted a high return on sales and has built a double-digit order backlog increase for 2010.

Turning to the Wolverine Footwear Group. Q3 revenue was down double digits compared to the prior year due primarily to the domestic economy which has seen increased factory closings and workforce reductions. However, there were a number of encouraging performance metrics for the group versus the prior year, as SG&A expenses, inventory levels and DSOs all showed improvement. Although faced with continued domestic market pressures, the Wolverine brand remains a leader in the core work category, with solid sell-throughs in our major retailers. Our top 20 customers generated Q3 growth in the mid single digit range and according to NPD point of sale data for the quarter ended in August, the Wolverine brand increased its market share in the work boot category by over 3 percentage points. This was driven to a large extent by the continued success at retail of the brands' innovative contour weld product line.

This growth was offset by challenges in the US independent retail work channel which continues to feel the brunt of the US economic slowdown. Product innovation and comfort technology continues to be the focus of the Wolverine brand as evidenced by the recent success of the Wolverine ICS and 1,000-mile boot programs. Together, these two programs have driven a very strong double-digit increase in the 2010 Wolverine rugged casual order backlog.

The Bates business is committed to being the leading provider of footwear solutions for all branches of the US military as well as the US and global civilian uniform markets. The continued success of our Bates ICS products fuels growth in the civilian sector during the quarter but this growth was offset by a planned decrease in our military shipment. The Wolverine and Bates brands continue to have incredible brand loyalty and hold the number one position in their respective markets.

The Outdoor Group, which consists of Merrell, Patagonia Footwear and Chaco, generated strong quarterly earnings on a low single digit revenue decline on a constant currency basis. Consumer demand remains strong for our Outdoor Group brands, especially Merrell. As retail sell-throughs are solid and our brands continue to gain market share. Merrell's Out Venture, that's it's outdoor performance category of footwear, had an exceptional quarter with a healthy revenue increase. The brand continues to gain market share and reinforced its position as a global leader in performance outdoor footwear. Early sell-through on fall product has been very good in many key areas.

The new men's Chameleon three stretch, the next generation of Merrell's iconic Chameleon collection was well received by Merrell's core consumers. Merrell's key product franchises continue to sell through very well at retail, including the men's Moab, the women's Siren, and the Water Pro collection. Merrell also had an excellent response to its highest intensity product, the new outbound hiking program, as consumers have embraced the aggressive styling and uncompromising performance of this new collection. Merrell continues to hold a dominant number one position in the multi-sport classification, the largest category of the outdoor footwear market, by offering cutting edge innovative product.

Merrell's Fusion, that's it's outdoor casual segment, launched new fall product that reflects the brand's foundation of comfort, versatility and durability, coupled with outdoor inspired style. The new Polaris collection, specifically the site and hyperbolic Mocks, is being embraced by the Merrell consumer looking for more casual fall footwear that can easily transfer from the office to the street. Fall sell-throughs in the women's have been very good, especially for the new Snow Devai collection. The Moxy collection of women's dress casuals with an elevated heel and Merrell air cushion continues to perform very well at retail. The Fusion category remains a significant growth opportunity for Merrell.

During the quarter, Merrell apparel was prominently featured in many outdoor and sport publications. New products for trail activities, sun protection and commuter cycling in the 2010 spring product line have been very well received by retailers, resulting in a strong double-digit order backlog increase for spring 2010. The Merrell apparel program has enabled us to accelerate the opening of Merrell lifestyle concept stores around the world. Merrell's global retail presence continued to expand in the third quarter, with 16 new concept stores opened by distributors in Japan, China, Korea and Italy. And a Company owned concept store opened just outside of Boston. Merrell plans to have over 100 Merrell branded stores and almost 1,000 Shop in Shops globally by the end of this year.

Merrell's success has been achieved by reinventing what outdoor product can mean to our consumers on and off the trail. This spirit continues to attract consumers through our product, retail store development, growing online presence and support for outdoor participation. To enhance its position, Merrell recently announced a major partnership with a National Parks Foundation. Under this long-term partnership, Merrell will encourage greater participation in our National Parks and build on its, "Let's get outside" message. Outdoor participation in our natural parks is at an all-time high and this partnership is an important initiative as Merrell increases the relevance of the outdoors to a wider consumer base.

Patagonia footwear. Patagonia is experiencing strong sell-through of key models with our top retailers this fall. This momentum will carry forward as the spring 2010 product has booked in very well and our order backlog is up high double digits across all product categories. On the consumer front, Patagonia footwear continues to benefit from strong editorial and consumer appreciation for the brand's ongoing commitment to making the best possible product with no unnecessary harm to the environment.

Chaco. Chaco is performing above our expectations as a result of our early efforts to quickly integrate the brand and focus on operational, quality and product delivery improvements. We have been very pleased with the strong sell-through at retail and the incredible enthusiasm for this pure outdoor adventure brand. Demand well outpaced our inventory availability in the summer months and many retailers are looking to expand their Chaco business in 2010. We have high expectations for Chaco to deliver strong double-digit growth in 2010, at an expanded product range and an improved replenishment business. Chaco is an important growth vehicle for the Company and has a very exciting future. The outdoor group in total continues to be the Company's largest generator of revenue and earnings.

Overall, we were very pleased with our year-to-date performance. Looking ahead, we believe the current economic challenges could continue for some period of time. The global economy appears to be stabilizing but the recovery, when it begins, will likely be at a slow pace. While there has been some recent improvement in a number of macroeconomic indicators, retailers will likely take a very conservative approach to inventory levels, at least until there is evidence that a new normal level of consumer spending has been achieved. We are fortunate to possess a dynamic business model with compelling brands, quick cycle times and strategies that position our Company to perform in this environment. We have been using the global recession to create some space between us and the competition.

It's also important to note that the global consumer hasn't quit spending all together, but is simply being more thoughtful and disciplined in their purchases. Our brands and products continue to offer exceptional value, innovation and style, even at full retail price. And there's been some hard evidence that our business has begun to turn even in the current environment. We directly operate over 90 stores under several retail banners, primarily in the United States but also in the UK and Canada. The strong consumer response to our product offerings that started in about mid-May in our own stores has continued through the third quarter.

For Q3, our Company owned and operated stores recorded a strong double-digit total revenue increase driven by a comp store increase of over 4%. Our most recent openings including the Hush Puppy concept stores in Montreal and our own Merrell store in Boston are easily exceeding our internal plans and expectations. Our eCommerce business also continues to post very strong double-digit increases. If you offer innovative product, the consumer is still buying.

The second encouraging indicator for our business is the trend in our incoming future orders. Our current order backlog position has improved significantly for spring deliveries in 2010. While we believe retailers will continue to closely monitor at once orders as they enter this holiday season, we believe that they have begun to adjust to the current retail environment and are placing future orders on a more normalized basis in order to keep their stores fresh, and to ensure that key product will be available when needed. While we expect the tough retail environment to continue through the holiday season, and our own fourth quarter to be challenging from a top line perspective, our order backlog position at the end of Q3 was up solidly for 2010. This is certainly encouraging.

I will now turn the call over to Don Grimes, our CFO and Senior VP, who will provide you with some additional information regarding our Q3 results and our outlook for the rest of the year. Don?

Thank you, Blake. Good morning everyone. Thanks for joining us today. This morning I will review our third quarter financial results in a little more detail as well as offer additional insights into the quarter and an update on our expected full year 2009 results. In particular, we are very pleased to raise our full year earnings per share guidance in one of the toughest business climates in decades. More on that in a bit.

Before diving into the detail I wanted to call out some very positive financial highlights achieved in the quarter. First, adjusting for nonrecurring restructuring charges and the impact of a stronger US dollar fully diluted earnings per share were $0.67 in the quarter, an 8.1% increase over the prior year. Second, our disciplined approach to running the business resulted in a reduction of over 11% in operating expenses after adjusting for the quarter's non-recurring or unusual items. Third, our trailing 12 month return on average invested capital was a strong 17.4% after adjusting for the non-recurring restructuring charges reflecting the efficiency of our business model even in these challenging economic times. Finally, our relentless focus on asset management continued to yield results in the quarter, as net working capital was down over 9% at quarter end, helping drive year-to-date cash from operations of over $71 million.

Turning to the detail. Earlier this morning we reported third quarter revenue of $286.8 million, a decline of 10.1% compared to prior year revenue of $318.9 million. As we indicated in our previous quarter's earnings call, Q3 was a challenging quarter from a revenue perspective. About one-third of the revenue decline in the quarter was driven by a stronger US dollar so the revenue decline in constant dollars was approximately 6.9%.

Looking at the quarter's revenue performance by geography, Canada was a bright spot with revenue growth in the mid single digits, driven by Merrell's continued strong performance in that important market. Our other major geographies including our third party international distributor and licensee businesses experienced revenue declines in the quarter as curtailed consumer spending and retailer cautiousness continues. The Company continued to make substantial progress in the quarter with a strategic restructuring plan announced earlier this year. Our plan focused primarily on generating significant efficiencies in the Company's supply chain, manufacturing and back room functions. Nonrecurring restructuring and related charges of $5.1 million were recorded in the quarter, $1.3 million in the cost of sales and the balance in operating expense, bringing the year-to-date total of $27.5 million of which $8.7 million are noncash charges.

In the quarter, we realized approximately $4 million of benefits directly related to our restructuring initiatives and have realized benefits that are approximately $9.5 million year-to-date. Gross margin in the quarter after adjusting for the nonrecurring restructuring charges was 40.2%, compared to 40.4% in the prior year's third quarter. Further adjusting for the negative impact of foreign exchange, gross margin was 40.9% in the quarter. As expected, we began to realize the benefit of lower product costs in the third quarter. However, a larger benefit from lower product cost will be experienced in the fourth quarter of 2009. We still expect gross margin expansion in the fourth quarter such that full year gross margin adjusted only for nonrecurring restructuring charges will approximate the prior year.

The Company delivered an outstanding quarter of disciplined expense management. We continually strive to become an ever more efficient organization and we're succeeding at this without sacrificing necessary investments in product design, development or marketing to support our brands. Operating expenses were down 11.1% in the quarter, after adjusting for restructuring and related charges, foreign exchange, operating expenses directly resulting from our newly acquired brands, and finally, increased pension expense. Adjusting only for the nonrecurring restructuring and related charges, operating income in the quarter was $41.3 million and operating margin was 14.4% versus last year's 14.5%. However, further adjusting this year's results for the stronger US dollar, operating margin was 15.2%, 70 basis points better than last year. We are very attuned to the fact that companies take dollars not margin to the bank, but it is still very gratifying to see improvements in margin metrics in such a difficult economic environment.

The effective tax rate for the quarter was a low 26.6% driven by the cumulative year-to-date benefit from the implementation in the quarter of new tax planning strategies related primarily to the Company's international operations. We are estimating a full year effective tax rate of 29% and will continue to look for ways to structure our operations in a more tax efficient manner.

Adjusting for the nonrecurring restructuring charges in this year's third quarter and using a fully diluted share count of 49.4 million shares, fully diluted earnings per share were $0.62, which is equal to the prior year. Adjusting further for the impact of a stronger US dollar, current year earnings as mentioned earlier were $0.67 per share, an 8.1% increase over the prior year. Accounts receivable of $223.5 million at quarter end decreased 7.1% compared to the prior year, as we continue to effectively monitor customer's credit worthiness and collect amounts due. Days sales outstanding declined modestly from the prior year.

We are very pleased with our inventory position at the end of the third quarter. As expected, we made substantial progress in bringing inventories into line without stressing gross margin. Inventories were down 5.2% versus the prior year, compared to being up 6.9% at the end of Q2, and up 15.6% at the end of Q1. Although we still expect our inventory position to be meaningfully lower at yearend, we remain mindful of the need to have sufficient inventory on hand to meet replenishment demand and respond to the current trend of retail customers ordering closer to their anticipated date of need.

We reduced our revolver balance by quarter end to $9.9 million, down significantly from $34.8 million at the end of the second quarter. The Company ended the quarter with $78.5 million in cash and cash equivalents and total interest bearing debt of $11.6 million. The strength of the Company's balance sheet and our credit standing with lenders remain key competitive advantages. Wolverine consistently generates strong operating cash flow and we intend to continue our recent history of using that cash flow to fuel the organic growth of our business, fund strategic acquisitions and support a healthy dividend payout and when appropriate share repurchases.

Turning back to our restructuring program for a minute, the initiatives in the restructuring plan are all on schedule and are delivering the benefits we anticipated. In the quarter we identified two expanded initiatives that will potentially impact the total amount of the restructuring charge but are clearly in the best interest of our shareholders.

First, rather than continue operating two domestic manufacturing facilities focused on different footwear types, we made the critical decision in the quarter to drive additional efficiencies by consolidating our domestic manufacturing operations into our Big Rapids, Michigan, facility. As a result, we announced in July that we would be closing our Jonesboro, Arkansas facility. We are in the process of winding down the Arkansas factory and transitioning production to Michigan. Second, we are capitalizing on the leadership changes in our outdoor group product development team announced in the quarter to make significant improvements in both our footwear and apparel product creation activities. Improvements that we believe will generate efficiencies and more importantly accelerate growth.

Regarding timing, we expect that the expanded initiatives just discussed may not be fully completed until the first half of 2010. In addition, we now estimate total nonrecurring restructuring and related charges in the range of $35 million, to $38 million, and consistent with our Q2 guidance, we expect $33 million to $36 million will be recorded in 2009. Of the total, approximately $10.5 million represents noncash charges related primarily to asset impairment. Each of the two expanded initiatives was subjected to the same rigorous discounted cash flow analysis that we required for all of the other restructuring initiatives. Once all initiatives are fully implemented, we now expect annualized pretax benefits in the range of $19 million to $21 million up from our previous estimate of $17 million to $19 million.

Turning to the full year. As noted in this morning's press release, we are very pleased to be able to raise our full year earnings guidance. Excluding the nonrecurring restructuring and related costs we now expect earnings per fully diluted share in the range of $1.65 to $1.75, up from our previous estimate of $1.55 to $1.73. Still included in this guidance is an estimated full year negative foreign exchange impact of $0.14 per share and $0.12 per share of increased pension expense.

Though the US dollar has generally weakened over the last few months, the four quarter results will reflect the impact of foreign currency forward contracts that were entered into earlier in the year when the US dollar was stronger than current spot rates. The prior year's fourth quarter had the benefit of foreign currency forward contracts that were entered into prior to last fall's swift strengthening of the US dollar. Thus the expected fourth quarter negative impact on earnings from foreign exchange is about $0.09 per share. We have also narrowed our full year revenue guidance to a range of $1.08 billion to $1.11 billion with the midpoint of the revenue guidance remaining unchanged at $1.095 billion. Foreign exchange has reduced year-to-date reported revenue by about $41 million, and we expect minimal currency impact on fourth quarter's reported revenue.

Our revenue guidance implies a challenging fourth quarter and there are two reasons for this. First, we're going to have a tougher comp driven by the fact that last year's fourth quarter results for Wolverine didn't reflect the full impact of the deepening global economic crisis. Recall that our fourth quarter revenue last year was off only 3.2% versus 2007. The weakening economies in Europe and Asia did not have a significant impact on our business until the first quarter this year when consumer spending fully reflected the weakened economy and retailers became increasingly determined to manage inventories to lower levels. Second, our retail customers, though enthusiastic about our spring summer 2010 line, are less inclined to follow the historical norm of receiving initial spring shipments in the latter part of the fourth quarter and are instead requiring ship dates in Q1 of 2010. To underscore this last point and to demonstrate why we have guarded optimism regarding next year, let me share some details regarding our quarter end backlog.

Total backlog after adjusting for excessive order cancellations in last year's fourth quarter is down only in the mid single digits. However, when you dig a little deeper our backlog for orders scheduled to ship in the first quarter of next year is up solidly and although a smaller dollar amount, our backlog for orders currently schedule to ship in the second quarter of next year and beyond is up even more. We believe the improving trend in our spring 2010 future order backlog demonstrates a fundamental health of our business and continued strength of our brands around the world.

The current order backlog along with expectations for favorable year-over-year product cost, favorable foreign exchange, and continued operating expense discipline, should get us off to a solid start in 2010. The outlook for 2009 was a bit murky when we entered the year. We are extremely pleased to have overdelivered on the earnings expectations that we had at the beginning of what has in fact turned out to be a very challenging year. It's worth repeating that we're excited about our prospects for next year. With that I'll now turn the call back over to Blake for some closing comments.

Thanks, Don. We are obviously pleased to have delivered another quarter of very good results which is the end result of a great team managing a proven business model. Though 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 you time this morning. We'll now turn the call back to the operator so we can take your questions. Operator?

Thank you. (Operator Instructions) Our first question is from Mitch Kummetz of Robert Baird.

Yes, thank you and congratulations on the quarter.

Thanks, Mitch.

A few questions. Let me start with the backlog. So, Don, you mentioned down mid single digits at the end of the third quarter but up solidly for Q1, up even more than that for Q2 and beyond. Could you maybe better quantify the spring backlog in terms of the increase that you have right now?

I mean, we're not giving a specific dollar amount by quarter, Mitch. It's up solidly in Q1 and up a smaller dollar amount in Q2. I will say that the dollar amount that we have on the books now for Q1 represents a meaningful portion of expected or anticipated Q1 revenues so I think that's a pretty good indicator as to how Q1 looks. The shift from Q4 to Q1 is for the reasons that we cited during the prepared remarks.

Is the spring backlog up across all of your business groups?

I would say -- this is Blake. I would say generally yes, that's true.

Okay. And, Blake, you mentioned that in your comments that retailers are placing futures on a more normal basis. I know that in the last year there's been a shift away from the prebook with more retailers skewing towards at once orders. So how much of the solid spring backlog do you think is just a reflection of that pendulum swinging back the other way where maybe as you go into the first half of next year more of your business is going to be captured by your prebooks and less at once and maybe your ultimate sales aren't going to be as strong as what your prebooks might be indicating, if that makes sense?

Yes. What's happening is not unexpected. I guess last year Q1, Q2, even Q4 of last year, we saw the retailer scramble to adjust their inventories. So there were almost no future -- I mean, future orders fell off significantly for retailers and they only placed at once orders on really a needed basis. The pendulum we hope and believe has swung back to a more normalized order placement for future orders. They need their stores looking fresh. They need to plan their inventory. Inventory levels are a lot thinner today than they were a year ago, so we're not surprised. So we're seeing at once maybe fall to a more normalized level and that may take another quarter or two, but future orders hopefully have reached a normalized level.

Okay. And then a question on FX. Don, you mentioned minimal impact on sales for Q4 but about a $0.09 impact on earnings, I think you said. So does that earnings hit then come through the gross margin line based on your hedges? And how should we be thinking about the impact of FX beyond the fourth quarter, given your hedges and the weakening of the US dollar? At what point does that negative turn into a positive or potentially turn into a positive and where should we see that on the P&L, again, does that come through on the gross margin side.

The answer to your first question is yes the contract impact will flow through cost of sales and therefore impact gross profit and gross margin in the fourth quarter. So we're still forecasting gross margin expansion in the fourth quarter, even without regard for that. Second part of your question is we'll start seeing some of the turnaround in Q1 of next year, Mitch, but probably more so in Q2 when we start having contracts maturing that reflect the more recent weakening of the dollar.

And then last question. When I look at your outdoor business through the first three quarters of this year, the trend has been pretty lumpy. I think sales down 9% Q1, up 6% Q2. Blake, I think you said down low singles in constant for Q3, which I'm guessing is probably mid singles in reported dollars. I mean, is that largely a function of, again, just kind of the pattern that retailers are taking deliveries later in the season and should we think that the outdoor business is better in Q4 than it was in Q3, just like it was better in Q2 than it was in Q1?

Yes, I would really view this as -- you have to remember, the outdoor specialty distribution channel went into the recession a little bit later than other -- later than department stores and some other distribution channels, so that's part of the reason for some of the up and down. Clearly, in the quarter, though, the Outdoor Group was our best performing group from a revenue standpoint. It's a little frustrating to us. We're not getting more at once orders, especially when we look at the sell-through data and reports that we're getting across our product range, including some existing key styles, but new styles, but I think the Outdoor Group will continue to be one of our fastest growth vehicles.

Okay. Thanks, good luck.

Thank you. Our next question comes from Jim Duffy of Thomas Weisel Partners.

Hi, Jim.

Good morning. Thanks.

Good morning.

Hey, Don, can I ask you to speak to how you're tracking to the annualized expense savings you outlined with the restructuring?

I'm sorry, can you say it again.

Could I ask you to speak to how you're tracking to the annualized expense savings you outlined with the restructuring?

Yes, I mean, I think I noted in the prepared remarks that we recorded about $9 million year-to-date of benefits. Every initiative, Jim, is tracking on-line in terms of timing as well as the benefits to be delivered. In fact, we're having a Board meeting starting this afternoon and going for the next -- and we're reviewing the deck and our update to the Board shows that every initiative is progressing as had been anticipated so we're fully on track to have the annualized benefits in the 19 million to $21 million range once all the initiatives are fully implemented.

Okay. Great. And recognizing that you haven't yet spoken to 2010 outlook, in constant dollar terms, based on what you know right now, would you expect 2010 to be an up year for revenue?

Well, frankly, Jim, it's kind of hard to tell right now. I mean, I think we, like most companies, have more insight today than maybe we did last year at this time, but we're still waiting to see if the consumer's going to follow some of the good news, macroeconomic indicators and other good news that we've all been reading about in the newspaper recently. But on the other hand, I have to tell you, we're not waiting around for things to get better. Good companies don't wait around. They use the recession, they use it as an opportunity to double down on product development, double down on marketing, and to take market share so that they can have accelerated growth once it ends.

Jim, I will say that we're going into 2010 planning meetings over the next four or five weeks. I know we have a number of our brand leaders listening on the call. So I want to clarify that we have expectations for revenue growth next year. And certainly as it relates to how the 2010 backlog looks today, based on the one piece of hard data we have, then we certainly are pointing towards revenue growth in 2010.

So when you look to that 1Q backlog number that you spoke to, how much of that do you feel is a shift in timing of receipts or desired receipt dates from the retailers from late in the fourth quarter to early in the first quarter?

It's hard to try to quantify, Jim. We talked about it but there's no really good way I guess without going out and interviewing key customers as to how much of it is a shift from Q4 to Q1, how much represents a better outlook on the first part of next year.

You guys have done a great job on the expense side. The important thing for investors at this point is confidence that you can return to a growth trajectory. As you look out to 2010, what are some of the components of the business that you're most excited about? What are some of the things which you think can or should be drivers of growth in 2010?

Well, I mean, first and foremost, I think our Outdoor Group, all of the brands in the Outdoor Group we're looking forward for growth next year. Merrell is obviously the largest brand in our portfolio. We still believe Merrell is going to be our first $1 billion brand. But you look at a couple of the very small brands we picked up, Cushe and Chaco, they should post some very healthy numbers next year. Albeit on a pretty small base to begin with, but you also have to remember Merrell was pretty small when we acquired Merrell and we've done pretty well with that brand. So we look for growth across all of our portfolio, possibly the US work sector may be a bit of a challenge next year. We'll have to see where jobs go here and manufacturing jobs in the USA but we're in 180 countries around the world and a lot of those economies are starting to uptick. So we're enthusiastic about 2010.

Great. Well, thanks very much.

Thank you, Jim. Bye-bye.

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

Good morning, everyone.

Good morning, Chris.

Hey, Chris.

A couple questions. I guess first on product cost trends starting to reverse themselves here as you go through the second half and entering next year. Just wondering as you look at your ordering trends and your visibility, can you maybe just quantify that to some degree in terms of what's happening from a trend perspective, how much it's coming down and based on futures, is it starting to flatten out as you get into the second and third quarters in terms of what you're seeing? Just a little color on what's going on with product costs?

Yes. We're going to see a much more significant benefit in the fourth quarter from lower product costs. Of course it differs by brand but what we'll see in Q4 across the brand portfolio are average product costs down in the mid-to high single digits which is going to be probably one of the biggest contributors to the gross margin expansion that we're guiding to in the fourth quarter such that we'll have flattish full year gross margin.

In terms of the outlook as it relates to 2010, we would expect there, as I mentioned in the prepared remarks, we would expect there to be product cost favorability in the first half of 2010 as we're comparing what we hope will be lower product costs flowing through cost of sales to what were higher product costs in cost of sales in the first half of 2009.

Okay. That's helpful. And then as you guys think about SG&A, and the improvement that you've seen here through 2009, at what point, when you guys start to grow again do you need to start to invest in the business to an extent that it -- do you see an environment where you have to catch up on investments or if business started to improve to the stent extent that it would delever or is it -- there's certainly enough consolidation that you've seen over 2009 and efficiency that that wouldn't be the case if revenue started as you're calling out growth going into next year?

I think that we've shown discipline during 2009 in several areas, capital expenditures as well as SG&A. Certainly on the capital expenditure side we've maybe deferred or delayed some projects that we'll want to maybe catch up on and pursue in 2010 and beyond. On the SG&A side, I really think that we've really taken a good, hard look on how we can run the business more efficiently and I wouldn't expect a large part of the SG&A reduction to creep back into SG&A as long as we remain vigilant and mindful of continuing to run the business better, in a more efficient way. What comes first, the chicken or the egg.

We want to ratchet up our spending in areas that we think have a direct correlation with revenue growth and gross margin expansion so we talk about consumer direct initiatives and really communicating our brands' attributes and improving brands awareness, particularly of our Merrell brand. Those are areas over time I think you'll see the investment levels be redeployed from other areas into those areas to help fuel revenue growth.

Consumer direct, talking about stores?

Stores as well as advertising promotion and marketing.

And also especially product development. All the SG&A improvement you're seeing this year has not come at the expense of those drivers.

Okay. That's helpful. Last question I have is just on -- let's just touch on apparel for a moment. You've made a lot of strategic changes, some new hires there. Just kind of your thoughts, could you just maybe put in perspective the size of the apparel piece, your thoughts as you kind of go into next year and where you're developing the product, channels of distribution, just some additional color, just given what's going on there?

Yes, I mean, obviously we're very excited to bring an industry veteran like Mark Sandquist on board for the Company are excited about this leadership for our Merrell apparel initiative and some of our other brands. I would say that apparel this year, just to give you some idea as to size, it will be a little less than $15 million from a sales and a profit standpoint. It's on or ahead of plan this year and we expect that to improve next year. We stumbled out of the box as I've said before with Merrell apparel a little bit but the current lines are aligned much closer to footwear. They're more outdoor, athletic performance based in some respects. The branding is more prominent. So we've made significant headway already. Apparel and being able to present Merrell as a multi-category lifestyle brand is critical to our expanded retail stores and website business. So although it's small right now, the consumer appeal of a lifestyle store as opposed to a footwear only store is significant. So we continue to view apparel, our apparel initiatives, although small at this point, but especially for Merrell is critical to building Merrell into our first $1 billion brand.

All right. Thank you very much. Congratulations.

(Operator Instructions) Our next question comes from Sam Poser of Sterne Agee.

Good morning.

Good morning, Sam.

Hi, Sam.

Just to follow up one more time on the backlog, can you give us an idea of what percent the backlog has been of total revenue or how you're foreseeing the change in the backlog of total revenue on a year-over-year basis or on a historical basis?

When you say what percent of the backlog has been a business, are you talking about as of the end of Q3, 4, versus Q4 or--?

I mean, basically what I'm trying to figure out is, you said in the first half of the year that the backlog was based on whatever your planned sales are, higher percentage of what they potentially were in Q1 2008.

I guess, Sam, it's a pretty dynamic environment. We've always said that we wish we could device a specific predictor formula that we could apply to our backlog number. I don't think we or anybody else in the industry has quite been able to do that yet but it is an indicator. Earlier on this year, we also said that backlog is probably less of an indicator, just because of the shifts we were seeing in order cancellations, maybe a little retailer panic a year ago and the shift in mix between at once and futures and that dynamic has continued. We do think it's reaching a more normalized level, though, and it clearly is a trend, a fact that we look to to predict future trends. So in that respect, it's -- we're excited about 2010, obviously.

Sam, what I've seen in my handful of quarters here is that the backlog at the beginning of a quarter, the backlog that's on the books to ship in that next quarter is about 70% of that next quarter's ultimate revenue and then you get at once orders that come in during the course of the quarter, then we have some order cancellations that were in the beginning backlog that get cancelled that were a lower dollar amount and then we have some orders that just don't get shipped out because a customer is on credit hold or we don't have the inventory or whatever it might be. Then when you add in some retail revenue on top of that, that gets to you the full quarter's revenue. So that's how much of the next quarter's revenue that a backlog would represent at the beginning of that quarter. When you start going out further than that, like the Q1 revenue, based on the Q3 backlog, it's a meaningful percentage but it's about half of what we might expect Q1 revenue to be ultimately.

Normally Q1 and Q3 would be higher backlog numbers because you're shipping more goods versus those time periods, versus fill-ins in Q2 and Q4. Would that just be in a general sense, correct?

Historically there would be more futures orders in Q1 and Q3 for us and quarters 2 and 4 would normally shift a little bit more towards at once, fill-in.

Thank you. And then just can you give us the actual reported revenue numbers by group? I know it comes out in the Q for outdoor, Hush Puppies, Heritage and so on.

Sure, I think Don has that.

For the Outdoor Group it was $122.3 million. For Heritage Brands Group it was $58.5 million. For the Wolverine Footwear Group, it was $53.8 million. For Hush Puppies, $38.6 million. And for our other segment which is Wolverine retail and leathers, $24.4 million.

Can you break out the other and the leathers, because you do that on the -- in the Q.

We're looking for the number right now, Sam. I suppose we can follow up with that.

I have the percentage increase. I have retail up 16% and leathers had a tough quarter because there's been lower leather prices, and lower demand for leather. Leather was off by 46%. I don't have that actual dollar breakdown in front of me, Sam.

I appreciate it. Then when you look at the Hush Puppies business in the US versus internationally, could you just give us a little more color there, department stores, specialty and some of the upgrades you've been working on on the women's side?

As you know, Sam, it's been a project for us for a number of years. We really view the out-of-the box performance of the two Montreal stores as a very good indicator of what Hush Puppy can mean in North America. We're using a not just the Canadian product line up there but we're using a more across the Company global product line and what's interesting is some of our best selling shoes have been the shoes that have the highest style content and are the highest priced shoes. So we're -- those two stores are teaching us a lot. We're learning a lot from those two stores and the emotional appeal that that brand still has.

In the US, we continue to try and take the brand up market. There's been no doubt that that has hurt us from a top line perspective, but as you know, we're trying to match our domestic brand placement and perceptions with that of our international business, which is very strong and better grade.

Does that mean retail stores are coming to the US? And that will be my last question.

Yes, I mean, we're constant -- we looked at some locations, frankly, Sam, last year in the US. Montreal as you know is a very fashion-forward market as well and certainly there's some better deals on retail space out there than there was a year ago so we'll be looking at some key locations in the US going forward for sure.

Thank you. Good luck.

One other comment on Hush Puppies US business. I think it's some good news for the brand. In the quarter, the US business for Hush Puppies was off. It was driven by a decline in the Soft Style business, which was really driven more by some factory delays as well as we had a major department store customer drop their kids business. So when you look at Hush Puppies men and women's business in the US, it was flat year-over-year in the quarter which we think is an encouraging performance.

Okay. Great. Thank you.

Our next question comes from Todd Slater of Lazard Capital.

Hi. It's [Diana Katz] for Todd. Congratulations it was an impressive quarter. You mentioned a lot of economies are starting to uptick. Can you talk specifically about what you're seeing in the UK market and then also you mentioned there was a strong response to Caterpillar in Italy. Maybe you could talk about what you're seeing in Italy as well?

Well, generally, I think -- let me answer your second question first. There is -- clearly it's going to be a strong season this fall for boots. And as you know, in Europe, CAT is more of a fashion brand than a work boot brand and that's good for Caterpillar. But I think whether it's Europe or the United States, it's going to be a pretty good boot season and so far the weather seems to be cooperating with that. That's good for retailers as well because those tend to be higher priced products.

With respect to the global economy, I mean, clearly we've seen some countries that have come out of this economy, China, for example, India's doing pretty well. On a more accelerated pace than the US and Western Europe. As we said in prior calls, it was our general feeling that Western Europe kind of lagged going into the recession by a quarter and there may be some countries in Europe that Europe frankly may lag a quarter or two coming out of the recession, behind the USA, but for us, it's just -- it's still a clear competitive advantage to be in 180 countries around the world and to have that kind of diversified risk in our portfolio.

Okay. Great. Given that it's a strong boot season, how quickly can you go in if there's a lot of at once orders for your boots?

Well, we've gotten pretty good over the years. As you know, starting about three or four years ago, we made a conscious decision to focus our wholesale inventory that we hold for at once business, fill-in orders, on a narrow and deep philosophy. So we like to be narrow and deep in the key items. We probably don't guess 100% right every season for every brand, but we've gotten pretty good at that and we feel very good about -- we feel very good about our inventory positions on those key items. If you get an item as you know that's super hot, you can never catch it quick enough. But we'll deal with that when it comes.

Okay. Great. And then last question, I guess it's for Don. Do you still believe I guess for the next quarter you previously gave guidance for SG&A in the second half would be down about where it was for the first half, SG&A came in a little better than we had thought in this quarter. Do you still plan I guess the whole of second half SG&A to be down where it was in the first half?

I would look at kind of the year-to-date number on an adjusted basis, adjusted for the nonrecurring or unusual factors that we cited and look at the adjusted SG&A performance on a year to date basis and that would be a decent proxy for the fourth quarter.

You're right, Q3 was excellent performance and I'm not sure I would take that 11% and extend it into Q4.

Okay. Great. Thank you. Great quarter.

Thanks.

Our next question comes from Elizabeth Montgomery of Longbow Research.

Hi, guys. Congratulations from me as well.

Good morning.

Good morning.

I had two questions. I think the first one, Blake, you talked to performance of the Out Venture in Merrell. But I wondered, was the Fusion category in Merrell also up year-over-year or is there any specific markets that you can call out with -- related to the Fusion product?

I don't have specific numbers in front of me on Fusion. We had some -- I know we had some very good success with some of the new product, the Polaris collection, Snow Devai, the Moxy collection, some of the new styles. I would say, just viewing those two general categories, that we are super strong in Out Venture, Outdoor Performance, and Fusion, although we've got some very good performing styles, we've got plenty of room for growth in the Fusion category. The consumer's waiting for it.

So they're waiting for newness in the Fusion product line?

You bet.

What is the breakout roughly between Fusion -- I know Fusion I guess it's larger in the US and Out Venture is a little bit larger in Europe, is that accurate or?

Yes. Well, it varies from country to country. Out Venture would be much more important in Canada. The US could be split about evenly at this point. You'd have some countries in Europe like Italy that started off almost all Fusion with the Sprint category with sports fashion, silhouettes and then you'd have other countries in Europe like the UK that started out more Out Venture, performance oriented. So it's kind of a mix across the board.

Would it be fair to say it's still roughly 50/50, everything consolidated?

I would say that's probably about right.

Okay. And then Don, I know the most -- the two most recent restructuring initiatives you said probably won't get completed until the first half of 2010. Is it fair to assume that somehow you'll see the full benefit, the 19 million to $21 million in the cost take-out for 2010 or should it be a little bit less because of that?

I think we won't see the full benefit of the 19 million to $21 million in 2010 because of the two expanded initiatives won't be completed until either late Q1 or sometime in Q2. So really at the end of Q2, for the 12 months going forward from that, is when you would see a full 19 million to $21 million but you'll see the vast majority of the 19 million to $21 million in the 2010 results, versus, again, just to clarify a point I've made in past calls, is that it's versus the status quo that existed prior to the restructuring program being started.

Okay. So really we should look for the full year run rate of 19 million to $21 million at the end of 2Q and the cost control in the first half kind of consistent with the back half of this year in Q4?

Yes, just to clarify, when you say cost control in the first half, I wouldn't necessarily expect the same kind of percentage decreases in SG&A in the first half of next year. As relates to restructuring, yes, the benefits will start cycling in total beginning in Q3 of next year.

All right. Thank you, guys.

Next question is from Tom Shaw of Stifel Nicolaus.

Thanks, guys. Nice quarter. Just a clarification. I was just running through the numbers you gave Sam. Were the segment revenue numbers adjusted or were those reported?

Those are reported.

Okay. Because they seem to match the -- okay. Second note, I guess the tax rate, how should we look at that going forward? I mean, if it's kind of in the 27 range for the fourth quarter, is that a good level for 2010?

It will be 20 -- our year-to-date tax rate is 29%. We just adjusted Q3 to reflect the cumulative impact of the new planning initiatives. So the 29% year-to-date tax rate would be the best proxy for Q4, Tom. Okay.

Does that continue, if it's--?

Yes. 29% is as of right now is a decent estimate for 2010, although we're not offering 2010 guidance, I will say the 29% represents a good estimate for ongoing effective tax rate.

Okay. And another--?

I will say that we're striving to structure the operations in ever-more efficient manner from a tax standpoint so our goal is to drive the effective tax rate down even lower, by being smarter about how our operations are structured.

Got you. And another kind of 2010 question. You've had pretty substantial growth in points of distribution. The concept stores and Shop in Shops. What's sort of a ballpark of how that should continue to grow next year?

I mean, I think we would -- one way we view it is we look at Hush Puppies. So for example, Hush Puppies is sitting here today with well over 500 concepts stores. We hope to end the year with Merrell at 100. In our mind, there's an opportunity for Merrell in concept stores, at least as big as Hush Puppy for example. So we would expect to see continued controlled distribution expansion internationally for us and you will see prudent expansion and number of stores and clearly Shop in Shops, whenever we feel it's appropriate, in those countries where we have owned operations, Canada, the United States and Europe.

Okay. Lastly, I'll leave you with, you gave sort of an indication of orders for Wolverine, ICS and Thousand Mile, what are you seeing an current sell-through, as those have sort of recently hit accounts.

Sell-throughs for both the Bates product that has ICS and the Wolverine product that has ICS have been simply excellent and this is obviously very early on with a lot -- without a lot of frankly marketing support or anything. I've got several pairs myself, I've been wearing and the ability to tune the cushion and customize the footwear to your particular gait, it's a very unique and important comfort feature. It's something that we received a utility patent on so we're very excited about the potential for that, for the Wolverine brand and the Bates brand.

All right. Thanks, guys.

Next question is a follow-up from Mitch Kummetz of Robert Baird.

Yes, thanks. Just a quick follow-up on the gross margin. So Don, you're planning for flat year-over-year adjusting for the restructuring which includes up in Q4 with a lot of that coming from lower input costs. What's the overall impact on the year from input cost? Is it still a negative for the full year?

Just isolating product costs themselves, yes, because we were rather aggressive on the pricing front, Mitch, to try to combat that. So if you're focused on just -- when you get to the full year, then to get a higher year-over-year, product cost, the answer, clearly, yes.

So higher product costs on the gross margin for the full year. FX has got to be a negative to gross margin for the full year then, too, right?

Correct.

If you're looking flat for the year -- if those two are negative, is it mix? Is it pricing on your end that gets you to flat for the full year?

It's mix. It's pricing. We also had because of the higher product costs at the end of last year, we had an increase in our LIFO reserve in Q4 of last year that we expect the LIFO reserve to go down this year which is a contributor to Q4 gross margin.

Okay. And then I know you don't want to give guidance on 2010 but again, isolating those two impacts, FX and input costs, is it safe to assume that those should be a net benefit to your gross margin in 2010?

Based on spot rates today, I would say FX would be a benefit to gross margin in 2010. Product costs, less competence in making the same statement but net net I would say they probably would represent a benefit to 2010.

How far out are you hedged right now for 2010?

We hedge out 12 months.

Okay. And then in terms of--?

I'm sorry, just to clarify, on a graduated basis so we're not 100% hedged for 12 months. We have some contracts in place for 12 months out.

Then on the input cost side, how far have you contracted some of that pricing or how does that work? I mean, I guess you have pretty good sense as to what input costs are going to be on your spring business, right, but probably not for the back half.

And our fall business is pretty much put to bed as well. We're still working on some of those prices but clearly for the first half of the year we put those prices to bed sometime ago and we're still working on some of the fall stuff but that will come in the near future too.

Okay. All right. That's all very helpful. Thanks again.

All right, Mitch. Bye-bye.

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

Thank you. On behalf of Wolverine World Wide I would like to thank you all for joining us today and as a reminder our conference call replay is available on our website at www.wolverineworldwide.com, and the replay will be available through Wednesday, October 21, 2009. Thank you and good day.

This concludes today's teleconference. You may now disconnect your lines.